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Issues to be Addressed in China Phase Two Agreement Outlined in USTR Report

Friday, March 13, 2020
Sandler, Travis & Rosenberg Trade Report

The Office of the U.S. Trade Representative’s annual report on China’s compliance with its World Trade Organization accession commitments details complaints on a number of issues the U.S. wants to address in a phase two trade agreement.

As it typically does, the report highlights China’s failure to meet many of its accession commitments and asserts that the WTO’s current rules and structure are not designed to address this problem. However, the focus of this year’s report is more on emphasizing the Trump administration’s success in using tariffs and other enforcement measures to begin forcing more fundamental changes.

At the same time, the report acknowledges that the phase one trade agreement with China does not cover all U.S. concerns and that as a result negotiations on a phase two agreement will focus on the following topics. Some of the major U.S. concerns listed in the report with respect to each topic are specified below.

Intellectual Property

 

- inadequacies in the protection and enforcement of trade secrets

- continuing registration of trademarks in bad faith

Technology Transfer

- conducting or supporting cyber-enabled theft and unauthorized intrusions into U.S. commercial computer networks for commercial gains

Services Market Access

- discriminatory regulatory processes

- informal bans on entry and expansion

- case-by-case approvals in some services sectors

- overly burdensome licensing and operating requirements

Excess Capacity

- severe and persistent excess capacity in several industries, such as steel and aluminum, and potential creation of severe excess capacity in other industries

Subsidies

- continuing provision of substantial subsidies to domestic industries, some of which appear to be prohibited under WTO rules

- failure to submit to the WTO a complete notification of subsidies maintained by the central government

Cybersecurity

- a 2016 law that imposes severe restrictions on a wide range of U.S. and other foreign information and communication technology products and services, restrictions on cross-border data flows, and requirements to store and process data locally

- other measures that have required Chinese information technology users to purchase Chinese products and favor Chinese service suppliers, imposed local content requirements, imposed domestic research and development requirements, considered the location of R&D as a cybersecurity risk factor, and required the transfer or disclosure of source code or other intellectual property

Data Localization and Cross-Border Data Transfers

- draft and final measures being developed by China’s regulatory authorities that would (a) prohibit or severely restrict cross-border transfers of information that are routine in the ordinary course of business and fundamental to any business activity and (b) impose local data storage and processing requirements on companies in critical information infrastructure sectors

Pharmaceuticals and Medical Devices

- overly restrictive patent application examination practices

- weak protections against the unfair commercial use and unauthorized disclosure of regulatory data

- regulatory approvals that are delayed or linked to extraneous criteria

- time-to-market for innovative pharmaceutical products

- proposals seeking to promote government-directed indigenous innovation and technology transfer through the provision of regulatory preferences

Competition Law Enforcement

- selective enforcement of the Anti-Monopoly Law against foreign companies seeking to do business in China and limited enforcement against state-owned enterprises

- insufficient predictability, fairness, and transparency in Anti-Monopoly Law investigative processes

Standards

- pressure by Chinese government officials on foreign companies seeking to participate in domestic standards-setting processes to license their technology or intellectual property on unfavorable terms

- continued pursuit of unique national standards in a number of high-technology areas where international standards already exist

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