USTR Releases Proposed Determination in the Section 301 Investigation of China’s Policies and Practices Related to Forced Technology Transfers and Discriminatory Intellectual Property Practices
Date: April 06, 2018
In late March 2018, the Office of the U.S. Trade Representative (USTR) announced its findings of an investigation into the acts, policies and practices related to technology transfer, intellectual property and innovation by the People’s Republic of China (China), concluding that China’s acts, policies and practices are unreasonable or discriminatory and burden or restrict U.S. commerce. On April 3, 2018, the USTR announced its intent to implement tariffs on certain products imported from China.
The proposed list of Chinese products covers approximately 1,300 separate tariff lines and will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, the USTR will issue a final determination on the products subject to the additional duties. The USTR stated that the “total value of imports subject to the tariff increase is commensurate with an economic analysis of the harm caused by China’s unreasonable technology transfer policies to the U.S. economy” and amounts to approximately $50 billion in Chinese goods.
Implementation of 25 Percent Duties on Certain Chinese Goods
While cautioning that the list of Chinese goods is not final and is subject to further review and discussion, the USTR has identified a list of products of Chinese origin that will be subject to a duty of 25 percent in addition to any existing duties on the products. The full list of proposed products is included as an annex in the USTR’s Notice of Determination. The exact timing of when the additional duties may be implemented remains unknown as the USTR has indicated that a specific deadline for finalizing the list after receiving public comments has not been established.
According to the USTR, the list of products covered by this proposed action was developed after trade analysts from several U.S. government agencies identified products that benefit from Chinese industrial policies, including “Made in China 2025.” The list was then refined by removing (1) specific products identified by analysts as likely to cause disruptions to the U.S. economy and (2) tariff lines subject to legal or administrative constraints. The remaining products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product. The proposed list was then compiled by selecting products from the ranked list with the lowest consumer impact.
The docket number for this matter is USTR-2018-0005 and may be accessed via the Federal eRulemaking Portal: http://www.regulations.gov.
- Written Comments – USTR is requesting comments from interested parties, including comments on: (1) the specific products to be subject to increased duties, whether products listed in the annex should be retained or removed, or whether products not currently on the list should be added; (2) the level of the increase, if any, in the rate of duty; and (3) the appropriate aggregate level of trade to be covered by additional duties. USTR has specifically requested that commenters address whether imposing increased duties on a particular product would be practicable or effective in bringing about the elimination of China’s acts, policies and practices, and whether maintaining or imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-sized businesses and consumers.
- Public Hearing – USTR will hold a public hearing in the main hearing room of the U.S. International Trade Commission, 500 E Street, S.W., Washington, D.C., 20436, beginning at 10 a.m. on May 15, 2018. Persons wishing to appear at the hearing must submit a request by April 23, 2018. The request to appear must include a summary of testimony and may be accompanied by a pre-hearing submission. Any post-hearing rebuttal comments will be due by May 22, 2018.
All written comments, hearing testimony and rebuttal comments will be posted to the docket for public review, except for any information that a party has specifically indicated and requested be handled as business confidential information.
Section 301 of the Trade Act of 1974 provides the United States with the authority to enforce trade agreements, resolve trade disputes and open foreign markets to U.S. goods and services. It is the principal statutory authority under which the United States may impose trade sanctions on foreign countries that either violate trade agreements or engage in other unfair trade practices. When negotiations to remove the offending trade practice fail, the United States may take action to raise import duties on the foreign country’s products as a means to rebalance lost concessions.
For over 10 years, China has been placed on the USTR’s “Priority Watch List” of countries with significant intellectual property issues. This trade action against China is the result of a Section 301 investigation initiated on August 18, 2017 to determine whether acts, policies and practices of the government of China related to technology transfer, intellectual property and innovation are discriminatory and unfair. After conducting an investigation, the USTR prepared a report on the findings of its investigation detailing the acts, policies and practices undertaken by China that are harmful to the United States. According to the report:
- China uses joint venture requirements, foreign ownership/investment restrictions, equity limitations, and administrative review and licensing processes to force or pressure technology transfers from U.S. companies.
