How to Confront China: Economic Espionage and the WTO

The views and opinions expressed in this article are those of the authors only.

Robert Kuhn

Vol. 40 Articles Editor

As vitally interlinked partners, the United States and China form one of the largest trading partnerships in the world. Total trade between the two states is worth an astounding $578.6 billion.[1] This vital trade relationship brings prosperity to both countries. However, many studies have reported troubling signs of Chinese economic espionage.[2] To sustain a healthy Chinese-American trading relationship, the United States should confront this problem through a World Trade Organization (WTO) complaint, not unilateral tariffs. The politics of trade are especially difficult to maneuver. For free trade to be successful, as a practical matter, it must be perceived as fair by the relevant body politics. The very nature of free trade is disruptive: It dislocates long-standing domestic industries, leaving many previously thriving communities without a vital source of economic growth.[3] The disruptive impact of free trade has the potential to leave workers displaced with strong feelings of resentment.[4] This has a significant impact on trade policy because these losses can be concentrated in specific regions and specific industries while the benefits of free trade, usually in the form of enhanced competition, are dispersed.[5] In a classic collective action problem, it is difficult to organize consumers to demand the lower prices and higher quality that free trade offers.[6] It would be unwise to add to this difficulty–and to the frustration it provokes–a sense that American trading partners bested domestic industry through deceptive trade practices. Consequently, unfair trade practice claims are an important consideration in our future trading relationship with China. In addition to the widespread reports of technology theft in the Chinese economy, signs indicate that these intellectual property transfers are being supported by the Chinese government.[7] A report by the National Bureau of Asia estimates that “theft of trade secrets could be as high as $600 billion [annually],” not including patent infringement.[8] The report attributes this in large part to China, the “principle IP infringer.”[9] A groundbreaking book by William Hannas and others, Chinese Industrial Espionage, has provided an in-depth look into Chinese government involvement in technology transfer.[10] Hannas reports significant Chinese investment in collecting inventories of foreign technology and providing access and research assistance for Chinese companies.[11] He discovered national policies that call on government officials to “encourage” technology transfer as well as explicit requirements of that products contain domestically owned intellectual property.[12] Most alarmingly, Hannas reported state-funded “technology transfer centers” have been placed throughout the country.[13] For a specific example of the type of harm that can be done to American industry, CBS’s 60 minutes reported on a U.S. wind energy company that had a technology central to its business stolen. In wake of this attack, the company experienced a dramatic decline in economic performance as its product was repackaged and sold by a Chinese company. The CBS report linked the attack directly to a Chinese joint-venture partner with Chinese government ownership.[14] In the interest of fairness fundamental to any bilateral economic relationship, and more importantly, for the sake of sustaining free trade, the U.S. government should respond to China’s actions. The U.S. has begun investigating China for its improper technology transfer not with the eye, however, toward a multilateral negotiation or a WTO complaint, but with the threat of invoking unilateral tariffs.[15] In a world which has so much American influence within international trade organizations like the WTO,[16] the United States would be foolish to avoid making a trade claim for Chinese IP infringement. The first set of claims could be pursued through the General Agreement on Tariffs and Trade’s (GATT) national treatment requirement. Article III, paragraph 4 of GATT provides that foreign goods, once imported into a country, that are “like products” to certain domestic goods shall have “no less favorable [treatment]” in “all laws [and] regulations.”[17] Although there are reports of American companies fearing Chinese retaliation,[18] surely the U.S. would be able to find some firms willing to assist in such a complaint. The American business community has some strong voices which outcry against Chinese abuse.[19] Taking the report in 60 minutes as an example, the U.S. could argue that American firms in wind energy technology are in a competitive relationship with Chinese firms and are thus “like products.”[20] Although the wind technology at issue could be defined as both a good and a service, at least the microchips used to run wind turbines would be defined as goods. As goods, GATT requires a fair playing field once they enter China’s internal market. The WTO’s Appellate Body has stated that “treatment no less favorable” requires “effective equality of opportunities for imported products to compete with like domestic products.”