How Updating a Century-Old Trade Law Could Limit China’s Ability to Profit From Unfair Trade Practices
China is rapidly gaining market share in strategically important advanced industries, and it’s coming at the expense of America and its allies. What’s worse is that China engages in a host of unfair trade practices to achieve its goals, and U.S. policy responses so far have been ineffective or insufficient. But judiciously updating a century-old trade law could change the game: Section 337 of the 1930 Tariff Act allows the U.S. International Trade Commission to bar imports when there is evidence that unfair competition is causing economic harm. Unfortunately, the law has major shortcomings and has become a forum for patent disputes among allied nation multinationals. So, a new report from ITIF details how to revamp Section 337 to address China’s 21st century brand of “innovation mercantilism.” Doing so would send a clear message that China will no longer be able to profit by violating trade rules, because Chinese firms that benefit from unfair practices will be denied access to U.S. and (ideally) allied markets.
ITIF President Robert D. Atkinson presented the report at a briefing event on Capitol Hill. Senator Mark Warner (D-VA) delivered keynote remarks and a panel of trade policy experts discussed how to limit China’s ability to profit from its predatory trade practices. Speakers included former U.S. trade officials Wendy Cutler, Meredith Broadbent, and Gilbert Kaplan.
Robert D. Atkinson:
Well, good afternoon everyone. I want to welcome you to this ITIF event to formally release a new ITIF report on a area that might seem a little arcane unless you’re a trade lawyer in Washington, but I assure you it is far from arcane, and that is a proposal that we’ve made to reform what’s called Section 337 of the 1930 Tariff Act. And I’ll talk about that report in just a minute.
Let me introduce our panelists now.
Senator Mark Warner is going to be joining us. I’ll introduce Senator Warner when he arrives.
We’ll go in the order that we have here.
Wendy Cutler who is Vice President and Managing Director of the Asia Society Policy Institute. She spent nearly three decades as a diplomat and negotiator at USTR. She most recently in that role, served as acting deputy US Trade Representative with Asia Pacific region.
She was responsible for the TPP agreement but not responsible for it not passing, let’s just put it that way. It should have passed. And she was also the chief negotiator in the KORUS Free Trade Agreement, US-Korea. So thank you, Wendy.
My colleague Meredith Broadbent is a senior advisor at the Center for Strategic and International Studies, CSIS. Meredith is also former chair of the USITC, which has a jurisdiction over 337, so it’s great to get her insights onto how that might actually work.
She’s a former US trade representative for industry market access and telecom. She also drafted major portions of the Trade Development Act in 2000 and the Trade Act of 2002, so a long career in international trade policy.
And finally, Gil Kaplan, my colleague, is a senior fellow at the Manufacturing Policy Initiative at Indiana University. He’s also former Undersecretary of Commerce for International Trade in the US Department of Commerce during the Trump administration. He’s a former partner at King and Spalding, and was part of the International Trade Practice Group that worked on 337 cases. And he filed and prosecuted the first successful anti-subsidy case against China in 2007.
Okay. I think it’s pretty clear there’s a growing consensus in Washington after many, many years of seeing it otherwise that China’s economic, technology, and trade practices are unfair and they pose a significant threat to US economic and national security.
So, good, we’re finally at that point. But what do we do? Where do we go next?
The policy debate now is about what we should do and there are really two main camps in that camp in that debate. One is the speed us up camp. This camp says, “Don’t worry about China. Let’s just go as fast as we can.”
And emblematic of that was the CHIPS and Science Act, which ITIF was very involved with and very supportive of. A great piece of legislation.
And then there’s the slow down China camp, which is, “We have to really work to throw sand in the gears to slow down China to make it harder for them to benefit from a lot of these unfair practices.”
The reality is this is not mutually exclusive. This is like that Miller Lite commercial, “Tastes great and less filling.” We have to do both. The idea that we can only do one is not enough. If we only do one, we’re not going to succeed.
So in the slow down China camp, there really was three big ideas. One was, “Well we’ll pressure China and somehow they will retract or slow down, or pull back from their innovation mercantilist predatory trade practices.”
This was largely what President Trump tried to do and it was a good effort, but it failed, and it will continue to fail because there’s virtually nothing we can do to change China’s policies. Nothing. They’re going to do what they’re going to do.
What we can do is we can limit key US inputs, for example, an access to our financial markets, US FDI, their foreign direct investment in the US, limit their ability to steal our intellectual property.
And those are all and many other things useful to do. But even there, that’s not enough.
What we argue now is that we need to limit Chinese ability to benefit from their economic predation. In other words, we can’t change their economic mercantilist practices, but hopefully, we can limit their ability to benefit from them.
And to do that, what we argue is that China should amend the Tariff Act of 1930 which was pretty interesting bill that actually established the US International Trade Commission at the time, to enable stronger use of the Section 337 statute to make it easier to exclude goods and services from China that are systematically supported by unfair trade practices.
Let me stop there because I see my colleague, Senator Warner. I’m technically a colleague. I’m not a senator, but I could be.
So I want to introduce Senator Warner now because he’s so kind to join us.
I think everybody knows Senator Mark Warner. He was a former governor of the state of Virginia from 2002 to 2006. He was elected to the Senate in 2008. He’s in his third term now. He’s on Senate Finance, Banking, Budget, and Rules Committees.
He’s also chairman of the Select Committee on Intelligence, which has offered a number of really important and innovative proposals on how to address China and how domestically we need to do a better job of that.
And overall, Senator Warner in his time in the Senate has championed a wide variety of bipartisan efforts to boost US competition and innovation including the CHIPS Act.
So Senator Warner, thank you so much.
Sen. Mark Warner:
Thank you, Rob. I appreciate that very much. And Rob and I literally go back 30 plus years, maybe some, close to 40.
You were a rising star in the Rhode Island state government when we first started, but I am very much appreciate the opportunity to be here. And while I’ve got incredibly good five to seven minute remarks, I thought I’d rather just speak about this issue in terms of how I got here and where I hope we’re going, and want to applaud Rob and the institute’s work on some of your more recent work.
I’m not an expert on 337 versus 301, but I know that’s going to be part of the discussion today, but I think this issue of how we take on the technology competition with China really is the issue of our time.
