Testimony before the Committee on Banking, Housing, and Urban Affairs, Subcommittee on Economic Policy July 22, 2020.
Chairman Cotton, Ranking Member Cortez Masto, thank you for the invitation to testify and thank you for holding this hearing on this most important topic.
It is not too much to say that the competition between the United States and the Chinese Communist Party is the great power contest of this and the next generation (at least).
Don’t take my word for it. Take the word of the General Secretary of the Chinese Communist Party, Xi Jingping.
In his January 2013 remarks to the Party, Secretary Xi laid out the competition from the view of the Chinese Communist Party.
“Facts have repeatedly told us that Marx and Engels’ analysis of the basic contradictions in capitalist society is not outdated, nor is the historical materialist view that capitalism is bound to die out and socialism is bound to win. This is an inevitable trend in social and historical development. But the road is tortuous. The eventual demise of capitalism and the ultimate victory of socialism will require a long historical process to reach completion. In the meantime, we must have a deep appreciation for capitalism’s ability to self-correct, and a full, objective assessment of the real long-term advantages that the developed Western nations have in the economic, technological, and military spheres. Then we must diligently prepare for a long period of cooperation and of conflict between these two social systems in each of these domains.
For a fairly long time yet, socialism in its primary stage will exist alongside a more productive and developed capitalist system. In this long period of cooperation and conflict, socialism must learn from the boons that capitalism has brought to civilization. We must face the reality that people will use the strengths of developed, Western countries to denounce our country’s socialist development. Here we must have a great strategic determination, resolutely rejecting all false arguments that we should abandon socialism. We must consciously correct the various ideas that do not accord with our current stage. Most importantly, we must concentrate our efforts on bettering our own affairs, continually broadening our comprehensive national power, improving the lives of our people, building a socialism that is superior to capitalism, and laying the foundation for a future where we will win the initiative and have the dominant position.”
It has been said that the first line of encryption the Chinese use is Chinese itself. The Chinese Communist Party is not shy, ashamed, or particularly secretive about its plans: the extent to which it hides them at all, it hides them with the Chinese language.
General Secretary Xi promises the “eventual demise of capitalism”. He promises that Chinese socialism will “win the initiative and have the dominant position.” This is not a promise of peaceful co-existence between competing world views.
Professor Josh Eisenman has compared this Chinese socialism to earlier incarnations of national socialism in Mussolini’s Italy and Hitler’s Germany given the common themes of fascist government. It appears fascism truly is back, just not necessarily where some are looking for it.
So General Secretary Xi has been clear about his plan. What is our plan in the U.S.?
On May 20th of this year, the White House released the “U.S. Strategic Approach to the People’s Republic of China”, in response to Congressional direction, which was nested within earlier strategic documents like the National Security Strategy of 2017. It laid out two principal lines of effort:
“Our competitive approach to the PRC has two objectives: first, to improve the resiliency of our institutions, alliances, and partnerships to prevail against the challenges the PRC presents; and second, to compel Beijing to cease or reduce actions harmful to the United States’ vital, national interests and those of our allies and partners. Even as we compete with the PRC, we welcome cooperation where our interests align. Competition need not lead to confrontation or conflict.”
What we are witnessing is a full court press by our senior national security leaders to alert Americans to the national security threats posed by what Director Wray referred to as a “whole of society threat” in 2018 testimony before the Senate Select Committee on Intelligence.
Attached to my statement is a public version of what we used to call the “wheel of death” when I served in government – it shows how China leverages its “whole of society” approach to steal its way to economic development and military modernization. I urge the Members of this panel, the staffs, and everyone watching, to familiarize yourselves with this unclassified U.S. government product: don’t assume you aren’t involved in the competition with the Chinese Communist Party.
Let’s be clear, it isn’t enough to win a competition in a “whole of society” contest with only the national security apparatus aligned. Our economic apparatus must be aligned as well, and there is work to be done in this respect.
I recommend to you three specific areas of focus to enhance U.S. economic strength to win the competition with the Chinese Communist Party:
- expand the surface area of the competition with China by creating a truer competitor to the China market;
- reform our approach to the promotion of U.S. exports and alternatives to China Inc. into a true strategic process for winning the competition; and,
- overhaul our approach to export controls (a critical and effective tool, when used as a part of a balanced, integrated policy framework).
