Technology transfers in the trenches of US-China trade war

Forced technology transfers are the new bone of contention in the intellectual-property battle of the impending US-China trade war. Since 1989, the Office of the United States Trade Representative (USTR) has  released an annual review of the global state of intellectual property rights (IPR) protection and enforcement.

The report is called “Special 301” to signify that it ultimately serves to provide the US administration with legal evidence to activate Section 301 of the Trade Act of 1974 against IPR violations.

In fact, over the past two decades, the Special 301 Report has regularly put China on the Priority Watch List, in particular regard to counterfeit goods and software piracy.

However, in more recent years, technology transfers have emerged as a highly contentious area of international trade policy that governments and multinational corporations can see as both limiting or enabling innovation and investment, according to their different economic circumstances.

The administration of US President Donald Trump shows little doubt on which side of the fence it sits. A recent Presidential Memorandum for the USTR highlighted the importance of keeping trade secrets from China’s hands.

The memorandum indeed claims that Chinese regulations “inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation”.

More specifically, in the words of the 2017 Special 301 Report, China tops the Priority Watch List as it systematically “imposes requirements that US firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market.”

This shows how forced technology transfers are inherently related to the various domestic laws and international treaties regulating foreign investment. In fact, since China’s accession to the World Trade Organization (WTO) in 2001, its commercial and administrative law has been gradually easing the stringent rules that govern foreign invested entities.

Last October there was a major revision of the statutes concerning wholly foreign-owned entities, equity joint ventures and contractual joint ventures, which no longer require the approval China’s Ministry of Commerce, but just a plain registration.

Nevertheless, as usual the devil is in the details, as the Commerce Ministry maintains a catalogue for the Guidance of Foreign Investment Industries with a schedule of encouraged industries. In essence, this is a negative list of sectors and firms denied to foreign investment and ownership.

In business-law terms, the ministerial catalogue restricts foreign firms to those corporate structures and market access requirements that enable the legal transfer of technological know-how to their Chinese partners.

Add to this China’s newly introduced Cybersecurity Law, which imposes security assessments on data transfer overseas in ways that may force IPR disclosures to local firms. Furthermore, effective from June 2017, the Cybersecurity Law restricts enterprises identified as “critical information infrastructure operators” to storing data domestically.

All these issues paint a picture in which the USTR is yet another step closer to taking legal action against China’s technology-transfer tactics. The defensive instrument of choice is crucial to define how the looming Sino-American trade war is going to affect the future of economic globalization.

The USTR can either go multilateral by bringing the claim before the WTO Dispute Settlement Unit, or it can go solo by imposing unilateral restrictions on Chinese goods, services and investment based on the Section 301 investigation.

The multilateral option seems less likely, considering Trump’s notorious change of tack in trade and industrial policy. On the other hand, the unilateral option would certainly be quicker to implement and more to the taste of trade hardliners in Trump’s administration. However, it would certainly spark Chinese commercial retaliations and thus lead to unprecedented geopolitical troubles across the Asia-Pacific region.

On paper, another possible solution is reviving the stalled US-China bilateral investment treaty (BIT), so as to follow the tracks of existing free-trade agreements that include investor-state dispute settlements, such as the North American Free Trade Agreement (NAFTA).

The European Union is also promoting to its major trade partners a multilateral investment court modeled on the WTO dispute-settlement mechanisms.

The China BIT with further integration with the EU project could be the most balanced forum to keep the US-China trade relationship from falling apart and dragging down the world economy in the process, if only it didn’t take years if not decades to set up this kind of mechanism.

However, now the reality is that President Trump is looking for legal sparks to wage a full-blown trade war with China as a sure way to leave a long-lasting legacy from his “America First” foreign-policy agenda.