This article is written by T. Ajay Shankar, a 3rd year law student from Tamil Nadu National Law University. This article discusses the crisis in WTO as a result of US – China Trade war.
The Article examines the United States ongoing trade disputes with China. The Trump administration has been critical of WTO handling China’s trade violations. It is true that China poses lot of unique problem to WTO but the WTO dispute settlement has more potential to address Chinese practice than what the US administration believes. If the US administrations want China to be more open, transparent then they should use WTO better. Rather than imposing unilateral tariffs which is illegal in the eyes of International Law and undermines the legitimacy of US claim, it must work with its allies and bring about coordinated effort to help solve the Trade dispute through WTO.
There has been a bipartisan support in the United States of America over condemning China for its Trade Practices. On March 22, 2018, President Trump announced that US will impose unilateral tariffs on China as a retaliation for intellectual Property theft, forced transfer among others. Trump has been sceptical of WTO since his campaigning days; he has accused it of having unfair practices towards countries like China (Developing countries). His administration has even gone as far to suggest China’s entry to the WTO in 2001 under the terms adopted was a mistake (USTR 2017 report).
It is true that the rise of China poses a unique problem for the WTO but to call its membership a mistake made by the US in 2001 is far-fetched. All 164 members of the WTO (including China) are much better off with China being in WTO than not. It must be understood that in the present globalised world we cannot rise by pulling one down, we must rise by raising each other.
The paper argues that despite Trump’s scepticism on WTO, it is the best forum for charging or disciplining China on its WTO commitments. WTO and TRIPS agreement together provide a comprehensive framework for the US to solve its dispute with China. It also has more legitimacy in the eyes of International law than in the present scenario of issuing unilateral tariffs.
For a long time since China joined WTO in 2001, the Chinese authorities have been accused of blatantly violating various agreements on Intellectual Property (TRIPS agreement), Subsidies (SCM agreement) and etc. China’s Trade Practices has led to a bipartisan support among the Democrats and Republicans. Various Countries including the United States have filed cases against China in the WTO Dispute Settlement Body for actions contrary to WTO obligations (China is facing 44 cases as of 2019).
Initially the US administration used WTO as a means to correct China’s behaviour but with Donald Trump winning the 2016 elections, things have spiralled down in the US-China relationship. Trump has been sceptical of the effectiveness of using WTO against China. Thus the Trump administration in response to China’s predatory business practices decided to impose unilateral sanction (Tariff of $50 Billion against Chinese Goods on March 22, 2018) against China using Sec 301 of the Trade Act 1974.
This illegal unilateral Tariff has led to tit for tat tariffs against American goods by the Chinese Authorities plus the Chinese authorities have already filed a complaint with the WTO against US for not consulting dispute resolution system, bringing the World to a Trade War.
The American Interest
The US is concerned with China’s Economic ambitions and views the rise of China as a threat to its own hegemony. With China laying down clear goals and policies for its Made in China 2025 to convert the Chinese factory from producing low-grade goods to High-quality goods, services and becoming a world leader in fields of Artificial Intelligence, Semiconductors, Integrated Circuits, Robotics etc.
There has been a growing legitimate concern among the US politicians that American industries will suffer as a result of unfair trade practices of China and the Made in China 2025 policy has only added more fuel to the fire.
Secondly, Chinese goods especially in the Tech sector has been viewed with suspicion among the intelligence community. China has been accused of spying and cyber theft, putting Chinese thirst for dominance in these sectors as a potential risk for National Security.
Chinese IP theft and Forced Technology Transfer
A constant US media refrain is accusing China of Stealing US Intellectual Property. The US has abundant cause against China’s intellectual property laws which has failed to protect American business. Though China has strengthened its IP laws since joining WTO it is still ill-equipped and poorly developed to suit the need of Foreign entities.
