[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





      U.S. STRATEGIC INTERESTS AND THE APEC AND EAST ASIA SUMMITS

=======================================================================


                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON ASIA AND THE PACIFIC

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2015

                               __________

                           Serial No. 114-130

                               __________

        Printed for the use of the Committee on Foreign Affairs


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                      COMMITTEE ON FOREIGN AFFAIRS

                 EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey     ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida         BRAD SHERMAN, California
DANA ROHRABACHER, California         GREGORY W. MEEKS, New York
STEVE CHABOT, Ohio                   ALBIO SIRES, New Jersey
JOE WILSON, South Carolina           GERALD E. CONNOLLY, Virginia
MICHAEL T. McCAUL, Texas             THEODORE E. DEUTCH, Florida
TED POE, Texas                       BRIAN HIGGINS, New York
MATT SALMON, Arizona                 KAREN BASS, California
DARRELL E. ISSA, California          WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina          ALAN GRAYSON, Florida
MO BROOKS, Alabama                   AMI BERA, California
PAUL COOK, California                ALAN S. LOWENTHAL, California
RANDY K. WEBER SR., Texas            GRACE MENG, New York
SCOTT PERRY, Pennsylvania            LOIS FRANKEL, Florida
RON DeSANTIS, Florida                TULSI GABBARD, Hawaii
MARK MEADOWS, North Carolina         JOAQUIN CASTRO, Texas
TED S. YOHO, Florida                 ROBIN L. KELLY, Illinois
CURT CLAWSON, Florida                BRENDAN F. BOYLE, Pennsylvania
SCOTT DesJARLAIS, Tennessee
REID J. RIBBLE, Wisconsin
DAVID A. TROTT, Michigan
LEE M. ZELDIN, New York
DANIEL DONOVAN, New York

     Amy Porter, Chief of Staff      Thomas Sheehy, Staff Director

               Jason Steinbaum, Democratic Staff Director
                                 ------                                

                  Subcommittee on Asia and the Pacific

                     MATT SALMON, Arizona Chairman
DANA ROHRABACHER, California         BRAD SHERMAN, California
STEVE CHABOT, Ohio                   AMI BERA, California
TOM MARINO, Pennsylvania             TULSI GABBARD, Hawaii
JEFF DUNCAN, South Carolina          ALAN S. LOWENTHAL, California
MO BROOKS, Alabama                   GERALD E. CONNOLLY, Virginia
SCOTT PERRY, Pennsylvania            GRACE MENG, New York
SCOTT DesJARLAIS, Tennessee


















                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Mr. Michael H. Fuchs, Deputy Assistant Secretary of State for 
  Strategy and Multilateral Affairs, Bureau of East Asian and 
  Pacific Affairs, U.S. Department of State......................     5
Mr. Bruce Hirsh, Assistant U.S. Trade Representative for Japan, 
  Korea, and APEC, Office of the United States Trade 
  Representative.................................................    13

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Mr. Michael H. Fuchs: Prepared statement.........................     7
Mr. Bruce Hirsh: Prepared statement..............................    15

                                APPENDIX

Hearing notice...................................................    36
Hearing minutes..................................................    37
The Honorable Brad Sherman, a Representative in Congress from the 
  State of California: Material submitted for the record.........    38
The Honorable Gerald E. Connolly, a Representative in Congress 
  from the Commonwealth of Virginia: Prepared statement..........    44
The Honorable Alan S. Lowenthal, a Representative in Congress 
  from the State of California: Prepared statement...............    46
Questions submitted for the record by members of the Subcommittee 
  on Asia and the Pacific........................................    48
Written responses from Mr. Michael H. Fuchs to questions 
  submitted for the record by the Honorable Brad Sherman and the 
  Honorable Gerald E. Connolly...................................    49

 
      U.S. STRATEGIC INTERESTS AND THE APEC AND EAST ASIA SUMMITS

                              ----------                              


                      WEDNESDAY, DECEMBER 2, 2015

                       House of Representatives,

                 Subcommittee on Asia and the Pacific,

                     Committee on Foreign Affairs,

                            Washington, DC.

