Tensions between China and the United States are mounting. China’s policies on technology transfer from foreign entities have resulted in two new World Trade Organization (WTO) dispute settlement cases. In one, the United States alleges that China has violated the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). In the other, China asserts that the United States’ unilateral measures against certain Chinese goods (as countermeasures against China’s intellectual property policies) violate US obligations under the General Agreement on Tariffs and Trade 1994 (GATT 1994) and the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).

The US unilateral measures contested by China are based on specific provisions of the United States Trade Act of 1974 (Sections 301-310, collectively referred to as “section 301”). Section 301 allows unilateral proceedings to be taken against jurisdictions whose actions discriminate against or negatively impact US trade interests and intellectual property, and preceded the Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement), including the DSU.

In a 2018 U.S. Special 301 Report, China was called out for its discriminatory practices on technology transfer. And in the 2019 Trade Policy Agenda, the United States references those practices as enabling “technology transfer from U.S companies by directing or facilitating systematic investment in, and acquisition of, these U.S. companies and assets, and for stealing sensitive commercial information and trade secrets of American companies through unauthorized intrusions into their computer networks.”

Which of the US trade actions against China — if any — are permissible under the WTO Agreement?

On March 23, 2018, the United States initiated a WTO dispute related to China’s measures pertaining to the licensing of intellectual property rights. The United States continued to pursue the other practices covered by the section 301 investigation on a bilateral basis, by levying surcharges on certain Chinese products. Effectively, the United States challenged China on intellectual property measures on two fronts: Chinese measures on the licensing of intellectual property rights would be challenged in WTO dispute settlement proceedings as violations of the TRIPS, while other policies that presumably fall outside of the WTO Agreement would be handled under section 301.

Given this bifurcated approach, how might China and the United States reconcile their intellectual property disputes, and which of the US unilateral 301 trade actions against China — if any — are permissible under the WTO Agreement?

The United States’ WTO Case against China

In its complaint, the United States alleged that China’s policies on technology transfer prevent foreign patent holders from enforcing their patent rights in China or negotiating licensing contracts on market-based terms. For example, the United States asserted that China’s regulations — that give a Chinese party to a joint-venture agreement the right to continue to use technology transferred under the agreement after its expiration — violate the national treatment obligation of TRIPS article 3 (by giving enhanced rights to the Chinese party) and the right of foreign patent owners to enforce their own patent rights stipulated by TRIPS article 28. 

In this case, the panel has been established and its composition has been determined (by appointment by the director general of the WTO on January 16, 2019). On June 1, 2018, the European Union filed a parallel request to consult with China on its technology transfer practices. That case has not gone beyond the consultation phase.

The US case fits the traditional mould of WTO dispute settlement cases; it alleges specific violations of certain provisions of the TRIPS agreement (which make US retaliation possible under WTO rules if the United States is successful and China fails to comply). A complication, however, is China’s adoption of a new foreign investment law. In March 2019, China outlawed the compulsory transfer of technology requirements that were targeted by the US WTO case. This new law will enter into force on January 1, 2020. It remains to be seen how this will affect the WTO dispute.

US Unilateral Action against China

In July and August 2018, the United States made use of its section 301 mechanism and imposed a 25 percent tariff on a total of approximately $50 billion of Chinese goods, as part of the US response to China’s unfair trade practices with respect to US intellectual property. In September, the United States imposed additional tariffs on approximately $200 billion of imports from China. These tariffs were set at 10 percent and were to be increased later to 25 percent. The increase was deferred while negotiations between the United States and China took place on their trade relationship, including on forced technology transfer, intellectual property protection, cyber intrusions and cyber theft. These negotiations broke down on May 10, 2019. On the same day, the US Trade Representative announced that the United States would impose the previously deferred tariffs of 25 percent (on Chinese goods worth approximately $200 billion) effective immediately.  

China’s WTO Case against the United States

On April 4, 2018, even before the United States imposed surcharges of 25 percent on certain Chinese goods, China filed a request for WTO consultations on these impending surcharges. In response to China’s request, a WTO panel was established on January 28, 2019. However, the composition of the panel remains to be determined. 

China’s complaint challenges the surcharge of 25 percent on certain products of Chinese origin by alleging violations of the most-favoured-nation treatment obligations under GATT 1994 and the US Schedule of Concessions and Commitments. Further, China claimed that the United States violated article 23 of the DSU, by seeking “the redress of an obligation or impairment of benefits under the covered agreements or an impairment to the attainment of any objective of the covered agreements.”

The exchange of documents between the United States and China indicates that the United States will likely defend its imposition of surcharges on Chinese goods under section 301, by arguing that its surcharges on Chinese goods constitute a response to acts, policies and practices of China that have caused harm to the United States and fall outside the scope of TRIPS (and are therefore not subject to WTO dispute settlement).   

These US-China intellectual property cases are being litigated against the backdrop of other WTO cases filed in 2018 regarding the United States’ imposition of unilateral surcharges on steel and aluminum products. These surcharges were imposed pursuant to section 232 of the 1962 Trade Expansion Act, which gives broad powers to the US president to restrict imports in the interest of national security. In these WTO cases, nine WTO members filed requests for consultations and subsequently requested the establishment of WTO dispute settlement panels in proceedings against the United States. In turn, the United States challenged the countermeasures of six WTO members.

The cases will also be litigated against a background of the WTO Appellate Body crisis. Currently, the Appellate Body has three members, rather than the seven members foreseen by DSU article 17.1. With two current members’ terms ending this year, the Appellate Body will have only one member after December 10, 2019, less than a quorum, which will render the Appellate Body non-functioning. This will surely have adverse effects on the WTO dispute settlement system as a whole.