And as I start, I want to make clear, because I think policy makers in particular when they fail to make this clerk at the front end, literally play in to the agenda of the CCP. And my beef not with the Chinese people or the Chinese diaspora anywhere in the world, but it is with the Communist Party, Xi Jinping’s leadership, his approach and this view that he brings to the table that this is a competition where there has to be a winner versus a loser, as opposed to how our two countries where in certain places can compete, and in certain places, can cooperate.
And let me say at the outset that I didn’t start with this position. I like many policy makers in the early 2000s when I was governor, believe that enhanced cooperation and collaboration with China would be the right policy moving forward.
I remember my universities in Virginia, many of them making collaboration with Chinese universities. I remember trying to bring trade missions as governor.
The thing where this started to change was more in the 2012 to 2015 timeframe where business leaders across the country and around the world were still looking to try to further develop this bilateral relationship.
And yet I would sit in intelligence hearings week after week, Obama administration, Trump administration, where the litany of intellectual property theft getting close to $500 billion a year, the amount of unfair competition, the investment that China was making in technology domain after technology domain, the upscaling, and candidly, sometimes American universities being penetrated with intellectual property theft and stuff, scared the heck out of me.
And what was the final wake up call for me was, and my background when I was in the business sector, was in the telecommunication space and wireless space, so I knew a little bit about 5G when suddenly, lo and behold, here was the next generation of wireless technology, and it was being dominated not by any American firm where there wasn’t even an American firm, or not even any Western firm, but not one, but literally two new Chinese firms, Huawei and ZTE, that had great products at an affordable rate, subsidized by the CCP and the Chinese government close to $100 billion, and China was running the table in terms of dominating the next level of wireless domain.
And what was particularly concerning to me was that not only was China having a company that was in the lead, but China was also flooding the zone on the standard setting bodies. And this is nerdy, but this is really in my mind, one of the areas where America and the West has been a leader literally since Sputnik, where regardless of the innovation that was taking place, oftentimes we as the largest economy in the world would get to set the rules, standard, protocols and procedures. And oftentimes, that drove economic development, and frankly gave us a bit of an advantage.
China and 5G was flooding the International Telecommunications Union and other entities with their engineers and many allies, and were literally setting the standards.
I’m proud to say the Intelligence Committee was the first committee that drove this, helped sound the alarm about Huawei. We then said we would go about this in a more orderly fashion. I know originally my friend and fellow member of the intelligence committee, John Cornyn was supposed to be here and he and I have been great partners, along with Richard Burr and we claim we are the last fully functioning bipartisan committee in the Senate.
And we have been united. We literally started what we called Classified Roadshows where we did 20, now pre-pandemic and post-pandemic, I think 22 now, where we would sit with industry sector after industry sector in a classified setting and describe this challenge and threat.
And the evolution of the response from industry from 2017 to 2022 has been a remarkable change, as people were somewhat skeptical at the front end, but now particularly as we’ve reemerged on this post-COVID, realized there’s general agreement from virtually every industry sector, including even private equity, which was a reluctant believer on the front-end. And I think in many ways that generated the activity that John Cornyn and I said started with the CHIPS Bill where I won’t go through all of the statistics other than a quick top lines.
This is an industry where we basically made about 38, 39% of all the semiconductors in the world. In the 1990s, we were down to about 12%. We don’t make any of the most advanced cutting edge semiconductors in this country that are used in our advanced military and intelligence activities.
They’re not all made in China by any means, but the vast majority are actually made in Taiwan, which raises its global importance also going forward.
The CHIPS Bill was as you know, $52 billion, of which $40 billion will help try to bring some of the fabrication facilities back to this country. $12 billion will go into R and D. There’s another 20 to $25 billion in tax credits.
While it didn’t get a lot of attention, in the bill, there is $1.5 billion for next generation wireless beyond 5G, so called Open Radio Access Network, I think as you’re going to hear a lot more about, as we try to move away from hardware stack technology to more software based.
And the implementation of the CHIPS Act, getting it right is going to be extraordinarily important because my feeling is there may be other domains where we’re going to have this competition, and we, and I should say this, we needs to be democracies around the world. I think we need to think about this much broader than the Five Eyes or NATO, or even beyond some of our traditional allies like Japan, South Korea, Australia, etc. But to a host of countries that are non authoritarian around the world who frankly see this competition with the CCP in very similar ways that we do.
A piece of this will be what the panel and what Rob has written about in terms of how we utilize our trade policies in a smart and efficient way, and how we potentially restrict additional Chinese products that have frankly unfair advantages in a host of domains. I do think though we have to have a level of sophistication on this.
For example, there are some, and this is where Senator Cornyn and I may not have full agreement, but we’re trying to talk it through. They say we ought to be much more restrictive on any outflow to China in terms of American products.
And while at the advanced end, I agree with that, I do worry... Let me cite two examples. If we suddenly say no American based chip company can send and sell even any legacy chips into Chinese firms that are frankly commodities, all we’ve done is replaced American firms with potentially Japanese or South Korean, or other firms who won’t take that action.
So realizing the area where there’s commodity versus the intellectual property and cutting edges is one point we need to think through.
I think as well, some of the questions that, and we’ve seen this even as recently as we try to move forward on the energy transition, goals on trying to move more of the innovation back to America and friends, I support. But recognizing there was a timeline on some of this, you can’t flick a switch. And I know there have been some proposals that would say no matter where you are in the DOD supply chain, if you’ve got anything to come from an unfriendly country, no matter where they are in the supply chain, without some evaluation of whether it’s a commodity or not, we can’t do an equivalent of what we did with Huawei, rip and replace with a whole system series of television sets that may simply be at a defense contractor that may have been acquired 10 years ago.
So I lay that out as a caution as we think about in a smart way, and why I want to applaud Rob and the panel for thinking through how we can use existing tools or with legislative changes to tighten up smartly. Let me just close with this and I’ll be happy to take one or two questions, and that is, we’ve seen this now this debate with 5G and with chips. I think the vast majority members of Congress, regardless of party, get it that this is a technology competition.
I think we’ve seen American business get it in terms of trying to bring back jobs to this country. I think the American people broadly, regardless of partisan affiliation, want things to be made in America again. So we’ve got all of this aligned. What I hope to do is, and my fear is that there are so many other domains where we may have similar real time competition.
