May 11, 2022
Statement of Hon. Nazak Nikakhtar
Partner, International Trade and National Security Practice Chair, Wiley Rein LLP
Former Assistant Secretary for Industry & Analysis, Under Secretary for Industry & Security*
U.S. Department of Commerce
Testimony Before the Senate Select Committee on Intelligence*
Threats to U.S. National Security:
Countering the PRC’s Economic and Technological Plan for Dominance
Senator Warner and Senator Rubio, Committee experts, policy advisors, and staff,
thank you for the opportunity to speak about the growing challenges posed by the People’s
Republic of China (“PRC”) to U.S. and global national security and economic security interests,
and the appropriate U.S. Government response.
My name is Nazak Nikakhtar, and it is an honor to appear before you today. I am an
international trade attorney and Chair of the National Security practice at the Washington, DC,
law firm of Wiley Rein LLP. I am also a trade and industry economist, a former Georgetown
University adjunct law professor, and recently completed my second tour of duty in the U.S.
Government. Twenty years ago, I began my career as an analyst at the Department of Commerce’s
Bureau of Industry and Security and subsequently at the International Trade Administration, where
my colleagues and I witnessed from the frontlines the predatory economic tactics used by our
trading partners to erode our industries. In 2004, I helped establish and lead the Commerce
Department’s China/Non-Market Economy Office and, for several years thereafter, I audited
numerous foreign (including Chinese) companies and their affiliates for the Department. In 2018,
I returned to the Commerce Department to serve as Assistant Secretary for Industry & Analysis
and, in 2019, I simultaneously served, performing the non-exclusive functions and duties, as the
*Performing the non-exclusive functions and duties of Under Secretary while also serving as Assistant Secretary.
The views and opinions expressed in this testimony are mine only and do not represent the views of Wiley Rein LLP
or any of the firm’s clients.

Under Secretary for the Bureau of Industry and Security. It is from all of these vantage points that
I offer my testimony and observations today about the risks to U.S. national and economic security,
as well as the gaps in U.S. laws that must be closed to adequately mitigate these risks. There are
many.
I.

THE EROSION OF SUPPLY CHAINS AND THE RESULTING ECONOMIC AND
NATIONAL SECURITY THREATS
Only recently, in 2017, the U.S. Government began to aggressively confront the challenges

posed by the PRC’s predatory economic practices. These challenges had been ignored for decades
and, as a result, over the course of the past 40-plus years, the United States continuously lost
capabilities in sector after sector in manufacturing, technology, and services that are essential to
our national security. In goods alone, the offshoring of manufacturing has created supply chain
vulnerabilities across hundreds of critical products, ranging from semiconductor and electronics
manufacturing to the development of active pharmaceutical ingredients. This has led to job losses
of between 3.4 to 3.7 million between 2001 to 2018.1 In key sectors such as communications
equipment, electronics, and computer technology, we ceded up to 40% to 60% of the domestic
market share to Chinese imports, and globally the PRC has captured extensive market shares in
those sectors as well.
Let me be clear on two key points. First, these are not incidental consequences of open
and free trade. These are the very perverse and adverse consequences of one country exploiting
open borders to cripple other nations’ economies. Our economic losses have resulted from the
PRC’s deliberate attempts to hollow out our industries in order to create dependency on their own

1

Robert Scott and Zane Mokhiber, Growing China Trade Deficit Cost 3.7 Million American Jobs Between
2001 and 2018, Economic Policy Institute (Jan. 30, 2020), available at https://www.epi.org/publication/growingchina-trade-deficits-costs-us-jobs/.

2

distorted market. The weaker our industries become – semiconductors, telecommunications,
critical minerals and rare earth elements, high-capacity batteries, and pharmaceuticals and medical
equipment – the more our national security is at risk.2 Without access to secure supply chains, we
are unable to sustain our economies, and we are unable to develop the weapon systems necessary
for national defense. The result is that our military will have a “one strike” capability. This is also
true for our allies and the rest of the world.
Second, the economic facts before us should make abundantly clear that the PRC
government has waged an economic war against the rest of the world aimed at eroding nonChinese supply chains so that no country is able to depend on itself or its allies for the essential
items it needs. The PRC’s end game is to render the rest of the world dependent on it, and today
this plan is succeeding. At present, we depend on the PRC for 80% of our critical minerals,3 2023% of our semiconductor chips (92% on Taiwan for our most advanced chips),4 60% of our
consumer electronics including telecommunications equipment,5 75% of our lithium-ion battery
cells,6 and 100% for many of our pharmaceuticals and medical supplies. The greater our
dependence grows, the more vulnerable and fragile we become. This is not a sound strategy.

2

President Biden’s 2021 supply chain Executive Order lists these critical sectors. Executive Order on
America’s Supply Chains, The White House (Feb. 24, 2021), available at https://www.whitehouse.gov/briefingroom/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.
3

A Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals, U.S. Department of
Commerce
(2019),
available
at
https://www.commerce.gov/sites/default/files/202001/Critical_Minerals_Strategy_Final.pdf.
4

Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, Boston Consulting Group and
Semiconductor Industry Association (Apr. 2021) at 5, 35, available at https://www.semiconductors.org/wpcontent/uploads/2021/05/BCG-x-SIA-Strengthening-the-Global-Semiconductor-Value-Chain-April-2021_1.pdf
(“BCG/SIA 2021 Report”); Taking Stock of China’s Semiconductor Industry, Semiconductor Industry Association
(July 13, 2021), available at https://www.semiconductors.org/taking-stock-of-chinas-semiconductor-industry/.
5

BCG/SIA 2021 Report at 28.

6

Gavin Thompson, Batteries with Chinese Characteristics, Wood Mackenzie (Feb. 10, 2021), available at
https://www.woodmac.com/news/opinion/batteries-with-chinese-characteristics/; Protecting Americans’ Sensitive
Data From Foreign Adversaries, Exec. Order No. 14034 of June 9, 2021, 86 Fed. Reg. 31,423 (June 11, 2021),
available at https://www.govinfo.gov/content/pkg/FR-2021-06-11/pdf/2021-12506.pdf.

3

To be clear, we have not yet felt the full adverse effect the PRC’s control over our supply
chains and economies yet. Not because control does not exist, but rather because the PRC
government has chosen not to exercise it yet. When will that time come? When the PRC knows
that we are too weak to respond – perhaps when it displaces the U.S. dollar from the global
currency market, or when it fully indigenizes leading-edge semiconductor development such that
it no longer needs U.S. technology. This time horizon is only a few years away. This is becoming
an immediate threat.
As a nation, we tend to downplay these risks because we steadfastly hold onto the belief
that the United States’ economy is strong and resilient, and so it will be immune from external
threats. The prevailing argument – that U.S. purchasing power will continue to keep the PRC
dependent on the United States and prevent it from harming U.S. interests – is terribly
misinformed. We source from the PRC not because we choose to but because we have little other
option. Today’s economic reality is that United States and the rest of the world have absolutely
no choice but to import heavily from the PRC because this is where supply chains for the most
critical products reside. The current trade deficit with the PRC, which stood at $355.3 billion in
2021, underscores this point.7 The coronavirus pandemic highlighted supply chain reality. And
the farther our supply chains migrate into the PRC, the greater our dependence will become.
As our import dependence on PRC-origin goods expands, we need consider the following
question: Will the PRC government guarantee to the rest of the world fair and equitable access to
its supply chains? The answer is a definitive “NO.” We have already witnessed instances of the
PRC’s stranglehold over its trading partners. For example, the debt-trap deliberately created by

7

The deficit with China increased $45.0 billion to $355.3 billion in 2021. Exports increased $26.6 billion to
$151.1 billion and imports increased $71.6 billion to $506.4 billion. U.S. International Trade in Goods and Services,
December 2021, U.S. Department of Commerce Bureau of Economic Analysis (Feb. 8, 2022), available at
https://www.bea.gov/news/2022/us-international-trade-goods-and-services-december-2021.

4

the PRC’s One Belt One Road scheme where African and South American countries, who were
once lured by the PRC government’s promises for substantial investment, have now been forced
to give up their most valuable national assets (e.g., mines, roads, and ports) in repayment.8 These
countries are now at the PRC government’s mercy and, so far, their only recourse is to ask the
United States and other countries for assistance. We – the United States, our North America allies,
European and Asian partners – are all nearing this dangerous tipping point as well.
For those of us who have studied the PRC in-depth for decades, this is precisely the PRC
government’s end game: to deplete other nations of the resources necessary for self-defense by
creating supply chain weaknesses and economic dependence. This PRC strategy, coupled with
reports of the PRC government’s endless intimidation of Taiwan, Japan, Australia, South Korea,
and Lithuania, and the government’s repeated threats of military attacks against the United States
and its allies must make absolutely clear that we are not dealing with a friendly nation. The PRC
government is a threat, and both the Trump and Biden Administrations have designated the PRC
government as a “foreign adversary” along with the governments of the Republic of Cuba, the
Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Russian Federation, and
Venezuela’s Nicolás Maduro Regime.9 This designation means something.
To be clear, the United States, Europe, and the rest of the world are already in a very
vulnerable position with respect to critical minerals and semiconductors supply chains. Without
access to these goods, we have very little leverage over the PRC government, and our military
capabilities are severely limited. This, then, leads to the obvious question: if the PRC government

8

Jeremy Mark, China’s Real ‘Debt Trap’ Threat, Atlantic Council (Dec. 13, 2021), available at
https://www.atlanticcouncil.org/blogs/new-atlanticist/chinas-real-debt-trap-threat/.

9

Securing the Information and Communications Technology and Services Supply Chain, 86 Fed. Reg. 4,909,
4,911 (Dep’t Commerce Jan. 12, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-01-19/pdf/202101234.pdf.

