November 28, 2018

USTR Issues Updated Section 301 Report on China

On November 20, 2018, the United States Trade Representative (USTR) issued an updated report concerning China's acts, policies, and practices related to technology transfer, intellectual property, and innovation. The updated report is part of the Trump administration's enforcement efforts against China, which, over the past year, have yielded additional tariffs of 10% to 25% on many Chinese-origin imports, pursuant to Section 301 of the Trade Act of 1974. USTR's updated report comes just in advance of the G20 talks scheduled for the end of this month in Buenos Aires, where the United States and China are expected to discuss trade relations between the two countries. A dinner for President Trump and his Chinese counterpart, President Xi Jinping, is planned for Saturday, December 1.

Overall, USTR concludes that China has not altered its acts, policies, and practices, and, in fact, appears to have taken further unreasonable actions in recent months. To support that conclusion, USTR focuses on four key points in the updated report, as summarized below:

  1. China's foreign ownership restrictions continue. Since the publication of USTR's original Section 301 Report in March, USTR acknowledges that China has taken some actions to remove or relax certain foreign ownership restrictions, but USTR notes that such actions have been taken in sectors where China already has an internal reason for inviting more foreign participation or where market conditions already favor Chinese companies. As a result, USTR concludes that, despite the relaxation of some foreign ownership restrictions and other incremental changes, the Chinese government has persisted in using foreign investment restrictions to require or pressure the transfer of technology from U.S. companies to Chinese entities.
  2. China's policy of illegally obtaining sensitive information continues. Intellectual property, technical data, negotiating positions, and sensitive and proprietary internal business communications continue to be illegally obtained by China from U.S. companies, and from companies in Canada, Australia, Japan, the European Union, and South Korea, according to USTR's findings. In fact, as reported, cyber-enabled theft against the United States has increased in frequency and sophistication since the issuance of the USTR's initial findings in March. Chinese state actors have improved their methods of infiltration and concealment by using tools that leave few, if any, unique traces, making attribution more difficult.
  3. China's "Made in China 2025" policy continues. China continues to encourage and facilitate ongoing direct and unfair systematic investment in, and acquisition of, U.S. companies and assets by Chinese entities, thereby allowing China to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer. Chinese outbound investment is increasingly focused on venture capital investment in U.S. technology centers such as Silicon Valley, with Chinese investments reaching record levels in 2018. Notably, stricter reforms to oversight by the Committee on Foreign Investment in the United States (CFIUS) by means of the Foreign Risk Review Modernization Act of 2018 (FIRRMA) were recently adopted to address these very concerns.
  4. China's discriminatory licensing restrictions continue. China maintains policies that interfere with the ability of foreign technology holders to set market-based terms in licensing and other technology-related contracts, and deny foreign patent holders basic patent rights to stop a Chinese entity from using technology after a licensing contract ends. The United States intends to repeat a request to establish a dispute settlement panel at the World Trade Organization (WTO) to discuss these policies, despite the fact that China blocked the first U.S. request for a panel on this issue.

Currently, additional tariffs of 25% are in place on two tranches of Chinese imports with a combined annual trade value of $50 billion. Additional tariffs of 10% are also imposed on a third tranche of $200 billion in Chinese goods, with those tariffs set to increase to 25% on January 1, 2019, absent intervention by President Trump. Moreover, the looming specter of additional tariffs on a fourth tranche, which could cover an additional $260 billion in Chinese goods – effectively all or nearly all remaining imports from China into the United States – is also under consideration by the administration.

This week President Trump signaled that he is prepared to move quickly and impose tariffs against this fourth tranche if he is not satisfied with his discussions with President Xi. These comments, along with the concurrent release of the updated report from USTR, are intended to increase pressure on China to make substantive changes to its trade policies and practices. Indeed, the outcome of their discussions at the G20 summit may well set the tone for Sino-U.S. trade relations in the new year.

We continue to monitor developments in connection with the Section 301 investigation and trade relations with China. If you have questions regarding how this ongoing trade dispute may affect your business, please contact Venable's International Trade and Customs Group for advice and guidance.