Artificial intelligence is something that a great deal of conversation is going on about. Quantum computing.
What the intelligence committee is going to do because we think we can convene in a bipartisan way, both industry and the intel community which does a good job of looking out but can’t really look in at what we’re doing here domestically.
So we’ve also partnered with Secretary Armando on this is what are other areas where we need to get ahead of the game? And I cite two. One is advanced energy. We think about how we need to move towards more efficient energy systems and frankly, cleaner energy systems. But you can’t measure your Tesla’s climate evaluation if you don’t weigh in the fact that the battery was made in China with coal fired plants creating that electric battery.
So how we go back on the supply chain. Could we bring back part of the solar industry, which is a relatively mature industry which was entirely driven in America 20 years ago, and there are certain choke points.
How can we think about advanced energy in terms of nuclear effusion, hydrogen, advanced batteries? There’s a whole host of areas where I think we along with non-authoritarian countries around the world can make sure that we don’t end up with where we are frankly in solar or where we were headed in 5G, and potentially where we were headed in chips.
The other area is synthetic biology which offers everything from a new way to think about drug making, to new way to think about food production, to a new way thinking about chemical production, frankly to areas around... For example, carbon capture may be best suited to synthetic biology rather than some of the more traditional activities.
So we hope to go deep on this and potentially bring back ideas and potentially legislation that would make sure that we keep this technology advantage in not only the domains that we’ve already addressed, but a number of domains going forward. And how we do that will require the kind of thinking that Rob and the panel brings, but will also require the thinking of everyone in this room.
The good news is, this is one of the few issues where there is broad overwhelming bipartisan agreement here in the Congress, from the business community, and I think from the American public. So we’ve just got to make sure we execute it correctly.
Thank you all very much.
Robert D. Atkinson:
Sen. Mark Warner:
Do you want to take a question or two?
Robert D. Atkinson:
We may have time for maybe one or two questions, particularly from folks in the media. So right over here. Yes, ma’am.
Senator, why is the Chinese GPS satellite, the BeiDou Northern Star here in North America?
Sen. Mark Warner:
I’m not going to... One, I’m not as familiar with that Chinese entity. And two, there are as you know, competing approaches that we have versus China has on GPS, and I reserve comments on that for another time, but thank you for the question.
Robert D. Atkinson:
Any other questions?
Okay. Thank you so much.
Sen. Mark Warner:
Thank you all. Thank you very much.
Robert D. Atkinson:
I want to thank the senator for all his leadership on these issues. He’s really played a critical role.
I should have mentioned Senator John Cornyn had committed to come today but unfortunately had a last minute conflict, so he sends his regrets.
So let me just quickly go through this. In the Trade Act of 1930, there’s a thing called Section 337, and what it does is it gives the US International Trade Commission the power to essentially block imports for a period of time on basis of two factors. One is intellectual property, and the second is broader unfair trade practices.
Over time, particularly in the last 15 years or so, 337 has not lived up to its promise. It’s evolved essentially into another secondary patent court.
As one scholar, Linda Sun wrote, she said, some scholars argue that the US ITC has departed from its original mission of protecting domestic industry and has become a patent validity court instead.
I think that’s true. It’s not to say that some of those cases aren’t important, but many of those cases are really about one US firm battling against another US firm.
So that’s why our view is we need to have a new approach to 337 to really beef up its original mission, which was to protect the US economy from systematically unfair trade practices from other countries.
So how do we do that?
There’s several specific policy recommendations that we propose in here.
One is to define unfair trade practices specifically in non-market, non-rule of law nations.
There’s really no reason to include places like Canada, or Germany or Japan. That’s why we have the WTO. That’s why we have the North American Free Trade Agreement policies to enable these kind of disputes to be settled.
The WTO who doesn’t work for China. It doesn’t work for China for a long array of reasons, which I won’t get into.
So essentially what we need is a carve out for 337 for non-market, non-rule of law nations, which is China.
The second thing we need to do is we need to beef up the unfair trade provisions part of 337. In the legislation it doesn’t talk about things like forced technology transfer. That’s an unfair trade practice. Close domestic markets.
You look at a lot of Chinese firms, for example, the Chinese heavy construction equipment industry, companies like Zoomlion. They have three major companies in that industry. They were nonexistent really 15 years ago. Now they are in the top 10 in the world. And one of their core advantages is that the Chinese policies simply say, “If you are doing a big construction project in China or in Belt and Road nations, you cannot use non-Chinese construction equipment.” So that is an unfair trade practice.
So what Congress should do is make clear that these and related unfair trade practices are eligible for 337 investigations, but only against companies from non-market, non-rule of law economies.
And this gets a little detailed so I won’t try to get too much into it, and people who follow countervailing duties issues like Gil, and you read some of these orders and they’re like, “12 inch steel pipe, less than nine feet long.”
What this needs to be about is broader. These need to be an exclusion order on an entire array of products a particular company makes, not just a particular narrow product. And the reason for that is that many of these companies, their subsidies and other advantages are so intertwined.
Senator Warner mentioned Huawei, which has received over $75 billion in subsidies. It benefits from a allocated market in China where 96% of domestic 5G equipment is allocated and mandated has to be by Chinese companies.
Huawei makes computers, they make phones, they make telecom equipment. All those subsidies, you can’t parcel them out and say it goes to one particular thing.
Equally, if not more important, we need to eliminate the requirement for injury. So this is a big problem in trade law. You have to show that you’ve been injured.
The problem with that is that in innovation-based industries, the injury can be you don’t gain market. You could keep the market if the market is your market. If the market is growing and the Chinese firm that’s competing unfairly, takes all of that growth in the market, you haven’t laid anybody off but you have suffered severe injury because your revenues aren’t going up as much. You’re not able to reinvest that back into R and D, and new equipment and the like.
So the injury claim to me should be completely irrelevant. There’s no injury claim needed for the patent cases or IP cases, by and large, but there should be for these other unfair trade practices.
In addition, Congress needs to make it clear that any agency of government can file a complaint.
I was talking to a company recently that filed a complaint against a Chinese company that had stolen its intellectual property and trade secrets, and they were able to prevail. They got an exclusion order, 10 years against this Chinese company but it cost them $10 million.
