[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
A NEW ERA OF U.S.-CHINA RELATIONS?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ASIA AND THE PACIFIC
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 17, 2014
__________
Serial No. 113-216
__________
Printed for the use of the Committee on Foreign Affairs
Available via the World Wide Web: http://www.foreignaffairs.house.gov/
or
http://www.gpo.gov/fdsys/
______
U.S. GOVERNMENT PRINTING OFFICE
89-813 PDF WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
______
COMMITTEE ON FOREIGN AFFAIRS
EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida ENI F.H. FALEOMAVAEGA, American
DANA ROHRABACHER, California Samoa
STEVE CHABOT, Ohio BRAD SHERMAN, California
JOE WILSON, South Carolina GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas ALBIO SIRES, New Jersey
TED POE, Texas GERALD E. CONNOLLY, Virginia
MATT SALMON, Arizona THEODORE E. DEUTCH, Florida
TOM MARINO, Pennsylvania BRIAN HIGGINS, New York
JEFF DUNCAN, South Carolina KAREN BASS, California
ADAM KINZINGER, Illinois WILLIAM KEATING, Massachusetts
MO BROOKS, Alabama DAVID CICILLINE, Rhode Island
TOM COTTON, Arkansas ALAN GRAYSON, Florida
PAUL COOK, California JUAN VARGAS, California
GEORGE HOLDING, North Carolina BRADLEY S. SCHNEIDER, Illinois
RANDY K. WEBER SR., Texas JOSEPH P. KENNEDY III,
SCOTT PERRY, Pennsylvania Massachusetts
STEVE STOCKMAN, Texas AMI BERA, California
RON DeSANTIS, Florida ALAN S. LOWENTHAL, California
TREY RADEL, Florida--resigned 1/27/ GRACE MENG, New York
14 deg. LOIS FRANKEL, Florida
DOUG COLLINS, Georgia TULSI GABBARD, Hawaii
MARK MEADOWS, North Carolina JOAQUIN CASTRO, Texas
TED S. YOHO, Florida
LUKE MESSER, Indiana--resigned 5/
20/14
SEAN DUFFY, Wisconsin--
added 5/29/14
CURT CLAWSON, Florida--
added 7/9/14
Amy Porter, Chief of Staff Thomas Sheehy, Staff Director
Jason Steinbaum, Democratic Staff Director
------
Subcommittee on Asia and the Pacific
STEVE CHABOT, Ohio, Chairman
DANA ROHRABACHER, California ENI F.H. FALEOMAVAEGA, American
MATT SALMON, Arizona Samoa
MO BROOKS, Alabama AMI BERA, California
GEORGE HOLDING, North Carolina TULSI GABBARD, Hawaii
SCOTT PERRY, Pennsylvania BRAD SHERMAN, California
DOUG COLLINS, Georgia GERALD E. CONNOLLY, Virginia
LUKE MESSER, Indiana--5/20/14 WILLIAM KEATING, Massachusetts
CURT CLAWSON, Florida
added 7/9/14
C O N T E N T S
----------
Page
WITNESSES
Mr. Christopher K. Johnson, senior adviser and Freeman Chair in
China Studies, Center for Strategic and International Studies.. 6
Mr. Gordon Chang, author......................................... 15
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Mr. Christopher K. Johnson: Prepared statement................... 9
Mr. Gordon Chang: Prepared statement............................. 17
APPENDIX
Hearing notice................................................... 42
Hearing minutes.................................................. 43
The Honorable Gerald E. Connolly, a Representative in Congress
from the Commonwealth of Virginia: Prepared statement.......... 44
A NEW ERA OF U.S.-CHINA RELATIONS?
----------
WEDNESDAY, SEPTEMBER 17, 2014
House of Representatives,
Subcommittee on Asia and the Pacific,
Committee on Foreign Affairs,
Washington, DC.
The committee met, pursuant to notice, at 2:30 p.m., in
room 2172 Rayburn House Office Building, Hon. Steve Chabot
(chairman of the subcommittee) presiding.
Mr. Chabot. Good afternoon, and welcome to this afternoon's
subcommittee hearing. I want to thank our distinguished
witnesses for being here as we examine a critical relationship
that is becoming increasingly challenging and unfortunately
confrontational--and one that surely deserves more attention.
The nature of the United States' relationship with the
People's Republic of China has arguably entered a new era.
Since President Xi Jinping assumed the leadership role in
China, U.S.-China affairs have steadily undergone a fundamental
transformation. In this new era, the PRC is more assertive and,
indeed, aggressive on an entire range of issues covering the
political, security, and socioeconomic spectrums.
Today, we hope to learn more about China's new leadership
team and discuss what we can do as a nation to ensure that
America's interests are best represented overseas.
I believe that the U.S.-China relationship is one of our
most important given what is at stake. And when we discuss what
exactly is at stake--such as peace and security across the
Taiwan Strait and freedom of navigation and movement in the
East China and South China Seas--we see that not enough
attention is being given to this critical relationship.
Just a few months ago, the debate focused on whether the
administration's ``pivot to Asia'' was adequately resourced.
Today, I believe that this ``pivot'' is stuttering. When it
comes to the Asia-Pacific region, the conversation is focused
on China, and this includes China's aggressive foray into the
South China Seas. It's clear the administration is struggling
to find a way to better direct America's resources toward the
Asia-Pacific and find a way to manage the growth of maritime
territorial disputes. As a result, with this void, we see that
China is shifting its assertiveness in the security arena and
is now focusing it on American businesses operating in that
country.
According to a recent article in the New York Times,
``foreign companies in a range of industries including
automobiles, technology, pharmaceuticals and food packaging
have faced increased scrutiny including raids and allegations
of unfair practices.'' The article goes on to say that the
heightened attention against foreign companies--including many
American firms--comes at a time when Beijing is looking for
ways to help its homegrown industries. I find this behavior
particularly troubling given that it violates China's own
commitments to the World Trade Organization.
China's increased level of enforcement activity comes from
the implementation of its Antimonopoly Law, which was drafted
over a period of 10 years in consultation with authorities in
the U.S. Government and the European Union. The law even draws
from elements of both U.S. and EU competition laws. But, now,
it's being used to target U.S. and EU companies. During the
U.S.-China Security and Economic Dialogue held this past July,
China committed to using its monopoly laws to promote consumer
welfare and not its domestic companies or industries. This is
not what we are seeing happen.
China's National Development and Reform Commission, the
organization responsible for reviewing monopoly activities,
abuse of dominance, and abuse of administrative power involving
pricing, asserts that foreign companies only account for 10
percent of antimonopoly cases. However, this can't be verified
and the situation seems anything but fair, objective,
transparent, or nondiscriminatory.
Earlier this month, the U.S.-China Business Council
reported that 86 percent of its member companies are concerned
about China's evolving antimonopoly regime. Among the many
reasons are broader concerns about how China will use this law
to protect domestic industry, how it will affect the value of
intellectual property, and whether it will be used to force
lower prices rather than let the market decide. As a result, in
addition to already growing concerns about China cyberhacking
offensive, warming relations with Russia, and aggressive
incursion upon the territories claimed by neighboring nations,
the implications of China's antimonopoly investigations could
be quite serious.
In my congressional district in southwestern, Ohio which
includes the city of Cincinnati, a significant number of
businesses count on the Chinese market for an important part of
their annual sales. Small businesses and large businesses
alike, exports to China have helped many firms grow and
prosper--and hire American workers. However, as reports about
China's antimonopoly investigations mount, so do worries about
the unfair treatment of U.S. businesses in that country.
Looking ahead, it's vital that we gain a better
understanding of the Chinese leadership, and its political,
security, and socioeconomic goals. It's also critical for us to
determine a way forward for effectively engaging with various
stakeholders in China so that the U.S. businesses have a
clearer understanding about what this means for their future
activities in China. What is at stake in this new era of U.S.-
China relations is extremely important and now is the time to
give it the attention it deserves. I look forward to the
testimonies of the witnesses here this afternoon, and I would
now like to recognize the ranking member of this subcommittee,
Eni Faleomavaega from American Samoa.
Mr. Faleomavaega. Thank you, Mr. Chairman. And I want to
thank you for holding today's hearing on U.S.-China relations.
This is an important opportunity for our subcommittee to review
and evaluate our relationship with China as we move forward in
the coming years.
I especially want to thank my good friend and dear
colleague, the congressman from California, for all these years
that we have been butting heads too, and deeply enjoyed his
input and understanding of the issues affecting the Asia-
Pacific region. And I also personally welcome Mr. Johnson and
Mr. Chang as our witnesses this morning.
As China's economy continues to rise and the U.S. economy
stagnates, there is no doubt that China will overtake the U.S.
as the world's largest economy soon. China remains the largest
manufacturer, the largest trading economy, and also holds the
largest foreign exchange reserves in the world.