5

were to restrict global access to its critical mineral exports, as well as its own and Taiwan’s
semiconductor supply chains, what would be the economic impact and how would we respond?
The economic impact to the United States will be in the trillions. Compounded by the
economic impact across the rest of the world – the result will be catastrophic. Almost everything
we manufacture or consume today, and all of our technological advancements, depend in some
way on Chinese-processed critical minerals or Chinese and Taiwanese semiconductor supply
chains. Without access to these materials, the global economy will come to an abrupt halt.
As to how we would respond, our response would be ineffective. Realistically, it will take
a minimum of three to five years to scale production of critical minerals mining, extraction, and
processing capabilities to wean dependence off the PRC. Additionally, it will take at least 10 to
20 years to recreate the vast semiconductor ecosystem that currently exists in the PRC and Taiwan,
including the development of upstream raw material and chemical supply chains, as well as the
back end assembly/testing/packaging capabilities, which are presently concentrated in the PRC
and Taiwan.10 During this transition period, our countries are vulnerable.
This is the point that most policymakers fail to realize. The PRC is leveraging its near
monopoly over critical global supply chains to secure its ambitions for economic and military
hegemony. We need to quickly reverse our vulnerabilities, and I urge the Commission and
Congress to act before it becomes too late.
II.

THE UNITED STATES MUST RETHINK ITS APPROACH TO NATIONAL
SECURITY AND TRADE LAWS
For years, I have described the predatory economic tactics that the PRC government has

systematically used to weaken our industries and economy, and I have often stressed that we do

10

BCG/SIA 2021 Report at 19.

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not adequately leverage our laws to counter these security threats. Appended hereto is my prior
testimony on this topic. Today, however, my goal is to offer perspectives on how to cure our
vulnerabilities in order to better protect our economies and technologies. The recommendations I
provide may not all be easy. They will require sacrifices. But if we, as a nation, are resolute, we
may be able to solve our weaknesses before it is too late.
Success will depend on open trade and reliance on the comparative advantages of the
United States and our allies. Success will depend on our ability to work together to reconfigure
supply chains out of the PRC. And success will depend on forging greater economic ties between
like-minded partner countries. For the United States, the economic impact of moving our supply
chains out of the PRC is approximately 1% of U.S. gross domestic product in the short-run. If we
do this in concert with our European, Japanese, and South Korean allies, the economic impact is
significantly lessened. After three to five years, any negative economic impact will turn into
substantial gains for the United States and those gains will grow significantly. Overall, the benefit
to the free world of disentangling from a predatory actor will be immeasurable.
A.

Deterring Invasion of Taiwan

At the outset, one of the most immediate threats to global security is the PRC government’s
potential move on Taiwan, whether by military force, legal decree, or another mechanism. The
PRC government’s objective in obtaining control over Taiwan is to gain control over the island’s
semiconductor and electronics industries, and thereby gain almost absolute control over the global
economy. In other words, control over Taiwan will allow the PRC government to bring the global
economy to its knees.
Importantly, however, the United States still controls one of the most powerful weapons of
the global economic order – the U.S. dollar. The dollar’s special status as the global currency
gives our nation unrivaled sanctioning power. Given that access to dollars is a near-necessity for
7

multinational businesses and global financial institutions, the United States is able to impose
significant economic damage by denying certain entities or governments access to the dollar.
Indeed, the sanctions that are currently pummeling the Russian currency, banks, and the internal
economy are a vivid demonstration of the power of the U.S. dollar. Coupled with sweeping
European sanctions, the United States and its allies are capable of imposing significant costs to the
PRC economy through comprehensive financial sanctions on PRC banks should it take control of
Taiwan.
It should be noted that the PRC government is now hastening efforts to reduce reliance on
the U.S. dollar to protect itself from potential U.S. sanctions. It is simultaneously working to
displace the dollar from serving as the global currency in favor of the Yuan. But it will take years
for the Yuan to gain any significant foothold in the global economy. Until then, and while the
dollar still maintains substantial influence, the U.S. Government should be prepared to use this
economic lever as deterrence.
B.

The U.S. Government Needs A Legal Mechanism to Recognize PRC Entities’
Ties to the Central Government

Over the course of the past 10 years, the PRC government has steadily increased its control
over Chinese companies. And by doing so, it has coerced companies to aid the central government
in growing its military base, technological capabilities, and surveillance activities. It is well
documented that the PRC government mandates and coerces – through law, administrative
guidelines, and regulations – entities to transfer sensitive information, trade secrets, and
intelligence information to the central government. In addition, PRC laws require that entities
conform their practices to advance the Chinese Communist Party’s (“CCP”) military and

8

surveillance interests.11 Moreover, the PRC’s Military-Civil Fusion strategy demands that entities
cooperate with the People’s Liberation Army (“PLA”) to advance the military strength and
ambitions of the PRC government for global power. All Chinese entities, even those enterprises
that still remain ostensibly private and civilian, are legally obligated to serve the state and the
leadership of the central government such that Chinese entities have limited autonomy over their
business decisions. The PRC government’s routine installation of CCP officials inside private
firms ensures compliance with the party’s mandates.
The reality today is that Chinese entities operate in a military-driven ecosystem that is
centrally coordinated by the CCP to advance the country’s weapons capabilities, intelligence
operations, and security apparatuses. The legal framework through which the PRC government
forces entities to contribute to the modernization and expansion of the CCP’s military industrial
complex continues to expand rapidly and, therefore, poses a significant threat to the national
security, foreign policy, and economy of the United States.
In light of the foregoing, it is surprising that the U.S. Government does not have a
consistent legal framework across all federal agencies for finding affiliation between Chinese
commercial entities and the PRC central government. In fact, it never has. Crippled by this lack of
comprehensive legal framework, the U.S. intelligence community has been hampered in both its
offensive and defensive capabilities, the U.S. Department of Defense is limited in the types of
companies it can eliminate from supply contracts, and U.S. Government agencies are unable to

11

USCBC, Fact Sheet: Communist Party Groups in Foreign Companies in China, China Business Review
(May 31, 2018), available at https://www.chinabusinessreview.com/fact-sheet-communist-party-groups-in-foreigncompanies-in-china/.

9

legally prohibit procurement from CCP affiliates or prohibit U.S. investments in PLA affiliates.12
However, if the U.S. Government had an actual legal framework to determine whether companies
are (1) controlled by the PRC government, or (2) affiliated with the PRC government, it could do
more to protect U.S. industries, economy, and national security from their malign activities.
Accordingly, U.S. Government should develop a comprehensive, consistent, and
complementary legal standard for evaluating the extent to which commercial and non-commercial
PRC entities are controlled by or affiliated with their provincial or central governments. The lack
of framework has, to date, significantly impeded the U.S. Government’s analysis in export
controls, foreign direct investment screenings (discussed further below), intelligence community
risk assessments, federal government acquisitions, and supply chain vulnerability analyses. This
shortcoming ought to be remedied, and the solution is quite simple. Congress should, by
legislation, adopt the longstanding legal definitions of affiliation that exist in U.S. trade laws,
through statute, regulations, and case precedent, and apply these definitions to augment the legal
authorities currently existing across all federal agencies. The trade laws extend the definition of
affiliation beyond ownership interests to the broad range of ways in which foreign governments
are able to exercise influence over corporate entities’ business operations such that the entities lose
autonomy over key decisions. These trade laws have been upheld by U.S. courts for decades, are
consistent with the United States’ obligations under the World Trade Organization (“WTO”)
agreements, and will therefore withstand judicial scrutiny. It is axiomatic that the application of a
comprehensive legal standard such as this would improve each federal agency’s ability to
maximize the use of its own existing authorities where a determination of affiliation is needed.

12

E.g., through the U.S. Department of the Treasury’s Chinese Military Industrial Complex companies. See
Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC List), U.S. Department of the Treasury
(Dec. 16, 2021), available at https://home.treasury.gov/policy-issues/financial-sanctions/consolidated-sanctionslist/ns-cmic-list.

10

Further, a consistent legal approach such as this would promote uniformity and predictability
across the U.S. Government agencies’ legal authorities and provide better clarity to businesses
seeking regulatory approvals from various agencies.
C.

The United States and Its Allies Should Rely More Heavily on Export Controls

The PRC’s growth has been driven in significant part by U.S. companies as well as firms
in allied nations racing to transfer technology to Chinese counterparts – many of which are
controlled by the PRC government – in exchange for temporary access to the PRC market. The
fact that the PRC government restricts access to its domestic market in exchange for technology
transfer to individual companies confirms the extensive collusion and connection between PRC
companies and their central government.
This technology-transfer trend has accelerated over the course of the past two decades and
has resulted in so much technology transfer to the PRC that the PRC is now technologically neckin-neck with the United States in many important sectors (e.g., telecommunications and
computers), and vastly ahead in others (e.g., hypersonic weapons, artificial intelligence, genomics,
and robotics). This is incredibly alarming. In order to solve this problem, we need to revise our
current strategy.
1.

The Need for a “Block” and “Run Faster” Approach

At the outset, the United States’ export control community has traditionally pursued a
competition strategy of “run faster” when it comes to developing export control policies.13 The
theory behind this strategy is that, by permitting exports of critical technologies to PRC entities,
U.S. firms will gain access to the revenue needed in order to invest in next-generation technologies
and stay ahead in the technology race. But this strategy has failed over the years. Although it

13

It is important to emphasize that export controls are not prohibitions on exports per se. They simply subject
exports to a license review process.

