Part Twelve on Tariffs on intellectual property, technology, national security, and trade imbalance?

This is Part Twelve of a series showing how inflation, deflation, barter, tariffs, taxes, postage, war, counterfeiting, history, economics, ‘free’ trade, famine, dearth, climate, auctions, precious metals, religion, and education are combined into one great whole.

Part Twelve. Why study tariffs on intellectual property, technology,

national security, and trade imbalance?

Previous parts have explained that trade wars can deflate industries, putting the target industries out of business by micro-deflation. Trade taxes can be styled as tariffs, levies or countervailing duties. Negotiations are pending between the President Trump Administration and China. China’s technology transfer regime and foreign Ownership restrictions are in the United States Trade Representative (USTR) report of March 22, 2018, as follows.

Statement by the President Regarding Trade with China

Issued on: June 15, 2018 My great friendship with President Xi of China and our country’s relationship with China are both very important to me. Trade between our nations, however, has been very unfair, for a very long time. This situation is no longer sustainable. China has, for example, long been engaging in several unfair practices related to the acquisition of American intellectual property and technology. These practices, documented in an extensive report published by the United States Trade Representative (USTR) on March 22, 2018, harm our economic and national security and deepen our already massive trade imbalance with China.

In light of China’s theft of intellectual property and technology and its other unfair trade practices, the United States will implement a 25 percent tariff on $50 billion of goods from China that contain industrially significant technologies. This includes goods related to China’s Made in China 2025 strategic plan to dominate the emerging high-technology industries that will drive future economic growth for China, but hurt economic growth for the United States and many other countries. The United States can no longer tolerate losing our technology and intellectual property through unfair economic practices.

These tariffs are essential to preventing further unfair transfers of American technology and intellectual property to China, which will protect American jobs. In addition, they will serve as an initial step toward bringing balance to the trade relationship between the United States and China.

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

Abbreviations and Acronyms

Acronym Definition

3PLA People’s Liberation Army, Third Department

4WD four-wheel drive

AAFA American Apparel & Footwear Association

ABA American Bar Association

ABC Agriculture Bank of China

ABPIA American Bridal & Prom Industry Association

ACC American Chemistry Council

AEI American Enterprise Institute

AGIC Asia-Germany Industrial Promotion Capital

AI artificial intelligence

AmCham American Chamber of Commerce Shanghai

AML Anti-Monopoly Law

AMSC American Superconductor Corporation

APEC Asia-Pacific Economic Cooperation

APT advanced persistent threat

AQSIQ Administration of Quality Supervision, Inspection and Quarantine

ATI Allegheny Technologies, Inc

AVIC Aviation Industry Corporation of China

AVICEM ACIF Electromechanical Systems Co., Ltd

AWD all-wheel drive

BCM Bank of Communications

BEA U.S. Bureau of Economic Analysis

BGI Shenzhen Beijing Genomics Institute

BIO Biotechnology Innovation Organization

BIS Bureau of Industry and Security

BoC Bank of China

BRI Belt and Road Initiative

BRIC Brazil, Russia, India, and China

C&C command-and-control

CAAC Civil Aviation Administration of China

CAIGA China Aviation Industry General Aircraft Co.

CAST China Association of Science and Technology

CCBC China Construction Bank Corporation

CCC China Compulsory Certification

CCCME China Chamber of Commerce for Import & Export of Machinery and Electronic Products

CCOIC China Chamber of International Commerce

CCP Chinese Communist Party

CCXR China Chengxin Securities Rating Company

CDB China Development Bank

CFIUS Committee on Foreign Investment in the United States

CG Complete Genomics

CGCC China General Chamber of Commerce

CIC China Investment Corporation

CIGS copper indium gallium selenide

CIPL China Intellectual Property Law Society

CJV contractual joint venture

CMG Continental Motors Group Limited

CMOS complementary metal-oxide semiconductor

CNOOC China National Offshore Oil Corporation

CNY Chinese yuan

COMAC Commercial Aircraft Corporation of China, Ltd

CompTIA Computing Technology Industry Association

CPPCC Chinese People’s Political Consultative Conference

CSI Coalition of Services Industries

CSIS Center for Strategic and International Studies

CSP cloud service providers

CTA Consumer Technology Association

DHH DHH Washington Law Office

DHS U.S. Department of Homeland Security

DOJ U.S. Department of Justice

DRC Development and Reform Commission

EJV equity joint venture

EXIM China Export-Import Bank

FADEC full authority digital engine control

FAW First Automotive Workers

FDI foreign direct investment

FIE foreign-invested entities

FYP Five-Year Plan for National Economic and Social Development

GA general aviation

GAC General Administration of Customs

GDP gross domestic product

GMO genetically modified organism

HNA Hainan Airlines

IaaS infrastructure as a service

IAM International Association of Machinists and Aerospace Workers

IATA International Air Transport Association

IC integrated circuit

ICBC Industrial and Commercial Bank of China

ICT information and communications technology

ICTSD International Center for Trade and Sustainable Development

IDAR introduce, digest, absorb, and re-innovate

IDC internet data center

IDDS innovation-driven development strategy

IGBT insulated-gate bipolar transistors

IGCC University of California Institute on Global Conflict and Cooperation

IMF International Monetary Fund

iML Integrated Memory Logic Limited

IP intellectual property

IPIRA Intellectual Property and Industry Research Alliances

ISS Imaging Solutions and Services

ISSI Integrated Silicon Solutions, Inc.

IT information technology

ITAR International Traffic in Arms Regulations

ITI Information Technology Industry Council

ITIF Information Technology & Innovation Foundation

JCCT U.S.-China Joint Commission on Commerce and Trade

JV joint venture

M&A merger and acquisitions

MCF military-civil fusion

MCM multi-chip module

MEMA Motor & Equipment Manufacturers Association

MEMS micro-electromechanical systems

MERICS Mercator Institute for China Studies

METI Ministry of Economy, Trade, and Industry

MIIT Ministry of Industry and Information Technology

MLP National Medium- and Long-Term Plan for the Development of Science and Technology

MLPS Multi-level Protection Scheme

MLR Ministry of Land and Resources of the People’s Republic of China

MNE multinational enterprise

MOA Ministry of Agriculture of the People’s Republic of China

MOF Ministry of Finance of the People’s Republic of China

MOFCOM Ministry of Commerce of the People’s Republic of China

MOST Ministry of Science and Technology of the People’s Republic of China

MPS managed print services

MRO maintenance, repair, and overhaul

MSS China’s Ministry of State Security

MW megawatt

NAM National Association of Manufacturers

NBC National Bureau of Statistics of the People’s Republic of China

NDRC National Development and Reform Commission

NEA National Energy Administration

NEV new-energy vehicle

NFTC National Foreign Trade Council

NHI Northern Heavy Industries Group

NPC National People’s Congress (China)

NTE National Trade Estimate

OCTG oil country tubular goods

ODI overseas direct investment

OECD Organization for Economic Cooperation and Development

OFDI outbound foreign direct investment

PaaS computer platform as a service

PBOC People’s Bank of China

PERC Passivated Emitter Rear Contact

PLA China’s People’s Liberation Army

PMA parts manufacturing and authorization

PMDD Permanent-Magnet Direct Drive

PPD-28 Presidential Policy Directive 28

PPP private-public partnership

PRC People’s Republic of China

PWM pulse width modulation

R&D research and development

RMB renminbi (official currency of China)

S&ED U.S.-China Strategic & Economic Dialogue

iii

S&T science and technology

SaaS computer software as a service

SAFE State Administration of Foreign Exchange

SAIC State Administration of Industry Commerce

SASAC State-owned Assets Supervision and Administration Commission

SASTIND State Administration for Science, Technology, and Industry for National Defense

SAT State Administration of Taxes

SEI strategic and emerging industries

SIA Semiconductor Industry Association

SIGINT Signals intelligence

SIPO State Intellectual Property Office

SMIC Semiconductor Manufacturing International Corporation

SNPTC State Nuclear Power Technology Corporation

SOE state-owned enterprise

SSLP seamless standard line pipes

TIA Telecommunications Industry Association

TIER Regulations of the PRC on Administration of Import and Export Technologies TRB technical reconnaissance bureau
TRIPS Trade-Related Aspects of Intellectual Property Rights
UAV unmanned aerial vehicle

UNCTAD United Nations Conference on Trade and Development

USC United States Constitution

USCBC U.S.-China Business Council

USCIB U.S. Council for International Business

USD U.S. dollars

USITC U.S. International Trade Commission

USPTO U.S. Patent and Trademark Office

USW United Steel Workers

UT United Turbine

VAT value-added tax

VC venture capital

WFOE wholly foreign-owned entity

WIPO UN’s World Intellectual Property Organization

WNA World Nuclear Association

ZGC Zhongguancun

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

CONTENTS

Overview …………………… 3
Core Elements of Section 301……………… 3
Background to the Investigation ………….. 4
Initiation of the Investigation…………. 5
China’s Bilateral Commitments to End its Technology Transfer Regime and to Refrain from State-Sponsored Cyber Intrusions and Theft ………… 6
Input from the Public ………. 9
China’s Technology Drive…… 10

China’s Unfair Technology Transfer Regime for U.S. Companies in China …..19
Introduction ………….. 19
Key Elements of China’s Technology Transfer Regime ………….. 19
A Persistent Problem for U.S. Business………. 22
Foreign Ownership Restrictions as Used in China’s Technology Transfer Regime …….. 23
The Foreign Investment Catalogue and Technology Transfer ….. 24
Illustrative Examples of China’s Use of Investment Restrictions to Pressure Technology Transfer ……… 29
Administrative Review and Licensing Processes as Used in China’s Technology Transfer Regime ………………… 35

Technology Transfer Pressure in Administrative Approvals and Licensing ………….. 36 Forced Disclosure of Sensitive Technical Information ……………. 41

China’s Acts, Policies, and Practices Are Unreasonable ….. 43

China’s Acts, Policies, and Practices Burden or Restrict U.S. Commerce…….. 45

III. China’s Discriminatory Licensing Restrictions …….. 48

Introduction ………….. 48

Foreign Licensing Restrictions and China’s Technology Transfer Regime …… 48 Different Outcomes for U.S. Companies versus Chinese Competitors ……. 51 Indemnification Against Infringement Claims ………….. 51

Ownership of Improvements to Licensed Technology …………….. 52

Use of Technology after the Technology Contract Expires………. 53

Concerns Raised by Other Trading Partners……… 54

China’s Acts, Policies, and Practices are Discriminatory…. 55

Justifications for Discrimination…… 55

Acts, Polices, and Practices of Other Countries ………… 57

China’s Acts, Policies, and Practices Burden U.S. Commerce ………. 60

Outbound Investment……………… 62
Introduction ………….. 62
Policy and Regulatory Framework …….. 66
Major Policies to Acquire Foreign Technology…………. 66
The Chinese Outbound Investment Approvals System ……………. 70
Sectors “Encouraged” for Outbound Investment……….. 77
Outbound Investment Policy in Technology and Sectoral Policies…………. 78
State-Backed Actors………. 80

Impact of Policies and Implementing Measures on Chinese Investment in the United States ……… 97

Chinese Investment Activity in the United States: Analysis of Data ……… 98

Effect of State Policies and Implementing Measures on Chinese Acquisitions ……. 102

Leveraging “International Innovation Resources” Through Engagement with Silicon

Valley…………… 142

China’s Acts, Policies, and Practices are Unreasonable …. 147

China’s Acts, Policies, and Practices Burden U.S. Commerce …….. 150

Unauthorized Intrusions into U.S. Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information ………….. 153
Introduction ………… 153
China’s Acts, Policies, and Practices Regarding Unauthorized Intrusions into U.S. Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information …… 154
The Chinese Government’s Extensive Cyber Activities ………… 154
The United States Department of Justice Indicted Chinese Government Hackers in

May 2014 ……… 157

China’s Institutional Framework Supports Cyber Intrusions into U.S. Commercial

Networks ………. 164

China’s Recent Cyber Intrusion Activities Against U.S. Commercial Networks …. 167
China’s Acts, Policies, and Practices Regarding Cybertheft of Intellectual Property Are Unreasonable………. 171
China’s Acts, Policies, and Practices Regarding Cybertheft of Intellectual Property Burden U.S. Commerce …….. 173

Other Acts, Policies, and Practices of China ………. 177
Introduction ………… 177
Measures Purportedly Related to National Security or Cybersecurity …… 177
Inadequate Intellectual Property Protection…………….. 179
China’s Anti-Monopoly Law ……… 180
China’s Standardization Law ……… 181
Talent Acquisition……….. 181
Conclusion………….182

Overview
A. Core Elements of Section 301

This investigation has been brought under Section 301 of the Trade Act of 1974, as amended (the Trade Act).1 Section 301 is a key enforcement tool that may be used to address a wide variety of unfair acts, policies, and practices of U.S. trading partners. Section 301 sets out three categories of acts, policies, or practices of a foreign country that are potentially actionable: (i) trade agreement violations; (ii) acts, policies or practices that are unjustifiable (defined as those that are inconsistent with U.S. international legal rights) and that burden or restrict U.S. Commerce; and (iii) acts, policies or practices that are unreasonable or discriminatory and that burden or restrict U.S. Commerce. 2 The third category of conduct is most relevant to this investigation.

Section 301 defines “discriminatory” to “include, when appropriate, any act, policy, and practice which denies national or most-favored nation treatment to United States goods, service, or investment.”3 An “unreasonable” act, policy, or practice is one that “while not necessarily in violation of, or inconsistent with, the international legal rights of the United States is otherwise unfair and inequitable.”4 The statute further provides that in determining if a foreign country’s practices are unreasonable, reciprocal opportunities to those denied U.S. firms “shall be taken into account, to the extent appropriate.”5

If the USTR determines that the Section 301 investigation “involves a trade agreement,” and if that trade agreement includes formal dispute settlement procedures, USTR may pursue the investigation through consultations and dispute settlement under the trade agreement. Otherwise, USTR will conduct the investigation without recourse to formal dispute settlement.

Moreover, if the USTR determines that the act, policy, or practice falls within any of the three categories of actionable conduct under Section 301, the USTR must also determine what action, if any, to take.6 For example, if the USTR determines that an act, policy or practice is unreasonable or discriminatory and that it burdens or restricts U.S. commerce,

The Trade Representative shall take all appropriate and feasible action authorized under [Section 301(c)], subject to the specific direction, if any, of the President regarding any such action, and all other appropriate and feasible action within the power of the President that the President may

1 Unless otherwise specified, “Section 301” refers generally to Chapter 1 of Title III of the Trade Act of 1974 (codified as amended in 19 U.S.C. §§ 2411-2417). Furthermore, for ease of reference, full citations are used throughout this report.
2 Trade Act of 1974, 19 U.S.C. § 2411(a)-(b).

3 19 U.S.C. § 2411(d)(5). Section III describes discriminatory acts, practices, and policies of the Chinese government.
4 19 U.S.C. § 2411(d)(3)(A).
5 19 U.S.C. § 2411(d)(3)(D).

6 For example, in 2014, USTR determined that action against Ukraine was not appropriate due to the political situation. See Notice of Determination in Section 301 Investigation of Ukraine, 79 Fed. Reg. 14,326-27 (Mar. 13, 2014).

Overview

direct the Trade Representative to take under this subsection, to obtain the elimination of that act, policy, or practice.7

Actions specifically authorized under Section 301(c) include: (i) suspending, withdrawing or preventing the application of benefits of trade agreement concessions; (ii) imposing duties, fees, or other import restrictions on the goods or services of the foreign country for such time as deemed appropriate; (iii) withdrawing or suspending preferential duty treatment under a preference program; (iv) entering into binding agreements that commit the foreign country to eliminate or phase out the offending conduct or to provide compensatory trade benefits; or (v) restricting or denying the issuance of service sector authorizations, which are federal permits or other authorizations needed to supply services in some sectors in the United States.8 In addition to these specifically enumerated actions, the USTR may take any actions that are “within the President’s power with respect to trade in goods or services, or with respect to any other area of pertinent relations with the foreign country.”9

Background to the Investigation

On August 14, 2017, the President issued a Memorandum to the Trade Representative stating inter alia that:

China has implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests. These laws, policies, practices, and actions may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation.10

The President instructed USTR to determine under Section 301 whether to investigate China’s law, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development.11

Concerns about a wide range of unfair practices of the Chinese government (and the Chinese Communist Party (CCP)) related to technology transfer, intellectual property, and innovation are longstanding. USTR has pursued these issues multilaterally, for example, through the WTO dispute settlement process and in WTO committees, and bilaterally through the annual Special 301 review. These issues also have been raised in bilateral dialogues with China, including the U.S.-China Joint Commission on Commerce and Trade (JCCT) and U.S.-China Strategic & Economic Dialogue (S&ED), to attempt to address some of the U.S. concerns.

7 19 U.S.C. § 2411(b).
8 In cases in which USTR determines that import restrictions are the appropriate action, preference must be given to the imposition of duties over other forms of action. 19 U.S.C. §§ 2411(c).
9 19 U.S.C. § 2411(b)(2).
10 See Addressing China’s Laws, Policies, Practices, and Actions Related to Intellectual Property, Innovation, and Technology, 82 Fed. Reg. 39,007 (Aug. 17, 2017).
11 Id.

Overview
Initiation of the Investigation

USTR initiated this investigation on August 18, 2017 after consultation with the interagency Section 301 committee and private sector advisory committees.12 On that same date, USTR also requested consultations with the Government of China.13 China’s Minister of Commerce responded to this letter on August 28, opposing the initiation of a Section 301 investigation.14

The Federal Register Notice described the focus of the investigation as follows:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

12 See Initiation of Section 301 Investigation; Hearing; and Request for Public Comments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 82 Fed. Reg. 40,213-14 (Aug. 24, 2017) (Appendix A).
13 See Appendix A.

