Legal Sidebar Tricks of the Trade Section 301 Investigation of Chinese Intellectual Property Practices Concludes Part II Updated March 29 2018 As noted in Part I of this two-part Sidebar 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 the President 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 licensing practices The Memorandum also directed the Secretary of the Treasury to propose possible investment restrictions on China in response to China’s alleged systematic investment in and acquisition of U S companies to obtain technologies and intellectual property While Part I describes the legal framework governing Section 301 investigations generally this part applies this legal framework to this specific Section 301 Investigation providing background on the investigation describing the USTR’s findings and the President’s directives and concluding by addressing what legal issues lie ahead The Section 301 Investigation On August 14 2017 President Trump directed the USTR to “determine whether to investigate any 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 ” The USTR initiated such an investigation pursuant to Section 302 b on August 18 2017 and requested consultations with the Government of China as required by Section 303 a On August 28 2017 China’s Minister of Commerce responded that China opposed the initiation of the Section 301 Investigation As part of its investigation the USTR accepted public comments and convened a public hearing on October 10 2017 The USTR issued the final investigation report on March 22 2018 Congressional Research Service https crsreports congress gov LSB10109 CRS INSIGHT Prepared for Members and Committees of Congress Congressional Research Service 2 The USTR’s Determinations In its notice of initiation the USTR noted it was investigating China’s conduct under Section 301 b As described in detail in Part I this provision governs “discretionary action” under which the USTR is to determine whether 1 “an act policy or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce” and 2 “action by the United States is appropriate ” In addition the initiation notice cites Section 304 a 2 B as furnishing the deadline for this investigation a provision that applies to Section 301 investigations that do not involve trade agreements Moreover in its final investigation report the USTR stated that the “unreasonable” or “discriminatory” conduct provisions of Section 301 b were “most relevant to this investigation ” Thus as a threshold matter it appears the USTR determined that this Section 301 Investigation or at least certain aspects of it did not “involve a trade agreement ” As detailed in Part I the USTR’s apparent determination that at least certain aspects of this Section 301 Investigation do not involve a trade agreement is legally significant because it indicates the USTR’s view that resort to formal dispute settlement procedures is unnecessary and unilateral action to redress some of China’s practices is arguably possible Moreover if the USTR determines that China’s conduct is not covered by a WTO agreement then the United States’ position as stated in the 1994 Statement of Administrative Action that accompanied the relevant implementing legislation for the WTO agreements appears to be that it is unnecessary to bring the instant dispute to the WTO’s Dispute Settlement Body It should be noted however that these issues are not addressed in the USTR’s report As to the USTR’s findings following an analysis of the evidence it received the USTR concluded that certain “acts policies and practices of the Chinese government related to technology transfer intellectual property and innovation are unreasonable or discriminatory and burden or restrict U S commerce ” Specifically the USTR determined that 1 China’s use of foreign ownership restrictions such as joint venture requirements and foreign equity limitations foreign investment restrictions and administrative licensing and approval processes to pressure technology transfers from U S to Chinese companies is unreasonable and burdens or restricts U S commerce 2 China’s use of licensing processes to transfer technologies from U S to Chinese companies on terms that favor Chinese recipients is discriminatory and burdens U S commerce 3 China’s facilitation of systematic investment in and acquisition of U S companies and assets by Chinese entities to obtain technologies and intellectual property thereby generating large-scale technology transfer is unreasonable and burdens U S commerce 4 China’s cyber intrusions into U S computer networks to gain access to valuable business information are unreasonable and burden U S commerce Having made this determination the statute directs that the USTR “shall take all appropriate and feasible action authorized under subsection c of Section 301 subject to the specific direction if any of the President regarding any such action ” The President’s Directives In response to the USTR’s findings the President issued the Memorandum directing three responses to the Section 301 Investigation First Section 1 of the Memorandum directs the USTR to “publish a proposed list of products” from China and “any intended tariff increases within 15 days of the date of this memorandum ” These proposed tariffs would then be subject to a notice-and-comment period and consultations with other agencies and committees after which the USTR “shall publish a final list of products and tariff increases if any and implement any such tariffs ” Second Section 2 of the Congressional Research Service 3 Memorandum directs the USTR to pursue dispute settlement before the WTO with specific regard to the USTR’s second finding concerning China’s allegedly discriminatory licensing process The USTR is to report to the President within sixty days on the progress of this effort Third Section 3 of the Memorandum directs the Secretary of the Treasury to “propose executive branch action to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States ” The Secretary is also to report to the President within sixty days as to progress on this front Legal Issues Going Forward As is evident the Memorandum directs various actions by several actors raising legal questions at both the domestic and international levels As to the proposed tariffs the USTR is reportedly preparing a list of products that will be subject to increased tariffs with a value commensurate with the harm caused to the U S economy resulting from China’s unfair policies estimated to be at least $50 billion per year according to a fact sheet issued by the USTR The White House has issued a fact sheet indicating the tariff increase could be 25% and may target the aerospace information communication technology and machinery industries More certainty regarding the tariff increases however will be gained with the release of the USTR’s tariff list currently due on April 6 2018 Further as noted the proposed tariffs are subject to a notice-and-comment period before being imposed Thus whether tariffs will definitively be imposed following this Section 301 Investigation remains an open question that will not soon be resolved If the proposed tariffs are imposed they could be subject to challenge in court under the Administrative Procedure Act as noted in Part I The tariffs would likely raise international legal questions as well As a unilateral action taken without authorization from the WTO’s Dispute Settlement Body the tariffs could be found to violate certain WTO obligations a finding that could eventually result in retaliatory tariffs on U S exports As discussed in Part I such a violation will likely pivot on whether the Chinese conduct that the United States is attempting to redress unilaterally “involves a trade agreement” if so the United States may be obligated under international trade law to bring the dispute to the WTO under the Dispute Settlement Understanding With regard to the President’s directive related to the filing of the WTO case concerning Chinese licensing practices on March 23 2018 the USTR announced it had requested WTO consultations with China the first step in the WTO dispute settlement process This announcement seemingly indicates that the USTR considers that at least some of the conduct investigated during the Section 301 Investigation “involves a trade agreement” and therefore requires resort to the WTO’s Dispute Settlement Body as discussed in Part I Indeed in its request for consultations the United States has alleged that certain conduct on the part of China is inconsistent with China’s obligations under the Agreement on TradeRelated Aspects of Intellectual Property Rights Whether additional disputes before the WTO will be pursued to challenge other Chinese acts policies or practices examined during the Section 301 Investigation is unclear Finally the legal implications of the Memorandum’s directive to the Secretary of the Treasury regarding investment restrictions on China are the least clear of the three courses of action According to one report “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 ” Such a regime could be subject to challenge if it runs afoul of any of the WTO agreements such as the Agreement on TradeRelated Investment Measures However the United States and China could also enter into a mutually acceptable bilateral agreement to avoid further disputes The details of the activities and negotiations related to this directive will likely be away from the public eye therefore it is difficult to anticipate what if any action will result and what the legal implications of those actions will be Congressional Research Service 4 Some Members of Congress are reportedly closely monitoring the actions that will be taken in response to the Section 301 Investigation particularly the possible imposition of tariffs All such resulting measures however could be affected or superseded by ongoing negotiations between the United States and China And as discussed in Part I any resulting action could be subject to challenge in court While it is unclear what concrete actions will eventually result from the USTR’s findings in this Section 301 Investigation it is clear that activity related to the investigation will continue for some time to come at both the domestic level through the tariff proposal process and the international level through the WTO dispute 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 LSB10109 · VERSION 3 · UPDATED