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takes our firms years, even decades, to develop new technologies, we are handing over these
technologies to the PRC virtually overnight, allowing them to bypass the extended technologydevelopment lead times and costs (including trial-and-error) that innovators endure. In other
words, our strategy has been to place the painstaking technology development burden on our own
businesses, and then allow the rapid transfer of the resulting technology to adversaries enabling
them to “run faster” than us. Two examples demonstrate the danger of the ‘tech transfer for
revenue’ approach.
ASML is the Dutch photolithography company that developed the highly-advanced and
one-of-a-kind extreme ultraviolet (“EUV”) lithography tool that produces the most leading edge
semiconductors in existence today. This tool was developed, in part, using U.S.-controlled
technology. ASML is the only firm in the world that is capable of making these sophisticated
machines,14 and it has taken ASML 20 years to develop this tool with billions of dollars in
investments.15 If the PRC semiconductor industry were to acquire this machine, it would be able
to reverse engineer it in three years, giving it a substantial boost in semiconductor development
and solidify its position as a global leader. Indeed, the PRC semiconductor industry in 2020
surpassed Taiwan for the second year in a row in global semiconductor chip sales.16 With this
added EUV capability, along with the downstream assembly/packaging/testing ecosystem that the

14

Sam Shead, Investors are Going Wild Over a Dutch Chip Firm, And You’ve Probably Never Heard of It,
CNBC (Nov. 24, 2021), available at https://www.cnbc.com/2021/11/24/asml-the-biggest-company-in-europe-youveprobably-never-heard-of.html.
15

Matthew Gooding, ASML Might Be The Most Successful Tech Company You’ve Never Heard Of, Tech
Monitor (Aug. 6, 2021), available at https://techmonitor.ai/technology/future-of-asml-photolithographysemiconductor-chip-euv.
16

China’s Share of Global Chip Sales Now Surpasses Taiwan’s, Closing In on Europe’s and Japan’s,
Semiconductor Industry Association (Jan. 10, 2022), available at https://www.semiconductors.org/chinas-share-ofglobal-chip-sales-now-surpasses-taiwan-closing-in-on-europe-and-japan/.

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PRC government has developed, the PRC will be positioned to dominate the global chip industry
likely by 2025.17
In comparison, the United States is lagging behind; we do not have the capability to
produce all of the semiconductors required for our defense capabilities, let alone a substantial
portion of our economy. We produce neither all of the upstream raw materials necessary to
manufacture the chips, nor do we maintain an assembly/packaging/testing ecosystem to
operationalize the chips. This is the fundamental problem. It will take 10 to 20 years to rebuild
an on-shore and complementary near-shore semiconductor ecosystem to cure the United States’
and our allies’ dependence on the PRC and Taiwan. The PRC, by contrast, is only a few years
away from independence.
The second example is the well documented PLA’s advancements in hypersonic weapons,
which was facilitated by the transfer of U.S. semiconductor technology to the PRC. To be clear,
one U.S. company’s technology transfer allowed the PRC military to race ahead of the United
States, and that company’s realized short-term profits now threatens our national security and the
world’s security.
Clearly, we need a different strategy – one that both blocks technology transfer and allows
us to run faster. This means that we need more aggressive export controls on transfers of critical
technology through the denial of export licenses to adversaries in the PRC. We also need to
augment investments in U.S. innovation, as discussed further below.

17

Tim De Chant, The Chip Choke Point, The Wire China (Feb. 7, 2021), available at
https://www.euvlitho.com/Blogs/The%20Chip%20Choke%20Point%20-%20The%20Wire%20China.pdf;
Robert
Castellano, 3 Headwinds Facing ASML’s Non-EUV Business in China, Seeking Alpha (Mar. 22, 2021), available at
https://seekingalpha.com/article/4415477-three-headwinds-facing-asml-s-non-euv-business-in-china, Misha Lu, Is
Huawei Making its Own Lithography Equipment, Tech Taiwan (June 9, 2021), available at
https://techtaiwan.com/20210609/huawei-duv/.

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2.

Controls on Emerging Technologies

Although the Export Control Reform Act of 2018 (“ECRA”) legislated the protection of
“emerging technologies” through the use of export controls,18 the debate continues in the U.S.
Government as to the most effective way to implement ECRA’s mandates and restrict such
exports. At the outset, there is widespread recognition that emerging technologies are most
vulnerable to foreign acquisition when they are at the nascent stages of development. Congress
recognized this reality when it used the term “emerging” in ECRA. Indeed, at the nascent stage
of development, the full range of applications that may arise from new technologies are seldom
identified. Because Congress recognized this uncertainty, it instituted regulatory controls over
their exports given that the same technologies that wield the power to drive significant
advancements in the commercial sector may also be exploited for both known and yet-to-be known
dangerous uses by foreign adversaries.

Artificial Intelligence is a perfect example of this

intersection.
My understanding is that the U.S. Government appreciates the enormous difficulty
associated with the task of identifying “emerging technologies” for export controls when those
technologies and their applications are constantly evolving. The Government further recognizes
that, in order to move forward with controls, it must decide between two very different types of
regulatory approaches. The first option is to wait until “emerging” technologies develop into
somewhat better understood, more “mature” technologies in order to be more precisely defined for
controls (in much the same way that most technologies are identified on export control lists).
Alternatively, the U.S. Government has the option of acting more swiftly by delineating and
controlling broader categories of technologies as “emerging technologies” under ECRA.

18

Export Control Reform Act, H.R. 5040, 115th Cong. § 106 (2018).

14

I do not believe that the U.S. Government has abandoned either option to date, even though
there are downsides associated with each.

The former approach, whereby “emerging

technologies” are narrowly defined, risks additional delay in instituting controls that are presently
needed. Moreover, by attempting to define technologies that are not yet fully understood with a
high degree of specificity, the Government may inadvertently omit necessary technologies from
control. A too-narrow definition also increases the likelihood of circumvention by technology
developers who may be able to reconfigure their technologies in minor ways in order “design out”
from the scope of controls. On the other hand, the alternative approach of adopting a broader
definition of “emerging technologies” – while it allows for the more expeditious implementation
of licensing requirements – runs the risk of regulating more exports than necessary to protect
national security. To the extent the U.S. Government adopts either option, it should consider
imposing licensing requirements for only exports of emerging technologies to entities and/or
countries that pose the most significant national security risks. To the extent that the acquisition
of emerging technologies by U.S. allies does not pose risks, allies could be exempt from licensing
requirements. This approach additionally eases the licensing burden on federal agencies and U.S.
businesses.
3.

Exports to Countries that Do Not Permit Adequate End-Use Checks

The U.S. Government also needs to better control technology transfers to countries with
inadequate “End-Use Checks,” like the PRC. End-use checks are mechanisms by which U.S.
Government officials conduct on-site audits of foreign recipients’ (“end users”) use of controlled
items to determine whether the items are being used in accordance with the terms and conditions
associated with the U.S. Government’s export authorization.
Today, in order for the U.S. Government to conduct an end-use check of any PRC entity,
it must notify the PRC government of its intent and seek the government’s authorization in advance
15

of the actual check. Often, end-use checks are not permitted for weeks. This affords the PRC
government ample time to tamper with the end user’s records in order to obfuscate any evidence
of export control violations. The PRC government and its companies are notorious for falsifying
records and diverting exports of controlled items to unauthorized end users within the PRC (e.g.,
the PLA, military end users) and countries abroad (e.g., Iran). The U.S. Government needs to take
this reality into account.
If the U.S. Government does not have full confidence in its ability to conduct thorough and
transparent end-use checks in the PRC, then it should not authorize exports of sensitive items to
the PRC at all. At a minimum, the Government ought to adjudicate export licenses to the PRC
under a “presumption of denial” evaluation criteria rather than the current “case-by-case” criteria,
which is normally enjoyed by firms in nations that authorize end-use checks by U.S. officials and
otherwise fully comply with U.S. export laws. The PRC should not be subject to the same license
review criteria as fully-cooperating partners. This policy needs to change.
4.

Entity List License Review Criteria

The U.S. Government should also update its Entity List policy. The Entity List (found in
Supplement No. 4 to Part 744 of the Export Administration Regulations (“EAR”)19) “identifies
entities for which there is reasonable cause to believe, based on specific and articulable facts, that
the entities have been involved, are involved, or pose a significant risk of being or becoming
involved in activities contrary to the national security or foreign policy interests of the United

19

15 C.F.R. § 744.16, available at https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapterC/part-744/appendix-Supplement%20No.%204%20to%20Part%20744.

16

States.”20 Where the U.S. Government determines that reasonable cause exists, it may include a
parent company, as well as its affiliates, on the Entity List.21
For items subject to the EAR, the entity listed companies are generally prohibited from
receiving U.S. exports absence a license from the U.S. Commerce Department, and the majority
of export licenses to Entity List companies are subject to a “presumption of denial” license review
policy. The legal threshold for including entities on the Entity List is by design a flexible standard
so that the U.S. Government has improved ability to curtail these entities’ harmful actions through
export licenses.22
Today, there are a number of entities on the Entity List where U.S. exports are subject to
an export license review policy of “case-by-case” or “presumption of approval,” rather than the
“presumption of denial” policy. These more lenient license review criteria obviate the punitive
impact of a company’s designation on the Entity List. It makes no sense to place a PRC entity on
the Entity List for having engaged in malign activities if, through the designation, the entity is able
to benefit from the same or better export-license adjudication procedures than non-harmful actors.
Congress has, in the past, requested license review and approval statistics for PRC
companies on the Entity List and has been surprised by the large number of export licenses
approvals to Entity Listed companies. This is the reason.

20

Clarification of Entity List Requirements for Listed Entities When Acting as a Party to the Transaction Under
the Export Administration Regulations (EAR), 85 Fed. Reg. 51,335 (Bureau of Indus. and Sec. Aug. 20, 2020),
available at https://www.govinfo.gov/content/pkg/FR-2020-08-20/pdf/2020-17908.pdf.

21

15 C.F.R. § 744.11(b).

22

Company-specific Entity Listings are not a substitute for item-specific export controls. An Entity Listing
regulates exports of many items to a specific entity (e.g., SMIC, Huawei), whereas the control list designation regulates
exports of a particular item to all entities in various countries. These authorities are not substitutes and should not be
used interchangeably.

17

5.

Unilateral Versus Multilateral Controls

It is also worth pointing out that the notion of consistently favoring a multilateral approach
for export controls over a unilateral approach may not always be justified and may ultimately
impede the implementation of much-needed controls to safeguard national security. The reality is
that not all countries are able to move in lock-step with the United States by imposing controls at
the same speed, same scope, same manner, and at the exact same time.
Most countries’ economic exposure to the PRC and geopolitical vulnerabilities are far
greater than the United States’, and these exposures necessitate a different approach to controls.
For example, Europe is far more economically entangled with the PRC, and South Korea and Japan
are far more geographically vulnerable. In light of this reality, it makes little sense for the U.S.
Government to continuously demand multilateral export restrictions and expect allies to
consistently act in unison in order for it (the U.S. Government) to act. Again, this delays the
implementation of controls to protect U.S. national security.
Where the United States has the will and ability to impose controls in advance of its allies,
it should do so and with faith that our allies will likely follow our lead. This is exactly what
happened when the United States imposed restrictions on U.S. exports to Chinese telecom giant
Huawei Technologies Co., Ltd. (“Huawei”) several years ago. Had the U.S. Government pursued
export restrictions multilaterally, the restrictions would never have been imposed.
For reference, in May 2019, the United States placed Huawei on the Entity List for its
violation of U.S. financial sanctions against Iran.23 The U.S. business community responded with
outrage because it argued that foreign countries would increase sales to Huawei and displace U.S.