China's economic growth is also driving the demand for
energy for a population of almost 1.4 billion people. This is a
direct impact on world energy markets. China will likely be the
world's largest importer of oil, and is heavily relying on
other countries to provide long term energy resources, like
natural gas and oil pipelines from Russia and Central Asia as
well as the influx of Chinese investments for steady oil supply
from Africa.
A greater concern for economic and strategic security is
the significant increase in spending by China to beef up its
military and develop more high tech weapons. With the expansion
of China's naval and improvements in its defense and missile
capabilities, this buildup may be a direct threat to countries
like Japan, Vietnam, the Philippines, and others which are
engaged in territorial disputes with China in the South China
Sea and East China Seas. Although military ties between the
U.S. and China have strengthened and engagement has increased
in the past few years, the United States is pivoting to Asia as
a counter.
Are we too late, Mr. Chairman? For years I have been
critical of U.S. foreign policy toward the Asia-Pacific region,
because for too long the United States has neglected a part of
the world where two thirds of the world's population resides
and which includes, according to the United States Pacific
Command, seven of the world's ten largest standing militaries,
five of the world's declared nuclear nations, two of three
largest economies, and the largest democracy, the world's
busiest international sea lanes and nine of the ten largest
ports, all in the Asia-Pacific region.
So while I appreciate the need for the United States to
focus on Europe and the Middle East, given the complexities in
those regions I am disappointed that the United States has
failed to devote the same time, attention and resources to the
Asia-Pacific region where we are also faced with unique and
complex challenges that also seriously affect U.S. security and
stability.
For your information, Mr. Chairman, many of American
Samoa's sons and daughters as well as military men and women
from your district proudly serve in the U.S. Pacific Command to
protect and defend the territory of the United States, its
people and its interest in the Asia-Pacific region and they
deserve more than a pivot as do Pacific Island nations.
Pacific Island nations supported U.S. interest during World
War II, but when times got good for us we neglect them also.
Now China is providing hundreds of millions of dollars in aid
to help their struggling economies and improve their quality of
life.
Many Pacific Island nations including American Samoa's
closest neighbor, the Independent State of Samoa, is accepting
China's assistance. Many Island nations' leaders have no choice
but to work and strengthen their partnerships with China, and I
don't blame them given that the United States has been an
undependable partner.
It is very unfortunate, Mr. Chairman, that the United
States, Australia and New Zealand are just now realizing how
important the Asia-Pacific region is. But as the Pentagon
finally shifts its posture for rebalancing in the Asia-Pacific
region, it is my sincere hope that the administration will not
only take a look at engaging China and improving bilateral
relations that would be beneficial to both countries, but I
also hope that we will seriously go about in strengthening our
relationships with our allies and partners throughout the Asia-
Pacific region. I also hope we will address the concerns of our
U.S. business community overseas.
With that, Mr. Chairman, again I thank you for your
leadership and for taking this time to hold this hearing, and
again I welcome our witnesses this morning. Thank you.
Mr. Chabot. Thank you very much. The gentleman yields back.
And I would now like to recognize the gentleman from
California, Mr. Rohrabacher, who also is the chairman of the
Subcommittee on Europe, Eurasia, and Emerging Threats, for the
purpose of making an opening statement.
Mr. Rohrabacher. Thank you very much, and I will treat this
as not a new era but an emerging threat.
I want to thank the chairman and thank my good friend, Eni
Faleomavaega. And it took me a long, long time to learn how to
pronounce that name, but it was worth it because Eni has been
one of the great, great members of this body and who has won
the hearts and respect of people on both sides of the aisle. So
we are very happy to celebrate your leadership as well, Eni.
Today we are of course looking at China. And let me just
give this challenge to the leadership in China who I hope are
listening. They usually do pay attention to hearings like this.
If you want us to believe that you are reforming, do something
that you can do that will indicate that you are taking a major
step in the right direction.
And that would be, I would suggest, that you declare that
it is no longer the policy of the Communist Party of China to
discourage the worship of God and that you now respect the
freedom of people to worship God in their own way.
That is a very doable thing for them. It would not in any
way put them in harm's way. If they can't do that they can't
reform anyway politically and socially in that country. We have
Falun Gong who are still being arrested in great numbers and
murdered in prison, their organs sold; Muslims who are being
repressed; Buddhist monasteries in Tibet that are still
suffering, and Buddhist priests that are treated so badly they
are committing suicide, burning themselves to death. And then
of course we have the control of Christian churches so that
they have strict controls of what is going on.
This is something they can do. If they want to--look, we
know there are no opposition parties. There is no freedom of
press. There is no freedom of demonstrations. There is no labor
unions. There is no independent court system in China for this
new day. But if they want to show us that they are going in the
right direction, they can't cure all of that or maybe even one
of those might be too much, but at least walk away from this
idea that you have got to repress people when they are
worshiping God. And that is the challenge of today.
I am interested in hearing the witnesses, and especially in
terms of the military actions that China has taken, the rogue
China that now threatens the territorial claims against Japan,
the Philippines, Vietnam and India. Thank you very much, Mr.
Chairman.
Mr. Chabot. Thank you very much, Mr. Chairman. And I have
been advised that we have visitors with us today from the
American Chamber of Commerce in Shanghai, and the subcommittee
would like to welcome you; we hope that your visit is
productive. And if you would like to stand and be recognized we
would encourage you to do so. [Applause.]
Thank you for spending some time with us. And I would now
like to introduce our distinguished panel here this afternoon
before we hear their testimony.
First, Mr. Christopher Johnson is a senior adviser and
holds the Freeman chair in China Studies at the Center for
Strategic and International Studies. Previously, Mr. Johnson
worked as a senior China analyst at the CIA. Mr. Johnson served
as an intelligence liaison to two Secretaries of State on
worldwide security issues, and in 2011 was awarded the U.S.
Department of State's Superior Honor Award for outstanding
support to the Secretary. He has also served abroad in
Southeast Asia. Throughout his career, Mr. Johnson has focused
on China's political and economic transformation, the
development of its military, and its resurgence as a regional
and global power. He has frequently advised senior U.S.
policymakers and foreign officials on Chinese leadership and
Beijing's foreign and security policies. Mr. Johnson graduated
summa cum laude with bachelor's degrees in history and
political science from the University of California at San
Diego and received his M.A. in security policy studies from the
George Washington University. We welcome you this afternoon,
Mr. Johnson.
I would next like to introduce Gordon Chang. Mr. Chang is
the author of the ``Coming Collapse of China'' and ``Nuclear
Showdown: North Korea Takes On the World,'' which focuses on
nuclear proliferation and the North Korean crisis. He is a
regular contributor at Forbes.com and blogs to the World
Affairs Journal. Mr. Chang has worked in China and Hong Kong
and most recently in Shanghai as counsel to the American law
firm Paul Weiss, and earlier in Hong Kong as partner in the
international law firm Baker and McKenzie. His writings have
appeared in numerous publications and he is a frequent speaker
at universities, think tanks, and private institutions. Mr.
Chang has briefed several government agencies and has testified
before the House Committee on Foreign Affairs and the U.S.-
China Economic and Security Review Commission. He has also
served two terms as a trustee of Cornell University. We welcome
you here this afternoon, Mr. Chang.
I am sure both witnesses are familiar with the 5-minute
rule. We would ask that you keep your testimony within that
time. There should be a yellow light that comes on and lets you
know when you have 1 minute to wrap up; and the red light will
come on. Then we would appreciate it if you would conclude your
testimony as close to that time as possible.
And we will begin with you, Mr. Johnson. You are recognized
for 5 minutes.
STATEMENT OF MR. CHRISTOPHER K. JOHNSON, SENIOR ADVISER AND
FREEMAN CHAIR IN CHINA STUDIES, CENTER FOR STRATEGIC AND
INTERNATIONAL STUDIES
Mr. Johnson. Thank you very much, Mr. Chairman.
Distinguished members of the subcommittee, good afternoon,
and thank you for this opportunity to come before you today. I
am especially pleased to know that as was mentioned in some of
your opening statements that despite the complex challenges the
United States currently is facing in other parts of the world,
there is an eagerness among the members to discuss these
important issues with regard to the future trajectory of U.S.-
China ties under the leadership of its new President, President
Xi Jinping.
Although these other challenges that we are facing
represent issues of concern and even a clear and present danger
to U.S. interests and the lives of our citizens, I would submit
that they ultimately should be viewed as near term tactical
issues to be skillfully managed by U.S. policymakers. By
contrast, getting our relationship with China right should
represent the fundamental strategic preoccupation of U.S.
foreign policy thinkers in the 21st century.
So let me spend just a few minutes sketching out for you my
assessment of the state-of-play in the relationship as well as
some of the specific issues that I have been asked by the
subcommittee to address in this testimony.
In terms of the relationship, the bilateral relationship,
relations between Washington and Beijing while generally stable
are certainly under stress. Chinese leaders and officials are
at best confused by what they see as a lack of consistency from
the Obama administration with regard to its policy toward
China, and at worst convinced that the United States is bent on
containing China's rise.