For a midsize company, that’s a lot of money. Even for a big company.
And so what happens when that company won that case? It didn’t just help that company, it helped the entire US economy, because the US economy overall is stronger.
This is what economists would call an externality where the benefits of what happens to one company are way beyond the benefits just to that company. So the overall US economy helps the community that industry that firm was in is helped, the workers are helped.
So what we propose is that the Department of Commerce should be given significant funding to bring cases.
And the two main reasons for that. One is just simply the cost. These cases cost a lot of money and we can’t expect the private sector to do it on their own. Actually, these are attacks upon America, on America’s economy, so the US government acting on behalf of the US state should be engaged.
And then the other reason is retaliation. Any American company that is in China, that has a plant in China or selling in China and brings a 337 case, will be retaliated against by the Chinese government. And they all know that. So this is why, by the way, the WTO doesn’t work because of retaliation.
We should allow exclusionary orders to digital products. So there’s a case a few years ago. The product was a digital product, some kind of software, was clearly in violation, but because of the way the court interpreted the original statute of the word product, they didn’t think software was a product.
I think also we should continue to move forward with legislation that would reduce the use of the 337 for these IP cases against American firms.
There’s a bill in Congress which is an important step. I think we need to go even further. But HR 5184 by Congresswoman Suzan DelBene and Representatives Schweikert, Estes and Beyer would change a number of the provisions in there, including the domestic industry standard that would just make it a little bit harder, and would move more of the cases towards really unfair practices against Chinese companies, not cases between American companies where they just like the venue rather than the District Court.
And finally, if we move forward with this, we need to do this in cooperation with our allies.
The European Commission passed a rule last year that would push back against the advantage that Chinese companies have in the European market with regard to subsidies and other unfair provisions.
So they’ve already established a benchmark. I think we should leap forward beyond that benchmark and do even more. But clearly there are other countries out there that are looking at this issue the same way that we are.
So in closing, let me just sum up by saying reforming Section 337 would not only send a clear message for free trade. It would say America is open for trade with other countries, particularly China, if it’s unsubsidized and fair.
But it would also slow down Chinese firms that are benefiting unfairly from these practices, while enabling allied nation firms to more effectively compete with their Chinese government-backed state champions.
So with that, thank you. I want to turn it over now to Wendy for comments.
Wendy, you want to be here, or... Probably up here is...
I think I’ll do it from here if that’s okay.
Well, thank you very much. And Rob, thanks for reuniting me with two old colleagues, not old, but I’ve known them for a long time, both Gil and Meredith.
[inaudible 00:31:46] ...Young colleagues.
Two young colleagues.
And I feel much better because Gil knows the anti-dumping and countervail inside and out, and Meredith knows everything the ITC does.
And in fact, coming from USTR, we didn’t spend a lot of time on 337, so I had to read your report carefully and then actually look at the law and other sources to learn more about Section 337.
You said some of this is arcane. I found it riveting, which I think just shows I’m a total trade nerd, but we can discuss that later.
I couldn’t agree more with the premise of your paper. And that is we’re not going to achieve negotiated solutions with China on their practices, and so therefore we need to look elsewhere.
I think the Biden administration’s doing a great job working with allies and partners to develop a united front, and also building our competitiveness at home in cooperation with Congress, with senators like Warner and Cornyn.
They’ve also talked a good game, I would say, about strengthening our tools in coming up with new tools to get at Chinese unfair trade practices, but to date, we really haven’t seen a lot of these new tools. They haven’t revealed these tools, and I think it’s because it’s very difficult to come up with effective tools that are going to hurt China and not end up hurting the United States at the same time.
I also agree that the Chinese practices have become complex, elusive and sophisticated, and that US trade law just hasn’t kept up with the realities of the scope, magnitude and complexities, but also the synergies of these practices as well.
I participated a few years in the report, US Foreign Policy for the Middle Class, which was co-authored by a number of senior Biden officials in the administration right now. And in that report we issued three years ago, we recommended that we look at modernizing US trade law, and we called for a comprehensive review of US trade laws to be undertaken to improve the US ability to respond more effectively and quickly to unfair trade practices.
It wasn’t just aimed at China, but more broadly, but China clearly was in mind.
When I think of the number of issues that you raised about 337 and areas that can be improved and looked at, I think there are commonalities with other trade laws as well.
In fact, when people talk about Section 301 and they talk about anti-dumping countervail 232, a number of the issues including standing, who can bring these cases to the appropriate agency, the need to expedite the investigations, they all take a long time, and sometimes once the penalties are actually implemented or the remedies are implemented, the industry is no longer strong, or sometimes even in business.
Relaxing the injury standard has been something that has been advocated by many folks with respect to a number of trade laws and strengthening the penalties and frankly looking beyond tariffs, and finally providing more US government resources to allow us to build better cases and facilitate investigations.
When you invited me to this panel, I thought Section 337 frankly just dealt with IP. It was a surprise to me that it has a strong unfair trade component to it.
But I would say that Section 337 is not alone in addressing unfair trade practices. That also falls under the rubric of Section 301 administered by USTR, and anti-dumping and countervail administered by the Commerce Department.
And I’d also just like to put on the table that Section 301, the remedies under that statute are not limited to tariffs.
Tariffs have been used to implement Section 301, but broader authority has been given to USTR, particularly in the services and investment areas to take action against the offending party.
And tariffs, frankly before the Trump tariffs against China under Section 301, were normally at the 100% level, which I would conclude is an import ban or an import prohibition. But under President Trump, and maybe had to do with the magnitude of products captured under his orders, he decided that the tariff should only be as high as 25%.
Let me just close by saying I think it’s important that we look at all of our tools, including Section 337, to respond to Chinese unfair trade practices, but I also believe it’s worth considering Section 337.
And really in the context of a more comprehensive review of our trade laws, I think instead of pursuing a piecemeal approach, it might really behoove us to take the time, look at our entire arsenal, maybe even appoint a select group of experts to come up with recommendations.
But I think at the end, that might serve us better. So I welcome this report and I welcome the discussion and the comments from my fellow panelists.
Robert D. Atkinson:
Great, thank you so much, Wendy. Meredith?