First, developing the free market to defeat Chinese mercantilism.
The Trans-Pacific Partnership (TPP) arose from trade discussions in the early 2000s under President George W. Bush, culminating in an agreement between 12 nations signed by President Barack Obama in his final year in office.
Unfortunately, support for free trade had begun to fade by 2016, when both major party candidates for the Presidency announced their opposition to TPP.
Given how the PRC has abused and violated its commitments under earlier trade agreements, to the detriment of American workers, seemingly with no response from policymakers in Washington DC, the diminution of support for new trade agreements should not have been a surprise.
To be clear, the withdrawal of the U.S. from TPP was a loss for our economic well-being and for our efforts to counter the CCP’s predatory behavior.
Yet, on July 1st of this year, the United States, Mexico, Canada Agreement (USMCA) took full effect.
USMCA, the fullest update to date of the 1994 North America Free Trade Agreement, deepens the integration of the economies of the United States, Mexico, and Canada making North America one of the most deeply integrated economic zones on Earth.
The USMCA agreement was also remarkably successful by political standards, being endorsed by both the U.S. Chamber of Commerce and the AFL-CIO and passing the Senate on an 89 to 10 vote and the House on a 385 to 41 vote.
Of critical importance to the competition with the Chinese Communist Party, the update to NAFTA includes critical provisions that address the impacts of “state owned enterprises” including those not in North America that could affect trade or investment within North America.
Together, the USMCA economies serve 478 million people; their economic output is approximately $24 trillion per year, representing approximately 28 percent of the world’s output at seven percent of its population.
Now imagine if a newly sovereign United Kingdom, with its 66 million people and nearly $3 trillion in gross domestic product, joined USMCA.
What about Japan’s $5.1 trillion in GDP and 126 million citizens?
Australia, South Korea, New Zealand together represent $3.7 trillion in output and 81 million people. They could be brought in too.
At a combined economic output of nearly $36 trillion, and with 751 million citizens, a USMCA joined by the remaining Five Eyes, plus Japan and South Korea could be the freest and most productive trade bloc in the world. And it would be based on western values for the environment, labor, transparency and the rule of law.
The choice between access to a socialist marketplace (“with Chinese characteristics”) and such a free trade bloc is really no choice at all.
Compare that to the status quo where international banks like HSBC believe they have to choose between the PRC and the West as the CCP violates China’s international agreements and destroys Hong Kong’s autonomy.
It would be far easier for Western companies to compete with Made in China 2025 state champions to build independent energy, telecommunications, and pharmaceutical supply chains. As I mentioned, USMCA builds in tools to counter state-owned enterprises in a way the World Trade Organization has refused to do.
But what if we don’t build such an economic bloc? By some projections, in 2050, the U.S. will not only not be the largest economy by 2050, it won’t even be the number two economy. How well postured will we be to compete with the CCP in that position?
Second, leveraging U.S. foreign assistance and investment.
As I alluded before, the Chinese Communist Party really doesn’t hide its plans. China certainly hasn’t tried to hide its Made in China 2025 plan.
U.S. business has just seen fit to ignore what’s plainly obvious, lured into Beijing’s maw by the promise of market access.
As you’ll see in the enclosed 2019 Newsweek article, this may be changing, finally. But significant damage has been done.
The CCP has proven successful at boosting prospects of its favored domestic champions – among the most infamous, Huawei – with tens of billions of dollars in tax breaks, cheap financing, access to cheap resources, and privileged domestic market access.
In essence, the CCP has destroyed the free market in its prioritized areas.
What’s needed to counter the CCP’s approach isn’t to copy what they’ve done.
We need to strengthen the free trade bloc (as I outlined above) and implement a strategic approach that can level the playing field. And we have tools…lots of them. For example:
- the Export Import Bank, with a lending limit of approximately $135 billion according to the Congressional Research Service;
- the Development Finance Corporation, built on the foundation of the old Overseas Private Investment Corporation with $60 billion in financing authority;
- in FY20, the Congress appropriated over $56 billion for international affairs, including approximately $20 billion that USAID manages;
- numerous other related organizations like the Millennium Challenge Corporation, the Economic Support Fund, the Global Fund, and many, many others; and,
- extensive infrastructure at the U.S. Departments of State and Commerce to advocate U.S. trade around the world (you have likely met with representatives of these services on your CODELs and in meetings with various Chambers of Commerce of U.S. business around the world).
