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Update on U.S. Investigation of China’s IP Practices

Further to our alert published on November 13, 2017 regarding whether acts, policies, and practices (APPs) of China related to transfer of technology, intellectual property, and innovation are actionable under Section 301(b)(1) of the Trade Act of 1974 (Section 301), it is anticipated that the U.S. Trade Representative (USTR) will make affirmative findings and remedy recommendations well ahead of the August 2018 statutory deadline, potentially as early as January 2018. USTR is authorized to take specified actions (noted below), “subject to the specific direction, if any, of the President regarding such action[s]” and is authorized to take “all other appropriate and feasible action within the power of the President that the President may direct USTR to take.”

According to USTR officials, if the United States makes an affirmative determination, the next steps will likely proceed in two tracks: (1) the United States may elect to initiate a World Trade Organization (WTO) dispute regarding the APPs, if they are considered to be in violation of WTO commitments, and/or (2) the United States may take unilateral retaliatory action.  Below, we comment briefly on both tracks.

WTO Action. Article 7.3 of China’s Protocol of Accession to the WTO specifically prohibits the imposition by it of technology transfer obligations. Although technology transfer requirements have been a longstanding issue in the U.S.-China bilateral relationship, neither the United States nor other WTO Members have previously challenged such requirements under the WTO. Notably, however, in December 2017, at the 11th WTO Ministerial Conference, the United States, European Union, and Japan issued a joint statement stating that the three Members would work “within the [WTO] and other multilateral groups” to eliminate unfair competitive conditions caused by, inter alia, technology transfer requirements.

The statement could foreshadow that the United States could decide to initiate a WTO dispute alleging violations of China’s Protocol of Accession to the extent that it incorporates commitments related to technology transfer in the Report of the Working Party on the Accession of China.

Unilateral Action. Unilateral actions under Section 301 can include:

  • Suspension, withdrawal, or prevention of the application of benefits of trade agreements concessions
  • Duties or import restrictions
  • Withdrawal, suspension, or limitation of benefits accorded to certain developing countries
  • Binding agreements to eliminate or phase out practice, or provide compensatory benefits
  • “All other appropriate and feasible actions” within the power of the President.

According to recent reporting, the remedies recommended by USTR may include unilateral action in the form of “‘significant’ tariffs covering retaliatory action in the trillion-dollar range,” representing the alleged cumulative damage caused by China’s policies over the past 10-year period. However, if trade-restrictive measures are imposed without WTO authorization, China could claim that the United States itself was in violation of its international obligations. USTR may therefore seek to identify other types of actions that would not directly violate pre-existing U.S. commitments to China.