• Tariff rises of 25 percent proposed, including for aerospace, telecoms and machinery sectors.
  • Chinese investment in the U.S. may be limited by reciprocity requirements on treatment of U.S. investment in China.
  • U.S. to file World Trade Organization dispute over Chinese licensing practices.

Yesterday, President Trump issued a memorandum (Memorandum) directing his Administration to take several actions related to the investigation by the Office of U.S. Trade Representative (USTR) into China’s acts, policies, and practices (APPs) related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974 (Section 301). The actions include restrictions on Chinese investment in the United States and the imposition of higher customs duties on imports from China. At the signing ceremony, President Trump called this action “the first of many” against Chinese practices. USTR Ambassador Robert E. Lighthizer echoed the President at a hearing before the Senate Finance Committee today, noting that the Administration “expects to bring additional [actions] in other areas where the [United States does not] have reciprocal response.”

Below, we describe these actions and USTR’s findings in the Section 301 investigation.

Actions

Potential Tariff Increases

President Trump instructed USTR to take action under Section 301 to address APPs of China that are “unreasonable or discriminatory and that burden or restrict U.S. commerce.” Toward this end, the President instructed USTR to publish for public comment a proposed list of products and intended tariff increases (25 percent, according to the White House fact sheet) within 15 days of the Memorandum (that is, by April 6, 2018). An accompanying fact sheet states that the industry sectors subject to the proposed tariffs will include aerospace, information communication technology, and machinery. (This does not mean other sectors will not be targeted, however.) Following the comment period and consultation with appropriate agencies and committees, the President directed USTR to “publish a final list of products and tariff increases, if any, and implement any such tariffs.” Notably, the quoted language seems to leave open the possibility for USTR ultimately to determine not to impose tariff increases.

Investment Restrictions

President Trump also directed the Secretary of Treasury (Secretary) to propose action to address Chinese-directed or facilitated investment in the U.S. in sectors deemed important to the United States. For example, in the submissions made by U.S. commentators in connection with the Section 301 investigation, concerns were raised about Chinese-directed support for mergers and acquisitions in the semiconductor industry. Within 60 days of the Memorandum (by May 21, 2018), the Secretary is required to submit a progress report to the President.

It has been reported that the Trump Administration is considering a reciprocal investment regime under which Chinese foreign investment would be restricted to the extent China restricts U.S. foreign investment. Under the regime, Chinese investors seeking to invest in a sector in the United States would be required to “demonstrate that China allows U.S. investment in a specific sector” before being allowed to invest in that sector. This prospect could present opportunities for engagement with Treasury to demonstrate where such reciprocity exists and how Chinese investment has benefitted the U.S. economy and jobs in the U.S.

World Trade Organization Dispute Settlement

Finally, President Trump directed USTR to pursue a World Trade Organization (WTO) dispute “to address China’s discriminatory licensing practices.” Within 60 days of the Memorandum (by May 21, 2018), USTR is required to submit a progress report to the President. USTR has already submitted a request for consultations with China (the first procedural step in initiating a WTO dispute settlement arbitration) earlier today.

As we discussed in our January 8, 2018 blog post on Section 301, in December 2017, at the 11th WTO Ministerial Conference, the United States, European Union, and Japan issued a joint statement stating that the three Members would work within the WTO “to eliminate unfair competitive conditions” caused by, inter alia, technology transfer requirements. This statement could foreshadow that the EU and Japan may cooperate with the United States in the forthcoming WTO dispute against Chinese licensing practices.

USTR’s Findings

Also yesterday, USTR released a report on its findings in the Section 301 investigation. The Memorandum and accompanying fact sheet highlighted the following findings:

  • China’s actions undermine the value of U.S. investments and technology and weaken the global competitiveness of U.S. firms.

* These actions include foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities. They also include administrative review and licensing procedures to require or pressure technology transfer.

  • China’s actions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer. As a result, U.S. companies seeking to license technologies are effectively required to license on terms that unfairly favor Chinese recipients.

* These limits include substantial restrictions on, and interventions in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms.

  • China directs and unfairly facilitates investments and acquisitions of U.S. companies in order to obtain cutting edge-technologies and generate large-scale technology transfer from U.S. companies to Chinese entities.

* China pursues these actions in prioritized industries, which are industries deemed important by the Chinese government under its industrial plans.

* A Chinese government-backed fund helped Apex Technology Co., a Chinese investment consortium, acquire a U.S. computer printer maker which had previously sued Apex over patent infringement.

  • China conducts and supports cyber intrusions into U.S. companies to access sensitive information and support China’s strategic development goals.

* These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications.

* The actions support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.