Keith Krach testifies before Senate Commerce Subcommittee on Security

Keith Krach testifies before Senate Commerce Subcommittee on Security

ICYMI: Sullivan Chairs Hearing on Chinese Threats to American Economic Competitiveness

Under Secretary Krach addressed the dilemmas facing American multinational corporations that are forced to disclose their intellectual property and yield to the directives of the Chinese Communist Party in order to access the Chinese market.

News Release from the office of Senator Dan Sullivan (R) Alaska

KEITH KRACH, UNDER SECRETARY FOR ECONOMIC GROWTH, ENERGY AND THE ENVIRONMENT

FOR IMMEDIATE RELEASE

July 31, 2020

WASHINGTON, D.C.— Continuing his leadership efforts to address the non-reciprocal economic relationship between the United States and China, U.S. Senator Dan Sullivan (R-Alaska) yesterday chaired a hearing of the Senate Commerce Subcommittee on Security entitled “The China Challenge: Realignment of U.S. Economic Policies to Build Resiliency and Competitiveness.” The hearing examined topics related to the Chinese Communist Party’s unfair trade practices, intellectual property theft, and market manipulation and their harmful impact on U.S. global economic competitiveness. Click here to watch the full hearing.

Since arriving to the Senate, Senator Sullivan has observed an emerging “Cold War” between the United States and China across a number of sectors. In a speech before the Heritage Foundation in September of 2019, Sullivan charted a strategy for how the U.S. can establish reciprocity in the bilateral relationship and how the U.S. can strengthen its economy and military to meet the rising threat from China. Sullivan echoed these themes and solutions in the hearing today.

“The Communist Party-led People’s Republic of China, through unfair trade practices, intellectual property theft, market manipulation and…non-reciprocal treatment…has been a force in the global economy that undercuts the resiliency and strength of the U.S. economy,” Senator Sullivan said in his opening remarks. “In May, the White House issued…the United States Strategic Approach to the People’s Republic of China…These documents…have very strong bipartisan support in the Congress for laying out the challenge that our nation faces with regard to China. What they lack right now is implementing documents [and] implementing strategies, particularly as it relates to the economic challenge that China poses…Our hearing intends to…start the focus on the implementation and execution of these strategies.”

The subcommittee heard from two panels of witnesses. The first consisted of Dr. Rush Doshi, director of the Chinese Strategy Initiative at the Brookings Institution, and Michael Wessel, a commissioner on the U.S.-China Economic and Security Review Commission. The second panel consisted of Keith Krach, under secretary for economic growth, energy, and the environment at the U.S. Department of State, and Nazak Nikakhtar, assistant secretary for industry and analysis at the International Trade Administration within the Department of Commerce.

Senator Sullivan asked Under Secretary Krach and Assistant Secretary Nikakhtar about the dilemmas facing American multinational corporations that are forced to disclose their intellectual property and yield to the directives of the Chinese Communist Party in order to access the Chinese market, particularly what the U.S. government should do to mitigate the challenge.

“Mr. Secretary and Madam Secretary, both of you, I’d like your comment on this very challenging issue that we’ve seen really over decades, and that’s the temptation, I would call it, by U.S. companies that want to access the Chinese market,” said Senator Sullivan. “What ends up happening is that the U.S. companies are either forced to transfer their technology beyond what they want to do, or they, in some ways, kowtow to Chinese interests—think of the NBA—on broader kinds of statements that China finds objectionable, and we have American companies or organizations that start to toe the China line. It’s a dilemma because a lot of this has taken place for decades in the private sector. CEOs making these calls maybe for short-term profit to access to China market, but longer term, in terms of U.S. strategy, it might be undermining our broader strategic goals as a nation if some of our best companies are selling out their own [intellectual property rights] IPR to gain access to the Chinese market. What should we, as a government, do about this very important issue where our private sector is leveraged to get access to the market of China, but then has to give up things or toe the line on broader issues relating to Taiwan or other things where they’re almost forced to make statements that are in line with Chinese Communist Party objectives?

After detailing why American companies are financially obligated to enter the Chinese market in order to compete globally with subsidized Chinese companies, Nikakhtar offered two solutions to the senator’s question.

“If it’s cheaper to operate in China, to compete with China, then we have to figure out how to give these companies a financial boost so they can now compete, if they offshore to another country,” said Assistant Secretary Nikakhtar. “Two, we have to amplify, as the U.S. government, the risks of doing in business with China now. Given everything I said with the Chinese threats to companies, [we must] amplify the risks and give [companies] a way to be cost competitive if they leave China.”

In response to Senator Sullivan, Under Secretary Krach advocated for greater disclosure and transparency requirements for Chinese companies operating in the American market, and for an overall policy of reciprocity.

“If you look at Chinese companies on our American stock exchanges, these are the only companies that don’t obey Sarbanes-Oxley and can’t get audited,” said Under Secretary Krach. “As the guy who has taken three companies public, it kind of makes me mad, but that’s not the point. The point is it puts our American investors at risk. It also creates an unlevel playing field for our companies, because anybody in the business world understands that financial strategy is a key part of your competitive strategy, and this allows them to misstate their earnings, hide subsidized revenue, [and] count things as perpetual revenue versus not. It gives the Chinese companies a competitive advantage.”

Additionally, Senator Sullivan highlighted a concern raised by Senator Ted Cruz (R-Texas) about the United States’ rising dependence on China for critical minerals and metals that are essential for virtually all modern technology.

“We have [rare earth minerals] in America. We certainly have them in my state,” said Senator Sullivan. “And, by the way, our record on mining them and producing them is much higher in terms of the environmental standards than the Chinese, by far. If we have them and it’s good jobs and it’s important for our national security, and we have a strong record on environmental protection on mining them, then we should utilize that.”

“You’re absolutely right. In the United States, rare earth minerals aren’t that rare,” replied Under Secretary Krach. “But what the Chinese have done is they’ve put our processing plants out of business by subsidized pricing…Their aim is not just to compete. Their aim is to drive you out of business…It’s a strategic pinch point underlying everything…And the one thing I must say, it’s been great to see in this administration coming in is that when you look at the work [Assistant Secretary] Nazak [Nikakhtar] is doing in Commerce, what we’re doing at State, the NSC, in terms of really analyzed strategic bench points in the supply chain, I don’t know if it was ever done before.”

Senator Sullivan, a member of the Senate Armed Services Committee, included two amendments in the Fiscal Year 2021 National Defense Authorization Act, which recently passed the full Senate, to set forth U.S. policies to achieve ambitious 10-year critical mineral goals and require the Department of Defense to produce a study on U.S. defense critical mineral needs.