Wendy and I shared an office on Capitol...
Robert D. Atkinson:
Meredith, is your mic on?
Wendy and I shared an office on Capitol Hill many years ago and it’s really interesting because I’m going to double down on what you said in the sense that this is an excellent paper. So much thought has gone into it.
But I think before we get to amending 337 to go off after this challenging China problem we have, we need to step back and see what in the existing system is not working and why. What are the deficiencies of Section 301?
I actually feel like the recent case on tariffs in terms of the investigation, and the evidence, and the picture presented of what China’s practices are on forced technology transfer and investment in US tech companies, licensing, etc, it goes on for probably 250 or 300 pages of evidence against China and the problems that we’re having.
And that was a report from USTR that came out in March 28th, 2018. And I think I’d refer a lot of you that are worried about China to look at this report because it’s seminal in what Democrat and Republican administrations have thought about China, and I think it builds on work from the Obama administration and then the Trump folks actually finished it up.
But I think it’s very much a bipartisan assessment of some of our challenges with China.
And the remedy there, of course, was the very broad difficult tariffs which are 25% on $250 billion in imports, and 7.5% tariffs on $12 billion of imports which are hitting very broadly US industry across the board, and we’re frozen politically with those tariffs on, and not getting the result or any real satisfaction from China, as Rob alluded to, which is very difficult.
So I would argue that we do take a more global look, and I think this is Congress’s job, particularly Ways and Means Committee and the Finance Committee have a series of hearings and just inquiries into where the biggest deficiencies in US law and why is it not working right now.
And coming up with another trade remedy tool might help, but it may not. We have a lot of tools in the toolbox right now that are not that deficient and there’s other dynamics that are probably weighing in against more stronger action that some panelists may counsel.
I think we’re at a great time. The COVID pandemic is over. We’ve got bipartisan Congress, two different houses. You could have gridlock, but maybe you’ll have progress on figuring out where we want to be strategically with China.
And I think you see the Senate, Senator Warner looking at strategies, and so far in dealing with the China problem, we’ve been basically pretty ad hoc behind the eight ball, not anticipatory of what the damage is going to be to US industries.
But I guess being at the International Trade Commission, I should have said I don’t speak for anybody there. I just speak in my own personal viewpoint, and there’s a lot of experts in the audience here that can chime in during the question period.
But I think politically, if Section 301 can be revised or even used as it is, we’re better off having a democratically elected administration manage the whole of government to deal with this, what is a whole of government challenge. And you have to be balancing off the cost to innocent parties, bystanders that are US industries trying to succeed in the international economy that are importing something with which they’re manufacturing in the United States and get hit with 25% tariffs unknown to them.
These are things that need to be balanced in the broader equation, and our strategic decision maybe that this is for the good of the order and we need to do these pretty onerous sanctions, but I think this is something that the inter-agency process, USTR leading trade policy is more capable of understanding than the International Trade Commission.
And I think the International Trade Commission has huge strengths that could weigh into this process and one of them is the expertise on what’s happening with the domestic industry. What are trends in the global economy? Could we set up a horizon looking mechanism that would look at industries like solar panels, where huge amount of product was pumped into the international economy, and we weren’t really noticing it, and it was way too late by the time a trade remedy case was taken.
So I do think looking ahead, horizon scanning mechanism might be a place that ITC would be strong in contributing to the process.
But I think six commissioners, we don’t even have a full compliment of commissioners there. There’s more Democrats than Republicans now, trying to decide what case they’re going to take against our biggest strategic competitor in the world.
It’s probably not the most balanced way government can work and I stand to be corrected. Maybe Section 301 is very deficient. I just think we need to look at our existing tools and tune them up, and have more of a coherent, whole of government approach to some of these very serious problems that we have with China.
Robert D. Atkinson:
Okay, thank you. Gil.
Thank you, Rob. And thank you our prior speakers who did such a great job. I’ll follow.
As a trade lawyer, I’ve been a number of different things. I’ve been a trade lawyer. I’ve been a trade administrator at Commerce on two different occasions.
I think we start with the proposition that we have not come up with a solution on non-market economies of the size and scope of China, and we need to think of new approaches.
Just to summarize something that was in the paper that Rob wrote, it’s important to note that China has gone way beyond subsidies in the way they assist their industry, including forced technology transfer, IP theft, very large subsidies, and massive capacity buildup, currency manipulation, and closed home markets.
There is no trade remedy in the United States that can look at this and do anything. You can pick out little pieces of it and do it, but that’s like if you’re going up against an enormous criminal enterprise and you find some guy who went into CVS and stole a loaf of bread and you arrest him, that’s not going to solve the whole problem [inaudible 00:44:48] looking at.
So I think the interesting thing about Rob’s proposal on 337 is in theory, if you could get through the administrative issues, which are clearly there, it could be one part of the solution.
In the United States, we’ve worked on non-market economy trade issues for years, and I wrote these down and I was amazed to find that I’d worked on all of them. The dumping law in 1988, the 1988 Trade Act, we put in the factors of production approach.
I won’t get into it, but it’s basically you look at the inputs in China and cost them in a market economy to find out if they’re dumping or not.
Then in 2007, as Rob mentioned, I filed the first successful anti-subsidy or CVD case against China and that was on carbon steel pipe, which Rob always uses as an example. I hope doesn’t work.
Then we’ve had Section 301, particularly the IP issues within the NME problem.
Then when I was at Commerce recently, we put in effect an amendment on currency manipulation.
For years we’ve tried to deal with currency manipulation. Now there is a amendment and a part of the regulations. It wasn’t a statutory amendment which says that the Department of Commerce can countervail currency manipulation, which I think is an enormous change.
We tried negotiations and the Trump administration, I would describe that as a managed trade solution, like what we did with Japan and semiconductors in the ‘80s.
What I think, at least I was thinking, about in terms of the Trump 301 was, we’re not going to be able to change China, but maybe have time to get back to that issue. But we can manage trade. In other words, we wanted to say what they could trade here and what we would trade there.
So it would be an agreement in effect. That I think we could do and is worth looking at.
And then finally there’s been talk about changing the WTO to deal with China and NMEs. And I looked at this in the last few days. I may have missed something, but I have seen no proposals as to how to deal with this. I’ve seen people say we need to deal with it. Very eminent people, but I’ve seen nothing that gets us anywhere.