A report by the White House titled “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World” says that China has been engaging in State sponsored cyber espionage, IP theft, evasion of US export control law and Piracy. In fact China is regarded as the primary culprit for counterfeit goods and accounts for 87% of Counterfeit goods seized in US. In 2017 alone the reported loss for the US economy because of Chinese IP theft was more than $225 Billion.
The Chinese authorities in addition to engaging in IP theft also facilitates Technological Transfer or IP transfer from foreign entities to Chinese entities by way of illegal means. The Chinese governments through administrative guidelines and licensing procedure such as Indigenous Innovation policy require foreign entities to transfer technology to their Chinese counterparts to do business in China. China legally speaking has the power to do so, in absence of a Bilateral Investment
Treaty protecting foreign investment, foreign companies can face any restrictions in doing business. Exploiting this hole China forces foreign companies to form Joint Ventures with Chinese companies to avail similar credit conditions as their domestic counterparts.
Other than facilitating foreign companies to transfer their technology by way of policies, the Chinese authorities are also engaging in hacking and cyber espionage to acquire American Intellectual Property. In 2014, the US Justice Department indicted 5 Chinese Military personnel of conducting economic espionage and where charged for hacking and trying to steal American Trade secrets.
Various American firms in Industries considered as “Strategically Significant” have experienced numerous data breaches traceable to Unit 61398 of the Chinese Liberation Army. Almost 115 cyber attacks against American industries (mainly Information technology and High-Electronic Technology) have been traced to Unit 61398.
Why approaching WTO over IP violations and Forced Technology Transfer is more appropriate?
- Intellectual Property Violation –
The WTO is an international organisation which establishes a rule based system for International Commerce. The WTO framework provides a minimum standard for Trade Policy by way of various agreement with member states, mainly GATT (General Agreement on Trade and Tariff) and Uruguay Round. Failure to implement or follow WTO rules allows members to file suit in its Dispute Settlement Body and is authorized to allow States to impose Tariff in retaliation for violations.
One of the most important WTO obligation is respecting Intellectual Rights enumerated in Trade related aspects of Intellectual Property Rights aka TRIPS agreement. The most striking feature of TRIPS agreement is that it lays affirmative rules compared to WTO which lays down ‘Dont’ rules. But this TRIPS agreement has largely been unexplored in WTO dispute settlement. Although there has been various reports suggesting that various countries including China have violated the TRIPS agreement, no member state has ever brought a suit against other members for not enforcing intellectual Property rules effectively.
- Forced Technology Transfer
Forced Transfer has been a long-standing issues between China and the USA. In response to USTR request for comments under section 301 regarding China trade practices, various organisation identified “Forced Transfer” to be their biggest threat. In the Chinese case to understand whether complaints regarding forced technology transfer can be handled by WTO litigations we must try to understand China’s ob
- FDI in Goods
- FDI in Services
- Forced Technology Transfers
In respect to FDI in goods, there aren’t any rules per se in the WTO framework. There are only international agreement called BITs (Bilateral investment Treaty) and China has signed various BITs with countries like USA, members of European Union and etc. But the problem with these agreement is that no specific obligations have been created for issues relating to forced Technology transfer. Presently the EU and USA has been re-negotiating their BITs agreement but with the on going crisis in the US-China relationship, these negotiations are going nowhere.
China has assumed obligations under Mode 3 in its schedule of concessions under GATS for FDI in services. China’s treatment of Foreign companies on National treatment often violates Art. XVI of GATS (Market access)
Art. XVI.2 (e) of GATS reads as follows,
In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as:
(e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service.
This means with clear indications that China cannot subject foreign companies to enter into Joint Ventures to have commercial presence in China.
- What the US administration can do ?
In the case of Forced Transfer, the entire case is quite complicated. It is crucial to establish the role played by the government , Which government department or agencies are involved? How do they pressure the Foreign companies to hand over their technology?
This information is crucial because forced transfer is allowed under restrictive conditions of Art 31 of TRIPS agreement (compulsory licensing). Though China’s action seem to violate the spirit of WTO it is necessary to prove it violates law also.
