Trade tensions between the United States and China have escalated under the Trump administration. Some of this tension has resulted from the steel and aluminum tariffs imposed by the United States on most of its trading partners in the spring of 2018.Footnote 1 Another major source of conflict relates to President Trump's concerns with China's perceived unfair practices in relation to intellectual property and technology rights. The Trump administration has addressed these concerns both by pursuing unilateral responses and seeking relief through the World Trade Organization (WTO).
On August 14, 2017, Trump directed the U.S. Office of the Trade Representative (USTR) to “determine, consistent with … the Trade Act of 1974 … , 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.”Footnote 2 On August 18, 2017, USTR responded to this directive by initiating an investigation under Section 301 of the Trade Act,Footnote 3 which it describes as “a key enforcement tool that may be used to address a wide variety of unfair acts, policies, and practices of U.S. trading partners.”Footnote 4
In the final report for this investigation on March 22, 2018, USTR concluded that China was engaging in a number of unfair trade practices related to intellectual property and technology.Footnote 5 As summarized in an accompanying press release, the report reached four distinct conclusions related to Chinese trade practices:
(1) 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.
(2) 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.
(3) 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.
(4) 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.Footnote 6
That same day, Trump issued a memorandum noting these findings and directing USTR to take two actions in response: first, pursuing tariff increases; and second, seeking WTO dispute settlement “to address China's discriminatory licensing practices.”Footnote 7
Regarding tariffs, Trump specifically directed USTR to “publish a proposed list of products and any intended tariff increases within 15 days. …”Footnote 8 When released on April 3 by USTR, the list contained roughly 1,300 separate tariff lines aimed at $50 billion of Chinese imports, subject to a notice and comment period with the final list to be determined thereafter.Footnote 9
Over the following several months, China and the United States engaged in a series of negotiations and further actions relating to these proposed tariffs. China at one point threatened retaliatory tariffs on $50 billion of U.S. goods,Footnote 10 leading the United States to threaten tariffs on an additional $100 billion of Chinese goods.Footnote 11 At other times China signaled a willingness to make concessions to the United States, including making a reduction in tariffs on imported cars and their partsFootnote 12 and offering to purchase more American goods.Footnote 13 For its part, the United States at one point suggested that it would not move forward with its proposed tariffs pending negotiations,Footnote 14 but, as of the end of May, it had decided otherwise. On May 29, the White House released a statement announcing that, in accordance with the Section 301 report:
the United States will impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the “Made in China 2025” program. The final list of covered imports will be announced by June 15, 2018, and tariffs will be imposed on those imports shortly thereafter.Footnote 15
On June 15, the Trump administration finalized its list of imports subject to the tariffs, with implementation to begin on July 6, leading China to announce that it would impose comparable tariffs in response.Footnote 16
As a matter of U.S. domestic law, the authority of the Trump administration to impose these tariffs pursuant to Section 301 of the Trade Act of 1974 may depend on the extent to which China's perceived unfair practices lie outside the reach of existing WTO agreements. In 1994, when seeking congressional approval for the Uruguay Round, the Clinton administration submitted a statement of administrative action, which, among other things, specified how the executive branch's use of Section 301 would relate to the newly revitalized international trade regime:
[F]or [Section 301] investigations that involve an alleged violation of a Uruguay Round agreement or the impairment of U.S. benefits under such an agreement … the Trade Representative will
• invoke [Dispute Settlement Understanding (DSU)] dispute settlement procedures, as required under current law;
• base any section 301 determination that there has been a violation or denial of U.S. rights under the relevant agreement on the panel or Appellate Body findings adopted by the [Dispute Settlement Body (DBS)].
• following adoption of a favorable panel or Appellate Body report, allow the defending party a reasonable period of time to implement the report's recommendations; and
• if the matter cannot be resolved during that period, seek authority from the DSB to retaliate.
Neither section 301 nor the DSU will require the Trade Representative to invoke DSU dispute settlement procedures if the Trade Representative does not consider that a matter involves a Uruguay Round agreement. Section 301 will remain fully available to address unfair practices that do not violate U.S. rights or deny U.S. benefits under the Uruguay Round agreements and, as in the past, such investigations will not involve recourse to multilateral dispute settlement procedures.Footnote 17
In addition to making clear that it would wait to impose retaliatory measures pursuant to Section 301 for issues involving U.S. rights under WTO agreements, the Clinton administration also acknowledged “the expectation of the Congress that future Administrations” would abide by the statement of administrative action.Footnote 18 And in its law approving the Uruguay Round, Congress explicitly “approve[d] … the statement of administrative action.”Footnote 19
Perhaps in an attempt to sidestep the legal concerns that would arise from an explicit attempt to disregard the 1994 statement of administrative action, USTR has described its Section 301 investigation as focused not on violations of international trade law per se, but rather more generally on “acts, policies or practices that are unreasonable or discriminatory and that burden or restrict U.S. Commerce.”Footnote 20 Nonetheless, there are now ongoing proceedings relating to the Section 301 investigation in the WTO, where both the United States and China have requested consultations.
The United States filed its request for consultations at the WTO on March 23, 2018 as part of President Trump's response to the Section 301 investigation.Footnote 21 Focusing on one aspect of the findings of the Section 301 investigation, it argued that, “China deprives foreign intellectual property rights holders of the ability to protect their intellectual property rights in China as well as freely negotiate market-based terms in licensing and other technology-related contracts.”Footnote 22
China filed its own request for consultations on April 3, 2018, responding to the initial proposed list of tariffs announced by the United States.Footnote 23 It asserted that these proposed tariffs would violate Article I.1 and II.1(a) and (b) of the General Agreement on Tariffs and Trade (GATT) 1994, and also that they would violate Article 23 of the DSU, “because the measures at issue fail to recourse to [sic], and abide by, the rules and procedures of the DSU.”Footnote 24 The Trump administration responded by saying that it was willing to engage in consultations, even though no tariffs had been imposed to date and the issue was therefore premature.Footnote 25
An additional strain on trade relations between China and the United States that exists outside of the confines of the Section 301 investigation is the fate of Zhongxing Telecommunications Equipment (ZTE) Corporation, a company recognized as “China's second-largest maker of telecommunications equipment.”Footnote 26 In mid-April the Trump administration announced that, effective immediately, it was banning ZTE from making use of technology exports from the United States.Footnote 27 This ban resulted from ZTE's failure to punish employees who the United States had found to be in violation of American sanctions against Iran and North Korea,Footnote 28 a failure which in turn violated an earlier settlement reached between the United States and ZTE.Footnote 29 Less than a month after the order was imposed ZTE appeared to be on the verge of collapse, announcing that it had ceased “major operating activities.”Footnote 30 The fate of ZTE has now become intertwined with the broader China-U.S. trade negotiations. On May 13, Trump indicated that he and President Xi Jinping were working together to try and stop the collapse of ZTE.Footnote 31