So what’s the problem with CVD? It is narrow product coverage. You can cover a pipe of 12 feet, but if the next pipe that comes in is 13 feet, you’re probably not going to be covered for a lot of complicated reasons. But it’s a narrow set of what’s called like products.
It only covers subsidies, and subsidies are very narrowly defined. It’s not everything. For example, if they are keeping the market closed, which certainly can be a help to a company in China or any other country, just keeping the market close so they have free reign to sell in China, that would not be considered a subsidy.
Even when you get to the subsidies that are considered subsidies like low cost loans and things like that, they’re very narrowly defined. You have to have a financial contribution. And many of these subsidies are not financial contributions under the definitions. You have to have a benefit to the recipient and it has to be specific. It can’t be to the whole economy.
Rob mentioned the problem of injury. These injury cases are very hard to do as Commissioner Stern and Meredith clearly know because they’ve been there working on these as commissioners.
You get a tariff, not an exclusion order with a CVD. Even if it could be a high tariff, it’s not an exclusion order.
Let me just say one thing about 301 and I think we can talk about it.
The problem with 301, at least in real life for trade lawyers, for years, USTR would not do 301 cases. We filed cases for years on currency manipulation, which clearly I think ought to be looked at. Everyone agreed it ought to be looked at, but they wouldn’t take the case. So it’s all up to the discretion of one person, the USTR.
Now, 301 looks a lot more usable right now after what Ambassador Lighthizer did. But as far as I know, there are no 301 cases starting now at USTR.
As a matter of fact, there are no cases being taken by the Biden administration against China on anything.
And I wrote an article on the Hill on that we’re not using the tools we now have. I don’t mean to be critical, but to say we should go back to 301, then you’re going to have a very small group of people at USTR deciding whether to take these cases or not. It’s not mandatory.
337 on the whole, if you file a case and you meet the statutory requirements, the ITC has to go forward with the case. They can’t just say, “Well, we don’t think this is a very good case.”
They can say it doesn’t meet the requirements, but they don’t have that discretion.
So much has been said. I’ll skip some of my brilliant comments here, but I agree with agree Rob that dealing with cutting edge industries raises some very unique issues which have to be looked at in terms of trade.
The learning curve effect. This is very important in semiconductors. If you can figure out how to make these incredibly complex tiny semiconductors and get started doing them, you go down a learning curve so your costs are so much lower than any new entrants that there will be no new entrants. And that’s what happened and why the CHIPS Act was passed in effect to let us get some new entrants in certain parts of the semiconductor world.
There are certain tipping points or takeoff points on new technology that if another country or another company beats you, it’s very hard to catch up, so the enormous amount of money being put in to these high tech industries in China is a real problem for us.
Two advantages of 337 if we want to use it, is it’s already clear under Section 337 you can have a general exclusion order. In other words, it’s not just against one company, it’s against all the products coming in from a certain country that use the technology at issue.
It’s a complicated point, but it’s not narrowly drawn to one company. It covers a whole range of imports coming in from a country.
And secondly, there’s clear ability to do discovery under Section 337. You cannot do discovery under 301. You can do something similar under the CVD law, but you can’t send a subpoena to somebody.
I went to Taiwan to do depositions of Chinese companies who came down to Taiwan in a large case we had done on semiconductor products because they knew that if they didn’t participate in these depositions, the commission could make adverse inferences against them, and it’s a very powerful tool.
I think we could rewrite 337. It would not be that difficult to do, looking at it as a trade lawyer. You’d have to add a definition of unfairness, which I think it would not be insurmountable.
You’d have to give the authority to the ITC to issue cease and desist orders against digital products and services. You’d have to add a provision that the exclusion order, and cease and desist order could be against a very wide class of respondents, like a general exclusion order.
You’d have to add definitions of what an NME is, non-market economy, if we’re talking about a case or a statute that only applies to NMEs. You’d have to define that which is already done in the anti-dumping law.
And what’s more difficult is Rob talks about non-rule of law countries. That’s a very interesting area to get into to figure out how to define that.
We need to run faster in the United States even if we put this statute into effect. The CHIPS Act is great. It really will help the US semiconductor industry.
But without another progeny of the CHIPS Act, as Senator Warner was discussing, is a great idea, but we have to have trade remedies at the same time because otherwise we could have a great industry. We had a great solar industry, but without the trade remedies, we lost it very quickly.
I’ll just conclude by saying I think China could change course. And I was involved with negotiations with China. I filed the first CVD case ever against China. I think China could change.
When you do a trade agreement, the other side always changes. There’s no such thing as a trade agreement where the Japanese don’t change or where people who join the WTO don’t change.
They all change because that’s the whole point of a trade agreement. They’re committing to do something and you as the US are committing to do something, so I would not reach that conclusion quite so quickly.
It looks pretty bad right now for obvious reasons, but I think it’s worth still trying certain solutions. And even if you file these 337 cases and are able to shut out large amounts of product from China, it’s invariably the case in trade and trade cases that they almost always lead to trade negotiations.
Large cases are often finished with some negotiation... [inaudible 00:55:03] ... what it was with the phase one agreement. And lumber. There’s been lumber cases forever against Canada. They always tend to always lead to agreements. So there’s a rule among trade lawyers that very large cases always end up in agreements.
I’ll stop there.
Robert D. Atkinson:
Okay. Thank you Gil. Just a couple of quick comments and then I want to, if there’s anybody from the...
Oh Gil, could you turn your mic off... [inaudible 00:55:35]
Robert D. Atkinson:
And then we’ll open up for some questions.
I think one of the challenges...
First of all, I 100% agree with everybody’s comments that we should be thinking about an overhaul or revision, reform, improvements of all US trade laws.
The reason I think we need 337 is a simple one, is that it really hits the sweet spot between a 12 foot piece of pipe, which I know is important, Gil, and all imports coming from China in a particular industry, including from US companies.
It’s too broad. US companies didn’t do anything wrong, and oftentimes these are unfair provisions. It’s the Chinese companies that are... So to me this is a sweet spot.
