Key Notes:

  • The United States Trade Representative (USTR) has taken action in an effort to force China to respect international intellectual property (IP) rights by initiating an investigation into China’s alleged IP violations.
  • Any trade restrictions imposed by the United States as a result of the investigation’s findings will almost certainly be challenged by China at the World Trade Organization (WTO), which is likely to result in a showdown that could significantly weaken the organization.

Section 301 of the Trade Act of 1974 provides the United States with the authority to enforce trade agreements, resolve trade disputes and open foreign markets to U.S. goods and services. It is the principal statutory authority under which the United States may impose trade sanctions on foreign countries that either violate trade agreements or engage in other unfair trade practices. When negotiations to remove the offending trade practice fail, the United States may take action to raise import duties on the foreign country’s products as a means to rebalance lost concessions.

For over ten years, China has been placed on the USTR’s “Priority Watch List” of countries with significant intellectual property issues. This new action under Section 301 will allow the USTR to further investigate the allegations and engage in formal consultations with China. If the consultations do not resolve the issues and the violations are believed to violate international agreements – such as the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) – the USTR can then challenge China’s actions at the WTO.

Even if, however, the actions are not found to violate the TRIPS agreement or any other international agreement, Section 301 allows the USTR to act and potentially impose retaliatory measures without WTO approval if an action is found to be unjustifiable and burdens or restricts U.S. commerce. Under Section 301, the USTR’s action is permitted even if it may be inconsistent with U.S. international obligations.

Any U.S. action outside of the WTO dispute settlement process is expected to result in a WTO challenge by China. If the WTO rules in China’s favor – which is likely if the United States imposes trade restrictions on China outside of the WTO process – the United States could be found by the WTO to be violating its obligations under the WTO rules and China could be authorized to retaliate. If this occurs, the United States would either have to revoke the measures or face WTO-approved retaliation by China. The end result could lead to a trade war between the United States and China and/or undermine the WTO’s long-term viability.

This trade enforcement action is reported to be one of several trade actions that the Trump administration may take against China in the coming weeks to address alleged intellectual property violations and the theft of American trade secrets that administration officials stated the president “has identified for decades.” China’s actions in this area were highlighted most recently by USTR in its annual Special 301 report to Congress, released in April 2017. This report stated that the “USTR continues to place China on the Priority Watch List because longstanding and new IP concerns strongly merit attention. China is home to widespread infringing activity, including trade secret theft, rampant online piracy and counterfeiting, and high levels of physical pirated and counterfeit exports to markets around the globe.”

Alleged IP Violations and Impact on U.S. Business

The United States’ dissatisfaction with China’s intellectual property laws and their implementation is not new. China had no patent law until 1985. Under pressure, China has gradually expanded its laws and strengthened the agencies and tribunals that enforce them. A recent study indicates that Chinese courts treat foreign companies fairly in patent disputes, but that the Chinese patent office favors indigenous innovators over foreign applicants in the granting of patents. See de Rassenfosse, Gaétan and Raiteri, Emilio, “Technology Protectionism and the Patent System: Strategic Technologies in China,” July 2016. Trade secret misappropriation and counterfeiting by Chinese entities remain real concerns.

Assuming the Trump administration’s proposed Section 301 action will more effectively pressure China than prior U.S. efforts, one immediate effect could be on two proposed sets of guidelines on the application of competition law to IP, which China plans to finalize later this year. The drafts have been criticized as unfairly protecting Chinese industries and unreasonably requiring U.S. companies to forfeit intellectual property. See the April 20, 2017 Comments (in Chinese and English) of the American Bar Association Sections of Antitrust Law, Intellectual Property Law, And International Law on the Draft Anti-Monopoly Guidelines on Abuse of Intellectual Property Rights of the People's Republic of China and the March 24, 2017 Comments (in Chinese and English) of the American Bar Association Sections of Antitrust Law, Intellectual Property Law, And International Law on the Draft Anti-Unfair Competition Law of the People’s Republic of China. The Trump administration’s Section 301 action could help pressure China to amend its proposals.

Section 301 allows the USTR to impose retaliatory measures without WTO approval if Chinese actions are both unjustifiable and burden or restrict U.S. commerce. China will contend that some of its policies are justified. Like many other countries, China has increased its requirements for the disclosure of ingredients in chemical compositions and other products, arguing that this information is needed to address public health and safety concerns. China has also argued that rights of foreign companies in standard essential patents (SEPs) must be relinquished to allow unfettered use of standards on which Chinese communications and computer technology are based. China may successfully demonstrate that a Section 301 complaint should be rejected on such grounds.

In other technology areas, however, recent Chinese actions appear to constitute illegal protectionism designed to benefit domestic manufacturers at the expense of foreign businesses. These technology areas include information technology, biotechnology, energy, advanced materials and advanced manufacturing. The Trump administration’s proposed Section 301 action is more likely to have an impact in these areas. China has strengthened agencies and tribunals that handle trade secret theft, online piracy and counterfeiting. It has regimens in place for investigating such activity, confiscating infringing materials, shutting down illegal operations and assessing damages and fines. One weakness is the small amount of fines and damages that can be assessed. The administration’s new action may persuade China to further strengthen its IP policies and means for investigation and enforcement. But China has a large, growing economy, and even with the Chinese government’s complete attention to U.S. concerns, it is likely that an undesirable level of infringement and misappropriation by Chinese entities will continue.