May 17, 2019

The full House Transportation and Infrastructure Committee held a hearing yesterday on the participation of state-owned entities in the public transportation and freight rail sectors. The clear focus was the impact that the state-owned Chinese rail company CRRC is having on the U.S. mass transit rail car market, and on the independently-owned but state-subsidized electric bus company BYD’s entrance into the transit bus market as well.

Testimony was heard from the following witnesses:

• Scott N. Paul, President, Alliance for American Manufacturing (AAM) (Testimony)
• Brigadier General John Adams, U.S. Army (Ret.), President, Guardian Six Consultancy LLC (Testimony)
• Hamilton Galloway, Head of Consultancy, Americas, Oxford Economics (Testimony)
• Frank Cilluffo, Director, McCrary Institute for Cyber and Critical Infrastructure Security, Auburn University (Testimony)
• Zachary Kahn, Director of Government Relations, BYD Heavy Industries (Testimony)
• Phillip A. Washington, CEO, Los Angeles County Metropolitan Transportation Authority (Testimony)

Committee chairman Peter DeFazio (D-OR) began his opening statement by reciting his career-long bona fides against expansive free trade deals, and spoke about trade-related job losses in a way that sounded a bit like a slightly more organized version of a speech by the current POTUS:

For three decades, blue-collar workers have been getting shafted all in the name of free trade. I have watched industries suffer the fate of bad trade deals and foreign incursions into the U.S. marketplace. I have battled to save multiple industries including paper, lumber, furniture, solar, trucking, auto, maritime, and agriculture.

And the hits keep coming. Today, state-owned enterprises and similarly subsidized corporations are beginning to enter the transit rail and bus market, using subsidies from foreign governments to undercut long-established manufacturers and grab American taxpayer dollars. State-owned enterprises are also eyeing the U.S. domestic freight rail market. Tens of thousands of U.S. jobs are supported by this domestic manufacturing sector, but it could be decimated by unfair foreign competition.

Not on my watch.

DeFazio also went off-script and noted that CRRC and BYD had sited their U.S. assembly plants in very politically astute ways – he noted that BYD may not have anticipated that Democrats would take back the House when they put their facility in the district of House Republican Leader Kevin McCarthy (R-CA), but neglected to mention that CRRC’s big Massachusetts plant is in the district of the new House Ways and Means chairman Richard Neal (D-MA), and the CRRC Chicago plant is in the home state of Senate Democratic Assistant Leader Richard Durbin (D-IL).

That reference means that this is a good place to begin the background of the issue: if all politics is indeed local, then the opposite side of the coin is that legislators whose districts have facilities of U.S.-based rail car manufacturers have been the most forward in opposing CRRC’s entry into the mass transit market, because they see it as CRRC getting a foothold into the freight rail market eventually as well. The big U.S. freight manufacturers are Trinity Industries (based out of the Dallas-Fort Worth, Texas area) and Greenbrier Industries, which is based in Portland, Oregon (not in DeFazio’s district, but with a big statewide economic impact).

Last year, the House Appropriations Committee adopted a provision by Reps. Mario Diaz-Balart (R-FL) and Kay Granger (R-TX, from the Dallas area) putting a hold on federal dollars for transit procurements from Chinese state-owned or subsidized entities. Later, the Senate adopted an appropriations amendment offered by Sen. John Cornyn (R-TX) that would have done something similar.

These amendments were dropped earlier this year in the final 2019 omnibus appropriations bill (there was a lot of behind-the-scenes Durbin vs Granger stuff), but two months ago, Cornyn, along with Sen. Tammy Baldwin (D-WI, a key Buy America proponent) and the chairman and ranking Democrat on the Senate panel overseeing mass transit policy, Mike Crapo (R-ID) and Sherrod Brown (D-OH), introduced a new bill that would permanently ban U.S. transit agencies from buying rail cars or buses made by any company that is “owned or controlled by, is a subsidiary of, or is otherwise related legally or financially to a corporation” located in the People’s Republic of China. The number of cosponsors on that bill (S. 846) has grown from 3 to 37.

The House companion bill to S. 846 was introduced the day before the House T&I hearing as H.R. 2739 by Reps. Harley Rouda (D-CA), Rick Crawford (R-AR, who is also the new ranking Republican member on the T&I railroad subcommittee), Scott Perry (R-PA), Granger, Tim Ryan (D-OH), Eleanor Holmes Norton (D-DC), Randy Weber (R-TX), and John Garamendi (D-CA). Unlike their Senate authorizing committee counterparts, DeFazio and full committee ranking minority member Sam Graves (R-MO) have not cosponsored the legislation. (Yet.)

