China Claims U.S.’s Section 301 Investigation into Its Tech Transfer and IP Licensing Policies May Violate WTO Dispute Settlement Understanding

On March 22, the U.S. Trade Representative (USTR) announced the findings of its Section 301 investigation of “China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation.” The report alleges that the government of China has unfairly forced U.S. firms doing business in China to transfer intellectual property to Chinese business partners, has denied U.S.-based firms market based terms for technology transfer licenses, and may be directly involved in cybertheft of trade secrets and other forms of intellectual property. USTR concludes that it”acknowledges the importance of these issues and agrees with stakeholders that the matters warrant further investigation. …A range of tools may be appropriate to address these serious matters including more intensive bilateral engagement, WTO dispute settlement, and/or additional Section 301 investigations.”

Last week, China warned that the U.S.’s threat of unilateral sanctions under Section 301 of the Trade Act violates its WTO commitment to settle disputes within the WTO Dispute Settlement framework, and it referred to a previous case in which a panel addresses how the U.S. could use Section 301 and stay within the bounds of the WTO framework. Inside U.S. Trade reports “China cited DS152 to make the claim that unilateral trade restrictions taken by the U.S. via Section 301 would be inconsistent with WTO rules. The panel in DS152, a case brought by the European Communities that challenged as such aspects of the 301 law, determined that the statute does not breach WTO rules because the U.S. government had provided statements that it would follow WTO rules when making WTO-related determinations under the statute.”

The United States responded that the findings of the Section 301 investigation did not allege China was in violation of TRIPS, and therefore recourse through the WTO Dispute settlement system was not required. The distinction matters.  As Sean Flynn pointed out in an earlier post about the designation of Ukraine as a Priority Foreign Country in the 2013 Special 301 Report, the U.S. is obliged to follow the WTO Dispute Settlement procedures in cases where it alleges TRIPS violations.