A good example to use would be the Comac C919. There’s no question in my view that in 10 years, Boeing and Airbus will be selling a lot fewer jets, single isle passenger jets in China. And the only reason that that’ll happen is because China has massively subsidized a state owned aerospace company that never should have existed.
It never should have existed. It wouldn’t have made any economic sense for the Chinese to do that, so they massively subsidized it. They’ve told all of their state-owned airline companies like Air China and others, “You have to buy these Comac planes.”
Why is that anywhere near a legitimate company with a legitimate product?
So to me that would be a great place for a 337 case to say, “Hey Delta, United, American, Southwest, 10 or 20 years from now, you can’t buy Comac because it’s not a legitimate product.”
So I think that’s to me, the advantage, is it gives you the sweet spot not to sweep in a lot of other... There are legitimate Chinese companies, I don’t want to deny that either, that are competing fairly and we shouldn’t be excluding them either.
And the last point is Gil’s point, which is I think one of the key things in doing anything on trade is we have to do it in a way that maintains our rule of law. And there’s a risk of going through with 301 where it’s capricious.
At least with this case, as Gil you noted, the Chinese companies can present their own defense.
In fact, if you go and look at the MIIT, Ministry of Industry and Information Technology, if you go and look at their website and I cite it in here, they actually list a bunch of trade law firms in Washington that they recommend that their firms use to win 337 cases.
So they have every right in the world to come and buy the best lawyers in Washington and they have every right to bring their case. And if they lose, they’ve lost legitimately, and to me that’s another advantage of this. It gives us a little bit more credibility.
But any other comments folks want to make before we turn it over?
I just have one question in terms of defining, you amend 337 as you... [inaudible 00:58:39].
Robert D. Atkinson:
If you’re amending 337 as you propose, Rob, is there a definition of what the unfair trade practice is? Have you given that some thought?
Robert D. Atkinson:
Obviously, I had to go through this quite quickly, but I used the... There’s an act Congress pass two years ago on Uyghur forced labor, and they used a rebuttable presumption notion there.
And I think that’s a good legal principle where your standard doesn’t have to be quite as high, but there should be some, and I agree with Gil, there can be.
For example, the OEC defines what is a export financing and what is not.
So countries are allowed to use export financing. We use the EXIM Bank. Europe has their own. And so they’ve defined that, and you’re supposed to stay within that, the percentage of financing.
China is 10 times more.
So there would be a clear case. If you’re two times more, maybe you’re okay, but above that, you’re off.
There could be the same kind of thing with subsidies as a share of sales. I use this in the paper. Even with our semiconductor subsidies, we’re not going to be anywhere near the level of subsidies as a share of revenue that the Chinese companies have.
So I don’t think it can be a clear black and white measure, but it could give some leeway. I think it could be quite close. Same thing with domestic markets. Certainly, IP theft is clear as well.
Can I just ask about retaliation, because that’s a real concern in the China world, and China has a track record of proportionally retaliating like they did under the Section 301 under the Trump administration.
But what you’re talking about, if you’re talking about the injury, the value of the action, let’s just say keeping out Comacs from the market, that would be a big price tag. And if the Chinese were to counter retaliate, they probably wouldn’t do it in that sector, but in other sectors. So how do we work through that?
Robert D. Atkinson:
Yeah. Wendy, that’s a great point.
I think there’s really only two fundamental things you can say. Well you’re going to say, “Well they’re going to retaliate little bit like the mafia.”
You don’t want to mess with the mafia. You’re going to get retaliated against. They’re going to retaliate. So the question then is, “Why don’t we just give up? The pain is too great.”
And I think ultimately, we have to say we cannot do that because we know what the end game will be. The end game will be Comac will have a big share of the global market. We know the Chinese electric vehicle companies have a big share of the market. We know Huawei has a big share.
I think what we have to do, and this is a critical point that I didn’t touch on too much, we have to do this with our allies because at some point, they can only retaliate so much if their opponents, if you will, are weakened. And that’s why I was so heartened by the new EU law on subsidies.
I’ve talked to some EU members of parliament who seem interested in this. I think the Japanese would be interested. Ideally, this would be something that the Biden administration or a follow on administration in ‘25 would say, “Let’s see if we can get a bunch of our allies to agree to some similar things.”
So I agree that that’s the risk, but I think if we can get a few core allies involved, then retaliation risk go down significantly.
Go to the mic.
Robert D. Atkinson:
There’s a mic back there in the back of the room. If anybody has questions, you can line up behind it.
My name is Pat Malloy. I’m a trade lawyer, but I’ve been in government and I’ve been on the China Commission for a number of years, and I appreciate very much this panel and all you’re doing, and the need for a review of our trade laws.
You will all have talked about forced technology transfers as being that the Chinese used that to get our company to transfer technology and R and D, and other things to them.
When I first went to China in ‘81, I saw poverty stricken country. I’ve been there many times, including when I was on the China Commission for 10 years. And what I saw, our corporations were focused on enriching shareholders. That was what they said their responsibility was on the business round table website.
So the Chinese would say, “If you want to be a friend of China and do better here, you should transfer technology or put an R and D lab and other things here.”
And the American companies were enticed to do that.
Now there’s something in the Congress right now that has passed the House called the Casey-Cornyn Provision, which is in the House China bill. It’s not in the Senate China bill, but they’re they’re in conference still on this bill.
The administration strongly supports the Casey-Cornyn provision and says it may have to do it by executive order if Congress doesn’t get that provision passed.
What does this panel think about the Casey Corner Provision, which would say to our companies, “We can review some of the things that you’re putting into China and maybe prohibit it?”
So that’s a very important provision of law, and I just want to see what this panel thinks of that kind of provision. Thank you very much for letting me put that question to you.
Robert D. Atkinson:
Well, I would just say quickly, if you look at the very first company that transferred technology in China to Huawei, it was a long report I wrote about called Who Lost? Why don’t we have a telecom?
The very first company was Bell Belgium. They were the ones that broke ranks. Lucid didn’t want to do it. Nortel didn’t want to do it, but Bell Belgium was weak economically. They said, “Sure, we’ll do a deal because then we’ll get some market share.”