(And, of course, anyone who wants more background on this issue should read the Eno Center’s September 2018 report, The Implications of the Federal Ban on Chinese Railcars.)

The opening statements of the witnesses can be paraphrased thusly:

• Scott Paul, AAM – The Made in China 2025 initiative is a real threat to U.S. firms, it’s not fair for American firms to compete with foreign governments (as opposed to foreign companies), and we should protect U.S. jobs and demand more trade reciprocity.
• Gen. Adams, Guardian Six – The Chinese government is aggressively targeting U.S. cybersecurity, we cannot ignore the threats to rail security posed to CRRC, and CRRC’s bid for the WMATA 7000 series of cars is a major security opening.
• Hamilton Galloway, Oxford Economics – We did a study showing two scenarios. First, for transit contracts that are not Buy America compliant (like MBTA), 5.4 U.S. jobs of some type are lost for every 1 assembly job created by CRRC in the U.S. Second, even for transit contracts that are compliant witH Buy America, every assembly job created by CRRC in the U.S. still kills 3.5 other American jobs.
• Frank Cilluffo, McCrary Institute – China is a major cybersecurity threat, and don’t just look at mass transit. Chinese manufacturer have captured most of the drone market, the surveillance camera market, and remember that 5G will be looped into all kinds of transportation infrastructure as well. But national security and free markets are not mutually exclusive.
• Zachary Kahn, BYD – Our assembly facility is in Lancaster, California and supports 900 U.S. employees, 775 of which are unionized by SMART Local 105. We are not a state-owned entity and our largest outside shareholder is Warren Buffett’s Berkshire Hathaway.
• Phil Washington, L.A. Metro – The big problem is that there are zero U.S. manufacturers of railcars. This industry needs to be rebuilt, and I have a vision for building a rolling stock manufacturing facility in Los Angeles. Also, the Eno Center’s report on this issue is excellent.

The Q&A period emphasized some of the following themes:

Getting tougher on state-owned entities in general. In another off-script moment in his opening statement, DeFazio recounted a conversation he’d had with White House economic adviser Larry Kudlow about the Jones Act. DeFazio said that Kudlow gave him the standard free market criticism of protectionist legislation, but that DeFazio had responded, “Larry, is it competition for a free market shipyard to compete with government of Communist China?” He said that Kudlow sounded a bit befuddled when DeFazio phrased it that way. Galloway said that the long-term solution is to get China to privatize its SOEs so that they compete on a fairer footing, and also to get China to sign government procurement agreements to allow reciprocity in that area.

Dealing with cyber threats. The hearing featured a lot of agreement that cybersecurity is Very Very Important, but not a lot of discussion of how to deal with those threats other than by banning all Chinese firms from selling products in the U.S. market at all. In this respect, the February 2019 House Homeland Security hearing on this topic was much more informative – see here for our writeup.

Strengthening Buy America laws. DeFazio noted that current Buy America laws and rules are riddled with loopholes, and while he criticized BYD for taking advantage of those loopholes, he acknowledged that BYD is probably complying with the law. (The loophole in question is that BYD can manufacture lithium battery cells in China, manufacture the frames to hold many battery cells in series in China, and then ship the battery cells and the frames to the U.S., have a U.S. worker plug the batteries in, and then claim that the full multi-cell battery was somehow manufactured in the U.S. Paul indicated that there is a new battery standard in the pending U.S.-Mexico-Canada trade agreement that, if applied to China, would help remedy that. The BYD representative said that if Congress clarified that battery assembly in the U.S. is not manufacturing, BYD would consider building battery cell plants in the U.S.

Auditing Buy America compliance. Paul suggested that somebody in the government (DOT IG? GAO?) audit CRRC and BYD compliance with existing Buy America rules and noted that the City of Albuquerque Inspector General report on that city’s problematic BYD procurement raised questions about Buy America compliance.

Rebuilding U.S. manufacturing. When Rep. Grace Napolitano (D-CA) asked Phil Washington what Congress could do in surface transportation reauthorization to help bring back American rail car manufacturing, Washington responded that they should give preferential treatment to mass transit manufacturers to base here in America, not just assembly but all the way down the manufacturing chain, and also enable local hire (workforce development is a key part of Washington’s plan for a L.A.-based transit manufacturing facility).