One way to prove China’s failure is to look into Part III of the TRIPS agreement is titled “Enforcement of Intellectual Property Rights” this is because WTO members must put-forth effective enforcement regime.
Art 41.1 of TRIPS agreement provides,
“Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement ……. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide safeguards against their abuse”
Thus Art. 41.1 establishes an affirmative stance over enforcement by making it mandatory for member states to comply with. But there is a catch, what does the term “effective action against IP infringement must be available” mean? Does it mean having sound laws is enough like the Chinese case or should there be effective enforcement regime which the Chinese fails?
Although Art 41.5 says that member states do not need to establish distinct Judicial Courts to enforce Intellectual Property rights but by virtue of Art 40 they must control anti-competitive practices in contractual licensing. Thus by looking through Art 40 it is necessary for member states to not only have sound laws but also sound mechanism to enforce them.
Even the Appellate body and WTO Jurist have said that
“Making something available means making it obtainable, putting it within ones reach and at one disposal in a way that has sufficient form or efficacy”.
We can also look into Part 1 of China’s Protocol of Accession which contains number of specific requirements for China, this is because China is not only bound by its obligations to WTO but also its requirements in part for accession to WTO. This is commonly referred as WTO-plus Obligations.
- Section 2(A) (uniform administration) provides
“ 2 . China shall apply and administer in a uniform, impartial and reasonable manner all its laws, regulations and other measures ……. pertaining to or affecting trade in goods, services, trade-related aspects of intellectual property rights (“TRIPS”) or the control of foreign exchange”
- Section 2(C) (transparency)
“1. China undertakes that only those laws, regulations and other measures pertaining to or affecting trade in goods, services, TRIPS or the control of foreign exchange that are published and readily available to other WTO Members, individuals and enterprises, shall be enforced………. In emergency situations, laws, regulations and other measures shall be made available at the latest when they are implemented or enforced.”
- Section 2(D) (judicial review)
“1. China shall establish, or designate, and maintain tribunals, contact points and procedures for the prompt review of all administrative actions….. Such tribunals shall be impartial and independent of the agency entrusted with administrative enforcement and shall not have any substantial interest in the outcome of the matter.
2. Review procedures shall include the opportunity for appeal, without penalty, by individuals or enterprises affected by any administrative action subject to review. …….. The appellant shall also be informed of any right to further appeal.”
These Sections do not exclusively talk about IP concern or Forced Transfer but have laid out the conditions that apply to the entire WTO as well as TRIPS agreement for China. Reports have found enough information that China has not been following these rules.
Furthermore Section 7(3) of Chinese Accession Protocol includes explicit reference towards Technology Transfer,
“Without prejudice to the relevant provisions of this Protocol, China shall ensure that . . . any other means of approval for . . . investment by national and sub-national authorities, is not conditioned on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China”
This is also elaborated in the Working Party Report para 203 which was incorporated into the Protocol,
“The allocation, permission or rights for . . . investment would not be conditional upon performance requirements set by national or sub-national authorities,…… for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology. Permission to invest . . . would be granted without regard to the existence of competing Chinese domestic suppliers. Consistent with its obligations ……. the freedom of contract of enterprises would be respected by China”
Pursuant to these provisions the Chinese Administration at any level cannot lay conditions for approval of investment on Technology Transfer. If the complainant can prove that this is happening with all relevant documents its likely it will succeed in the WTO dispute settlement.
The US should rely exclusively on the framework provided in WTO rather than in engaging illegal methods such as tariffs.
In the past, the US has challenged successfully certain parts of the Chinese legal system for Intellectual Property in the WTO Dispute Settlement. But the US administration has never challenged the Chinese legal system as a whole for failure to fulfil Part III of TRIPS agreement; it was only in bits and pieces. Thus the Trump administration must try to resort to methods provided within the WTO framework.
