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USTR Launches Section 301 Probe Against Mainland China

The Office of the U.S. Trade Representative self-initiated on 18 August a Section 301 investigation pursuant to Section 302(b)(1)(A) of the Trade Act of 1974 into mainland China’s acts, policies and practices related to technology transfer, intellectual property and innovation. While the practices examined will relate to specific intellectual property transfers and related issues, any eventual relief would almost certainly be imposed on a broader basis and affect a range of mainland Chinese products.

The term "Section 301" is commonly used to include Sections 301-309 of the Trade Act of 1974. This tool is arguably the most potent weapon in the U.S. trade remedy arsenal. Section 301 requires USTR to attempt to open foreign markets to U.S. exports. There are two ways to commence a Section 301 action: (i) under Section 301(a) any enterprise, trade association, union, group of workers or person with a significant economic stake that is affected by a foreign government’s act, policy or practice may petition USTR to investigate that government’s measure; and (ii) under Section 301(b) USTR or the president may self-initiate an investigation after first having consulted with the appropriate advisory committees. The type of case most likely to prompt action involves a governmental practice that is directly prohibited by an international trade agreement. In this proceeding, USTR self-initiated the action at the direction of the president.

USTR will now evaluate whether the acts, policies and practices at issue are unreasonable or discriminatory and burden or restrict U.S. commerce, and are therefore actionable under Section 301(b) of the Trade Act. Unreasonable actions are those that, while not necessarily in violation of or inconsistent with the international legal rights of the United States, are otherwise unfair and inequitable. USTR has requested bi-lateral consultations with mainland China concerning the issues under investigation and will normally determine within 12 months from the date of initiation (estimated to be by 17 August 2018) whether any actionable acts, policies or practices exist, and if that determination is affirmative, what action, if any, the United States should take.

According to the notice of initiation, USTR intends to conduct its investigation and make a determination pursuant to Section 304(a)(2)(B) of the Trade Act, which is a provision used for proceedings not involving a trade agreement. Unlike Section 304(a)(2)(A), which is normally used for proceedings involving a trade agreement (including a multi-lateral agreement), Section 304(a)(2)(B) does not set a specific deadline to wrap up consultations with mainland China (other than the general deadline to complete the investigation) nor does it specifically require the United States to pursue formal dispute settlement proceedings under a trade agreement (such as the WTO dispute settlement mechanism). It appears the Trump administration may have deliberately elected to make its determination under Section 304(a)(2)(B) in an attempt to bypass the WTO dispute settlement process.

Comments in connection with this investigation must be submitted to USTR by 28 September and a hearing will be held on 10 October, with rebuttal or final comments due by 20 October. These initial comments and hearing will focus on the specific practices in mainland China that are purportedly negatively impacting U.S. companies. If relief is determined to be appropriate, and if this investigation follows normal procedures, a second set of comments will be sought with respect to the type of relief to be granted.

USTR states that this investigation will initially consider the following specific types of conduct.

  • The mainland Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements and other mechanisms, to regulate or intervene in U.S. companies’ operations in mainland China, in order to require or pressure the transfer of technologies and intellectual property to mainland Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, that are applied in a selective and non-transparent manner by mainland Chinese government officials to pressure technology transfer.
  • The mainland Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licencing and other technology-related negotiations with mainland Chinese companies and undermine U.S. companies’ control over their technology in mainland China.
  • The mainland Chinese government reportedly directs and/or unfairly facilitates the systematic investment in and/or acquisition of U.S. companies and assets by mainland Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by mainland Chinese government industrial plans.
  • Whether the mainland Chinese government is conducting or supporting unauthorised intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to mainland Chinese companies or commercial sectors.

However, interested parties may also submit for consideration information on other mainland Chinese acts, policies and practices relating to technology transfer, intellectual property and innovation that might be included in this investigation and/or addressed through other applicable mechanisms.

Relief under Section 301 is broad in nature and may not be limited to the specific industry against which the action is brought. Rather, it typically includes other related sectors as a means of pressuring the targeted industry. For example, in the U.S.-EU beef hormone dispute the United States obtained relief from European restrictions on imports of beef containing certain hormones by imposing retaliatory duties on chocolate, water, tomatoes, certain cheeses and similar products. Relief will often be imposed on tangentially related products in sectors successfully targeted by U.S. manufacturers.

