China’s Recent Trade Investment Agreement with the EU and the Impact of its Provisions on Forced Technology Transfer

Author: Dr. Paolo Beconcini

2020 China-E.U. Trade Investment Agreement and IP/Technology Theft

On December 30, 2020, after seven long years of negotiations, China and the EU concluded negotiations for a Comprehensive Agreement on Investment (CAI). The frayed political and trade relations with the US, as well as Brexit, convinced the EU members to set aside objections pertaining to China’s human rights violations in order to close the best possible deal with China; now one of their major trade partners. The Chinese, hard pressed to offset the 2020 diplomatic setbacks, including the mishandling of the initial Covid-19 crisis, the Xingjian labor camps issue, and the Hong Kong crisis, were keen to make concessions. High on China’s priority list was also the need to circumnavigate the now strained relations with the US. Among those concessions are some key provisions of the CAI concerning the issue of China’s forced technology transfer regime that, if implemented by China, could give EU businesses an advantage against their US competitors. These new technology transfer provisions would also illustrate China’s preferential treatment of the EU, demonstrating a concession China was willing to make for the EU but not for the US after the US had long demanded such provisions. This post will briefly analyze the CAI’s provisions on forced technology transfer and will compare them to other similar commitments taken in the recent past by China and assess their possible impact on EU and US IP holders in China.

Forced Technology Transfer

In recent years, the US and EU have accused China of pursuing and enacting a number of policies and practices perpetuating forced technology transfer, undue IP disclosures, and innovation theft. In particular, China has been accused of enacting regulations that require or pressure foreign companies to transfer technology by forcing them to joint venture with local competitors, restrict technology licensing terms[1], allow unprotected and unchecked technology disclosures and transfer in administrative licensing and permit proceedings, and blatantly or inadvertently support acts of industrial and cyber espionage.[2] These alleged illicit practices are among the several reasons why, in 2018, the US initiated Section 301 investigations against China. Those investigations led to the US bringing trade sanctions against China, ultimately igniting the ongoing trade war between the two countries.  

In light of China’s new innovation policies implemented by the Xi Jinping administration, including the ambitious goal of making China technologically independent, especially from the US in the next 5 years[3], and in consideration of China’s current gap with the west and dependency from the US for critical technologies in key industrial sectors, the above accusations are very serious and present the biggest challenge facing US and EU right holders doing business in China.

The CAI Provisions on Forced Technology Transfer

According to the summary of the key clauses contained in the CAI provided by the EU official website, the CAI lays very clear rules against the forced transfer of technology. The provisions consist of: a) the prohibition of several types of investment requirements that compel transfer of technology, such as requirements to transfer technology to a joint venture partner; b) prohibitions to inhibit interference with contractual freedom in technology licensing; and c) heightened protection of confidential business information collected by administrative bodies (for instance in the process of certification of a good or a service) from unauthorized disclosure.[4]  In practice, implementation of these commitments would meet the demands of the EU and the US (as long as the deal implementation will be applicable to US companies as well).

If these commitments were indeed effectively translated into laws and regulations, they would provide EU businesses with a much safer environment to conduct their business, especially in those key sectors listed in the CAI.[5] This advantage would be even bigger if China implemented these commitments only in favor of EU right holders.

Cautionary Tale and Conclusions

As promising as this seems on paper, it is not the first time China has taken such commitments. With the signing of the US-China Trade Agreement of January 15, 2020 ending the trade wars, China had already taken a partly similar commitment with the US. For instance, art. 1.9, Section B, Chapter I of the US-China Trade Agreement stipulates the following:

1. To further strengthen the protection of trade secrets, as well as better encourage various enterprises to innovate, China shall prohibit the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third-party experts or advisors in any criminal, civil, administrative, or regulatory proceedings conducted at either the central or sub-central levels of government in which such information is submitted.
2. China shall require administrative agencies and other authorities at all levels to: (a) limit requests for information to no more than necessary for the legitimate exercise of investigative or regulatory authority; (b) limit access to submitted information to only government personnel necessary for the exercise of legitimate investigative or regulatory functions; (c) ensure the security and protection of submitted information; (d) ensure that no third-party experts or advisors who compete with the submitter of the information or have any actual or likely financial interest in the result of the investigative or regulatory process have access to such information; (e) establish a process for persons seeking an exemption from disclosure and a mechanism for challenging disclosures to third parties; and (f) provide criminal, civil, and administrative penalties, including monetary fines, the suspension or termination of employment, and, as part of the final measures amending the relevant laws, imprisonment, for the unauthorized disclosure of a trade secret or confidential business information that shall deter such unauthorized disclosure.[6]

The provision appears to contain, in part, some of the critical stipulations of the corresponding provision in the CAI agreement. At present, a comparison between the two texts is not possible because the CAI is not yet available in full text. For now, we can focus on the principles. The US-China Trade Agreement, like the CAI provisions, acknowledge the existence of hurdles in handling foreign trade secret and technology entering the Chinese market. In particular, both agreements acknowledge the problems surrounding the protection of confidential business information collected by the Chinese administration from unauthorized disclosures.