    The subcommittee met, pursuant to notice, at 2:35 p.m., in 
room 2255, Rayburn House Office Building, Hon. Matt Salmon 
(chairman of the subcommittee) presiding.
    Mr. Salmon. This subcommittee will come to order.
    Good afternoon. We convene this hearing today to gain a 
deeper understanding of the administration's continued efforts 
to engage with Asia at the Asia-Pacific Economic Cooperation 
and East Asia Summits. This hearing will examine the outcomes 
of APEC and EAS and determine how Congress can support the 
expansion of U.S. presence in the region.
    The APEC Summit convened 21 member economies in Manila to 
discuss economic growth and integration in the region, which is 
no light task. As a bloc, APEC countries represent over half 
the world's GDP and 44 percent of all their global trade.
    Given that summit occurred immediately following the Paris 
attacks, the fight against ISIS was a large part of the 
conversation. The heads of state at the summit rightly took a 
united stance against terrorism and stressed the importance of 
using economic tools to address the root causes of such evils. 
I am curious about how Asia's views of terrorism may or may not 
have changed at this event.
    I just returned from a trip to Taiwan where I had the 
opportunity to meet with President Ma and leaders of the 
opposition DPP party. As a strong supporter of Taiwan's 
participation on the global stage, I am encouraged to see 
Taiwan's membership and the engagement in APEC. Still, I would 
like to see additional partners in the Asia-Pacific region take 
advantage of membership in APEC, including India, the region's 
third-largest and fastest-growing economy. As APEC would 
greatly benefit from the inclusion of the next global economic 
powerhouse, I urge our administration to support India's 
candidacy for APEC membership.
    APEC also provided a platform for leaders of TPP countries 
to hold meetings following the completion of the agreement. We 
will be watching closely as the parties work toward 
ratification, though it seems that the TPP strategic value 
continues to hold. Indonesia and the Philippines and South 
Korea have each expressed interest or intent to seek inclusion 
in the deal. Experts say the completed negotiation of TPP is a 
major blow to RCEP, China's rival to the agreement.
    I would be interested, though, to hear from our 
administration witnesses how they see or foresee TPP fitting 
into the regional architecture with a number of competing trade 
deals in Asia. And I am sure Mr. Sherman will have his thoughts 
and comments, too, which I welcome. I actually find it quite 
refreshing. It is kind of fun.
    President Obama also visited the Gregorio del Pilar, a 
former Coast Guard cutter that is now a centerpiece of the 
Philippine Navy, to talk about the defense of our allies' 
maritime security and the South China Sea. He announced a $250 
million plan to provide assistance to regional partners to 
improve their maritime capabilities, signaling that China's 
belligerent activities would be a prominent agenda item at both 
summits, even in light of APEC's economic focus. And I welcome 
that. I think that kind of clarity is badly needed, so thank 
you.
    Maritime security was discussed in depth at the East Asia 
Summit in Kuala Lumpur immediately following APEC bringing 18 
members of consultations on political and strategic issues. 
Even after President Xi gave his assurance to President Obama 
and the public that China would not militarize the manmade 
islands of the South China Sea, China continues to build dual-
use facilities on them.
    China's paper-thin efforts to characterize the construction 
of assets with military applications as a public service made 
clear the dishonesty in prior statements. Despite this, I was 
really glad to see the summit chairman's statement reaffirm the 
importance of the freedom of navigation and overflight in the 
region and supported a rules-based order in the maritime space.
    The EAS also provided an opportunity for discussions of 
other interests to include terrorism, energy, health, 
development, combating human trafficking, and poverty 
reduction. I had the recent opportunity to meet with 
representatives from all the ASEAN nations and reassured them 
of our support for the development of democracy and security in 
their countries and across the region.
    Summits such as APEC and EAS have provided substantial 
opportunities for the United States to bolster our foreign 
policy goals in the region, strengthen our partnerships and 
alliances, open our markets, and promote sound international 
law and norms.
    And with that, I look forward to hearing from our 
witnesses. Members present will be permitted to submit written 
statements to be included in the official hearing record. And 
without objection, the record will remain open for 5 calendar 
days to allow for statements, questions, and extraneous 
materials subject to the length limitation in the rules.
    And, Mr. Sherman, I will turn to you.
    Mr. Sherman. I oppose the Pivot to Asia if by that phrase 
we mean redirecting our military focus to a place where there 
are few reefs that we can quibble about at a time when ISIS and 
the Iranian-led Shiite alliance are killing tens of thousands 
of people and killing as many Americans as they can.
    It may be useful politically in Beijing to focus 
nationalist attention on these reefs, and of course it meets 
the desire of some in our Pentagon to focus on a confrontation 
of uniformed and advanced militaries with which they are 
comfortable. But the fact is these so-called islands, reefs, 
are basically useless. We are told they are important because 
ships passing close to them involve hundreds of billions of 
dollars of trade. That is true. They are all going in and out 
of Chinese ports, and I do not think that China will blockade 
its own ports.
    That being said, we do believe in freedom of navigation. We 
should continue to assert that, but not as the chief focus of 
our military. What is happening now at the Pentagon is they are 
abandoning the research and procurement and structuring and 
planning necessary to deal with the problems of the Middle East 
and focusing their attention to building advanced naval systems 
designed solely to confront China. Keep in mind if these so-
called islands are of any economic value, that value does not 
accrue to the U.S. taxpayer. It accrues to Japan, Korea, the 
Philippines, et cetera, while we are without much attention, 
spending hundreds of billions of dollars in procurement and 
planning at the Pentagon redirecting our military efforts to 
the defense of these supposedly valuable islands. The amount of 
additional money being spent on defense by the countries that 
claim to own these islands pales in insignificance.
    Much brouhaha about Japan making the slightest change in 
where it will deploy its forces, the fact that there is so much 
brouhaha over that proves how insignificant the Japanese--I 
hope I said Japan and not China as to the application of their 
forces. The fact is Japan claims the islands but claims that we 
should defend them and has not insignificantly increased its 
military budget.
    The one exception to this on burdening-sharing is Taiwan. 
They want to buy a couple frigates for them. The Congress has 
authorized it. It has been planned. They are ready and it is 
time to deliver them. And we will have legislation on that to 
push the delivery of those frigates.
    We do need to focus on the interests of the American middle 
class and the American taxpayer that sends us to Washington. 
This TPP is such a terrible economic deal for the American 
middle class that it is being sold as good geopolitics because 
it can't be sold on the basis of economics. As a method of 
containing China, it is a fantastically good deal for China and 
they didn't even have to show up to the negotiations.
    Two things: First, we are told this deal sets precedence of 
a world adopting America's rules. They are not America's rules. 
They are the rules that have destroyed the American middle 
class over the last 30 years. They are Wall Street's rules. But 
the one case the rules reflected in the TPP are not Wall 
Street's rules; they are Beijing's rules. This is the holy 
grail that establishes that currency manipulation is allowed 
and almost glorified in the text of this agreement, or should I 
say the missing pages of the text of this agreement. So it 
establishes for China's benefit and, I hate to say it, but also 
for Japan's benefit that currency manipulation is allowed and 
cannot be stopped.
    Second, under the rules of origin, goods that are admitted 
to be 30 percent made in Vietnam or Malaysia but 70 percent 
made in China get duty-free access to the United States. Now, 
it is not just 30 percent because if a Chinese company creates 
a factory in Vietnam and then labels things saying, well, at 
least 30 percent of the goods were--they are making all the 
decisions as to how to allocate the costs of production. They 
are doing the intercompany invoicing. Goods that are 3 percent 
made in Vietnam could be labeled 30 percent made in Vietnam. 
And this agreement does not employ 50 or 100,000 accountants to 
go look at every intercompany invoice, which is what would be 
necessary.
    So this is a free trade deal par excellence for China. Now, 
I know they are fainting and saying, oh, we want to join the 
deal. They get all the benefits of the deal just as soon as 
Congress approves it. Well, maybe only 97 percent of the 
benefits. They will still have to do a little bit of the work 
in Vietnam or Malaysia.
    So if this deal cannot be sold as good economics for the 
American middle class, it would be sold on the basis of 
patriotism because Americans are patriotic. And we will tell 
our constituents you have got to lose jobs but it is necessary 
for our security. No. It is necessary to further enhance China 
and Wall Street.
    And I yield back.
    Mr. Salmon. Thank you. Mr. Bera?
    Mr. Bera. Thank you, Mr. Chairman.
    You know, I want to thank the chairman for having this 
hearing because obviously when we are thinking about the Asian 
markets, you know, some of the fastest-growing markets that are 
critically important to our economy and growing our economy, 
making sure that we have fair access to those markets and our 
companies.
    Also, you know, I would like to align myself with the 
chairman's statements that what is happening in the South China 
Sea is critically important, both strategic value, as well as--
it is quite important to make a statement today so we don't 
have to engage militarily in the future. And it is incredibly 
important that international law, international waterways, and 
international norms in the South China Sea are recognized.
    And, you know, I have stated in committee many times that, 
you know, China has incursions here. The building of these 
manmade islands really goes outside international norms. And it 
is very important that we send a strong message that that is 
not okay.
    Extremely important that we keep these markets open, 
extremely important that we create a fair playing field for 
American companies, for the American worker and, you know, 
evaluate how we engage again in an incredibly important region 
of the world.
    So, again, thank you, Mr. Chairman, for holding this 
hearing, and I look forward to the testimony of the witnesses.
    Mr. Salmon. I thank the gentleman.
    We are really appreciative to have both the very 
distinguished witnesses joining us this afternoon.
    First, Mr. Michael Fuchs is the deputy assistant secretary 
of State for Strategy and Multilateral Affairs in the 
Department of State's Bureau of East Asian and Pacific Affairs.
    And Mr. Bruce Hirsh is the assistant U.S. Trade 
Representative for Japan, Korea, and APEC, and you have been 
really busy lately.
    We would like to start with you, Mr. Fuchs.