Specific types of retaliatory action under Section 301 include (i) suspension or withdrawal of trade agreement concessions, (ii) imposition of duties or other import restrictions, (iii) imposition of fees or restrictions concerning services, and (iv) entry into agreements with the subject country to eliminate the unacceptable practice or provide compensatory benefits for the United States. USTR is authorised to take action against any goods or economic sector without regard to whether such goods or economic sector were involved in the targeted act, policy or practice. The agency must give preference to the imposition of duties over other import restrictions and, if an import restriction is imposed, it must consider substituting on an incremental basis an equivalent duty for such other import restriction.

Should USTR issue a final affirmative determination in this case, any proposed remedies would normally have to be implemented within 30 days of such determination. Implementation may be delayed by up to 180 days if such a delay is requested by a majority of the representatives of the domestic industry that would benefit from the action, or if USTR determines substantial progress is being made or that a delay is necessary or desirable to obtain U.S. rights or a satisfactory solution with respect to the targeted acts, policies or practices.

It is difficult to predict with any degree of certainty whether any retaliatory action will eventually be pursued against mainland China, as well as the form and magnitude of any such action. Importantly, if President Trump perceives that Beijing is not doing enough to address the threat posed by North Korea he could conceivably adopt a tougher stance on trade with mainland China – including by imposing Section 301 remedies – despite the expected opposition of the moderate wing of the White House.

Retaliatory action terminates automatically after four years if neither the petitioner nor any representative from the affected domestic industry that benefits from the action requests a continuation. This request must be submitted in writing at least 60 days before the automatic termination date, and USTR must consider whether the action has achieved its intended objectives and evaluate its effects on the U.S. economy.

There have been more than 120 cases initiated under Section 301 since its enactment in 1974. Most cases have been resolved through trade agreements and only a small number have resulted in trade sanctions. The most recent case involving mainland China was filed in September 2010 with respect to a range of mainland Chinese policies in the renewable energy sector, but that proceeding did not result in any sanctions. It is worth mentioning that, in contrast to the proceeding currently underway, USTR explicitly sought to determine in the renewable energy sector probe whether the targeted acts, policies and practices denied any U.S. rights or benefits under the GATT 1994, the Agreement on Subsidies and Countervailing Measures, and mainland China’s protocol of accession to the WTO.

The U.S. International Trade Commission indicates in its most recent annual report on the operation of the U.S. trade agreements programme that in 2016 there was a single on-going Section 301 investigation, involving various meat hormone directives issued by the EU. The United States instituted this proceeding in 1987, successfully challenged the targeted restrictions at the WTO during the 1990s, and imposed additional duties on certain products in 1999 when the EU failed to lift the restrictions. In 2012, the United States and the EU signed a provisional settlement and the additional duties were rescinded. However, in December 2016 representatives of the U.S. beef industry filed a request with USTR asking that the additional duties be reinstated.

According to press reports, the mainland Chinese government has vowed to use “all means necessary” to defend the mainland and mainland Chinese companies from the current Section 301 probe. Mainland China’s Ministry of Commerce has reportedly described the investigation as “irresponsible,” “protectionist” and ignorant of WTO rules. Gao Feng, a spokesman for the ministry, ostensibly referred to the move as a “violation” of the international trade system.

The response from the U.S. business community has been relatively muted so far, although several associations have commented on the 14 August executive memorandum instructing USTR to initiate the Section 301 proceeding. On 14 August, the National Association of Manufacturers highlighted two tweets by NAM President and CEO Jay Timmons stating that mainland China’s intellectual property practices hurt the U.S. manufacturing sector and expressing NAM’s willingness to work with the administration to protect U.S. intellectual property. The U.S. Chamber of Commerce, meanwhile, indicated on 14 August that the executive memorandum “is an opportunity” for the U.S. government to examine serious concerns regarding a range of mainland Chinese government policies and practices and consider a “prudent path forward.” The association also urged the two sides to “work together to resolve these concerns” in light of the “critical” importance of the bi-lateral relationship.

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