For eg – Art 3 of TRIPS agreement states that member states must treat Foreign firms no less favourably than Domestic firms in Intellectual property. The Chinese indigenous Innovation policy restricting foreign entities from entering their market without agreeing to transfer intellectual property doesn’t lay the same obligation for the Domestic entities. A WTO panel will find these policies inconsistent with Art 3.
The complaint must also be expanded to address issues of State espionage, TRIPS does not address State Espionage. So what the US administration can do is argue that IP theft by Chinese Hackers benefit Chinese Companies on the expense of American Companies. The TRIPS agreement covers all aspects and kinds of IP, and the prevalence of such theft indicates that China is failing to fulfil its WTO obligations.
Art 15 and 16 of the TRIPS agreement allows exclusive rights to Trademark owners over their Trademark and prevents any third party from infringing this right. Art 9 provides law against copyright infringement. Thus Chinese production of counterfeit goods violates Art 16 and piracy violates Art 9.
And China’s failure to have a competent enforcement agency allows the US administration to have a case for violating Art 42 of TRIPS agreement.
Art 42 obliges member states to have effective enforcement agency to adjudicate and enforce IP violations. Civil mechanism must allow effective action against IP infringement, provide remedies and provide deterrence. Thus mere presence of enactment without proper enforcement agency violates Art 42. China has created specialized courts to deal with IP issues and has strengthened its regulatory framework but still it ccounts for majority of counterfeit goods seized in US. If the WTO finds out that the Chinese framework doesn’t satisfy Art 42, they will be forced to bring in compliance.
Thus the US must challenge China’s entire legal system for failure in enforcing WTO rules. This would not only be beneficial for the US but it will also set a precedent for other members in dealing with China. It would also put the WTO to a test. Initiation of voluminous legal pleadings will force the members and WTO jurists to address fundamental questions both for and against the rule based system.
Why Trump is wrong about WTO?
Trump and his rhetoric on China has always shown WTO in bad light. Trump’s argument is that China cheats, rendering the rules worthless and that using WTO to correct China’s behaviour will be futile. This scepticism and rhetoric if examined closer carries little weight.
WTO is the best medium for US to discuss its issues with China, Why?
- Most cases brought to WTO settle amicably before the final judgement is given. Thus WTO might end up acting as a forum for US and China to settle their woes without resulting to Tariffs.
- If the case is not settled amicably and proceeds to adjudication, the chances of US winning the case is higher. WTO generally rules in favour of complaining countries and the US has won 91% of its case.
- China’s compliance with WTO ruling sits at 100%.
Thus the overall picture looks in favour of US and China’s response to WTO ruling is satisfactory. Although there is scepticism against the extent to which China has changed itself and seen by some as mere paperwork. But unlike other countries till now there as been no case where China simply ignored the ruling. For eg, the US has not complied to the WTO ruling on cotton subsidies brought by Brazil.
One must understand that China is working to update its law, like any other country it is trying to stay updated. Antagonising China for this to score political goals are going to take us nowhere and will only make matters worse. Thus Trump must tone down his rhetoric and have more faith in his legal representatives to bring “A deal made of Art”. Which he can appropriate as his own to meet his supporters need.
The takeaway is that it works, using WTO to get stuffs done works on China. Of course it doesn’t work perfectly but no ruling as ever worked perfectly on any country. As Mark Wu (Prof at Harvard for International Trade Law) despite his reservation on WTO in respect to China puts “On the numerous occasions when the WTO has ruled against China, the Chinese government has willingly complied with the judgment and usually altered its laws or regulations to comply with WTO rules.”.
Despite Trump’s scepticism, WTO is the best way to solve issues with China. The administration must roll back its sanctions under Section 301 of Trades Act 1974 which although allows tariff as a means to retaliate is still illegal in eyes of International Law. This allows China to downplay the importance of US allegations by attacking the legitimacy of the US action. One must understand that you cannot expect change with a barrel of gun at your head. Negotiation and using the available legal procedure (WTO, TRIPS) is the only way forward. The Trump administration must try to work with its allies to use the WTO dispute process to press China to fulfilling its international obligations.
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