14 See Letter from Minster of Commerce Zhong Shan to Ambassador Robert Lighthizer (Aug. 28, 2017) (on file with author).

Overview

In addition to these four types of conduct, interested parties could submit for consideration information on other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation for potential inclusion in this investigation or to be addressed through other applicable mechanisms.15

The terms “technology” and “technology transfer” are key concepts in this investigation. They are defined in Box I.1.

Box I.1: Technology and Technology Transfer Defined

Technology is defined broadly in this investigation to include knowledge and information needed to produce and deliver goods and services, as well as other methods and processes used to solve practical, technical or scientific problems. In addition to information protected by patents, copyrights, trademarks, trade secrets, and other types of intellectual property (IP) protections, the term also includes “know-how”, such as production processes, management techniques, expertise, and the knowledge of personnel.

Technology and innovation are critical factors in maintaining U.S. competitiveness in the global economy. Among all major economies, the United States has the highest concentration of knowledge- and technology-intensive industries as a share of total economic activity. And in high-tech manufacturing, the United States leads the world with a global share of production of 29 percent, followed by China at 27 percent.

Technology transfers made on voluntary and mutually-agreed terms, and without government interference or distortion, are critical to the U.S. economy. In fact, U.S. companies are global leaders in the transfer of technology through legal mechanisms such as trade in high-tech goods and services; the licensing of technology to companies and persons abroad; and foreign direct investment (FDI).

Sources: OECD, Glossary of Statistical Terms; Keith E. Maskus, UNCTAD-ICTSD, Encouraging International Technology Transfer 9 (2004); U.S. Dept. of Commerce, Intellectual Property and the U.S. Economy 1 (2012); National Science Board, Science & Engineering Indicators 4, 4-17 (2016); OECD, Main Science and Technology Indicators: Technology Balance of Payments: Receipts (Current Prices), 2016; UNCTAD, World Investment Report, 2017, 14.

China’s Bilateral Commitments to End its Technology Transfer Regime and to Refrain from State-Sponsored Cyber Intrusions and Theft

In the bilateral relationship, China repeatedly has committed to eliminate aspects of its technology transfer regime. On at least eight occasions since 2010, the Chinese government has committed not to use technology transfer as a condition for market access and to permit technology transfer decisions to be negotiated independently by businesses. China has further committed not to pressure the disclosure of trade secrets in regulatory or administrative

15 See Appendix A.

Overview

proceedings. The evidence adduced in this investigation establishes that China’s technology transfer regime continues, notwithstanding repeated bilateral commitments and government statements, as summarized in Table I.1, below, and discussed in the remainder of this report.

Overview
Table I.1 China’s Bilateral Commitments Relating to Technology Transfer, 2010 – 2016

Year Mechanism

2010 S&ED
2011 JCCT
2012 S&ED

2012 Xi Visit Commitment

2012 JCCT

2014 JCCT

2014 JCCT
2015 Xi Visit Commitment
2015 Xi Visit Commitment
2016 Xi Visit Commitment

Commitment

China reaffirmed that the terms and conditions of technology transfer, production processes, and other proprietary information will be determined by individual enterprises.

China confirmed that it does not and will not maintain measures that mandate the transfer of technology in the New Energy Vehicles Sector. China further clarified that “mastery of core technology” does not require technology transfer for NEVs.

China reaffirmed its commitment that technology transfer is to be decided by firms independently and not to be used by the Chinese government as a pre-condition for market access.

China reiterated that technology transfer and technological cooperation shall be decided by businesses independently and will not be used by the Chinese government as a pre-condition for market access.

China reaffirmed that technology transfer and technology cooperation are the autonomous decisions of enterprises. China committed that it would not make technology transfer a precondition for market access.

China committed that enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises.

China confirmed that trade secrets submitted to the government in administrative or regulatory proceedings are to be protected from improper disclosure to the public and only disclosed to government officials in connection with their official duties in accordance with law.

China committed not to advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in the Chinese market.

China committed to refrain from conducting or knowingly supporting cyber-enabled theft of intellectual property cyber- enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors.

China committed not to require the transfer of intellectual property rights or technology as a condition of doing business.

Source: USTR, CATALOGUE OF JCCT AND S&ED COMMITMENTS (2016); 2016 USTR REP. TO CONG. ON CHINA’S WTO COMPLIANCE 7.

Overview
Input from the Public

USTR provided the public and interested persons with opportunities to present their views and perspectives on the issues highlighted in the Federal Register Notice, including through a public hearing on October 10, 2017.16 Witnesses with varied interests and perspectives testified and

responded to questions from the interagency Section 301 committee including representatives of U.S. companies and workers, trade and professional associations, and think tanks, as well as law firms and representatives of trade and professional associations headquartered in China.17 Interested persons also filed approximately 70 written submissions in the public docket for this investigation.18

As U.S. companies have stated for more than a decade,19 they fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices. Concerns about Chinese retaliation arose in this investigation as well. Multiple submissions noted the great reluctance of U.S. companies to share information on China’s technology transfer regime, given the importance of the China market to their businesses and the fact that Chinese government officials are “not shy about retaliating against critics.”20

For example, a representative of the Commission on the Theft of American Intellectual Property testified at the hearing: “American companies are intimidated and reticent over the issue, especially in China. There they risk punishment by a powerful and opaque Chinese regulatory system.”21 In addition, according to the U.S. China Business Council, their member companies do not presently have “reliable channel[s] to report abuses and to appeal adverse decisions…without fear of retaliation.”22 Similarly, a representative of SolarWorld stated that “many other companies face the same issues of cyberhacking and technology theft that [it] has faced, but are unwilling to come forward publicly due to fear of lost sales or retaliation by China.”23

16 The transcript of the hearing is available on the Federal eRulemaking Portal, https://www.regulations.gov and on USTR’s website, https://ustr.gov.
17 The following individuals participated in the public hearing: Richard Ellings, Commission on the Theft of American Intellectual Property; Stephen Ezell, Information Technology and Innovation Foundation; Erin Ennis, US- China Business Council; Owen Herrnstadt, International Association of Machinists and Aerospace Workers; Juergen Stein, SolarWorld; Daniel Patrick McGahn, American Superconductor Corporation; William Mansfield, ABRO Industries; Scott Partridge, American Bar Association Intellectual Property Law Section; Scott Kennedy, Center for Strategic and International Studies; Jin Haijun, China Intellectual Property Law Society; Chen Zhou and Liu Chao, China Chamber of International Commerce; XU Chen, China General Chamber of Commerce; John Tang, DHH Washington Law Office; Wang Guiqing, China Chamber of Commerce for Import and Export of Machinery and Export Products. See Appendix B.

18 See Appendix C for a summary of the public submissions. The submissions can be viewed on the Federal eRulemaking Portal, https://www.regulations.gov.
19 U.S. CHINA BUSINESS COUNCIL [hereinafter “USCBC”], Submission, Section 301 Hearing 4 (Sept. 28, 2017); see also SOLARWORLD, Submission, Section 301 Hearing 2 (Oct. 20, 2017).
20 James Lewis, CENTER FOR STRATEGIC & INT’L. STUDIES [hereinafter “CSIS”], Submission, Section 301 Hearing 6 (Sept. 27, 2017); see also Lee Branstetter, Submission, Section 301 Hearing 4 (Sept. 28, 2017); Stephen Zirschky, Submission, Section 301 Hearing 2 (Sept. 28, 2017).
21 USTR, Hearing Transcript, Section 301 Hearing 13 (Oct. 10, 2017); see also COMM’N. ON THE THEFT OF AM. IP [hereinafter “IP Commission”], Submission, Section 301 Hearing 8 (Sept. 28, 2017).
22 USCBC, Submission, Section 301 Hearing 4 (Sept. 28, 2017).
23 SOLARWORLD, Submission, Section 301 Hearing 2 (Oct. 20, 2017).

Overview

Because USTR self-initiated this action, no particular company or group of companies was required to step forward and file a Section 301 petition to initiate this investigation. Moreover, in making this determination, USTR and the interagency Section 301 committee took into account not just investigation submissions and testimony but also public reports, scholarly articles, and other reliable information. In addition, business confidential information has been provided and considered as part of the record in this investigation, so that companies could share sensitive information without the threat of business loss or retaliation.

China’s Technology Drive

Official publications of the Chinese government and the CCP set out China’s ambitious technology-related industrial policies. These policies are driven in large part by China’s goals of dominating its domestic market and becoming a global leader in a wide range of technologies, especially advanced technologies. The industrial policies reflect a top-down, state-directed approach to technology development and are founded on concepts such as “indigenous innovation” and “re-innovation” of foreign technologies, among others. The Chinese government regards technology development as integral to its economic development and seeks to attain domestic dominance and global leadership in a wide range of technologies for economic and national security reasons.24 China accordingly seeks to reduce its dependence on technologies from other countries and move up the value chain, advancing from low-cost manufacturing to become a “global innovation power in science and technology.”25 In pursuit of this overarching objective, China has issued a large number of industrial policies, including more than 100 five-year plans, science and technology development plans, and sectoral plans over the last decade.26 Some of the most prominent industrial policies include the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020) (MLP),27 the State Council Decision on Accelerating and Cultivating the Development of Strategic Emerging Industries (SEI Decision)28, and, more recently, the Notice on Issuing “Made in China 2025” (Made in China 2025 Notice).29

The MLP, issued in 2005 and covering the period 2006 to 2020, is the seminal document articulating China’s long-term technology development strategy. The MLP recognizes the country’s “relatively weak indigenous innovation capacity,” its “weak core competitiveness of enterprises,” and the fact that the country’s high-technology industries “lag” those of more developed nations.”30

24 See James Lewis, Submission, Section 301 Hearing 1 (Sept. 2017).
25 CCP State Council Releases the “National Innovation-Driven Development Strategy Guidelines §2(3) [Chinese], XINHUA NEWS, May 19, 2016, http://news.xinhuanet.com/politics/2016-05/19/c_1118898033.htm.; see also TAI MING CHEUNG ET AL., U.S.-CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT [hereinafter “IGCC REPORT”] xiii (2016).
26 IGCC REPORT at 30.
27 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020) [hereinafter “MLP”] (State Council, Guo Fa [2005] No. 44, issued Dec. 26, 2005).
28 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries (State Council, Guo Fa [2010] No. 32, issued Oct. 10, 2010).
29 Notice on Issuing “Made in China 2025” (State Council, Guo Fa [2015] No. 28, issued May 8, 2015).
30 MLP §1.

Overview

As its focus, the MLP identifies 11 key sectors, and 68 priority areas within these sectors, for technology development.31 It also designates eight fields of “frontier technology,” 32 within which 27 “breakthrough technologies” will be pursued, and highlights four major scientific research programs.33 The MLP also establishes the cross-cutting goal of reducing the rate of dependence on foreign technologies in the identified sectors to below 30% by the year 2020.34

The MLP strategy for securing sought-after technology development includes several key elements, which continue to have a negative impact on U.S. and other foreign companies:

· A top-down national strategy, in which implementation requires the mobilization and participation of all sectors of society35 and the integration of civil and military resources;36
· Prioritization of certain industries and technologies for development,37 particularly those that can advance “sustainable development,” “core competitiveness,” “public service,” and “national security” objectives.38
· Leveraging state resources and regulatory systems;39
· Import substitution to be achieved through “indigenous innovation”40 and re-innovation

based on assimilation and absorption of foreign technologies;41 and

· Promoting Chinese enterprises to become dominant in the domestic market42 and internationally competitive enterprises43 in key industries.

The MLP set in motion a web of policies and practices intended to drive innovation and re- innovation. For example, Section 8(2) of the MLP calls for “enhancing the absorption, digestion,

31 The sectors include energy, water and mineral resources, environment, agriculture, manufacturing, transportation, information and services, population and health, urbanization, public security and national defense.
32 The areas include biotech, information technology, advanced materials, advanced manufacturing, advanced energy technology, marine technology, laser technology and aerospace technology.

33 The fields include protein science, nanotechnology, quantum physics and developmental and reproductive science.
34 MLP § 2(2) ¶ 3, Guiding Directives, Development Targets, and Comprehensive Arrangements.
35 MLP § 2(1). (“In sum, we must make enhancing indigenous innovation capacity our national strategy, and implement it in all aspects of modernization construction and in every industry, sector and region.”). §8(5) also guides “all types of financial institutions and private funds to participate in science and technology development.” 36 MLP § 8(7).

37 MLP § 3 sets out the “Key Sectors and their Priority Issues.” 38 MLP § 3, Preamble.
39 MLP § 9.
40 MLP § 2(1).

41MLP §§ 2(1), 8(2). The term “introduce” used throughout MLP refers to introduction of technology through foreign investment. This is made more explicit in the measures defining and discussing IDAR below.
42 MLP § 2(2) states dependence on foreign technology should be reduced to only 30% by 2020.
43 See IGCC REPORT at 157. See also MLP § 2.

Overview

and re-innovation of introduced technology.”44 Following the issuance of the MLP, China detailed these policies in the Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020)” (MLP Supporting Policies)45 and the Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade (IDAR Opinions),46 which articulate the concept of Introducing,47 Digesting,48 Absorbing,49 and Re- innovating50 foreign intellectual property and technology (IDAR). The IDAR approach involves four steps, each of which hinges on close collaboration between the Chinese government and Chinese industry to take full advantage of foreign technologies:

· Introduce: Chinese companies should target and acquire foreign technology. Methods of “introducing” foreign technology that are specifically referenced include: technology transfer agreements, inbound investment, technology imports, establishing foreign R&D centers, outbound investment, and the collection of market intelligence by state entities for the benefit of Chinese companies.51 Technology to be “introduced” from overseas includes “major equipment that cannot yet be supplied domestically”, as well as “advanced design and manufacturing technology”;52 conversely, the government discourages imports of technologies for which China is already deemed to “possess domestic R&D capabilities.”53
· Digest: Following the acquisition of foreign technology, the Chinese government should collaborate with China’s domestic industry to collect, analyze, and disseminate the information and technology that has been acquired.54
· Absorb: The Chinese government and China’s domestic industry should collaborate to develop products using the technology that has been acquired. The Chinese government should provide financial assistance to develop products using technology obtained through IDAR, including foreign trade development funds, government procurement, and fiscal incentives.55 To absorb foreign technologies, authorities have established engineering research centers, enterprise-based technology centers, state laboratories, national technology transfer centers, and high-technology service centers.56

44 MLP §§ 2(1), 8(2).
45 Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline (2006-2020)” (State Council, Guo Fa [2006] No. 6, issued Feb. 7, 2006).
46 Several Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade (MOFCOM, NDRC, MOST, MOF, GAC, SAT, SIPO, SAFE, Shang Fu Mao Fa [2006] No. 13, issued July 14, 2006).
47 English translation of Chinese term yinjin.
48 English translation of Chinese term xiaohua.
49 English translation of Chinese term xishou.
50 English translation of Chinese term zai chuangxin.
51 IDAR Opinions § 7-9, 11-12. See also IGCC REPORT at 118-119.
52 MLP Supporting Policies § 28, 29.
53 MLP Supporting Policies § 29.
54 IDAR Opinions § 7; MLP Supporting Policies § 31.
55 IDAR Opinions § 15, 18; MLP Supporting Policies § 30, 32.
56 IGCC REPORT at 118.

Overview

Re-innovate: At this stage, Chinese companies should “re-innovate” and improve upon the foreign technology. The ultimate objective is to develop new, home-grown products that are competitive internationally, so as to “allow enterprises to possess more indigenous intellectual property for core products and core technologies.”57

The IDAR approach embraces a strong role for the Chinese government in guiding and assisting Chinese industry in technology development and has had profound implications, in particular, for the way in which China has sought to introduce foreign technologies into China over the last decade. It has spurred Chinese government ministries and government officials to pursue an array of aggressive implementing acts, policies, and practices, including those that are the subject of this investigation.

China has continued to emphasize the IDAR approach since it was first articulated in 2006 in broad-ranging five-year plans and technology development plans issued by China’s State Council, central government ministries and provincial and municipal governments, and the CCP. The IDAR approach also has been incorporated into numerous economic development plans for specific sectors, such as integrated circuits.58

In 2010, the Chinese government announced another seminal technology development strategy, which calls for the accelerated development of seven so-called “strategic emerging industries” (SEIs): (1) energy efficient and environmental technologies, (2) next generation information technology, (3) biotechnology, (4) high-end equipment manufacturing, (5) new energy, (6) new materials, and (7) new energy vehicles.59 The 12th Five-year National Strategic Emerging Industries Development Plan (12th Five-year SEI Plan)60 subsequently recommended specific fiscal and taxation policy support and set a target for SEIs to account for 8% of China’s economy by 2015 and 15% by 2020. The 12th Five-year SEI Plan also aims to foster a group of Chinese enterprises – including state-owned enterprises – into “backbone enterprises” that can become

57 IDAR Opinions § 5.
58 E.g., 12th Five-year Development Plan for the Integrated Circuit Industry (Ministry of Industry and Information Technology, published Feb. 24, 2012) § 3(1), ¶ 3: “Maintain innovation drivers. Combine implementation of national science and technology major special projects and megaprojects, using innovation in technologies, modes, mechanisms, and systems as the impetus to make breakthroughs in a group of shared core technologies. Strengthen introduce, digest, absorb, and re-innovate, to stride down the path of open-type innovation and internationalized development.” (emphasis added).
59 State Council Decision on Accelerating the Development of Strategic Emerging Industries (State Council, Guo Fa [2010], No. 32, issued Oct. 10, 2010).
60 Notice on Issuing the 12th Five-year National Strategic Emerging Industries Development Plan (State Council, Guo Fa [2012] No. 28, issued July 9, 2012).

