US President Signs Memo on Proposed "Section 301" Measures Directed at China

22 March 2018

US President Donald Trump signed a presidential memorandum on Thursday 22 March which laid out the possibility of hefty tariffs on imports from select Chinese technology and industrial sectors, as well as potential restrictions on investment and the launch of a WTO legal case, while leaving the full scope and application of these measures to be finalised at a later date. 

Trump described the move as a sign that “the era of economic surrender is over,” presenting the document during a press conference in Washington on Thursday where he was flanked by government officials such as Vice President Mike Pence, Commerce Secretary Wilbur Ross, US Trade Representative (USTR) Robert Lighthizer, as well as business representatives. 

Along with citing concerns over Chinese intellectual property practices, Trump also reiterated past criticisms of China’s bilateral trade surplus with the US, while tying the move into the wider narrative of trying to negotiate better deals with major American trading partners. 

“I’ve been speaking with the highest Chinese representatives, including the President, and I’ve asked them to reduce the trade deficit immediately by US$100 billion. It’s a lot. So that would be anywhere from 25 percent, depending on the way you figure, to maybe something even more than that. But we have to do that,” said Trump before signing the memorandum. 

He also said that while his administration has been in touch with Chinese officials, and he has established his own relationship with Chinese President Xi Jinping, the Trump Administration still finds that there is more work to be done to resolve deep-seated trade irritants. 

“So we’ve spoken to China and we’re in the midst of a very large negotiation. We’ll see where it takes us. But in the meantime, we are sending a Section 301 action,” he said. Trump was not specific about what he meant by the negotiation with China, such as whether it involved resuming a “Comprehensive Economic Dialogue” among high-level officials which was launched last year or through some other approach. 

Section 301 report lays out IP claims

In tandem with the presidential memorandum, the Office of the US Trade Representative also released the Section 301 report whose findings served as justification for the proposed measures. The investigation was launched in August 2017. 

Section 301 refers to part of the 1974 Trade Act, specifically to the section entitled “relief from unfair trade practices.” That section describes options for pursuing mandatory or discretionary measures in response to such trade practices, following an investigation conducted by the Office of the USTR and a decision by the US President, along with prescribing what form these measures could take and other conditions. 

Discretionary measures, like the ones proposed yesterday, can be in response to “an act, policy, or practice of a foreign country [that] is unreasonable or discriminatory and burdens or restricts United States commerce” and where “action by the United States is appropriate.” 

The 215-page Section 301 report addresses four overarching areas of concern: various measures, including investment restrictions, that allegedly force US firms operating in Beijing to transfer their intellectual property or technology to Chinese firms; “discriminatory licensing practices” with the same objective; the facilitation of Chinese company “systematic investment in, and/or acquisition of, US companies and assets,” also geared towards achieving technology transfer; and claims of government-facilitated cybertheft of trade secrets and other know-how. 

The report also raises questions over whether China’s alleged practices are in violation of WTO rules, such as the commitments that Beijing took on when joining the global trade club in 2001. 

“In 2001, China joined the WTO and committed not to condition the approval of investment or importation on technology transfer. 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,’” the report notes.

It specifically cites paragraph 7.3 of China’s WTO accession protocol, which requires Beijing to be in line with the organisation’s Agreement on Trade-Related Investment Measures (TRIMs) immediately upon becoming a WTO member. That paragraph also requires China to make sure that any approvals for importation or “right of importation or investment” by traders are “not conditioned on” technology transfer or domestic content requirements, among others. 

The Section 301 report also devotes several pages to analysing Beijing’s “Made in China 2025” strategy and other technological development programmes. The 2025 strategy is aimed at a massive overhaul of Chinese industry, with a focus both on pursuing more innovative approaches to manufacturing as well as on meeting specific time-bound targets for increasing the share of domestic content in Chinese goods. 

The plan would have this share go up to 40 percent by the end of the decade and rise significantly further, to 70 percent, just five years later. The Made in China 2025 strategy was announced in 2015, and Chinese officials pledged last October to direct an additional US$1.5 billion in funding projects to support its objectives. 

“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,” the Section 301 report says. 

