- The US Trade Representative is investigating Chinese practices on technology transfer, intellectual property and innovation.
- Section 301 of the 1974 trade law allows a response to practices judged unfair, including through unilateral measures.
- For companies with global supply chains, the risk is greater tariff uncertainty, although there are no concrete measures yet.
On 18 August 2017 the US Trade Representative, Robert Lighthizer, formally initiated an investigation under Section 301 of the Trade Act of 1974 into China’s laws, policies and practices related to technology transfer, intellectual property and innovation. It follows a presidential memorandum signed on Monday 14 August asking him to consider opening that procedure.
The investigation must determine whether those practices are unreasonable or discriminatory and whether they burden or restrict US commerce. The memorandum argues that Chinese conduct may limit US exports, cost American workers and innovators their jobs and widen the trade deficit. The announcement imposes no tariffs or sanctions: it opens an analytical process whose deadlines and public hearings will be set in a notice in the Federal Register.
What Section 301 is
Section 301 is a tool in US trade law that lets the Trade Representative’s office respond to what it considers unfair practices by other countries. If it concludes that conduct warrants action, it may take appropriate and feasible action to eliminate it, subject to the President’s direction, which includes restrictions on trade in goods and services. Before acting, the law provides for consultations with the country under investigation and for public comment, so the outcome is not automatic.
This type of procedure was used frequently in the 1980s and 1990s and lost prominence with the creation of the World Trade Organization, which offers a system for settling disputes between states. Turning to it again against a partner the size of China can be read as a preference for more unilateral routes. In general, the procedure sets maximum deadlines of around a year for a determination, although it can be resolved sooner.
What is at stake
The United States and China are among the world’s largest trading partners, and many European companies are integrated into supply chains that pass through both countries. An escalation of measures could affect components, consumer goods and technology, with indirect effects on prices, investment and exchange rates. China is also a major buyer of European goods and services, and any tension that affects its growth or its demand eventually reaches the continent’s exporters.
For now there are no new tariffs or restrictions. What is foreseeable is a period of analysis, public consultation and hearings before any decision, with a schedule to be published in the Federal Register. But markets react to uncertainty, and anyone who depends on trade with either country should follow the matter closely.
What to review
Companies that import or export with the United States or China, or that depend on suppliers that do, can identify which products and components would be most sensitive to a change in tariffs and which alternative suppliers exist. Reviewing international contracts to see who bears the cost of new tariffs, through price clauses, Incoterms or price revision, avoids surprises.
Companies with their own intellectual property and technology, especially if they operate or license in China, should review how they protect their patents, trademarks and trade secrets and which technology-transfer agreements they have signed, because that is precisely the terrain of the investigation. And private investors should remember that trade news causes short-term moves that do not always last.
An investigation is not a sanction, but it opens a period of uncertainty in which it pays to know your own exposure.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
