US, EU, Japan Will Take China to Task for Violating WTO Rules

President Donald Trump holds a memorandum on tackling China’s trade practices, at the White House on Aug. 14, 2017. CHRIS KLEPONIS-POOL/GETTY IMAGES

The United States, Japan, and the European Union are considering filing a joint case against China at the World Trade Organization (WTO) over Chinese regulations that force foreign firms doing business there to transfer their tech innovations to domestic companies, according to Japanese newspaper Yomiuri Shimbun.

The three entities began discussing ways to curb China’s policies in January, and are preparing to file a case as early as March, the Yomiuri Shimbun reported on Feb. 15.

Foreign firms in China often feel compelled to set up joint-ventures with domestic firms in order to gain access to the country’s massive market.

And an “indigenous innovation” policy that the Chinese regime rolled out in 2006 effectively requires all foreign companies to transfer technology over to their Chinese counterparts.

The United States

Forced transfer and theft of intellectual property in China has concerned the administration enough that in August 2017, President Donald Trump signed a memorandum directing the U.S. trade representative to determine whether a formal investigation into China’s trade practices is needed.

Counterfeit goods, pirated software, and theft of trade secrets are estimated to cost the U.S. economy between $225 billion and $600 billion annually, according to the IP Commission, an independent group of experts who investigate the theft of American intellectual property (IP).

China is the world’s top IP infringer, responsible for between 50 and 80 percent of all IP theft costs, the IP Commission estimated.

American businesses in China feel those challenges. In the 2018 business climate survey conducted by the American Chamber of Commerce in China, when asked about what barriers prevented them from increasing innovation, 27 percent of American businesses surveyed said lack of sufficient IP protection, while 15 percent said “IP localization requirements and/or technology transfer requirements.” Another 15 percent responded, “indigenous innovation policies that discriminate against foreign-invested enterprises.”

The United States, EU, and Japan are now formally filing a complaint with the WTO, claiming that China’s policies are discriminatory toward foreign companies, which violates WTO rules.

After the complaint is filed, countries involved will hold discussions. If they do not resolve the issue, the complaint goes to a WTO dispute settlement panel, after which the panel will decide whether trade rules have been broken, according to Yomiuri Shimbun.

The EU and Japan

The EU Chamber of Commerce in China released a 2017 business confidence survey where 17 percent of businesses had to transfer technology in exchange for market access. In some industries, more than 20 percent of companies from the EU had to do so: 31 percent in aerospace and aviation, 23 percent in machinery, and 21 percent in environment-related and automotive/auto components.

European auto companies based in Tianjin and Shenyang cities—both auto manufacturing hubs—feel particularly pressured, according to the survey.

In January 2017, the Chinese communist regime mandated that joint ventures demonstrate they have mastered all the technology for “new energy vehicles” before getting permission to produce the cars. The EU Chamber of Commerce expressed concern that the law would require foreign manufacturers to transfer software codes and other important knowledge to their Chinese joint ventures, according to a Financial Times (FT) report.

Japan also suffered big losses when Kawasaki Heavy Industries, the maker of Japan’s bullet trains, signed a licensing deal with Chinese firm CSR Qingdao Sifang in 2004.

A Shinkansen bullet train in Tokyo on May 18, 2016. Toru Yamanaka/AFP/Getty Images

The Chinese have since patented similar high-speed rail technology as their own and are selling it abroad. Japan now faces competition from Chinese railway companies that offer the technology at lower prices.

Trade Tensions

Tensions have been building between the United States and China. In January, Trump vowed to enact a fine for China’s IP theft. Then the administration called the United States’ support of China’s entry into the WTO a mistake, and finally, imposed tariffs on imported solar panels and washing machines. China dominates much of the world’s solar panel manufacturing.

Beijing seems to have finally conceded to the United States. Last week, China’s leading diplomat Yang Jiechi visited Washington for meetings with the administration to smooth out trade tensions.

FT also reported on Feb. 13 that Terry Branstad, the U.S. ambassador to China, has been meeting privately with Chinese leader Xi Jinping and his trusted confidant, Wang Qishan, to alleviate the strained relations between the two countries, citing sources familiar to their discussions.

U.S. Ambassador Terry Edward Branstad (L) shakes hands with Chinese leader Xi Jinping at the Great Hall of the People in Beijing on September 30, 2017. Lintao Zhang/AFP/Getty Images

Xi’s top economic advisor and member of China’s ruling Politburo Committee, Liu He, has also requested a meeting with Branstad, FT reported.

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