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Senate Subcommittee On China: “A 50 To 100 Year Threat”

July 31, 2020

By Kenneth Rapoza

The Senate Subcommittee on Security held a hearing on China this week. This is what we learned.

Ladies and gentlemen, we have consensus.

Senate Republicans and Democrats on the Subcommittee on Security's China Challenge hearing chaired by Dan Sullivan (R-AK) all agreed on Thursday that the threat posed by the world’s No. 2 economy on the U.S. was not much different than it was in the Soviet Union years. And so, the strategy of containment is back.

One of the key messages from Trump Administration officials inside the State Department was that a defacto “new NATO” is plausible. As NATO was designed to contain Russia, the British-proposed D-10, a coalition of 10 democracies to contain China on matters of technological competition, IP theft, and fair trade. If the World Trade Organization can’t police it, the U.S. and its allies will.

There was bipartisan support yesterday among committee members for writing legislation protective of U.S. critical supply chains and the industries of the future.

Administration witnesses at the hearing said they were working with allies to get them on the same page. One example was Great Britain and France’s about-face on Huawei. Germany is next. It is hard to imagine a European wide 5G telecommunications network using both European and Chinese systems. It’s going to be one or the other.

“The US is leading the way towards insulating our country and the West from China’s multi-dimensional predation. Congress must come to realize that Post World War II institutions built around the market economies of Western Europe and the U.S. cannot be bent into a different shape to handle 21st century challenges of non-market, communist authoritarianism with Chinese characteristics,” said Michael Stumo, CEO of the Coalition for a Prosperous America. “We must not be squeamish about using our domestic law and policy tools to minimize the threat, even when misplaced objections from legacy international institutions arise.”

Subcommittee chairman Sullivan noted something rarely mentioned in the financial press here: the U.S.-China relationship is a total one-way street. This needs to be said more often, instead of the constant plea to get the Europeans to support our view.

How hard is it to understand that our tech is banned there. TikTok is allowed here. Portfolio investment dollars flow to China in record numbers due to ever-increasing weighting in the major financial indexes; China basically bans its locals from buying American stocks. China promises to open a market, and buy a product, and doesn’t deliver. If this were a romance, your best friend would tell you to find somebody new.

“We are going to need to bring government and society together for the long term, literally decades, like we did in the Cold War with the USSR if we are going to execute in a way that protects our workers and our economic and national security interests,” Sullivan said. (He is still waiting for China to import all the Alaskan-caught fish they said they would under the phase one trade agreement.)

Subcommittee members agree that critical supply chains have to be moved out of China. They also agree that government support, such as the Defense Authorization Act which is funding a new pharmacological inputs lab in Rochester, NY led by Kodak, is one of the best ways to bring it home. We need more of this. Keep going.

The first witness panel featured two think tank experts: Michael Wessel, Commissioner of the U.S. - China Economic and Security Review Commission (opening testimony here) and Brookings director for the Chinese Strategy Initiative, Rush Doshi (testimony).

Wessel said that China poses a threat to U.S. businesses of all sizes and warned that many nations are waiting to see if they should emulate the China model or the U.S. model.

“Years of attacks on our IP, countless unfair trade practices, massive subsidies to SOEs and many predatory and protectionist policies and human rights abuses all require that we more seriously confront China,” Wessel said. “The CCP policies have hollowed out our production, and we have a dangerously risky supply chain.”

China is eyeing the fourth industrial revolution and its role in it. They know tech will lead the way. They’re already a massive player in 5G. Their apps have gone viral worldwide. They have all the factories. They are the go-to manufacturing hub for virtually everything. Apple relies heavily on mainland China electronics manufacturers and assembly.

“China can do reverse engineering and eventually make the same product,” says Doshi. “But members of the U.S. Chamber of Commerce will tell you that their main members are not leaving China because logistics are so good. What can we do about that? I don’t believe China’s advantages are insurmountable.”

China has the biggest ports in the world. India, Brazil, Mexico are not even close.

Their Greater Bay Area project promises to be the new Asian Silicon Valley. We shouldn’t doubt for a second that they will get there faster than we think.

Richard Blumenthal (D-CT) sent a letter to the Assistant Attorney General, John Demers, on Thursday calling for an investigation into Zoom and TikTok owner ByteDance. He wants Chinese made retail drones banned. China runs about 90% of that market.

Ted Cruz (R-TX) wants rare earth mining brought home, or at least less reliant on China. Cruz wrote the Onshoring Rare Earths Act in May.

“We used to produce rare earths here at a facility in California and in Indiana we had a smelter for magnets,” Wessel noted. In 1996, that unit was sold to the Chinese and China later put the California mine into bankruptcy.

“No company is going to invest in rare-earth mining in the U.S. if they know China will eventually replace them,” said Nazak Nikakhtar, the Assistant Secretary of Industry and Analysis at the International Trade Administration of the Department of Commerce (testimony). You can replace rare earths with virtually any other product – microbial face mask to fight off viruses, audio electronics, tires, Nike sneakers.

“When you are forced to compete with China, you are eventually forced to source in China,” she said. In a pushback to free traders afraid of Trump tariffs, she asked, “what are the alternatives?”

Nikita Khrushchev said in the Cold war that “we value trade the least for economic reasons and the most for political reasons,” Nikakhtar said. “This is a problem that’s been with us from the time of the Soviet Union and we have made no progress on it. Trump is tackling all of these issues simultaneously. Time is not on our side.”

With the days of the Cold War in mind, the other Administration official at the hearing, Keith Krach, the Under Secretary for Economic Growth, Energy, and the Environment at the State Department, hinted of a new alliance of nations that will share research and invest in each other’s technology. It’s at least as good an idea as NATO was at the time The Kremlin was trying to convince the world that their model was best. He said they were working on promoting what they call “clean” trade, which basically relates to anything that doesn’t have the Chinese firewall, and undercuts China labor and regulatory arbitrage that makes it cheaper to do business.

He said they have about 35 countries on board with “clean 5G”. He particularly cited Teleco Italia, Telefonica, the top three telecos in Singapore and Canada and a new campaign being launched for “clean apps” and “clean labor.”

We believe multinational corporations have to get with the program or it’s a losing battle.

“The biggest elephant in the room is the threat of China retaliation,” said Krach. “It terrifies companies and it terrifies countries. The biggest delta in terms of strategy is in further strengthening our relationship with our allies and amplifying the moral high ground of (Western) values. Bullies back down when they are confronted and they really back down if you bring your friends with you,” he said.

China knows the U.S., Japan, Taiwan and South Korea are rethinking their supply chains. Xi Jinping has been thanking multinationals for sticking with China, and for large domestic manufacturers for doing the same.

Xi wants to keep China’s position in global supply chains because he knows it matters to his party, and to the job market. We’d like some of that here, too. It is good to see we have allies for that goal in the Senate.

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