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Economy

Assessing America’s Section 301 Investigation

Jul 30 , 2018
  • Tu Xinquan

    President of the China Institute for WTO Studies at the University of International Business and Economics.

On July 10, the Office of the United States Trade Representative (USTR) issued a statement claiming that Chinese retaliatory tariffs were illegal under Section 301 of the Trade Act of 1974, ignoring the actual illegality of $34 billion in tariffs that the US had previously imposed. The report went on to criticize the unfair nature of China’s industrial and innovation policies, which it claims harm US companies and economic interests. It used this as a justification for a 10% tariff on $200 billion worth of Chinese exports. China’s Ministry of Commerce swiftly responded by issuing a six-point statement refuting the US’ unfounded accusations.

The Trump administration is aware that unilateral tariff increases are illegal, but it is using perverted logic in an attempt to create some guise of plausibility. The easiest route for them is to blame every problem on China. Unfortunately, however, the US is in no position to criticize China’s so-called unfair trade practices.

Since the founding of the WTO in 1995, legal action has been taken against the US 147 times, the highest number for any member. Since China joined in 2001, it has seen just 42 cases, less than half of the 91 that the US faced in the same period. Concerning just the recent US imposition of steel and aluminum duties under Section 232 of the Trade Expansion Act of 1962, eight countries took legal action. More tellingly, the US has the worst dispute settlement in the WTO. Of the seven cases in which the WTO has authorized reprisals by the winning party, six were due to the US refusing to comply with the ruling. Particularly concerning is the US government’s malicious blocking of WTO Appellate Body appointments because it has ruled against it in multiple lawsuits. The US has not only repudiated its debts from those cases, it has also ousted the judges and is attempting to shut down the court entirely. How can a nation which so egregiously views itself as above the rules accuse others of not complying?

The Trump administration has repeatedly accused China of compulsory technology transfers and inadequate protection or even systematic theft of US intellectual property. In the 215-page Section 301 investigation, allegations concerning this matter are based on interviews and surveys, with no legal, policy-based, or other physical evidence. The report even admitted that it would be almost impossible to take legal action against China due to the lack of evidence. A seemingly reliable piece of data cited in the report was from a survey conducted by the US-China Business Council, which stated that 19% of companies surveyed claimed to have been asked to transfer technology. The US-China Business Council is an influential US organization in China and has made important contributions to economic relations between the two countries. Nevertheless, its survey data is questionable because of its small sample size: the organization has only 200 corporate members, whereas the US has as many as 67,000 companies in China. More importantly, of the 19% of companies that had been asked to transfer technology, 67% were asked to do so by their joint venture partners and not by the Chinese government. In other words, they were not forced, as companies do not possess the powers to enforce such a request. These so-called compulsory technology transfers, then, were simply requests by Chinese companies using their market position to propose conditions during negotiations between joint venture partners.

Concerning the protection of intellectual property rights (IPR), a US business association in China again provided favorable evidence. According to a survey conducted by the American Chamber of Commerce in China in 2017, IPR infringement ranked 12th among business challenges faced by its members. Given that the same issue ranked seventh in 2013, this clearly indicates that China’s protection of IPR has improved significantly in recent years. Of course, there is no denying that China’s protection of IPR requires further improvement, a necessity for its development into an innovation-based country.

As for the claim that China’s retaliatory measures have no legal basis, this is a prime example of the US using the logic of gangsters. First of all, the US fired the first shot in this trade war. Regardless of whether one considers that to be the Section 232 duties imposed on steel and aluminum products or the Section 301 tariffs placed on $50 billion worth of Chinese exports, both of these are unilateral trade protection measures that flagrantly violate WTO rules. The Trump administration is claiming that voluntary, mutually-beneficial trade between Chinese and American companies harms its economic and national security. This ignores the harm to Chinese companies and security that the illegal tariffs cause. The Chinese government, therefore, is entitled and, indeed, obligated to take measures to safeguard China’s economic and national security and protect the legitimate rights and interests of Chinese enterprises and consumers. According to Article 60 of the Vienna Convention on the Law of Treaty, the behavior of the US constitutes a material breach of its treaty with China. Under such circumstances, China is fully entitled to suspend part of its WTO treaty obligations to the US.

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