Part Sixteen. Why study the United States Trade Representative (USTR) report on China’s unfair acquisition of American intellectual property and technology?

Previous parts explained how trade taxes, tariffs, levies or countervailing duties, are a national security matter. China’s (VI) anti-monopoly and talent acquisition was reported by the United States Trade Representative (USTR) on March 22, 2018. Abbreviations and Acronyms may be found in Part Twelve.

OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT  FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974 March 22, 2018

https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF

1. Other Acts, Policies, and Practices of China A. Introduction

The Federal Register Notice also invited comments from interested parties on other acts, policies and practices of China relating to technology transfer, intellectual property (IP), and innovation that might be included in this investigation, and/or might be addressed through other applicable mechanisms.1106 The following issues were cited by interested parties as acts, policies, and practices of China that may warrant investigation. While the following actions may well meet the Section 301 standards of unreasonable or discriminatory acts, policies, and practices that burden or restrict U.S. commerce, this investigation does not make that determination. These matters warrant further investigation. Going forward, USTR will identify the best tools to address them including, but not limited to, more intensive bilateral engagement, WTO dispute settlement, and/or additional Section 301 investigations.

1. Measures Purportedly Related to National Security or Cybersecurity

Stakeholders report that China increasingly is incorporating into its commercial regulations protections allegedly needed for “national security” or “cybersecurity” purposes.1107 Many of China’s regulations are new or in draft form and their effect on U.S. companies is still coming into view. Companies have raised particular concerns about the Cybersecurity Law of the People’s Republic of China (Cybersecurity Law). The Cybersecurity Law, which came into effect in June 2017, generally establishes security reviews for a broad range of IT products and services1108; imposes restrictions on the cross-border flow of data; requires data localization for certain parties and types of data; and authorizes the development of national cybersecurity standards that exceed the burden and scope of international standards.1109

The Cybersecurity Law’s provision requiring the implementation of a cybersecurity-specific multilevel protection scheme for information and communications technology (ICT) products used in network security appears to reinforce China’s Regulations on Classified Protection of Information Security, also known as the Multi-Level Protection Scheme (MLPS), about which

1106 See Appendix A.
1107 These cyber-security measures/protections include: Administrative Measures for New Internet Services Security Assessments (Draft), Baseline for Cybersecurity Classified Protection: Special Security Requirements for Mobile Interconnection (Draft), Catalogue of Network (Cyber) Critical Equipment and Cybersecurity Specific Products, Controllability Evaluation Index for Security of Information Technology Products, Part 1: General Principles (Draft), Controllability Evaluation Index for Security of Information Technology Products, Part 2: Central Processing Unit (Draft), Controllability Evaluation Index for Security of Information Technology Products, Part 5: General Purpose Computer (Draft), Cryptography Law of the People’s Republic of China (Draft), Cybersecurity Law, National Security Law of the People’s Republic of China, Key Network and Specialized Equipment Security Products Catalogue, Regulations on Classified Protection of Information Security (MLPS), and Information Security Technology – Security Controllable Level Evaluation Index of Information Technology Products: Part 2: Central Processing Unit (Draft).
1108 For a discussion of security review processes and requirements for disclosure of sensitive information, see Section II.C. of this report.
1109 See, e.g., NAT’L FOREIGN TRADE COUNCIL [hereinafter “NFTC”], Submission, Section 301 Hearing 4 (Sept. 28, 2017) (explaining that particularly with respect to cloud service providers, China is the only country addressing national security concerns by pressuring the transfer of technology).

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the United States has expressed concern since adoption in 2007.1110 In general, the MLPS is a system that classifies ICT products and components according to their level of national security. It is reportedly aimed at promoting indigenous innovation by mandating that products used in Chinese information networks at a certain level of national security importance be developed and produced by entities owned or controlled by the government.1111

With regard to data localization, a number of interested parties discussed Chinese policies that require certain “critical information infrastructure providers” to store their data on servers in China.1112 As the U.S. Chamber of Commerce explained, if a foreign company is forced to localize a valuable set of data or information in China, whether for R&D purposes or simply to conduct their business, it will have to assume a significant amount of risk that its data or information may be misappropriated or misused, especially given the environment in China, where companies face significant legal and other uncertainties when they try to protect their data and information.1113 As noted further, “Chinese laws, such as the National Security, Cybersecurity, and recently passed National Intelligence Laws, give authorities expansive latitude to gain access to companies’ physical facilities and digital information.”1114