 STATEMENT OF MR. MICHAEL H. FUCHS, DEPUTY ASSISTANT SECRETARY 
OF STATE FOR STRATEGY AND MULTILATERAL AFFAIRS, BUREAU OF EAST 
      ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Fuchs. Thank you, Mr. Chairman, Ranking Member Sherman, 
members of the subcommittee. Thank you for the opportunity to 
appear before you today to testify on the recently concluded 
East Asia Summit and U.S.-ASEAN Summit. I would also like to 
thank the committee for your continued leadership and 
supporting and promoting engagement in the Asia-Pacific region.
    Two weeks ago, as you know, President Obama made his ninth 
trip to the Asia-Pacific, which is a reflection of a continued 
importance of the region to U.S. national interests and the 
administration's commitment to advancing the rebalance 
strategy. A central component of this strategy is what I would 
call a ``rebalance within the rebalance'' to Southeast Asia and 
those 10 countries that make up the Association of Southeast 
Asia Nations, or ASEAN.
    Given its strategic location and the essential role it 
plays in the region's multilateral institutions, ASEAN is at 
the core of one of the world's most dynamic regions. This year 
in particular has been a historic one for our engagement with 
ASEAN. At the U.S.-ASEAN Summit, the President and ASEAN 
leaders elevated the U.S.-ASEAN relationship to a strategic 
partnership and agreed on a new plan of action for 2016 to 
2020. And we were pleased to announce that the ASEAN leaders 
had accepted the President's invitation to attend a special 
summit in the United States in 2016.
    Taken together, these summits are charting a course forward 
with ASEAN, guiding our efforts to work together on everything 
from climate change to trafficking-in-persons to maritime 
security and beyond.
    The President also participated in the East Asia Summit, 
which has quickly become the premier forum for addressing 
political and security issues in the Asia-Pacific region. This 
year was its 10th anniversary, and leaders used the occasion to 
endorse a number of institutional reforms to move the EAS 
closer to being the strong, effective institution that the 
region needs to support the rules-based order.
    This year, the leaders of EAS also endorsed statements on 
key regional challenges, including maritime cooperation, cyber 
issues, preventing health pandemics, and countering violent 
extremism, which will help build a foundation for regional 
cooperation.
    And as the region's premier institution for addressing 
political and security concerns, the leaders also focused on 
the South China Sea. At both the EAS and the U.S.-ASEAN 
Summits, the President directly addressed the maritime disputes 
in the South China Sea. All countries of the EAS, claimants and 
non-claimants alike, have a vested interest in how this issue 
is addressed. While the United States is not a claimant and 
takes no position on the sovereignty of particular features in 
the South China Sea, the President used the East Asia Summit to 
convey the United States' deep and abiding commitment to 
freedom of navigation and overflight and other lawful uses of 
the sea, upholding international law, and the maintenance of 
peace and stability in the region.
    He made clear that the United States will stand by our 
treaty obligations and our security commitments. The President 
encouraged ongoing efforts to develop a code of conduct between 
ASEAN and China. He also urged parties to take more immediate 
steps to lower tensions, including a halt to land reclamation, 
construction of new facilities, and any further militarization 
of outposts.
    He noted the unanimous October 29 decision of the arbitral 
tribunal regarding its jurisdiction in the case between the 
Philippines and China and expressed support for the arbitration 
process as a peaceful mechanism to resolve disputes.
    The level of concern over events in the South China Sea was 
clear from across the region during the summit. At the East 
Asia Summit, 15 of the 18 leaders present expressed concerns 
over tensions in the South China Sea, and 10 of those leaders 
emphasized the importance of the non-militarization of 
outposts. And this year, ASEAN itself sent a direct and 
unmistakable signal to China on the South China Sea referring 
in its own summit statement to concerns about the possible 
militarization of outposts. This chorus of support on the issue 
of non-militarization is a step forward and one we intend to 
work with others to build on in the coming weeks and months.
    Fundamentally, of course, these maritime security issues 
are about rules, not rocks. The question is whether countries 
work to uphold international legal rules and standards or 
whether they flout them. It is about whether countries work 
together with others to uphold peace and stability or use 
coercion and intimidation to secure their interests.
    And I want to reaffirm here today that we will continue to 
champion respect for international law, freedom of navigation 
and overflight and other lawful uses of the seas, unimpeded 
lawful commerce, and the peaceful resolution of disputes.
    Finally, while my colleague Bruce Hirsh will address APEC 
in more detail, I would like to note quickly that we view APEC 
as the premier economic forum in the region for advancing free 
and open trade and investment, as well as for fostering 
cooperating and promoting sustainable and equitable growth. The 
United States' priority in APEC is to enhance regional 
integration and stability while establishing systems conducive 
to U.S. economic competitiveness.
    So in conclusion, I thank the committee for its interest in 
these issues and look forward to working with you in pursuit of 
U.S. interests in the Asia-Pacific. I look forward to answering 
any questions you may have.
    [The prepared statement of Mr. Fuchs follows:]
   
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    Mr. Salmon. Thank you.
    Mr. Hirsh?

      STATEMENT OF MR. BRUCE HIRSH, ASSISTANT U.S. TRADE 
REPRESENTATIVE FOR JAPAN, KOREA, AND APEC, OFFICE OF THE UNITED 
                  STATES TRADE REPRESENTATIVE

    Mr. Hirsh. Chairman Salmon, Ranking Member Sherman, and 
members of the subcommittee, thank you for the opportunity to 
testify on the recently concluded APEC Leaders' Meeting and on 
APEC's importance for U.S. economic and trade engagement in the 
Asia-Pacific region.
    The Asia-Pacific region continues to be a dynamic and 
growing part of the global economy. The 21 APEC economies 
account for nearly 60 percent of global GDP and international 
trade and are home to 2.8 billion consumers, 40 percent of the 
world's population.
    U.S. engagement in APEC plays an important role in helping 
to secure the economic benefits offered by the Asia-Pacific 
region and to address the challenges we face there. APEC 
remains the premier regional forum through which we are able to 
advance U.S. trade policy objectives in a leadership role. With 
other economic powers vying for influence in the region, U.S. 
active engagement remains essential.
    The unique characteristics of APEC make it an effective 
forum to advance work on emerging issues in the trade and 
economic area. First, given how much the region has benefitted 
from trade, APEC economies generally embrace open markets and 
ideas that advance free trade.
    Second, APEC outcomes are nonbinding and voluntary in 
nature, thus allowing APEC economies to be more forward-leaning 
and open-minded when exploring new issues in contrast to other 
venues where achieving consensus is more difficult.
    Third, APEC initiatives can take a variety of forms with 
varying levels of participation by economies. This flexibility 
allows for more creative and diverse approaches to new and 
emerging issues.
    Finally, APEC has a diverse membership. As a result, 
initiatives that emerge from APEC carry significant weight in 
other fora. For example, the WTO Information Technology 
Agreement and a subsequent expansion have their origins in 
APEC. Similarly, the 2011 commitment by APEC leaders to reduce 
tariffs on environmental goods gave impetus to the launch of 
the WTO Environmental Goods Agreement. And APEC's long-term 
work on supply chain facilitation helped lay the groundwork for 
the WTO Trade Facilitation Agreement.
    In 2015, with the Philippines as host, APEC continued its 
work to improve the business environment in the Asia-Pacific 
and to facilitate trade. This work culminated in a number of 
outcomes at the November 18 to 19 Leaders Meeting, including on 
topics of great interest to U.S. stakeholders such as the 
reaffirmation of the commitment to reduce environmental goods 
tariffs, endorsement of substantive work on the internet and 
digital economy, a mandate to elevate APEC work on services 
trade, and the instruction to complete work on APEC best 
practices on trade secrets protection and enforcement. Other 
outcomes were reached on electric vehicle standards, trade and 
health care products, and advertising standards, among others. 
The U.S. has been a leader on all of these issues.
    Finally, APEC leaders also noted the recent conclusion of 
the Trans-Pacific Partnership negotiations. All 12 TPP members 
are in APEC, and most other APEC economies have expressed an 
interest in the agreement. Given this connection, the United 
States and other APEC members have a real opportunity over the 
coming years to educate APEC members about the benefits of 
adopting policies that will meet the requirements of high-
standard agreements like the TPP. In this way, U.S. engagement 
in APEC will further serve to support the objective of creating 
a rules-based trading system for the Asia-Pacific region.
    Looking ahead to 2016 when Peru will serve as APEC host, 
the United States will have an opportunity to push for 
significant outcomes on digital and services trade, as well as 
on trade secrets protection and enforcement. APEC will assess 
progress on its target of improving supply chain performance by 
10 percent and look beyond that target. And we will continue to 
explore ways to ensure that the benefits of economic growth 
extend to businesses of all sizes.
    One of APEC's successes lies in its mandate to engage with 
the business community. The APEC Business Advisory Council 
plays an important role by providing its views and priorities 
to APEC officials throughout the year. In the United States we 
have a longstanding and close working relationship with the 
National Center for APEC. We will also continue to consult with 
Congress as we plan our agenda for APEC in 2016. We are 
grateful for the interest of this subcommittee in this regard.
    In conclusion, I want to thank you for the opportunity to 
discuss the outcomes of the APEC Leaders Meeting and the 
importance of APEC to U.S. engagement in the Asia-Pacific 
region. As that region continues to grow in economic and 
strategic importance, U.S. leadership in APEC will be 
increasingly vital. Thank you very much.
    [The prepared statement of Mr. Hirsh follows:]
    
    
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                              ----------                              