23

Addition of Entities to the Entity List, 84 Fed. Reg. 22,961 (Bureau of Indus. and Sec. May 21, 2019),
available at https://www.govinfo.gov/content/pkg/FR-2019-05-21/pdf/2019-10616.pdf.

18

business opportunities. Businesses, in effect, complained that America’s allies would work against
U.S. interests. But that is not what happened. In fact, the exact opposite occurred.
Soon after the U.S. Government placed Huawei on the Entity List and restricted exports to
Huawei under a “presumption of denial” export license review policy,24 America’s allies began
pulling back sales to Huawei. Not because they were legally obligated to do so, but because it was
the correct course of action. Yet they did not pull back publicly. Each country, given its own
unique economic and political circumstance, retreated from Huawei in its own manner, most often
quietly and without any public fanfare. In fact, the United States’ unilateral action caused a
multilateral ripple effect among our allies, and by our giving them “top cover,” our allies followed
suit. The result, of course, was the crushing defeat of Huawei’s smartphone business.25
This example illustrates that, when coordinating export controls with allies, we need not
always move in in perfect synchronicity. The United States should, whenever necessary, act to
protect its national security interests and be assured that our allies will follow, albeit at their own
pace and through their own legal mechanisms.
6.

Closing the Fundamental Research Gap in Export Controls

Further, our adversaries are exploiting research in our universities to obtain cutting-edge
technology, and our universities are in turn freely transferring technology to high-threat actors
using the “fundamental research” exception of the export control rules. The EAR currently
defines fundamental research as:

24

The license review policy was subsequently changed in August 2020 to a “case-by-case” license review
criteria for most exports.
25

Rob Thubron, Huawei experiences largest-ever revenue fall as sanctions crush its consumer division, Tech
Spot (Aug. 6, 2021), available at https://www.techspot.com/news/90696-huawei-sees-largest-ever-revenue-fallsanctions-crush.html.

19

{R}esearch in science, engineering, or mathematics, the results of which
ordinarily are published and shared broadly within the research community, and
for which the researchers have not accepted restrictions for proprietary or national
security reasons.26
“Technology” or “software” that arises during, or results from, fundamental
research and is intended to be published is not subject to the EAR.27
These exceptions permit the flow of cutting-edge research and development in critical
technologies – for example, artificial intelligence (“AI”), leading edge semiconductor design and
production, lithium-ion batteries, robotics, genomics – to high-threat actors. This is another
gaping hole in our laws that needs to be closed.
U.S. universities ought to be subject to export control licensing requirements before
engaging in such technology transfer, and there are steps that the U.S. Government can take to
regulate this flow of information. An immediate step is to issue notices to universities (via a
Presidential Proclamation or a Federal Register notice) providing that licenses would
be required for sharing controlled technology with non-U.S. persons. The legal mechanism here
is the “is-informed” process, which is a “stop gap” measure where the U.S. Government informs
the entity/entities (universities in this case) of a license requirement in advance of a formal rule
change. Subsequently, the U.S. Government should revise its definition of “fundamental
research” in the EAR to make it more restrictive. Fundamental research should be treated no
differently than controlled technology; once basic research evolves into the type of know-how
matching control levels, licenses should be required. Indeed, the U.S. Government maintains the
authority to change its own regulations to keep pace with new national security threats. It must
do so now; time is overdue.

26

15 C.F.R. § 734.8.

27

Id.

20

7.

Export Controls on Data

In today’s high-technology ecosystem, there is no reason why we are not controlling
through export controls data transfers to foreign adversaries, especially when it is public
knowledge that our data are being used and misused by our adversaries to build dangerous AI
capabilities and massive surveillance machines. Similarly, U.S. businesses should not be placing
data storage centers in the countries of our adversaries or allowing them to have any control over
our domestic data storage systems. Some of these transactions would never come under the
review of the Committee on Foreign Investment in the United States (“CFIUS”) (falling below
the regulatory thresholds or developments through greenfield investments), so we need
independent legal authority to deal with this risk. The proposed outbound investment review
legislation discussed below would help regulate the transfer of data storage centers abroad.
Export controls are additionally needed to regulate the export of sensitive data.
8.

Secondary Sanctions as a Tool

Secondary sanctions should also be leveraged as a viable economic tool. The U.S.
Government and Congress receive substantial information on a regular basis – whether through
intelligence reporting or public news outlets – of sanctions violations by PRC entities. Under U.S.
laws, violations of U.S. sanctions are punishable by the imposition of secondary sanctions. Yet,
the U.S. Government has, to date, been reluctant to punish PRC companies for such violations.
Presumably, the reason for this is the extent of American companies’ financial exposure to the
PRC.
Herein lies the irony of the U.S. Government’s policies. The U.S. Government, on one
hand, is unable to hold PRC entities accountable for undermining U.S. national security interests
and, on the other hand, permits businesses to transact with harmful entities even though doing so

21

fuels the PRC’s growth. Our refusal to impose secondary sanctions also emboldens PRC entities
to continue undermining U.S. interests.
Our policies need to change. Secondary sanctions need to be used to address activities that
undermine U.S. national security interests.
9.

Revenue Substitution – Away from the PRC and Towards Allies

Finally, we should dispel the prevailing notion that U.S. businesses need revenue from
sales to the PRC in order to invest in next-generation technologies and survive economic
competition. Indeed, any revenue lost from sales to the PRC may be replaced (and even
augmented) by increasing sales within the United States and to nations of allies. It makes no sense
to invest in the supply chains of an adversary instead of our own. We must build our own supply
chains, as well as our allies’, in order to achieve much-needed redundancies in our most critical
supply lines. Furthermore, redundancy is essential where supply chains are most vulnerable. The
U.S. Government should support investments to build supply chains domestically and with allies.
D.

Regulating Foreign Direct Investment (“FDI”) Flows

The U.S. Government needs to better regulate FDI flows that harm U.S. economic and national
security interests.
1.

Delayed Reviews of FDI in Existing Critical Technology Businesses

The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”)
represented a major milestone in protecting national security by granting to CFIUS enhanced
authority to protect “critical technologies” from foreign acquisition through FDIs. However,
nearly four years into its enactment, the U.S. Government has not yet been able to fully utilize this
new authority. This is because FIRRMA’s definition of “critical technologies” rests in large part
on ECRA’s identification of “emerging technologies,” and until the U.S. Government makes
progress on this issue, gaps in our national security laws persist.
22

Here too, the question of whether to narrowly or broadly define “emerging technologies”
(as explained above) has important implications in the context of reviews of FDI transactions. On
one hand, a broader definition would subject a wider range of transactions to FIRRMA authority,
thereby giving the U.S. Government increased visibility into U.S. FDI activities and greater
authority to restrict those that threaten national security. On the other hand, it is argued that
increased regulatory oversight will deter FDI flows into the United States. To address this latter
concern, the U.S. Government could consider limiting mandatory filing requirements to only those
entities and/or countries that pose the most significant threats to U.S. national security. This would
decrease regulatory burdens on U.S. businesses and ultimately reduce the volume of transactions
subject to review by federal agencies. A broader definition applied to a narrow set of countries is
the most effective and efficient national security approach.
Whichever option the U.S. Government pursues has serious implications. But the ultimate
point here is that the U.S. Government needs to make substantial progress in its identification of
“emerging technologies” under ECRA and “critical technologies” under FIRRMA. Movement on
these fronts will give businesses some clarity going forward and enable the U.S. Government to
better exercise the legal authorities it possesses to protect national security. The exercise of those
authorities has, for nearly four years, languished.
2.

Merits of Outbound Investment Reviews

In much the same way that FIRRMA and its predecessor, the Foreign Investment and
National Security Act of 2007, imposed national security reviews on inbound FDI transactions,
Congress is now considering similar legislation for outbound investments to high-risk countries.
New legislation would call for CFIUS-type reviews of U.S. asset flows to foreign markets for
national security risks. Even though this outbound investment review screening mechanism is one

23

of the most important pieces of legislation before Congress today, it is one of the most
contentious.28
To the extent there is any question as to whether such investment review mechanisms are
warranted, we should be clear about how urgent the situation has become. At the end of 2020,
U.S. investments in in PRC companies totaled by capital investment type (public and private
equity):


U.S. Entity List Companies: $48.6 Billion



PRC State-Owned Enterprises: $152 Billion



PRC Military End User and Chinese Military Companies: $54 Billion



Telecommunications: $43 Billion



Robotics: $1.3 Billion



Biotechnology: $50.4 Billion



Artificial Intelligence: $221 Billion



Surveillance: $3.8 Billion



Aerospace and Defense: $1.3 Billion



Semiconductors: $21 Billion



Pharmaceuticals: $31 Billion

In total, U.S. financial investments in Chinese domiciled companies totaled over $2.3 trillion in
market value of holdings at the end of 2020. Compounding this fact is the additional transfer of
our technology and supply chains, and the outbound investment screening legislation is a key step
to solving this problem. We need this law.
Before I explain the merits of this proposed legislation, it is important to level-set, as there
has been extensive misinformation about this law. The proposed legislation is not in any way an

28

To lessen the burden on U.S. businesses in filing notices of such transactions for federal agency review and to
ease the workload for U.S. Government agencies adjudicating such transactions, the scope of reviews could be
limited to outbound transactions involving foreign countries that pose the most significant national security threats.