Fears about data misappropriation are also raised by Article 37 of the Cybersecurity Law, which prohibits critical information infrastructure operators from exporting “personal information” or “important data” unless they have first gone through a security assessment. While some other jurisdictions require companies to ensure an adequate level of protection for personal information transferred abroad, typically these rules are strictly limited to personal information. An extension to “important data” would therefore appear to sweep in much of the business data that is otherwise routinely and freely transferred cross-border by multinationals operating in other jurisdictions.1115 Moreover, as the general scope of these security assessments is still being defined, it remains worth monitoring whether China will ultimately impose stricter requirements for “personal information” exports than what is now found in international practice.

Stakeholders also raised concerns with China’s encryption regulations and the China Compulsory Certification (CCC) testing regime for information security products. While these measures have been in force since 2009, until 2017 they were limited to companies seeking to sell to China’s government. However, in June 2017, the Cybersecurity Administration of China

1110 INFORMATION TECHNOLOGY & INNOVATION FOUNDATION [hereinafter “ITIF”], Submission, Section 301 Hearing (Sept. 28, 2017).
1111 U.S. CHAMBER OF COMMERCE [hereinafter “U.S. Chamber”], Submission, Section 301 Hearing 32 (Oct. 3, 2017); SEMICONDUCTOR INDUSTRY ASS’N [hereinafter “SIA”], Submission, Section 301 Hearing 11-2 (Oct. 5, 2017).

1112 The definition given for “critical information infrastructure operators” in the Cybersecurity Law (adopted by the Twentieth Session of the Twelfth NPC on Nov. 7, 2016, effective June 1, 2017) is vague and it is unclear how broadly it will be interpreted. See Cybersecurity Law, art. 31 (“The national government, on the basis of a network security level protection system, will prioritize protection of important industries and fields including public communications and information services, energy, transport, water utilities, finance, public services, and e- government affairs, as well as other critical information infrastructure that may result in serious damage to national security, people’s livelihoods, and the public interest as soon as it is destroyed, loses its functionality or experiences a data breach.”).

1113 See, e.g., U.S. CHAMBER, Submission, Section 301 Hearing 33-4 (Oct. 3, 2017). 1114 See, e.g., U.S. CHAMBER, Submission, Section 301 Hearing 10, 34 (Oct. 3, 2017). 1115 U.S. CHAMBER, Submission, Section 301 Hearing 10, 34 (Oct. 3, 2017).

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released the Catalogue of Critical Network Equipment and Network Security Products (First Batch),1116 which expanded the restrictions beyond government procurement to 15 categories of commercial products, including routers, anti-spam software, servers, and other technology products.1117 These and other final and draft regulations raise substantial concerns for U.S. stakeholders.

2. Inadequate Intellectual Property Protection

Inadequate protection of IP has been a top concern for American companies doing business in China for many years.1118 Stakeholders identified numerous IP protection problems including trade secret theft1119 and bad faith trademarking.1120 With regard to patents, stakeholders also asserted that Chinese government-owned entities were responsible for substantial infringement.1121 Stakeholders were further concerned about widespread counterfeiting in China and the distribution of counterfeit products over the Internet.1122 Counterfeiting occurs in a wide

1116 Four Department Notice on Announcing the Catalogue of Critical Network Equipment and Network Security Products (First Batch) (National Internet Information Office, MIIT, Public Security Bureau, Certification and Accreditation Administration, issued June 1, 2017).
1117 TELECOMMUNICATIONS INDUSTRY ASS’N [hereinafter “TIA”], Submission, Section 301 Hearing 3 (Sept. 28, 2017).