Overview

market leaders domestically and compete globally.61 The Chinese government later reaffirmed and refined this strategy in its 13th Five-year Strategic Emerging Industries Development Plan.62

Notably, support for the IDAR strategy was reiterated in the CCP’s 2013 Third Plenum Decision63 (Third Plenum Decision) released in connection with the Third Plenary Session of the 18th National Congress of the CCP. IDAR’s inclusion in the Third Plenum Decision is significant because the document was widely seen as setting forth the priorities of President Xi Jinping’s new administration with respect to China’s future economic development path.64 By reaffirming that China should “establish and perfect a mechanism to encourage original innovation, integrated innovation, and introduce, absorb, digest, and re-innovate,”65 the Third Plenum Decision signaled the CCP’s continued high-level support for the IDAR approach to technology innovation.

In 2015, the State Council released the Made in China 2025 Notice,66 which is China’s ten-year plan for targeting ten strategic advanced technology manufacturing industries for promotion and development: (1) advanced information technology; (2) robotics and automated machine tools; (3) aircraft and aircraft components; (4) maritime vessels and marine engineering equipment; (5) advanced rail equipment; (6) new energy vehicles; (7) electrical generation and transmission equipment; (8) agricultural machinery and equipment; (9) new materials; and (10) pharmaceuticals and advanced medical devices.67

While the Made in China 2025 Notice references market-oriented principles, it closely resembles China’s other state-led, technology-related plans, such as the MLP, issued a decade earlier, in that it:

Reaffirms the Chinese government’s central role in economic planning;68

61 For example, the 12th Five-year National Economic and Social Development Plan Outline (adopted by the NPC on Mar. 14, 2011) calls for the cultivation of a group of backbone enterprises within strategic emerging industries. Ch. 10, §2 “Fostering the Development of Strategic Emerging Industries”. The 12th Five-year SEI Plan further specifies that backbone enterprises are to have “relatively strong indigenous innovation capacity and a technological leadership effects.” § 2(3), “Guiding Thoughts, Fundamental Principles, and Development Targets”. At the sectoral level, the Guidelines for the Development and Promotion of the Integrated Circuit Industry (State Council, issued June 24, 2014) laud the fact that China has established “a group of backbone enterprises with significant international competitiveness.” § 1, ¶ 1. The Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation (State Council, Guo Fa [2015] No. 30, issued May 13, 2015) provides that a “main target” of the policy is to “establish a group of backbone enterprises that possess international competitiveness and the ability to open up markets.” § 2(6).

62 Notice on Issuing the 13th Five-year National Strategic Emerging Industries Development Plan (State Council, Guo Fa [2016] No. 67, issued Nov. 29, 2016).
63 CCP Central Committee Decision on Several Major Issues for Comprehensively Deepening Reform (CCP Central Committee, issued Nov. 12, 2013) [hereinafter “Third Plenum Decision”).
64 Third Plenums have historically been used to announce major economic reforms, such as the adoption of reform and opening during the Third Plenary Session of the 11th National Congress of the CCP in 1978, and the endorsement of the socialist market economy following the 14th National Congress of the CCP in 1993.
65 Third Plenum Decision § 13.
66 Decision on Issuing “China Manufacturing 2025” (State Council, Guo Fa [2015] No. 28, issued May 8, 2015).
67 Made in China 2025 Notice § 3(6).
68 Made in China 2025 Notice § 2(2).

Overview

· ·
·
·

Calls on all facets of society to mobilize behind the plan;69

Seeks technological breakthroughs in key areas for economic and security purposes;

Promotes further civil-military integration and the two-way transfer and conversion of military and civilian technologies;70

Leverages state resources,71 policy support,72 and regulatory systems;73

Continues to promote import substitution and rely on indigenous products to meet growing demand in China;74

Reaffirms the leading role of backbone enterprises in technology development;75 and

Promotes Chinese enterprises to become dominant in the domestic market and internationally competitive in key industries.76

The Made in China 2025 Notice expressly calls for China to achieve 40% “self-sufficiency” by 2020, and 70% “self-sufficiency” by 2025, in core components and critical materials in a wide range of industries, including aerospace equipment and telecommunications equipment.77 The “Made in China 2025” Key Area Technology Roadmap (Made in China Roadmap) sets explicit market share targets that are to be filled by Chinese producers both domestically and globally in dozens of high-tech industries.78

69 Made in China 2025 Notice § 1(3).
70 Made in China 2025 Notice § 3(1).
71 Made in China 2025 Notice § 4.
72 Made in China 2025 Notice § 1(3).
73 See generally Made in China 2025 Notice. This is particularly the case in quality standard regulations as described in §§ 2(1) and 3(4).

74 Made in China 2025 Notice § 1(2) describes the growing demand for new equipment, consumption, and safety, while § 1(3) calls for China to “rely more on Chinese equipment and Chinese brands.”
75 Made in China 2025 Notice § 3(1).
76 Made in China 2025 Notice § 1(3).

77 Made in China 2025 Notice, Box 3.
78 Made in China 2025 Key Area Technology Roadmap, (National Strategic Advisory Committee on Building a Powerful Manufacturing Nation, issued Oct. 10, 2015); see also U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 8 (2017). The Made in China Roadmap was released by the National Strategic Advisory Committee on Building a Powerful Manufacturing Nation (also known as the “National Manufacturing Strategy Advisory Committee”) which was established pursuant to the Made in China 2025 Notice with responsibility to provide advice and assessments on China’s major manufacturing policies. In August 2015, Vice Premier Ma Kai, who leads the Strong Manufacturing Country Leading Small Group, spoke at the Committee’s first meeting and lauded its establishment as a way to “strongly promote Made in China 2025.” National Strategic Advisory Committee on Building a Powerful Manufacturing Nation Established; Chaired by Ma Kai [Chinese], XINHUA (Aug. 26, 2015), available at http://www.xinhuanet.com/info/2015-08/26/c_134556815.htm (last visited Mar. 16, 2018). See also Notice on the Establishment of the Strong Manufacturing Country Leading Small Group, (General Office of the State Council, Guo Ban Fa [2015] No. 48, published June 24, 2015) (last visited March 16, 2018); and National Strategic Advisory Committee on Building a Powerful Manufacturing Nation Established, STATE INTELLECTUAL PROPERTY OFFICE OF THE P.R.C. (Aug. 26, 2015), available at http://www.sipo.gov.cn/yw/2015/201508/t20150826_1165829.html (last visited Dec. 21, 2017).

Overview

For example, indigenous new energy vehicles are to achieve an 80% domestic market share79 with foreign sales accounting for 10% of total sales by 2025.80 Similarly, domestically produced energy equipment is to achieve 90% domestic market share, with exports accounting for 30% of production, by 2020,81 and renewable energy equipment with indigenous IP is to achieve 80% domestic market share by 2025.82 In comparison to previous plans, Made in China 2025 expands its focus to capturing global market share, not just dominance in the China market, and is part of a “broader strategy to use state resources to alter and create comparative advantage in these sectors on a global scale.”83

The Made in China 2025 Notice sets forth clear principles, tasks, and tools to implement this strategy, including government intervention and substantial government, financial and other support to the targeted Chinese industries.84 Domestic dominance and global competitiveness are to be achieved by upgrading the entire research, development, and production chain, with emphasis on localizing the output of components and finished products.85 Foreign technology acquisition through various means remains a prime focus under Made in China 2025 because China is still catching up in many of the areas prioritized for development, and as U.S. companies are front-runners in many of these areas.86

China’s Ministry of Industry and Information Technology (MIIT) has explained that Made in China 2025 is part of a three-step strategy for China to become a world leader in advanced manufacturing. Under the first step, by 2025, China should “approach the level of manufacturing powers Germany and Japan during the period when they realized industrialization.” In the second step, China should “enter the front ranks of second tier manufacturing powers” by 2035. In the final step, China should “enter the first tier of global manufacturing powers” by 2045, at which point China will have “innovation-driving capabilities,” “clear competitive advantages,” and “world-leading technology systems and industrial systems.”87

In recent years, China also issued policies specific to advanced technologies in which U.S. firms are market leaders. Information and communications technologies have been a focal point, with more and more strategies emanating from the National Informatization Development Strategy (2006-2020), such as the National Integrated Circuit Industry Development Outline, the Internet

79 Made in China 2025 Key Area Technology Roadmap § 6.2.2.
80 Made in China 2025 Key Area Technology Roadmap § 6.2.2.
81 Made in China 2025 Key Area Technology Roadmap § 7.1.2.
82 Made in China 2025 Key Area Technology Roadmap § 7.1.2.
83 U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 6 (2017).
84 See AM. CHAMBER OF COMMERCE IN SHANGHAI, Submission, Section 301 Hearing 2 (Sept. 28, 2017); NAT’L. ASS’N OF MANUFACTURERS [hereinafter “NAM”], Submission, Section 301 Hearing 3 (Sept. 28, 2017); WILEY REIN LLP, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); BJÖRN CONRAD, ET AL., MERCATOR INST. FOR CHINA STUDIES [hereinafter “MERICS”], MADE IN CHINA 2025 7, 11 (2016); and U.S. CHAMBER OF COMMERCE, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 7, 15, 18 (2017).

85 IGCC REPORT at 121.
86 IGCC REPORT at 121.
87 Made in China 2025 Explanation 6: The Manufacturing Power ‘Three-Step’ Strategy, MINISTRY OF INDUSTRY AND INFORMATION TECHNOLOGY (May 19, 2015), http://www.miit.gov.cn/n1146295/n1146562/n1146655/c3780688/content.html; see also IGCC REPORT at 47-48.

Overview

Plus Plan, the “Broadband China” strategy and corresponding implementation plan, and the designation of next-generation information technology as a “strategic emerging industry.”88

In addition, China recently announced that it will pursue an “innovation-driven” development strategy89 and that it has made breakthroughs in higher-end innovation a top priority.90 At the 19th National Congress of the CCP, held in October 2017, President Xi Jinping’s remarks specifically referenced the goal of building China into a “powerful nation [or power] in science and technology, quality, aerospace, the Internet, and transportation” and called for “accelerating the construction of [China as] a manufacturing power” by “accelerating the development of advanced manufacturing industry” and “promoting the deep integration of the Internet, big data, and artificial intelligence with the real economy.”91

Like the MLP a decade ago, newer plans such as the Made in China 2025 Notice and the various plans focused on information and communications technologies call for a wide array of Chinese government intervention and financial and other support designed to transform China into a world leader in technology. While these policies and practices are not necessarily new, their actual and potential effects on foreign companies and their technologies have become much more serious. As James Lewis of CSIS explained in his submission to USTR:

What is new is that unfair trade, security and industrial policies, tolerable in a smaller developing economy, are now combined with China’s immense, government-directed investment and regulatory policies to put foreign firms at a disadvantage…China now has the wealth, commercial sophistication and technical expertise to make its pursuit of technological leadership work. The fundamental issue for the U.S. and other western nations, and the IT sector is how to respond to a managed economy with a well-financed strategy to create a domestic industry intended to displace foreign suppliers.92

As detailed in Sections II through VI of this report, a key part of China’s technology drive involves the acquisition of foreign technologies through acts, policies, and practices by the Chinese government that are unreasonable or discriminatory and burden or restrict U.S. commerce. These acts, policies, and practices work collectively as part of a multi-faceted strategy to advance China’s industrial policy objectives. They are applied across a broad range of sectors, overlap in their use of policy tools (e.g., the issuance of planning documents and guidance catalogues), and are implemented through a diverse set of state and state-backed actors, including state-owned enterprises.

Section II describes the Chinese government’s use of foreign ownership restrictions, such as joint venture (JV) requirements and foreign equity limitations, other foreign

88 IGCC REPORT at 44.
89 IGCC REPORT at 41 (“This innovation-driven development strategy (IDDS) was officially promulgated by the Chinese authorities in May 2016 and provides a ‘top-level design and systemic plan’ for China’s innovation over next 30 years.”).
90 IGCC REPORT at xiii-xiv.
91 Xi Jinping, Speech at the 19th CPC National Congress: Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era (Oct. 18, 2017), available in Chinese at http://www.gatj.gov.cn/html/6/wjjh/17/10/3257-6.html.
92 James Lewis, CSIS, Submission, Section 301 Hearing 1 (Sept. 27, 2017).

Overview

investment restrictions, and the administrative licensing and approvals process to require or pressure the transfer of technology from U.S. companies to Chinese entities.

Section III describes how U.S. companies seeking to license technologies to Chinese entities must do so on non-market-based terms that favor Chinese recipients.

Section IV describes how the Chinese government directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese entities, to obtain cutting-edge technologies and intellectual property and generate large- scale technology transfer in industries deemed important by state industrial plans.

Section V describes how the Chinese government has conducted or supported cyber intrusions into U.S. commercial networks targeting confidential business information held by U.S. firms. Through these cyber intrusions, China’s government has gained unauthorized access to a wide range of confidential business information, including trade secrets, technical data, negotiating positions, and sensitive and proprietary internal communications.

Section VI describes other acts, policies, and practices of by the Chinese government to acquire foreign technologies, including measures purportedly related to national security or cybersecurity, inadequate intellectual property protection, the Antimonopoly Law of the People’s Republic of China, the Standardization Law of the People’s Republic of China, and talent acquisition.

China’s Unfair Technology Transfer Regime for U.S. Companies in China A. Introduction

The previous section of this report detailed China’s technology drive and how it seeks to support prioritized industries and foster “national champions” by pursuing technology advancement through the acquisition and “re-innovation” of foreign technology.93 One method China uses to achieve this goal is through restrictions on foreign investment, which it uses to selectively grant market access to foreign investors in exchange for commitments to transfer technology. This section will detail how China uses inbound foreign ownership restrictions, such as joint venture (JV) requirements and foreign equity limitations, and the administrative licensing and approvals process to require or pressure the transfer of technology.

Key Elements of China’s Technology Transfer Regime

The evidence collected in this investigation from hearing witnesses, written submissions, public reports, journal articles, and other reliable sources indicates there are two key aspects of China’s technology transfer regime for inbound foreign investment.

First, the Chinese government uses foreign ownership restrictions, such as formal and informal JV requirements, and other foreign investment restrictions to require or pressure technology transfer from U.S. companies to Chinese entities. These requirements prohibit foreign investors from operating in certain industries unless they partner with a Chinese company, and in some cases, unless the Chinese partner is the controlling shareholder. Second, the Chinese government uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous administrative approvals needed to establish and operate a business in China.

These two aspects of China’s technology transfer regime are furthered by the non-transparent and discretionary nature of China’s foreign investment approvals system. Prior to 2001, China often explicitly mandated technology transfer, requiring the transfer of technology as a quid pro quo for market access.94 In 2001, China joined the WTO and committed not to condition the approval of investment or importation on technology transfer.95 Since then, according to numerous sources, China’s technology transfer policies and practices have become more implicit, often carried out through oral instructions and “behind closed doors.”96

93 See Section I.C.

94 See, e.g., OFFICE OF TECH. ASSESSMENT, 100TH CONG., OTA-ISC-3401, REP. ON TECHNOLOGY TRANSFER TO CHINA (1987); OFFICE OF STRATEGIC INDUS. & ECON. SEC. BUREAU OF EXPORT ADMIN. & DFI INT’L., U.S. DEPT. COMMERCE, U.S. COMMERCIAL TECHNOLOGY TRANSFER TO THE PEOPLE’S REPUBLIC OF CHINA (Jan. 1999); THOMAS J. HOLMES ET AL., FED. RES. BANK OF MINNEAPOLIS, RES. DEP’T STAFF REP. 486, QUID PRO QUO: TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 3 (2015).

95 China’s accession agreements include the Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001) [hereinafter “Accession Protocol”], and the Report of the Working Party on the Accession of China, WTO Doc. WT/ACC/CHN/49 (Oct. 1, 2001) [hereinafter “Working Party Report”]. China’s technology transfer commitments are contained in Accession Protocol, General Provisions ¶ 7.3 and Working Party Report ¶ 203 (incorporated into the Accession Protocol through ¶ 1.2).

96 See, e.g., THOMAS J. HOLMES ET AL., FED. RES. BANK OF MINNEAPOLIS, RES. DEP’T STAFF REP. 486, QUID PRO QUO: TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 3 (2015); TAI MING CHEUNG ET AL., U.S.-

China’s Unfair Technology Transfer Regime for U.S. Companies in China

As the Information Technology and Innovation Foundation (ITIF) stated in its written submission in this investigation:

Chinese officials are careful not to put such requirements in writing, often resorting to oral communications and informal ‘administrative guidance’ to pressure foreign firms to transfer technology.97

According to another expert, Chinese measures and practices “no longer spell out the most controversial requirements in black and white. Verbal instructions and requests to ‘volunteer’ one’s technology are today’s rules of the road.”98 Similarly, a 2014 study of China’s foreign investment policies conducted for the European Union found that China has relied more heavily on opaque administrative processes to promote its technology transfer goals as international trade rules have limited its ability to formally codify foreign investment restraints.99

Another particular challenge is the complex relationship between China’s private sector and the government, which provides both direct and indirect mechanisms by which the government may pressure foreign companies. In some cases, the Chinese government may directly pressure the foreign company to transfer technology, but in other cases the demand may come from a Chinese partner.100 As discussed in more detail below, when confronted with this latter scenario, foreign companies often reasonably understand that the demand originated from the government,101 as “business decisions [in China] are very much influenced by the public policy objectives pursued by the State and the CCP.”102 Moreover, because the Chinese partner serves as the applicant in the approval process on behalf of the JV, the Chinese partner is able, in many cases, to control the communication channels between the foreign investor and the Chinese government authorities.103 Section IV of this report further details how the Chinese government and Chinese Communist Party (CCP) utilize a wide array of actors, regulations, and informal guidance to achieve China’s industrial policy objectives.104

CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT 163 (2016) (citing US-CHINA BUSINESS COUNCIL [hereinafter “USCBC”], CHINA’S STRATEGIC EMERGING INDUSTRIES: POLICY, IMPLEMENTATION, CHALLENGES, AND RECOMMENDATIONS (Mar. 2013)); 2016 USTR REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE 104 (2017).

