On August 18, 2017, US Trade Representative Robert Lighthizer formally initiated an investigation of China under Section 301 of the Trade Act of 1974, as amended. According to the announcement, the investigation will seek 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 US commerce.

The announcement follows President Donald Trump’s memorandum of August 14, 2017, instructing the US Trade Representative (“USTR”) to consider initiating an investigation. The president’s memorandum emphasized that “the United States is a world leader in research-and-development-intensive, high-technology goods,” and that “violations of intellectual property rights and other unfair technology transfers potentially threaten United States firms by undermining their ability to compete fairly in the global market.”

Section 301gives USTR broad authority to respond to a foreign country’s unfair trade practices. If USTR makes an affirmative determination of actionable conduct, it has the power to take all appropriate and reasonable action to obtain the elimination of the act, policy or practice, subject to the direction of the president, if any.

The statute includes authorization to take any actions that are within the president’s power with respect to trade and goods or services or any other area of pertinent relations with the foreign country. Such measures may include, for example, allowing the United States to impose unilateral duties on foreign countries engaged in unfair trading practices.

The United States has rarely imposed unilateral trade sanctions under Section 301 since the World Trade Organization (“WTO”) began in the 1990s. Administration officials have pointed out that there are “a wide variety of potential responses” to an adverse finding against China in a Section 301 investigation, including the possibility of a negotiated settlement.

As outlined in USTR’s notice, the issues to be investigated under Section 301 include:

  • China’s use of a “variety of tools” to “require or pressure the transfer of technologies and intellectual property to Chinese companies.” The notice mentions administrative approval processes, joint ventures, foreign equity limitations and divergent rules between foreign and domestic companies as part of this concern.
  • Chinese government policies that “deprive US companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies.” The announcement cites China’s Regulations on Technology Import and Export Administration that sets terms for ownership of imported technology.
  • Chinese government assistance to Chinese companies seeking to acquire US companies for the purpose of technology transfer.
  • Whether the Chinese government is supporting hacking of US commercial computer networks to access IP or confidential business information for commercial gain.

Shortly following the August 18 announcement, the Chinese government expressed “strong disapproval” of the 301 investigation. A Ministry of Commerce statement said that “the United States’ disregard of World Trade Organization rules and use of domestic law to initiate a trade investigation against China is irresponsible, and its criticism of China is not objective.”

Once an investigation under Section 301 is initiated without using the dispute settlement mechanism under a trade agreement, it must be completed within one year, if not even sooner. According to USTR’s announcement, initial written comments regarding the investigation are to be submitted by September 28, 2017. The Section 301 Committee will convene a public hearing at the US International Trade Commission on October 10, 2017. The deadline for submission of post-hearing rebuttal comments is October 20, 2017.

The notice further states that comments may address the acts, policies and practices of China relating to technology transfer, intellectual property and innovation as described in the president’s memorandum and USTR’s announcement; the nature and level of burden or restriction on US commerce caused by those practices and any economic assessment of that burden or restriction; whether actionable conduct exists under Section 301; and what action, if any, should be taken as a result of the investigation.

USTR’s announcement is significant and will be closely watched because Section 301 has not been used in a unilateral manner in recent years, except when a country is designated as a priority foreign country in the annual Special Section 301 Report. That is not the case with the new investigation regarding China. The most recent pure domestic investigation that did not involve a country designated in a Special Section 301 Report was a 1997 probe into Korean barriers to auto imports. Section 301 investigations were conducted more frequently during the Reagan administration, before the United States agreed in the mid-1990s to settle disputes through the WTO dispute settlement system.