    Mr. Salmon. Thank you both very much.
    You know, for the last several administrations we have 
operated on an overarching policy toward China under the 
umbrella of a term that just makes me feel about like, you 
know, the time I remember getting my tooth drilled without 
Novocain, it is called strategic ambiguity because I believe if 
we need clarity anywhere, we need it with China.
    And on that vein I would like you to pass something on to 
your boss. I applaud him for what he said about the rules of 
the road in maritime space in the South China Sea and the 
overflights. I think that kind of strategic clarity and that 
recommitment to something that is incredibly important not just 
to the United States but to the world at large was badly 
needed, and thank him for showing that leadership. I don't 
think we do that enough.
    We have all been concerned about how we juxtapose this 
Pivot to Asia with the needs and the crisis in the Middle East. 
Based on this year's Asia-Pacific Summits--and by the way, I 
think the Pivot to Asia is a great thing. I want to go on 
record saying that. I think it is incredibly important that we 
can walk and chew bubblegum at the same time and that we can do 
more than one thing.
    But based on this year's Asia-Pacific Summits, how do you 
assess the region's views toward transnational terrorist 
threats? And have these summits yielded any lessons or insights 
we can apply to better balance global crises with long-term 
policy goals and to remain engaged in Asia while handling 
responsibilities elsewhere? Do you feel that the recent events 
in the Middle East and Europe have changed Asia-Pacific 
perceptions about terrorism and how to address it? Mr. Fuchs, 
can I start with you?
    Mr. Fuchs. Thank you, Mr. Chair. I think it is obviously a 
very important issue that you have raised. And I think coming 
back from these summits I can say without a doubt that the 
countries of the region are focused on this issue. And this is 
something that, obviously, many of the countries in the region 
and Southeast Asia have been focused on for a number of years. 
These are threats to them as well. And so this is why this has 
been a priority for us working both bilaterally with many of 
these countries to strengthen their capacity, information-
sharing, to deal with these issues and to coordinate and 
cooperate on them. And it is also why we have tried to engage 
through these regional institutions, including ASEAN and East 
Asia Summit, to build broader cooperation throughout the region 
in dealing with these issues.
    In 2014, last year's summit in Burma, the leaders of the 
East Asia Summit adopted a statement about the need to stem the 
flow of foreign fighters to and from Iraq and Syria and agreed 
to take a number of steps to do so and to cooperate on that 
endeavor.
    This year, following up on that--and obviously the horrible 
attacks of Paris had just taken place right before the leaders 
of the EAS met this year, and so that was very much on their 
minds as well. And they adopted a statement on countering 
violent extremism and again trying to set out some actions and 
some principles at least that countries can use to cooperate 
when it comes to this important issue. So without a doubt I can 
say this is on their minds and this is something the region has 
to deal with.
    Mr. Salmon. Well, and one of the rationales I used for 
trying to get Taiwan observer status in INTERPOL is that when 
we have a global terrorist crisis, then it needs to be all 
hands on deck. And hopefully, all of these countries understand 
that. It is nobody's responsibility solely. It is collectively 
our responsibility to deal with this horrible global threat.
    I have a question for you, Mr. Hirsh. Twelve out of the 21 
APEC countries are members already of TPP. How does the 
conclusion of the TPP affect where APEC fits in the U.S. policy 
toward Asia? And how do you reconcile APEC's principles of 
volunteerism and open regionalist with the TPP, which is a 
binding agreement?
    Mr. Hirsh. Thank you very much. And those are very good 
questions.
    You know, the TPP is going to serve as a race to the top, 
we hope, in terms of the rules of the road in Asian trade. We 
have had a lot of interest from a number of non-TPP parties in 
what is in the agreement, and we believe that the conclusion of 
the agreement will help to emphasize the importance of 
maintaining high standards.
    With regard to reconciling APEC's volunteerism with the 
approach in the TPP, APEC has a very useful and important role 
to play by virtue of the fact that not every member of APEC is 
in the TPP. Because it is a voluntary organization, APEC 
members who are not members of TPP will be more open to 
experimentation and exploration of ideas that ultimately will 
allow them to adopt policies that are consistent with high-
standard agreements like the TPP. So APEC can continue to serve 
as an incubator for good policy ideas in the region, and it can 
help us to educate countries in the region about the value of 
high standards such as those in TPP.
    Mr. Salmon. Thank you. Mr. Bera?
    Mr. Bera. Thank you, Chairman.
    You know, I applaud the work that the administration has 
done in the Pivot in laying some of the groundwork, working 
with the APEC nations. Obviously, they are creating economic 
cooperation to help their region, and our partnership there 
certainly is important. I also think, you know, a good TPP 
certainly starts to build a framework for economic cooperation 
throughout the Pacific Rim nations.
    So as we evaluate the TPP and look at that and consider it 
here in this body, I think many of us will be doing it with 
that eye to the future, does it lay the foundation for a fairer 
trade policy across the entire Pacific Rim region.
    You know, as I think about APEC, though, and some of the 
steps, you know, I have a unique focus on the U.S.-India 
relationship and certainly a lot of the discussion that is 
going on in economic cooperation between the United States and 
India. Certainly, Prime Minister Modi and President Obama have, 
you know, both echoed a similar theme to, you know, open up 
stronger economic ties between both countries. You know, while 
the bilateral investment treaty is not moving as quickly as I 
would like to see, you know, certainly is a starting point. But 
another starting point that many of us have talked about is 
India's desire to join APEC and, you know, some have suggested 
that the United States should take a more active role in, you 
know, pushing for India's inclusion.
    I would be curious as to what challenges and what 
suggestions either one of you would have for both, you know, 
Members here in Congress who might suggest that we push to 
include India, but then also what India ought to be doing to 
make it more palatable to join APEC.
    Mr. Hirsh. Thank you very much. Well, we welcome India's 
interest in joining APEC. It is important for economies that 
are interested in APEC to align their trade and investment 
policies and their economic reform plans with APEC's 
longstanding commitments to trade and investment liberalization 
and market-driven economic reforms.
    APEC is an important consensus-based economic institution 
that deals with a wide range of issues, and it will be 
important for India to demonstrate its commitment to that 
consensus-based approach, as well as to the free and open trade 
and investment policies that APEC espouses. So we certainly 
will want to understand better how APEC fits into India's 
economic reform efforts.
    Mr. Fuchs. If I may add, Congressman, perhaps taking a step 
back as well, I think as you mentioned, this administration and 
President Obama have taken a real interest in engaging with 
India and strengthening our partnership with India. And that 
includes, you know, the top of that list, engaging with India 
with respect to the Asia-Pacific region. Obviously, President 
Obama's trip there earlier at the beginning of this year, they 
released a joint vision statement on cooperation between our 
two countries and the Asia-Pacific, the goals that we share.
    In this administration we have begun a series of other 
dialogues, including a bilateral U.S.-India dialogue about the 
Asia-Pacific, a trilateral dialogue with India, as well as 
Japan, covering issues with respect to the Asia-Pacific region. 
And so, broadly speaking, we are engaged in multiple different 
levels with India trying to deepen the relationship and the 
cooperation that we can pursue together on a wide range of 
issues in the Asia-Pacific.
    Mr. Bera. Great. And I agree, laying that foundation today, 
you know, which, again, we may not see the return on this 
investment, for, you know, several years or maybe a decade. But 
it is important that we start to lay that foundation of 
economic cooperation not just in the region but again across 
the Pacific, which I do believe, as that partnership 
strengthens, as the economic relationship between the TPP 
countries, as well as the APEC countries, strengthens, I do 
think China will actually see the importance of, you know, 
normalizing its economy in a way that, you know, allows it to 
consider joining the TPP. I don't see this as a giveaway to 
China. I see this actually as the United States strengthening 
our rules of economic engagement.
    And actually hearing the desire of the countries in the 
region to play by our economic rules, which are much fairer, 
which are much more equitable, and much more benevolent in 
