One of the biggest criticisms of China’s trade practices over the years has been that China engages in “forced technology transfer.” When foreign companies invest in China, they are often required to do so with a joint venture partner, and then the Chinese government pressures the foreign company to transfer some of its knowledge of the product being made or the production process to its Chinese partner. The recently published EU-China Comprehensive Agreement on Investment (CAI) has new rules to address this practice. This post analyzes them briefly, focusing on a comparison to the rules in this area that came before (the U.S.-China Phase One trade deal and China’s commitments in its WTO Accession Protocol). A fuller picture will only emerge when the provisions are applied, but on their face the CAI rules appear to offer broader and more detailed coverage than the previous obligations in this area.

The business community has alleged for many years that the Chinese government forces foreign investors to transfer technology to their Chinese partners. In its March 2018 Report on China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, under Section 301 of the Trade Act of 1974, the U.S. Trade Representative’s Office described the issue of forced technology transfer as follows:

the Chinese government uses foreign ownership restrictions, such as formal and informal JV requirements, and other foreign investment restrictions to require or pressure technology transfer from U.S. companies to Chinese entities. These requirements prohibit foreign investors from operating in certain industries unless they partner with a Chinese company, and in some cases, unless the Chinese partner is the controlling shareholder. Second, the Chinese government uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous administrative approvals needed to establish and operate a business in China.

(See p. 19)

The report provides assertions and evidence of these Chinese actions, submitted by various industry groups.

There is a strong argument that such practices violate China’s obligations in its WTO Accession Protocol, at least in some circumstances. Paragraph 7(3) of the protocol states:

China shall ensure that the distribution of import licences, quotas, tariff-rate quotas, or any other means of approval for importation, the right of importation or investment by national and sub-national authorities, is not conditioned on: … performance requirements of any kind, such as .. the transfer of technology … .

These provisions are worded somewhat vaguely and narrowly, as they specify only certain types of measures (e.g. “means of approval for importation”) which are not to be “conditioned on … the transfer of technology.” “Conditioned on” is a very general way of describing the practice of forced technology transfer. Nevertheless, these provisions could be used to challenge China’s practices. Indeed, in December of 2018, the European Union brought a WTO complaint against China on “Certain Measures on the Transfer of Technology,” in which it cited paragraph 7(3), among other provisions. However, according an official EU summary of the status of its WTO disputes, the case never moved beyond the consultations stage.

In response to the Section 301 report and resulting tariffs imposed by the United States, China and the United States negotiated a trade agreement generally referred to as the “Phase One” trade deal, which was published in January of 2020. Its provisions on forced technology transfer are more detailed than the Accession Protocol provisions, and read as follows:

Article 2.1: General Obligations
…
2. Any transfer or licensing of technology between persons of a Party and those of the other Party must be based on market terms that are voluntary and reflect mutual agreement.

…

Article 2.2: Market Access

Neither Party shall require or pressure persons of the other Party to transfer technology to its persons in relation to acquisitions, joint ventures, or other investment transactions.

…

Article 2.3: Administrative and Licensing Requirements and Processes

1. Neither Party shall adopt or maintain administrative and licensing requirements and processes that require or pressure technology transfer from persons of the other Party to its persons.

2. Neither Party shall require or pressure, formally or informally, persons of the other Party to transfer technology to its persons as a condition for, inter alia:

(a) approving any administrative or licensing requirements;

(b) operating in the jurisdiction of the Party or otherwise having access to the Party’s market; or

(c) receiving or continuing to receive any advantages conferred by the Party.

3. Neither Party shall require or pressure, formally or informally, persons of the other Party to use or favor technology that is owned by or licensed to its persons as a condition for, inter alia:

(a) approving any administrative or licensing requirements;

(b) operating in the jurisdiction of the Party, or otherwise having access to the Party’s market; or

(c) receiving or continuing to receive any advantages conferred by the Party.

On their face, these provisions offer much more detailed legal standards related to forced technology transfer as compared to the Accession Protocol. For example, Article 2.2 talks about “requiring or pressuring” the transfer of technology, which is more specific than “conditioning on,” and refers to technology transfer that is “in relation to acquisitions, joint ventures, or other investment transactions”; and Article 2.3 makes clear that both formal and informal requirements and “pressure” is covered. However, these provisions have not been formally invoked by the United States so far, and the precise scope of the provisions remains unclear.

In January of this year, the EU released the text of the China-EU Comprehensive Agreement on Investment (CAI). This agreement still needs to be ratified by the European Parliament, so it may be a while before it goes into effect and is applied. Nevertheless, its provisions on forced technology transfer provide an interesting comparison to the Phase One deal provisions, and appear to expand on it in certain ways:

Article 3
Performance Requirements

1. Neither Party may, in connection with the establishment or the operation of all enterprises in its territory, impose or enforce any requirement or enforce any commitment or undertaking:

…

(f) to transfer technology, a production process, or other proprietary knowledge to a natural person or an enterprise in its territory;

…

2. Neither Party may condition the receipt or continued receipt of an advantage, in connection with the establishment or operation of all enterprises in its territory, on compliance with any requirement:

…

(f) to transfer technology, a production process or other proprietary knowledge to a natural person or an enterprise in its territory.

…

3. Neither Party shall directly or indirectly require, force, pressure or otherwise interfere with the transfer or licensing of technology between natural persons and enterprises of a Party and those of the other Party. Such transfer or licencing of technology shall be based on market terms that are voluntary and reflect mutual agreement.

How do these two sets of provisions compare? In terms of both the substance and procedure, there are important differences between the CAI and the Phase One deal.

On the substance, the words “directly or indirectly” in Article 3, para. 3 could be taken as even more of an expansion in scope then “formally or informally” in the Phase One deal; and “otherwise interfere with” in the same provision seems to expand the scope of government actions covered. In addition, Article 3.1(f) refers to transferring technology, but also covers transferring “a production process, or other proprietary knowledge.” It is easy to imagine that the Biden administration would want to upgrade its demands for obligations in this area, in order to obtain similar provisions in any future negotiation with China.

And on procedure, the CAI’s dispute settlement provisions offer neutral arbitration of disputes, as they provide for a panel that can rule on a party’s compliance with its obligations. By contrast, the Phase One deal merely provides for consultations and the possibility that a party may impose tariffs in retaliation for perceived violations. In this way, the CAI has the potential to be more effective in disciplining China’s practices.

Both the European Union and the United States have been pushing back against Chinese practices related to technology transfer for years. The latest negotiated trade and investment agreements have developed much broader provisions to deal with the issue than what existed before. However, it will take actual practice under these agreements to determine whether the new provisions have an impact.