USTR’s 301 Investigation on China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation – An Important Opportunity to Address Long-Standing Distortions in our Bilateral Relationship
President Trump signed a Presidential Memorandum to the U.S. Trade Representative on August 14, 2017 directing the USTR to determine “whether to investigate any of China’s laws, policies, practices or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology developments.” 82 FR 39,007 (August 17, 2017).
Four days later on Friday, August 18, 2017, the U.S. Trade Representative “initiated an investigation pursuant to section 302(b)(1)(A) of the Trade Act of 1974, amended (the Trade Act), to determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are actionable under section 301(b)(1) of the Trade Act.” See https://ustr.gov/sites/default/files/301/FRN%20China%20301.pdf. The USTR notice of initiation, which will be published this week in the Federal Register, identifies the date for comments as September 28, 2017, provides for a public hearing on October 10, and post-hearing rebuttal comments for October 20.
After many years of efforts by the United States to get China to in fact stop forced technology transfer and effectively deal with intellectual property theft and, in more recent years, cyber attacks on companies stealing confidential information, trade secrets and other intellectual property, the U.S. is starting a more formal probe of the extent of the problem and what options exist to address it. The announcement has received bipartisan support from Congressional members. It is likely that this could be the most important trade policy investigation that the Trump Administration conducts as it goes to America’s ability to maintain its competitive strengths in innovation and to address some of the worst forms of distortions created by China’s system of active government interference in the operation of the market.
That this is not a new issue is apparent to anyone who has been involved in China trade issues over the last two decades. Our firm did several research projects back in 2007 that resulted in publications, including China’s Laws, Regulations and Practices in the Areas of Technology Transfer, Trade-Related Investment Measures, Subsidies and Intellectual Property Protection Which Raise WTO Compliance Concerns (September 2007) available at https://www.uscc.gov/sites/default/files/Research/TLAG%20Report%20-%20China%27s%20Laws%2C%20Regulations%2C%20Practices%20in%20Areas%20of%20Technology%20and%20WTO%20Non-Compliance.pdf.
Most of the Executive Summary is reproduced below, but the concerns of 2007 remain largely valid in 2017 and have been expanded by possible misuse of competition policy in China to limit U.S. companies and by cyber attacks. :
CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS
When China joined the World Trade Organization (“WTO”), the Chinese government committed to far-reaching reforms to bring its laws and regulations into conformity with the WTO Agreements. China’s final “accession package” also included specific commitments made during the Working Party to address particular concerns of negotiating Members. The commitments addressed the market access of goods and services and included commitments related to investment, intellectual property, and subsidies. While China has made extensive revisions to its laws and regulations since joining the WTO, many of its laws, regulations, and practices appear to be inconsistent with certain WTO provisions and specific commitments made by China. This paper reviews some of the problems China has had with respect to technology transfer, investment measures, subsidies, and intellectual property protection, which raise WTO compliance concerns.
As China has gradually reformed its laws and economic policies over the last two and a half decades, the extent of the central government’s control over development and the economy has gradually diminished. The commitments made by China during its WTO accession required that the government further relinquish such control. Amendments to China’s laws and regulations to make them WTO-compliant and consistent with specific commitments have decreased the level of direct government involvement in the economy. However, many interventionist policies, that the reforms were intended to alleviate, continue to be used.
Primarily, these policies have the effect of restricting foreign investment and promoting domestic companies. The Chinese government continues to use import substitution policies to direct and stimulate the economic development of certain sectors and to move the economy into more technologically-advanced sectors. Specifically, these policies encourage technology transfer, export performance, and the use of local content requirements. China has also maintained indirect policy tools such as subsidies to guide resources into activities the government favors. Industrial policies maintain government involvement by “encouraging” practices that the government deems beneficial to economic development. This is true for new policies as well as those policies that were amended to remove WTO-inconsistent requirements. While “encouraging” economic development is not a WTO violation, many U.S. businesses have complained that, often, “encouraged” policies are, in effect, “requirements” for access to the Chinese market.
Since China’s accession, the U.S. has worked with China at the bilateral and multilateral levels to address U.S. industry concerns over China’s policies. Recently, the U.S. filed two requests for the establishment of panels under the WTO’s dispute settlement mechanism to review allegations concerning China’s automobile policies and certain subsidies that are not consistent with China’s WTO commitments. However, there remain other Chinese programs and industrial policies that the Chinese government uses to restrict foreign investment and provide more favorable treatment to domestic businesses.
Additionally, with respect to intellectual property (“IP”), China committed to bring all of its laws and regulations into compliance with the obligations laid out in the Agreement on Trade-Related Aspect of Intellectual Property Rights (TRIPS). In the years following accession, China has made many substantive reforms to its IP laws, and there is now general agreement that such laws are not substantively inconsistent with the WTO obligations. However, the TRIPS Agreement also contains specific provisions with respect to enforcement of IP rights, which lay out, inter alia, the general obligation that a Member must provide enforcement measures that allow for effective action against acts of IP infringement. This general obligation further provides that such enforcement measures must include remedies that are sufficient to deter future infringements.
