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Commentary

In Trade War, Washington Lacks Legal Footing

By Sourabh Gupta

May 08, 2018

Source: UnSplash

Articles and Analysis

Could North Korea Help Bring the United States and China Closer Together?
Patrick M. Cronin
Foreign Policy, May 4

“North Korea is Asia’s most immediate security threat, but confrontation between China and the United States remains the main long-term risk to regional prosperity and stability. Even as prospects for a diplomatic breakthrough with North Korea brighten, dark clouds hover over China-U.S. relations.”

Perspective – Nuclear Negotiations with North Korea
Derek Bolton
American Security Project, May 3

“This report examines the recent breakthrough in diplomatic activity on the Korean Peninsula and suggests key areas that policymakers must keep in mind as negotiations progress. In it, Dr. Derek Bolton argues that national narratives hold important insights into understanding state perceptions and interests, and should be taken into consideration when formulating bargaining positions. Nuclear weapons provide North Korea both physical and ideational security. Negotiators must address both of these issues to be successful.”

Past Events

Schieffer Series: China and North Korea – What’s Next?
Event hosted by Center for Strategic & International Studies, April 24

CBS News’ Bob Schieffer led a discussion on China and North Korea with Margaret Brennan,

“Face the Nation” Moderator and Senior Foreign Affairs Correspondent at CBS News, Sue Mi Terry, Senior Fellow and Korea Chair at CSIS, Matthew Goodman, William E. Simon Chair in Political Economy and Senior Adviser for Asian Economics at CSIS, and Jon Alterman, Senior Vice President, Zbigniew Brzezinski Chair in Global Security and Geostrategy, and Director, Middle East Program at CSIS. Watch the webcast here.

New Year, New Strategy: Shifting Policies on North Korea in 2018
Event hosted by Wilson Center, April 25

“We are cautiously optimistic that this time, the inter-Korean summit and the North Korea-U.S. summit can be a success… Changes of government, bottom-up approaches, and a lack of trust between North Korea and the United States all contributed to the failure [of previous efforts]. This time, the situation is different… Most importantly, these talks are being conducted in a top-down manner… North Korea and the United States can talk directly, building trust without the risk of any third-party miscommunication.” [Joonho Cheon, Minister, Embassy of the Republic of Korea]

“North Korea still has not frozen its program. It has frozen certain aspects of testing – no nuclear tests and no testing of certain ballistic missiles –[but] their nuclear scientists are still able to do their work… Just so long as they are not conducting these full-out tests, their program is still moving. As time goes along, their capabilities can continue to improve.” [Abraham Denmark, Director, Asia Program, Wilson Center]

21st Century Security Forum: The National Defense Strategy and its global impact
Event hosted by Brookings Institution, April 26

“In the National Defense Strategy (NDS) released earlier this year, Secretary of Defense Jim Mattis states “America’s military has no preordained right to victory on the battlefield.” The NDS not only argues for urgency in planning, but it marks a significant change in the focus of our forces. Notably, the document marks a shift from anti-terrorism operations to great power competition, including a new commitment to countering the actions of China and Russia. This shift has immediate consequences for policymakers around the world, and it will continue to require additional examination and discussion as it goes fully operational in the time ahead.”

“On April 26, Foreign Policy at Brookings hosted a forum on the near-term global impacts of the recently released NDS. Panelists included military fellows from Brookings and other think tanks as well as a number of national security professionals with backgrounds in government and academia. General Robert Neller, commandant of the U.S. Marine Corps, headlined the event, with a discussion on resetting the Department of Defense under the 2018 NDS. Brookings President John R. Allen joined General Neller for the discussion.”

Maritime Security in the Polar Regions: Legal Perspectives from the United States and China
Event hosted by Wilson Center, April 27

Dr. Nong Hong shared the key findings in her report China’s Interests in the Arctic: Opportunities and Challenges. She concluded that China’s regional interests mainly included seeking participation in the Arctic Council, promote bilateral diplomacy in Arctic area, shipping, resources development, polar research, and cooperation between Arctic and Non-Arctic States.

Mark Rosen, Senior Vice President and General Counsel of the CNA Corporation, shared his analysis of current risk trajectories in three aspects: maritime activities, such as the absence of legal agreements to address liability for offshore accidents; land-based activities, including the challenge of timely discovery and response to remote incidents in the region; and investment issues, given that no regional standards on regulating Foreign Direct Investment were imposed.

Xi’s Three Battles: China’s Anti-Poverty Campaign
Event hosted by Center for Strategic & International Studies, May 3

“The Freeman Chair in China Studies discussed poverty alleviation in China. At the December 2017 Central Economic Work Conference, Chinese policymakers decided that China would focus on fighting three tough battles to achieve high quality development in the next three years, among them reducing rural and urban poverty. This event featured experts who discussed the political, economic, and social aspects of addressing poverty. Georgetown University Professor Kristen Looney, Lead Economist for the World Bank’s Development Research Group John Giles, and Director of the Grassroots Initiative at Johns Hopkins SAIS Anne Thurston discussed China’s trends in poverty and economic development, policy implementation for poverty alleviation, the demographic challenges to China’s development, and the roles of NGOs in China’s community development. Scott Kennedy, Deputy Director of the Freeman Chair in China Studies, moderated the discussion.”

Spring Summitry on the Korean Peninsula: Peace Breaking Out or Last Gasp Diplomacy?
Event hosted by Center for Strategic & International Studies, May 7

The CSIS Korea Chair experts and special guests assessed the results of the April 27, 2018 inter-Korean summit and its implications for the U.S.-North Korea summit in May in two panels. Watch the webcast here.