For their part, U.S. policymakers are deeply concerned by
Beijing's exceptionally forthright assertion of its sovereignty
claims to disputed territories in the East and South China
Seas, as well as the new Chinese leadership's seemingly more
active foreign policy approach in regions outside China's
traditional areas of foreign policy interest and focus as China
reasserts itself as a global power.
Add to these persistent U.S. concerns with regard to
Chinese cyberespionage and the litany of thorny economic issues
between our two countries and it is easy to see why the
relationship appears more tense than it has in some time.
Moreover, senior officials in both capitals bemoan the lack of
meaningful strategic dialogue between the two leaderships.
The practical implications of this absence of effective
senior level dialogue is the absence of strategic trust between
the two leaderships and the resultant drift in bilateral ties
brought on by policy stagnation. Still, in my assessment none
of these trends is irreversible. It simply requires leadership
and a commitment on both sides to building a truly new style of
relations between the two nations going forward.
Finally, the traditional conceptions and cadence of the
relationship still are adjusting to the phenomenon that is the
leadership of Xi Jinping. While certainly no strong man within
the Chinese system, Xi is without question the most powerful
Chinese leader to emerge in several decades.
Although it is far too early in his tenure to be able to
predict with any certainty the precise ramifications of his
particular brand of foreign policy making, one thing is
perfectly clear. Xi is not responding to the traditional
messaging and cueing that being employed by the United States
on issues such as tensions in the East and South China Seas, or
at least he is not doing so in a way that the U.S. Government
would like him to.
This reality does not necessarily demand a specific set of
policy responses from the United States, but it should give
U.S. policymakers pause and a desire to reflect on whether, and
how, U.S. actions may need to be recalibrated to deal with this
fundamentally different approach from the Chinese leader.
Turning to the prospects for economic reform inside China,
it is fair to say that the reform progress has struggled in the
first half of this year. And this can be ascribed to several
factors including a recognition on the part of Xi Jinping and
his economic team that the scale of the challenge is much
greater and the resistance that they face is far more
entrenched than they might earlier have assessed.
Another factor is the pervasive fear that has been
engendered among working level officialdom as a result of Xi
Jinping's anticorruption drive. Officials have been in a near
state of paralysis for fear that they may somehow be swept up
in the campaign. Against this backdrop, few in the working
level bureaucracy have been inclined to offer up radical reform
proposals.
Finally, the economy's sluggish performance also has acted
as a drag on reform progress. This will provide all the more
incentive for the government to adopt additional stimulus
measures for the final quarter of the year in order to meet the
leadership's ambitious annual growth target of 7.5 percent.
Such pressures and practices risk crowding out the room for
reform headway as officials, especially at the local level,
single-mindedly batten down the hatches to be able to weather
the storm that they are facing.
Still, there are reasons to believe that prospects for
reform progress at the end of this year and going into 2015 may
be brightening. For example, it will be important for the
leadership to set the right tone on the pace of reform before
the Communist Party's economic planners begin focusing in
earnest on drafting the 13th Five-Year Plan which will be
approved at a fall plenum next year.
And finally, let me turn to this issue of market conditions
facing foreign companies operating in China. The environment
confronting foreign companies doing business in China has
changed substantially in the wake of the 2008 global financial
crisis. In this year's business confidence study conducted by
AmCham China, for example, 40 percent of respondents perceive
that foreign companies are being singled out in the pricing and
antitrust investigations that now are touching a very wide
array of industries operating inside the country.
There is no one clear answer concerning what may be driving
these pressure tactics, though the pattern that emerges from a
close look at the investigations being conducted suggests that
they are motivated by some combination of an understandable
desire to bring prices down, traditional rent-seeking behavior
and some element of bureaucratic competition between the
Chinese Government entities charged with overseeing the
investigations.
Still, these explanations though certainly part of the
puzzle are dwarfed by a single, overarching priority of the
regime, the preservation and strengthening of China's unique
state capitalist system. In fact, the regulatory agencies
appear to be designing a template with these investigations
with potential applicability across a wide variety of
industries.
The specific measures taken will vary on a case-by-case
basis, but it is likely to involve a combination of several
techniques including the threat of price investigations to win
concessions, the use of investigations often in tandem with
well coordinated exposes by state-controlled media to mar the
reputational standing of the targeted firm, and the provision
of subsidies and the promotion of consolidation of domestic
producers in the targeted industry to boost the competitiveness
of designated so-called national champions.
Going forward, we can expect that China will continue to
use all the tools at its disposal including selective
enforcement of rules, provision of subsidies, and technology
transfer requirements to create an environment that unduly
favors the development of its domestic champions.
And with that I will cease there and yield back to the
chair. Thank you.
[The prepared statement of Mr. Johnson follows:]
----------
Mr. Chabot. Thank you very much.
Mr. Chang, you are recognized for 5 minutes.
STATEMENT OF MR. GORDON CHANG, AUTHOR
Mr. Chang. Chairman Chabot, Ranking Member Faleomavaega--
and I hope I pronounced that correctly and I apologize if I
didn't----
Mr. Faleomavaega. You said it just right, John Wayne.
Mr. Chang [continuing]. And distinguished members of the
committee, it is a privilege for me to appear before you today.
Mr. Chabot. Just for the record, you mispronounced my name,
but that is okay.
Mr. Chang. I apologize.
Mr. Chabot. It is Chabot, like in S-H, even though it is C-
H, but everybody mispronounces it, so there you go. So nobody
can win around here, Eni.
Mr. Chang. It is a privilege for me to appear before you
today and I thank you for this opportunity. My testimony
focuses on the highly discriminatory antimonopoly enforcement
against foreign companies in China, and there are three reasons
why we need to be concerned.
First, China's obviously unfair application of its laws in
this area is illustrative of common themes of foreign business
in China. Second, this campaign complicates already
deteriorating China-U.S. relations. And finally, the
fundamental reason that Beijing engages in this campaign
suggests that relations between China and the U.S. over the
long term will remain troubled. And I will direct my testimony
to the last point.
There has always been some hostility in China toward
foreign business, but new ruler Xi Jinping has taken it to a
new level. So, for instance, in July of last year, the National
Development and Reform Commission, which is one of three of
China's competition regulators, forced these companies, about
30 of them, into a room for 2 days and wanted them to write
self-criticisms.
Since then, the campaign against American companies has
been unrelenting. Microsoft is the current target, but QualComm
could be wounded, perhaps seriously, because China is targeting
its most important source of revenue. And Time Magazine, in
July, asked, is no foreign brand safe in China? And
unfortunately the answer is, no brand is safe. And the question
we need to ask is why?
Well, many say that this is just a squabble over market
share with increasingly powerful state enterprises wanting to
take business away from foreign companies. Now of course there
is more to it than that. The campaign against foreign business
almost certainly is directed from the top of the Chinese
political system, the seven-member Politburo Standing Committee
of the Communist Party, because nothing this important in China
could go on for so long unless it had approval from the top of
the system.
The campaign unfortunately is a frontal attack on foreign
business and it brings to mind the xenophobia of the Maoist
area because Xi Jinping has been conducting a series of Maoist
inspired rectification and mass line campaigns since he took
over as China's leader in November 2012. Now the use of
Cultural Revolution style methods against multinationals
suggests that this Maoist rhetoric is actually starting to
affect Chinese governance.
Now Chinese leaders are not acting pragmatically right now,
that is because of the nature of the Chinese political system.
And despite all the reform and progress that we have seen
today, China is still driven by the need to seek to, first and
foremost, legitimize the Communist Party. Xi Jinping, I
believe, is trying to legitimize the Party not only by
attacking foreigners, but also he is attacking foreigners to
help him consolidate what I believe is a shaky political
position at home.
So political considerations are driving the Chinese leaders
to go after us, and in all likelihood I believe that this
campaign will intensify at least in the long term. The fault is
in the nature of the Chinese political system which no Chinese
leader is prepared to change. And in this highly charged
political environment, it is not likely that China can maintain
good relations with its neighbors, with the international
community, with the United States. It is clear that considering
everything that Xi Jinping will not stop this campaign until
the U.S. Government impose costs on China that are greater than
the benefits that China gets from discriminating against U.S.
companies.
With China's growing reliance on exports, Washington has
the leverage to stop China in its tracks. For instance, last
year, China's overall merchandise trade surplus against the
United States which was a record $318.7 billion was a stunning
122.7 percent of China's overall surplus. We can find other
locations to manufacture goods, and in fact that process is
happening already. But China cannot replace the U.S. market.
We can protect our companies by limiting China's access to
our market through special tariffs and other mechanisms but it
is clear that we have to do something. Our companies and our
workers are already bleeding. Thank you.
[The prepared statement of Mr. Chang follows:]
----------
Mr. Chabot. Thank you very much. Really excellent
testimony. We were both just commenting on that. Very, very
good. I will recognize myself for the purpose of asking
questions for 5 minutes.
