Phase 1 of the China/US Trade Agreement: Technology Transfer

The USTR Fact Sheet (13 December 2019) on Phase 1 of the China/US Trade Agreement included the following reference to Technology Transfer:

Technology Transfer:

The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.

Breaking this down:

1. For the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government.

  • This will be the first time that China has agreed to end this practice in a trade agreement. In fact, it will probably be the first time that China has acknowledged that any such transfer is “forced”. However, China has been moving to address this perception recently anyway.
  • In March 2019 China’s new Foreign Investment Law (FIL) was announced, effective on 1 January 2020. The new FIL will replace the existing foreign investment laws covering Wholly Foreign Owned Enterprises (WFOEs), China-Foreign Contractual Joint Ventures (CJVs), and China-Foreign Equity Joint Ventures (EJVs). The changes in the new FIL include:
    • (i) Government departments and their employees must not force technology transfer by administrative measures;
    • (ii) Government departments and personnel are not allowed to disclose trade secrets learned in the course of performing their duties to any other party.
  • Also in March 2019, the State Council made changes to the Implementation Regulations of the Equity Joint Venture (EJV) Law and the Administration Regulations of the Import and Export of Technology. Although the EJV law will be replaced by the new FIL in 2020, these changes included the removal of requirements such as:
    • (i) within the term of a technology import agreement, the results of any improvements in the technology will belong to the party who makes the improvements; and
    • (ii) the assignor shall be liable for any infringement of rights and interests of any third party as a result of the assignee’s use of the technology provided by the assignor in accordance with a technology import contract.

2. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.

  • Again, China has been moving to address these issues recently. Changes in the new Foreign Investment Law included, for Foreign Invested Enterprises (or FIEs):
    • (i) the business relationship between the parties is encouraged to be based on free will and business rules in the process of foreign investment;
    • (ii) technical co-operation conditions of the business relationship between the parties will be determined by the principle of fairness upon equal negotiation; and
    • (iii) for investments in areas of technology not covered by the negative list:
      • FIEs will get national treatment and administration in line with domestic investment;
      • FIEs can participate equally with domestic companies in standard setting; and
      • FIEs and domestic companies will be treated equally with respect to government procurement within China.
  • It should be noted that where the technology area is included in the negative list, the negative list rules will still apply. The technology areas included in the negative list have recently been reduced as part of the process of “opening up” the China market for investment, and this list should be reviewed regularly for further changes.

3. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.

  • This is the most interesting concession, as it suggests that China may have agreed to restrict one of the major foundations of its Made in China 2025 (MiC2015) policy (the reference to “industrial plans that create distortion” appears to be a thinly veiled reference to that policy). A fundamental principle of the MiC2025 policy is “the market to lead, government to guide and reforms to deepen”;
  • One of the central goals of the MiC2025 policy was to break China’s reliance on foreign technology. In other words, China quite understandably wants to move from being the world’s manufacturer to be a world innovator;
  • To do this, China needed to have access not only to world leading technology but also to the innovation systems and processes behind that technology. To do this by 2025 required aggressive and targeted acquisition of companies controlling desired technology to shorten the timelines involved. It how the Chinese government supports and guides that process of technology acquisition that is at issue.

There will be little difficulty in China meeting the requirements of the first two technology transfer concessions made in Phase 1 of the Agreement. China has options in place to meet these already and it will be a matter of clarification and possibly expansion of what is included that will be needed. 

As far as the third concession is concerned, the situation is far less clear. Whether the MiC2025 policy is still central Chinese government policy or not, its ambitions and goals will certainly remain. Chinese government involvement in strategically important businesses is pervasive. For the Chinese government to agree to restrict its involvement in decisions on outbound investments aimed at acquiring foreign technology in that context is no small thing.

In addition, the qualification “…pursuant to industrial plans that create market distortion” is clearly intended to allow Chinese companies to acquire foreign companies and related technologies in the ordinary course of their business, at least as far as the Phase 1 Agreement is concerned. However, many foreign countries are blocking Chinese technology deals, not because of market distortion, but because of concerns about the impact of Chinese ownership and control of those technologies. Phase 1 of the Agreement does not address this so presumably these foreign domestic restrictions will continue. Distinguishing allowable Chinese technology acquisitions under Phase 1 of the Agreement from technology acquisitions based on “industrial plans that create distortion” in that business environment will be difficult and will inevitably become increasingly politicised. The ability to distinguish between these acquisitions, and to have resultant decisions accepted, will be critical to the success of not only Phase 1, but of the Agreement as a whole.

 

Written by: Tim Jackson and Jacqueline Zhao