On August 14, 2017, President Donald Trump instructed the U.S. Trade Representative (USTR) to determine whether to initiate an investigation under Section 301 of the Trade Act of 1974 “of China’s laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.” USTR initiated the investigation on Friday, August 18.
Under the statute, USTR must complete the investigation within one year. If USTR determines that a Chinese act, policy or practice is “unreasonable or discriminatory and burdens or restricts United States commerce,” the USTR will decide whether “action by the United States is appropriate.” Such action might include the negotiation of an agreement with China, the imposition of new restrictions on Chinese goods and services or “other appropriate and feasible action within the power of the President that the President may direct the Trade Representative to take . . . to obtain the elimination of that act, policy, or practice.”
USTR will accept comments from interested parties until September 28. USTR has scheduled a hearing for October 10. Posthearing rebuttal comments are due on October 20. USTR did not allege that China has breached its obligations under World Trade Organization (WTO) agreements. While USTR is not required to initiate a Section 301 investigation to initiate WTO dispute settlement and may initiate WTO proceedings at any time, any U.S. decision to initiate WTO dispute settlement against China may be informed by the results of the Section 301 investigation.
Practices Under Investigation
USTR requested comments on the following four areas of concern:
- “[T]he Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.”
- “[T]he Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non-market terms in licensing and technology contracts.”
- “[T]he Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.”
- “[T]he investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.”
In addition, USTR invited interested parties to comment on “other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation described in the President’s Memorandum that might be included in this investigation, and/or might be addressed through other applicable mechanisms.”
Any comments should address “[t]he nature and level of burden or restriction on U.S. commerce caused by the applicable acts, policies and practices of the Government of China, and/or any economic assessment of that burden or restriction” and “whether actionable conduct exists under section 301(b) and what action, if any, should be taken."
Background on Section 301
There are two types of Section 301 investigations — generally referred to as “mandatory” and “discretionary.”
“Mandatory” investigations focus on whether (a) “the rights of the United States under any trade agreement are being denied” or (b) (i) “an act, policy, or practice of a foreign country violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any trade agreement” or (ii) “is unjustifiable and burdens or restricts United States commerce.” If USTR were to reach an affirmative determination with respect to these matters, it is required to take action, except in certain limited circumstances, such as where the WTO Dispute Settlement Body has adopted a report or ruling that the country has not violated the WTO agreements or where any action would have a disproportionate adverse impact on the U.S. economy. ”Discretionary” investigations examine whether “an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce.” The Section 301 investigation USTR initiated against China is of this second type. If USTR were to reach an affirmative determination at the end of the investigation, it would not be required to take action but would instead decide whether action is appropriate.
Actions USTR might take include
- negotiating an agreement with China
- imposing duties on imports of Chinese goods
- imposing fees and restrictions on Chinese services restricting the terms and conditions of, or denying, federal service sector authorizations pending, or applications for which were or are submitted, on or after August 18 1
The President may also direct USTR to take “all other appropriate and feasible action within the power of the President that the President may direct the Trade Representative to take . . .”
The statute states that “[a]ctions may be taken that are within the power of the President with respect to trade in any goods or services, or with respect to any other area of pertinent relations with the foreign country.” Any action need not be targeted at the same type of goods or economic sector that were implicated by the foreign country’s own actions that gave rise to the Section 301 investigation.
After the entry into force of the WTO agreements in January 1995, USTR rarely resorted to Section 301 as an independent enforcement tool outside the scope of WTO dispute settlement proceedings. Otherwise, USTR generally avoided using Section 301 because, in most cases, the actions contemplated in the statute would violate U.S. trade agreement obligations, including its WTO obligations. For example, in most cases, raising tariffs on imports, or imposing fees or restrictions on services, of a single country would violate U.S. obligations to ensure most-favored-nation treatment to the goods and services of other WTO members.
In its notice of initiation, USTR did not indicate whether — in the event it makes an affirmative determination — it intends to raise tariffs on Chinese goods or impose fees or restrictions on Chinese services. It also did not indicate whether it believes such actions would be consistent with U.S. WTO obligations or whether it would feel constrained by such obligations in the event USTR determined action were appropriate. USTR has also not indicated whether it intends to seek to negotiate an agreement with China.
After President Trump instructed USTR to determine whether to undertake a Section 301 investigation, China’s Ministry of Commerce issued a statement indicating that if the United States takes action that “disrespects multilateral trade rules, China will not sit idle but [will] take necessary measures to safeguard our legitimate rights."