97 ITIF, Submission, Section 301 Hearing 5-6 (Oct. 25, 2017).
98 See Covington & Burling LLP, Measures and Practices Restraining Foreign Investment in China, prepared for the European Commission Directorate-General for Trade 63-4 (Aug. 2014) (citing to JAMES MCGREGOR, NO ANCIENT WISDOM, NO FOLLOWERS: THE CHALLENGES OF CHINESE AUTHORITARIAN CAPITALISM 38 (2012)).
99 Covington & Burling LLP, Measures and Practices Restraining Foreign Investment in China, prepared for the European Commission Directorate-General for Trade 11 (Aug. 2014).
100 USCBC, 2017 MEMBER SURVEY 9 (2017).
101 USCBC, 2017 MEMBER SURVEY 9 (2017).
102 EUROPEAN COMM’N, COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 (SWD(2017)483 FINAL/2, 39 (Dec. 20, 2012).
103 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 38-9 (Nov. 2012).
104 See e.g., Mark Wu, The ‘China, Inc.’ Challenge to Global Trade Governance, 57 HARV. INT’L L. J. 284 (May 2016) ( “China’s economic structure involves a complex web of overlapping networks and relationships—some formal and others informal—between the state, Party, SOEs, private enterprises, financial institutions, investment

China’s Unfair Technology Transfer Regime for U.S. Companies in China

The fact that China systematically implements its technology transfer regime in informal and indirect ways makes it “just as effective [as written requirements], but almost impossible to prosecute.”105 This difficulty is further exacerbated by the reality that foreign companies have no effective recourse in China and have been hesitant to report these informal pressures for fear of Chinese government retaliation and the potential loss of business opportunities.106 Nevertheless, as shown below, confidential industry surveys, where companies may report their experiences anonymously, make clear that they are receiving such pressure. The lack of transparency in the regulatory environment, the complex relationship between the State and the private sector, and concerns about retaliation have enabled China’s technology transfer regime to persist for more than a decade.107

In the course of this investigation, certain Chinese trade associations and law firms representing Chinese interests defended China’s technology transfer regime, arguing that technology transfer decisions are products of “voluntary agreement” without “government intervention.”108 They also asserted that JV and technology transfer arrangements are distinct from broader national industrial policies, and that domestic and foreign companies can choose when and whether to establish business partnerships.109 Further, they stated that no Chinese laws or regulations explicitly force foreign investors to transfer technology, and that the central government has instructed local governments not to require technology transfer.110

vehicles, trade associations, and so on.”). See also EUROPEAN COMM’N, COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 SWD(2017)483 FINAL/2, 13 (Dec. 20, 2012) (“Therefore, even though today the Chinese economy is to some extent made up of non-state actors…the decisive role of the State in the economy remains intact, with tight interconnections between government and enterprises (going far beyond the boundaries of SOEs) in place.”).

105 ITIF, STOPPING CHINA’S MERCANTILISM: A DOCTRINE OF CONSTRUCTIVE, ALLIANCE-BACKED CONFRONTATION 18 (Mar. 2017).
106 See U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKETACCESS,NATIONALTREATMENTANDTRANSPARENCY2,40(Nov.2012). ITIF’ssubmissioninthis investigation also illustrates how the threat of Chinese government retaliation leads U.S. companies to avoid seeking redress. For example, the ITIF submission provides that, “[a] top executive at a large U.S. plant biotechnology firm told ITIF recently of its experience in China. China was dumping the chemicals for a particular herbicide the U.S. company sold on global markets. The company confronted the Chinese agricultural minister with fact and said that it was planning to bring a complaint before the WTO. The Chinese minister simply responded that if the case were brought, the company would lose access to the Chinese market. Needless to say, the U.S. firm did not bring the case, even as it continued to lose global market share and jobs in the U.S.” ITIF, Submission, Section 301 Hearing 6 (Oct. 25, 2017).

107 See, e.g., U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 38-9 (Nov. 2012); EUROPEAN CHAMBER OF COMMERCE, CHINA MANUFACTURING 2025 15-16 (2017) (“For example, a longstanding feature of China’s industrial policy is that foreign companies are often pushed to transfer technology as the price of market entry…Forced technology transfer is nothing new to FIEs. However, it is now an increasing requirement for more advanced technologies to be shared.”).

108 See generally, CHINA CHAMBER OF COMMERCE FOR IMPORT & EXPORT OF MACHINERY & ELECTRONIC PRODUCTS [hereinafter “CCCME”], Submission, Section 301 Hearing 6 (Oct. 20, 2017); CHINA CHAMBER OF INT’L. COMMERCE [hereinafter “CCOIC”], Submission, Section 301 Hearing 12 (Sept. 28, 2017).
109 CCCME Submission, Section 301 Hearing 8-9 (Sept. 27, 2017).

110 CCOIC, Submission, Section 301 Hearing 124 (Sept. 28, 2017). 21

China’s Unfair Technology Transfer Regime for U.S. Companies in China

USTR has carefully considered these arguments and finds them unsupported by the evidence and unconvincing. As set forth in detail below, the weight of the evidence shows that China uses foreign ownership restrictions, including joint venture requirements and equity limitations, and other investment restrictions to require or pressure technology transfer from U.S. companies to Chinese entities. The evidence further establishes that China uses discretionary and non- transparent administrative reviews and licensing processes to pressure technology transfer or force the unnecessary disclosure of sensitive technical information.

A Persistent Problem for U.S. Business

Due to the fact that much of China’s technology transfer regime occurs “behind closed doors,” confidential surveys provide an important source of information on how the regime works in practice. These surveys make clear that China’s technology transfer regime is a persistent problem for U.S companies in China, particularly in high-tech sectors targeted by the Chinese government.

According to the US-China Business Council’s (USCBC) most recent member survey, 19 percent of responding companies stated that in the last year they had been directly asked to transfer technology to China.111 Of these, 33 percent said that the request came from a central government entity and 25 percent that it came from the local government.112

Annual surveys conducted by the American Chamber of Commerce in China (AmCham China) reflect a similar problem. For example, in a 2013 survey of 325 U.S. companies in various sectors, more than one-third of respondents (35 percent) reported that they were concerned about “de facto technology transfer requirements as a condition for market access.”113 In a 2017 survey, 36 percent of respondents cited “reducing the need for us to engage in technology transfer” as one factor that would cause them to increase their investment levels in China.114

Other evidence indicates that this problem may be even more widespread than these surveys suggest. For example, one participant testified in the hearing for this investigation that while he was aware of these survey results, his own research indicated through “many, many private interviews with companies…we did not find a single instance in which companies had not felt pressure and in many cases caved into the pressure to share technology.”115

111 USCBC, 2017 MEMBER SURVEY 9 (2017).
112 USCBC, 2017 MEMBER SURVEY 9 (2017) (67 percent said the request was made directly by a Chinese company during the negotiations. The survey states, “[t]he request most frequently comes from a Chinese partner, rather than a government entity. While some of these requests may be a normal part of commercial negotiations, in many cases the hand of the Chinese government is behind these requests.”).
113 THOMAS J. HOLMES ET AL. FED. RES. BANK OF MINNEAPOLIS, RES. DEP’T STAFF REP. 486, QUID PRO QUO: TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 8 (2015) (citing AM. CHAMBER OF COMMERCE IN CHINA, CHINA BUSINESS CLIMATE SURVEY REPORT (2013)).
114 AMCHAM CHINA, 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 44 (2017). Of these, 22 percent stated that this reduction would be somewhat significant to their investment decision, 9 percent as very significant and 5 percent as extremely significant.
115 Richard Ellings, COMMISSION ON THE THEFT OF INTELLECTUAL PROPERTY [hereinafter “IP Commission”], Testimony, Section 301 Hearing, 37 (Oct. 10, 2017) (emphasis added).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

Moreover, in sectors that are the focus of the Chinese government’s industrial policy initiatives, the pressure on U.S. companies to form JVs and transfer technology is particularly intense. For example, according to AmCham China’s 2013 survey, 42 percent of respondents in advanced technology sectors (including aerospace, automotive, chemical, and information technology) were concerned about “de facto technology transfer requirements as a condition for market access.”116 Only 3 percent of surveyed companies reported that these technology transfer requirements were decreasing, while 37 percent reported they were increasing and 26 percent that they were staying the same.117

A 2017 survey of the U.S. integrated circuit design and manufacturing industry conducted by the Department of Commerce’s Bureau of Industry and Security yielded similar results: 25 U.S. integrated circuit companies responded that they will have to form JVs with Chinese entities and transfer intellectual property to obtain or maintain access to the China market.118 In 2017, these 25 integrated circuited companies accounted for more than $25 billion in total sales and over a quarter (26 percent) of all integrated circuits made and sold in the United States.119

U.S. companies are not alone in their concerns about China’s technology transfer regime. According to a 2011 public consultation process conducted by the EU, the top barriers to investment in China included technology transfer requirements; JV requirements; foreign ownership limitations; prohibitions or limitations on the scope of business investments; licensing requirements/procedures; and regulatory approval procedures.120

Foreign Ownership Restrictions as Used in China’s Technology Transfer Regime

Foreign ownership restrictions such as JV requirements121 and foreign equity limitations are a cornerstone of China’s technology transfer regime. China’s Catalogue of Industries for Guiding Foreign Investment (Foreign Investment Catalogue), and other rules and regulations, require U.S. companies seeking to invest in certain industry sectors to enter into cooperative

116 AMCHAM CHINA, 2013 CHINA BUSINESS CLIMATE SURVEY REPORT 10 (2013).
117 Id. (“N/A or don’t know” responses omitted).
118 U.S. DEP’T OF COMMERCE, BUREAU OF INDUS. & SECURITY, ASSESSMENT OF THE U.S. INTEGRATED CIRCUIT DESIGN AND MANUFACTURING INDUSTRY (forthcoming).
119 U.S. DEP’T OF COMMERCE, BUREAU OF INDUS. & SECURITY, ASSESSMENT OF THE U.S. INTEGRATED CIRCUIT DESIGN AND MANUFACTURING INDUSTRY (forthcoming).
120 EUROPEAN COMM’N, IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS, SWD (2013) 185final 12 90, 95 (May 23, 2013).
121 The three most common corporate forms for foreign-invested entities (FIEs) in China are contractual joint ventures, equity joint ventures, and wholly foreign-owned enterprises. Each of these forms has different requirements and restrictions under Chinese law. See generally Law of the People’s Republic of China on Chinese- Foreign Contractual Joint Ventures (adopted at the First Session of the Seventh NPC on Apr. 13, 1988, amended by the 18th Session of the Standing Committee of the Ninth NPC on Oct. 31, 2000, further amended Sep. 3, 2016, in Executive Order No. 51, and Nov. 7, 2016, in Executive Order No. 57, and Nov. 4, 2017, in Executive Order No. 81); Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (adopted at the Second Session of the Fifth NPC on July 1, 1979, amended Apr. 4, 1990, in Executive Order No. 27, further amended Mar. 15, 2001, in Executive Order No. 48, and Sept. 3, 2016, in Executive Order No. 51); Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises (adopted by NPC on Apr. 12, 1986, amended Oct. 31, 2000, further amended Sept. 3, 2016).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

arrangements with Chinese partners.122 According to submissions and testimony in this investigation, China’s imposition of these requirements precludes U.S. companies from entering the market on their own terms and lays the foundation for the Chinese government to require or pressure technology transfer. For example, the U.S. Chamber of Commerce states in its written submission that:

As companies negotiate the terms of the joint venture, the foreign side may be asked—or required—to transfer its technology in order to finalize the partnership. Especially in instances where the Chinese partner is a state-owned or state-directed company, foreign companies have limited leverage in the negotiation if they wish to access the market. Although this type of technology transfer may not be explicitly mandated in a Chinese law or regulation, it is often an unwritten rule for market access.123

The USCBC similarly states that JV and other investment restrictions necessarily create an “unbalanced negotiation” with respect to technology transfer:

Chinese companies are in an inherently stronger position since their participation is required to form a joint venture or to provide the remaining equity in restricted sectors. As a consequence, a request for technology transfer made by a Chinese party in a business negotiation can reasonably be interpreted by foreign parties as a requirement for the deal to be concluded.124

The National Association of Manufacturers (NAM) stressed the negative effects of China’s technology transfer regime on U.S. companies’ global competitiveness:

This tilting of the playing field leaves manufacturers with untenable choices: they must either transfer their technology to the new China-based joint venture, or they must cede the world’s fastest-growing market to foreign competitors, thus harming both their short- term growth and their long-term competitiveness. 125

The Foreign Investment Catalogue and Technology Transfer

China maintains a detailed system for administering inbound foreign investment. The Foreign Investment Catalogue is a starting point for analyzing the restrictions on foreign investment in a particular industry, and is an important element of China’s technology transfer regime.126 First

122 Catalogue of Industries for Guiding Foreign Investment (2017 Amendment) (NDRC, MOFCOM, Order No. 4, issued June 28, 2017).
123 U.S. CHAMBER OF COMMERCE, Submission, Section 301 Hearing 15 (Oct. 3, 2017).
124 USCBC, Submission, Section 301 Hearing 6-7 (Sept. 28, 2017).

125 NAT’L. ASS’N OF MANUFACTURERS [hereinafter “NAM”], Submission, Section 301 Hearing 3 (Sept. 28, 2017). See also Lee Branstetter, Submission, Section 301 Hearing 2, 3 (Sept. 28, 2017) (U.S. companies are forced to choose between protecting their valuable technologies or losing access to a critical market. If they choose to forego the Chinese market to protect their valuable intellectual property, their foreign competitors exploit the market opportunity, thereby inhibiting U.S. companies’ global competitiveness in the long-run).

126 In addition to the Foreign Investment Catalogue, there are thousands of other regulations, rules, and regulatory documents related to foreign investment that are issued by central government authorities, as well as a countless local government regulations and restrictions that must be consulted to fully understand the restrictions foreign investors face in any particular sector. See Covington & Burling LLP, Measures and Practices Restraining Foreign

China’s Unfair Technology Transfer Regime for U.S. Companies in China

issued in 1995, and most recently revised in 2017, the Foreign Investment Catalogue has historically divided industries into three basic categories: (1) “encouraged,” (2) “restricted,” and (3) “prohibited.”127 Industries not listed in one of these categories generally are considered to be “permitted.”

Different categories of investment generally lead to different degrees of approval scrutiny or application requirements. For example, foreign investments in “restricted” industries are subject to stricter government review and a case-by-case administrative approval process.128 “Encouraged” industries benefit from special preferences and from a file-for-the record system of approvals, but can still be subject to investment restrictions.129 Moreover, even for “encouraged” sectors, stakeholders have expressed concerns, based on past experiences, that once China’s economy has achieved self-sufficiency in a particular industry and closed the technology gap, it will impose additional requirements or restrictions in these industries.130

Since its inception, the Foreign Investment Catalogue has required that investments in certain sectors take the form of a JV, that the proportion of foreign equity investment in the JV be capped at a particular level, that the Chinese party hold a controlling interest, and imposed other restrictions.131 These arrangements may take different forms including: (i) a requirement that the U.S. company enter into an equity joint venture (EJV) or contractual joint venture (CJV) with a Chinese party; (ii) a requirement that Chinese parties must be controlling shareholders or hold

Investment in China, prepared for the European Commission Directorate-General for Trade 5 (Aug. 10, 2014) (reviewing 39 central government agencies that promulgated 137,328 measures affecting foreign investment that were in effect at the time of the survey).
127 In 2017, a “negative list” approach was adopted under which the catalogue was divided between a list of “encouraged” sectors and a “Foreign Investment Access Negative List” (Negative List), which consisted of three types of industries: (a) “restricted” (b) “prohibited” and (c) certain “encouraged” industries subject to limitations on shareholder structure or other limitations. This approach is fundamentally similar to previous catalogues and merely re-categorizes the restricted and prohibited industries under the rubric of a Negative List. Further, the Negative List is not a comprehensive identification of all foreign investment restrictions as it is based on earlier catalogues, which as described above, do not comprehensively list all investments restrictions that may apply to foreign investors in China. Foreign Investment Catalogue.

128 See WTO Secretariat, Trade Policy Review: China, ¶2.45-¶2.76, WT/TPR/S/300 (May 27, 2014).
129 Projects in the “encouraged” category” may be eligible for certain preferential policies, such as customs duty preferences on the importation of certain capital goods. See e.g, General Administration of Customs Announcement On Implementing Issues Regarding Foreign Investment Industry Guiding Catalogue (amended 2017) §1 (GAC, 2017 Announcement No. 30, issued July 17, 2017). Encouraged industries subject to foreign equity restrictions are listed twice, once under the encouraged category and then again under the restricted category. Foreign Investment Catalogue.
130 U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27 (2017); EUROPEAN CHAMBER OF COMMERCE, CHINA MANUFACTURING 2025 15 (2017). See also TAI MING CHEUNG ET AL., U.S.-CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT 166 (2016) (“In cases where China has no bargaining power but wants the technology, it will allow 100 percent foreign ownership since that is the only choice. An example of an ‘encouraged’ investment with no JV or equity requirements is ‘IC design, manufacturing of 28 nm and below large-scale digital IC, manufacturing of 0.11-micron and below analog and mixed signal IC, manufacturing of MEMS and compound semiconductor IC, and BGA, PGA, CSP, MCM, and other advanced packaging and testing.’ This category does not specify any joint venture or Chinese controlled entity requirement.”). 131 See TAI MING CHEUNG ET AL., U.S.-CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT 166 (2016); Foreign Investment Catalogue.