Let me begin with you, Mr. Johnson. Since President Xi
assumed power, it seems that we have seen a discernible change
in China's behavior. It is more aggressive, more risk oriented
and it seems pretty much impervious to U.S. pressure. As
today's hearing title suggests, it seems we are entering a new
era in U.S.-China relations. First, would you agree? And
second, how can the administration recalibrate its strategy to
more effectively deal with China's fundamentally different
approach to foreign and economic policies?
Mr. Johnson. Thank you, Mr. Chairman. It is my perception
that indeed we are entering a fundamentally different period
under Xi Jinping's leadership with regard to his approach to
Sino-U.S. relations but also to China's foreign policy at
large, and I think there are several reasons for that.
The first is that unlike his most immediate predecessor, Hu
Jintao, Xi Jinping is a very confident leader, someone who does
command the system, has a deep political network that runs
throughout the system, and has very strong views about how he
thinks about China's place in the world. It was very telling,
for example, when he was first revealed as the new leader of
China. In his opening speech, which was very brief, he put a
lot of emphasis on these concepts of the Chinese dream and the
great rejuvenation of the Chinese people and China as a nation.
And I think we see this stream running through his foreign
policy approach.
With regard to the U.S., I think the fundamental thing to
understand in terms of how Xi Jinping approaches the
relationship is that unlike his two predecessors who arguably
spent between 80 and 90 percent of their foreign policy energy,
or bandwidth, if you will, focused on Sino-U.S. relations
whether those relations were good, bad or indifferent.
Xi Jinping does not operate that way. His view is that he
does not, of course he is not seeking to sort of diminish the
status of U.S.-China relations, but he is not as solicitous or
desirous of the relationship as his predecessors have been. And
I think we have seen that time and again.
So for as just one example, you had the Sunnylands meeting
between our two leaders. Things seemed very solid in that
meeting and a good opportunity for the two Presidents to be
able to get to know each other and to think about how we might
indeed go through this new style of major country relations.
But since then we have seen this drift come in and traditional
mechanisms like the Strategic and Economic Dialogue between our
two countries, which in my assessment has become a fairly
useless entity, we are not connecting on this level. And I
think it is because when President Xi looks at President Obama
he sees a leader who unlike himself is not confident, is not
control of his own system, is not reliable.
And in the long management of U.S.-China relations, the
most important thing to the Chinese side is consistency. They
will take a difficult position from the United States when
necessary if they know that the leader is consistent, and they
have real questions about the consistency in President Obama's
approach.
In terms of his broader foreign policy strategy and the
things you mentioned with regard to his approach to the
neighbors, what we see, I think, is a fundamental rejection, if
you will, by Xi Jinping of the longstanding foreign policy
dictum stated by Deng Xiaoping, which is that China should bide
its time, keep a low profile, never take the lead
internationally.
It was very telling to me that when the Foreign Minister
Wang Yi gave his first press conference in the spring at their
national legislative session, when asked by the CCTV reporter
in the audience, so obviously a planted question, how would you
describe the success of China's foreign policy under the new
leadership in the first year in office, he said, in a word,
active, which tells us a lot. Because 35 years ago, no senior
Chinese official would have described their foreign policy as
active.
So how should the U.S. respond to----
Mr. Chabot. Can I cut you off here?
Mr. Johnson. Sure. Yes.
Mr. Chabot. Because I am almost out of time and I think Mr.
Chang should respond to that question as well for a minute or
two.
Mr. Chang. I think that when Xi Jinping looks at Obama and
Obama looks at Xi Jinping, he must think that the Chinese
leader himself is unreliable, and the problem is of distress in
the political system. June 26, Politburo meeting, Xi Jinping
admits that his signature campaign against corruption, which is
really just a political purge, was stalemated. And then he
talked in melodramatic terms about his own death.
Well, there have a been a number of coup rumors over the
last 3 years, some of very recent vintage. We don't know a lot
of what is going on, but we can see that there are things which
are not consistent with a stable political system in China. So
that I think is going to be driving U.S.-China relations.
Mr. Chabot. Okay, thank you very much. My time has expired,
and I will recognize the ranking member, Mr. Faleomavaega.
Mr. Faleomavaega. Thank you, Mr. Chairman. To counter the
U.S. pivot to Asia, China is aggressively pushing for free
trade agreements within the Asia-Pacific region which include
South Korea and Japan, and looking somewhat of a maritime Silk
Road, if you will, it will also create free trade agreements
with Southeast Asian countries.
I would like to ask both gentlemen of what significant
impact will this have on the United States especially within
the administration's ongoing efforts with the Trans-Pacific
Partnership initiative?
Mr. Chang. Obviously I think there is going to be
competition between the United States and China. China's trade
with the region certainly has grown dramatically with all of
its neighbors, but I think that to a certain extent we are
seeing troubles in the Chinese economy itself. It is not
growing at the 7.5 percent that Beijing claims. It is probably
closer to 1 or 2 percent.
And I think that we are going to see a decrease and a
decline in Chinese trade with its neighbors despite all of
these free trade agreements. The Trans-Pacific Partnership
concept is very important for the United States because when we
talk about the pivot we often think about military means, but
really the most important part of the pivot is the Trans-
Pacific Partnership because that will be there for generations.
Mr. Faleomavaega. Mr. Johnson?
Mr. Johnson. I would just add briefly to that by saying
that the TPP really is the fulcrum of the rebalance in the
region. And in the Asia-Pacific region, economics is security.
That is how the countries in the region view it. And so without
TPP there is no economic counterweight to what China has been
doing, and then this often will end up driving some of their
behavior toward the Philippines, toward Vietnam.
I think the assessment sometimes in Beijing is, why
shouldn't be assertive with this when ultimately these
countries will have to knuckle under because of their economic
dependence on China? Likewise, I think it is the best way that
we can signal to the region that there is truth, there is
action behind our rhetoric with regard to our statements about
being in the region for the long term.
Mr. Faleomavaega. There are at least 11 independent Pacific
Islands nations, each have a vote in the United Nations. It is
no secret that China, in 2009 alone, gave over $200 million in
aid to these Pacific Island countries. Is there a connection
between the U.N. votes and the increased aid, and, if so, does
this pose a security threat to our interests, Australia, as
well as New Zealand?
Mr. Chang. I believe there are 14 U.N. votes in the
Pacific, and this is, I think, one of the important things for
China. Clearly it was important for China's initiatives toward
Africa and Latin America. And to the extent that the U.N. is
relevant and that changes day by day, then of course this is
going to be important because the U.S. will be outvoted in the
General Assembly time after time unless we have much better
relations with countries in the Pacific.
And one important thing on that is that China's relations,
economic relations, are not always to the benefit of those
islands and those nations. We need to have better trade. This
is something that we can really win.
Mr. Faleomavaega. Mr. Johnson?
Mr. Johnson. Yes, I would agree with that and simply add
that this is another area, while not affecting those islands
where TPP is so important in terms of getting a U.S. style
standard involved in a lot of these free trade agreements,
because what we see with the Chinese is a lot of direct buying
of influence with these countries through economic projects and
so on.
Mr. Faleomavaega. I don't have the exact geography of the
situation in the Pacific region, but I know that the compact of
these Pacific Island countries compose at least a vast part of
the world's geography as far as sea bed minerals, marine
resources. Do you think the United States should pay a little
more attention to the situation there in that region?
Mr. Johnson. Absolutely.
Mr. Faleomavaega. Okay. I am sorry, my time is up. Thank
you, Mr. Chairman.
Mr. Chabot. Thank you very much, Mr. Faleomavaega. The
gentleman from Calfornia, Mr. Rohrabacher, is recognized for 5
minutes.
Mr. Rohrabacher. I have often told people who want to
invest in other countries and do business and then they come to
me and they want different type of trade agreements that would
facilitate their commerce in other countries, I always say that
I do believe in free trade, but I believe that in free trade
between free people. And that when you have a free trade system
with a dictatorship or with a country that is run by a clique
as we seem to see in China that the trade will be manipulated
in order to enrich the clique.
And is what we have is a basically a clique in China that
is, I noticed there is so many more millionaires being created.
If you are in the clique you have opportunity and freedom, if
you are out of the clique the system will work against you? Is
that what we face there in China?
Mr. Chang. That is certainly the case that we face in
China. Just today I heard the story of a U.S. investor, Susan
Weinstein, whose investment was completely taken away by
Shanghai gangsters. So this is the clique at work.
China's trade behavior, since it joined the World Trade
Organization at the end of 2001, has deteriorated over the last
3 or 4 years in very ways that are troubling. Because we were
always told that China would become a good trader, would become
a part of the international system, well, in effect, over the
last 3 or 4 years it has gotten much worse, and so therefore
there is a problem.
And if I may say so, I think that China's desire, the
Communist Party's desire for control, which has manifested
itself on these antimonopoly investigations, is the same desire
for control of Christians and other people of faith in China.
Mr. Rohrabacher. I guess you might call this what we are
describing as the ultimate crony capitalism, which is, in other
words some people believe crony capitalism is actually fascism
which is another way of expressing that.