24

overreach by Congress to interfere in the free market – far from it. Rather, the proposed legislation
is essential to protecting U.S. national security interests that are currently unprotected. To be clear,
businesses are primarily motived by revenue, and that is their strong suit. Yet, this fact should not
cause them to be unregulated, especially when profit seeking interests undermine U.S. national
security. It is the Government, not business, that is charged with protecting national security, and
to the extent transactions strengthen adversaries in dangerous ways, the Government must
intervene. We have, for centuries, regulated the transfer of defense articles to foreign adversaries.
Today, in much the same way, we need to regulate the transfer of technology, economic flows,
and supply chain capabilities to them. These are the new weapons of modern economic warfare
and our strategic capabilities should not fall into the wrong hands.
As a nation, we need to come to terms in particular with our technology transfer to the
PRC.

Make no mistake, the PLA’s hypersonics advancements were fueled by U.S. chip

technology. One company’s short-term profits have now threatened to erode the United States’
and the world’s national security and economic stability. That makes no sense. Our data and
technology transfer have also enabled the PRC to race ahead with AI, where reports are starting to
surface that Chinese enterprises are using our software and phone apps to track and monitor our
movement and behavior data.
As Joseph Stalin is rumored to have said: “We will hang the capitalists with the rope they
sell us.” Whether this quote is accurate or not, it is illustrative of what is happening today. We
have had decades of unregulated supply chain and technology transfer to the PRC that has
systematically eroded our own supply chains and rendered us dangerously dependent on the
adversary. This is not a good national security strategy. We need a new strategy.

25

As I mentioned, there is currently no legal authority that reviews these types of transactions
for national security risks – namely, joint ventures between U.S. and foreign firms abroad, the
acquisition by U.S. firms of shares in companies abroad, or the transfer of a skilled work-force
abroad. Such business transactions are frequent and, in the countries of foreign adversaries where
the government regularly coerces businesses to act in ways that undermine U.S. national security
interests, the risks are serious.
There are four key ways that business transactions are able to undermine U.S. national
security interests by transferring to the foreign country/business the following:
(1) transfer of emerging uncontrolled technology,
(2) transfer of operational know-how that may fall below export controls but
nevertheless confers critical know-how to build and/or operate very sensitive
machinery (e.g., for nuclear reactors),
(3) transfer of engineers that will develop technologies abroad and so will fall outside
the jurisdiction of U.S. export controls (this also results in a “brain drain” in the United
States), and
(4) movement of critical manufacturing capabilities and supply chains abroad, such as
lithium-ion batteries, active pharmaceutical ingredients, semiconductor manufacturing
operations, and medical supplies including personal protective equipment (“PPE”).
The foregoing should illustrate that this is a zero sum game; our adversaries’ gain is our
loss, and our gain is their loss. We need to be clear about this reality. The more we invest in a
government-run, command-style non-market economy that is designed to undermine our markets,
the more we move production to the PRC to avail ourselves of its cheap prices, forced labor, and
other non-market distortions, and the more we purchase cheap goods from PRC businesses rather
than goods produced in market economies, the more we allow non-market forces to capture a
greater share of the global market. In this way, we are accelerating the demise of capitalism and
the market based system. We need outbound review and restrictions as a measure to protect

26

national security. That is Congress’s responsibility and I commend you for not losing sight of this
objective. Congress should pass this legislation as it is a national security imperative.
3.

Reconsidering CFIUS Mitigation Agreements with the PRC

The U.S. Government’s CFIUS “mitigation agreement” policy also warrants
reconsideration in light of the PRC government’s laws mandating that Chinese and foreign
companies transfer sensitive intellectual property, proprietary commercial secrets, and personal
data to the central government and the PLA. Among the relevant PRC laws are:


National Security/Intelligence Laws: mandating the transfer of data, information,
and technology to the PRC authorities.29



Cybersecurity Law: mandating that network operators cooperate with public security
organs. 30



Cryptography Law: eliminating “core function exemption” for products with
encryption as general features. 31



Data Security Law: empowering CCP authorities to demand data from companies
and requires companies to “favor economic and social development in line with the
CCP’s social morality and ethics.” 32



Export Control Law: prohibiting exports of “important data,” essentially any
information outside of China, even if that data originated from a foreign country,
including a U.S. business.33

These laws appear to apply to all companies operating in the PRC, regardless of nationality and,
in some instances, they also appear to have extraterritorial application, reaching to corporate

29

Data Security Business Advisory: Risks and Considerations for Business Using Data Services and Equipment
from Firms Linked to the People’s Republic of China, U.S. Department of Homeland Security (Dec. 22, 2020) at 6-7
(“DHS Advisory”), available at https://www.dhs.gov/sites/default/files/publications/20_1222_data-security-businessadvisory.pdf.
30

Lauren Maranto, Who Benefits from China’s Cybersecurity Laws?, Center for Strategic & International
Studies (June 25, 2020), available at https://www.csis.org/blogs/new-perspectives-asia/who-benefits-chinascybersecurity-laws.
31

DHS Advisory at 8-9.

32

Id. at 7-8.

33

Ck Tan, China’s Export Control Law to Become ‘Key Dynamic’ in U.S. Relations, Nikkei Asia (Dec. 1,
2020), available at https://asia.nikkei.com/Economy/China-s-export-control-law-to-become-key-dynamic-in-USrelations.

27

operations abroad. In the CFIUS context, these laws likely trump the U.S. Government’s
mitigation agreements.
In reviewing transactions for national security risks, CFIUS commonly enters into
agreements with parties in order to mitigate any national security risk resulting from the transfer
of information, data, or technologies from the United States to the foreign acquirer. However,
when the foreign acquiror is a PRC entity that is also subject to its own governments’ data transfer
requirements, that entity cannot logically be expected to abide by both the U.S. mitigation
agreement and the conflicting PRC government laws. In other words, when a conflict exists
between CFIUS’s prohibitions on information transfer and the PRC’s mandate for data transfer,
there is simply no way to adhere to both requirements.
Of course, the PRC government has levers to compel cooperation with its own laws instead
of the United States’ requirements. One example is the PRC government’s nationwide social credit
rating system that applies to all corporations for the purposes of detecting misconduct and noncompliance with PRC government rules. 34 The “Corporate Social Credit System” has implications
for companies with respect to proprietary technical information, sensitive personal data, and
surveillance information. Companies may be given low scores if they fail to transfer their data to
the PRC government as part of their obligations. Failing to score well, by non-compliance with
the PRC government’s policies or demands, may subject companies to myriad sanctions, including
higher taxes or permit difficulties, or a blacklisting which could mean financial ruin for that entity.

34

See, e.g., China’s Corporate Social Credit System, Congressional Research Service (Jan. 17, 2020), available
at https://crsreports.congress.gov/product/pdf/IF/IF11342; Kendra Schaefer, China’s Corporate Social Credit System:
Context, Competition, Technology and Geopolitics, Trivium China (Nov. 16, 2020), available at
https://www.uscc.gov/sites/default/files/2020-12/Chinas_Corporate_Social_Credit_System.pdf.

28

The European Chamber of Commerce describes this credit rating system as potentially amounting
to “life or death” for companies.35
The U.S. Government and Congress must account for the PRC’s enormous control over
companies and evaluate the effectiveness of the CFIUS agreements. Until the U.S. Government
is able to resolve the conflicts described above, it should not permit mitigation agreements for any
PRC transactions.
4.

The Need for National Security Reviews of Greenfield Investments

Unregulated greenfield investments in the United States also pose very real risks to our
national security interests. While CFIUS jurisdiction currently extends to certain real estate
transactions that are located within certain geographical areas, for example, certain pre-defined
military installations,36 “greenfield” investments are not broadly subject to CFIUS jurisdiction.
This is an enormous gap in our regulations.
Today, malign actors are able to acquire real estate in the United States and use this asset
to harm the U.S. interests in a variety of significant ways. Examples include (1) the disruption of
regional economic commerce by interfering with critical supply chains (e.g., agriculture,
transportation, telecommunication); (2) the displacement of U.S. manufacturers through economic
distortive trade activities (underpricing or overproduction to eliminate competition); (3) the
acquisition of sensitive personally identifiable information about the general population (e.g.,
genetic, biometric data); (4) the use of soft power and political propaganda to undermine U.S.
democracy (e.g., political promotion programs and media); (5) mass surveillance of U.S.

35

European Chamber Report on China’s Corporate Social Credit System, A Wake-Up Call for European
Businesses in China, European Chamber of Commerce (Aug. 28, 2019), available at
https://www.europeanchamber.com.cn/en/pressreleases/3045/european_chamber_report_on_china_s_corporate_social_credit_system_a_wake_up_call_for_europea
n_business_in_chin.
36

31 C.F.R. §§ 800.213, 802.212.

29

populations (through the establishment of hotels, medical, and service oriented businesses); and
(6) the disruption of the energy grid through the transmission of malicious code (e.g., through
malicious software in electric vehicle charging stations or smart homes that connect to the grid).
These are just a few examples.
President Biden has already warned the American public that the PRC government has
been conducting large-scale cyberattacks against the United States. 37 Indeed, some of these threat
vectors are coming from within our own boarders. In 2014, the China Rail Rolling Stock Corp.
(“CRRC”), a PRC state-owned enterprise, built a passenger rail assembly plant in Springfield,
Massachusetts. Over time, this investment destroyed U.S. competition in the rail car market. The
CRRC now has passenger rail cars in the U.S. North East, Midwest, and West Coast and it is able
to leverage these assets to conduct massive surveillance operations over major U.S. populations
and control the movement of the public. Presently, the CRRC controls more than 83% of the
global rail market, and the company has publicized its aim to dominate the remainder of the world
market as well.38
Of course, FDI is capable of delivering enormous benefits to an economy. But the U.S.
Government must be aware of the risks posed by malign investors as well. The time is ripe to
expand CFIUS jurisdiction to greenfield investments. Even though the U.S. Government will never
be able to entirely eliminate all threat vectors from its borders, it must do a better job of addressing
the range of threats that exist right now.

