United States Trade Representative (“USTR”) Robert E. Lighthizer launched an investigation under Section 301 of the Trade Act of 1974 (“Section 301”) into acts, policies, and practices of the Chinese government as they relate to “technology transfer, intellectual property [IP], and innovation.” The August 18 announcement of the investigation came just days after President Donald Trump signed a memorandum directing the USTR to consider whether to launch an investigation of China’s IP laws and practices that “may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation.”

While Section 301 was a frequently used tool between the 1970s and 1990s (including when Ambassador Lighthizer was Deputy USTR during the 198os), the number of such investigations declined significantly after the World Trade Organization (WTO) dispute settlement system was established. Use of Section 301, however, is consistent with this Administration’s apparent willingness to use a broader range of trade tools to more aggressively combat potential unfair trade practices.

Section 301 allows—and, in certain circumstances, requires—the USTR to investigate and take unilateral retaliatory action in response to certain trade-related harms. The USTR must take appropriate action if the rights or benefits of the United States under any trade agreement are denied, violated, or otherwise harmed, or if its international legal rights are infringed in a way that burdens or restricts U.S. commerce. The USTR may take action at his or her discretion if an act, policy, or practice is unreasonable or discriminatory and burdens or restricts U.S. commerce. Among other things, a Section 301 action may be taken if a foreign country denies adequate and effective intellectual property protection or fair and equitable market opportunities, even if its behavior is consistent with its obligations under the World Trade Organization’s (“WTO”) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).

The Federal Register notice launching the investigation highlights concerns that the Chinese government uses the transfer of foreign technology and intellectual property to advance its industrial policy goals. The USTR investigation will first examine acts, policies, and practices of the Chinese government that fall into the following four categories:

  1. The use of “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;”
  2. Acts, policies, and practices that “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;”
  3. Direction and/or unfair facilitation of “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;” and
  4. Conduct or support of “unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information” (as well as the harm they may cause to U.S. companies and the competitive advantages they may bring to Chinese companies).

Beyond the categories enumerated above, which are focused on technology/IP transfer and cyber-theft, the USTR notice also invites submissions of “information on other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation described in the President’s Memorandum,” leaving open the possibility for the investigation to widen. The announced scope of the investigation highlights the discretionary factors to be considered under the statute, indicating that USTR is not focused solely on actual violations of China’s obligations under international trade law.

Consistent with the statute, the notice provides that USTR has 12 months to make a determination as to whether action is warranted. If it is determined that action is warranted, USTR may consider a broad range of retaliatory tools, including the withdrawal of trade concessions, the imposition of duties or other import duties, and “all other appropriate and feasible action within the power of the President that the President may direct the Trade Representative to take…to enforce such rights or to obtain the elimination of such act, policy, or practice…[with actions that may be taken being] 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.” Retaliatory actions may be targeted at industries other than those directly linked to the identified harm. USTR also has the discretion to come to an agreement with the foreign country’s government to eliminate or obtain compensation for the identified harm. As required by law, USTR has requested formal consultations with the Chinese government regarding the issues under investigation.

The behavior targeted by this Section 301 investigation reflects concerns of the international business community in China. For instance, 43 percent of companies responding to AmCham China’s annual Business Climate Survey in 2017 reported that reducing the need to engage in technology transfer would have at least a somewhat significant impact on increasing their investment levels in China. These companies may find this investigation to be an opportunity to advance their specific concerns. Meanwhile, Chinese companies that may be at risk for retaliatory action under Section 301, and U.S. companies potentially vulnerable to counter-retaliation by Chinese authorities, should carefully monitor the situation.

The Chinese government has expressed its concerns about the investigation. Suggesting that the United States is sending the wrong signal to the international community, a statement from the Ministry of Commerce asserts, “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.” While launching an investigation of China’s unfair trade practices is not, in and of itself, inconsistent with U.S. WTO obligations, imposition of some—though not all—of the retaliatory measures authorized under U.S. law could potentially violate WTO rules. China’s statements indicate that should the U.S. investigation lead to unilateral retaliatory action, China will respond in various ways, including by considering a challenge to such measures at the WTO.

The USTR notice calls for written comments by interested persons to be submitted by September 28. The interagency Section 301 Committee, which is chaired by the USTR, is scheduled to hold a hearing in Washington, D.C., on October 10. Requests to appear at the hearing are also due on September 28.