Talking Trade blog
Special 301 investigation: The expected and the unexpected so far
Published 12 October 2017
What are the prospects of a potential trade war between the US and China at the moment? The initiation of the Section 301 investigation brought closer the possibility of a trade war between the two largest economies. But the outcome of the investigation’s first steps – collecting public comments and a public hearing on October 10 in Washington DC based on these comments – might not point in the same directions.
Under US President Donald Trump’s order, discussed in an earlier Talking Trade post, USTR launched the Section 301 investigation in August 2017 to look into China’s “unreasonable” and “discriminatory” practices and regulations that have been harming American companies. This investigation has already drawn public attention and controversies over USTR’s objectives, potential outcomes of the investigation, potential actions of USTR following the investigation, as well as China’s reactions to all these moves.
Within one month, USTR received 52 public submissions from 45 organizations, consisting of 1223 pages of public comments. Compared with the 203 comments – consisting of 1598 pages – received for the Section 232 investigation on the Steel Case in June 2017, the number of public comments for Section 301 seems quite low. Note that comments may also have been received confidentially.
Moreover, considering just how important this investigation will be for both US companies and US-China future relations, 52 submissions suggests something not right about either the method or the rationale of this decision.
Perhaps USTR expected this investigation to give them more detailed evidence of real American companies being harmed and challenged by “unreasonable” and “discriminatory” practices and regulations in China so that they can go ahead with section 301 unilateral punishment on China. Or USTR might have expected to receive a substantial amount of comments to show the strong support for USTR’s move and dissatisfaction of the widest possible range of US companies about China’s practices. This would reinforce the American case in future dialogue with China.
As it stands, however, the outcomes of the public consultation tend to increase the confusion over what the US is trying to do and whether Section 301 will be an effective approach.
First, not many companies or organizations gave specific examples of how US companies are being harmed and damaged by China’s government and companies’ practices. This was a key announced objective of the investigation process.
Out of 52 submissions, only six included real examples of themselves or of other companies (for a total of nine cases reported).
Among these nine cases, six are not new to the public. Two can be bundled together—the instance when five Chinese military hackers were charged with cyber espionage in back in 2014. Only three cases were not reported widely on the media before and might catch attention from USTR.
Among the submissions, three of them were from small businesses, four from corporations and the rest are associations, chambers of commerce, alliance, research firms, law firms, foundations, and broader society.
The majority of the submissions focused solely on pointing out the unreasonable regulations and practices in China that are causing US companies a lot of trouble when accessing China market. The most common complaints are around restrictions on FDI and cross-border data transfers, requirements for technology transfer, China-specific technical standards, regulations on technology import and export administration, and new regulations of the Food and Drug Administration (CFDA) These types of comments are not particularly helpful for USTR since they are not new and have already been mentioned elsewhere in USTR’s documents, including the annual special 301 reports.
Even though not many specific or detailed examples were mentioned in the comments submitted to USTR, some companies and organizations managed to put a sophisticated cover to their example with “just enough” information so that it could facilitate further investigation by the USTR in the “right direction.”
Second, the majority of the submissions stressed the importance of US-China trade relations that could be severely damaged should the US decide to take further action under Section 301 and warned about the consequences.
Sixteen submissions warned USTR that the impact could be substantial while 20 encouraged USTR to consider constructive approach that could benefit both countries. Most emphasized how closely American business, in some sectors, are linked to their partners in China and how harmful a deteriorating or ruptured relationship between China and the US would be for American businesses, workers and the broader economy.
Seven comments noted that USTR’s pursuit of Section 301 would violate WTO rules.
Despite the remaining issues of China’s regulations and practices, 22 submissions recognized the improvement and effort of the Chinese government over the past ten years. Some argued that China’s intent was not malicious, but a by-product of China’s focused economic development plans.
Exceptionally, amidst all the comments trying to specify why US companies are having a difficult time with their Chinese partners, William Mansfield from ABRO Industries told the story of how his company and himself were successful in fighting counterfeit goods and IPR infringement in China by working closely with local authorities. Through his own case study, Mr. Mansfield raised the question of whether US companies have well understood how the system works in China and if they should learn how to adapt to the new market.
However, this is not to ignore or deny the real challenges that foreign companies are facing when operating in China. These issues revolve around the complicated, vague, overly strict and sometimes conflicting regulations in China as well as the inconsistency between the practices at the central and local level. Even though China has made great effort in improving the situation, the slow progress and the longstanding issues raised the question of whether all the attempts were just another camouflaged tactics China is playing to pursue the industrial plans set by the leading party.
Commentators recommended different platforms for holding constructive dialogues. Available channels include US-China Joint Commission on Commerce and Trade (JCCT), the China-US Strategic and Economic Dialogue (SED), and the U.S.-China IP Cooperation Dialogue.
Another suggestion is the multilateralism approach that says the US should join forces with other countries from around the world to persuade the Chinese government that what they are trying to do affects their trading partners in negative ways. The involvement of other countries such as EU and Japan in the effort to challenge Chinese regulators on their existing rules could be much more effective than for the US to go it alone.
The public hearing in Washington on October 10 featured an even more scaled back set of participants. Just 14 witnesses appeared with several likely groups declining to give testimony.
So what happens next? Under the terms of Section 301, USTR has completed two key items on the checklist. It will likely issue a damage assessment figure that can be used as the basis for a preliminary calculation of potential sanctions. These sanctions could be rolled out at any time between now and August 2018, if the US decides that China is making insufficient progress towards satisfactory resolution of the problems identified in the original complaint.
But as the comments and hearing illustrated, it remains unclear at this point what is the likely area or areas where USTR might chose to focus attention. The comments failed to shed new light on specific challenges in a way that might have made it easier to guess which way the investigation will roll in the future.
The Comments in More Detail
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