37

Sean Keene, Biden Administration Blames China For Microsoft Exchange Email Hack, C Net News (July
19, 2021), available at https://www.cnet.com/news/privacy/biden-administration-blames-china-for-microsoft-serverhack/.
38

David C. Lester, Rail Security Alliance Expresses Concern about CRRC to U.S. Dept. of Defense, RT&S
(June 9, 2021), available at https://www.rtands.com/passenger/rail-security-alliance-expresses-concern-about-crrc-tou-s-dept-of-defense/.

30

E.

The Chips Act

The Chips Act is a crucial first step to growing the domestic semiconductor
manufacturing base in order for the United States to become self-sufficient in semiconductor
manufacturing capability and the associated intellectual property. The majority of this capability
currently resides in the PRC, Taiwan, and Southeast Asia. Presently, there are quite a number of
rumors concerning potential beneficiaries of the Chips Act using financial awards to not only
invest in U.S. manufacturing facilities, but also to funnel the corporate capital otherwise saved to
investments in China and other geographically vulnerable regions in Southeast Asia. This is an
enormous problem. The Chips Act is necessary to strengthen U.S. supply chains and thereby
avoid risks associated with our adversaries’ growing stranglehold over this sector. It would be
antithesis to the object and purpose of the Act to fund domestic industries while allowing the
same beneficiaries to double-down on Chinese investments and undermine U.S. national
security. There ought to be guardrails put in place in any forthcoming appropriations language.
Further, lawmakers should be mindful of the fact that creating a resilient U.S. supply
chain for chips is a an enormously complex endeavor, as secure supply chains outside of the
PRC and Southeast Asia are needed for a range of semiconductors products (e.g., logic, memory,
analog, digital, and mixed-signal) at varying nodes (180 nm, 7 nm, 5 nm, etc.). In total, this
comprises hundreds and thousands of discrete semiconductor chip types with unique chip
designs. Additionally, investments are also needed for the development of next-generation
lithography technology to manufacture leading edge chips in the United States. As the PRC is
endeavoring to acquire current technologies, we need to stay steps ahead.
Moreover, we need to build resilient supply chains for the backend and highly-technical
assembly, packaging, and testing capabilities. We also cannot lose sight of the upstream supply
chains required to manufacture both the semiconductor chips and the wafer fabrication
31

equipment themselves, including as raw materials certain critical minerals (e.g., gallium,
germanium), chemicals (e.g, hydrofluoric acid), superabrasives (e.g., diamond powder),
etc. Most of these supply chains – for both the United States and our allies – reside in the PRC
and Southeast Asia.
Finally, the U.S. military needs to ensure that we have robust domestic capabilities –
from raw materials, wafer fabrication equipment, to backend assembly, testing, and packaging –
to manufacture the semiconductors needed for defense applications, in the event that access to
the South China Sea is blocked and armed conflict ensues. Without a strong upstream and
downstream military supply chain, our armed forces will only have one-strike capabilities. This
is a dangerous position to be in.
F.

Trade Remedy Laws Must Be Improved to Protect Injured U.S. Industries

Substantial improvements must also be made to existing U.S. trade remedy laws to better
protect injured U.S. industries and provide American businesses with the support needed to regrow.
1.

The PRC’s Distortion of the Surrogate Country and Surrogate Value
Methodology

From the early 2000s, following the China’s 2001 accession to the WTO, the PRC
government began an aggressive push to erode U.S. industries through predatory pricing practices.
Trade with the PRC increased over the years, and the number of trade disputes grew exponentially.
Presently, the United States has over 223 trade remedy cases against the PRC versus a total
of 441 cases against all other nations combined.39 This is astounding, and the level of harm
inflicted by PRC exporters through their underpricing behavior is the most significant of any other

39

United States International Trade Commission Website, available at https://www.usitc.gov/.

32

trading nation. What is more, the number of complaints against the PRC continues to increase
well into the its third decade of WTO accession. This tells us something very important: that the
PRC is continuing to take advantage of the multilateral trading system in order to displace
competitors from the global market.
While the United States currently maintains a robust set of trade remedy laws (antidumping
and countervailing duty laws) to offset unfair trade and “level the playing field” for domestic
manufacturers, many of the policies that the U.S. Government pursues to carry out these laws need
to be updated to address the PRC’s growth.
One of the most compelling areas for change is the manner in which the U.S. Government
selects “surrogate” countries in dumping proceedings to value goods produced by the PRC.
Because the PRC is a non-market economy, the U.S. Government relies on third country prices,
or “surrogate country” prices to value the cost of production in the PRC (which is then compared
to U.S. prices to measure unfair dumping). However, because PRC goods have penetrated global
markets so aggressively, it is nearly impossible to find a surrogate country that has not been
adversely affected by the PRC’s predatory pricing. Prices around the world have been depressed
so extensively that virtually all benchmark prices in trade cases are now understated and inadequate
for measuring underselling by the PRC.
The result is that the tariffs ultimately imposed by the U.S. Government on Chinese imports
to offset dumping are inadequate to “level the playing field,” and consequently proper relief is
denied to American firms. The U.S. Government must update its tools to more effectively prevent
harms to the domestic industry. The present system is failing.

33

2.

Section 301 Investigations to Address Additional Predatory Economic
Practices and Creation of An Innovation Fund

Finally, Section 301 of the Trade Act of 1974, as amended, provides a remedy against
country-specific unfair trade practices, and action is permissible if the United States Trade
Representative determines that U.S. rights under a trade agreement are being denied, or a practice
by a foreign country violates or is inconsistent with a trade agreement, or is unjustifiable and
burdens or restricts U.S. commerce.40 If such a finding is made, Section 301 authorizes the U.S.
Government impose a range of remedial trade measures, including but not limited to the imposition
of tariffs on goods imported from the foreign country.
It has been rumored that the United States may be considering, in addition to the current
Section 301 tariffs on PRC goods for intellectual property theft (i.e., tariffs ranging from 7.5% to
25% on specific imports),41 tariffs in response to the PRC government’s use of industrial subsidies.
That is, a new Section 301 investigation would be launched to determine whether such industrial
subsidies have harmed U.S. interests.
Beyond IP theft and industrial subsidies, there are numerous additional ways in which the
PRC is undermining U.S. national security and economic security interests. The PRC focuses on
areas where existing laws are inadequate or altogether nonexistent: global overcapacity, covert
cyberattacks, market access restrictions (in China), and the exploitation of assets in the U.S.
market.42 Here too, USTR should conduct Section 301 investigations on these practices and

40

Section 301 of the Trade Act of 1974, as amended (19 U.S.C. § 2411).

41

Section 301 tariffs were imposed by the United States on imports from the PRC to recoup the approximately
$50 billion a year economic harm to the U.S. economy caused by the PRC’s intellectual property theft. See Section
301 Tariffs on Goods from China: International and Domestic Legal Challenges, Congressional Research Service
(April 5, 2022), available at https://crsreports.congress.gov/product/pdf/LSB/LSB10553.

For example, PRC entities underselling through physical presence in the U.S. market where existing trade
remedy tools that are specific to countering unfairly priced imports (e.g., antidumping and countervailing duty laws)
would not apply, and where Federal Trade Commission anticompetition laws do not probe national security threats
for action.
42

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impose import-restrictive measures to recoup the value of economic harm caused to U.S.
businesses.
Moreover, if affirmative determinations of harm are made as a result of the Section 301
investigations and additional Section 301 tariffs are imposed on imports, then the U.S. Government
should consider shifting the tariff payment responsibility onto PRC exporters rather than U.S.
importers. Currently, U.S. Customs and Border Protection requires that the “importer of record”
(which may be the U.S. importer or foreign exporter) pay tariffs on imported goods. However,
often for the payment of Section 301 tariffs, PRC exporters pressure U.S. importers to bear the
costs. If, however, the responsibility for the Section 301 tariffs were legally placed on the PRC
exporter, it would relieve the U.S. importer of this financial burden. Through a Presidential
Proclamation, the U.S. Government could legally require PRC exporters to be liable for 301 tariffs.
Furthermore, the U.S. Government should consider using the tariff revenue collected to
create an “Innovation Fund” dedicated to capitalizing high-technology U.S. industries. The fund
should ideally be used to assist U.S. manufacturers and innovators, including high-end
semiconductor technology companies and infrastructure companies, obtain a strong foothold in
the U.S. market through augmented research and development investments and facility builds.
The U.S. Government has collected well over $100 billion in Section 301 tariffs since their original
imposition in 2018, and these tariffs, in addition to any new ones, should be directed at growing
and catalyzing U.S. innovation and industry growth. The revenue stream certainly exists, and so
the U.S. Government should leverage this opportunity to support the nation’s industrial and
engineering advancements.

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III.

CONCLUSION
I would like to conclude with a one final note. The world may very well be on the brink a

new national security crisis. In order for the United States to lead and defend our nation and our
allies, we must have a robust economy, a strong manufacturing base, and the protection of critical
assets and technologies. Our vulnerabilities are currently significant, and we need to quickly make
important decisions to solve them. Time is not on our side and the challenge ahead of us is
enormous.
I look forward to your questions.

