Trump Administration and American Companies Challenge Chinese Regulation Regarding Intellectual Property

Sergio Juwa
Associate Editor
Loyola University Chicago School of Law, J.D. 2019

 

Chinese foreign investment policies have long favored investments that bring the country technological advances from foreign companies. In recent years, China has increasingly developed policies which force foreign companies to share their intellectual property with China and to allow Chinese companies to conduct business with the foreign country China has backed off their previous requirements to transfer such information in an attempt to meet the requirements of the World Trade Organization (“WTO”) since joining the organization in September of 2001. Evidenced by President Donald Trump recently signing a directive to initiate an investigation into Chinese trade practices regarding the attainment of intellectual property from foreign companies, many companies and trade organizations believe that China is not adequately protecting intellectual property rights of foreign companies.

Chinese Foreign Investment Policies

China’s foreign investment regulations have grown increasingly stringent and have aligned with the nation’s policy interests in the past decades. Chinese regulations impact foreign businesses as well as joint ventures, partnerships between Chinese companies and foreign companies. Intellectual property policies are designed with China’s best interests in mind, with a focus on industrialization, infrastructural development, the development of technology, and research and development. However, some regulations have since been removed in order to comply with the membership requirements of the World Trade Organization (“WTO”).

Since China first reformed its policies regarding foreign direct investment, it has maintained the introduction of new technologies and intellectual property as a primary objective in the development of its laws surrounding international business. Chinese regulation encourages foreign investment because of its ability to stimulate technological advancement, and the favorable tax breaks offered under Chinese law promote such investment. Similarly, joint ventures engaged in the development of technology enjoy even greater policy preferences because they are viewed as a better means for transferring new technologies into China.

China has leveraged the increasing strength of its own companies to demand more from foreign competitors who would like to enter Chinese markets. Additionally, companies from the United States and elsewhere may not always know what to expect when entering the Chinese market because local regulations regarding the transfer of intellectual property are drafted in vague terms, and enforcement is inconsistent.

President Trump’s Response to China’s Intellectual Property Regulation

The Trump administration has recognized this issue and intends to implement trade measures to reduce existing technology-sharing requirements that American companies must comply with in order to conduct business in China. The President is authorized to take such action under Section 301 of the Trade Act of 974, and President Trump recently used this authorization to sign a directive to initiate a formal probe of whether the Chinese Government or Chinese companies are unfairly gaining access to valuable intellectual property from foreign companies. This power has not been used since the implementation of the World Trade Organization in 1995; however, the Trump administration does not feel that the WTO rules are sufficient to adequately protect intellectual property. This investigation would be the first step in the United States’ potential move to impose trade sanctions on Chinese companies, or the creation of restrictions on the transfer of intellectual property to the Chinese government or companies.

The Chinese Director General disagrees with sentiments that Chinese regulations are harmful to international businesses. In recent statements, he acknowledged that China has embraced the technological revolution as a means of increasing economic productivity, emphasizing that China is committed to openness in its policies, and believes this will stimulate growth. This contrasts with the Notice of Initiation of Investigation issued by the United States, which asserts that Chinese policies regarding intellectual property “inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation”.

The investigation could take a year to conclude and to determine whether sanctions are appropriate. The outcome of this investigation will determine how international investment regulations will change both in the United States and within China in the future. If the investigation determines that China’s policies unfairly disadvantage United States companies, sanctions could include policy measures which restrict the transfer of intellectual property. China stands firm behind the claim that the practices in question are legitimate rights which its Government will act to defend if necessary. It is a possibility that any changes to Chinese regulation going forward will restrict American access to Chinese markets further as the nation’s policies seem intent on making China self-sufficient in the coming years.

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