China’s Unfair Technology Transfer Regime for U.S. Companies in China

the majority of shares in the venture; and (iii) other types of restrictions on foreign ownership or control. 132

Although reforms to China’s foreign investment regime have enabled other forms of investments, including wholly-owned foreign enterprises (WFOEs) in certain sectors, ownership restrictions continue to operate in many key sectors important to foreign investors, including in the services, agriculture, extractive industries, and manufacturing sectors.

Currently, 35 sectors remain in the “restricted” category of the Foreign Investment Catalogue.133 The category includes, inter alia, the following sectors, which are subject to equity limits and/or local partner requirements (see Table II.1).

Table II.1: Examples of Equity Restrictions and Local Partner Requirements in China’s 2017

Foreign Investment Catalogue

Sector	Summary of Requirements
Selection and cultivation of new varieties of crops and production of seeds	Chinese party must be the controlling shareholder.
Exploration and development of oil and natural gas	Limited to CJV or EJV
Manufacturing whole automobiles	Chinese party’s investment cannot be lower than 50 percent, and the same foreign investor may establish no more than two JVs in China for the same kind of automobiles, subject to certain exceptions.
Manufacturing commercial aircraft	Chinese party must be the controlling shareholder.
Construction and operation of nuclear power plants	Chinese party must be the controlling shareholder.
Value-added Telecommunications Services	Foreign investment cannot exceed 50 percent, excluding e-commerce, and is limited to WTO commitments. Note that China classifies a broad range of internet and technology-related services under this sector.
Basic telecommunications services	Chinese party must be the controlling shareholder and foreign investment is limited to WTO commitments.
Banks	Foreign financial institution investment cannot exceed 20 percent or 25 percent depending on how the investment is structured.
Medical institutions	Limited to CJV or EJV.
Surveying and mapping companies	Chinese party must be the controlling shareholder.

Source: Foreign Investment Catalogue (2017 Amendment).
By promoting foreign investment in certain industries while limiting or altogether prohibiting

investment in others, the Chinese government uses its foreign investment regime to channel

132 Foreign Investment Catalogue.
133 Sectors in the “restricted” category are described in Appendix D to this Report.

China’s Unfair Technology Transfer Regime for U.S. Companies in China

foreign investment into industries of its choosing to support policy objectives.134 For example, the U.S. Chamber of Commerce in a March 2017 report on the Made in China 2025 initiative, notes that foreign investment restrictions impact companies in the plan’s targeted industries:

These restrictions either block opportunities for foreign companies to operate in the market, or, in some cases, create a de facto technology transfer requirement to the Chinese partner as a precondition for market access.135

These technology transfer pressures occur not only in the high-tech sectors targeted by Made in China 2025 but also in more traditional sectors in which China has sought to obtain advanced technologies through the imposition of JV requirements. The shale gas industry provides one example of how the Foreign Investment Catalogue is used to channel investment to support industrial policy objectives. In this industry, China seeks to acquire foreign technologies in order to unlock the potential of its shale reserves located in geologically complex areas, and has explicitly stated in its industrial policies that “cooperation” with foreign companies should be used as one way to introduce this technology to China. For example, China’s Shale Gas Development Plan (2011-2015) encourages international cooperation to “absorb and emulate mature advanced technologies from abroad and create core technologies for exploration and development that possess ‘Chinese characteristics.’”136 In addition, China’s Shale Gas Industrial Policy reiterates that China will encourage domestic enterprises to engage with foreign enterprises “that possess advanced shale gas technology” in technical cooperation in order to “introduce”137 shale gas technology and operational experience.138 Accordingly, oil and natural gas exploration and development continue to be subject to a JV requirement in the Foreign Investment Catalogue.139 As discussed in more detail in Section V.B of this report, China has also used cyber intrusions to obtain technology and sensitive commercial information from U.S. companies operating in the oil and gas sectors, underscoring how the Chinese government uses a range of tools at its disposal to achieve its industrial policy objectives and to effect the transfer of technology from U.S companies.

Foreign companies typically prefer to invest in China through a WFOE, rather than a JV, if the option is available. This preference often stems from concerns about the loss of control over their valuable technologies.140 In a survey of 1,000 companies conducted on behalf of the EU, only 12 percent of respondents reported they would have chosen their current JV structure in the

134 USTR, 2016 USTR REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE 103-4 (2017); see also U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 26 (2017); EUROPEAN CHAMBER OF COMMERCE, CHINA MANUFACTURING 2025 15 (2017).
135 U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 26 (2017).

136 Notice on Issuing the Shale Gas Development Plan (2011-2015), Sec. 5(1)2 (NDRC, MoF, MLR, NEA, Fa Gai Neng Yuan [2012] No. 612, issued Mar. 13, 2012).
137 See Section I.C for an explanation of China’s IDAR strategy and the concept of “introducing” technology from abroad.

138 Shale Gas Industry Policy, art. 9 (NEA, 2013 Order No. 5, issued Oct. 22, 2013). The policy at art. 10 also encourages enterprises to participate in shale gas exploration and development through joint ventures.
139 Foreign Investment Catalogue.
140 INTERCHINA CONSULTING, ESTABLISHMENT OF A JOINT VENTURE IN CHINA 5 (June, 2011) (“Many foreign investors have discovered through hard found experience that one of the greatest exposures to IPR infringement is by having a Chinese partner.”); EUROPEAN COMM’N, IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS, SWD (2013) 185final 12 95-6 (May 23, 2013).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

absence of JV requirements. Most (52 percent) would have preferred a fully-owned business and 32 percent wanted a greater ownership stake in the JV than permitted.141

The risk of technology loss is exacerbated when the Chinese partner in the JV operation maintains other factories and workers that compete with the JV operation.142 The employees of the JV often are recruited from, or have ties to, the Chinese partner’s existing operations.143 Under these conditions, there is a considerable likelihood that the JV’s technology and know- how will leak, either through “unintentional osmosis or through intentional diversion.”144 In contrast, a WFOE has more control over its operations and can sometimes minimize operational decisions that create technology risks.145 Nevertheless, WFOEs also face various technology- related pressures from the Chinese government, as part of China’s numerous administrative review and licensing processes, as described in more detail below.146

In this investigation, the Intellectual Property Law Section of the American Bar Association noted that many U.S. companies—including American Superconductor Corporation (AMSC), Corning, DuPont, Eli Lilly, and General Motors—have sued for the misappropriation of trade secrets by JV partners, employees and others in Chinese courts.147 The U.S. International Trade Commission also has been a frequent forum for U.S. companies asserting trade secret misappropriation claims based on conduct by JV partners and others in China, including SI Group, Fellowes, and Manitowoc Company.148

In response to these concerns, defenders of China’s technology transfer regime argue that China has opened its economy to foreign investment in several respects, such as the introduction of the “Negative List” system, in which foreign investment in all sectors is permitted unless it is expressly included on a negative list.149 Despite these changes, substantial restrictions on foreign

141 EUROPEAN COMM’N, IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS, SWD (2013) 185final 12 13 (May 23, 2013).
142 OWEN D. NEE, JR., SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 (Thomson Reuters ed, 2016); see also INTERCHINA CONSULTING ESTABLISHMENT OF A JOINT VENTURE IN CHINA 5 (June, 2011); ITIF Submission, Section 301 Hearing 10 (Oct. 25, 2017) (stating that, “[a]nother way China acquires technology and intellectual property is to steal it.”).

143 OWEN D. NEE, JR., SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 (Thomson Reuters ed, 2016).
144 OWEN D. NEE, JR., SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 (Thomson Reuters ed, 2016).

145 OWEN D. NEE, JR., SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 (Thomson Reuters ed, 2016).
146 See infra Section II(C).
147 AM. BAR ASS’N SECTION OF IP LAW [hereinafter “ABA Section”], Submission, Section 301 Hearing 3 (Sept. 27, 2017). See also Daniel C.K. Chow, Navigating the Minefield of Trade Secrets Protection in China, 47 VAND. J. TRANSNAT’L L., 1007, 1009 (2014); Paul Ranjard, Benoit Misonne, Study 12: Exploring China’s IP Environment, in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 15 (2007). (describing a “common scenario” of IP violations by Chinese JV partners with competing businesses that use technology obtained from the foreign JV partner).

148 ABA IP Law SECTION, Submission, Section 301 Hearing 3 (Sept. 27, 2017).
149 Opinions on the Implementation of the Market Access Negative List System § 1(1), (State Council, Guo Fa [2015] No. 55, issued Oct. 2, 2015, effective from Dec. 1, 2015 to Dec. 31, 2017); CCOIC, Submission, Section 301 Hearing 33 (Sept. 26, 2017); CHINA INTELLECTUAL PROPERTY LAW [hereinafter “CIPL”], Submission, Section 301 Hearing 40 (Sept. 27, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

investment remain. First, China continues to use an approach that is fundamentally similar to previous versions of the Foreign Investment Catalogue, in which many “restricted” and “prohibited” investments are included under the “Negative List”.150 During the period of this investigation, key sectors remain subject to JV and other investment restrictions.151 Moreover, even if China dropped its JV and other foreign ownership requirements, foreign investors would still continue to face pressures to transfer technology or disclose technical information through China’s licensing and administrative approvals regime (detailed in Section II.C, below).

Illustrative Examples of China’s Use of Investment Restrictions to Pressure Technology Transfer

While companies from the United States and other advanced economies have long faced JV requirements and other limits on control over their technologies in China, the most intensive technology transfer pressures often arise in sectors that align with the Chinese government’s industrial policy objectives. For example, studies commissioned by the European Commission have found that in key sectors, including machinery and environmental technologies, European companies have to enter into partnerships with Chinese state-owned enterprises (SOEs) and acquiesce to technology transfer demands to access the market or bid on government projects.152 Highlighted below for purposes of illustration are examples of technology transfer requirements or pressures imposed by the Chinese government in the automotive and aviation sectors.

a) Auto Manufacturing and New Energy Vehicles

When China initially opened the auto manufacturing sector to foreign investment, its goal was to use the transfer of technology from U.S. and other foreign auto makers to modernize SOEs in the sector.153 To accomplish this goal, China has long required U.S. and other foreign car makers to enter into JVs where non-Chinese ownership is capped at 50 percent.154

China’s strategy of leveraging the technology of foreign automakers through JV requirements to grow its indigenous innovation capability has been called the “Changan Model” by Chinese

150 U.S. CHAMBER OF COMMERCE, Submission, Section 301 Hearing 14 (Oct. 3, 2017) (China’s latest changes to its investment regime have provided, “…little in the way of comprehensive and meaningful openings to foreign investors.”).
151 See Appendix D.

152 Joachim Ihrcke, Krystina Becker, Study 1: Machinery, in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 33 (2007); Celine Louche, Angus Lambkin Padraig Oliver, Study 11: Sustainable Technologies and Services, in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 66 (2007).

153 2015 U.S.-CHINA ECON. & SEC. REV. COMM’N ANN. REP. 84-5 (2015); KATHERINE KOLESKI, U.S.-CHINA ECON. & SEC. REV. COMM’N, CHINA’S 13TH FIVE-YEAR PLAN 153 (Feb. 14, 2017); see also USITC, INV. NO. 332-519, CHINA: EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U.S. ECONOMY 5-33 (2011).

154 2015 U.S.-CHINA ECON. & SEC. REV. COMM’N ANN. REP. 84 (2015); KATHERINE KOLESKI, U.S.-CHINA ECON. & SEC. REV. COMM’N, CHINA’S 13TH FIVE-YEAR PLAN 153 (Feb. 14, 2017); see also USITC, INV. NO. 332-519, CHINA: EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U.S. ECONOMY 5-33 (2011).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

government entities.155 This model refers to the 50/50 JV entered into by a U.S. auto manufacturer and Chongqing Changan Automobile (Changan), a state-owned company ultimately controlled by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) through China South Industries Group.156 A research division under the State Council lauded the “Changan Model” as an example of China’s Introduce, Digest, Absorb, Re-innovate (IDAR) approach157 to technology development through the “introduction of technology and the digestion and re-innovation of technology.”158 According to an article on the SASAC website, the model’s advantages include Changan’s control of the JV’s core production technology, the development of domestic innovation capabilities through control of that core technology, and the gradual upgrading of the domestic brand.159

As China gained advanced auto manufacturing technology through JVs and sought to promote its own domestic brands, foreign automakers have found their industry placed in increasingly restrictive sections of the Foreign Investment Catalogue. Thus, the Foreign Investment Catalogue “encouraged” the “manufacturing of complete automobiles” until 2010, “permitted” it from 2011-2014, and “restricted” it in 2015, as China’s domestic capability grew.160

Technology transfer pressures have intensified as China has sought to develop expertise in the manufacture of new energy vehicles (NEVs), which includes plug-in hybrids, electric batteries and fuel cell vehicles. The NEV sector was specifically targeted by the Chinese government in 2010 following the release by the State Council of the Decision on Accelerating the Development of Strategic Emerging Industries, which designated NEVs as one of the seven “strategic emerging industries” selected for accelerated development. In 2012, the State Council released the Energy-Saving and New-Energy Automotive Industry Development Plan (2012-2020) (NEV Plan),161 which set forth an industrial development blueprint for NEVs calling for the

155 “Changan Model” Radiates at the China Auto Industry Indigenous Innovation Summit [Chinese], SASAC, Nov. 7, 2006. http://www.sasac.gov.cn/n2588025/n2588124/c3877435/content.html (last visited Nov. 29, 2017).
156 CHONGQING CHANGAN AUTOMOBILE CO., LTD. 2016 ANNUAL REPORT 42 [Chinese] (2016), available at http://www.chinasouth.com.cn/1144.html (last visited Dec. 2, 2017). China Southern Industries Group is a major Chinese arms manufacturer. SASAC is a part of the Chinese government, directly under the State Council, tasked with overseeing China’s SOEs.

157 See Section I.C for an explanation of China’s IDAR strategy.
158 Development Research Center of the State Council: Changan Innovation Model Evokes Interest [Chinese], CHINA ENTERPRISE CONFEDERATION / CHINA ENTERPRISE DIRECTORS ASSOCIATION, Nov. 14, 2006, available at http://info.cec-ceda.org.cn/jx/pages/20061114_32467_6_2.html (last visited Nov. 29, 2017).
159 Changan Model” Radiates at the China Auto Industry Indigenous Innovation Summit [Chinese], SASAC, Nov. 7, 2006, available at http://www.sasac.gov.cn/n2588025/n2588124/c3877435/content.html (last visited Nov. 29, 2017).
160 See 2015 U.S.-CHINA ECON. & SEC. REV. COMM’N ANN. REP. 85 (2015). See also Catalogue of Industries for Guiding Foreign Investment (National Planning Commission, National Economic and Trade Commission, Ministry of Foreign Economics and Trade, Order No. 21, issued Mar. 4, 2002); Catalogue of Industries for Guiding Foreign Investment (amended 2004) (NDRC, MOFCOM Order No. 24, issued Nov. 30, 2004); Catalogue of Industries for Guiding Foreign Investment (amended 2007) (NDRC, MOFCOM Order No. 57, issued Oct. 31, 2007); Catalogue of Industries for Guiding Foreign Investment (amended 2011) (NDRC, MOFCOM Order No. 12, issued Dec. 24, 2011); Catalogue of Industries for Guiding Foreign Investment (amended 2015) NDRC, MOFCOM Order No. 22, issued Mar. 10, 2015); Catalogue of Industries for Guiding Foreign Investment (amended 2017) (NDRC, MOFCOM, Order No. 4, issued June 28, 2017).
161 Energy-Saving and New-Energy Automotive Industry Development Plan (2012-2020) § 6(2)(2) (State Council, Guo Fa [2012] No. 22, issued June 28, 2012) [hereinafter “NEV Plan”].

China’s Unfair Technology Transfer Regime for U.S. Companies in China

establishment of numerous regulations and subsidy programs to support domestic R&D, manufacturing, and utilization of NEVs. The NEV Plan sets a target of achieving cumulative production and sales volume of 5 million NEV units by 2020.162 A “basic principle” of the NEV Plan is to “expedite the formation of technology, standards, and brands using indigenous intellectual property.”163 China’s focus on developing its domestic capacity to produce NEVs was recently reconfirmed with the sector’s inclusion in the Made in China 2025 Key Area Technology Roadmap (Made in China 2025 Roadmap), which calls for, inter alia, indigenous NEVs to comprise 70 percent of domestic NEV sales by 2020 and 80 percent by 2025.164

Foreign NEV producers seeking to sell their products in China face pressure to produce their automobiles in China with a JV partner rather than exporting them to China, due to a range of Chinese policies, including steep import tariffs165 and subsidies available for domestically- produced NEVs,166 as well as a new NEV credit system.167 These pressures to produce NEVs locally work in tandem with China’s JV requirements to elicit the transfer of technology from foreign automakers to domestic Chinese automakers.

