Critical Questions

Section 301, Tariffs, and Chinese Trade and Investment

March 23, 2018

On March 22, the Trump administration released the findings of its Section 301 investigation into China’s practices related to technology transfer, intellectual property (IP), and innovation. Responding to the finding, President Trump directed his administration to take a range of actions including additional tariffs of 25 percent on certain Chinese imports; investment restrictions in key technology sectors; and a new World Trade Organization (WTO) case. Among the critical items still to be decided are the Chinese products that will be subject to additional tariffs, as well as the exact nature of investment restrictions. Although China has already signaled its intention to respond, the exact nature of the retaliation is another key unknown.

Q1: What is Section 301?

A1: Section 301 of the Trade Act of 1974 provides the executive branch with the authority to respond to unfair, unreasonable, or discriminatory trade practices and gives the Office of the U.S. Trade Representative (USTR) the ability to take action to compel another country to eliminate the offending act, policy, or practice, with the president’s approval. Notably, Section 301 allows the United States to respond not only through actions specifically related to trade in goods and services, but in any pertinent area of relations with the other country.

Q2: What prompted this Section 301 investigation, and what did USTR find?

A2: American companies have long complained about Chinese policies that effectively force the transfer of technology and intellectual property in exchange for access to Chinese markets. The investigation was launched in August 2017 against the backdrop of a U.S. trade deficit with China of more than $350 billion. While the deficit is likely overstated in value-added terms, it is the largest of any trading partner, and the bilateral trading relationship is increasingly viewed through the lens of strategic rivalry, raising questions about its impact on U.S. national interests.

Yesterday’s announcement was the latest phase of the investigation. At the time, President Trump asserted that “China has implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests” and that these actions “may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation.”

Surprising no one, the 301 investigation found that “the acts, policies, and practices of the Chinese government related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.” Measures in the U.S. response include: the launch of a WTO case on China’s discriminatory technology licensing practices; 25 percent additional tariffs on select Chinese imports to compensate for the $50 billion in estimated annual harm caused to the U.S. economy as a result of China’s practices; and investment restrictions aimed at protecting key U.S. technologies.

Q3: What happens now?

A3: The exact list of Chinese imports subject to new tariffs should be provided within 15 days—by April 6—followed by a 30-day comment period and public hearing that will likely lead to some adjustments in the list. Ambassador Robert Lighthizer told the Senate Finance Committee that the imports covered by the new tariffs would come from innovative sectors such as advanced robotics, new energy vehicles, high-speed transport, and other unspecified products that would result in relatively more pain for China and relatively less pain for the United States. As far as investment restrictions are concerned, recent decisions by the Committee on Foreign Investment in the United States (CFIUS)—which recommended against the foreign acquisition of Qualcomm and reportedly declined to give approval to the purchase of MoneyGram—provide some clues as to which sectors will be affected, as do frequent references by U.S. officials to those sectors covered in “Made in China 2025” and to the idea of a reciprocity policy where Chinese investment in the United States would be restricted in the same sectors where China restricts U.S. investment.

Q4: How is China likely to respond?

A4: If and when tariff hikes and investment restrictions go into effect, China will almost certainly retaliate, just as it announced on March 22 in response to the U.S. steel and aluminum tariffs that went into effect the following day. China’s Ministry of Commerce reportedly has a detailed plan to counter U.S. actions that would target U.S. exports of soybeans, pork, and other agricultural products, as well as aircraft sales by Boeing, a company whose biggest market is China. The pain will be felt by U.S. consumers, who will see an increase in the costs of goods imported from China; by U.S. exporters subject to Chinese retaliation; and by U.S. manufacturers who may see their supply chains disrupted. Beyond soybeans and planes, Chinese retaliation is also likely to come in the form of more opaque and informal measures, for instance, in the form of new security audits under China’s cybersecurity law that could be used as political tools to block market access.

There are signs that China is sensitive to U.S. pressure, with senior official visits to Washington and a vague statement earlier this week by Chinese premier Li Keqiang that China would no longer force technology transfers to Chinese companies. If there is progress, the Trade Act has a stipulation that allows for a delay in U.S. actions, which could create time and space to improve the bilateral relationship.

When asked at Wednesday’s Senate Finance Committee hearing what outcomes are sought with China, Ambassador Lighthizer answered, “changed behavior” and shared his personal view that “China is always going to challenge the system and want to take over the world.” That perspective, combined with a pronounced skepticism of bilateral U.S.-China dialogues, does not bode well for a quick and painless resolution of tensions.

Stephanie Segal is a senior fellow and deputy director of the Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Reinsch holds the Scholl Chair in International Business at CSIS. Marnie Ginis, Simon Chair research intern, and Elizabeth Keller, Simon Chair program manager and research associate, contributed to this piece.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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