helping those countries grow their economies, grow their 
stability. And I do see this as a key to building stability in 
the region. So, you know, again, I applaud the administration's 
efforts. And I will yield back.
    Mr. Salmon. Thanks, Mr. Bera.
    Mr. Lowenthal, did you have any questions?
    Mr. Lowenthal. Yes, I have--thank you, Mr. Chairman--
statement by also applauding not only the Pivot to Asia but the 
administration moving towards--in much more way moving toward 
policies, a strong stance on the South China Sea and making 
sure that, you know, being the adult in the room and talking 
about how we have freedom of navigation and that territorial 
disputes must be kind of resolved in a rational way. And I 
think that is really a very, very important message for the 
United States not only to shift but to send that message.
    I have three issues wanting to understand more about our 
role and maybe either in ASEAN or APEC. One of them is human 
rights, another one is climate change, and the third one is 
Taiwan. And human rights, we have seen how human rights abuses 
in one nation can have a regional impact. The persecution of 
the Rohingya Muslims in Burma has created a refugee crisis that 
affects surrounding countries. Are these issues that are 
discussed and in this kind of context? I would really kind of 
like to know how those issues are being discussed.
    The same thing by climate change, how is the United States 
bringing up climate change in the context of these talks? 
Developing nations in ASEAN that are expected to rapidly grow 
and develop in coming years, have they been receptive to 
discussing emissions and how to limit them? And beyond 
emissions, how have the Asia-Pacific nations been preparing for 
adaptation and resiliency? And so that is the second.
    And the third one, again, with a lot of questions is, you 
know, we have known that the Presidents of mainland China, 
President Xi and President Ma, have held a historic meeting 
last month. And APEC is one of the few international bodies 
where the PRC and Taiwan both participate. Has APEC been 
historically a place where the two can cooperate? And do other 
APEC participants, have they facilitated any dialogue between 
Taiwan and the PRC? So take a stab at any of the three: Human 
rights; climate change, our role; and Taiwan.
    Mr. Fuchs. Thank you, Congressman. I think that those are, 
again, I think very important and relevant questions. I will 
try to tackle the first two----
    Mr. Lowenthal. Okay.
    Mr. Fuchs [continuing]. If I can start. Human rights issues 
without a doubt are regularly discussed in a variety of 
different manners in these summits. For instance, trafficking 
in persons is an issue that is front and center in Southeast 
Asia and in this region obviously. We do a lot of work 
programmatically and otherwise with the countries of ASEAN 
bilaterally at 10 to try to address these issues and to 
strengthen regional cooperation.
    Just the other week during the series of ASEAN summits, 
ASEAN itself actually inaugurated its own convention against 
trafficking in persons, especially women and children, which is 
a real step forward----
    Mr. Lowenthal. Okay.
    Mr. Fuchs [continuing]. For ASEAN. And we are doing some 
work now with the member countries of ASEAN to try to ensure 
that they can begin to implement that convention. And so that 
is without a doubt a feature of these conversations.
    Other human rights issues obviously are regular features of 
our conversations, especially at the bilateral level and with 
all of these countries on the sidelines of them. You saw 
President Obama make some comments about these issues when he 
was in Malaysia as well. And so again, this is a regular 
feature of all of our engagement in the region.
    With respect to climate change, this is obviously, again, a 
top priority for the administration. And with respect to ASEAN 
in particular, we in the last couple of years have been doing a 
lot of work with ASEAN. Last year, in the 2014 summit, the 
leaders in the U.S.-ASEAN Summit, the 11 leaders agreed to a 
statement on climate change, which the first time had all 11 
countries and all 10 countries of ASEAN agreeing to put forth 
their intended nationally determined contributions well before 
Paris. At that point I believe only one of the countries of 
ASEAN had done so. And to date I think all but two now have 
done so.
    And the process of engaging with them on the negotiation of 
that statement, again, was a real boost and a chance for us to 
discuss a wide variety of these issues.
    Mr. Lowenthal. But I was wondering, you know, we are seeing 
a dramatic--I think--dramatic change in China. China a few 
years ago said there is a critical difference between 
developing nations and developed nations in terms of setting 
standards. They have subsequently changed that position and 
really have come to now address that this is a critical issue 
for them also.
    Are we seeing with these developing nations--what is the 
discussion because they are further behind and so I just would 
like to understand how do they see themselves as--you know, on 
one hand they will be tremendously impacted, especially those 
in the Southeast Asia that are on sea level rise. On the other 
hand, they have a long way to go. And so I am just kind of 
wondering how that dynamic has been played out.
    Mr. Fuchs. Well, I think if I can--just to add, I think, to 
answer your question, I think you have summed it up actually 
quite well, the way in which they see this. This is both 
something that is going to affect them so they need to adapt, 
they need to find ways to grow their economies in sustainable 
ways, and they are grappling with these issues right now in a 
very real and tangible way.
    They also recognize, though, that with respect to the 
global negotiations and the fact that this is a global issue 
and that there are many economies in Southeast Asia that are 
very large and are growing rapidly in terms of emissions and so 
they also have a responsibility to contribute when it comes to 
reducing emissions. And so I think that they are trying to 
grapple with both of these issues at the same time. And for our 
part again, we are trying to engage on both sides. The 
statement with respect to climate change last year was engaging 
them, I would say, a lot more on the latter side of it, how can 
we work together to reduce emissions?
    On the former side and the adaptation and growing 
sustainable economies, we have done a lot of work, including 
through one of our sub-ASEAN initiatives called the Lower 
Mekong Initiative, which works with the five countries of 
mainland Southeast Asia on a variety of transnational issues, 
frankly the top one of which is climate change and the 
environment and water and the nexus between that and energy. 
And so we have been doing a lot of work with those five 
countries to build local capacity.
    Mr. Salmon. The chair recognizes Mr. Chabot.
    Mr. Chabot. Thank you very much, Mr. Chairman. And I 
apologize for being a little late for this meeting. As some may 
have already mentioned, there is a Middle East committee 
hearing going on at the same time so I am trying to cover both 
areas.
    But just a couple questions, and if you already asked 
these--somebody already asked and they were answered, I 
apologize for that. But India sought membership in APEC for 20 
years and has been an observer since, I believe, 2011. However, 
some members of the U.S. business community have expressed 
doubts about India's role in APEC and feel that the U.S. should 
refrain from proactively supporting India's membership. Could 
you comment on that? And does the administration believe India 
has shown enough commitment to economic reform to warrant U.S. 
support in India's membership, whoever wants to handle that?
    Mr. Hirsh. Sure. Yes, again, we do welcome India's interest 
in joining APEC, but we are evaluating some of the 
considerations that you mentioned. It is important for 
economies that are interested in APEC to demonstrate that their 
policies are aligned with the approaches in APEC for trade 
liberalization and economic reform.
    Also, APEC is a consensus-based organization, and so it is 
important for prospective members to indicate their ability to 
work in that environment, as well as to demonstrate their 
commitment to free trade and open trade and investment. So we 
are certainly examining these criteria as we look at this 
question.
    Mr. Chabot. Thank you. Next, President Xi continues to 
argue that China does not intend to pursue militarization in 
the South China Sea, but many experts would argue that it has 
already done so and that the artificial islands have both 
civilian and military applications. How are President Xi's 
arguments received by other Asian neighbors, many of whom are 
our allies? What steps is the U.S. taking to display an active 
leadership role in preventing China's militarization of the 
area? And what further steps might we contemplate from the 
administration?
    Mr. Fuchs. Congressman, that is a great question and one on 
the front of a lot of our minds, as well coming out of these 
summits.
    First, to take a step back and get the second part of your 
question, I think that this administration has pursued a 
consistent strategy with respect to the South China Sea that is 
focused on upholding our interests, our interests in upholding 
international law and the freedom of navigation, the peaceful 