1118 See e.g., AM. BAR ASS’N [hereinafter “ABA IPL”], Submission, Section 301 Hearing 2 (Sept. 27, 2017); ABRO INDUSTRIES [hereinafter “ABRO”], Submission, Section 301 Hearing 1 (Sept. 28, 2017); AM. APPAREL & FOOTWEAR ASS’N [hereinafter “AAFA”], Submission, Section 301 Hearing 2, 4 (Sept. 28, 2017); AM. BRIDAL & PROM INDUSTRY ASS’N [hereinafter “ABPIA”], Submission, Section 301 Hearing 2-3 (Sept. 28, 2017); AM CHAMBER OF COMMERCE SHANGHAI [hereinafter “Am. Cham. Shanghai”], Submission, Section 301 Hearing 1 (Sept. 28, 2017); AM. CHEMISTRY COUNCIL [hereinafter “ACC”], Submission, Section 301 Hearing 3 (Sept. 27, 2017); AM. SUPERCONDUCTOR CORP. [hereinafter “AMSC”], Submission, Section 301 Hearing 2-3 (Sept. 28, 2017);BIOTECHNOLOGYINNOVATIONORG. [hereinafter“BIO”],Submission,Section301Hearing1-2(Sept.28, 2017); BONUMOSE BIOCHEM [hereinafter “Bonumose”], Submission, Section 301 Hearing 3-4 (Sept. 27, 2017); LEE BRANSTETTER, Submission, Section 301 Hearing 4 (Sept. 28, 2017); Stephen Zirschky, Submission, Section 301 Hearing 2 (Sept. 28, 2017); BSA THE SOFTWARE ALLIANCE [hereinafter “BSA”], Submission, Section 301 Hearing 2 (Sept. 28, 2017); JACK CHANG, Submission, Section 301 Hearing 4 (Sept. 28, 2017); COMPTIA, Submission, Section 301 Hearing 2 (Sept. 28, 2017); CONGRESSMAN PASCRELL, Submission, Section 301 Hearing 4 (Sept. 28, 2017); CONSUMER TECHNOLOGY ASS’N [hereinafter “CTA”], Submission, Section 301 Hearing 2 (Sept. 28, 2017); James Lewis, CENTER FOR STRATEGIC & INT’L. STUDIES [hereinafter “CSIS”], Submission, Section 301 Hearing 6 (Sept. 27, 2017); DAIS ANALYTIC CORP. [hereinafter “Dais”], Submission, Section 301 Hearing 2 (Sept. 27, 2017); COMM’N ON THE THEFT OF INTELLECTUAL PROPERTY [hereinafter “IP Commission”], Submission, Section 301 Hearing 3 (Sept. 28, 2017); MOTOR & EQUIPMENT MANUFACTURERS ASS’N [hereinafter “MEMA”], Submission, Section 301 Hearing 2 (Sept. 28, 2017); MICHELMAN, Submission, Section 301 Hearing 2 (Oct. 6, 2017); NAT’L. ASS’N OF MANUFACTURERS [hereinafter “NAM”], Submission, Section 301 Hearing 2 (Sept. 28, 2017); NFTC, Submission, Section 301 Hearing 2 (Sept. 28, 2017); PHRMA, Submission, Section 301 Hearing 2 (Sept. 22, 2017); SIA, Submission, Section 301 Hearing 1 (Oct. 5, 2017); STEWART & STEWART, Submission, Section 301 Hearing 2 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 5 (Oct. 3, 2017); U.S. CHINA BUSINESS COUNCIL [hereinafter “USCBC”], Submission, Section 301 Hearing 2 (Sept. 28, 2017); U.S. COUNCIL FOR INT’L BUSINESS [hereinafter “USCIB”], Submission, Section 301 Hearing 1-2 (Sept. 28, 2017); WILEY REIN, Submission, Section 301 Hearing 12, 14 (Sept. 28, 2017).

1119 SIA, Submission, Section 301 Hearing 15-16 (Oct. 5, 2017); ABA IPL, Submission, Section 301 Hearing 3-4 (Sept. 27, 2017).
1120 CTA, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017).
1121 CATHERINE LIN-HENDEL, Submission, Section 301 Hearing (Aug. 28, 2017); SKADDEN, ARPS. SLATE, MEAGHER & FLOM LLP [hereinafter “Skadden”], Submission, Section 301 Hearing 20 (Sept. 28, 2017).

1122 AAFA, Submission, Section 301 Hearing 2, 4 (Sept. 28, 2017); ABPIA, Submission, Section 301 Hearing 1-2 (Sept. 28, 2017).

