With the world’s attention focused on Beijing’s meddling in the affairs of foreign nations and on tensions in an increasingly adversarial relationship between China and the United States, a panel of witnesses with expertise in diplomacy, trade, and national security presented a range of views on how best to counter the Chinese threat and safeguard American interests.
The Feb. 7 hearing took place just days after the U.S. military shot down a Chinese balloon believed to have penetrated American airspace for espionage, and the international incident came up frequently during testimony.
Entitled “Combatting the Economic Threat From China,” the hearing featured testimony from a wide range of experts including Rep. Maxine Waters (D-Calif.); Rep. Blaine Luetkemeyer (R-Mo.), the new chair of the House Subcommittee on National Security, Illicit Finance, and International Financial Institutions; Clete Willems, a partner at the law firm Akin Gump Strauss Hauer & Feld and a special assistant to the president for international trade, investment, and development during the Donald Trump administration; Tom Feddo, founder and director of The Rubicon Advisors LLC; Eric Lorber, principal of the Cyber, Risk & Regulatory practice at PricewaterhouseCoopers and a senior advisor to the undersecretary of state for Terrorism and Financial Intelligence during the Trump administration; and Rich Ashooh, corporate vice president for global trade and government affairs at the Lam Research Corporation.
A Range of Views
Opinions presented at the hearing were notable for their political and ideological diversity and the variety of approaches advanced for countering the Chinese threat. Waters criticized GOP lawmakers for wrangling with Democrats and the Biden administration over the debt ceiling and suggested that the default on U.S. debt that may result from such infighting would play right into the hands of the Chinese Communist Party (CCP).
“If House Republicans continue their brinksmanship, it will result in major job losses and a recession of epic proportions, and would hand the Chinese Communist Party a massive win. We’ve been down this road before, and there have been real harms to our economy,” Waters stated.
Waters urged the lawmakers in attendance to take the threat of default much more seriously and to “explain how a default would affect Americans’ standard of living and political influence across the globe.”
Luetkemeyer emphasized how the increasingly close business and economic ties between China and the United States provide abundant opportunities not only for Beijing to use U.S. dollars to expand and upgrade its military, but also for companies controlled by the CCP to infiltrate the stateside business landscape and gain access to highly sensitive commercial, diplomatic, and military secrets.
“For decades, China has employed a civil and national strategy to develop the People’s Liberation Army into a world-class military,” Luetkemeyer said.
Luetkemeyer went on to quote then-President Donald Trump’s executive order from 2020 which was intended to curb investment in People’s Republic of China (PRC)-affiliated entities: “The PRC is increasingly exploiting United States capital as a resource in order to enable the development and modernization of its military and other security apparatuses. China continues to use their economy to repress its own people. This oppression includes speech suppression of all citizens and the persecution of religious and ethnic minorities, including arbitrary imprisonment, forced labor, and genocide.”
But even in the face of this acknowledged reality, the resolve needed for the decoupling of American capital from Chinese security and military forces is lacking, Luetkemeyer said, alluding to the events of recent days.
“The U.S. government seemingly acknowledges this, but we lack meaningful action, as we just witnessed this past weekend with the balloon fiasco,” he said.
The Chinese Presence
The risks to economic and national security are severe given the extent of integration between the Chinese and American economies at this juncture, Luetkemeyer suggested. He noted that, as of Jan. 9, 2023, U.S. exchanges had listings for 252 Chinese companies whose total market capitalization exceeds $1 trillion. Moreover, as of 2021, the U.S. trade deficit with China has hit $355 billion.
Another area of grave concern is the data and intellectual property theft that such close ties facilitate.
“While it is hard to put a dollar sign on China’s theft of intellectual property, certain estimates put it at as much as $600 billion a year,” Luetkemeyer said.
“It is our committee’s job to examine all interconnections and pursue options to limit U.S. capital flowing into those areas,” he added.
Ashooh emphasized the need for U.S. departments and agencies to pool their resources and close those gaps that permit capital, trade, and technology secrets to go to the wrong parties. He urged various agencies and outfits to work closely together and ground their classification of impermissible security breaches in “well-defined export control lists.”
“Gaps do exist. Leverage what works to address them. The United States should consider a new method for multilateral controls in targeted technology areas,” Ashooh said.
Ashooh contrasted such a coordinated, targeted strategy to the “ad hoc approach” applied to semiconductor supply chains, among other areas.
“U.S. technology leadership is indispensable. Without such alignment, unilateral policy will ultimately fail,” he said.
A New Bureau?
The witnesses concurred on the need for much higher levels of scrutiny around outbound trade and investment. But a new interagency bureaucracy to oversee export controls, which some have argued for establishing, may in the end cause more problems than it solves, believes Feddo.
