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U.S. response to Chinese IP theft could skirt WTO rules

Worker prepares to destroy pirated CDs and DVDs in China
Pirated CDs and DVDs in Taiyuan, China. Photo: Jie Zhao / Corbis via Getty Images

U.S. companies have long decried Chinese theft of their intellectual property. In August 2017, the U.S. Trade Representative (USTR) launched an investigation into China's intellectual property policies and practices, which is set to conclude before August 2018.

Why it matters:  It is unclear whether the Trump administration intends to move against China without first going to the WTO. If so, it might argue that its concerns about China’s intellectual property policies and practices do not involve a WTO trade agreement. How the administration finesses this issue could affect the WTO’s ability to resolve future trade disputes.

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The backdrop:

  • In 2011, the U.S. International Trade Commission (ITC) published a report about the impact on U.S. companies of China’s foreign technology acquisition policies as well as its lax intellectual property enforcement. U.S. companies reported that these policies and practices had cost them sales, profits and royalties.
  • The ITC found that if China matched U.S. levels of intellectual property protection, it would likely create 923,000 U.S. jobs and increase U.S. exports and affiliated sales to China by approximately $107 billion per year.
  • Section 301 of the Trade Act of 1974 authorizes USTR to respond to a foreign country’s unfair trade practices, subject to direction from the president.

But, but, but: For cases involving a trade agreement, the authoritative interpretation of U.S. obligations established during the Clinton administration requires USTR to employ the dispute resolution procedures under the trade agreement before taking any action under Section 301. In other words, the U.S. committed to avoiding unilateral approaches wherever possible.

What's next: Watch for whether USTR's chosen remedies place heavy reliance on tariffs, which are subject to specific WTO commitments, or feature more unconventional tools (such as export restrictions). Another possible outcome would be the use of Section 301 to set the stage for a fresh round of negotiations on the need for structural reform in China.

Dean Pinkert is a partner at Hughes Hubbard & Reed LLP and a former commissioner at the U.S. International Trade Commission.

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