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range of product categories, including medicines, consumer electronics, toys, computer accessories, clothing and footwear, formalwear, automobile parts, and semiconductors.1123

Stakeholders also raised concerns over inadequate IP enforcement mechanisms available in China. Although some stakeholders submit that the legal framework has improved, many reported substantial obstacles to civil enforcement and ineffective and inconsistent criminal and administrative enforcement by the government of China.1124 Stakeholders further stated that enforcement problems are exacerbated by insufficient governmental coordination, insufficient political will by Chinese officials, and inadequate resources and capacity to address IP problems.1125

3. China’s Anti-Monopoly Law

A number of submissions asserted that China uses the Anti-Monopoly Law of the People’s Republic of China (AML) as a means to obtain U.S. IP, citing as examples the AML agencies’ multiple draft guidelines. Other submissions raised general concern regarding use of the AML for industrial policy purposes, and several complained about poor procedural protections in enforcement of the AML and about certain enforcement actions allegedly addressing abuse of dominance in the exercise of IP rights.

In regard to the concerns raised on IP guidelines, submissions cited the State Administration of Industry Commerce (SAIC) 2015 Rules on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights (SAIC Rules) and the March 2017 draft State Council Anti-Monopoly Commission Guidelines Against Abuse of Intellectual Property Rights (Guidelines).1126 For example, there were concerns with Article 7 of the SAIC Rules, which recognizes IP as an “essential facility,” with one submission noting that this provision could allow SAIC to treat any unilateral refusal to license as an “abuse of IPR.”1127

In regard to enforcement, several submissions asserted that Chinese AML authorities use the AML as a tool to advance industrial policy rather than to protect competition.1128 While some submissions noted improvements in AML enforcement, they also noted continued concerns with

1123 See, e.g., COMPTIA, Submission, Section 301 Hearing 7 (Sept. 28, 2017); CHINA CHAMBER OF INTERNATIONAL COMMERCE [hereinafter “CCOIC”], Submission, Section 301 Hearing 24-9 (Sept. 26, 2017); ABPIA, Submission, Section 301 Hearing 1 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 36 (Oct. 3, 2017).
1124 ABA IPL, Submission, Section 301 Hearing 2, 4 (Sept. 27, 2017); CTA, Submission, Section 301 Hearing 4 (Sept. 28, 2017); MEMA, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); NAM, Submission, Section 301 Hearing 13-4 (Sept. 28, 2017); USCBC, Submission, Section 301 Hearing 2 (Sept. 28, 2017).

1125 MEMA Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); NAM, Submission, Section 301 Hearing 13-4 (Sept. 28, 2017).
1126 See, e.g., Stephen Ezell, ITIF, Testimony, Section 301 Hearing 21 (Oct. 10, 2017); NAM, Submission, Section 301 Hearing 9, 13 (Sept. 28, 2017).

1127 SIA, Submission, Section 301 Hearing 13 (Oct. 5, 2017).
1128 See, e.g., USCIB, STATEMENT ON CHINA’S COMPLIANCE WITH ITS WTO COMMITMENTS 15 (Sept. 20, 2017); USCIB, Submission, Section 301 Hearing 1-2 (Sept. 28, 2017).

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transparency and due process,1129 and alleged discriminatory enforcement against certain foreign companies.1130

4. China’s Standardization Law

According to stakeholder submissions, China’s recently enacted Amendments to the Standardization Law of the People’s Republic of China (Standardization Law Amendments) raise concerns related to whether U.S. companies will be required to transfer valuable IP or license it on non-market terms as a condition of participation in standards setting bodies.1131 Stakeholders assert that the amendments impose unique and potentially damaging requirements on enterprises to publicly disclose functional indicators and performance indicators of their products or services, which may result in unnecessary costs and risks.1132 Furthermore, the Amendments reportedly endorse a preference for indigenous innovation in Chinese standards, to the detriment of U.S. and other non-Chinese companies.1133

5. Talent Acquisition

Certain participants in the investigation emphasized the challenges posed by China’s acquisition of U.S. engineers and other professional employees in technology-related companies. For instance, the Semiconductor Industry Association (SIA) has observed a “notable shift from M&A to a more sophisticated process of acquiring hundreds of talented engineers and managers from foreign companies.”1134 As SIA explains:

It has been reported that Chinese state-owned firms have been highly successful in recruiting this high-tech engineering talent, which is enabled by massive Chinese government subsidies that allow for salaries to be offered at high, non-market rates. Often high-level managers are lured away from target companies with compensation packages four or five times the market rates. These managers then target key former employees in technology development, manufacturing and facilities, promising outsized compensation.1135

The Chinese government has issued a number of medium- and long-term plans for talent development,1136 while pursuing initiatives that actively encourage the recruitment of foreign