resolution of disputes, and that is where our energy is 
focused. So we are doing that in a variety of ways. It is by 
making concerns directly known to the Chinese. It is by 
increasing our maritime security capacity-building, just as the 
President announced some more funding for during his stop in 
Manila. It is by actively supporting the development of crisis 
mechanism tools, the availability of--supporting the ability of 
countries to avail themselves of international legal mechanisms 
like arbitration such as the Philippines is doing. And it is 
including, of course, by strengthening our defense posture in 
the region so we can ensure that we are upholding these variety 
of interests.
    But obviously we are clear-eyed about the challenges that 
we face in the South China Sea. This is about, I think, shaping 
an environment to ensure that we can uphold these interests.
    So with respect to President Xi's comments about 
militarization, I think that coming out of the East Asia 
Summits and the various summits, to your first question, the 
response is very clear from--the majority of the region is 
concerned about the actions taking place in the South China 
Sea. Ten of the leaders in the room at the East Asia Summit, 
including Premier Li, mentioned the importance of non-
militarization of these outposts.
    And so we are looking to ensure that there is a regional 
consensus to ensure that there is no militarization and no 
further militarization of these outposts. That is our goal.
    Mr. Chabot. Thank you. Just one final comment--my time is 
ready to run out--but one of my real concerns that the 
administration has been sending in the whole defense area--and 
I am sure this has some concern with our allies in the region--
is that, you know, we are now down--or we will be if the 
President's proposals go forward--to have an army that we 
haven't seen as low in numbers since World War II, an Air Force 
that is getting older and apparently numbers under when we 
first had an Air Force. And on the naval front, whereas Ronald 
Reagan was trying to get it up to a 600-ship Navy, we are now 
down to 200 and some, which is levels that are all the way back 
to 1916 in the Navy area. And that is of particular concern in 
that part of the world.
    So I think some of the actions and some what we talk about 
and what the President is proposing are inconsistent, and I 
will leave it there since my time has run out. I yield back.
    Mr. Salmon. Up for another round of questions? I have got--
--
    Mr. Sherman. I didn't get my first round.
    Mr. Salmon. What?
    Mr. Sherman. I am up to my first round.
    Mr. Salmon. Oh, you didn't have your first round. Okay. Go 
ahead.
    Mr. Sherman. I will try to make my questioning memorable 
enough to----
    Mr. Salmon. We will give you a second round, too.
    Mr. Sherman. Oh, good for me, maybe not for the witnesses. 
We will see.
    Mr. Fuchs, I will ask you to just answer for the record 
just basic questions on the law of the sea, at least as 
interpreted by the United States. How big is the economic zone 
for an uninhabited reef or island that is submerged at high 
tide? What is the size of the economic zone for an uninhabited 
island or reef that at least a little bit is above the water at 
high tide? And what is the economic zone for an inhabited 
island? And what is the economic zone for an island that has 
been uninhabited for the last few millennia but the Chinese 
Government puts one fisherman's family on it and gives him a 
free boat and tells him that he has got to live there whether 
he likes it or not? But he does get a free boat, and then after 
maybe 5 or 10 years they put a different--in other words, 
habitation that begins only after the South China Sea becomes a 
huge area of dispute but islands that have been uninhabited for 
at least the last millennia as far as we know.
    Now, for questions for an oral response, we got a $600 
billion military budget, especially if you throw in veterans' 
benefits or the cost of compensating our troops. And it is hard 
for any cost accountant to tell you what portion of that $600 
billion is properly allocable to the cost of defending world 
security in the Eastern Pacific or the Asia-Pacific area. But 
when I talk to the military about, say, research projects, they 
say we are not interested in doing research on anything that is 
going to help us in the Middle East. We want all of our 
research to be how to shoot down Chinese planes over the South 
China Sea.
    And so knowing that no one could possibly refute it because 
we can't possibly know, I will say that we are now spending, 
say, one-third of our military budget focused on the Asia-
Pacific area and we are on our way to spending half or $300 
billion. So whether it is $200 billion, whether it is $300 
billion or it is $200 billion now, whether it is $300 billion 
later, how much collectively is Japan, the Philippines, and 
South Korea spending on their total military, all of which is 
devoted to the East Asia area? And any chance they are 
increasing their budgets or collective budgets by $100 billion 
or anything close to that?
    Mr. Salmon. Before you answer all those questions, I just 
want to say if you can get them all off the top of your head, I 
am going to buy you a milkshake.
    Mr. Sherman. I am going to buy him a drink.
    And if you prefer, you can just respond for the record and 
answer the more general--give me solid numbers for the 
general--but is there any evidence of tens of billions of 
dollars of increase in the defense budgets of Japan, South 
Korea, and Philippines?
    Mr. Fuchs. Well, Congressman, I will have to look into some 
of these questions to get back to you with some specific 
answers for the record so that I can make sure that they are 
accurate.
    What I can tell you about your first question, although I 
am not a lawyer, is that my understanding is that with respect 
to some of the general explanations of features is that if 
there is a feature that is submerged, it derives nothing----
    Mr. Sherman. Right----
    Mr. Fuchs [continuing]. No territorial sea, no exclusive 
economic zone----
    Mr. Sherman. We agree on that, yes.
    Mr. Fuchs. Yes. Right.
    Mr. Sherman. I just threw that in to give you more 
questions to answer for the record.
    Mr. Fuchs. Right. So we can provide you with some of the 
other answers to those.
    Mr. Sherman. Yes. But what will be interesting is the 
inhabited and then the ``never inhabited before, but now that 
there is a dispute, there is a fisherman.''
    Mr. Fuchs. Okay.
    Mr. Sherman. Mr. Hirsh, okay, we have got the rules of 
origin under TPP, but if you controlled the entire supply 
chain, if you own the factory in China and you own the factory 
in Vietnam or you just have a cooperative relationship but you 
could own it, a factory that is Chinese-owned and the goods are 
70 percent made in China, 30 percent made in Vietnam, if the 
rule of origin is 30 percent, they get duty-free in the United 
States, right?
    Mr. Hirsh. The rule of origin varies by product so----
    Mr. Sherman. Right. And for many products. And then for 
others it will be 40 percent and others will be 45 percent.
    Mr. Hirsh. There has to be a verification or there can be 
verification in examining the eligibility of a product so----
    Mr. Sherman. How would you possibly do that with less than 
50,000 accountants?
    Mr. Hirsh. Well, the way that we--I am sorry, Congressman.
    Mr. Sherman. Yes.
    Mr. Hirsh. Yes. Yes, the way that we have approached that 
in our past FTAs that we would approach here, as well, is just 
through a multilayered approach where there are spot-checks, 
verifications----
    Mr. Sherman. Spot--okay. Every invoice, every intercompany 
billing decision is totally in the control of those who want 
the free entry of the product. What spot-checking--I mean, your 
spot-checking could verify that nothing was being done to the 
product in Vietnam, but how would you possibly know whether it 
was 33 percent or 23 percent Vietnamese-made?
    Mr. Hirsh. Well, spot-checks are one of the mechanisms 
which are used to confirm rule of origin. Customs also conducts 
verifications in which they actually go onsite and examine the 
company's books in great detail----
    Mr. Sherman. But the books are made by the company. I mean 
have you ever done a--you have never been involved on the tax 
side but we do this in the section 482 audits. There is no 
chance of catching. Every invoice, every decision, every 
booking--you get to look at the company's books? They will put 
on the books what they need to put on the books. How are we 
supposed to say that if the left side of the product was made 
in China and the right side of the product was made in Vietnam 
that it is incorrect to say that the Chinese portion is only 42 
percent?
    Mr. Hirsh. Well, they have to follow generally accepted 
accounting principles and customs----
    Mr. Sherman. I am probably the only CPA in the room and I 
know generally accepted accounting principles do not answer the 
question. So what it means is goods that are maybe 10 or 15 
percent in reality made in Vietnam get duty-free into the 
United States. So China knows that even if we decide to push 
them with higher tariffs on their own goods, they can just 
stamp the made-in-Vietnam sticker on it, bring it into the 
United States.
    I yield back.
    Mr. Salmon. We are going to do another round.
    Mr. Sherman. Yes.
    Mr. Salmon. If you want to ask another question----