Upcoming Events

The Rise of China’s Private Security Companies
Event hosted by Carnegie Endowment of International Peace, May 8

On grand strategy: A conversation with John Lewis Gaddis
Event hosted by Brookings Institution, May 8

Chinese Influence Operations in the U.S: Shedding Some Light on all the Heat
Event hosted by Wilson Center, May 9

ICAS Roundtable: Previewing the Trump/Kim Summit
Event hosted by ICAS, May 10

Forty Years of U.S.-China Relations
Event hosted by Center for Strategic and International Studies, May 11

The U.S.-China Digital Economy: Opportunity, Compromise and Peril
Event hosted by Wilson Center, May 14

The Future of Nuclear Power in China
Event hosted by Carnegie Endowment for International Peace, May 14

How to Talk to North Korea
Event hosted by Carnegie Endowment for International Peace, May 14

Perspectives on a Trade War: The Trade and Investment Disputes between the U.S. and China
Event hosted by American Security Project, May 15

Commentary

In Trade War, Washington Lacks Legal Footing

By Sourabh Gupta

Washington has never been at a loss for words to smear Beijing’s industrial policies or practice of intellectual property rights (IPR), and the recent United States Trade Representative (USTR) Section 301 report of China’s IPR and technology-transfer practices is no different.

In the report, the USTR bluntly declares that China uses foreign ownership restrictions (such as joint venture requirements and foreign equity limitations) and various administrative review and licensing processes to abusively coerce technology transfers from US companies — including forced transfers on non-market terms that favour Chinese recipients.

Conditioning foreign inward investment-related approvals on technology transfer requirements is plainly illegal as per international trade law. China’s WTO trade-related investment measure obligations contained in Section 7(3) of its Protocol of Accession specifically enjoin China to “ensure that…any means of approval for importation or investment…is not conditioned on…the transfer of technology.” Beijing is at liberty to determine how open (or closed) its foreign inward investment regime should be, but investment market access liberalisation cannot be conditioned on foreigners having to explicitly transfer their proprietary technologies to gain market entry. If China engages in such policies and practices, as the USTR alleges, it is in violation of the law.

Curiously, Washington seems to be at a loss for words in explaining how China’s technology-transfer policies and practices amount to a legal violation of its international treaty obligations.

At a WTO Dispute Settlement Body meeting in Geneva five days after the Section 301 report was issued, the USTR let it be known that China’s policies and practices did not implicate any trade-related investment measure violations; China’s practices were perfectly compliant with the law. China’s laws and regulations only appeared inconsistent with two relatively minor national treatment-related provisions under its obligations on trade-related aspects of intellectual property rights.

This paucity of evidence at the Dispute Settlement Body meeting should not come as a surprise. The USTR has consistently released an annual ‘Special 301’ report on global intellectual property rights practices that names and shames countries along the way. China’s practices have been scanned in great detail over the years. If there were significant legal shortcomings, the USTR would not have been shy to slap a WTO case against China, just as it has done in other areas of trade law against Beijing on over 20 occasions. The United States has not done so in a decade because it has never had a durable case.

Yet on this meager evidentiary basis, the Trump administration now proposes to impose a 25 percent duty on 1333 tariff lines that cumulatively cover approximately $50 billion worth of Chinese exports to the United States. This would be the most regressive trade policy measure against a major trading partner since the Smoot-Hawley tariff impositions of the Great Depression era.

The United States is not wrong to argue that China uses foreign ownership restrictions and administrative licensing procedures to induce, and in many cases, de facto pressure U.S. companies into transferring technologies to Chinese entities. However, these practices appear to have become more implicit following China’s WTO accession. Further, a series of promises by China to liberalize its foreign inward investment regime have not translated into action.

Equally, China is not wrong to argue that its foreign inward investment regime, including joint venture requirements, is de jure consistent with its WTO treaty obligations — even if many do not regard it as legitimate. China is not obliged to provide unreciprocated concessions to the United States in excess of international treaty rules — rules that it had no part in writing, but to which it by-and-large adheres faithfully. Bilateral promises to the United States constitute no more than “best endeavor” efforts; they are not legal commitments.

Washington is wholly in the wrong to threaten the imposition of unilateral trade remedies. The tariffs, if imposed, would violate fundamental tenets of international trade law, such as the non-discrimination principle (that WTO trade must be conducted under most-favored nation treatment) and the predictability principle (that tariff increases must not exceed a certain self-notified ceiling). It would also procedurally violate the United States’ legal obligation to submit its claims first to the WTO’s dispute settlement body and, until that body rules, to stay its hand on enforcement action.

That said, the United States does not have to let China’s foreign inward investment-related practices go scot-free. Bilateral investment flows are an eminently suitable area of reprisal. Investment rules in the multilateral system are shallow; there is no bar to unilateral remedies. Further, the U.S. president enjoys a broad domestic authority to impose a variety of tailored restrictions on Chinese investment inflows and on China-bound technology outflows.

President Trump could decree that Chinese entities in the United States cannot acquire the proprietary intellectual property of core systems technologies in the strategic advanced manufacturing sectors enumerated in Beijing’s “Made in China 2025” plan. He could further decree that if a U.S. enterprise worked on such a project in China, the project must be performed within a majority- or fully-owned investment structure. For Beijing too, an organic learning-by-doing approach rather than mere acquisition or reverse engineering is a far more durable innovation strategy, especially as it rapidly ascends the advanced technologies ladder.

Trump has a variety of options if he wishes to address China’s industrial and intellectual policy practices from a competitive superiority perspective; the Section 301 tariffs are not one of them. The tariffs as proposed are blatantly illegal and must go.


Sourabh Gupta is a Senior Fellow at the Institute for China-America Studies (ICAS) in Washington, D.C. A version of this article originally appeared in the East Asia Forum.