If American companies invest overseas, and now we have this
example where foreign companies are being targeted for
aggressive legal action, I don't think this should surprise
these businessmen. I mean you go and you invest in a country
that does not have an independent court system, am I correct in
assuming that if there is a business disagreement or if the
government has something to do that the court system is not in
any way a fair or free court system there?
Mr. Chang. The last thing that I did, Mr. Rohrabacher,
practicing law in Shanghai, was involved in a multiyear case as
a representative of a foreign bank against a local company. And
the odds were stacked so much against us it was not a fair
fight and, accordingly, we ended up on the short side of the
stick. But this experience is just replicated thousands of
times a year.
Mr. Rohrabacher. Well, we know that China is not only
condoning but, actually, the government of the clique that runs
the country is actually participating in the theft of American
intellectual property rights and cyberattacks, et cetera.
American businessmen who have been insisting on a free
trade approach with this type of country, I hope they don't
come to us now pleading with us to help them out. By investing
overseas, an American company that invests overseas in order to
make a 20 percent profit rather than investing here and making
a 10-percent profit have basically betrayed the American
people. Working people in our country who go to war, pay their
taxes, insist on honest government, and those honest citizens
here who expect perhaps those people with more money in our
society to take their well being into consideration when making
business decisions.
Well, the fact that those companies have gone over there,
they are getting their comeuppance and they should have watched
out for what we Americans hold dear in the first place and they
wouldn't be so vulnerable. So I would suggest, Mr. Chairman,
that we not go out of our way to protect the American companies
that are now in jeopardy in China.
Mr. Chabot. Thank you very much. The gentleman yields back.
The gentleman also from California, Mr. Bera, is recognized for
5 minutes.
Mr. Bera. Thank you, Mr. Chairman. Thanks for calling this
incredibly important hearing. From what both the witnesses have
described, China clearly is at a crossroads and over the past
few years it has been at a political crossroads, an economic
crossroads. Yet, China's importance to the region in terms of
trade with regional partners, Japan, Korea, the Southeast Asian
nations, and obviously the importance of being a trading
partner with us also has grown.
China has to make some decisions now. And I think Mr. Chang
you touched on one of the leverage points that we have. Because
of China's dependence on exports and their dependence on
exports to the United States, yes, there probably are
opportunities for us to leverage that reliance on exporting to
us.
So one of my questions, and then one of my thoughts and
then I would let the comment here, within this committee we
have looked at North Korea and some of the challenges that we
face in North Korea and the importance of needing a regional
approach and China's importance in leveraging North Korea to
become a more responsible player in the world.
How would, just again thinking, through knowing that you
have written a book on North Korea as well, how we could
leverage that again China has to be an important partner as we
approach North Korea, and approach it not as a U.S. versus
North Korea, but the United States with Japan, with Korea, with
China, with Russia, to leverage on North Korea?
Mr. Chang. Historically, China has had the most influence
in North Korea, but in recent years, especially the last year,
China has had less influence in North Korea than us. And so
therefore I don't think we need the Chinese to implement our
policies toward Pyongyang. It is a very much of a change of
attitude on the Kim regime, but clearly relations between
Beijing and Pyongyang have broken down. The United States can
act on its own in this case.
Mr. Bera. Should China though be a partner in this at all?
Do you think they can be a partner?
Mr. Chang. We have tried that approach for a decade and
didn't work. I don't know if it is going to work now,
especially with the problems inside Beijing.
Mr. Bera. Okay.
Mr. Johnson. My personal view is that there is more
opportunity with the Chinese than there has been in many, many
years with regard to North Korea. We have seen that Xi Jinping
has taken a somewhat different approach. There has been a lot
of commentary in air and ink spilled about whether or not China
has changed its policy. Fundamentally it hasn't. It is still
what keeps the North Koreans going on a day-to-day basis.
But what we do see is, as Gordon just suggested, a sort of
fundamental difference of opinion now between the two
leaderships. The one thing that frankly where roping them in as
a partner is an important piece, is that they are very much
embarked on a campaign now of seeking to peel South Korea off
from the alliance with the U.S. and Japan. And we saw this most
recently with Xi Jinping's visit to South Korea earlier in the
year.
And this is something that we the United States need to be
very mindful of and think about how we can leverage not only
our relationship with South Korea, but also Chinese concerns
about North Korea to try to manage that process.
Mr. Bera. If we shift now to some of the tensions that
occurring based on Chinese actions in the East China Sea and
the South China Sea and some of the unilaterally provocative
moves raising tensions between China and Vietnam in very
important trading routes, and then the same thing with the
Senkaku Islands in raising tensions between Japan and China,
and then obviously the ADIZ unilateral expansions. Again I
think all of our regional allies are looking for the United
States to make sure we are standing strong there and sending a
very strong message.
And I would be curious again how we push back. Because
again if these unilateral decisions that China is making go
unchecked, they have somewhat of a propensity to continue
moving the ball down the field.
So Mr. Johnson?
Mr. Johnson. Yes. It is, in fact, one of the things that is
maddening about some of these moves that the Chinese are making
is that they are very hard to counter in a sophisticated way.
One of the challenges is that I believe the Chinese have made
the assessment that with regard to how to manage these kind of
salami-slicing tactics that we have been seeing from them, they
understand that the U.S. tool kit is actually fairly limited.
We have rhetorical responses which we have been using, and we
have the 7th Fleet. And between there is not a whole lot that
we can be doing.
One area though is in the space of improving maritime
domain awareness for the littoral countries. This is
inexpensive from a U.S. point of view and also will help create
a more common picture and understanding of what the Chinese are
doing with regard to their reclamation of these atolls and so
on.
Mr. Bera. All right. And I think I am out of time.
Mr. Chabot. Thank you. The gentleman's time has expired.
The gentleman from Arizona, Mr. Salmon, is recognized, who is
also the subcommittee chairman for the Western Hemisphere.
Mr. Salmon. Thank you very much. And what is really
fascinating is that I do not speak Spanish and I am the
chairman over the Western Hemisphere. I actually speak Mandarin
Chinese, and it doesn't go very far when I go to Mexico.
But anyway this is my second stint in Congress. I was here,
in fact, Mr. Chabot and I were elected the same term, 1994----
Mr. Chabot. Twenty years ago.
Mr. Salmon [continuing]. During the great Contract with
America. And I came at a time when every summer we would have a
debate on Jackson-Vanik and we would be kicking the stuffings
out of China every July. And I became a very strong advocate of
PNTR, and I became a very strong advocate of them entering into
the WTO.
I was in Seattle at the time a lot of that was happening
when they were throwing the chairs through the windows, and I
was there at that time. I had been over to China probably over
40 times, and many of those visits I have stayed for as long as
a couple of months so I know a little bit about China. I
couldn't be more profoundly disappointed in the predictions
that I made if China was to get PNTR as far as being a good
trader and our values maybe rubbing off on them.
I remember making the argument, I think the most valuable
export that we have to China is not to any of the commodities
or services but it is our ideals and it is freedom. And I
believed at that time that a lot of the human rights issues
would become better, that religious freedom would improve.
And I am sad to say that was over a decade ago and it has
not. And in many ways, Mr. Johnson, you said it is worse, and I
agree. And I think the aggression has become worse. Now our
President at the first of this year said that he and his
administration would make a pivot to Asia. How is that working
out? Is the pivot being made?
Mr. Johnson. Well, certainly in terms of the rhetorical
pieces of the pivot we have had some execution, but I can tell
you that when I travel to the region I am constantly asked by
our regional partners and allies, when is it going to
materialize? When are we going to see some----
Mr. Salmon. That is what I am wondering too.
Mr. Johnson [continuing]. Meat on the bone, if you will----
Mr. Salmon. Yes.
Mr. Johnson [continuing]. With regard to how it works. And
as I mentioned just a moment ago, things like focusing on
building this maritime domain awareness net, enhanced
intelligence cooperation, for example, with allies and partners
in the region, these are real things that we can be doing with
our partners that we aren't, to make this pivot real.
I also would just underscore again what both Gordon and I
suggested with regard to TPP and the importance of that in
terms of balancing the rebalance, right?
Mr. Salmon. Well, right after the President spoke in his
State of the Union and said that TPA and TPP were extremely
important, the majority leader on the other side said, over my
dead body. And there has been, really, no push from the
administration to move over that.
Mr. Johnson. Well, this is a fundamental challenge. I mean
I have yet to see a legislative strategy from the
administration----
Mr. Salmon. Exactly.
Mr. Johnson [continuing]. In moving TPP forward.
Mr. Salmon. And it is very, very frustrating. I have a
specific question. Because when I left in my private life, one
of the things I did was I became the CEO of a company that was
manufacturing its product over in China and it actually had
patents all over the world filed.
And we had a really interesting phenomenon happen in China,
and that was that when we filed our patent in China we had some
bad actor cross file, and then what he did because the courts
were colluding with him, what he basically wanted was extortion
money. Buy him off for several million dollars so that he would
go away. Do you see a lot of that?