1129 AM. CHAMBER OF COMMERCE CHINA, 2017 AMCHAM CHINA WHITE PAPER 38 (2017).
1130 See, e.g., USCIB, Submission, Section 301 Hearing 2 (Sept. 28, 2017); WILEY REIN, Submission, Section 301 Hearing 6-8 (Sept. 28, 2017); IP COMM’N, Submission, Section 301 Hearing 8 (Sept. 28, 2017).
1131 U.S. CHAMBER, Submission, Section 301 Hearing 26 (Oct. 3, 2017); WILEYREIN, Submission, Section 301 Hearing 6-7 (Sept. 28, 2017).
1132 U.S. CHAMBER, Submission, Section 301 Hearing 26 (Oct. 3, 2017).
1133 PRC Standardization Law Amendments, art. 20 (promulgated by the Fifth Session of the Twelfth NPC on Dec. 29, 1988, amended by the Thirtieth Session of the Twelfth NPC on Nov. 4, 2017).
1134 SIA, Submission, Section 301 Hearing 15 (Oct. 5, 2017).
1135 SIA, Submission, Section 301 Hearing 15-6 (Oct. 5, 2017).
1136 For instance, to improve the quality of high-skilled labor in the economy, the CCP Central Committee and the State Council issued the Outline of the National Medium- and Long-Term Talent Development Plan in 2010. See Outline of the National Medium- and Long-Term Talent Development Plan (CCP Central Committee and State Council, Zhong Fa [2010] No. 6, issued Apr. 1, 2010); Wang Huiyao, CHINA’S NATIONAL TALENT PLAN: KEY MEASURES AND OBJECTIVES, BROOKINGS INSTITUTE, 23 (Nov. 2010).

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talent and Chinese persons overseas to boost national competitiveness. These plans establish specific targets for attracting “talented” individuals and cut across technical specializations, finance, and high-technology domains.1137

China’s talent acquisition activities are global in their scope and scale, but reportedly have been particularly concentrated in top U.S. universities and Silicon Valley. With support from various government programs and entities, notably the China Association of Science and Technology, Chinese enterprises reportedly have begun establishing “talent bases” in China and the United States to support cutting-edge R&D and the active recruitment of top talent. For instance, Chinese government plans prioritize the pursuit of human capital in artificial intelligence (AI).1138 And, as the SIA submission indicates, Chinese companies have reportedly lured top talent from foreign companies by paying well above market compensation—enabled by government financing, direction, and support.1139 These activities may provide a key conduit for technology transfer from the United States to China.

1. Conclusion

USTR acknowledges the importance of these issues and agrees with stakeholders that the matters warrant further investigation. A number of concerns of this nature have previously been raised in USTR’s annual proceedings under Special 301 and the annual review of China’s WTO accession compliance. A range of tools may be appropriate to address these serious matters including more intensive bilateral engagement, WTO dispute settlement, and/or additional Section 301 investigations.

1137 See, e.g., Notice on Issuing the “Medium- and Long-Term Financial Sector Talent Development Plan” (People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, Yin Fa [2011] No. 18, promulgated Jan. 24, 2011); Notice on Launching Stage-Wise Evaluation Work for the “Medium- and Long-Term Plan to Establish Technical Specialization Talent Teams (2010- 2020) (Ministry of Human Resources and Social Security, promulgated on May 27, 2013); Medium- and Long-Term Plan to Establish High-Skilled Talent Teams (Ministry of Human Resources and Social Security, promulgated in 2011).

1138 State Council Notice on the Issuance of the New Generation Artificial Intelligence Development Plan (State Council, Guo Fa [2017] No. 35, promulgated on July 8, 2017), available at http://www.gov.cn/zhengce/content/2017-07/20/content_5211996.htm; see also An Overview of Overseas Offshore Talent Innovation Base, CAST, http://www.cast.org.cn/n200675/n202200/n202372/c400650/content.html.

1139 SIA, Submission, Section 301 Hearing 15-6 (Oct. 5, 2017); Huang Yijun, Chen Liangrong, He Yunting, Interview with Ziguang Group Chairman Zhao Weiguo, TIANXIA NEWS, Nov. 1, 2015; Taiwan Semiconductor Leader Jumps to the Mainland, INITIUM MEDIA, Oct. 7, 2015; David Manners, Micron Sues Ex-Employees Working for China DRAM Companies, ELECTRONICS WEEKLY, Apr. 7, 2017.

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