Article 2.2, Chapter 2 of the US-China Trade Agreement provides that 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. This provision seems to cover the issue of the prohibition of several types of investment requirements that compel transfer of technology, such as requirements to transfer technology to a joint venture partner as also addressed by the CAI.

Additionally, article 2.3, Chapter 2 of the US-China Trade Agreement also addresses the issue of China’s regulatory impingement of contractual freedom in technology licensing; a provision akin to what is contained in the CAI regarding licensing freedom.[7] Therefore, we can fairly assume that the CAI contains provisions that were already included in the US-China Trade Agreement.

If we now look at what China has done to implement the latter’s commitments, we notice that in the last 12 months, China has yet to enact any provisions to implement the above quoted articles of the US-China Trade Agreement. However, it is true that China has enacted and implemented other provisions of the US-China Trade Agreement; with some covering very critical and urgent issues. For instance, we can refer to the recent implementation of critical amendments to the new patent law and insightful interpretations of the Supreme People’s Court in the second half of 2020. However, there is no provision or apparent attempt at addressing the above specific commitment on forced IP handover.

This precedent may not bode well for the implementation of the parallel CAI provisions on forced transfer of IP. Aside from the fact that the agreement may never come to exist if not ratified by the EU parliament, the concrete implementation of the mentioned commitments may take a long time and may never meet the full range of the demands from the EU and the US.

Tackling the forced technology transfer issue is more complex than just changing a law or two. It will require China to implement complex regulations involving the overlapping and confusing jurisdiction of different administrations, each jealous of its privileges. It will require China to redefine the role and further reform the structure of State-Owned Enterprises (“SOE’s”) in order to concretely give effect on equal market access, while safeguarding SOE’s competitiveness in a more open and fairly regulated market. Eventually, playing by fairer market rules will require China to further strengthen the foundations of its overall innovation system, including education, talent acquisition, research & development, etc. However, even a normative reform at the top-level will not necessarily result in a timely and unhitched implementation. The pace and intensity of the latter will mostly depend on the immediate benefits and interests of the agreed norms in supporting China’s implementation of its strategic plan for the next five years.[8]

For these reasons, the steps China takes with the CAI will have to be read with caution. The EU’s expectations will need to remain realistic as well. Real change on the issue of forced technology transfer and acquisition is not yet here. With that being said, such change might come sooner if the EU adopts a more coordinated approach with the US — an approach that the Biden administration seems to support.[9]

[1] See Request for Consultation by the United States, China — Certain Measures Concerning the Protection of Intellectual Property Rights, WTO Doc. WT/DS542/1 (Mar. 23, 2018), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds542_e.htm. In the WTO Dispute initiated by the US government against China on 2018, the US alleged that its request for dispute resolution was based on the following: “China denies foreign patent holders the ability to enforce their patent rights against a Chinese joint-venture party after a technology transfer contract ends. China also imposes mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology. Therefore, China deprives foreign intellectual property rights holders of the ability to protect their intellectual property rights in China as well as freely negotiate market-based terms in licensing and other technology-related contracts.”

[2] Office of the United States Trade Representative, 2020 Special 301 Report (2020), https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf. All these allegations can be found in the 2020 Special 301 Report of the Office of the United States Trade Representative.

[3] See Institute for Security & Development Policy, Made in China 2025 (June 2018), https://isdp.eu/content/uploads/2018/06/Made-in-China-Backgrounder.pdf. The 2015 launch of “Made in China 2025” was a state-led industrial policy seeking to achieve China’s dominance in global high-tech manufacturing, resorting to government subsidies, involving state-owned enterprises, and pursuing intellectual property acquisition to catch up with—and then surpass—Western technologies in advanced key industries. See also Dorcas Wong, What to Expect in China’s 14^th Five Year Plan? Decoding the Fifth Plenum Communique, China Briefing (Nov. 12, 2020), https://www.china-briefing.com/news/what-to-expect-in-chinas-14th-five-year-plan-decoding-the-fifth-plenum-communique/. The 14^th Five Year Plan formulated by the Fifth Plenary Session of the 19^th Central Committee of the Communist Party at the end of October 2020 highlights the switch of China’s economy from a quantitative, export oriented one, to a high-quality development focusing on technological self-reliance and growth driven by domestic demand.

[4] European Commission, Key elements of the EU-China Comprehensive Agreement of Investment, European Commission (Dec. 30, 2020), https://ec.europa.eu/commission/presscorner/detail/en/IP_20_2542.

[5] Id. These include the general manufacturing industries, automotive, financial and banks, hospitals and health businesses, R&D on biological resources, telecommunications, cloud and computer services, air and maritime transport, business and environmental services, and construction.

[6] Economic and Trade Agreement, China-U.S., Jan. 15, 2020, https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf.

[7] Id. ch. 2, art. 2.3. This provision reads as follows: “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….”

[8] Wong, supra note 3. This plan is now incorporated in the 14^th Five-year Plan and in the Dual Circulation policy also now incorporated in the 14^th Five Year Plan.

[9] James Griffiths, Neither human rights concerns nor US disapproval could stop the EU-China investment agreement, CNN (Dec. 31, 2020, 4:43AM), https://www.cnn.com/2020/12/31/asia/eu-china-trade-deal-human-rights-us-intl-hnk/index.html.