    Mr. Sherman. I am going to go ahead, yes.
    Mr. Salmon [continuing]. Then we will go to the next one 
because I will get you another chance so he can get----
    Mr. Sherman. Okay. Then I will----
    Mr. Salmon. How about we move on to Mr. Connolly and then--
--
    Mr. Sherman. Yes.
    Mr. Salmon [continuing]. You think about the answer to that 
one because we are going to go back around again.
    Mr. Sherman. We will give you a chance, yes.
    Mr. Connolly. Thank you, Mr. Chairman.
    I have got to say the implication here is that Vietnam and 
China are in collusion because Vietnam is just so much in love 
with China and everything Chinese. I think that is a false 
premise.
    Mr. Sherman. If the gentleman will yield?
    Mr. Connolly. I would yield.
    Mr. Sherman. My question was a company in Vietnam entirely 
owned by China would cooperate with its parent company, and of 
course it would be in the interest of the Vietnamese Government 
to let this happen----
    Mr. Connolly. But I am not----
    Mr. Sherman [continuing]. Because at least they are getting 
some of the jobs.
    Mr. Connolly. Okay. But you seem to be making sweeping 
conclusions from that as if everyone is going to cheat and that 
clearly--apparently Chinese companies are going to dominate 
trade in 12 countries involving 40 percent of the world's 
economy. I think that is a false premise and I think it is a 
misleading suggestion. The fact that some people may cheat is 
sort of the human condition.
    My question, Mr. Hirsh, would be, you know, you got 
ridiculed for talking about spot-checks so please don't talk 
about spot-checks. Surely, we have some other mechanisms, 
however, for verifying the nature of goods and services coming 
into the United States or crossing borders pursuant to this 
pending trade agreement.
    Mr. Hirsh. Well, we do. As with other mechanisms in other 
FTAs, we have onsite verifications in which the books are 
examined in great detail, and if anything incorrect is found, 
there is the potential for enforcement actions where there 
would be penalties involved for providing inaccurate 
information.
    Mr. Connolly. So, for example, the example used, a Chinese-
owned company operating in, say, Cholon in former Saigon, now 
Ho Chi Minh City, if we were able to catch them cheating, there 
would be consequences?
    Mr. Hirsh. Yes, there would.
    Mr. Connolly. What would those consequences be?
    Mr. Hirsh. Well, in addition to the obvious consequence of 
denying them the benefits of the agreement, there are penalties 
under our customs statutes for providing incorrect information.
    Mr. Connolly. So when a company decides to cheat, pursuant 
to the example given by my friend from California, they have to 
calculate the risk here. And it is not a consequence-free risk 
if caught, is that correct?
    Mr. Hirsh. That is correct.
    Mr. Connolly. Would there be consequences for the host 
country, for Vietnam, since the private company--the example 
given by my friend Mr. Sherman--is not a signatory to the 
agreement? The Government of Vietnam is. Are there consequences 
to the Government of Vietnam for either turning a blind eye, 
acquiescing, or simply being malfeasant with respect to this 
cheating?
    Mr. Hirsh. Well, at the very least they would have an 
interest in not seeing their exporters cheating because it is 
going to expose their other exporters to closer scrutiny.
    Mr. Connolly. No, but my question was does the pending 
agreement penalize the host country if it knowingly or even 
blindly allows such blatant cheating, as described by my friend 
from California?
    Mr. Hirsh. I would probably have to take a closer look at 
that question. But if it is merely a question of one of their 
companies doing this, I don't know that the country itself 
would be penalized.
    Mr. Connolly. Okay. If it were a pattern, however, if there 
were thousands of Chinese-owned companies engaging in this kind 
of subterfuge, would there be consequences for the Government 
of Vietnam?
    Mr. Hirsh. I will have to take a closer look at that 
question and get back to you. But, if in fact they were 
involved in encouraging that behavior, then----
    Mr. Connolly. Well, it is a pretty significant question my 
friend from California is asking, and I think it is pretty 
important that you answer it hopefully forthrightly and 
forcefully because, frankly, this goes to the question of are 
there teeth in the enforcement of this agreement or not? Are 
there consequences for serious patterns of evasion and cheating 
or not? If there aren't, then the treaty isn't worth much.
    Mr. Hirsh. I understand.
    Mr. Connolly. We already have cheating without a treaty.
    My friend also asked, Mr. Fuchs, questions about defense 
spending. Our NATO allies, are they all meeting their goals in 
defense spending? They are all spending billions of dollars 
more in defense spending right now, too, right?
    Mr. Fuchs. Congressman, I work in the Bureau of East Asian 
and Pacific Affairs so----
    Mr. Connolly. How compartmentalized.
    Mr. Fuchs. I----
    Mr. Connolly. Well, are you aware of the fact that there is 
a 2-percent goal for NATO members, that we want you to be 
spending 2 percent of your GDP on defense? Are you aware of any 
besides the United States, member of NATO, who in fact is 
meeting that goal?
    Mr. Fuchs. I would have to get back to you on that, 
Congressman.
    Mr. Connolly. Well, would it surprise you to learn not one? 
Would it surprise you to learn that most of them in fact are 
retreating from the goal rather than advancing toward the goal? 
I only point that out because it is not unique to Asia that our 
allies in fact are not meeting defense investment goals.
    And my friend mentioned the Middle East, too, but I would 
be interested in seeing data on the Middle East when you can 
talk to your colleagues, you know, how is Jordan doing, how is 
Israel doing, how is Egypt doing? And what percentage of their 
current defense spending is coming from the United States?
    Japan's defense budget, we provide a protective umbrella. 
We have a collaborative relationship but we don't subsidize 
their defense that I am aware of. But when you get back to us 
for the record, I would be interested in seeing that data.
    But I think it is important that the State Department give 
us the comparative data because I don't want--the suggestion 
being that Asia is unique. It isn't. So I would request you add 
to that, knowing and stipulating that you are in your 
compartment, but the State Department covers the world and if 
you could get back to us, I would appreciate it.
    Mr. Fuchs. Absolutely.
    Mr. Connolly. Thank you, Mr. Chairman.
    Mr. Salmon. Thank you.
    Mr. Hirsh, I have a question for you. And before I ask the 
question, I want to precursor it by saying that this is my 10th 
year in Congress. It was kind of bifurcated. I started in '94 
and I served to 2000. Bill Clinton was the President. And now I 
am going on my--well, next year will be my 4th year back, my 
second time around. During that whole time, I have supported 
every free trade agreement that has come before us in the 
Congress. I voted for TPA, and so I am very robust. I have held 
many hearings trying to be very supportive of the TPP process 
because I know how important it is both to our country and to 
the region.
    That having been said, what are you guys at USTR or with 
the administration doing to manage the expectations of the 
other 10 TPP countries that--it is probably pretty likely that 
we are not going to get something out of the Congress approving 
that next year. I mean we are entering the silly season, and 
the leading candidate on the President's side has come out 
against it even though she helped shepherd it through when she 
was Secretary of State. Many of our candidates on the 
Republican's side are coming out against it as well. It is a 
bizarre world.
    But the fact is TPA passed this body by four votes. And 
given some of the challenges now--and the vote will be sometime 
at best in the spring--I think it is very likely that TPP is 
not going to be ratified by the Congress next year. And I say 
that not because I hope that or because I want that. I think it 
is just a fact of life that we are all going to have to deal 
with.
    I have had lots of conversations with the Ambassadors from 
these TPP countries, and they have expressed to me their 
interest in being patient and staying the course and waiting 
for a good deal. I know that your real concern, as I am, about 
a vacuum being filled by China, and all those arguments are 
very good and forthcoming, but the fact remains that, 
politically, it is going to be a real heavy lift if not 
impossible to get it through next year. What are you doing to 
manage the expectations of those TPP partners so that they will 
stay patient and stay in the boat?
    Mr. Hirsh. Thank you, Mr. Chairman. Right now, we are 
focused on making the case for TPP here in Congress and for the 
American people. And we are confident that when we have made 
that case that there will be the support.
    With regard to our trading partners, our colleagues in TPP 
are following our processes closely, and I think they are aware 
of the challenges we face but share our optimism as well.
    Mr. Salmon. It is always great to be really optimistic, and 
I know every football team goes in with the idea that they are 
going to come out victorious, but at the end of the game, 
somebody comes out winning and somebody comes out losing. And I 
