Legal Sidebar Tricks of the Trade Section 301 Investigation of Chinese Intellectual Property Practices Concludes Part I Updated March 29 2018 In the latest in a series of international trade-related investigations conducted by the Trump Administration the Office of the U S Trade Representative “USTR” recently concluded its investigation under Section 301 of the Trade Act of 1974 the “Section 301 Investigation” “to determine whether acts policies and practices of the Government of China related to technology transfer intellectual property and innovation are unreasonable or discriminatory and burden or restrict U S commerce ” Thereafter on March 22 2018 President Trump issued a memorandum the “Memorandum” in response to the investigation’s findings directing the USTR 1 to determine whether to increase tariffs on certain goods from China and 2 to pursue dispute settlement before the World Trade Organization “WTO” to address China’s allegedly discriminatory intellectual property licensing practices The Memorandum also directed the Secretary of the Treasury to propose possible investment restrictions in response to China’s alleged systematic investment in and acquisition of U S companies in order to obtain technologies and intellectual property There are several notable legal distinctions between this Section 301 Investigation and other recent traderelated investigations that led to increased tariffs on imports of certain solar energy related products washing machines and steel and aluminum First unlike the prior trade investigations which were not country-specific under the relevant statutes the Section 301 Investigation involved China in particular and any resulting trade measures will apply only to China Second investigations under Section 301 unlike other recently used trade statutes require consultation and negotiation with the country under investigation Here such negotiations are reportedly ongoing with China Third Section 301 investigations are governed by a complex set of statutory provisions that interplay with dispute settlement mechanisms at the international level As one commentator notes Section 301 “marks a point of intersection between the international trade agreements regimes and the domestic trade laws ” Consequently investigations under Section 301 can result in multiyear negotiations much of which occur away from the public eye proceedings before the U S courts and proceedings before dispute settlement tribunals such as the WTO’s Dispute Settlement Body Congressional Research Service https crsreports congress gov LSB10108 CRS INSIGHT Prepared for Members and Committees of Congress Congressional Research Service 2 Part I of this two-part Sidebar describes the legal framework governing Section 301 investigations generally including the domestic statutory framework its relationship to international dispute settlement before the WTO and domestic court challenges to trade measures resulting from Section 301 investigations Part II applies this legal framework to the recently concluded Section 301 Investigation specifically by first describing the USTR’s findings and the President’s directives and then discussing the legal issues that lie ahead For a discussion of the policy considerations in Section 301 investigations and the history of their use with regard to China specifically see this CRS post Legal Framework The complex statutory framework governing Section 301 investigations is based in Section 301 through 310 of the Trade Act of 1974 Section 301 defines two types of executive action—mandatory or discretionary—that can result from Section 301 investigations Under Section 301 a —the “mandatory action” provision—the USTR must take action as specified by the statute subject to certain exceptions if he determines that    “the rights of the United States under any trade agreement are being denied ” or “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 “an act policy or practice of a foreign country is unjustifiable” defined to mean conduct that “is in violation of or inconsistent with the international legal rights of the United States” “and burdens or restricts United States commerce ” Thus the mandatory action provision generally applies in the context of a trade agreement provision or when a foreign country’s conduct violates or is inconsistent with international legal rights which likely are the product of a trade agreement By contrast under Section 301 b —the “discretionary action” provision—the USTR may take certain actions enumerated in the statute if he determines that  “an act policy or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce and action by the United States is appropriate ” The statute further specifies that conduct “is unreasonable if the act policy or practice while not necessarily in violation of or inconsistent with the international legal rights of the United States is otherwise unfair and inequitable ” Thus the discretionary action provision can operate outside of the context of a trade agreement or established “international legal rights ” Conduct is discriminatory under the statute when “any act policy and practice denies national or most-favored-nation treatment to United States goods services or investment ” “Most-favored-nation treatment” is a commitment on the part of trading partners to treat another country’s goods no less favorably than domestic goods or the goods of other trade agreement countries With respect to Section 301 b the statute provides examples of “unreasonable” conduct including examples relevant to the current investigation For example