36

ATTACHMENT

July 30, 2020
Statement of Nazak Nikakhtar
Assistant Secretary, International Trade Administration, Industry & Analysis
U.S. Department of Commerce
Before the
Senate Committee on Commerce, Science, and Transportation
Subcommittee on Security
“The China Challenge: Realignment of U.S. Economic Policies to Build Resiliency and
Competitiveness”
Good morning. Chairman Sullivan, Ranking Member Markey, and Members of the
Subcommittee, thank you for providing me the opportunity to testify today regarding the United
States’ economic relationship with the People’s Republic of China (PRC). We are at historic
cross-roads in the U.S.-China relationship, as the steps we take now will chart the course for U.S.
economic and technological leadership, and will shape the landscape for the democratic world
for decades, and possibly centuries to come.
The Department of Commerce’s International Trade Administration is responsible for
strengthening the competitiveness of U.S. industry in the United States and global marketplace,
increasing investments in America, monitoring compliance with U.S. trade agreements, and
enforcing U.S. trade laws. At Industry and Analysis (I&A), we are, in particular, responsible for
working with businesses to develop international trade and investment strategies for a range of
industries from the manufacturing sector to the financial services sector, including industries that
are critical to the United States’ national security interests. I&A also leads the Commerce
Department’s participation in the Committee on Foreign Investment in the United States
(CFIUS), a committee that reviews certain specific foreign investments and real estate
transactions in the United States for their impact on U.S. national security.
Today, I would like to speak about challenges to the United States’ national security
industries and set the stage for the successful commercial growth of our most critical sectors. In
2017, the U.S. Government began, for the first time, to confront head-on the challenges posed by
China’s predatory practices. Those challenges had been ignored for decades and, as a result,
over the course of the past 40-plus years, the United States has continuously lost capabilities in
sector after sector in manufacturing, technology, and services that are essential to our national
security. In goods alone, the offshoring of manufacturing has created supply chain
vulnerabilities across hundreds of critical products, ranging from semiconductor and electronics
manufacturing to the development of active pharmaceutical ingredients. This has led to job
losses of between 3.4 to 3.7 million between 2001 to 2018.1 In key sectors such as
communications equipment, electronics and computer technology, we ceded up to 40 percent of
Scott, Robert; Mokhiber, Zane, Economic Policy Institute, “Growing China Trade Deficit Cost
3.7 Million American Jobs Between 2001 and 2018,” (Jan. 30, 2020)
https://www.epi.org/publication/growing-china-trade-deficits-costs-us-jobs/; also Census Data
and Department of Commerce calculations.
1

1

the domestic market share to Chinese imports, and globally China has captured 40 percent of
market share in those sectors as well.
To underscore with examples of where that leaves us, the United States does not have the
domestic supply chains required to manufacture many key electronic components for our
telecommunications systems, or many active pharmaceutical ingredients for medicines to serve
America’s health needs. Nor does the United States process the rare earth elements that produce
magnets that are essential for military and weapons uses, as processing is now dominated by
China. Even the more mature steel and aluminum industries have been experiencing existential
challenges, as global overcapacity continues to weaken American firms. Where the United
States was once the undisputed leader in technological innovation and industrial advancements
across the board, it is now struggling to remain competitive in many key industries.
There are two classes of state actors in the global economy. The first class is comprised
of nations that generally adhere to their obligations under the rules and principles of the global
economic and trading system, as enshrined in international organizations such as the United
Nations, International Monetary Fund, Organization for Economic Cooperation and
Development, and the World Trade Organization (WTO). The second class is comprised of
nations that either do not adhere (or selectively adhere) to these rules and norms, or actively
circumvent them. While both classes of nations can introduce distortions into the global
economic order – for example, through corporate subsidies and discriminatory nontariff barriers
– the distortions can be managed when dealing with rules-based state actors and market-oriented
economies. Here, international agreements may provide viable legal mechanisms to address
non-competitive, market-distorting behavior, and states have historically adhered to their binding
commitments or improved their practices when compliance fell short.
The Chinese Communist Party (CCP), on the other hand, does not just fall within this
second class of state actors. It is also, by far, the most distortive economic actor that the global
trading system has ever encountered. Not only are the current rules of international trade and
monetary policy largely ineffective when dealing with China but, as a non-market economy
under the tight control of the CCP, the government of the People’s Republic of China flagrantly
flouts those rules when it believes it is in its interest to do so, and shows no intention of
reforming to a market-based system or adhering to its international obligations when those rules
frustrate its national industrial goals. And because of China’s size and scale, it has been able to
weaken international supply chains and disrupt the global economy significantly. In this respect,
the threat from China is formidable, and it is the largest threat the United States has encountered
to date.
But we need to remember that this threat is nothing new, it has its roots in the Cold War.
Khrushchev famously said “We,” meaning the Sino-Soviet bloc, “declare war upon you,” the
United States, “in the peaceful world of trade. We will declare a war; we will win over the
United States.” Again, quoting from the Prime Minister of the Soviet Union, “We,” again
referring to the Communist states, “value trade less for economic reasons and most for political
reasons.” The hearing transcript for the Trade Act of 1962 includes these powerful statements.
Perhaps in response to this threat, in the “Statement and Purpose” subsection of the Trade Act of
1962, 19 U.S.C. 1801, Congress explicitly enacted into law the goal of Chapter 19; it is inter

2

alia, “through trade agreements affording mutual trade benefits” to “prevent Communist
economic penetration.” This provision is still valid today precisely because the threats continue
today. And after 1979, when the United States formally normalized trade relations with China,
the PRC government accelerated its plan to augment global economic and military strength in a
quest that it concedes will ultimately lead to a great power struggle against the United States.
The PRC government’s weapon of choice is predatory economic tactics, and it has
successfully used such tactics to disrupt global supply chains and weaken the technological
advancements of the United States and its Western allies. China has transformed itself into the
epicenter of global commerce, has centralized manufacturing and research and development
(R&D) hubs within its own borders and, with this, it has accumulated the power to influence all
economies that are dependent on it.
CHINA’S USE OF PREDATORY ECONOMIC TACTICS TO CAPTURE CRITICAL
SUPPLY CHAINS AND TECHNOLOGY
In order to understand the PRC government’s predatory economic strategy, it is important
to understand the specific trade tools that it deploys. Indeed, China’s most effective tools, by
design, are those that are governed by weak or non-existent international rules and disciplines.
To understand a “strategic competitor” or an “adversary,” one has to understand their tactics. To
counter those tactics, we need to consider how our laws need to be strengthened.
Case in point: China’s economy has grown in large part because of the massive subsidies
it provides to industries, and the lack of transparency on the subsidies it provides results from its
failure to notify them completely to the WTO, as well as the absence of effective WTO rules
governing the types of market-distorting industrial subsidies used in China.2 It is difficult to
legally challenge what we do not know about or what the rules do not cover. Moreover, China
leverages its self-designated developing country status to avoid complying with existing WTO
rules and obligations, and WTO rules are generally silent on how a member state can challenge
another country’s self-designated status.
Next, the PRC government takes advantage of the absence of applicable international
rules over state-owned enterprises (SOEs) to funnel massive amounts of capital and other
resources to SOEs with the well-publicized intent of dominating strategic sectors worldwide.
The PRC government also distorts prices and costs throughout its economy (e.g., land and
property, energy, wages, and raw materials) through direct price controls and to export
undervalued goods and services worldwide, thereby weakening the competitive positions of
2

Examples include Chinese government subsidies that constitute unlimited guarantees to
corporations, subsidies to insolvent or ailing enterprises lacking credible restructuring plans (also
known as “zombie” companies), subsidies that encourage global overcapacity, subsidies to firms
unable to obtain long-term financing from independent commercial sources that are operating in
sectors or industries in overcapacity, and direct debt forgiveness.

3

market-based firms. Dangling possible access to China’s large consumer market and making
available cheap labor, goods and services are also how China lures foreign manufacturing
capacity and technological know-how into its own borders. And as the CCP controls the
government of a sovereign state, it knows full well that its non-market economic system is
unaffected by legal challenges or the prospect thereof by the rest of the world; even possible
losses of legal challenges at the WTO may not be incentive enough to compel China to reform a
system that has served it so well and eroded the competitive positions of its adversaries so
quickly.
Just as alarming, the PRC government takes advantage of the dearth of rules governing
global overcapacity to flood world markets with distortedly low-priced goods. In 2019, China’s
overcapacity significantly depressed global prices in the fiber optical cable market. Its strategy
is to eliminate competitors and obtain absolute control over this critical 5G infrastructure asset.
The PRC government has previously deployed the same strategy in the steel and aluminum
sectors, among many others, and the same strategy will create excess capacity in new sectors in
the future. And notwithstanding the fact that the 2020 coronavirus pandemic has dramatically
reduced demand for steel and aluminum products worldwide, China has once again ramped up
steel and aluminum production and dramatically increased inventories, contributing to drastic
global price depression. This illustrates the national security threat to our steel and aluminum
industries and why the President imposed Section 232 tariffs to address the impact of
overcapacity and the threat posed by steel and aluminum imports. Outside the United States,
however, the global surge continues and China’s actions are still destabilizing the global steel
and aluminum industries.
The PRC government is further exploiting opportunities abroad to monopolize strategic
ports and mines (among other assets). State-backed Chinese investors own 10 percent or more of
equity in ports in Europe, and it has major deals in Greece, Italy, Spain, France, the Netherlands,
and Belgium. This is in addition to a growing number of investments in more than 40 ports in
North America, South America, Eastern Europe, the Middle East, Africa, Central Asia, South
and Southeast Asia, Australia, and the Pacific. The PRC government is similarly increasing
control of the raw materials necessary for manufacturing high-technology products (e.g., phones,
vehicles, advanced energy storage systems, and magnets) that are sourced from a small number
of countries, and for which substitutes are unavailable. Operating in niche markets with limited
transparency, often in politically unstable countries, Chinese firms continue to capture supplies
of cobalt, graphite, lithium, nickel, niobium, and platinum, to name just a few. Because these
minerals and metals are finite assets that cannot be replaced, China is able to exert influence over
the rest of the world by withholding access to these assets to compel nations to bend to its will.
Additionally, in its never-ending quest for technological superiority and control over key
positions in the industrial value chain, the PRC government regularly has supported or directed
the theft and misappropriation of U.S. technology and intellectual property (IP). Monetary
damages accrued to the United States are estimated to range from $50 billion to as high as $600
billion annually. Moreover, by making short-lived market access promises to cutting-edge
technology companies, the PRC government pressures the most technologically-advanced firms
to transfer IP and sensitive data to it. The PRC government ultimately uses the IP it extracts
from companies to displace them from the market. China’s increased dominance in key