Specifically, market access rules issued in 2009 by the Ministry of Industry and Information Technology (MIIT), which applied to all enterprises that manufactured NEVs in China for use in China168 and were a condition to be eligible for certain NEV preference programs,169 required that NEV JVs hold intellectual property rights in one of three key NEV technologies: batteries, drive systems, or control systems.170 In effect, this requirement forced foreign NEV

162 NEV Plan § 3(2.1).
163 NEV Plan § 2(2).
164 Made in China 2025 Key Area Technology Roadmap (National Strategic Advisory Committee on Building a Powerful Manufacturing Nation, issued Oct. 2015).
165 Imported passenger vehicles are generally subject to a 25 percent tariff rate. See Customs Import and Export Tariff of the People’s Republic of China (2017).
166 The Chinese government provides subsidies to NEV manufacturers in connection with their sales of NEVs to consumers in China. In the current phase of the program, the central government subsidy amount is based primarily upon vehicle range and is capped at CNY 44,000 ($6,500) per vehicle. In addition, local governments are allowed to offer a subsidy of up to 50 percent of the value of the central government subsidy. Notice on Adjusting Fiscal Subsidy Policies for Promoting the Expanded Use of NEVs (MOF, MOST, MIIT, NDRC, Cai Jian [2016] No. 958, Dec. 30, 2016). Eligibility requirements for these subsidies are described below in more detail.
167 The NEV credit system requires all automakers selling vehicles in China to generate, by 2018, a certain portion of their production and imports from NEVs in order to generate “NEV credits” or be subject to penalties. See Provisional Measures for Administration of the NEV Fuel Use and Credit System, art 36 (MIIT, MOF, MOFCOM, General Administration of Customs, and General Administration of Quality Supervision, Inspection and Quarantine, 2017 Order No. 44, issued Sept. 27, 2017, effective Apr. 1, 2018); see also ITIF, Submission, Section 301 Hearing 6 (Oct. 25, 2017).
168 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 2 (MIIT, [2009] Order No. 44, effective July 1, 2009).
169 NEV models that satisfy the market access rules were published in a catalogue. See Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 8 (MIIT, [2009] Order No. 44, effective July 1, 2009). Only NEV models listed in the catalogue were eligible for certain subsidies. See Notice on Developing Energy Efficient and New Energy Vehicle Demo Promotion Pilot Work § 3, art. 7(1) (MOST, MOF, Cai Jian [2009] No. 6, issued Jan. 23, 2009). See also Notice on New Energy Vehicle Expanded Use Fiscal Support Policies for 2016-2020 § 1(2) (MOF, MOST, MIIT, NDRC, Cai Jian [2015] No. 134, issued Apr. 22, 2015).
170 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products (MIIT, [2009] Order No. 44, effective July 1, 2009), Appendix 2, Requirement 5 required the NEV manufacturer “possess intellectual property (at least rights to make design changes or usage rights) for the mastered core technology.” See

China’s Unfair Technology Transfer Regime for U.S. Companies in China

manufacturers to transfer their valuable technologies to the NEV JV, which they do not control, in order to gain market access.171

The pressure on NEV manufacturers to transfer core NEV technology to their JVs in China has intensified over the last year. New market access rules issued by MIIT in 2017, which also apply to all enterprises that manufacture NEVs in China for use in China172 and are a condition to be eligible for certain NEV preference programs,173 impose an even more onerous standard. These rules require that NEV manufacturers “master” the development and manufacturing technology for a complete NEV, rather than just one of the three key technologies listed in the 2009 market access rules, and possess key R&D capacities.174 As foreign automaker investment in China must be through a JV in which the foreign company holds no more than 50 percent equity, the foreign automaker effectively must transfer a high degree of key technologies and components to the JV in order for the JV to acquire mastery of the manufacturing process, including electronic and electrical control systems, on-board energy systems, powertrains, and dynamic coupling equipment.175

Several submissions from U.S. trade associations pointed to China’s NEV rules as evidence of China’s unfair technology transfer regime, with one trade association stating in hearing testimony that China’s NEV rules present “a clear case in the electric vehicle sector that you’re simply not going to be able to sell that product in China unless that local partner has mastered the ability to leverage the technology and take it to produce it going forth.”176

also TAI MING CHEUNG ET AL., U.S.-CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT 235-6 (2016); U.S. CHAMBER, Submission, Section 301 Hearing 16 (Oct. 3, 2017). See also Keith Bradsher, Hybrid in a trade squeeze, NEW YORK TIMES, Sept. 6, 2011 (reporting that the Chinese government was refusing to let GM’s electric vehicle, the Chevrolet Volt, qualify for certain subsidies unless GM agreed to transfer the technology for “one of the Volt’s three main technologies” (electric motors, electronic controls, or power storage) to a JV in China. These subsidies were reportedly “crucial” for allowing electric vehicles to sell in meaningful quantities.); Ben Klayman, GM, SAIC to develop electric vehicles in China, REUTERS, Sept. 20, 2011 (reporting that GM and its Chinese partner SAIC Motor Corp signed an agreement that they would build electric vehicles that would qualify for subsidies, noting that as the Volt was not built in China, it did not qualify for them).
171 TAI MING CHEUNG ET AL., U.S.-CHINA ECON. & SEC. REV. COMM’N, PLANNING FOR INNOVATION: UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL, ENERGY, INDUSTRIAL AND DEFENSE DEVELOPMENT 236 (2016) (citing Sabrina Howell, Henry Lee, & Adam Heal, HARVARD KENNEDY SCHOOL BELFER CENTER, LEAPFROGGING OR STALLING OUT? ELECTRIC VEHICLES IN CHINA (May 2014)).
172 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 2 (MIIT [2017] Order No. 39, effective July 1, 2017).
173 As with the 2009 rules, NEV models that satisfy the market access rules are published in a catalogue and only those NEV models listed in the catalogue are eligible for certain subsidies. Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 14 (MIIT, [2017] Order No. 39, effective July 1, 2017); Notice on New Energy Vehicle Expanded Use Fiscal Support Policies for 2016-2020 § 1(2) (MOF, MOST, MIIT, NDRC, Cai Jian [2015] No. 134, issued Apr. 22, 2015).
174 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 5(3), app. 1 (MIIT, [2017] Order No. 39, effective July 1, 2017); see also U.S. CHAMBER, Submission, Section 301 Hearing 16 (Oct. 3, 2017).
175 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products, art. 5(3), app. 1 (MIIT, [2017] Order No. 39, effective July 1, 2017).
176 Stephen Ezell, ITIF, Testimony, Section 301 Hearing 38-39 (Oct. 10, 2017); see also U.S. CHAMBER, Submission 16 (Oct. 3, 2017); U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27 (2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China
b) Aviation

The state is the dominant force on the demand-side in many industries in China, both through direct purchases made by the central and local governments and through purchases made by SOEs, which account for a large share of purchasing decisions.177 According to one hearing participant, “often an implicit part of the deal of whether or not a company has its product or good chosen and purchased is [whether] there’s going to be a transfer of technology concomitant with that sale.”178 Similarly, AmCham China’s 2013 White Paper on Civil Aviation states “many US companies possess intellectual property (IP) that serves as their source of competitiveness and profitability, yet they are sometimes required (implicitly or explicitly) to transfer such IP to their JV partners”. 179 In the aviation industry, China uses its purchasing power to require JVs and technology transfer in exchange for two types of business opportunities– the sale of commercial aircraft to China’s state-owned airlines and the sale of aircraft components to Chinese-made aircraft.

The fact that China’s three largest airlines – AirChina, China Eastern, and China Southern – are all state-owned and account for the vast majority of aircraft purchases provides the Chinese government with a significant degree of leverage over foreign aircraft makers.180 Purchases of commercial aircraft by China’s state-owned airlines require approval by the Chinese government.181 According to industry experts and participants, China uses its leverage to maintain a balance between purchases of foreign aircraft182 and to pressure them to form JVs with Chinese companies and localize production.183 China is effectively able to exert this pressure over aircraft manufacturers because of the size of China’s commercial aircraft

177 The European Chamber of Commerce in China in 2011 estimated that China’s government procurement market including SOEs ranges from 12 percent to 20percent of China’s GDP. EU CHAMBER OF COMMERCE IN CHINA, PUBLIC PROCUREMENT IN CHINA: EUROPEAN BUSINESS EXPERIENCES COMPETING FOR PUBLIC CONTRACTS IN CHINA 16 (Apr. 2011).

178 Stephen Ezell, ITIF, Testimony, Section 301 Hearing 38 (Oct. 10, 2017).
179 AMCHAM CHINA 2013 WHITE PAPER 188 (2012).
180 See KEITH CRANE, ET AL., RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 27 (2014).
181 See e.g., CAAC Notice Regarding the Report on Civil Aviation System Management System Reform, (State Council Guo Fa [1985] No. 3, Issued Dec. 3, 1984). See also Yan Yan, Secrets of “Elderly” Aircraft, PEOPLE’S DAILY, Apr. 6, 2015, http://paper.people.com.cn/gjjrb/html/2015-04/06/content_1550497.htm (last visited Dec. 8, 2017) for a description of the government approval process for purchasing and leasing aircraft in China.
182 This problem has been widely discussed in industry and government fora, including in two reports commissioned by the U.S.-China Economic and Security Review Commission which explain how the Chinese government leverages purchases of aircraft in exchange for agreements that it hopes will lead to technology transfers into China’s aviation industry. See, e.g., KEITH CRANE, ET AL., RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING (2014); ROGER CLIFF, CHAD J. R. OHLANDT, DAVID YANG, RAND, READY FOR TAKEOFF: CHINA’S ADVANCING AEROSPACE INDUSTRY 38 (Mar. 2011).
183 Owen Herrnstadt, INT’L ASS’N OF MACHINISTS & AEROSPACE WORKERS (hereinafter “IAM”), Testimony, Section 301 Hearing 28-9 (Oct. 10, 2017); KEITH CRANE, ET AL, RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 29 (2014); The Impact of International Technology Transfer on American Research and Development: Hearing Before the House Committee on Science, Space, and Technology, Subcommittee on Investigations and Oversight, 112th Cong. 8 (2012) (Statement of Robert D. Atkinson).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

market,184 coupled with required government approvals of aircraft purchases by state-owned airlines, and fierce competition for a limited number of government-approved sales.

China similarly uses its purchasing power to foster the development of a domestic supply chain for Chinese-made aircraft, particularly the C919, which will be China’s first “homegrown” large commercial aircraft.185 Industry observers have described the purchase order process for the C919 as “state directed,” “coerced,” and “choreographed” by the central government.186 Within this process, JVs are used as a key mechanism for obtaining the technology needed to support the development of a domestic supply chain for Chinese-made aircraft:

Chinese government officials have clearly communicated to foreign firms in the commercial aviation manufacturing industry that their business in China would be much more likely to enjoy success if they are seen as a “friend of China.” Companies can demonstrate this by setting up local production facilities, bringing in technologies, or participating in the C919 project…187

Specifically, the Commercial Aircraft Corporation of China (COMAC), a centrally-controlled SOE,188 has made clear that foreign suppliers to the C919 program must enter into JVs with Chinese suppliers to participate in tenders for key components and systems.189 This pressure is particularly prevalent in tenders for high-tech functions where Chinese capabilities are lagging,

184 The International Air Transport Association estimates that China’s aviation market will reach 1.3 billion passengers by 2035, compared to only 1.1 billion in the U.S. market. Based on these projections, some estimates predict that Chinese airlines will need to purchase 6,810 aircraft worth more than $1 trillion by 2035. Press Release, International Air Transport Association, IATA Forecasts Passenger Demand to Double Over 20 Years (Oct. 18, 2016); Boeing lifts long-term outlook for China plane demand to $1 trillion, REUTERS (Sept. 13, 2016).
185 This problem has been widely discussed in industry and government fora, including in two reports commissioned by the U.S.-China Economic and Security Review Commission which explain how the Chinese government leverages purchases of aircraft in exchange for agreements that it hopes will lead to technology transfers into China’s aviation industry. See, e.g., KEITH CRANE, ET AL., RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING (2014); ROGER CLIFF, CHAD J. R. OHLANDT, DAVID YANG, RAND, READY FOR TAKEOFF: CHINA’S ADVANCING AEROSPACE INDUSTRY 38 (Mar. 2011).
186 Steve Wilhelm, Mighty 737 Has Rivals on its Tail—and not Just Airbus, PUGET SOUND BUSINESS JOURNAL, Aug. 17, 2012; The Enduring Jetliner Duopoly, AEROSPACE AMERICA, Oct. 2012; C919 May Suffer Order Bottleneck over Next 4 Yrs, SINOCAST, Sept. 20, 2012; National Priority: COMAC Is Behind Schedule on C919 Supplier Selection, but Has State Directed Orders in the Bag, AVIATION WEEK & SPACE TECHNOLOGY, June 28, 2010; Alexey Komarov, Michael A. Taverna, Growing Pains, AVIATION WEEK & SPACE TECHNOLOGY, Nov. 22, 2010.
187 KEITH CRANE, ET AL, RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 31 (2014).
188 See List of Central Enterprises [Chinese], ASSET SUPERVISION AND ADMINISTRATION COMMISSION OF THE CHINESE STATE COUNCIL, available at http://www.sasac.gov.cn/n2588035/n2641579/n2641645/index.html (last visited Jan. 7, 2018).
189 Why the “Main Manufacturer – Supplier” Model [Chinese], COMMERCIAL AIRCRAFT CORPORATION OF CHINA (COMAC) (June 24, 2013), http://www.comac.cc/xw/mtjj/201306/24/t20130624_941203.shtml (last visited Dec. 11, 2017) (“As a result [of the drive to develop domestic industry], during the supplier bidding process, COMAC has explicitly put forward that for five systems including avionics, it seeks technological advancements, and at the same time, requires the establishment of joint ventures with domestic suppliers, build-out of R&D, integration, production and assembly, and testing capabilities for system-level products, as well as the formation of a complete set of batch-production and customer service capabilities. Concurrently, [COMAC] has supported the participation of domestic suppliers in system-level and equipment-level R&D cooperation, and encouraged domestic enterprises and institutions to cooperate with foreign suppliers in the form of subcontracted production, to participate in research and procurement projects for other large aircraft systems and equipment.”).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

such as advanced materials and flight control systems.190 A 2015 press statement issued by COMAC explains that it selected sixteen leading international suppliers and it pushed for these suppliers to partner with domestic enterprises to develop key technologies for the C919. As a result, these sixteen JVs have “improved the overall level of China’s aerospace R&D and manufacturing through technology transfer, diffusion, and spillover.”191

AmCham China’s 2012 White Paper on Civil Aviation makes clear how China’s technology transfer regime puts pressure on U.S. aviation companies:

Indigenous innovation industrial policy in the aerospace sector is forcing US companies to form joint ventures (JV) or localize manufacturing in order to participate in domestic aircraft programs such as the C919. Rather than being market-driven, these JVs are often with the Aviation Industry Corporation of China (AVIC) or COMAC designated partners… Additionally, many US companies possess intellectual property that serves as the source of their competitiveness and profitability, yet they are being forced to transfer their intellectual property in order to participate in this sector. It is challenging enough for companies to manage a successful JV when they choose their own JV partner. When JV partners are designated by an outside party, the difficulty of running a successful JV increases further.192

In this investigation, the International Association of Machinists and Aerospace Workers (IAM) criticized U.S. aviation companies for responding to this pressure by transferring certain technologies and production to China.193 Other submissions stated, however, that aviation companies face few realistic alternatives; even if U.S. companies did not accede, those from other countries would do so to and gain a critical competitive advantage.194 Another submission put the matter more starkly:

[A] ‘voluntary’ technology transfer takes place, but one that is only voluntary in the sense that the business transactions engaged in by the fictional gangster of the Godfather series, Vito Corleone, were voluntary. China is effectively making an offer multinationals cannot refuse. Once Chinese producers are able to produce commercial aircraft, the state-owned airlines can be induced to buy them, even if they lag multinational products in terms of reliability or performance. Shut out of the world’s largest market for their product, multinational players are forced to shrink, export opportunities are lost, and the leading firms have fewer resources to invest in the next generation of products.”195

Administrative Review and Licensing Processes as Used in China’s Technology Transfer Regime

190 KEITH CRANE, ET AL, RAND, THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING at 31 (2014).
191 The C919 First Large Passenger Plane Comes Off General Assembly Line, Xi Jinping Issues Important Directive, Premier Li Keqiang Issues Comments, Ma Kai and Han Zheng Attend the Ceremony [Chinese] COMAC (Nov. 2, 2015), http://www.comac.cc/xwzx/gsxw/201511/02/t20151102_3031037.shtml (last visited Dec. 11, 2017). 192 AMCHAM CHINA 2012 WHITE PAPER 190 (2012).

193 IAM, Submission, Section 301 Hearing 1 (Sept. 29, 2017).
194 Lewis, Submission, Section 301 Hearing 3 (Sept. 27, 2017).
195 Lee Branstetter, Submission, Section 301 Hearing 2 (Sept. 28, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

China also uses its administrative review and licensing processes to force the disclosure of sensitive technical information and to achieve its technology transfer objectives. China maintains numerous administrative review and licensing processes that companies must comply with before establishing or expanding operations, or offering products or services in the China market.196 These review and licensing processes, which occur in agencies at the central, provincial, and municipal levels, often are used as an opportunity to require technology transfer.197 Vaguely worded provisions and uncertainty about the applicable rules provide Chinese authorities with wide discretion to use administrative processes to pressure technology transfer, restrict investments to protect domestic competitors, or otherwise act in furtherance of industrial policy objectives.198

Technology Transfer Pressure in Administrative Approvals and Licensing

Foreign investment in China requires obtaining numerous government approvals depending on the terms of the investment and the industry and location in which the investment occurs. For instance, a foreign investment may be required to obtain (1) investment approval from the Ministry of Commerce (MOFCOM) or its local counterpart, (2) project approval from the National Development and Reform Commission (NDRC), its local counterpart, or the State Council, (3) national security and (4) anti-monopoly approval by MOFCOM, and (5) local approvals for site-related requirements.199

At each stage of the approval process, vaguely worded provisions provide government officials with significant discretion to impose technology transfer requirements. For example, China’s regulations governing JVs expressly state that equity joint ventures should raise China’s level of science and technology.200 Moreover, China’s JV regulations stipulate that MOFCOM in conducting its approval review of an EJV or CJV must consider inter alia whether the

196 USCBC, UPDATE: LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 2 (Jan. 2014).

197 USCBC, Submission, Section 301 Hearing 4 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 17 (Oct. 3, 2017) (misuse of administrative license procedures provides the opportunity for a company’s trade secrets to be put at risk of unnecessary disclosure); U.S. DEP’T OF STATE, INVESTMENT CLIMATE STATEMENT 6 (2017); Covington & Burling LLP, Measures and Practices Restraining Foreign Investment in China, prepared for the European Commission Directorate-General for Trade 65 (Aug. 2014).