The term MLP refers to China’s National Medium- and Long-Term Science and Technology Development Plan Outline, which covers the years 2006 to 2020 and targets a series of sectors for advancing technological development. 

“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 US commerce,” the report continues. 

Actions proposed, final details pending

The presidential memorandum itself refers to a three-pronged approach that the Trump Administration says it intends to use in response to the above-mentioned allegations. 

One of these three parts involves ad valorem tariffs, which are duties levied based on a product’s value. These tariffs would target sectors such as “aerospace, information and communication technology, and machinery,” according to a USTR factsheet. The factsheet suggested that these duties could be up to a quarter of a product’s value. 

The exact list of products that would be targeted for tariffs is not yet finalised, according to the presidential memorandum. Instead, the Office of the USTR is due to release a “proposed list” of such goods, along with additional details on the levels of tariffs each would face. This list would be published sometime in the coming fortnight and would be followed by additional steps such as comment periods and consultations before being finalised. 

Trump suggested on Thursday that the value of products targeted could be worth up to US$60 billion. Lighthizer told lawmakers in the Senate Finance Committee on Thursday that he would be recommending that these tariffs cover products in around 10 specific areas. 

“If you sit here, you’re going to think this is basically America in ten years. Aerospace and aeronautics equipment, maritime equipment and high-tech shipping, modern rail transport equipment, new energy vehicles and equipment, power equipment, agricultural equipment, new materials and biopharma and advanced medical products,” said Lighthizer in a hearing, which was on the President’s 2018 trade agenda. 

“Now, every one of these, [China says] they want to be mostly self-sufficient in, I think, two or three years and basically world dominant by China 2025. That’s the sense of China 2025,” the US trade chief continued. He also said that the full list of products would be determined partly by an algorithm aimed at limiting adverse effects on US consumers while having the intended impact on China. 

The second facet of Trump’s approach would involve filing a case under the WTO’s dispute settlement mechanism, while the third would involve possible investment restrictions, pending a proposal by the US Treasury Department and other related steps. 

The WTO case would address Beijing’s “discriminatory technology licensing practices,” according to a statement from the USTR’s office. Sources familiar with the planned legal dispute indicate that the US plans to focus on TRIPS obligations, claiming there is a discrimination against foreign-owned technology and that intellectual property owners are deprived of their ability to protect their rights in the Asian economic giant. 

The term TRIPS stands for the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights. The Section 301 report outlines in further detail what the US considers discriminatory licensing practices in this context. It also notes that the US and other countries have asked Beijing to elaborate on its technology transfer regime in the past, including on its licensing requirements for foreign IP licensors, such as during meetings of the WTO’s TRIPS Council.

The USTR report also notes, for example, concerns raised by Japan in a government review regarding the Regulations of the People’s Republic of China on Administration of Import and Export Technologies (TIER), specifically on how “mandatory provisions are applied only to foreign companies providing the technology.” 

The US says that TIER and other Chinese regulations “place US technology owners at a disadvantage relative to their Chinese counterparts when licensing technology into the Chinese market. The disparate treatment is effectively based on nationality, resulting in discrimination under Section 301.” 

The report also cites another alleged licensing restriction, specifically related to situations in some sectors where Chinese and foreign firms partner up to form a shared business entity in China, known otherwise as a joint venture (JV). The report specifically takes issue with Chinese regulations that provide a maximum ten-year term for technology transfer agreements involving these joint ventures. 

“The provision may result in US companies only having control over their transferred technology for ten years, even though some forms of technology, such as patents and trade secrets, may be protectable for much longer than ten years,” the USTR report says, noting that after the end of the agreement, the Chinese joint venture “shall have the right to continue to use transferred technology.” 

The third and final set of actions mentioned in Trump’s presidential memo involve investment restrictions, which are also not yet final. Instead, the US Treasury Secretary is now tasked with proposing options for Trump, with a progress report due from that department within two months. US Trade Representative Robert Lighthizer told reporters on Thursday that these restrictions would also focus on “high technology.” 

