U.S.-China Economic and Security Review Commission2
Bilateral Trade
U.S. Goods Deficit with China Increases as Imports Rise and Exports Stall
In February 2018, the U.S. goods deficit with China rose 27.4 percent year-on-year to $29.3 billion, the largest year-
on-year increase since March 2015 (see Figure 1).1 This increase was driven a jump in imports from China, which
grew 19 percent year-on-year.2 In particular, imports of computer and electronic products expanded by more than
$2 billion year-on-year, a 20 percent increase.3 By contrast, U.S. exports (which had registered steady growth in
2017*) stalled, increasing just 0.1 percent year-on-year and decreasing 0.3 percent month-on-month.4 U.S. exports
of fabricated metal, computer and electronic products, and agricultural products registered the largest year-on-year
decreases in February, falling 52 percent, 14 percent, and 12 percent respectively.5
Figure 1: U.S. Goods Trade with China, January 2017–February 2018
Source: U.S. Census Bureau, “Trade in Goods with China,” April 5, 2018. https://www.census.gov/foreign-trade/balance/c5700.html.
Bilateral Policy Issues
Section 301 Report on Chinese Technology Transfer and Intellectual Property
Practices Released
On March 22, the Office of the United States Trade Representative (USTR) released the results of a Section 301
investigation into the Chinese government’s practices regarding technology transfer and intellectual property (IP).
The report detailed four methods the Chinese government uses to unfairly advance its industrial policy aims: (1)
forced transfer of IP or technology; (2) discriminatory licensing restrictions; (3) state-coordinated or -supported
acquisition of technology and assets; and (4) use of cyber intrusions to gain unauthorized access to confidential
corporate information.6 Upon receipt, President Donald Trump directed the USTR to propose a list of imports for
targeted tariffs and initiate a case at the World Trade Organization (WTO) to address China’s discriminatory
* In 2017, U.S. exports to China increased 12.6 percent year-on-year. U.S. Census Bureau, “Trade in Goods with China,” April 5, 2018.
https://www.census.gov/foreign-trade/balance/c5700.html.
U.S. exports of fabricated metal not elsewhere specified or indicated (a catch-all export category) fell from $336 million in February 2017
to $161 million in February 2016.
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U.S.-China Economic and Security Review Commission3
licensing practices. He also directed the U.S. Department of the Treasury, in consultation with other agencies, to
review Chinese investment in key U.S. technologies.7
The Section 301 report finds the Chinese government sees China’s continued economic growth as predicated on
substituting imported technologies with “indigenous innovation.”8 Chinese companies can then achieve domestic
dominance and global leadership.9 The Chinese government pursues this aim through state-directed industrial
policies, notably the “Made in China 2025” strategy.10 Made in China 2025 mandates “40 percent self-sufficiency”
in designated priority industries by 2020 and “70 percent self-sufficiency” by 2025, with specific domestic and
export market share targets by industry.11 The Chinese government puts state financial and policy support behind
these targets, cementing its role in economic planning.12
In the USTR’s assessment, the Chinese government’s commitment to technological advancement has been
accompanied by actions that unfairly exploit or disadvantage foreign corporations.* The USTR report found
evidence of four methods the Chinese government employs to achieve its industrial policy aims:
(1) Technology and IP requirements for market access: Foreign investors in many industries may not establish
operations in China without engaging in a joint venture (JV) with a Chinese corporate partner, often a
partner with a controlling stake.13 In establishing the JV, Chinese government officials or corporate partners
may request or give verbal instructions that the foreign company transfer its technology. 14 Such requests
may also come during various licensing and approvals processes.15
(2) Licensing requirements benefiting Chinese partners in negotiations: Foreign companies are subject to two
regulations that may compel them to “grant ownership or usage rights” to domestic counterparties.16 These
regulations do not apply to domestic Chinese firms.17
Regulations of the People’s Republic of China on the Administration of the Import and Export of
Technologies (TIER): As specified in TIER, the technology transferor (typically the foreign licensor)
is liable for any third-party claim of infringement made against the licensee.18 In addition, all
improvements to the imported technology belong to the party making the improvement, and nothing
can legally prevent the licensee from making improvements.19
Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign
Equity Joint Ventures (JV Regulations): JV Regulations allow JVs to use transferred technology “in
perpetuity” after technology contracts expire, ten years or less after the transfer.20 JV Regulations also
require technology transfers to meet product improvement standards in performance, quality, or
efficiency, pressuring the transferor to provide the latest models or versions.21
(3) Unfair state support for investments and acquisitions of U.S. technology: The USTR cites numerous studies
documenting the Chinese government’s direction of or support for certain types of outbound investment.