Mr. Johnson. Constantly. And this is one area where, the
main problem in these litigations is that the local court is
appointed, paid and overseen by the local party, provincial
administration. And if the key SOE in the province is the one
you are up against, guess who is going to win the court case?
It happens this way every time.
And so this is something where we are watching carefully.
They will have their plenum here in a couple weeks. The
official theme is supposed to be Rule By Law, so it will be----
Mr. Salmon. And while the central government has passed
some very robust laws regarding IP violations, the problem is
there is no enforcement.
Mr. Johnson. Local enforcement, yes.
Mr. Salmon. There is no enforcement. And when you get down
to the provincial levels, they are doing their own thing and
they don't answer to the Federal Government, and so, really,
nothing has really changed. In fact, it is as bad as it has
ever been. Is that correct?
Mr. Johnson. That is my assessment.
Mr. Salmon. What would you say, Mr. Chang?
Mr. Chang. That is certainly correct. And it is because
there is, the Chinese central government if it wants to do
something it can find Falun Gong practitioners in some upland--
--
Mr. Salmon. Exactly.
Mr. Chang [continuing]. Remote place thousands of miles
from Beijing, but it can't enforce patent infringements in
Beijing. If I just may so, I think that American trade has
affected the Chinese people. The Chinese people now think very
much the way we do on the issues that you talk about, it is
just that the Chinese political system has gone the other way.
And so that is, I think, the paradox.
Mr. Salmon. Thank you. I am out of time. Would love to talk
with you a lot more. It is good stuff.
Mr. Chang. Thank you.
Mr. Chabot. The gentleman's time has expired. Is the
gentleman ready? We are doing a second round and we will start
with Mr. Sherman.
Mr. Sherman. Only in America would we ignore this enormous
trade deficit and focus instead on whether the Japanese get a
few islands, excuse me, rocks that we mischaracterize as
islands.
I don't know if either of you can answer this. Why is that
Germany is able to run a trade surplus with China, whereas we
run the world's, the largest trade deficit in the history of
mammalian life?
Mr. Johnson. I am going to largely defer to Gordon on this
one, but I would simply suggest that it is because the Germans
still make things. But----
Mr. Chang. I would like to defer to Mr. Johnson, but since
he has already started, I think that the most important thing
is that the United States has become strong by having open
markets.
Mr. Sherman. No, the United States has become weak by
having open markets. You are not in touch with the working and
middle class families that have been decimated while the grad
school educated elite in the country does so well. This has not
been a period of strength for America. This has been a period
of decimation for our families.
So you can continue.
Mr. Chang. The problem is that China has become much more
mercantilist as I mentioned before and trade behavior has
deteriorated. And it is a paradox for the United States because
it is a very difficult problem in that the sense that we do
believe in open markets and yet you have a predatory trader.
And the question is, how do you deal with that one trader
while still keeping the markets open which we believe to be
important? And it is, I think, because there has been
ineffective enforcement on the part of various administrations
to Chinese behavior, because we have always thought they would
get better. But over the last 3 or 4 years they have gotten
worse. And so I think that we need to actually start to look at
some much more punitive measures to make sure that as I said
before that we impose costs that are greater on them than the
benefits that they get by being mercantilists.
Mr. Sherman. Well, I think you misunderstand the gravity of
the situation. Every year they become another $300 billion
richer and we lose 2 million to 3 million jobs.
Japan is happy to have us expand our military spending to
defend islets that they hope will have oil which they will not
share with us. And of course they exaggerate the importance of
these. What is the Japanese military expenditure as a
percentage of their GDP?
Mr. Chang. One percent, I believe.
Mr. Sherman. I believe it is way less than 1 percent, isn't
it? Isn't 1 percent a ceiling they aspire to?
Mr. Chang. You very well may be----
Mr. Sherman. So now these same families that have been
decimated should pay higher taxes to the Federal Government so
that we can make sure to have a strong naval presence to defend
the oil that doesn't exist which will accrue to a nation that
isn't willing to spend its own money. We have decided to be
hawks on Japanese rocks and doves on trade. This meets the
institutional needs of Washington and the Pentagon and Wall
Street, and obviously is part of an overall program that has
decimated American working families.
I will yield back in hopes of an interesting second round.
Mr. Chabot. Okay, the gentleman yields back.
Let me start with you if I can, Mr. Chang. You had
mentioned the $318 billion deficit that we have with China, and
I think I share a lot of concerns with Mr. Salmon, because we
supported, what was at that time PNTR, which then became normal
trade relations and other things. What can we really do? If you
were King, what would you do to deal directly with that $318
billion trade deficit that we have with China?
Mr. Chang. Well, the one thing that I would do is I would
get on the phone with Xi Jinping and say that if he didn't stop
XY and Z that essentially the U.S. would start inspecting goods
at the Port of Long Beach. And that way the container ships
would be lined halfway across the Pacific.
And I know that some people believe that rigorous
inspection of Customs is a WTO violation, but nonetheless,
these guys play very hard and I think that we should play as
hard with them as they play with us. We have to remember that
the Blair-Huntsman Commission talked about a special tariff
because of Chinese intellectual property violations. And indeed
a special tariff, I think, would be something that could work
in a number of different areas, and so therefore it is one of
the things that we should look at.
But as long as we only talk about these things and don't
actually impose costs, we will never have any progress with the
Chinese on trade issues.
Mr. Chabot. Thank you. You mentioned that you would say
unless he does XY and Z that we are going to do these things.
What would X or Y or Z be? What are the things that we really
ought to demand from him?
Mr. Chang. Well, I think the thing that is most important
would be the subsidies that China gives to its manufacturers to
give them an extraordinary advantage, not only in global
markets but in China's own market of course. The list changes
day by day. I mean 1 year ago we would not have been talking so
much about the antimonopoly investigations, but now of course
they are the topic du jour.
This list is going to change, but the list is comprehensive
and we could come up in short order with a list of about 30
things that need to be done. And I would be happy to do that
for the committee if they so request.
Mr. Chabot. All right, well, thank you. I think we will
request that. So we appreciate that very much.
Let me ask both of you this. You suggested one method to
mitigate the Chinese offensive against American companies is
for companies finding other locations to manufacture their
goods, and that is going to take some time for that to happen.
You referred to it as a frontal attack on foreign businesses.
At what point do the foreign businesses either realize this or
does it no longer become, maybe not unprofitable, but not
profitable enough to take all this grief from China? Are we
approaching that point or did they make enough money now that
they are willing to put up with the garbage that they are
putting up with?
So either one of you or both of you.
Mr. Johnson. I will just offer a couple brief remarks. I
think that what we can say is that American firms, European
firms, other firms operating in the country certainly have
noticed that the environment has become much more difficult. I
think it is fair to say that 5 years ago when firms were
considering an investment in China, the discussion at the board
level was rather simpler. It is China, it is huge, we have to
be there, go.
Now I think firms are taking the opportunity to think more
deliberately about what might we get out of this particular
investment? What type of return might we be able to receive?
What will we give away both voluntarily and involuntarily
through cyber and other issues that we worry about? And are we
in an industry that it would actually make sense for us to be
operating in this current China landscape that they face?
Mr. Chabot. Thank you. Let me ask you this, Mr. Chang,
because I have only 1 minute to go. You mentioned when the
Chinese Government pulled these 20 American corporations, I
think?
Mr. Chang. There were 30, and they were mostly American but
there were others as well.
Mr. Chabot. All right. So could you tell us a little more
about that? What happened, where was it at and what were they
demanding of these people?
Mr. Chang. There were two series of meetings. There was one
set of meetings for Chinese companies. There was another set of
meetings for foreign companies. Both sets of meetings were
conducted in Chinese so there was no need to have two sets of
meetings. And, essentially, over 2 days, what the NDRC, the
National Development and Reform Commission, did was wanting to
force them to write confessions and essentially to agree to
fines for violations of the antimonopoly law, and companies of
course resisted.
To answer your other point, foreign direct investment is
starting to fall in China. In July it was down 17.0 percent. I
forget the figure for August. But it is not only the falls in
July and August, but also for 2014 as a whole FDI is down. This
is the first time this has occurred since China joined the WTO
in 2001.
Mr. Chabot. I am out of time, but do the Chinese realize
that this could have the opposite effect that they desire? That
they may end up shooting themselves in the foot?
Mr. Chang. I think they do realize that, but I also think
that they can't do very much about it because of Chinese state-
owned enterprises being too powerful within the Chinese system.
And so I think senior leaders, like Li Keqiang, the Premier of
China, can talk about this issue but there is very little he
can actually do about it.
Mr. Chabot. Thank you very much. My time has expired. Mr.
Faleomavaega is recognized for 5 minutes.
Mr. Faleomavaega. Thank you, Mr. Chairman. I am trying to
think in terms of some of the questions and issues that were
raised in our hearing this afternoon. It took American
democracy over 200 years to develop where we are now, and I was
wondering that there is an American Indian saying, walk in a
man's moccasins before you make judgment.