Lessons from the Past

This is not the first time that section 301 has been challenged. In 1999, the European Communities (EC) unsuccessfully challenged some of section 301’s provisions, claiming their inconsistency with articles 23.2(a) and (b) of the DSU and articles I, II, VIII and XI of GATT 1994. The EC challenged section 301 “as such” and did not challenge a particular application of the measure. The panel that heard the case found no violations by the United States of its WTO obligations. This outcome was based on assurances from the US government that a determination, under section 301, would be made only following US compliance with the WTO obligations.

The 1999 case focused on the potential pre-emption of the WTO dispute settlement process. In this case, the panel avoided the finding of any violation by relying on US assurances that the United States would, in practice, litigate any disputes under the available WTO dispute settlement mechanisms and avoid unilateral determinations of WTO violations and unilateral retaliatory measures. Despite the US technical win, the panel report contains important statements regarding the WTO constraints against self-help. The current case about the United States’ unilateral imposition of surcharges on certain Chinese goods pursuant to section 301 is not likely to reach the same outcome as the 1999 case; it concerns an actual application of the measure. Given that the United States is challenging alleged TRIPS violations by China in WTO dispute settlement proceedings, it appears that (from the US perspective) section 301 is being used in areas that fall outside the WTO agreement. This argument has some superficial appeal, but a number of the WTO annexed agreements — GATT 1994, the DSU and TRIPS — would present significant challenges:

GATT 1994: The United States may well have a valid argument that there is a sphere outside of TRIPS in which the use of section 301 is not constrained by the DSU; nonetheless, the application of surcharges on Chinese goods would still not be permitted. The unilateral imposition of surcharges on certain Chinese-origin goods can only be justified if the United States can successfully invoke one or more specific exceptions in GATT 1994, such as article XX (“General Exceptions”) or XXI (“Security Exceptions”). Any disagreement as to whether any such exception is available could then be litigated in WTO dispute settlement proceedings.

The DSU obligations against self-help: The key WTO provision against unilateral determination of, or unilateral retaliation against WTO violations by another WTO member (self-help) is DSU article 23, which contains very broad obligations in this regard. It prohibits self-help by WTO members by resorting to unilateral measures in disputes for which WTO dispute settlement is available.

DSU article 23.1 requires all WTO members to follow the procedures of the DSU when they seek redress of alleged violations of WTO obligations. DSU article 23.2(a) explicitly prohibits a WTO member from unilaterally determining that:

  • a violation of WTO obligations has occurred;
  • other commercial benefits have been denied (in non-violation cases); or
  • that the attainment of any objective of the covered agreements has been impeded.

The second and third categories provide scope for interpretation to enlarge the prohibition against self-help significantly.

The relevance of non-violation nullification or impairment (NVNI) under TRIPS: The US two-track strategy implicitly requires a determination of the parameters of the WTO agreement, including the WTO dispute settlement mechanisms. In this regard, the concept of NVNI may present special issues. Referred to in TRIPS article 64.2, NVNI would allow a WTO member to bring a dispute settlement action against another member even without violation of one of the obligations contained in TRIPS. NVNI does this by permitting a WTO member to claim the denial of economic benefits that it could reasonably expect from other members when it joined the WTO. In this case, NVNI seems particularly relevant to the US allegation of the thefts of sensitive commercial information and trade secrets of US companies through unauthorized intrusions into their computer networks as a result of policies and practices of China. The theoretical possibility of a US NVNI claim against China — even if the United States were never to actually assert such a claim — could work to China’s benefit, because it supports a broad interpretation of the prohibition of self-help of DSU article 23.2(a).

The WTO cases pending between the United States and China on intellectual property and related trade issues could clarify important questions of interpretation...

TRIPS article 64.2 excluded the applicability of NVNI with regard to TRIPS for five years from the day that the WTO Agreement entered into force (January 1, 1995). While this TRIPS provision now legally permits the bringing of a claim of NVNI, a political moratorium has been in place on the use of article 64.2 since that time. The moratorium was last extended by the WTO Ministerial Conference in 2017 (in effect until the next Ministerial Conference, now scheduled for 2020). In spite of the moratorium, the inclusion of TRIPS article 64.2 gives China room to argue that the prohibition against self-help of DSU article 23.2(a) extends — beyond the precise legal obligations of the covered agreements — to other commercial benefits that could reasonably be expected from WTO members. The legal availability of NVNI arguably extends the sphere of DSU article 23.2(a) and correspondingly narrows the sphere of where section 301 may apply without the constraints of the WTO Agreement.

As a counterargument, it would be in the United States’ interest to argue that NVNI is irrelevant in this case because of the current political moratorium. However, there would be room for China to argue that the moratorium is only of a political nature and does not legally remove TRIPS article 64.2 from the body of TRIPS; that the moratorium was adopted and extended by consensus (in which the United States joined); and that it, therefore, should not be used to exclude the relevance of TRIPS article 64.2 for the interpretation of DSU article 23.2(a).

The WTO cases pending between the United States and China on intellectual property and related trade issues — regardless of the outcome — could clarify important questions of interpretation of TRIPS, GATT 1994 and the DSU. Their outcome may also provide more clarity on the delineation of areas outside the scope of the WTO Agreement, where unilateral counter measures may be taken by one WTO member against another, without the constraints of WTO law. It is of obvious importance to the WTO membership and the body of WTO law to obtain elucidation on the extent to which self-help is still permitted, if at all.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.
  • Ton Zuijdwijk

    Ton Zuijdwijk is a senior fellow at CIGI. The focus of his research is on international trade law, particularly as it relates to intellectual property. 

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