Last week, President Trump proposed a $50 billion package of tariffs in response to the U.S. Trade Representative’s (USTR) investigation under Section 301 of the Trade Act of 1974 into China’s forced technology transfer and intellectual property (IP) theft. The investigation and resulting 215-page report here, which was initiated in August 2017, explored whether acts, policies, and practices of the Government of China related to technology transfer, IP rights, innovation, or technology development are unreasonable or discriminatory and burden or restrict U.S. commerce. Trump’s national security team has worked in tandem with the economic team and largely backs the measure.
As mentioned in prior notes, it’s worth pointing out that the steel and aluminum tariffs using Section 232 of the Trade Expansion Act of 1962 levied on March 1 were executed amidst West Wing chaos with Trump’s inner circle, as well as officials at the Department of Commerce, caught off-guard by Trump’s announcement setting off a mad scramble to complete the measure. There was widespread opposition to the steel and aluminum tariffs from Republicans on Capitol Hill with a number of Senators threatening to nullify the tariffs through legislation. That movement died on the vine. As expected, additional exemptions (temporary until May 1) to the Section 232 tariffs were announced by the Administration last week. On the other hand, opposition to Section 301 has been much more muted and some support can be found under the Dome for the latest round of action focused squarely on China.
KEY FINDINGS:
1. Forced Technology Transfer a) The Chinese government uses foreign ownership restrictions, such as formal and informal joint venture requirements, and other foreign investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities. b) The Chinese government also uses its administrative licensing and approvals process to force technology transfer. c) China often implements its technology transfer regime in informal and indirect ways.
2. Discriminatory Licensing Restrictions a) China’s licensing regulations result in discriminatory technology transfer-related acts, policies, and practices that burden U.S. commerce. b) U.S. entities seeking to license foreign technologies in China must do so on non-market-based terms that favor Chinese recipients. These terms do not apply to Chinese companies licensing technology to each other. c) Regulations deprive U.S. technology owners of the ability to bargain and set terms for technology transfer.
3. State-Coordinated and Supported Acquisition of Advanced Technologies a) The Chinese government directs and unfairly supports the systematic acquisition of U.S. companies and assets by Chinese companies to generate large-scale technology transfer in industries deemed important by state industrial plans. b) The government has devoted massive amounts of financing to encourage and facilitate the acquisition of strategic technologies, and China has enlisted a broad range of actors to support this effort, including SOEs, state-backed funds, government policy banks, and private companies. c) The result: i. Investment decisions are driven by China’s strategic goals, not by the market. ii. Other investors are crowded out as China gives its companies unfair advantages.
4. Unauthorized Intrusions into Computer Networks and IP Theft a) China conducts and supports cyber-enabled theft and intrusions into the commercial computer networks of U.S. companies. b) Through these intrusions, the Chinese government has gained access to IP and confidential business information, such as technical data, negotiating positions, and sensitive and proprietary internal business communications. c) China’s actions impose costs on U.S. companies and harm the competitiveness of U.S. industry.
These practices impose a substantial burden on U.S. commerce and represent a serious strategic threat to the United States, economically, politically, and militarily.
Source: Office of the USTR, March 22, 2018
In response to the findings, President Trump has directed USTR to release a proposal for public comment on a package of 25% tariffs on 1,300 products with a focus on aviation/aerospace, information communication technology, electric and new energy vehicles, solar panels, robots, and machinery. The complete list of products will be published within 15 days (April 6th), and tariffs are expected to go into effect soon after the 60-day public comment period closes. We're hearing the list may be ready as early as this week.
USTR will initiate a complaint against China’s “discriminatory technology licensing practices” at the World Trade Organization (WTO), and the Treasury Department will propose restrictions on investment in sensitive U.S. technologies.
What’s Next? China has warned of possible retaliatory action in response to any tariffs imposed under Section 301. The Chinese government is already investigating whether to impose tariffs on U.S. sorghum, and reportedly is considering tariffs on soybeans and live hogs. Of note, Trump won eight of the top 10 soybean and hog-producing states, and seven of the top 10 sorghum producing states in the 2016 presidential election. U.S. Trade Representative Robert Lighthizer stated in a House Ways and Means hearing last week the U.S. would respond with countermeasures if China targets U.S. soybeans. Lastly, China’s Ambassador to the WTO recently suggested China could challenge the United States’ tariffs at the WTO.
As back-channel discussions between the U.S. and China continue, Trump has repeatedly stated that his goal was to alter Chinese behavior and reduce their $375B trade surplus with the U.S. by $100B and China has signaled changes are forthcoming. Whether those changes will mollify Trump before the latest round of tariffs will take effect (likely in June) is anyone’s guess.
To help investors wade through all the noise, we hosted a conference call with Charles Freeman, the former Assistant U.S. Trade Representative for China and one of Washington's top China policy analysts to discuss the impact of Trump's newest tariff proposal. We covered a lot of ground with Freeman in just under 30 minutes - including timeline and prospects for negotiations, the scope of targeted goods and products and potential retaliatory action from China. To listen to the replay CLICK HERE.