[21] The U.S. could show that China violates this standard by pointing to regulations and laws that establish the agency that has assisted the Chinese company in stealing the wind energy. A claim could also be successful if the U.S. points to a Chinese industry that has been assisted by access to a government-funded technology database, established under Chinese law.[22] Along the same lines, the U.S. could use Chinese technology transfer stations to show China’s government is creating a discriminatory competitive opportunity.[23] Finally, the U.S. could look to proof or remedy requirements in litigation. Surely, if American companies lose billions in Chinese theft without proper compensation, litigation rules establish disadvantages to foreign firms. In a specific example, the 60 minutes report showed that during litigation the American firm had their litigation strategy hacked into by sources linked to the Chinese government.[24] The most significant WTO cases on national treatment concern direct bans on certain types of products.[25] However, there is nothing preventing the U.S. from alleging that the Chinese laws and regulations that establish protectionist institutions or those that directly discriminate against foreign competitors violate GATT. The WTO Appellate Body has stated that a violation requires “a genuine relationship between the measure at issue and its adverse impact on competitive opportunities.”[26] A strong argument can be made that China’s current measures meet that standard. The second type of claim that could be brought is through the enforcement provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).[27] Although the WTO Appellate Body has very few substantive cases on this issue, WTO has an affirmative requirement for members to provide intellectual property enforcement. Article 41, paragraph 1 provides that WTO signatories must “ensure that enforcement procedures…are available [to foreign IP holders] under their law so as to permit effective action against any act of infringement of intellectual property rights.”[28] It begs a serious question how the Chinese government can ensure “effective” IP protection when the Chinese government has created government offices to assist in technology transfer.[29] This claim would be even stronger if the U.S. could point to specific U.S. firms that have been forced behind the scenes to transfer technology to Chinese business partners. It is highly unlikely that local Chinese judges can provide effective enforcement when the Chinese government is acting, covertly and overtly all the way up to central agencies, to subvert IP rights. Furthermore, the fear of retaliation by the Chinese government against U.S. firms who bring such claims could be sufficient as well.[30] If China has groomed a system of widespread IP infringement and created a chilling effect on enforcement by using its powerful authority over the economy, it is largely irrelevant if Chinese judges are “available” to provide “fair and equitable [procedures],” as the TRIPS agreement requires.[31] A third claim that could be brought is through the China Accession Protocol’s technology transfer restriction. China’s Accession Protocol was signed to allow China originally to join the WTO and has certain restrictions that bind China alone to specific requirements. Out of the three suggested complaints, this violation would be the most directly on point with the reported abuses. This Protocol provides an affirmative obligation on China to “ensure that…[any] means of approval for importation is not conditioned on: … the transfer of technology.”[32] If the U.S. can get firms to speak out about informal pressure by the Chinese government to transfer technology to Chinese firms, this claim could be the easiest to prove. The U.S. may also point to the use of joint-venture requirements for importation.[33] While the requirements themselves may not be illegal under WTO law, when the Chinese government directly assists Chinese joint-venture partners in obtaining valuable technology from their American counterparts, as the 60 minutes report found, that looks very much like a de facto technology transfer requirement.[34] If any of these claims were successful, the U.S. would have several useful remedies. A positive ruling would pave the way for more effective negotiations with China. With a WTO decision in hand, the U.S. would be in a stronger negotiating position to help structure better IP protection in China. If all else failed, the U.S. could do what it is thinking of doing right now, impose retaliatory tariffs on China.[35] Unlike the current strategy, however, this tariff would be legalized by the WTO and would likely have strong international support. A successful complaint also would provide a valuable precedent which the U.S. can use if Chinese IP transfers continue in the future. However, if the political will is insufficient to pursue any claims, the U.S. may only be left with the remedy of unilateral tariffs. It would then be China, not the U.S., bringing a complaint before the WTO.