Chinese officials, US lawmakers air concerns

The proposed Section 301 measures, which have been rumoured for weeks, have drawn scrutiny at home and abroad for their potential to damage US-China trade relations significantly. Other concerns include the possibility of these measures destabilising interconnected value chains both between the two economic giants and at a wider scale, given the multi-country nature of many of the value chains involved. Even though some analysts note that the intellectual property issues are long-standing, many have questioned whether the proposed measures are the right approach. 

Trade analysts also question whether the tariffs would even achieve their intended effect, given that they would likely cover only a minute fraction of US-bound exports from China. They have also noted the relatively low value of the possible tariffs being considered. 

A few hours prior to Trump signing the memorandum, a spokesperson for the Chinese Ministry of Foreign Affairs pledged that Beijing would be prepared to respond to Section 301 measures. 

“China will never sit idly and let its lawful rights and interests be undermined and will surely take all necessary measures to firmly safeguard its legitimate rights and interests. We hope that the US can be fully aware of the mutually beneficial and win-win nature of China-US economic and trade relations and refrain from moves that will hurt both itself and others,” said Foreign Ministry Spokesperson Hua Chunying at a press conference in Beijing. 

After the US announcement, a spokesperson from China’s Ministry of Commerce issued a statement affirming that Beijing is “fully prepared to defend our legitimate interests.” It also said that China is “confident and capable of meeting any challenge.” In addition, China’s Ambassador to the WTO, Zhang Xiangchen told the Reuters news agency that Beijing would be considering filing its own WTO challenge, among other possibilities, but is hoping to discuss the situation further with Washington in a bid to lower tensions. Other officials have similarly stressed the importance of the multilateral rules-based trading system in this context and avoiding an escalation in tensions if possible. 

While China is reportedly considering other measures, including targeting a series of US goods worth a total US$3 billion with tariffs ranging from 15-25 percent, it has not yet confirmed plans to do so. 

Various US lawmakers have also cautioned that higher tariffs on these Chinese-made goods could have unintended consequences, such as by forcing American consumers to bear the brunt of these higher costs. The proposed measures have prompted questions from members of both major political parties, Democrat and Republican, in light of their implications for the US economy as well as the wider dynamic of recent unilateral US trade policy actions. 

“While I commend the administration for taking much-needed action toward China, I am concerned with their approach on tariffs. Hitting billions in goods with tariffs runs the risk of putting a bigger dent in the pocketbooks of American families across the country,” said Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, in a statement after the presidential memorandum was signed. 

His Democratic counterpart on that panel, Oregon Senator Ron Wyden, also welcomed the attempt to address concerns over Chinese intellectual property practices and pledged to take an active part in upcoming consultations, while noting that he would need to study the USTR Section 301 report in further detail.

Earlier in the day, both senators expressed concern over what Wyden referred to as the “chaotic” nature of some other US trade policy actions, particularly the administration’s approach towards enacting separate tariffs on imported steel and aluminium. The latter have drawn vocal pushback from many US trading partners, along with prompting intense discussions aimed at securing exemptions at either country or product level. Some trading partners have also made clear that they are ready to implement their own responses such they be hit by those measures. 

On Thursday morning, Wyden had told US Trade Representative Robert Lighthizer in the above-mentioned Senate Finance hearing that he was hoping to see a more coherent approach to US trade policy going forward, a sentiment shared by Hatch. 

“Bottom line, the Trump administration stormed into office promising better deals, more certainty for businesses to create jobs in America, and a stronger position in the world economy. But after 14 months, it’s mostly delivered a whole lot of chaos. Total chaos on trade isn’t going to create a single red-white-and-blue job,” said Wyden. 

Meanwhile, financial markets have also taken a toll, with key indicators such as the Dow Jones Industrial Average dropping 724 points on Thursday in a development that analysts have generally attributed to fears of worsening trade relations with Beijing. 

(Editor’s note: This story has been updated after its original publication on Thursday in order to reflect the final announcement from Washington.)

ICTSD reporting; “Dow plunges 724 points as trade war fears rock Wall Street,” CNN MONEY, 22 March 2018; “Exclusive: China to respond to U.S. tariffs, resist protectionism – WTO envoy,” REUTERS, 22 March 2018; “Markets edgy on US-China trade war fears,” BBC, 23 March 2018.

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