- China uses discriminatory technology licensing processes and restrictions to transfer technologies from U.S. companies to Chinese companies.
- China directs and facilitates systematic investments and acquisitions in U.S. companies and assets that result in large-scale technology transfers in industries deemed important to China’s industrial plans.
- China conducts and supports cyber intrusions into U.S. computer networks to gain access to valuable business information, such as intellectual property, trade secrets or other confidential business information.
According to the USTR, these unfair technology transfers and intellectual property policies are part of China’s intentional efforts to seize economic leadership in advanced technology as described in its industrial plans, such as “Made in China 2025.”
On March 22, 2018, President Trump issued a Presidential Memorandum announcing the findings of his administration’s Section 301 investigation into these practices by China. In addition to the implementation of tariffs on certain Chinese goods, the president directed his administration to take the following additional actions:
- File a complaint regarding China’s discriminatory technology licensing practices through a World Trade Organization (WTO) dispute settlement proceeding.
- Respond to Chinese investment in the United States aimed at obtaining key U.S. technologies and propose measures or restrictions addressing such investment practices.
On March 23, 2018, the USTR initiated a WTO dispute by taking the initial step of requesting consultations with China over these intellectual property rights issues. The request identifies apparent breaches by China of WTO rules that harm the intellectual property rights of U.S. companies and innovators. USTR claims that under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), China discriminates against foreign intellectual property rights holders (Article 3) and fails to ensure patent rights for foreign patent holders (Article 28). According to the request, “China deprives foreign intellectual property rights holders of the ability to protect their intellectual property rights in China as well as freely negotiate market-based terms in licensing and other technology-related contracts.”
Consultations are the first step in any WTO dispute settlement process. China has separately requested consultations over the proposed tariffs announced by the United States. The parties must now respond to the requests for consultations and, if agreed to, must enter into such consultations within 30 days. If the consultations do not resolve concerns by the parties, either the United States or China will be free to formally request the establishment of a dispute settlement panel to hear arguments on the matter. Dispute settlement proceedings are notoriously slow, and any resolution of this matter before the WTO would take several years.
While nothing formal has been announced, Treasury Secretary Stephen Mnuchin has indicated that his department has prepared options for President Trump to consider regarding restrictions on investments in the United States by Chinese companies. While there are certain actions the president’s administration can take, any long?term efforts to manage and/or curtail Chinese foreign investment in the United States will most likely require coordination with Congress and the passage of legislation. The United States has historically maintained and supported foreign investment due to its substantial economic benefits and the low risk to national security typically involved. Critics, however, argue that China has undertaken a concerted and deliberate effort to invest in more sensitive U.S. industries and to acquire ownership of critical or emerging technology.
Currently, several pieces of legislation have been introduced in Congress that seek to overhaul and modernize the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an inter-agency committee tasked with reviewing acquisitions, mergers and other foreign investments in the United States for national security risks. Senator John Cornyn has indicated that, “[b]y exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies.”
In response to the announcement of proposed tariffs by the United States, China’s ambassador to the WTO issued a formal statement indicating that the Section 301 finding is a “willful distortion of facts and full of selective assertions and allegations, turning a blind eye to the actual progress that China has achieved in the market-oriented reforms, further opening-up and enhanced IP protection.” China has stated that the actions proposed by USTR are a “gross violation of the WTO’s fundamental principles of non-discrimination and bound tariffs.” China announced that it would take the matter before the WTO for dispute settlement proceedings, and also announced its intent to immediately retaliate by imposing its own tariffs on U.S. goods in the amount of $50 billion. The list of U.S. goods on which China intends to impose tariffs is reported to include airplanes, automobiles, soybeans, beef, wheat, whiskey and certain chemicals.
FOR MORE INFORMATION
Thompson Hine will continue to closely monitor the Trump administration’s plan to implement these tariffs and other trade actions toward China. For more updates, please visit Thompson Hine’s SmarTrade blog.
With questions, please contact:
David M. Schwartz
Partner, International Trade
Scott E. Diamond
Senior Legislative & Regulatory Policy Advisor
Not licensed to practice law
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