[1] The People’s Republic of China, Office of the U.S. Trade Representative, https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china (last visited Dec. 20, 2017). [2] National Bureau of Asia Research, Update to the IP Commission Report: the Theft of American Intellectual Property (2017); William C. Hannas et al., Chinese Industrial Espionage: Technology Acquistion and Military Modernization (2013); Mukul Raheja, The Phenomenon of ‘Technology Transfer’: Lessons from China, Science, Technology and Security Forum (Nov. 30, 2016), http://stsfor.org/content/phenomenon-technology-transfer-lessons-china. [3] See, e.g., The National Academies of Science, Engineering, and Medicine, Automotive Fuel Economy: How Far Can We Go? 91 (1992) (describing at the time the increased pressure from Japanese automotive suppliers on the American automotive industry). One need only look at General Motor’s U.S. market share from around 50% in the 1950s to 17.3% in 2016. Matthew DeBord, GM May Have Just Made a Huge Bet on the American Economy, Business Insider, May 18, 2017; Statista, General Motors’ U.S. Market Share from 2000 to 2016 (2017), https://www.statista.com/statistics/239607/vehicle-sales-market-share-of-general-motors-in-the-united-states/. [4] See David H. Autor et al., The China Syndrome: Local Labor Market Effects of Import Competition in the United States, 103 Am. Econ. Rev. 2121, 2133; see Brandley Jones, Support for Free Trade Rebounds Modestly, But Wide Partisan Differences Remain (2017) (The source demonstrates the tight margins for support of trade in the United States. The phenomena is especially pronounced in Republican voters.) [5] Joost Pauwelyn et al., International Trade Law 17 (3rd ed., 2016) (“[W]ell-organized and concentrated interest groups often have disproportionate influence on policy…. [C]onsumers are diffuse and poorly organized [,] each individual consumer gains only a small amount from the liberalization of a given market.”). [6] See Martin Namaska, Trade as a Collective Action Problem (2015). [7] Hannas et al., supra note 2; National Bureau of Asia Research, supra note 2, at 1; Lesley Stahl, The Great Brain Robbery, 60 Minutes (CBS Television Broadcast Jan. 17, 2016), https://www.cbsnews.com/news/60-minutes-great-brain-robbery-china-cyber-espionage/ (includes the transcript to the television broadcast). [8] National Bureau of Asia Research, supra note 2, at 1. [9] Id. at 2. [10]Hannas et al., supra note 2. [11] Id. at 41 [12] Id. at 63-4. [13] Id. at 93. [14] Stahl, supra note 7. [15] Lesley Wroughton & Jeff Mason, Trump Orders Probe of China’s Intellectual Property Practices, Reuters, Aug. 14, 2017. [16] For example, the U.S. was a central player in the drafting and design of the major treaty of WTO law, the General Agreement on Tariffs and Trade. See Douglas Irwin et al., The Genesis of GATT (2007). [17] General Agreement on Tariffs and Trade art. 3 ¶ 4, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194. [18] See James A. Lewis, Put China’s Intellectual Property Theft in a Larger Context (2017). [19] See, e.g., Motor & Equipment Manufacturers Association, Comment Letter on Section 301 Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation (Sep. 28, 2017), https://www.regulations.gov/document?D=USTR-2017-0016-0029. [20] Stahl, supra note 7; Appellate Body Report, European Communities-Measures Affecting Asbestos and Products Containing Asbestos, ¶ 99, WTO Doc. WT/DS135/AB/R (Dec. 3, 2001) [hereinafter EC-Asbestos] (defining “like products”). [21] Appellate Body Report, European Communities-Measures Prohibiting the Importation and Marketing of Seal Products, ¶ 5.116, WTO Doc. WT/DS400/AB/R (May 22, 2014) [hereinafter EC-Seals]. [22] Hannas et al., supra note 2, at 41. [23] Hannas et al., supra note 2, at 93. [24] Stahl, supra note 7. [25] EC-Asbestos, supra note 20; EC-Seals, supra note 21. [26] Appellate Body Report, United States-Measures Affecting the Production and Sale of Clove Cigarettes, ¶ 179, WTO Doc. WT/DS406/AB/R (Apr. 4, 2012). [27] For another discussion on the possibilities of this claim, see James Bacchus, How to Take on China Without Starting a Trade War, The Wall Street Journal (Aug. 16, 2017). [28] Agreement on Trade-Related Aspects of Intellectual Property Rights, art. 41 ¶ 1, Jan. 1, 1995, 1869 U.N.T.S. 299 [hereinafter TRIPS]. [29] Hannas et al., supra note 2, at 93. [30] See Lewis, supra note 18. [31] TRIPS, supra note 28, Art. 41.2, 42. [32] Protocol on the Accession of the People’s Republic of China, art. 7 ¶ 3, Dec. 12, 2001, WTO Doc. WT/L/432. [33] See Export.gov, China-Joint Ventures and Licensing (Jul. 14, 2017), https://www.export.gov/article?id=China-joint-ventures (notifying U.S. exporters of the existence of joint-venture mandates). [34] Stahl, supra note 7. [35] Dispute Settlement Understanding, art. 22 ¶¶ 2-3, Apr. 15, 1994, 1869 U.N.T.S. 401.