Control over outbound investment could be asserted through a range of mechanisms, including foreign
exchange, state-backed financing, and outbound investment approvals.22 The USTR identified instances of
state-supported investment in seven industries: aviation, integrated circuits, information technology,
biotechnology, industrial machinery, renewable energy, and automotive.23 It concluded Chinese state-
sponsored investment practices burden U.S. commerce in three ways: they (1) “threaten the competitiveness
of U.S. industry”; (2) “undermine the ability of U.S. firms to sustain innovation”; and (3) “distort pricing
with respect to investments in the critical market for IP-intensive sectors.”24
(4) Unauthorized cyber intrusions to access confidential corporate information: U.S. law enforcement and
private parties contend the Chinese government has engaged in unauthorized cyber intrusions with the
intent to conduct commercial espionage.25 In September 2015, then President Barack Obama and Chinese
* For a primer on various policy actions the Chinese government employs in pursuit of technological upgrading, see Katherine Koleski and
Nargiza Salidjanova, “China’s Technonationalism Toolbox: A Primer,” U.S.-China Economic and Security Review Commission, March
28, 2018. https://www.uscc.gov/sites/default/files/Research/China%27s%20Technonationalism.pdf.
U.S.-China Economic and Security Review Commission4
President and General Secretary of the Chinese Communist Party (CCP) Xi Jinping reached an agreement
to refrain from cyber theft of IP and other commercial assets; however, the USTR’s investigation concluded
the Chinese government continues to engage in this practice.26 In its submission to the USTR, the U.S.
Chamber of Commerce agreed that “U.S. industry does not believe there has been a full cessation of cyber
enabled IP theft.”27
(5) Other Chinese policies or practices related to IP and technology transfer: The USTR also accepted
testimony outside of the four areas above if related to IP and technology transfer. Stakeholders brought up
an array of policy concerns: fears about data misappropriation and data localization requirements in the
Cybersecurity Law, IP protection challenges like counterfeiting, trade secret theft, and “bad faith
trademarking,” concerns about the potential misuse of the Anti-Monopoly Law to obtain IP, and IP transfer
as a requirement for participation in standards-setting bodies.28
In light of the investigation’s findings, President Trump issued a memorandum detailing a three-pronged response:29
The USTR to release a proposed list of products subject to tariffs: On April 3, the USTR released a list of
around 1,300 products to be targeted with 25 percent tariff increases, to go into effect after a consultation
period.30 These tariffs are set to be applied to $50 billion of U.S. imports from China, with a public comment
period open until May 22 and a hearing scheduled for May 15.31 Following the public comment period, the
USTR has significant leeway in its final determination.32
The USTR to launch a WTO case to address China’s licensing practices: On March 23, the USTR made a
consultation request of China regarding China’s licensing practices, the initiation of a WTO dispute.33 The
USTR will update President Trump on progress after 60 days.34 Japan and the EU have since filed to join
the United States in consultations, citing a “substantial trade interest” in the case.35
The Secretary of the Treasury to propose executive action regarding Chinese investment in U.S.
technologies, also updating President Trump after 60 days.36
The Section 301 report’s findings and President Trump’s actions have prompted a vigorous debate. Senate Minority
Leader Chuck Schumer supported the proposals, stating, “[President Trump] is doing the right thing when it comes
to China,” while Senator Ron Wyden opposed the move, stating U.S. businesses would not regain lost ground with
“tariffs slapped on imports indiscriminately.”37 Information Technology Industry Council President Dean Garfield
said tariffs are “counterproductive,” raising prices on U.S. consumers with no effect on China’s behavior.38 By
contrast, American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) President Richard
Trumka felt the package of tariffs, investment restrictions, and a WTO case might stop IP theft and unfair tactics
where “discussions and strongly worded letters” had not.39
The Chinese government quickly criticized the USTR’s conclusions and President Trump’s policy guidance. A
China Ministry of Foreign Affairs representative stated it was “irresponsible” to refer to Chinese trade practices as
“economic aggression.”40 The China Ministry of Commerce issued a statement saying that China would not “sit
back and allow its legitimate rights and interests to be harmed.”41 Chinese officials tried to diffuse tensions ahead
of the report’s release. A delegation led by President Xi’s top economic adviser, Liu He, arrived in Washington,
DC, on February 27 and met with senior members of the Trump Administration.42 Though news reports describe
possible negotiations between Chinese and U.S. counterparts, few details have yet to emerge.43 After the USTR
released its proposed tariff list on April 3, Chinese officials quickly proposed tariffs on $50 billion of U.S. exports,
targeting a vast array of U.S. goods, including agricultural products, autos, and chemicals.44 Many proposed tariffs
hit agricultural exports from Republican-led states, including soybeans, corn, cotton, beef, frozen orange juice, and
tobacco.45 In addition, on April 4, China initiated a dispute at the WTO, claiming U.S. Section 301 actions
represented a “gross violation” of the agreement’s fundamental principles.46