There have been persistent concerns voiced by China’s trading partners since the time of its accession that enforcement of China’s IP laws is lacking and overall protection of IP rights is inadequate. Members have provided technical assistance to China and continue to engage in dialogues in efforts to decrease the high levels of IP theft. However, despite China’s efforts to bolster its enforcement mechanisms, Members continue to be concerned with the lack of criminal prosecutions, low administrative fines and civil damages, and inadequate disposal of infringing goods and tools.
While the United States recently initiated a case at the WTO regarding certain aspects of China’s laws relating to protection and enforcement of intellectual property rights, there are additional enforcement challenges that could be addressed through this venue. Multiple aspects of China’s civil enforcement system appear to frustrate a right holder’s ability to enforce its rights and, thus, do not actually permit effective action against any act of infringement. Chinese judicial authorities regularly award low damages in civil IP disputes, which fails to deter future infringements and generally fails to adequately compensate the right holders for their injury as a result of IP infringement. Additionally, Chinese judges rarely order that the infringing goods and production tools to be destroyed, which leaves the means for additional infringement in the control of the infringer, and severely hampers the goal of deterring future infringements. All of these deficiencies are inconsistent with China’s enforcement obligations under the TRIPS Agreement.
Given that certain aspects of China’s laws, regulations and procedures remain
inconsistent with various provisions of the WTO agreements, the United States should consider pursuing additional action through the WTO dispute settlement process in the following areas:
|Deficiency in Law or Practice||WTO Articles Involved|
|China has failed to “eliminate and cease to enforce” technology transfer provisions in laws and industrial policies.||Paragraphs 1.2 and 7.3 of Part I of China’s Accession Protocol|
|China has failed to abide by the terms agreed to in its Accession Protocol.||Article XII:1 of the Marrakesh Agreement Establishing the World Trade Organization|
|Differential tax policy discourages the use of foreign- produced products over domestically-produced products.||Article III:2 of GATT 1994|
|Differential tax policy nullifies or impairs benefits accrued to the United States.||Article XXIII of GATT 1994|
|China’s Consumption Tax favors domestically-produced consumer goods over foreign-produced goods.||Article III:2 of GATT 1994|
|Low damages in civil disputes do not constitute a deterrent to future infringements, nor do they adequately compensate the right holder for the infringement.||TRIPS Articles 41.1, 42 and45.1|
|China’s evidentiary requirements in civil procedures effectively frustrate, rather than ensure, a right holder’s ability to take action against infringement.||TRIPS Articles 41.1, 41.2, 42,and 43.1|
|Limited destruction of infringing goods and production tools in civil disputes fails to constitute a remedy that deters future infringements.||TRIPS Articles 41.1 and 46|
Source: China’s Laws, Regulations and Practices in the Areas of Technology Transfer, Trade-Related Investment Measures, Subsidies and Intellectual Property Protection Which Raise WTO Compliance Concerns, Prepared by Terence P. Stewart, Amy S. Dwyer, Elizabeth A. Argenti, and Philip A. Butler, Stewart and Stewart (September 2007). Available at https://www.uscc.gov/sites/default/files/Research/TLAG%20Report%20-%20China%27s%20Laws%2C%20Regulations%2C%20Practices%20in%20Areas%20of%20Technology%20and%20WTO%20Non-Compliance.pdf.
The USTR notice of initiation identifies ongoing concerns in these same areas. See, e.g., page 4 (“First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.”). This is, of course, consistent with the persistent concerns raised in various annual reports from the U.S. Trade Representative. See, e.g., 2016 USTR Report to Congress on China’s WTO Compliance; 2017 National Trade Estimate Report on Foreign Trade Barriers; 2017 Special 301 Report (China continues on the Priority Watch List). (These reports are available at https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications.)
Business associations and the U.S.-China Economic and Security Review Commission have repeatedly outlined the challenges U.S. and other foreign companies face in China in these areas. See, e.g., 2015 Report to Congress of the U.S.-China Economic and Security Review Commission at 77-139 (includes concerns of various business groups; highlights the interference in the auto sector to force technology transfer) (November 2015); 2016 Report to Congress of the U.S.-China Economic and Security Review Commission at 46-58 (includes update on cyber security issues flowing from China) (November 2016). See https://www.uscc.gov/Annual_Reports.
The stakes for the United States and for the trading system from a successful investigation and correction of the identified problems are huge. China is the world’s largest exporter and an increasingly critical part of the global economy. The willingness of China to engage in such wide-ranging policies that distort trade flows and hamper trading partners from enjoying the fruits of their technological leadership has led to the type of trade imbalance that the U.S. has experienced with China. This trade imbalance is not sustainable. China has had sixteen years since joining the WTO to stop many of the abuses to foreign investors and trading partners that its system promotes and directs (directly or indirectly). As a major player in the global economy, more is needed from China than it has been willing to acknowledge or achieve to date. Let us hope China will in fact address the concerns constructively. The 301 investigation provides an avenue for the U.S. to gather the information, to negotiate with China, and to seek a resolution. Godspeed to the Administration as it undertakes this critical investigation.