In Section 301 Update, USTR Says China Hasn’t ‘Fundamentally Altered’ Unfair Trade Practices

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The Office of the United States Trade Representative (USTR) released an update on its Section 301 investigation into China last week, an update — titled “Update Concerning China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, And Innovation” — which followed the same theme as previous reports.

That theme? China has made some small changes to the U.S.’s liking, but not nearly enough to address U.S. concerns regarding intellectual property theft and investment restrictions, the USTR report explains.

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“We completed this update as part of this Administration’s strengthened monitoring and enforcement effort,” USTR Robert Lighthizer said in a prepared statement. “This update shows that China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”

The USTR launched the Section 301 probe in August 2017 “to determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.” In March, the USTR released an update titled “Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974.”

Using Section 301, the U.S. has already slapped a total of $250 billion in tariffs on U.S. goods, with President Donald Trump also having threatened to impose an addition $257 billion.

The USTR update cites a rise in China’s cyber-enabled theft of U.S. intellectual property, unfair technology transfer rules and discriminatory licensing restrictions, among other points, as evidence that China has not changed its practices. In meetings with Chinese trade officials throughout the year, the Chinese side has failed to adequately address U.S. concerns vis-a-vis the aforementioned issues, the USTR report claims.

“Despite repeated U.S. engagement efforts and international admonishments of its trade technology transfer policies, China did not respond constructively and failed to take any substantive actions to address U.S. concerns,” the report states. “As a result of China’s ongoing failure to respond constructively to U.S. concerns, USTR imposed tariffs on July 6, 2018 and August 23, 2018 on approximately $50 billion of Chinese imports as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property.

“The United States also requested dispute settlement consultations with China in the World Trade Organization (WTO) on March 23, 2018 concerning certain measures pertaining to the licensing of intellectual property rights, and the United States is now pursuing dispute settlement before the WTO on those issues.”

The USTR update went on to add that a 71-page white paper published by the Information Office of China’s State Council in September, which referred to the Section 301 probe as an example of “trade bullyism,” as further evidence of China’s unwillingness to address U.S. concerns (while also noting China’s counter-tariffs in response to the U.S.’s Section 301 tariffs.

“These actions demonstrated that USTR’s initial tariff action was no longer appropriate to obtain the elimination of China’s unfair trade acts, policies, and practices. In addition, the burden or restriction on United States commerce of these acts, policies, and practices continues to increase, including following the one-year investigation period,” the report states. “Accordingly, under direction of the President, USTR imposed additional tariffs on approximately $200 billion of imports from China on September 24, 2018.”

In terms of foreign investment restrictions, the USTR report claims China has made only “incremental” improvements.

“Using foreign ownership restrictions, including in connection with its administrative review and licensing processes, China continues to pressure technology transfer from foreign companies in numerous ways,” the report states. “For example, a September 2018 report by the Wall Street Journal provides case-specific examples of Chinese actions to obtain technology from five major U.S. companies: DuPont, General Electric, Advanced Micro Devices, Huntsman Corp, and Micron Technologies. Several of these companies faced coercive pressure from Chinese officials.”

In terms of outbound investment, the report notes China’s venture capital (VC) investment in the U.S. has served as a mechanism for technology transfer. Per the report, China’s VC investment in the U.S. from January-May 2018 hit $2.4 billion, matching the full-year high set in 2015.

“As this data makes clear, Chinese VC investors are increasingly active in the U.S. VC ecosystem,” the report states. “Analysts estimate that Chinese investors participated in 10-16% of all venture deals in the United States between 2015 and 2017.265 According to Bloomberg data, Chinese VC investors have participated in 151 deals through November 15, 2018, which roughly matches the pace set in 2017 when Chinese investors participated in an all-time high of 167 deals.”

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The full Section 301 report update can be found here.

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