On March 22, President Trump signed a memorandum related to China's trade practices that could have significant, wide-ranging consequences for US and global businesses. A copy of the memorandum may be viewed here.
The memorandum was issued following an investigation and report of the United States Trade Representative (USTR) under Section 301 of the Trade Act of 1974, a provision used rarely since the inception of the WTO in 1995. This is the first new Section 301 investigation since 2001.
In this case, the USTR investigation sought to determine whether China's laws, policies, practices, or actions are unreasonable or discriminatory and harm American intellectual property rights, innovation, or technology development. The USTR report, also issued on March 22, made affirmative findings of unreasonable and discriminatory practices that burden and restrict US commerce. The report may be viewed here.
The USTR's Four Findings
The president has directed the USTR to take steps based on the agency's findings, set forth in the presidential memorandum as follows:
"First, China uses 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. China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms."
"Second, China imposes substantial restrictions on, and intervenes in, U.S. firms' investments and activities, including through restrictions on technology licensing terms. These restrictions 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 must do so on terms that unfairly favor Chinese recipients."
"Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans."
"Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies. 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, and they also support China's strategic development goals, including its science and technology advancement, military modernization, and economic development."
President's Directive—Possible Tariffs, WTO Challenge, Investment Restrictions
Based on the USTR's findings, the president has directed the USTR to:
(i) Publish a proposed list of products from China that may be subject to increased tariffs and the amount of the tariff increases, by Friday, 6 April 2018, followed by a notice and comment period; and
(ii) Pursue WTO challenges to China's "discriminatory licensing practices" with a progress report to the president by 21 May 2018.
The president also directed the Secretary of the Treasury to propose appropriate actions to "address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States" and to report on progress by 21 May 2018.
It is being widely-reported that the list of products to be targeted with increased duties represents approximately USD 60 billion in Chinese imports and impacts a range of industries, including high tech products, consumer electronics, apparel, and footwear. The draft list is reported to include approximately 1,300 tariff lines. Once published, the public will have an opportunity to provide comments on the USTR's proposal. Any duties ultimately imposed would be in addition to any other duties currently payable (eg, normal duties, AD/CVD).
In the meantime, the USTR moved swiftly and on March 23 submitted to the WTO a request for consultation with the Chinese government concerning Chinese laws and regulations concerning the protection of intellectual property rights.
Changes to Foreign Investment Rules
President Trump directed Treasury Secretary Steve Mnuchin to develop an investment regime "to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States." This new regime will be in addition to the national security-focused investment screening conducted by Committee on Foreign Investment in the United States (CFIUS). It remains unclear what the scope and structure of this new investment regime will be. For example, it could exclude Chinese investment from certain sectors (perhaps mirroring Made in China 2025 priorities), or create reciprocity conditionality, which could be challenging given the often informal nature of the Chinese system where guidelines may be set forth in unofficial documents. In any event, it appears likely that the new regime will be based the on the International Emergency Economic Powers Act (IEEPA) of 1977, the same legislation currently supporting US export controls and a number of sanctions. IEEPA gives the President broad authority to regulate commerce after declaring a national emergency in response to any unusual and extraordinary threat to the US which has a foreign source.
Finally, it is expected that China will impose retaliatory measures on articles imported from the United States in response to the president's announcement. It is expected that a range of US exports will be impacted, but most notably, agricultural exports.
We will continue to monitor this matter and provide updates on related developments. In the meantime, if you would like to discuss these issues further, Baker McKenzie has a deeply experienced multi-jurisdictional international trade team advising clients on this matter, with the ability to quickly implement related measures in the United States and throughout the world. Please contact one of the attorneys listed below.