198 USCBC, Submission, Section 301 Hearing 4 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 17 (Oct. 3, 2017) (misuse of administrative license procedures provides the opportunity for a company’s trade secrets to be put at risk of unnecessary disclosure); U.S. DEP’T OF STATE, INVESTMENT CLIMATE STATEMENT 6 (2017); Covington & Burling LLP, Measures and Practices Restraining Foreign Investment in China, prepared for the European Commission Directorate-General for Trade 65 (Aug. 2014); U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27-29, 33 (2017).

199 See generally U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY (Nov. 2012); see also JAMES M. ZIMMERMAN, CHINA LAW DESKBOOK (4th ed. 2014). In 2016, some MOFCOM approvals were replaced with a record filing requirement, but MOFCOM approval is still required for those industries listed on the Negative List, and all FIEs are still subject to national security or anti-monopoly reviews where applicable.

200 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, art. 3 (State Council, Guo Fa [1983] No. 148, issued Sep. 20, 1983, effective Sep. 20, 1983, amended Jan. 15, 1986, in Guo Fa [1986] No. 6, further amended Dec. 21, 1987, in Guo Fa [1987] No. 110, Jul. 22, 2001, in Order of the State Council No. 311, Jan. 8, 2011, in Order of the State Council No. 588, and Feb. 19, 2014, in Order of the State Council No. 648).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

investment is consistent with China’s national economic development needs or industrial policy goals, respectively. 201

In addition, China imposes administrative licensing202 requirements on more than 100 different business activities, such as food and drug production, mining, or telecommunications services, for all enterprises in China.203 Even if a foreign investment in a particular industry is technically permitted, a foreign invested enterprise (FIE) must still obtain an industry-specific license in order to conduct these activities.204 The specific requirements and approval timelines vary widely depending on the industry at issue. For heavily regulated industries, the industry regulator review process can take more than a year.205

The US Chamber of Commerce has highlighted how the Chinese government uses its discretion in the review process to apply vague and unwritten rules in a selective and non-transparent manner:

The relatively opaque nature of the inbound FDI approval processes enables China’s investment approval authorities to favor domestic competitors over foreign investors, should they so desire, without leaving a paper trail of discriminatory written regulations that could clearly offend WTO obligations. Foreign investors have reported this favoritism occurring in two ways: (i) through the application of vaguely worded or unpublished rules or requirements in ways that discriminate against foreign investors; and (ii) through the imposition of deal-specific conditions that go beyond any written legal requirements.206

In one investigation submission, a former in-house counsel reported similar practices from his time doing business in China:

[T]here is a very clear discretionary administrative approval processes and other restrictions adopted by the Government of China that pressure the transfer of intellectual property to Chinese companies and/or to Chinese State Owned Enterprises in order to ‘do business’ in China and receive required licensing approvals. Often the language in Chinese licensing and business registration forms may not be clear as to its required and mandatory expectation for technology transfer by U.S. companies to Chinese firms or state agencies, but licensing officials within regional Chinese centers clarify in person, what is expected, without providing written documents that could be subsequently shared

201 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, art. 4; Rules for the Implementation of the Law of the People’s Republic of China on Chinese- Foreign Contractual Joint Ventures, art. 9 (Order of the State Council, issued September 4, 1995, last amended March 1, 2017); see also JAMES M. ZIMMERMAN, CHINA LAW DESKBOOK 147 (4th ed. 2014).

202 The Chinese term xuke zheng is often translated as “license” or “permit”.
203 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 17 (Nov. 2012).
204 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 18 (Nov. 2012).
205 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 18 (Nov. 2012).
206 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 35-36 (Nov. 2012).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

with global trade organizations. So a carefully crafted and structured process has been developed to avoid obvious demands for U.S. technology.207

The administrative licensing and approvals process can also work in tandem with the JV requirements described above to require or pressure technology transfer. A study conducted by the U.S. Chamber of Commerce concluded:

The [JV requirement] creates numerous circumstances where investment approval authorities are able to work in an nontransparent way with the local partner to ensure that valuable intellectual property, market channels, and other assets of the foreign investor are made available to the joint venture — often on extremely favorable commercial terms for the local partner. This problem is exacerbated by the fact that in Sino-foreign joint ventures, the local partner serves as the investment approval process applicant on behalf of the prospective joint venture. As a result, Chinese joint venture partners are able, in many cases, to control the communication channels between the foreign investor and the government approval authorities, making the process even more opaque for the foreign investor and enabling the local partner to shape the approval requirement imposed by the authorities to its advantage.208

Problems with administrative licensing processes are consistently identified as top concerns in annual surveys of U.S. companies in China.209 According to the most recent USCBC member survey, for example, companies specifically ranked “obtaining licenses and approvals” and “investment barriers” as the second and third greatest challenges, respectively.210 Moreover, 65 percent of respondent companies experienced problems obtaining necessary licenses and approvals in China. According to the survey, these licensing problems occurred overwhelmingly at the central government level (80 percent) and almost three-fourths of respondents report that China’s licensing reforms have had no impact to date.211 Similarly, in each of AmCham China’s 2017 and 2018 annual surveys, U.S. companies ranked China’s inconsistent regulatory interpretations as a top challenge. 212 Companies also repeatedly identified “difficulty in obtaining required licenses” as a top challenge.213

As one legal treatise on foreign investment in China explains:

Even under the existing laws, where approvals are required for foreign investment, it is not unusual to experience a situation where the Catalogue on Guiding Foreign Investment may provide that a certain activity may be conducted by a WFOE, [while] the Chinese

207 Stephen Zirschky, Submission, Section 301 Hearing (Sept. 28, 2017).
208 U.S. CHAMBER OF COMMERCE, CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT: IMPACT ON MARKET ACCESS, NATIONAL TREATMENT AND TRANSPARENCY 38-39 (Nov. 2012).
209 AMCHAM CHINA, 2016 AMCHAM CHINA WHITE PAPER: AMERICAN BUSINESS IN CHINA 8 (2016); USCBC, UPDATE: LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 1 (Apr. 2016).
210 USCBC, 2017 MEMBER SURVEY 2 (2017).
211 USCBC, 2017 MEMBER SURVEY 12 (2017).
212 AMCHAM CHINA, 2017 CHINA BUSINESS CLIMATE SURVEY REPORT 28 (2017); AMCHAM CHINA, 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 40 (2018).
213 AMCHAM CHINA, 2017 CHINA BUSINESS CLIMATE SURVEY REPORT 28 (2017); AMCHAM CHINA, 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 40 (2018).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

authorities openly state that a WFOE will never be approved—only a joint venture, and only if all material technology is transferred to the joint venture.214

ITIF’s submission in this investigation provides further example of how China’s administrative authorities pressure foreign investors’ decisions on technology and R&D localization:

The CEO of a large multinational telecommunications equipment company recently shared with ITIF that he opened up a large R&D facility in Beijing that employs over 500 scientists and engineers. When asked if he did this to access Chinese engineering talent, he responded bluntly: “Unless I promised the Chinese Government that I would open up an advanced technology lab there, I was told that I would not be able to sell to the Chinese telecommunications providers,” (most of which are de facto controlled by the Chinese government).215

As described above, discretion in China’s administrative licensing process can be used to require technology transfer or impose deal-specific conditions in exchange for the licenses necessary for a foreign investor to operate in China. Similarly, ambiguity in the administrative licensing and approvals process may also result in technology transfer where existing laws and regulations are unclear as to the relevant requirements for foreign investors— this problem is particularly acute in new and emerging industries.

As one submission noted:

“[U]ncertainty surrounding administrative licensing regulations can also serve as a de facto limit for companies hoping to move into certain sectors. Businesses are often particularly cautious about advancing into new and under-regulated business sectors such as telemedicine, fearing that they might find themselves in violation of new regulations after investing.”216

These violations may lead to technology transfer in circumstances where foreign-invested enterprises must quickly comply with new regulations (or new interpretations of existing regulations) that threaten to shut down their existing business in China. According to numerous submissions in this investigation, an important example of how ambiguity in China’s administrative licensing process is used to pressure technology transfer arises in the field of cloud computing.217

Cloud Computing

214 OWEN D. NEE, JR., SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 57 (Thomson Reuters ed, 2016). The authors further conclude that even if China does adopt a Negative List approach, “it is doubtful that a [negative list] will effectively abolish such internal regulations or “neibu wenjian.”
215 ITIF, Submission, Section 301 Hearing 6 (Oct. 25, 2017).

216 USCBC, Follow-Up Submission, Section 301 Hearing 4-5 (Oct. 30, 2017).
217 CONSUMER TECHNOLOGY ASS’N [hereinafter “CTA”], Submission, Section 301 Hearing 10 (Sept. 28, 2017); COMPTIA, Submission, Section 301 Hearing 4 (Sept. 28, 2017); INFORMATION TECHNOLOGY INDUSTRY COUNCIL [hereinafter “ITI”], Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); COALITION OF SERVICES INDUSTRIES, Submission Section 301 Hearing 2 (Sept. 28, 2017); see generally TELECOMMUNICATIONS INDUSTRY ASS’N, Submission, Section 301 Hearing (Sept. 28, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

China has prioritized the development of its cloud computing sector and seeks to raise its indigenous cloud computing capability and achieve “systematic breakthroughs” in “indigenously innovated core technology” by 2020.218 Submissions in this investigation raised concerns with China’s restrictions on foreign investment, and related licensing practices and policies in this field.219 These submissions indicate that the Chinese government has used regulatory ambiguity to benefit Chinese cloud computing businesses and pressure technology transfer. China first tacitly permitted foreign investors to partner with licensed Chinese cloud service providers in order to gain market access, and then, once key technology and know-how had been injected into these partnerships, China resolved the regulatory ambiguities that had necessitated these arrangements in favor of the Chinese partner, resulting in the transfer of technology to the Chinese partner.

China precludes U.S. cloud service providers (CSPs) from directly participating in the three most common forms of cloud computing: computing infrastructure as a service (IaaS); computer platform as a service (PaaS); and computer software as a service (SaaS).220 CSPs must obtain certain value-added telecommunication licenses, such as an internet data center (IDC) license, from China’s MIIT or its local counterpart to operate their businesses.221 According to numerous submissions in this investigation, in practice, China does not grant such licenses to U.S. investors and thus does not permit U.S. CSPs to provide cloud computing services directly to customers in China.222

However, the global nature of cloud computing means that forgoing the China market is simply not a commercially viable option for U.S. CSPs, whose customers demand globally available services.223 This is particularly the case for technology companies that have invested in and built up a market share in China in areas that are rapidly transitioning to cloud-based delivery. Thus, a business built on managing a customer’s computing resources, or supplying and maintaining software applications has little option but to offer those services on a cloud basis, given the economic, technical and security superiority of the cloud model, the transition to which customers now demand.

218 Notice on Issuing 13th Five-year Plan for National Informatization, Sec. 2(3) (State Council, Guo Fa [2016] No. 73, issued Dec. 15, 2016). In addition, the plan states that by 2020, China should have “basically established a secure and controllable IT industry ecosystem”, and asserts that “digitization comprehensively underpins the development of Party and national government initiatives.”

219 CTA, Submission, Section 301 Hearing 10 (Sept. 28, 2017); COMPTIA, Submission, Section 301 Hearing 4 (Sept. 28, 2017); ITI, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); U.S. CHAMBER OF COMMERCE, Submission, Section 301 Hearing 18-19 (Oct. 3, 2017); see generally TELECOMMUNICATIONS INDUSTRY ASS’N [hereinafter “TIA”], Submission, Section 301 Hearing (Sept. 28, 2017).

220 U.S. companies are global leaders in these sectors. USITC, GLOBAL DIGITAL TRADE 1: MARKET OPPORTUNITIES AND KEY FOREIGN TRADE RESTRICTIONS 19-20 (Aug. 2017).
221 See Telecommunications Regulations of the People’s Republic of China, art. 7 and the Telecommunications Services Catalogue, attached as the Annex (State Council Order No. 291, issued Sept. 25, 2000 and amended on July 29, 2014 and Feb. 6, 2016), which lists IDC under the VATS operator license.

222 IDC licenses have only been granted to Chinese companies and joint ventures with Hong Kong or Macau investors and have not been granted to joint ventures with investors from the U.S. and other jurisdictions. See Samuel Yang, Regulation of Cloud Computing in China, PRACTICAL LAW (Apr. 26, 2017).
223 BSA THE SOFTWARE ALLIANCE [hereinafter “BSA”], Submission, Section 301 Hearing 3 (Sept. 28, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

In view of this commercial reality, the only way U.S. suppliers are able to participate in the market is through contractual arrangements with Chinese entities eligible to obtain the required licenses.224 Under these arrangements, U.S. suppliers will train the employees of the Chinese license holder how to operate complex technology, and are effectively forced to provide their proprietary cloud computing technology, brands, and know-how to their Chinese partners, in exchange for a fee or a share of revenue.225 This reality disadvantages U.S. companies in China as these contractual arrangements provide even less rights and protections with respect to their investment and technology than would be available through an equity investment.

Until 2016, China permitted such contractual arrangements by granting the requisite license to the Chinese partner. However, recent draft regulations prohibit these arrangements, which have long been relied upon by foreign CSPs for market access. In March 2016, China released the Notice on Regulating Business Operations in Cloud Service Market (Draft for Public Comment) and the Circular on Cleaning Up and Regulating the Internet Access Service Market, which exacerbated the challenges facings U.S. CSPs operating in the Chinese market. 226 According to the written submissions in this investigation, these measures effectively prohibit, inter alia, (1) the Chinese license holder from providing any facilities or other resources to the foreign CSP; (2) the foreign CSP from entering into contracts with customers directly; and (3) the provision of cloud services under the trademark of the foreign CSP. 227

U.S. and other foreign CSPs operating in China through contractual arrangements inconsistent with this draft notice are now faced with the prospect of needing to restructure their existing arrangements and relinquish ownership and operations of their cloud business to a Chinese company in order to comply with the new rules.228 Indeed, although the draft notice has yet to be finalized, some U.S. suppliers have already done just that.229

Forced Disclosure of Sensitive Technical Information

A second technology transfer mechanism used by Chinese administrative agencies is the forced disclosure of sensitive technical information. In a wide variety of industry sectors, the Chinese

224 See e.g., Jason Verge, Microsoft Launches Azure in China Via 21Vianet Group, DATACENTER KNOWLEDGE, (May 22, 2013) (“In November 2012, Microsoft, 21Vianet and the Shanghai Municipal Government announced a strategic partnership agreement in which Microsoft licensed the technology know-how and rights to operate and provide Office 365 and Windows Azure services in China to 21Vianet. ‘21Vianet will act as an operation entity for Azure, hosting the service in its data centers and handling the customer relationship,’ said Vianet’s CFO, Shang Hsiao.”).