China has 1.5 billion people. It is one of the two most
populous nations in the world. And even India, if you talk
about it, there are tremendous opportunities as well as
responsibility. How do you go about in getting a system of
government that will address the means or the issues of some
1.5 billion people, not million, billion?
And I want to raise this issue with both of you gentlemen.
If you were in the President of China's seat, what would you be
doing or saying to provide, to feed 1.5 billion people? Now I
know that it seems that our whole interest it seems to be
emphasized on strategic and military, but what about
considering the social issues that the Chinese people and their
leaders have to confront? What do they have to do in order to
survive?
It is very easy for us because we are the most powerful, we
have the biggest economy in all of this, but it took us 200
years to get where we are now. So I would be happy to hear your
comments on that concern.
Mr. Chang. Well, China took 5,000 years and is still
working at it. If I were Xi Jinping, I would think that the
Communist Party system has basically run to its limits. It is
very much, it cannot really progress very much further within
the authoritarian system. And I would open it up for elections.
I would have very much fewer regulations on business. I would
get the state of business by privatizing state-owned
enterprises.
But fortunately or unfortunately I am not the leader of
China, and he is absolutely resistant to all the things that I
just talked about.
Mr. Johnson. I would simply add that this is probably the
core challenge that the Communist Party leadership faces going
forward. You have a very stovepiped and rickety Leninist system
riding atop one of the world's most dynamic countries and
whether or not the Party leadership can reinvent themselves in
some way.
And I really think it speaks very much to what Mr. Chang
just said with regard to we are not going to see the type of
reform and progress we want to see until the Party is able to
step back from the economy, and so far that is just something
they have not been willing to do.
Mr. Faleomavaega. How would you then compare the
socioeconomic interests of the Soviet Union, or what we now
call Russia, in terms of the development that they have taken?
Is it more a free market oriented or are they still having
problems with Lenin and the ideologies involved in that?
Mr. Johnson. They don't have troubles with Lenin, they have
troubles with mafias. It is an even more crony capitalistic
system than that you might see in China.
Mr. Faleomavaega. Mr. Chang?
Mr. Chang. What we see in both places was the Soviet Union
looked to be more vibrant than it actually was. I think China
is less vibrant than it appears to be. China's problem right
now is that it has run up enormous amounts of debt. It has put
in enormous amounts of stimulus since the end of 2008 to avoid
the effects of the global downturn. And so it does have
critical threats to its economy, but they are very different
than the ones that faced the Soviet Union at the end.
So essentially you have a political system that is
dominating the economy that is not allowing the actors in the
economy to do what is absolutely necessary to create
sustainable prosperity.
Mr. Faleomavaega. Two of the most populous nations in the
world are side by side, and I am talking about India and China.
And there seems to be a development ongoing in trying to figure
how they can provide programs that will naturally benefit them
economically. Do you think the United States should have a
policy in promoting better economic relations with China as
well?
Mr. Chang. I think that we should have a policy which is
much more focused on India. It is a democracy. We share values
with them. We also face a belligerence of China and so we do
face common threats. But I think the most important thing is
values and then that will create a stable relationship. The
United States has not had a stable relationship with a large
authoritarian nation ever, and I don't think that what we are
trying to do now is capable of success.
Mr. Faleomavaega. Mr. Johnson?
Mr. Johnson. I would note that what is interesting,
especially with now that Mr. Modi is in as Prime Minister of
India, certainly, and has a track record of holding very strong
and negative views about China, but yet we see that the two
leaderships are trying to court each other in this early
process.
I would simply emphasize that for the United States, the
main thing for us to remember is India will never agree to be
part of some sort of pincer movement to surround China. The
economic relationship is too strong. And so we have to be
mindful of the limits of how we might be able to----
Mr. Faleomavaega. Thank you, Mr. Chairman.
Mr. Chabot. The gentleman's time has expired. The gentleman
from Virginia, Mr. Connolly, is recognized for 5 minutes.
Mr. Connolly. Thank you, Mr. Chairman, and I have an
opening statement I would ask be entered in the record.
Mr. Chabot. Without objection, so ordered.
Mr. Connolly. I thank the chair.
Mr. Chang, I would like to pick up on something that just
intrigued me the way you put it. That China's Communist system,
Communist political apparatus, has maybe kind of run the clock.
I mean it is time out. It is over. I wonder if you could go
into that just a little bit more, because two things strike me
about China. One is, there is a sense, almost an obsessive
sense of the need for order, and order historically flows from
Beijing. And they have good reason given just 20th century
history why one might abhor the opposite of order, the chaos of
revolution and individual militias and of course the Japanese
occupation and then the virtual civil war between the
Kuomintang and the Communists led by Mao.
So does that, if I am right about almost, well, an
obsessive concern about order given their history, does that
not give the Communist Party some more rationale on staying
power than otherwise might exist in other countries where
Communism, in fact, govern?
Mr. Chang. I think that a desire for order gives a
government strength, but only up to a point and they have
passed that point. What is important right now is that the
Communist Party no longer inspires the Chinese people, and the
increasing expenditure on internal security, I think, is a
symptom of decline.
The other reason why the Chinese Communist Party has run
out the clock is essentially economic. What they have done is
they have created massive amounts of debt, perhaps as much as
between 15 to 30 percent a year increase in debt over the last
5 years, and they have not been able to create growth that is
sufficient to pay back that debt.
So China is on the edge of a debt crisis, plus also a
property meltdown which is what we are seeing at this present
moment as property markets across the country decline. So
essentially the problem is fundamentally economic, but it
underlines a political problem of not being able to inspire the
Chinese people.
Mr. Connolly. Did you want to comment? You were shaking
your head, Mr. Johnson.
Mr. Johnson. I take a somewhat different view. My own view
is that the Communist Party in China has proven itself to be a
very flexible and resilient entity. And that while they do face
a lot of these challenges, one thing that distinguishes them
from some of the other Communist systems, especially the Soviet
Union, that have existed is that they are far more aware about
the problems going on inside the country than their Soviet
counterpart was. They are far more aware of that.
And we see them historically being willing to take very
pragmatic steps to keep the wheel turning. I do think there is
a question under whether this new leadership under Xi Jinping
where he has really emphasized control and almost a sort of
looking back toward an earlier era of ideological
indoctrination, whether or not that is the right course for
them to be taking.
Mr. Connolly. But I think implicit in Mr. Chang's
observation is the fact that perhaps in a high tech, knowledge
based economy you have got to have unclad, unfettered ideas,
unfettered expression of ideas, unfettered exchange of ideas.
Mr. Johnson. Correct.
Mr. Connolly. And that is antithetical to any authoritarian
system, especially a Communist system. And so buried in his
comment, I think, is a prediction that even if you don't agree
that the Communist system is rickety, corrupt and lacking in
legitimacy, increasingly, nonetheless the driver of a
contemporary economy is just running headlong into that
structure and one or the other has to give.
Mr. Johnson. Yes. Precisely so. I mean this is one of the
challenges they are facing now, right, is their problem with
innovation. And I would like to remind Chinese friends that for
5,000 years of their history they didn't have a problem with
innovation and then the Communist Party took over and suddenly
they have had some difficulty with it.
Unfortunately the practical ramification of that, I would
argue, is that they know that in order to solve a lot of the
problems that Mr. Chang has referenced in their economy, they
do need to move up that value chain much faster than they
previously had assessed. Given the challenges that that system,
the restraints that it puts on innovation, unfortunately for
things like cyber, I think it sends all of the incentives in
the wrong direction and we should plan on seeing it increase.
Mr. Connolly. Yes, good point. Mr. Chang, I invoked your
name and characterized your comment. Did you just want to add
to that in terms of the knowledge based economy?
Mr. Chang. The problem is that manufacturing is becoming
more expensive in China. They are losing low end manufacturing
but they are not able to move up the value chain fast enough to
replace what they have lost. And that is going to be the
critical dynamic in China's economy going forward.
Mr. Connolly. Thank you. Thank you both. Thank you Mr.
Chairman.
Mr. Chabot. Thank you. The gentleman's time is expired. The
gentleman from Georgia, Mr. Collins, is recognized for 5
minutes.
Mr. Collins. Thank you, Mr. Chairman. I am not sure what is
going on today. It is just a privilege for me to be following
my friend from Virginia everywhere, but let him know that I am
following him as we go. It is good to be--he can take that and
he will understand as it goes, and we have had a good time.
This is a concern, and I agree, I am glad of the hearing
here, Mr. Chairman, and I appreciate you calling it. As
recently returned from China and speaking to, dealing
especially from my position in judiciary and intellectual
property and intellectual property courts, we had a lot of good
discussions with the intermediate courts in speaking in
different areas.
What was amazing to me was is while we were there dealing
with antitrust and dealing with these kind of, the monopolistic
provisions, all across the front page of the very, I guess,
fairly stated propagandistic China Daily, today was the issue
of they are going after Mercedes Benz and others and after
market parts.
