Trump authorises inquiry for investigation into China IP practices: What’s next?

President Trump has authorised an inquiry into China’s alleged theft of the intellectual property of US companies. While some believe this to be Trump’s way of forcing China to increase pressure against North Korea to stop developing nuclear weapons, others think Trump’s concern about how IP theft is affecting US businesses is genuine.

Lawyers, academics and business associations told Asialaw that enforcement issues are the crux of the problem, but the situation is improving, and Trump’s move may put more scrutiny on IP enforcement in China.

In announcing the inquiry on August 14, Trump gave US trade representative Robert Lighthizer a year to advise him if whether the US should launch a formal investigation into China’s policies. The US administration estimates IP theft of US companies by China to be as much as $600 billion. The Office of the US Trade Representative (USTR) has retained China on the priority watch list in its annual Special 301 Report on IP Rights, highlighting IP concerns such as “coercive technology transfer requirements, structural impediments to effective IP enforcement, and widespread infringing activity-including trade secret theft, rampant online piracy and counterfeiting, and high levels of physical pirated and counterfeit exports”.

"With the increasingly interwoven interests between China and the United States, a trade war will lead nowhere and neither side will win," said Chinese Foreign Ministry spokesperson Hua Chunying, according to a Xinhua news article. “China has always attached importance to protecting IPR by formulating laws and regulations, cracking down on violations and raising public awareness of IPR.”

“It’s seems more of a political measure and nothing substantive would happen, plus it will take some time for a formal investigation, after which the US will engage China in negotiations or dialogue,” says Eugene Low, partner at Hogan Lovells in Hong Kong. “I don’t expect a knee-jerk reaction coming from China and most likely it will be business as usual for now.”

IP enforcement still key

IP practitioners observe that China already has strengthened its laws but the issue is with enforcement. “China’s IP courts have proven to be thoroughly professional, but of course local patriotism remains challenging in second and third tier cities where an ‘away game’ is of course harder to win than a ‘home game’,” says Elliot Papageorgiou, partner at Clyde & Co in China. “Suzhou, Hangzhou, Nanjing, Chongqing and Qingdao have seen the creation of a more level playing field for foreign litigants.”

The situation is not completely negative in China. Low notes the establishment of IP courts and more robust data being used by courts, as well as trends towards higher damages and tougher interim injunctions.

Papagerogiou believes the US may want China to rethink how it deals with onshore IP, for example companies requiring high and new technology enterprises (HNTE) status to secure a tax reduction. Certified HNTEs qualify in China for a reduced corporate income tax rate of 15% instead of the standard 25%. In 2016, the HNTE qualification requirements relating to local IP ownership were tightened so that  licensing in technology would no longer suffice and revised provisions stipulated that China “shall own IP rights of key technologies which show core support to their main products/services gained through independent research and development, transfer, donation or acquisition”. Tendering processes that require foreign companies to form joint ventures with local partners are another challenging area from the perspective of potential unintended technology transfer.

China also has a whole string of draft IP laws, including the Anti-Unfair Competition Law, Patent Law, E-Commerce Law and Copyright Law but no timeline yet for implementation.

 A US business view

The American Chamber of Commerce of China says IP enforcement in China has steadily improved, in part because Chinese companies now want their IP protected, both in China and overseas. However, the level of IP protection in China falls far short of western standards. In the AmCham Shanghai 2017 China Business Report, a survey of 426 companies, 51% of respondents said that inadequate IPR protection limits investment in research and development.

“The investigation’s impact may help focus the Chinese government’s mind on the issue of IP protection, but China’s grand industrial policies are also partly built on the idea that western companies will part with their best technology in exchange for market access as they seek to participate in China’s move up the industrial value chain,” says Kenneth Jarrett, President of AmCham Shanghai.

He adds: “However, if the European Union and other countries follow America’s lead, China may need to adjust this pay-to-play strategy.  Not only is it unfair, but Chinese businesses overseas are never asked to share IP or technologies as the price of market entry.” 

A European business view

The European Union Chamber of Commerce (EUCCC) says China’s legal framework for IPR has improved markedly over recent years. However, only 29% of respondents to the European Chamber’s Business Confidence Survey 2017 feel that the Chinese authorities are delivering tangible enforcement of IPR. They also report instances of forced technology transfers to gain or maintain market access, with 17% of survey respondents indicating that this has occurred in their industry. This has had a negative impact on China because in many cases companies are reluctant or simply refuse to bring their best technologies and products to the market.

“Although there are areas that need improvement, the EU and China continue to work on IP issues,” says Mats Harborn, President of the EUCCC. “In fact, the Ministry of Commerce has said the exchanges that have taken place via the IP Key project set a benchmark for best practices in terms of bilateral IP cooperation.” IP Key is a platform for EU and Chinese agencies to cooperate on IPR issues.

Why is section 301 being used?

By using section 301 of the Trade Act of 1974 as his weapon, Trump has more control over the speed and progress of investigations. “The other option would be via the WTO complaints process,” says Papageorgiou. “But the WTO is not a US-controlled body. Applying the section 301 process enables the US to forge its own path-if for no other reason, than because such move enjoys thorough bi-partisan support.”

Chad Brown, senior fellow at the Peterson Institute for International Economics, says section 301’s heyday was in the 1980s. It fell into disuse after the WTO was established. “The increasingly effective and international accepted WTO dispute settlement system meant that Washington could use a better approach to pursue its grievances,” says Brown. “Before the brief revival of an IPR investigation of Ukraine in 2013, the last formal section 301 investigation took place in 2001.

 “If Trump acts unilaterally, what is to stop Chinese policymakers from enacting their own unilateral section 301 process?” Brown adds. “This will surely be abusive and less transparent than the status quo, and will lead to retaliation that hurts other US exporters.”

Julien Chaisse, professor of law at The Chinese University of Hong Kong who focuses on international trade, remarks that depending on the results, two actions are possible:

  • At the domestic level, the US could later decide on retaliatory action, based on the Economic Espionage Act, section 5 of the Federal Trade Commission Act and the National Defence Authorisation Act.
  • At the international level, the investigation could only result into a claim that the US would file at WTO against China. China could challenge section 5 measures at WTO but that is for the long term. There is no legal immediate action possible.

“One can however fear that China could take measures in some of other fields to react to any US administration move,” says Chaisse. “Even if the investigation results in, say one year, a decision to impose retaliatory action, one can expect China to challenge them at WTO. Interestingly also, Trump could only rely on WTO to defend his policy-an organisation he has been complaining about for a long time.”

China will probably take a wait and see approach. If anything, this whole situation may put pressure on China to improve its IPR enforcement, a move IP practitioners and foreign businesses would welcome.