225 NAT’L FOREIGN TRADE COUNCIL [hereinafter “NFTC”], Submission, Section 301 Hearing 3 (Sept. 28, 2017). 226 See Notice on Regulating Business Operations in Cloud Service Market (Draft for Public Comment) § 4(1)-4(5) (released by MIIT Mar. 2016); Circular on Cleaning up and Regulating the Internet Access Service Market (MIIT, Gong Xin Bu Xin Guan Han [2017] No. 32, issued Jan. 17, 2017).
227 ITI, Submission, Section 301 Hearing 4 (Oct. 4, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 19 (Oct. 3, 2017); NFTC, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); CompTIA, Submission, Section 301 Hearing 7-8 (Sept. 28, 2017).
228 See e.g., Stratford, et al., How China’s Draft Regulations Will Control Cloud Services, LAW360 (Dec.15, 2016); McGinty et al., HOGAN LOVELLS, DRAFT LEGISLATION TO AFFECT CHINA CLOUD SERVICES MARKET ACCESS (Jan. 2017).
229 Cate Cadell, Amazon Sells off China Cloud Assets as Tough New Rules Bite, REUTERS, Nov. 13, 2017 (“In November 2017, for example, Amazon.com Inc. sold off its public cloud business in China to its local partner for $301.2 million. According to Amazon, this was done ‘to comply with Chinese law.’”).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

government requires the disclosure of unreasonable amounts of sensitive technical information in exchange for necessary administrative approvals. As noted by European researchers:

A particular concern amongst various industries including but not limited to ICT, pharmaceuticals, chemicals, agro-food (in particular GMOs), machinery and financial services, centers on the depth of information which needs to be provided to the authorities for obtaining the authorization to build a factory, to market a product, etc. In some cases, this information was provided to the local industry who used this data to develop similar activities.230

U.S. stakeholders are particularly concerned because the forced disclosures put technology and intellectual property at risk.231 Forced disclosures of information are especially problematic in cases in which the disclosure must be made not just to government officials but also to outsiders. This occurs when China requires reviews by “expert panels” that may include representatives from Chinese government, industry, academia, or others who may have a competitive interest in the information.232

Information disclosure and expert panel review requirements can arise at any stage of a company’s operations in China and in a wide variety of industries. For example, in the pre- establishment phase, a company may be subject to expert review panels to assess the safety, environmental impact, and energy conservation of the proposed investment.233 Panels typically require companies to respond to “detailed information [requests] about project costs and revenue, capacity and equipment information, raw material and energy requirements, and other sensitive details about the operations.”234

The information required to be disclosed may include trade secrets. For example:

One company that submitted its safety assessment to an approval agency was required to provide specific temperature and pressure range information for its process equipment… that would make it easier for a competitor to learn about a production process the company considered to be a trade secret.235

As noted by the American Chamber of Commerce in Shanghai:

230 Paul Ranjard, Benoit Misonne, Study 12: Exploring China’s IP Environment, in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 24 (2007).
231 USCBC, Submission, Section 301 Hearing 4-5 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 17 (Oct. 3, 2017).
232 USCBC, UPDATE: LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 8 (Jan. 2014); USCBC, IMPROVING CHINA’S LICENSING SYSTEM: RECOMMENDATIONS FOR KEY SECTORS 2 (Mar. 2014); Paul Ranjard, Benoit Misonne, Study 12: Exploring China’s IP Environment, in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 15 (2007).
233 USCBC, Submission, Section 301 Hearing 5 (Sept. 28, 2017). See e.g., China Energy Conservation Product Certification Management Measures (National Economic and Trade Commission, issued Feb. 11, 1999), art. 3 states that evidence a product meets “standards or technological needs” is one of the criteria for receiving the Energy Conservation Certificate.
234 USCBC, IMPROVING CHINA’S LICENSING SYSTEM: RECOMMENDATIONS FOR KEY SECTORS 4 (Mar. 2014).
235 USCBC, IMPROVING CHINA’S LICENSING SYSTEM: RECOMMENDATIONS FOR KEY SECTORS 3 (Mar. 2014).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

Companies have also expressed concerns about some of China’s product approval requirements. In particular, for companies to gain approval from regulatory agencies they must disclose proprietary formula or designs. Despite assurances by regulators, companies are still not confident that the information will be protected. Some companies report that they have been able to push back but others have not been as successful and must face the difficult choice of seeking product approval, which could put proprietary information at risk, or not pursuing market opportunities in China in order to protect their IP.236

Similarly, environmental impact and energy conservation assessments require expert panel reviews, 237 and sometimes involve a “pre-review” by a separate panel prior to application.238 Environmental impact panels “frequently include competitors or scholars affiliated with competitors.”239 In general, the panels introduce significant liability for companies seeking to safeguard their trade secrets, particularly since there are few safeguards in place to ensure that information is not misused.240

Expert review panels do not just apply before a company is established in China. For example, in the post-establishment phase, expert review panels may be required for security reviews in a range of industries under China’s Cybersecurity Law of the People’s Republic of China (Cybersecurity Law). 241 Although many implementing regulations of the cyber-review regime are in draft form only, stakeholders report concerns that current ambiguities in the law will be used to pressure unnecessary disclosure of companies’ most critical technologies.242 For example, companies may be forced to disclose critical technologies, including source code, complete design databases, behavior models, logic models, and even floor plans and physical layouts of central processing units.243

China’s Acts, Policies, and Practices Are Unreasonable

236 AM. CHAMBER OF COMMERCE SHANGHAI, Submission, Section 301 Hearing 2 (Sept. 28, 2017);
237 See Environmental Impact Assessment Law of the People’s Republic of China (PRC Environmental Impact Assessment Law) ̧ art. 11, 13. (adopted at the 30th Meeting of the Standing Committee of the Ninth NPC, Order No. 77, on Oct. 28, 2002, effective Sept. 1, 2003, amended July 2, 2016). Art. 13 stipulates that the “expert working groups” shall be comprised of government representatives and other experts from the list of experts within the expert database created by the relevant government authority.
238 USCBC, Submission, Section 301 Hearing 1 (Oct. 20, 2017). See PRC Environmental Impact Assessment Law ̧ art. 11.
239 USCBC, Submission, Section 301 Hearing 1 (Oct. 20, 2017).
240 USCBC, UPDATE: LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 8-9 (Jan. 2014). See e.g., Administrative License Law of the People’s Republic of China (PRC Administrative License Law) (adopted by the Fourth Session of the Standing Committee of the Tenth NPC, Order No. 7, on Aug. 27, 2003, effective July 1, 2004), art. 31 (regarding scope of required information), art. 54-55 (regarding the types of technical material which need to be submitted for certain licenses), and art. 76 (regarding compensation in the event of violation).
241 Cybersecurity Law of the People’s Republic of China (adopted by the Twenty-fourth Session of the Twelfth NPC, on Nov. 7, 2016, effective June 1, 2017). Submissions received in this investigation are summarized in Appendix C to this report.
242 See CTA, Submission, Section 301 Hearing 6 (Sept. 28, 2017); U.S. CHAMBER, Submission at 31; TIA, Submission, Section 301 Hearing 2 (Sept. 28, 2017).
243 SEMICONDUCTOR INDUSTRY ASS’N [hereinafter “SIA”], Submission, Section 301 Hearing 10, fn 42 (Sept. 28, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

Conduct that is “unreasonable” is actionable under Section 301, provided that it also burdens or restricts U.S. commerce. The statute defines an “unreasonable” act, practice, or policy as one that “while not necessarily in violation of, or inconsistent with, the international legal rights of the United States is otherwise unfair and inequitable.”244 The statute further provides that in determining unreasonableness, the USTR shall take into account, to the extent appropriate, whether foreign companies in the United States have access to reciprocal opportunities to those denied U.S. companies.245 Based on the foregoing factors, China’s technology transfer regime is unreasonable.

According to the Organization for Economic Co-operation and Development (OECD), very few countries employ foreign equity limitations or screen foreign investments on the basis of potential technology-related benefits.246 China’s foreign investment restrictions and administrative review and licensing systems not only exert great technology transfer pressures on U.S. companies, but also are substantially more restrictive than those of the United States and most other countries. Indeed, the OECD has consistently ranked China’s foreign investment regulatory regime as one of the most restrictive in the world based on an evaluation of (i) equity restrictions on foreign ownership, (ii) screening and prior approval requirements, (iii) rules for key personnel, and (iv) restrictions on the operation of foreign enterprises.247 For example, in 2016, China was ranked the fourth most restrictive economy out of 63 OECD and non-OECD member economies measured—only the Philippines, Saudi Arabia, and Myanmar were more restrictive. This low ranking is particularly striking given that China is the world’s second largest economy and it has extensive global trading relationships as compared to the other economies at the bottom of the index. China’s restrictiveness score was also 3.7 times higher than that of the United States.248

Moreover, the OECD’s regulatory restrictiveness index does not even account for the full breadth of restrictive practices used by China to pressure technology transfer. The OECD index only captures those laws and policies pertaining to equity caps and pre-establishment administrative screening processes that have been formally adopted by the Chinese central government.249 As discussed above, China’s technology transfer requirements often do not take

244 19 U.S.C. § 2411(d)(3)(A).
245 19 U.S.C. § 2411(d)(3)(D).
246 PRZEMYSLAW KOWALSKI, DANIEL RABAIOLI, SEBASTIAN VALLEJO, OECD, INTERNATIONAL TECHNOLOGY TRANSFER MEASURES IN AN INTERCONNECTED WORLD: LESSONS AND POLICY IMPLICATIONS, TAD/TC/WP(2017)1/FINAL, 2017 43-45 ¶ 130-1 (2017) (“In particular, making FDI in technology-related sectors conditional upon joint ventures…or requiring direct transfer of technology to the local partner… are not found in most of the countries [surveyed]. This may be a result of awareness that such laws deter investors and may be counterproductive. However, such measures are still present in two developing countries, namely China and Nigeria…Screening on the basis of potential technology-related benefits… is present in only five countries. For example, in China, for a project to be approved, it should meet the requirements of mid and long term planning for national economic development, de facto meaning that the government will screen investment on the basis of its technology-transfer potential.”).
247 FDI Regulatory Restrictiveness Index, OECD, http://www.oecd.org/investment/fdiindex.htm (last visited Oct. 20, 2017).
248 FDI Regulatory Restrictiveness Index, OECD, http://www.oecd.org/investment/fdiindex.htm (last visited Oct. 20, 2017).
249 In its methodology, the OECD specifies that its regulatory restrictiveness measures do not account for measures imposed at the sub-national level, and do not account for variability in restrictiveness stemming from implementation of formally adopted laws or policies. In other words, the regulatory restrictiveness index does not

China’s Unfair Technology Transfer Regime for U.S. Companies in China

the form of written laws or policies promulgated by China’s central government and are often carried out orally and “behind closed doors.”250 Evidence collected in this investigation also has demonstrated that forced disclosure of technical information occurs throughout the life span of U.S. companies’ operations in China through a variety of administrative reviews and licensing processes.251 These practices are not captured by the OECD’s index.

China’s regime is ultimately unfair and inequitable because it greatly restricts the freedom of U.S. companies to deploy and fully protect their valuable and hard-won technologies to compete in China. Instead of fostering a level playing field, China’s regime gives systematic and structural support for technology acquisition by Chinese companies from U.S. and other foreign competitors.252 Faced with China’s regime, U.S. companies must either cede substantial control over their valuable technologies or be closed out of one of the world’s largest and fastest- growing economies.253 This results in a highly asymmetric playing field where U.S. companies face immensely restrictive policies in China, while Chinese companies are not equally restricted in the United States.254

Accordingly, China’s technology transfer regime—including foreign ownership restrictions and administrative approval and licensing process that are used to require or pressure the transfer of technology from U.S. companies to Chinese entities— is unfair, inequitable, and results in nonreciprocal opportunities relative to Chinese companies operating in the United States. These acts, practices, or policies are unreasonable as defined in Section 301.

China’s Acts, Policies, and Practices Burden or Restrict U.S. Commerce

The unreasonable act, policy, or practice of a foreign country must also burden or restrict U.S. commerce to be actionable under Section 301. In the present case, required or pressured technology transfer significantly undermines the value of American technology (including IP), thereby distorting markets and compromising U.S. companies’ global competitiveness. Therefore, China’s acts, policies, and practices that effectuate technology transfer burden and restrict U.S. commerce.

Technology and IP drive economic growth and sustain the competitive edge of the U.S. economy.255 According to the Department of Commerce, in 2014, IP-intensive industries

account for restrictions that are informally applied “behind closed doors”, by government officials. See Blanka Kalinova, et. al., OECD, FDI RESTRICTIVENESS INDEX: 2010 UPDATE 6 (2010).
250 See supra Section II.A-C.
251 See supra Section II.C. In a recent AmCham China survey, 52% of respondents believe that in China the risk of “IP leakage and IT and data security threats” was greater than those in other countries. AMCHAM CHINA, 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 31 (2018).

252 BSA, Submission, Section 301 Hearing 3-4 (Sept. 28, 2017); CSI, Submission, Section 301 Hearing 5 (Sept. 28, 2017); NAM, Submission, Section 301 Hearing 12-13 (Sept. 28, 2017).
253 BSA, Submission, Section 301 Hearing 3 (Sept. 28, 2017); U.S. CHAMBER, Submission, Section 301 Hearing 15 (Oct. 3, 2017).

254 U.S. CHAMBER, Submission, Section 301 Hearing 40 (Oct. 3, 2017).
255 U.S. PATENT & TRADEMARK OFFICE [hereinafter “USPTO”], & ECON. & STATISTICS ADMIN. INTELLECTUAL PROPERTY AND THE U.S. ECONOMY: 2016 UPDATE 1 (2016); see also NAT’L SCIENCE BOARD, SCIENCE & ENGINEERING INDICATORS, 6-20 (2016) (among all major economies, the United States has the highest concentration of knowledge-intensive and technology-intensive industries as a share of total economic activity).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

supported approximately 45.5 million jobs in the United States, and workers in those industries earned significantly higher wages on average than those working in non-IP-intensive industries.256 Further, IP-intensive companies represented more than 39 percent of U.S. GDP, and accounted for 52 percent of U.S. exports.257 Therefore, as noted by multiple submissions in this investigation, the well-being of U.S. companies and their workers, along with the broader U.S. economy, is dependent in substantial part on the continued strength of IP-intensive industries.258

China’s technology transfer policies effectively deprive U.S. companies of the full value of their IP and technology and inhibit them from fairly competing in the large China market. When U.S. companies are required or pressured to transfer their technology, they may experience not only a direct loss of key competitive assets, but also may lose their technological competitive edge in global markets. Moreover, as noted by submissions in this investigation, Chinese beneficiaries of technology transfer under the highly favorable circumstances created by China acquire powerful advantages without the expense or risk of developing the technology themselves, and thus enjoy an additional competitive advantage over foreign innovators.259 If U.S. companies alternatively elect not to comply with Chinese requirements, the companies are excluded from an important and growing market, foregoing sales and export opportunities, and economies of scale.260

No matter how a U.S. company responds, the Chinese government’s technology transfer regime generates considerable negative impacts on competition by depriving U.S. companies of the ability to achieve reasonable returns on their investments in the Chinese market and exploit legitimately obtained intellectual property rights, and prevents them from making investments at all.261 Given the strategic importance of the large and growing Chinese market, obstacles to level competition are acutely harmful to U.S. companies.

Moreover, U.S. companies that lose the option of exclusive enjoyment of their valuable technology and are therefore unable to compete fairly in China may become less globally competitive in the long run. When U.S. companies are deprived of fair returns on their investment in IP, they are unable to achieve the growth necessary to reinvest in innovation.262 In this sense, China’s technology transfer regime directly burdens the innovation ecosystem that is an engine of economic growth in the United States and similarly-situated economies.263

256 USPTO, INTELLECTUAL PROPERTY AND THE U.S. ECONOMY: 2016 UPDATE 4, 30 (2016).
257 USPTO, INTELLECTUAL PROPERTY AND THE U.S. ECONOMY: 2016 UPDATE iii (2016).
258 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017); IP COMMISSION, Submission, Section 301 Hearing 6 (Sept. 28 2017); see generally USPTO, INTELLECTUAL PROPERTY AND THE U.S. ECONOMY: 2016 UPDATE (2016).
259 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017); SOLARWORLD, Submission, Section 301 Hearing 2 (Oct. 20, 2017); NAM, Submission, Section 301 Hearing 9-10 (Sept. 28, 2017); CSIS, Submission, Section 301 Hearing 1 (Sept. 28, 2017).
260 AMCHAM SHANGHAI, Submission, Section 301 Hearing 2 (Sept. 28, 2017); NAM, Submission, Section 301 Hearing 13 (Sept. 28, 2017).
261 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017).
262 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017); see also IAM, Submission, Section 301 Hearing 1 (Sept. 29, 2017).
263 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017).

China’s Unfair Technology Transfer Regime for U.S. Companies in China

In fact, the displacement of global industrial leaders—including U.S. companies—so that China may achieve global market dominance is an explicit policy goal of the Chinese government.264 According to China’s Made in China 2025 initiative, for example, the Chinese government seeks to acquire foreign technology, absorb that technology to boost indigenous innovation, and displace foreign competitors in both domestic and international markets.265 China’s technology transfer regime is a key mechanism to achieve this goal.266

Annual surveys of companies conducted by AmCham China and USCBC indicate that addressing China’s technology transfer regime would significantly increase U.S. investment in China. According to the 2018 AmCham China survey of U.S. companies, surveyed companies stated that they would significantly increase investment if China’s government were able to: provide greater regulatory transparency and predictability; limit the use of industrial policies that create barriers; allow U.S. companies to enter business segments that are currently restricted; provide recourse for unfair investment treatment; allow U.S. companies to increase control over their operations by reducing the need for joint ventures and local business partners; allow strategic acquisitions; and reduce the need to engage in technology transfer.267

Ultimately, China’s acts, policies, and practices that require or pressure technology transfer undermine U.S. companies’ valuable IP, weaken their global competitiveness, and stunt investment in innovation.268 Therefore, China’s acts, policies, and practices with respect to technology transfer burden and restrict U.S. commerce.269

264 U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 13 (2017); BJÖRN CONRAD, ET AL., MERCATOR INST. FOR CHINA STUDIES [hereinafter “MERICS”], MADE IN CHINA 2025 14, 16 (2016).
265 MERICS, MADE IN CHINA 2025 16 (2016) (technological development to achieve the ultimate objective of import substitution is pervasive throughout the plan, which specifically calls for the development and usage of indigenous products in a variety of industries).

266 See MERICS, MADE IN CHINA 2025 41 (2016).
267 AMCHAM CHINA, 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 53 (2018).
268 WILEYREIN, Submission, Section 301 Hearing 11 (Sept. 28, 2017); U.S. CHAMBER, MADE IN CHINA 2025: GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 7 (2017).
269 This finding is consistent with numerous other sources that confirm that Chinese technology transfer practices burden U.S. commerce. See generally USTR, NTE, SPECIAL 301 AND WTO COMPLIANCE REPORTS; U.S.-CHINA EC. & SEC.REV. COMM’N (2016); USITC, INV. NO. 332-519, CHINA: EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U.S. ECONOMY (2011); USITC, INV. NO. 332-514, CHINA: INTELLECTUAL PROPERTY INFRINGEMENT, INDIGENOUS INNOVATION POLICIES, AND FRAMEWORKS FOR MEASURING THE EFFECTS ON THE U.S. ECONOMY (2010); U.S.-CHINA ECON. & SEC. REV. COMM’N, CHINA’S FIVE- YEAR PLAN, INDIGENOUS INNOVATION AND TECHNOLOGY TRANSFERS, AND OUTSOURCING (2011).

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Part Twelve on Tariffs on intellectual property, technology, national security, and trade imbalance?

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