The interesting part was is they were not really attacking,
in all fairness, the status of what they have and their market
share, what they were trying to do is negotiate price. And this
is where, I think, we have got to come back. Because just in a
matter of a few days, the companies all lower their prices and
is amazingly how it all goes away. So you can't have a
monopolistic or antitrust violation that goes away with a price
decrease. If that would be, then you would have a lot of
different issues in this here.
I think the interesting thing that I love to hear is
companies in the competition clauses and other things, and then
we can get into trademarks. There is so much from a rich
environment here and a judiciary aspect that is costing our
companies in--what I thought was very interesting was to
hearing from some of them that Wallway and several others were
actually moving facilities out of China because they were
concerned about their own intellectual properties being taken
to other companies and stolen with inside the country, so they
were actually moving them off on a quasi-state-owned basis.
So how do we encourage China? And I know probably some of
it has been discussed here. This was the part that came across
very clear in discussion with the businesses but also with the
business community, American business, foreign business
community in China and also with the Chinese themselves and the
government.
How do we encourage a sped up growth rate, if you would, to
be understanding of intellectual property in an international
understanding, not just a nationalistic understanding? It is
amazing their intellectual property courts are flooded with
their own cases. There are very few, actually, from foreign
companies.
So I want us a little open ended here for a moment. How do
we encourage them to do that in a productive way? How do we
encourage them to be a part of this process and give our
companies the assurances that when they do go, because they do
want to invest over here. We want to have reciprocal
investment. How do we do that?
Mr. Chang. I think that we have tried to do that over the
course of about three decades, and virtually everything that we
have done has failed. So I don't think that you can do that in
a nice way. And as I said, we have to start imposing costs on
China because that is the one thing that they do understand.
So unfortunately the engagement process just has seriously
failed, and we are seeing that day after day with so many
problems not only in the intellectual property area but in the
antimonopoly and other areas as well.
Mr. Collins. And one of the issues here, I think, that you
get into and this is one that we are switching, same gear, is
their exchange rate, their monetary system, this is another
issue. And just recently if you were just looking, their growth
rate is cooling off and they are having trouble sustaining this
stimulus based growth and they have actually done a little bit
of movement in how they are handling it.
But there are many of us who look at this area in China and
think that this is not just a short term problem, when you look
at their growth, you look at the empty rates in buildings,
these kind of things. Where do you see the next step for them
going knowing that they are not going to hit their mark at
least realistically but they may artificially try to, how
through exchange, through other things, what do you see?
Crystal ball it for just a second. What do you see them doing
next?
Mr. Chang. They don't have any solutions. What they did was
they poured a massive amount of stimulus into the Chinese
economy beginning at the end of 2008. It created growth at
first, but now it has created a debt which they can't pay back.
They are probably growing now at about 2 percent when you look
at independent data, corporate profit results and even official
numbers.
So I think they have run out of answers and they know that.
And the reason we can see it is that they can't do anything and
they haven't done anything in the last year or so. So they are
stuck.
Mr. Collins. Well, and I think, and not to, inside anything
in this, but I think it is also to me looking at it, I think,
from a very positive, from a market standpoint, from an
American, how we can have a positive relationship here. And as
long as we don't turn to a nationalistic interest, which is
definitely a concern here, rally the troops, we will go after
the Straits, we will do those kind of things, is in looking at
how we can continue to have the process of them investing here
and we investing in their, and having that mutual exchange
where you have a southern part, the Hong Kong, Shenzhen,
Guangzhou, those areas down there, the Guangdong province that
have basically become a more Western economy and with all that
is good and bad about that.
And I think that is going to be an interesting, would be a
great time as we continue these hearings, Mr. Chairman. I
appreciate your leadership. I appreciate you all being here. We
could go for a lot of time but I appreciate your answers.
Thank you. Mr. Chairman, I yield back.
Mr. Chabot. Thank you very much. The gentleman's time is
expired and we will conclude with the gentleman from
California, Mr. Sherman.
Mr. Sherman. I would like to explore the political
vulnerability of the Chinese Government. This is a government
which over the last 50 years has provided more economic growth
than just about any in world history. They have now turned to
nationalism to justify their position. Our institutions in the
United States survived the Depression, the Great Recession.
Mr. Johnson, can Beijing survive a recession of the level
we placed in 2008 or even the depression that Roosevelt guided
us through in the 1930s?
Mr. Johnson. I think it is an open question. Certainly what
is clear is that they managed to survive the global financial
crisis better than a lot of others, but as Mr. Chang said, with
serious unintended consequences with regard to their response,
and it does speak to the central element which is the state
driven system. They poured all this stimulus toward the state
banks which gave it to inefficient state-owned enterprises and
now they are buried by this level of debt.
I think what we need to see is can the reform program that
was tabled at the Party plenum last fall actually be
implemented? If it is successful that may be one way that they
can deal with such problems going forward and make their system
more resilient.
Mr. Sherman. Mr. Chang, if this government does lose power,
will it just peacefully cede power to a different system? Pull
a Gorbachev, shrug your shoulders, walk off the world stage? Or
will they use the People's Liberation Army and perhaps even
their nuclear weapons in an effort to hold onto their system?
Mr. Chang. I think that when China goes, and it will go
fairly soon, it will be pretty ugly. You have got to remember
that the Chinese Communist Party----
Mr. Sherman. Nuclear ugly or one step less than that?
Mr. Chang. Ugly with regard to its own people. And what we
could also see is China doing----
Mr. Sherman. And you are assuming they would not use
nuclear weapons against their own people?
Mr. Chang. Actually, they have threatened to do that
because they threatened to nuke Taiwan which they believe is
their 34th province. But apart from that, what we have seen
China recently do is lash out. Not only against its neighbors,
not only against the United States, but basically against
everybody, and that does not make strategic sense. But it is an
understandable tactic for leaders who are in trouble.
Mr. Sherman. It is the last refuge of every tyrant. If you
can't deliver you can at least deliver impassioned
nationalistic speeches.
You talked about a number of steps we could take on the
trade front. Why wouldn't we designate them a currency
manipulator except for the argument that they are manipulating
their currency a little less now than they used to? Are they
not still a currency manipulator and why have we not designated
them as such?
Mr. Chang. They still are, because almost every trading day
the People's Bank of China is in the market influencing the
Dollar/Renminbi exchange rate. And under U.S. law we have a
requirement to designate a country as a manipulator if it, in
fact, manipulates its currency which China does, and it does so
for a predatory trade purpose.
Wen Jiabao, who was Premier of China in 2008 or so, came to
New York and basically said that they were manipulating their
currency to keep their workers employed. And that is the
definition of a predatory----
Mr. Sherman. I wish we cared as much about our workers. But
go on.
Mr. Chang. So we have an obligation under U.S. law to
designate them a manipulator. That doesn't mean we have to do
anything about it, but we should respect our own law. Because
when the Chinese see that we don't respect our own law----
Mr. Sherman. You forgot the provisional law that says if
Wall Street finds it inconvenient then it doesn't work.
Mr. Johnson, do you agree?
Mr. Johnson. I don't have anything to add to what Mr. Chang
said.
Mr. Sherman. Okay. We have got a Foreign Corrupt Practices
Act. It penalizes American companies that bribe Chinese
officials. Presumably, this is for the benefit of the Chinese
system. Does our enforcement of the Foreign Corrupt Practices
Act with regard to U.S. companies doing business in China hurt
us economically? Does it hurt or help us in other ways?
Mr. Chang. I will let Mr. Johnson answer that question.
Mr. Johnson. No, I don't think it does hurt us
economically. I mean this is how we project our values abroad.
So I am a firm proponent of enforcement of the FCPA.
Mr. Sherman. Even with regard to protecting a regime from
the corruption of corruption when we don't actually wish that
regime well, at least many of us don't.
Mr. Johnson. Well, I don't think we would, even if that is
true I don't think we would want our businesses engaging in
corruption to help hasten its end if that is what you are
suggesting.
Mr. Sherman. Undermine, I think, is a better phrase than
hasten its end. Mr. Chang, do you have any different view?
Mr. Chang. Long term, I absolutely agree with Mr. Johnson.
Short term, you are right. On the short term, if we allowed
U.S. companies to go bribe Chinese companies they would do very
well. But long term that does hurt U.S. business not just in
China but around the world. We learned that with the behavior
of U.S. companies in Japan. I don't recommend it.
Mr. Sherman. I am looking for everything that might work. I
yield back.
Mr. Chabot. The gentleman's time has expired. I think this
was a particularly good panel that we had here this afternoon,
a good discussion, and thank you very much for enlightening us
on a whole range of issues relative to our relationship with
China. Members will have 5 days to supplement their statements
or submit questions in writing. And if there is no further
business to come before the committee, we are adjourned. Thank
you very much.
[Whereupon, at 3:44 p.m., the subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Record