A major trade investigation to determine the scope of undue burden placed on U.S. businesses by Chinese Intellectual Property (IP) practices is quietly progressing ,and this week the first public hearings for the investigation were held.
In mid-August, the U.S. launched a section 301 investigation into China’s public support for its private companies through the unfair transfer of IP. A positive finding in this investigation could result in the unilateral imposition of tariffs and quotas on Chinese goods in a broad array of industries. Administration officials, such as Pete Navarro and Wilbur Ross, have been advocating for such protectionist measures. Moreover, the U.S. Trade Representative (USTR) Robert Lighthizer has publicly stated his support for ignoring WTO dispute resolution mechanisms in favor of unilateral tools.
The goal of past section 301 investigations has been to force negotiations to resolve long standing trade issues. Over time, as new multilateral agreements on trade started to take effect, the tool was used less and less. The uncertain effects of using an old unilateral trade policy tool in a new multilateral environment has caused some to speculate that it will lead to a new era of protectionism. This combined with the administration’s disregard for the WTO’s dispute resolution process as set out in the president’s 2017 Trade Policy Agenda (PDF), means that trade resolution mechanisms which could have resolved some of this conflict in the past may be ignored in favor of negotiation through reciprocal retaliation. So while the aim of this investigation is to address long-standing trade issues with China directly, it bears the risk of escalating into a broader trade war.
The majority of industry associations and other concerned groups made clear that they believe that China’s IP practices represent an undue burden on U.S. commerce. However, many of the public comments on the investigation also showed that multilateral action, negotiation, or WTO-compliant retaliation would be the preferred course of action to address their concerns. The United States still has room for a broad range of actions it can take to counter Chinese IP practices, however the likelihood of a negotiated settlement is slim.
The best case scenario is an early negotiated settlement and would appear probable based on China’s weaker position due to its dependence on U.S. exports. However, China is for the most part unwilling to make significant changes to its IP laws because of its past success with technology transfer policies, its more recent technology dependent industrial policy plans (Made in China 2025 and China’s 13th 5-year plan), and domestic political pressures which hinder China from implementing significant legal changes.
Moreover, even if China were to recommit to the transparent and fair application of IP laws, it would be difficult for the United States to trust them because of their failure to follow through on similar commitments made with the Obama administration. Instead, China’s strategy to counter this investigation is to use a targeted approach in order to avoid broad escalation into a trade war. This approach would include pressuring companies in key congressional districts so as to influence future legislation.
Hopefully, some of these differences can be resolved before the investigation concludes during President Trump’s visit to China in November. However, the outlook is not optimistic.
Edward Barss is an independent consulting political analyst and researcher, focusing on international trade, man-made threats, and political risk.