4

segments of the industrial value chain further cements its technology transfer approach. Even
where Chinese firms are perceived to “collaborate” in technology development, take for example
Huawei’s announcement that it plans to build a $1.2 billion optical fiber research facility in the
United Kingdom, the gains are only one sided.3 Chinese companies will, as directed by the PRC
government, benefit from scientific research and collaboration with international scientists
abroad, resulting in some cases in the repatriation of technology to generate overcapacity to
eliminate competition and obtain a monopoly position. In sectors like 5G, where optical fiber
cables provide the infrastructure for an impending technology revolution, the national security
implications are obvious.
It is also reported that the Chinese government, this year, is implementing a nationwide
credit rating system for all corporations – foreign-owned or Chinese-owned – operating within
China. Companies handling sensitive personal data and proprietary technical information will be
required to transfer that data to the Chinese government. The European Chamber reports this
credit rating system as amounting to “life or death” for companies. 4
China’s engagement in international standards as a way to influence the global
technology market also is of great concern, but it is often not fully understood. To illustrate this
attempted influence, take for instance the fact that, from 2011 to 2019, the number of Chineseled technical committees in the International Organization for Standardization, one of the largest
international standards setting organizations, increased by 75 percent.5 Further, China has
strategically increased its participation in the International Telecommunication Union (ITU), an
agency of the United Nations responsible for coordinating telecommunications operations and
services, with the hopes of expanding its influence around the globe. In fact, in key technology
working groups of the ITU, China alone comprises 40 percent of participants.6 Moreover,
China’s press into international standardization ranges from introducing weak proposals into the
standards development process, flooding the organizations with low-quality proposals that
detract from and take resources away from sound proposals, to making financial contributions as
a way to wield power over those organizations and to punish member companies and countries
Gold, Hadas, CNN, “Huawei to Build $1.2 Billion Cambridge Facility as It Faces Uncertain
UK Future,”(June 25, 2020) https://www.cnn.com/2020/06/25/tech/huawei-cambridgeuk/index.html.
3

European Chamber of Commerce, “European Chamber Report on China’s Corporate Social
Credit System, A Wake Up Call for European Businesses in China,” (Aug. 28, 2019),
https://www.europeanchamber.com.cn/en/pressreleases/3045/european_chamber_report_on_china_s_corporate_social_credit_system_a_wake_u
p_call_for_european_business_in_china.
4

Kamensky, Jack, China Business Review, “China’s Participation in International Standards
Setting: Benefits and Concerns for U.S. Industry,” (Feb. 7, 2020)
https://www.chinabusinessreview.com/chinas-participation-in-international-standards-settingbenefits-and-concerns-for-us-industry/.
5

6

Department of Commerce calculations.
5

that do not side with its agenda. Indeed, China’s participation in international organizations has
become a vehicle to advance its One Belt One Road Initiative, and the more influence China has
over standards development, the more likely this initiative will succeed.
Additionally, China uses other international organizations to advance its global ambition,
including the Belt and Road Initiative. To illustrate, it has been reported that the head of the UN
Department of Economic and Social Affairs used his position to discriminate against people and
organizations who were drawing attention to the CCP’s repression of the Uighur ethnic group.
The World Health Organization’s capture by the Chinese government, by failing to alert
countries to the rapid transmission of the coronavirus, is yet another recent example. Even more
to the point, if the Chinese government is currently threatening to retaliate against Nokia and
Ericsson for the EU’s possible move to ban Huawei from their 5G systems,7 imagine the types of
influence that China could wield if it is able to dominate global standards organizations and the
standards themselves.
Finally, it is worth emphasizing that because China is a sovereign state, foreign laws can
never be sufficient to fully address its conduct. In fact, the PRC government takes advantage of
the United States’ lack of an extradition treaty with it to advance cyberattacks on sensitive U.S.
assets. The attacks not only obtain proprietary trade secrets from companies and sensitive
personal information about American citizens from servers, but these attacks also target crucial
weapons systems and sensitive military technology (well-documented examples include attacks
that extracted sensitive information about U.S. submarines, cryptographic systems, the F-35 Joint
Strike Fighter, and anti-ship missiles that are crucial for deterrence and developing
countermeasures). China’s medium of cybertheft also includes stealing computer software
source codes, design technology, and technical product specifications. And the PRC government
continues to violate its 2015 bilateral commitment to the United States in which it had vowed to
refrain from stealing and misappropriating U.S. IP.
The tactics used by the PRC government over the course of the past 40 plus years have
enabled the country to move its economy from the 12th largest in the world ($191 billion gross
domestic product, GDP (current prices), in 1980) to the second largest ($14 trillion GDP (current
prices) in 2019); become the second largest foreign holder of U.S. debt at $1.09 trillion in 2019
(the first largest being Japan holding $1.27 trillion), and grow as the world’s largest exporter of
goods. Indeed, the United States’ largest bilateral trade deficit is with China ($345.6 billion in
deficit in goods in 2019). In addition, China today holds uniquely powerful positions in the most
critical supply chains in the world including rare earths elements, medical equipment and
supplies, pharmaceuticals, and electronics.
The past policies of the United States did not effectively impede or curtail China’s rise as
a predatory economic actor. To build our seemingly efficient supply chains, we flocked to China
Lin, Liza; Woo, Stu; Wei, Lingling, “China May Retaliate Against Nokia and Ericsson If EU
Countries Move to Ban Huawei,” Wall Street Journal (July 20, 2020),
https://www.wsj.com/articles/china-may-retaliate-against-nokia-and-ericsson-if-eu-countriesmove-to-ban-huawei-11595250557.
7

6

as the low-cost producer of virtually every link in the chain, allowed the PRC government to
build reserves of U.S. dollars which it used to devalue its currency, traded our most sensitive
intellectual property in exchange for short-term market access and profits, and did not adequately
use legal enforcement tools to protect our industries. Our motives were short-sighted, and we
failed to sufficiently anticipate the vulnerabilities that this trading relationship would create.
As a result, we willingly transferred our debt and exported our manufacturing capabilities
(and jobs) to a non-market economy where market principles, transparency, and predictability do
not exist. By doing this, we created a global economy where distorted prices and non-market
conditions are allowed to proliferate. We also put China in control of our revenue stream. This
vulnerability is often not discussed among policymakers, but it is important to emphasize:
within our highest-technology sectors, substantial revenue comes from U.S. exports to China.
This means that China, by controlling America’s revenue stream, also controls America’s ability
to earn income and fund R&D. This is an extraordinary vulnerability that, if unaddressed, will
be used by the PRC government to further halt America’s technological progress.
RESHORING CRITICAL SUPPLY CHAINS
Traditionally, economists have viewed calls for countries to pursue policies aimed at
protecting national security production capacity skeptically. They argued that a nation could, in
a globalized world, always turn to other countries if the domestic supply chains eroded at home.
However, what we have learned from the coronavirus crisis is that borders do matter because any
state has the sovereign right, and ability to, restrict exports to the rest of the world. Indeed, the
PRC government strategically withholds exports: (1) as a bargaining chip to extract concessions
from trading partners; or (2) to punish trading partners that do not bend to its will. Even our
allies introduced earlier this year – at the height of the pandemic – emergency export restrictions
over much needed medical equipment in order to provide for their own citizens to the detriment
of neighbors in need.
These facts should serve as an important reminder to the United States that the security of
domestic supply chains is essential, and it must be regained because the basic political and
economic unit should always remain the nation-state. Indeed, the protection of American
citizens requires that the United States’ vulnerable supply chains be strengthened, and a major
component of supply chain resiliency must be reshoring. But how can the United States reverse
the excessive offshoring that has occurred over the course of the past 40 years?
The problem is complex, but it can be solved through a whole-of-Government approach.
That is, if we collectively are prepared to tackle difficult policy questions, even those that may
run counter to long-held economic biases. To the extent that those biases once formed policies
that incentivized critical industries to offshore, then logically they need to be revised or reversed.
Understanding what has led to the degradation of our supply chains, then it stands to
reason that a comprehensive reshoring strategy must remedy those causes. At the outset, the
United States must systematically and routinely identify all products, goods, and technologies
that are critical to national security to address the country’s dependency on imports from
strategic competitors, whether in a time of war, cyber-attack, pandemic or other national

7

emergency. This Administration – my office in particular on behalf of the White House – has
begun doing this. We need to continue this on a permanent basis. An additional component here
is measuring the flow of technology if it is now as equally as important, and in many instances
more important, than the traditional “national security good.”
A second essential component of a reshoring strategy is incentivizing inward investments
in domestic manufacturing and R&D activities. We have begun doing this to boost innovation
and economic growth through tax cuts. A whole-of-Government approach, in partnership with
Congress, will continue to make this effort successful.
Third, we have in our arsenal of tools powerful U.S. Government procurement authority,
including the Defense Production Act authority, to provide capital to new American investments
and also as a tool to generate demand, through U.S. Government purchases, for national securityrelated items that are produced within the United States. Reliance on Government procurement
authority is what will compel many companies to take a leap of faith and re-invest in the United
States. This is an important tool that we are using and should be empowered to use even more.
Fourth, it is, of course, axiomatic that U.S. investments must be encouraged to grow to
commercial scale in order to compete against more mature foreign competitors. Further, an
industry’s commercial viability will generate robust upstream and downstream supply chains,
draw in new market entrants to enhance production efficiency and moderate prices, attract
greater private sector investments, and encourage competition to accelerate R&D. These are the
fundamental building blocks of a resilient domestic supply chain.
Finally, we have the ability to increase exports of all U.S. firms – including those that reshore to the United States – through trade agreements. We have begun to increase exports
thorough the U.S.-Mexico-Canada Trade Agreement and the U.S.-Japan Trade Agreement, and
we should continue to encourage greater exports through new trade deals.
With the support of Congress, we can build the strongest supply chain in the world,
enhance our comparative advantage with allies, and create an ecosystem where market-based
principles prevail and market distortions are eliminated. We have begun doing this; we can do
more together, which is why this hearing is so important.
CONCLUSION
Historically, through times of adversity, the United States has led the world out of war
and economic turbulence into recovery. And now too, the world will look to the United States to
lead the way in solving today’s supply chain challenges. It should not be forgotten that the
global economy of the 20th century was developed by the United States and, although China is
aggressively seeking to shape the global economic order of the 21st century, it is not too late to
act. While the United States remains the largest economic power in the world (a status that is not
guaranteed as China’s exponential growth continues), it has the ability and leverage to act in
coordination with allies. Time is of the essence, and our supply chain vulnerabilities are too
great to await another national security crisis that may expose this country to even more
devastation and destruction.

8