OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS, POLICIES, AND PRACTICES RELATED TO TECHNOLOGY TRANSFER, INTELLECTUAL PROPERTY, AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974 March 22, 2018 CONTENTS I. Overview ................................................................................................................................. 3 A. Core Elements of Section 301............................................................................................. 3 B. Background to the Investigation ......................................................................................... 4 1. Initiation of the Investigation ........................................................................................ 5 2. China’s Bilateral Commitments to End its Technology Transfer Regime and to Refrain from State-Sponsored Cyber Intrusions and Theft .......................................... 6 3. Input from the Public .................................................................................................... 9 C. China’s Technology Drive ................................................................................................ 10 II. China’s Unfair Technology Transfer Regime for U.S. Companies in China ....................... 19 A. Introduction ....................................................................................................................... 19 1. Key Elements of China’s Technology Transfer Regime ............................................ 19 2. A Persistent Problem for U.S. Business...................................................................... 22 B. Foreign Ownership Restrictions as Used in China’s Technology Transfer Regime ........ 23 1. The Foreign Investment Catalogue and Technology Transfer ................................... 24 2. Illustrative Examples of China’s Use of Investment Restrictions to Pressure Technology Transfer ................................................................................................... 29 C. Administrative Review and Licensing Processes as Used in China’s Technology Transfer Regime .............................................................................................................................. 35 1. Technology Transfer Pressure in Administrative Approvals and Licensing .............. 36 2. Forced Disclosure of Sensitive Technical Information .............................................. 41 D. China’s Acts, Policies, and Practices Are Unreasonable .................................................. 43 E. China’s Acts, Policies, and Practices Burden or Restrict U.S. Commerce ....................... 45 III. China’s Discriminatory Licensing Restrictions .................................................................... 48 A. Introduction ....................................................................................................................... 48 B. Foreign Licensing Restrictions and China’s Technology Transfer Regime ..................... 48 1. Different Outcomes for U.S. Companies versus Chinese Competitors ...................... 51 2. Indemnification Against Infringement Claims ........................................................... 51 3. Ownership of Improvements to Licensed Technology ............................................... 52 4. Use of Technology after the Technology Contract Expires ........................................ 53 C. Concerns Raised by Other Trading Partners ..................................................................... 54 D. China’s Acts, Policies, and Practices are Discriminatory ................................................. 55 1. Justifications for Discrimination ................................................................................. 55 2. Acts, Polices, and Practices of Other Countries ......................................................... 57 E. China’s Acts, Policies, and Practices Burden U.S. Commerce ........................................ 60 IV. Outbound Investment ............................................................................................................ 62 A. Introduction ....................................................................................................................... 62 B. Policy and Regulatory Framework ................................................................................... 66 1. Major Policies to Acquire Foreign Technology .......................................................... 66 2. The Chinese Outbound Investment Approvals System .............................................. 70 3. Sectors “Encouraged” for Outbound Investment ........................................................ 77 4. Outbound Investment Policy in Technology and Sectoral Policies ............................ 78 5. State-Backed Actors .................................................................................................... 80 1 C. Impact of Policies and Implementing Measures on Chinese Investment in the United States ................................................................................................................................. 97 1. Chinese Investment Activity in the United States: Analysis of Data ........................ 98 2. Effect of State Policies and Implementing Measures on Chinese Acquisitions ....... 102 3. Leveraging “International Innovation Resources” Through Engagement with Silicon Valley ........................................................................................................................ 142 D. China’s Acts, Policies, and Practices are Unreasonable ................................................. 147 E. China’s Acts, Policies, and Practices Burden U.S. Commerce ...................................... 150 V. Unauthorized Intrusions into U.S. Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information ............................. 153 A. Introduction ..................................................................................................................... 153 B. China’s Acts, Policies, and Practices Regarding Unauthorized Intrusions into U.S. Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information ................................................................................. 154 1. The Chinese Government’s Extensive Cyber Activities .......................................... 154 2. The United States Department of Justice Indicted Chinese Government Hackers in May 2014 .................................................................................................................. 157 3. China’s Institutional Framework Supports Cyber Intrusions into U.S. Commercial Networks ................................................................................................................... 164 4. China’s Recent Cyber Intrusion Activities Against U.S. Commercial Networks .... 167 C. China’s Acts, Policies, and Practices Regarding Cybertheft of Intellectual Property Are Unreasonable................................................................................................................... 171 D. China’s Acts, Policies, and Practices Regarding Cybertheft of Intellectual Property Burden U.S. Commerce .................................................................................................. 173 VI. Other Acts, Policies, and Practices of China ...................................................................... 178 A. Introduction ..................................................................................................................... 178 1. Measures Purportedly Related to National Security or Cybersecurity ..................... 178 2. Inadequate Intellectual Property Protection .............................................................. 180 3. China’s Anti-Monopoly Law .................................................................................... 181 4. China’s Standardization Law .................................................................................... 182 5. Talent Acquisition ..................................................................................................... 182 B. Conclusion ...................................................................................................................... 183 2 I. Overview I. Overview A. Core Elements of Section 301 This investigation has been brought under Section 301 of the Trade Act of 1974, as amended (the Trade Act).1 Section 301 is a key enforcement tool that may be used to address a wide variety of unfair acts, policies, and practices of U.S. trading partners. Section 301 sets out three categories of acts, policies, or practices of a foreign country that are potentially actionable: (i) trade agreement violations; (ii) acts, policies or practices that are unjustifiable (defined as those that are inconsistent with U.S. international legal rights) and that burden or restrict U.S. Commerce; and (iii) acts, policies or practices that are unreasonable or discriminatory and that burden or restrict U.S. Commerce. 2 The third category of conduct is most relevant to this investigation. Section 301 defines “discriminatory” to “include, when appropriate, any act, policy, and practice which denies national or most-favored nation treatment to United States goods, service, or investment.”3 An “unreasonable” act, policy, or practice is one that “while