US Complaints About Technology Transfer In China: Negotiating The Endgame

By Dean A. Pinkert, Partner, Hughes Hubbard

The United States Trade Representative (USTR) has been open about its view of the difficulties faced by US companies who claim – generally anonymously – that they have been forced to transfer technology to Chinese entities: “The fact that China systematically implements its technology transfer regime in informal and indirect ways makes it ‘just as effective [as written requirements], but almost impossible to prosecute.’”[1]  As I explain in this article, I believe such informality is not merely a barrier to prosecutions; it also presents conceptual challenges for US trade negotiators as they attempt to craft effective means to address the concerns of US companies doing business in China.

The Underlying Issue

The Trump Administration has delayed a further increase in tariffs on imports of Chinese goods until March 1, 2019, while the United States and China continue to negotiate to resolve US complaints about Chinese acts, policies, and practices related to technology transfer, intellectual property, and innovation.  High on that list of complaints is what USTR characterized in its March 2018 investigative report under Section 301 of the Trade Act of 1974 as the Chinese regime of forced technology transfer with respect to inbound investment.[2]  For such purposes, USTR defined “technology” broadly to include knowledge and information necessary to produce goods and services, including information protected by patents, copyrights, trade secrets, and other types of intellectual property protection, along with “know-how,” such as production processes, management techniques, etc.[3]

USTR concluded that China uses foreign ownership restrictions to require or pressure US companies to transfer technology to Chinese entities.  It also concluded that China uses “discretionary and non-transparent administrative reviews and licensing processes” as a means to force technology transfer and/or require the disclosure of sensitive technical information.[4]  According to USTR, the broad discretion that enables Chinese authorities to use administrative reviews and licensing processes in this manner flows from vague wording in administrative regulations and uncertainty about the rules applied by agencies at the central, provincial, and municipal levels.[5]

In a follow-up report completed in November 2018, USTR found that foreign ownership restrictions work hand-in-hand in China’s technology transfer regime with other mechanisms, including (1) using local courts to invalidate patents and licensing arrangements, (2) deploying antitrust and other investigators to apply pressure to foreign businesses, and (3) structuring regulatory panels to serve as conduits for the disclosure of foreign industrial secrets to Chinese companies.[6]

Conceptual Challenges

Eliminating explicit, strict foreign ownership restrictions in China is a relatively straightforward matter – they are already being relaxed.[7]  I believe it is more difficult to address concerns about informal practices in China.

Vague wording in administrative regulations, uncertainty about the applicable rules, and the provision of broad discretion to administrative and judicial authorities are by no means unique to China or to the informal implementation of technology transfer policies.  For this reason, a direct attack on the discretion enjoyed by Chinese authorities could backfire and perhaps be used to make arguments against US institutional arrangements.  Moreover, it would probably be ineffective on its own terms, as it is unclear how one might measure and limit administrative and judicial discretion.

In any event, according to USTR, administrative and judicial discretion is exercised in China in the service of national economic planning, and central, provincial, and municipal authorities therefore know how they are expected to interpret and apply the legal instruments at their disposal.  Given this understanding of the situation, one way of addressing US complaints would be for China to embark on a reform effort designed to result in as transparent a decision-making process as possible in which authorities are permitted to operate independently of one another.  Because such reforms would require a very long-term commitment, and, once again, would present measurement difficulties, I do not believe it is an approach that would be acceptable to US negotiators.

Practical Approaches

There are, however, two practical approaches worth considering: (1) a parallel legal regime – perhaps modeled on investment arbitration – for US companies doing business in China (but this might evoke negative historical associations with lost sovereignty on the Chinese side); and (2) a mutually acceptable outcome-based metric, with a defined threshold for success, implemented by a bi-national authority that is tasked with evaluating whether pressure continues to be applied to US businesses in China to transfer their technology to Chinese entities.  Survey data, economic data and analysis, and/or confidential interviews might be used to make this determination on a periodic basis.

Finally, it should not be forgotten that it is not merely the United States that has expressed concerns about technology transfer in China.  Other World Trade Organization members with actual or potential business interests in China might also be included in any agreed resolution of the dispute.

Conclusion

The tone of recent trade negotiations between the United States and China has been good.  As is often the case, however, the details matter, and this is especially true in regard to US concerns about technology transfer in China.  Companies concerned about forced technology transfer are advised to stay tuned for the possibility that US and Chinese negotiators will explore creative approaches in attempting to address those concerns.

Dean Pinkert

Dean A. Pinkert is a partner in Hughes Hubbard’s International Trade practice. He is a former Commissioner of the US International Trade Commission. Dean was nominated by President Bush and confirmed by the US Senate in 2007, and was designated Vice Chairman by President Obama in 2014. Before his appointment, Dean was a senior attorney in the Office of Chief Counsel for Import Administration at the Commerce Department.

[1] Office of the U.S. Trade Representative, Findings of 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 at 21 (March 22, 2018) (citing ITIF report dated Mar. 2017).

[2] See generally, id.

[3] Id. at 6.

[4] Id. at 22.

[5] Id. at 36.

[6] Office of the U.S. Trade Representative, Update Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation at 27 (November 20, 2018).

[7] Id. at 22.

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