the statute defines as unreasonable any act policy or practice or combination thereof that denies “provision of adequate and effective protection of intellectual property rights notwithstanding the fact that the foreign country may be in compliance with the specific obligations of the Agreement on Trade-Related Aspects of Intellectual Property Rights ” That WTO agreement establishes the minimum standards of protection for and enforcement of intellectual property rights for WTO members Another example the statute defines as “unreasonable” is any act policy or practice or combination thereof that denies “nondiscriminatory market access opportunities for United States persons that rely upon intellectual property protection ” Congressional Research Service 3 If the USTR initiates an investigation Section 303 requires that on the date of initiation the USTR must “request consultations with the foreign country concerned ” Section 303 also requires the USTR to determine whether the Section 301 investigation “involves a trade agreement” and if so the statute directs the USTR to follow the formal dispute settlement process of that agreement if consultations with the other country fail Thus under this statutory framework for purposes of determining whether the mandatory or discretionary action provisions apply and whether formal dispute settlement processes must be followed the USTR must determine as a threshold matter whether the Section 301 investigation involves a trade agreement Neither the statute itself nor case law interpreting the statute appears to provide guidance as to how the USTR is to determine whether an investigation involves a trade agreement Whether falling under the mandatory or discretionary action provisions the actions that the statute authorizes the USTR to take include among others  suspending or withdrawing certain benefits of trade concessions in a trade agreement with the country under investigation  imposing duties or other import restrictions on goods from that country and  entering into binding agreements with the country that commits it to eliminate or phase out the act policy or practice in question Further once an action has been imposed the statute requires the USTR to “monitor the implementation of each measure undertaken” and allows the USTR to modify or terminate such actions under certain circumstances Legal Relationship Between WTO Dispute Settlement and Section 301 After the statute was enacted in 1974 the United States conducted numerous Section 301 investigations to enforce its trade rights Following the establishment in 1995 of the WTO’s dispute settlement procedures under the Understanding on Rules and Procedures Governing the Settlement of Disputes the “Dispute Settlement Understanding” however the United States has primarily relied on the WTO dispute settlement process to enforce its trade rights rather than on Section 301 Accordingly there have been fewer uses of Section 301 investigations since 1995 with the principal use being to enforce trade remedies already authorized by the WTO after formal dispute settlement See these CRS posts for more detail on dispute settlement under trade agreements generally and on dispute settlement before the WTO specifically The Dispute Settlement Understanding commits WTO members to bring trade disputes involving the WTO agreements and against other members to the WTO instead of resorting to unilateral trade-related action As discussed above however Section 301 allows the USTR to implement trade-related measures without following formal international dispute settlement processes if he determines that the conduct in question does not “involve a trade agreement ” This creates what one legal commentator calls a “tension between this domestic statute and the WTO system ” This tension was addressed in 1999 by a WTO dispute settlement panel which examined Section 301 and determined that while it seemingly appeared to violate the Dispute Settlement Understanding by allowing the United States to determine unilaterally whether a trade violation has occurred a 1994 U S Statement of Administrative Action the “Statement” that Congress approved along with the relevant implementing legislation for the WTO agreements alleviated the panel’s concerns Specifically the Statement indicated that the United States would refrain from applying Section 301 in a manner that would violate its WTO obligations indicating that if a Section 301 investigation involves a violation of a WTO agreement the United States is committed to pursuing formal dispute settlement before the WTO And the Statement’s introduction states “that it is the expectation of the Congress that future Administrations will observe and apply the interpretations and commitments set out in this Statement ” Congressional Research Service 4 On the other hand the Statement also provides “Neither section 301 nor the Dispute Settlement Understanding will require the USTR to invoke dispute settlement procedures if the USTR does not consider that a matter involves a WTO Agreement ” In this vein the Statement contemplates that “Section 301 will remain fully available to address unfair practices that do not violate US rights or deny US benefits under the WTO Agreements ” The Statement’s caveat highlights the importance of the USTR’s threshold determination described above as to whether a Section 301 investigation “involves a trade agreement ” While the 1999 WTO panel determined that the Statement indicated that U S challenges to allegedly unfair trade practices involving WTO agreements would be brought to