China’s “Theft” Of Foreign Technology Prompts Unlawful US Response, Experts Say 13/04/2018 by Steven Seidenberg for Intellectual Property Watch 1 Comment Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 20 years. He is based in the greater New York City area and may be reached at firstname.lastname@example.org. This time Donald Trump was correct: China has, for years, unfairly obtained and exploited American intellectual property and technology. But Trump’s response – imposing $50 billion in tariffs annually on a wide variety of Chinese imports – is problematic, experts warn. The tariffs appear to violate World Trade Organization rules, undermine the international rules-based economic order that has served the West well for decades, and threaten to ignite a trade war between the world’s two biggest economies. The Trump administration has a litany of complaints about China’s trade practices, ranging from the export of too many washing machines to the cybertheft of US firms’ technology. And since January, the administration has announced a variety of retaliatory actions, including a quota on imported Chinese washing machines, 25 percent tariffs on imported steel, restrictions on Chinese investment in US technology firms, and a WTO complaint about China’s alleged “discriminatory technology licensing requirements.” One of the biggest US actions to date occurred on 3 April, when the Trump administration announced 25 percent tariffs on approximately $50 billion of annual Chinese imports, covering 1,300 different products. These tariffs, which will not be finalized until after 22 May, are being imposed “in response to China’s policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises,” according to a press release [pdf] from the Office of the US Trade Representative. Too Successful China is not alone in pressing for technology transfer. Many developing countries demand such transfers from foreign firms seeking to do business in their countries. “It is common, going back to at least the 1970s, maybe the 1960s. Developing countries need to catch up, and this is one of the ways they do this,” said Dean Baker, senior economist at the Center for Economic and Policy Research, a left-leaning think tank. But most developing countries, unlike China, are not serious about technology transfer. “A lot of time this is just window dressing. The countries don’t have any mechanisms for providing its natives with expertise in foreign technology,” said Baker. “But China does [have such mechanisms], and that’s one of the reasons for the complaints [about China].” Another reason for the Trump administration’s complaints is that technology transfer has worked. China’s technological expertise is now approaching that of the West, so China’s continuing pressure for technology transfer is becoming more threatening. “Before, US companies could get away with giving out yesterday’s technology, so they were willing to do that. But in the last five to eight years, the Chinese are demanding better technology,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a leading US science and technology think tank. China’s technological goals have been set out in the government’s “Made in China 2025” policy. Adopted as a means to escape the middle-income trap that developing countries often fall into, the policy seeks to encourage local innovation and to replace most of the foreign technology it imports with domestically produced items. If the plan is successful, Chinese companies will occupy the highest parts of global production chains, particularly in ten cutting-edge industries, such as IT, biopharma, and new-energy vehicles. The policy would, from China’s point of view, make the country a serious technological competitor with the West. The Trump administration, however, believes the policy goes much further. “China … brazenly has released this China 2025 plan and basically told the rest of the world, ‘We’re going to dominate every single emerging industry of the future and therefore your economies aren’t going to have any future,’” White House trade adviser Peter Navarro said in a March television interview. In short, the Trump administration believes China’s continued insistence on technology transfer is a threat to US economic and technological leadership – a threat that must be eradicated. The Letter of the Law This perceived threat could not be defanged by the US filing a complaint with the WTO, according to many experts. “Under WTO rules, a country can’t make market access dependent on technology transfer. But China knows the WTO rules … [and] knows how to get around the letter of the law,” said Atkinson. China stays within WTO rules because the country has no statute or regulation that requires technology transfer. China gets what it wants by putting powerful, but informal, pressure on foreign companies to voluntarily share their technology. “It is all done in meetings,” said Atkinson. “Foreign companies are told, ‘If you do X, the central government would look much more favorably on your investment.’ It’s all done with a wink-wink.” Foreign companies that want to do business in the world’s second largest economy have little choice but to play along. “The deal is if you want to invest in China, you have to train a number of our people in your technology. If you don’t want to do that, you’ll have to put your investment somewhere else,” said Baker. Who’s Violating WTO? Because China’s actions may not have violated any WTO rules, the Trump administration is trying to force China to change its ways by acting unilaterally – threatening to impose $50 billion in annual tariffs on imports from China. These tariffs, however, appear to violate WTO rules. The General Agreement on Tariffs and Trade (GATT) Article I requires each signatory nation to grant “most favored nation” treatment to all other signatories. “You must charge everyone equal tariffs,” said Simon Lester, trade policy analyst at the libertarian think-tank, the Cato Institute, and former chair of the Appellate Body of the WTO. The threatened $50 billion tariffs violate this article by imposing tariffs on China, but not on other WTO members, according to Lester. GATT Article II gives effect to an attached schedule of tariff concessions. “Charging tariffs above the scheduled rate would violate Article II,” said Lester. And he notes that the threatened tariffs exceed the scheduled rates. “China said it will challenge the US tariffs before the WTO. If that is done, it is unclear what the US defense would be,” said Lester. “It is unclear why the [$50 billion in] tariffs … would not violate GATT Articles 1 and 2. The administration must have something in mind, but it is unclear what it is. So far, the government has offered no rationale.” Baker concurs with Lester’s analysis. He said, “Trump hasn’t built a case for these tariffs, so if China brought a case before the WTO, that country would almost certainly win.” “This is why China was so desperate to get into the WTO, because it gives them a ‘get out of jail free’ card,” said Atkinson. “Before China’s entry into the WTO, the US could act unilaterally against China. But once China joined the WTO, the US had to treat China like every other member state. If the US wants to bring an action against a particular country [e.g., China], we first have to go to the WTO tribunal and win a case. Only then can we impose retaliatory tariffs.” By ignoring America’s WTO obligations, the Trump administration has handed China a PR coup. China can rightly claim to be a champion of the rule of law and a supporter of the rules-based economic order. The US, meanwhile, appears to be acting as a renegade nation that ignores its treaty obligations and undermines the global economic order. This image, however, is somewhat muddied by China’s response to the $50 billion in tariffs. In addition to challenging these tariffs before the WTO, China has threatened to impose its own countervailing tariffs of $50 billion on US imports. Such countervailing tariffs, if imposed prior to a WTO adjudication, would run afoul of WTO rules – although China might still claim the moral high ground, since its tariffs were a response to the US, which was the first to impose unlawful tariffs. Meanwhile, the Trump administration has doubled down. If China does impose $50 billion in tariffs on US imports, the US has declared it will impose an additional $100 billion in tariffs on Chinese imports. The world might soon see whether Trump was correct to declare “trade wars are good, and easy to win.” Image Credits: Wikimedia Commons Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related Steven Seidenberg may be reached at email@example.com."China’s “Theft” Of Foreign Technology Prompts Unlawful US Response, Experts Say" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.