“Congress is best suited to respond to an issue of this complexity and potential scope and impact. There should be no dispute that, to ensure America’s future security, the PRC’s theft and the misappropriation of technology must be prevented,” Feddo said.
“The question is whether a new and far-reaching bureaucracy is the answer. The debate has taken on a presumption that outbound screening is necessary. But decision-makers would benefit greatly by not rushing into a solution. Additional hearings should be held to determine costs and benefits, and define objectives,” he added.
The Committee on Foreign Investment in the United States (CFIUS) has taken years to adopt and implement changes to its protocols, and if such a body were to come into existence to screen outbound investment, lawmakers and officials would be making it up “out of whole cloth,” Feddo said.
“From my CFIUS experience, a new interagency committee would be extremely time- and resource-intensive, and would require substantial effort to build a clear regulatory framework. It’s in the best interests of national security, a strong open economy, and accountable government to get this right. The alternative could be an unrestrained bureaucracy,” he continued.
Lorber argued that while sanctions have proven highly effective when dealing with abuses of foreign regimes at some points in the recent past, it is important not to overestimate the utility of sanctions. “They are not a silver bullet,” he said.
“While the U.S. use of sanctions against China has so far been limited, policymakers have increasingly focused on them,” Lorber said.
“Targeted, list-based sanctions can be impactful at disrupting threatening activity, making it harder and riskier for our adversaries to access U.S. markets,” he said.
However, no two sets of geopolitical circumstances are exactly the same. While sanctions may have worked in the case of Iran, given how few market players were willing to abandon U.S. business dealings and rely on Iranian supply chains, that scenario may have limited applicability to the present case.
“This dynamic may not hold in the context of China,” Lorber said.
If U.S. lawmakers wish to dissuade companies from having dealings with firms linked to the Chinese regime and its military and security apparatus, then it is hard to overstate the importance of providing them with alternative markets, argued Willems.
“The threat from China is not confined only to national security. China also seeks to challenge U.S. economic and geopolitical leadership and to remake the world order,” Willems said.
“I hope to facilitate the committee’s development of a strategic China agenda. To maximize our chances of success, our approach should be comprehensive and not only defensive in nature,” he said.
The United States has several advantages in its rivalry with China, namely a free-market system, democratic values, and a “deep network” of allies and partners, Willems stressed. But the comprehensive approach that he believes to be necessary to protect the security and integrity of U.S. economic and commercial interests means recognizing the reality that businesses will be ready and willing to walk away from China’s market of more than 1.4 billion consumers, without other opportunities in place.
“As we cut off capital and technology flows to China, we must also be creating opportunities for U.S. companies that are affected by these measures, [such as] market-access trade agreements that break down barriers in third countries and reduce our reliance on China for critical goods. We need to provide companies with meaningful incentives,” Willems said.
Establishing such trade agreements may help even the playing field in a global economy where China makes no secret of its ambition to cultivate closer ties to other markets.
“If we want to build those relationships, those partnerships, we need to have trade agreements. The reason that’s important for supply chains is that China’s going around the world, they’re cutting trade agreements with other countries that make it easier to facilitate trade between them. So we are at a cost disadvantage when other countries are making agreements about supply chains,” he said.
Willems also suggested that, as part of the same approach, it may be time to consider allowing the U.S. Export-Import Bank to take on more risk.
“Ex-Im has a 2 percent default cap. That’s the maximum default they’re allowed to have before they totally lose their ability to make investments. It’s a controversial policy, but we need to take another look if we’re serious about providing an alternative,” he said.
Willems clarified that he does not envision total decoupling and the absence of any Chinese-linked firms in stateside markets, but rather, he sees a need for higher levels of sophistication on the part of investors and a greater awareness of risks.
“I don’t think, inherently, that you don’t want any Chinese companies listed on U.S. exchanges. As long as they play by the rules, it’s good for us. That said, I don’t think U.S. citizens understand what they’re getting into with those investments,” said Willems.
“I do think that having disclosures about that is important so that investors can make the decisions,” he added.
One hopeful sign is that the Public Company Accounting Oversight Board (PCAOB) appears to have achieved some success at the end of 2022 in its monitoring of the operations and finances of Chinese companies in this country, including inspections of which the firms’ executives did not have warning.
“I think you’re right to wonder, was this a one-time thing where China wanted to avoid mass delistings, or is this China finally opening and saying, ‘We’re going to play by the rules that everyone else has to follow?’” Willems said.
In Willems’s view, there are grounds for optimism on this point and the PCAOB’s actions may have helped establish a useful precedent.
“At this point, we should take the PCAOB’s word for it that they were able to access Chinese papers in December. The checks were random, the Chinese didn’t know in advance,” he said.