Trade War with China

Chairman, we have now entered the realm of Alice in Wonderland. White is black. Up is down. It is amazing to watch a country that is the world’s most protectionist, mercantilist economy position itself as the self-proclaimed defender of free trade and the global trading system. The WTO must avoid falling down this rabbit hole into a fantasy world, lest it lose all credibility.
The truth is, it is China that is the unilateralist, consistently acting in ways that undermine the global system of open and fair trade. Market access barriers too numerous to mention; forced technology transfers; intellectual property theft on an unprecedented scale; indigenous innovation policies and the Made in China 2025 program; discriminatory use of technical standards; massive government subsidies that have led to chronic overcapacity in key industrial sectors; and a highly restrictive foreign investment regime – these are the issues that should be on today’s agenda. If the WTO wishes to remain relevant, it must – with urgency – confront the havoc created by China’s state capitalism.
This brings me to the Section 301 report that China has asked to be reflected on today’s agenda.
As Members are aware, the United States has issued a detailed factual report running nearly 200 pages with more than one thousand one hundred footnotes that details China’s distortive policies on technology transfer. China has not provided any evidence to refute the report’s facts or conclusions, only mere denials. The report, containing extensive evidence, is available on the USTR website.
What are these policies? There are four types of practices involving technology transfer:
First, China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from foreign companies.
These foreign ownership restrictions 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.
These requirements preclude foreign companies from entering the market on their own terms, and lay the foundation for China to require or pressure the transfer of technology.
China also uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous approvals needed to establish and operate a business in China.
Vague provisions and uncertainty about the applicable rules provide Chinese authorities with wide discretion to use administrative processes to pressure technology transfer or otherwise act in furtherance of China’s trade-distorting industrial policy objectives. And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?
Second, China’s regime of technology regulations forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.
China imposes a different set of rules for imported technology transfers originating from outside China, such as from foreign entities attempting to do business in China. These rules do not apply to technology transfers occurring between two domestic Chinese companies.
China’s mandatory requirements for importation of foreign technology are discriminatory and clearly more burdensome than the requirements applicable to domestic Chinese companies.
Specifically, China mandates that all indemnity risks be borne by the foreign technology transferor. Parties cannot negotiate the allocation of this risk, even if the transferee would be willing to bear the risk under the contract.
China also mandates that all improvements belong to the party making the improvement and that a foreign licensor cannot stop the Chinese licensee from making improvements to the technology. China further requires that joint ventures, mandated under Chinese law, may continue to use transferred technology after the conclusion of any licensing contract.
These restrictions tip the technology transfer regime in favor of Chinese entities before a foreign company even attempts to enter the market in China. And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?
Third, China directs and unfairly facilitates the systematic investment in, and acquisition of, foreign companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies.
The role of the state in directing and supporting this outbound investment strategy is pervasive, and evident at multiple levels of government – central, regional, and local.
China has devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deems strategic.
To implement these policies, China employs tools such as investment approval mechanisms and a system of “encouraged” sectors to channel and support outbound investment.
These investments and acquisitions align with state objectives and policies, and are often undertaken by state-owned enterprises that are, by definition, owned and controlled by the government.
Even when undertaken by companies in which the government does not own an observable controlling stake, these transactions are frequently guided and directed by the state.
In addition, many of these transactions are funded by state-owned entities or banks, often in situations where comparable commercial financing would have been unavailable. And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?
Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of foreign companies to access their sensitive commercial information and trade secrets.
For over a decade, China has conducted and supported cyber intrusions into U.S. commercial networks, targeting confidential business information held by U.S. firms.
Through these cyber intrusions, China has gained unauthorized access to a wide range of commercially-valuable business information, including trade secrets, technical data, negotiating positions, and sensitive and proprietary internal communications.
China has used cyber-enabled theft and cyber intrusions to serve its strategic economic objectives. Documented incidents of China’s cyber intrusions against U.S. commercial entities align closely with China’s industrial policy objectives. And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?
These four technology transfer policies harm every Member, and every industry in every Member, that relies on technology for maintaining competitiveness in world markets and increasing its people’s standard of living.
Instead of addressing its damaging and discriminatory policies, China accuses the United States of “unilateralism.”
This criticism has absolutely no validity. To the contrary, the four policies and practices I have outlined are examples of unilateralism by China, advancing its own interests at the expense of all of ours, and causing economic harm worth tens of billions of dollars annually to the United States, and multiples of that to WTO Members collectively.
The WTO system is not threatened – as China claims – where a Member takes steps to address harmful, trade distorting policies not directly covered by WTO rules.To the contrary, what does threaten the WTO is that China is asserting that the mere existence of the WTO prevents any action by any Member to address its unfair, trade-distorting practices and policies – unless those policies are currently subject to WTO dispute settlement.
If the WTO is seen as a shield protecting those Members that choose to adopt policies that can be shown to undermine the fairness and balance of the international trading system, then the WTO and the international trading system will lose all credibility and support among our citizens.

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