What’s missing is an organizational infrastructure and a clear mission.
There needs to be an ongoing evaluation of the important battlegrounds of the competition and a regular process to triage these battlegrounds and leverage our tools.
Who in the United States government has the responsibility to make sure the CCP doesn’t acquire advanced aerospace technology in Ukraine, or a key port in Portugal, or some of the world’s largest rare earth deposits in Greenland? If there’s no U.S. company interested, the answer is often “no one”. On the other hand, the CCP, with no accountability to its people, is willing to make the investment.
There must be clear direction given by the President for how he expects U.S. foreign aid to be utilized in the strategic competition with the CCP. To carry out that direction, it is imperative to re-establish the international economics directorate at the White House that lashed up the National Security and National Economic Councils.
DFC, as I noted, was built on top of OPIC, a development agency with a culture and mission established over decades. Included in its implementing legislation, the BUILD Act, was an effective prohibition on conducting business other than in low-income countries. The China competition doesn’t take place only in low income countries.
Ex-Im has requirements on minimum thresholds of U.S. content to qualify for its support. Do these thresholds make sense if the larger goal is to ensure a proposal other than Huawei’s wins a 5G tender?
At over $200 billion in capacity, we have what could effectively be a sovereign wealth fund for the China competition; what we need is a clear strategy to use it, with clear lines of authority and accountability to implement it.
While the 2017 National Security Strategy and the May 2020 Strategic Approach were important foundational documents, much remains to be done.
Lastly, leveraging export controls as a vital tool in an integrated technology protection framework.
Export controls have historically been a key tool the U.S. uses to prevent the spread of military sensitive, and especially proliferation sensitive, technologies.
They can also advance U.S. values and interest, as the Commerce Department proved yet again this past Monday with the third tranche of Entity List designations related to the CCP’s digitized concentration camps, and its July 1 Business Advisory warning companies of the risks of supply chains involving Uighur forced labor.
In the competition with the Chinese Communist Party, control of emerging and foundational technologies will take on new importance.
This is among the reasons why Congress overhauled export controls in the FY19 National Defense Authorization Act, in tandem with the modernization of the CFIUS process.
The Administration has had remarkable success with its campaign to counter Chinese 5G by using export controls: use of the Entity List and, more recently, updates to the foreign direct product rule, were directly responsible for the recent decision by the United Kingdom to alter its plans concerning Huawei.
But, the United States may also reach a point with export controls where it creates an incentive to “off shore” technology and production to put activity outside the reach of export controls.
Secretary Ross should be commended for his 100% commitment to the China competition. That said, it is time for additional agencies to come to the table.
For example, the Secretary of the Treasury has authority under the International Emergency Economic Powers Act (IEEPA), to add companies to the Specially Designated Nationals list, which would have the effect of blocking their access to the international banking system.
Such a designation would eliminate the incentive that export controls can create to offshore technology and production.
Policy makers should also consider whether it continues to make sense to split responsibility for the administration of export controls between the Department of Commerce and the Department of State for separate export control lists.
Such separation adds complexity for exporters, creates gaps through which our adversaries can seek to acquire U.S. technology, and it wastes resources that could be better applied to creating a nimble, streamlined process that serves both commerce and national security (including law enforcement).
Mr Chairman, Ranking Member Cortez Masto, Members of the Subcommittee, I don’t think it’s really questioned any longer that the Chinese Communist Party is a threat.
It’s not too much to say, as commentator Andrew Sullivan did recently that,
“[t]here is no doubt at this point that communist China is a genocidal state. The regime is determined to coerce, kill, reeducate, and segregate its Uighur Muslim population, and to pursue eugenicist policies to winnow their ability to sustain themselves.”
Likewise, General Secretary Xi himself spoke of the “eventual demise” of our way of life.
When we confronted the last strategic great power rivalry, we managed to make this a bipartisan fight.
Teamed up were: national security hawks, human rights doves; Wall Street and labor; churches and intellectuals.
So must it be this time around.
Republicans and Democrats can unite to counter the common threat of the Chinese Communist Party’s doctrine of national socialism.
Thank you again for the invitation to be here today.