the WTO it did not address the circumstance of a disagreement with a USTR determination that a given Section 301 investigation does not involve a trade agreement and therefore that resort to dispute settlement proceedings is in the USTR’s view unnecessary In other words a foreign country under investigation may disagree as to whether the conduct being investigated during a Section 301 investigation is in fact covered by a trade agreement This unresolved issue could have international legal implications for the current Section 301 Investigation as discussed in Part II of this Sidebar Court Challenges to Section 301 Investigations Because Section 301 investigations became less frequent after the WTO was established there are few recent cases challenging actions taken under the statute However two notable series of cases involving long-running disputes—the Gilda Industries cases involving a dispute between the United States and the European Community and the Almond Brothers cases involving a dispute between the United States and Canada—spawned numerous lawsuits concerning Section 301 investigations The Gilda Industries cases involved a challenge to the United States’ enforcement of trade rights through the imposition of retaliatory tariffs that the WTO authorized after formal dispute settlement The Almond Brothers cases by contrast involved a challenge to certain bilateral agreements the United States and Canada negotiated to resolve Section 301 and other trade investigations Thus both lines of cases involve challenges to the specific measures the USTR took in response to Section 301 investigations Nonetheless several general principles can still be gleaned First it appears settled that “ t he Court of International Trade ha s jurisdiction under 28 U S C § 1581 i to review the USTR actions” resulting from a Section 301 investigation Second once jurisdiction is established there the challenge would be centered on whether the USTR complied with the Administrative Procedure Act “APA” In one of the Almond Brothers cases however the court noted that the APA “precludes review of ‘agency action s that are committed to agency discretion by law ’” and “ a decision is more likely to be committed to an agency’s discretion when it requires ‘a complicated balancing of a number of factors which are peculiarly within its expertise ’” In the context of a legal challenge to an agreement with another country that resulted from a Section 301 investigation the court emphasized that “the USTR has discretion to craft whatever relief it deems necessary to resolve the dispute ” Because “ t he negotiation and determination of the terms of international agreements is a paradigmatic example of ‘a complicated balancing of a number of factors which are peculiarly within the USTR’s expertise ’” the court concluded that determining the terms of a trade agreement to resolve a Section 301 dispute was committed to the discretion of the USTR and therefore not subject to the court’s scrutiny under the APA Moreover although the dispute in the Gilda Industries cases was resolved through formal WTO dispute settlement and not through negotiation of an agreement as in the Almond Brothers cases the court again noted the USTR’s discretion in Section 301 investigations Specifically in one Gilda Industries case the court stated it “affords substantial deference to decisions of the USTR implicating the discretionary authority of the President in matters of foreign relations ” such as the selection of a remedy in response to a Section 301 investigation In other words because Section 301 investigations involve consultations with other countries and other foreign relations-related issues a degree of discretion is afforded to the actions Congressional Research Service 5 the USTR takes The court emphasized that “ i n international trade controversies of this highly discretionary kind—involving the President and foreign affairs—this court and its predecessors have often reiterated the very limited role of reviewing courts ” For a court to intervene “there has to be a clear misconstruction of the governing statute a significant procedural violation or action outside delegated authority ” Thus the case law suggests that the actions the USTR takes in response to a Section 301 investigation will be afforded substantial deference by the courts perhaps to the degree as in the Almond Brothers case of being unreviewable under the APA What remains open to challenge before the courts however are allegations of statutory misinterpretations on the part of the USTR violations of the statute’s procedures actions that exceed the authority delegated to the USTR by statute and similar claims For an examination of how these and other complex legal issues apply to the recently concluded Section 301 Investigation proceed to Part II of this post Author Information Brandon J Murrill Legislative Attorney Disclaimer This document was prepared by the Congressional Research Service CRS CRS serves as nonpartisan shared staff to congressional committees and Members of Congress It operates solely at the behest of and under the direction of Congress Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role CRS Reports as a work of the United States Government are not subject to copyright protection in the United States Any CRS Report may be reproduced and distributed in its entirety without permission from CRS However as a CRS Report may include copyrighted images or material from a third party you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material LSB10108 · VERSION 4 · UPDATED