think there has to be a plan B. This is too important to not 
have a plan B. And I hope that the administration is managing 
the expectations because I don't want our partners to lose 
heart and think that, you know, if it doesn't pass next year 
then it is off the table because I don't believe that is the 
case.
    Mr. Connolly. Mr. Chairman?
    Mr. Salmon. Yes, Mr. Connolly, I yield.
    Mr. Connolly. I just want to echo what you said. I couldn't 
agree with you more. I think timing is everything actually. 
And, Mr. Hirsh, I wish we lived in a world of pure reason and 
rational actors, but I don't think the dynamic for approval of 
this agreement is simply a matter of more information, the more 
people know, the more they will come to love it. I wish that 
were true but I don't think it is.
    You have got to do your job and we understand that, but I 
think timing is everything, and I think the chairman has said 
it well. And if the timing is wrong, it is not like we have 
some huge cushion to fall back on in terms of support up here. 
I believe TPA passed by a margin of 10.
    Mr. Salmon. Was it 10?
    Mr. Connolly. Was it 10?
    Mr. Salmon. I thought it was four.
    Mr. Connolly. I thought it was 218 to 208 but----
    Mr. Salmon. Anyway----
    Mr. Connolly [continuing]. Whatever.
    Mr. Salmon. It was not a lot----
    Mr. Connolly. It was not a lot to spare, to the chairman's 
point. And that is why, frankly, getting the timing right is 
really critical. So I echo what he said as a supporter of the 
agreement and of TPA. But this is going to be a slog and a bit 
of trench warfare.
    Mr. Salmon. And it would be prudent to have a plan B. The 
chair recognizes Mr. Sherman.
    Mr. Sherman. I would very much hope the trade decisions 
were made on the basis of pure reason and rational actors, in 
which case we would have a completely different trade policy 
than we have had for the last 30 years when we have decimated 
the American middle class.
    I do want to agree with the gentleman from Virginia that as 
much Chinese cheating as may go on under this agreement, that 
will not be the lion's share of all the trade that occurs under 
this agreement. Toyota will be a Japanese company whether we 
ratify--ratify is the wrong word--whether Congress approves the 
agreement or not.
    But just to show you how incredibly difficult it is to stop 
cheating, I want to put in the record two articles. One is 
``U.S. put China-made parts in the F-35 fighter program.'' 
There is no way that we are auditing Vietnamese and Chinese 
textile firms as carefully as our national security is focusing 
on the parts in the F-35. Even there, cheating happens. 
``Counterfeit Chinese parts slipping into U.S. military 
aircraft,'' ABC News is the second article that I would put in 
the record if there is no objection.
    Mr. Salmon. Can I just say to my friend, we are willing to 
audit every one of those firms if we get your vote.
    Mr. Sherman. Don't promise what you can't deliver.
    And the idea that you can catch this and will penalize it 
when you catch it, yes, you can audit the books but I am the 
only one in the room who has ever written one of these books, 
and you put in the books what you want to put in the books. You 
could easily value at zero for intercompany transactions the 
value of Chinese intellectual property in the product and value 
at a high value intellectual property that happened to be owned 
by one of the subsidiaries in Vietnam or Malaysia.
    There are so many ways to handle this, not to mention the 
profit margins. You could set a profit margin at zero of what 
the Chinese company ships to its Vietnamese subsidiary. And 
those are the above-board, legitimate ways to cheat. That 
doesn't even involve lying, just setting the prices 
differently.
    But the other concern I have is on coproduction agreements. 
Now and then, China does import something from the United 
States, and what they do is they say, okay, you think you are 
getting jobs because we are buying these planes, but in order 
to buy your planes, you have to build a factory in China to 
build the fuselages not just for the planes that you are 
selling to China but the planes you are selling all over the 
world.
    Now, that is great if all you are concerned with is Wall 
Street profits because you move the fuselage factory to China, 
maybe you will make even more money, but you of course lose the 
jobs. And once this deal goes forward and China has another 
route to ship its goods into the United States, we will never 
be able to demand that we don't have coproduction agreements.
    But, Mr. Hirsh, is there anything in this agreement that 
says that a Vietnamese airline or Malaysian airline can't 
prefer one aircraft supplier over the other based on which one 
is willing to produce parts for its plane or to have 
manufacturing facilities in the buying country? Are 
coproduction agreements bad?
    Mr. Hirsh. Thank you, Congressman. That is a very specific 
question that I don't have the answer right here.
    Mr. Sherman. Furnish it for the record, please.
    Mr. Hirsh. And we will look into that. Thanks.
    Mr. Sherman. Good. And I think I had asked another question 
prior to others that you might want to respond to. And do you 
have any other comments on any of the other parts of my 
diatribe that have been focused on you?
    Mr. Hirsh. Sir, only to say that we have a number of FTAs 
and that the enforcement of rules of origin is something which 
is an issue in every single FTA. We do have a track record 
there. And customs does look at these issues very seriously.
    Mr. Sherman. Okay. We here in Washington are cut off. Even 
I should probably be required to go and sit in the back of a 
Trump rally. If you think that our prior FTAs' enforcement is 
what America wants, that we have been doing a great job, that 
there is no cheating under our existing rules, that everything 
is hunky-dory and the middle class is doing well in the United 
States, then you and I should sit in the back of a Trump rally 
together and see the anger. I won't say that the focus of the 
solution for that anger, electing Mr. Trump as President, is 
the solution, but the anger is there and the anger is because 
for 30 years America hasn't gotten a raise, especially those 
who do not have grad school degrees.
    So I have gone way over time. I thank the chairman for his 
indulgence and I yield back.
    Mr. Salmon. You have given Steve and I an opportunity to 
think about a present that we could give you, maybe one of 
those Trump Make America Great hats.
    Mr. Sherman. The greatest present that you could give to my 
party and the worst thing or one of the worst things you could 
do for my country is to nominate the Presidential candidate who 
has got the hat.
    Mr. Salmon. All right. And on that note, ba-dum-bum, Mr. 
Chabot.
    Mr. Chabot. Thank you very much. Rather than discuss--never 
mind. I am just going to stay away from that altogether and go 
to something less controversial, and that is TPA and TPP. As 
one who also supported TPA and is inclined to support TPP or 
certainly was inclined and TTIP and other trade agreements, I 
have generally been considered a free-trader over my career, I 
was at a meeting this morning where a fairly prominent person 
indicated that in chapter 20 of TPP is language that in essence 
requires that TPP implementation of any environmental 
agreements that are agreed to in other forums, forums similar 
to the one that President Obama recently participated in in 
Paris.
    And a lot of ears perked up, including mine at that point, 
and I went and read the language myself, and it seemed 
relatively vague. I see that you could interpret it that way. I 
think you could perhaps interpret it a different way. But, Mr. 
Hirsh, on behalf of the administration, can you give us some 
clarification on that issue?
    Mr. Hirsh. I will have to defer to my colleagues back at 
USTR who are more familiar with the details of that particular 
issue, if that is okay.
    Mr. Chabot. Okay. Yes, I would like to get that as quickly 
as we can and as much detail as we can and clarification 
because if that is the case, you know, that would give a lot of 
people some real heartburn. So I will yield back at this point.
    Mr. Salmon. Great and lively discussion. I really 
congratulate the two of you for sitting through this and being 
so patient and diligent in your answers and your testimony. We 
really appreciate it. So thank you very much.
    And this committee is now adjourned.
    [Whereupon, at 3:48 p.m., the subcommittee was adjourned.]

                                     

                                     

                            A P P E N D I X

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                   Material Submitted for the Record


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  Material submitted for the record by the Honorable Brad Sherman, a 
        Representative in Congress from the State of California

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                               __________
                               
  Material submitted for the record by the Honorable Brad Sherman, a 
        Representative in Congress from the State of California

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Prepared statement of the Honorable Alan S. Lowenthal, a Representative 
                in Congress from the State of California



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