And once they did that, then you had Siemens do it. You had Lucid do it, you had... So Pat, this is not just American companies, this is everybody who does this because they have a gun to their head. They’re told, “You either do this or you don’t get access to the market,” which is why I’m more sympathetic to Senator Warner’s point. If we do this unilaterally, I just think the result will be American companies will be shut out. I think we have to do this with Japanese or allies, Koreans and Europeans.
Other comments, sir?
I haven’t looked at that act for a while, so I don’t want to specifically say...
Robert D. Atkinson:
Oh. I’m not exactly sure about all the provisions in that act. I haven’t looked at that for a while, but I totally support having a review mechanism on investments or capital flows from the United States to China. I think we absolutely have to do that.
Thank you. Thank you very much.
I have a question.
John, also from the US China Commission. My question is on the horizon scanning mechanism that Meredith, I think you brought up. Where in government currently do you think would be best suited for such a capacity to actually look at where Chinese subsidies might be coming down and should there be consequences that stem from analyses based on that horizon scanning?
I’m not suggesting a particular place at this point. I think we have a lot of work that goes on in government looking for cases, looking for trends. A lot of this, and Gil knows more about what goes on at the Commerce Department. It’s a large staff and they do do a lot of research. There’s inter-agency committees. It was the iTech and now I can’t remember the name of the inter-agency committee that is focused on trade enforcement, and they do a lot of collection.
And typically, the way the government works is if they needed more information, they could request the USTR to request the ITC to look at something. And it might be an interesting study to do for the ITC based on solar panels and aircraft, or typical products that we’ve been concerned about losing ground on to the Chinese. What did we know and when did we know it? And what kind of statistics would tell us that we were maybe under threat in a particular area?
And I just raised this as just a random idea, but I think the ITC has a lot of trade statistics, investment statistics, collection capability that could be deployed a little bit more to get ahead of the game on some of these issues.
Robert D. Atkinson:
One of the things that we propose in the report is that Congress establish within ITA, which is commerce, the position of Assistant Secretary for Non-market Economy Analysis. Because we do this on a haphazard basis, we think there might be an important issue and we study it. We don’t do it on a comprehensive basis. We should have a lot more US Commerce staff in China. We should be looking at pretty much every major industry in China, pick 50, 75 industries, and really study those industries so that we know on a real time basis what’s going on there.
And we don’t know that right now. It turns out that there are products that are made in China that when you start to dig into them, you really look at some other reports that you’re like, “I never knew that they were massively subsidized by the government.”
And not just the cash but free electricity, free land. There’s one company in China that a book on Chinese industrial subsidies by a husband and wife, and they found that one software company in China, they were given so much land downtown that their revenue from the rent of this land is greater than all of the company profits.
So that’s a subsidy and it probably wouldn’t be listed as how we analyze it. So I think we just have to get serious and sophisticated about studying this, because as Senator Warner said, this is the major economic issue of our time.
If I can just add, I think we need to do a good job of marshaling our resources and not duplicating them within the government. So when I read the part of your report where you talk about the ITA creating a group of experts who can look at this with Mandarin speakers, etc, it brought to my mind the body that USTR created along with commerce a number of years ago in an effort to file more WTO cases in general, but China-specific, and a number of Mandarin speakers were hired.
And listening to Meredith about the capabilities of the ITC, I think we really need to get a good hold of where are all these experts and then think about how we can marshal them, and maybe we need coordination under the National Economic Council and the White House to bring this together.
But what I would want to say is a lot of duplication and creating a lot of different new entities to do the same work.
Robert D. Atkinson:
Meredith, is your button on? Gil.
Well, being a veteran of commerce, I would say it should be at the Commerce Department, but obviously consulting with the ITC and every everywhere else.
On energy or electric vehicles, the expertise is at the Department of Energy. On anything with a substantial military component, it’s obviously at DOD, but there should be someone... Having run ITA, I do think ITA is probably the closest to the place where it should be centered. But obviously working very closely with USTR, and the ITC, and the Department of Energy, but with a responsibility to prepare this report on a regular basis because there is so much going on.
No one had ever heard of solar 10 or 15 years ago, and all of a sudden, everyone talks about how we lost that whole industry. You’d think someone in the government would have discovered that before it happened. And who knows what we’re losing right now? There isn’t a report on some other areas where we may be losing capabilities to the Chinese or other competitors right now.
Robert D. Atkinson:
Any other? Yeah, I think you need to go back to the mic.
Robert D. Atkinson:
We’ll wrap up after this question.
Thanks so much. This is a panel that should have happened four years ago in my estimation or more. We should have had this discussion before we went off on the 301 adventure.
I’m Ed Brzytwa with the Consumer Technology Association.
Senator Warner made an important comment from my perspective about avoiding barriers to trade on commodity products that are not subject to these intellectual property theft or forced technology transfer issues in China.
I think about the harm of the 301 tariffs on US consumers and working families. There is economic evidence of that. The 301 tariffs don’t make this distinction.
It seems to me that a 337, if properly constructed, could make that distinction as an alternative to the, I think Rob, you use the blunderbuss of the 301 tariffs. Could you comment on those distinctions in perhaps a ordinarily tailored approach to address the problems in China?
Robert D. Atkinson:
So I think one of the challenges in this issue is that everybody knows we need to do something. Some people are super passionate about doing something, and so we want to throw everything and the baby with the bath water.
So a good example of that would be to say, “We shouldn’t let our semiconductor companies sell any chips to China. Man, that’ll teach them.”
And Senator Warner alluded that what that will teach them is to buy Japanese and German chips, and Taiwanese chips, and South Korean chips.
So the point being, we have to really, and I think you said this as well, that we have to figure out things we can do that don’t hurt ourselves.
The tariffs at the end of the day, we can have a discussion about this, but we did an analysis of the tariffs, particularly on IT products, and they ended up raising the cost of IT products for consumers and companies, and they ended up lowering productivity.
It’s not what we wanted out of that. And so I couldn’t agree more.
And the other problem with the terrace is that, although some people like that idea, is that we made it harder for American companies. And at the end of the day, I think we should make it harder for Chinese companies and not American companies.
So that’s why I keep going back to this. I think we need a powerful tool, but not one that shoots grapeshot everywhere. One that puts it exactly where we need to do to send these Chinese companies and the government a message that you’re just not going to be able to benefit from this thing, at least in a lot of markets. Those markets will be closed to you if you go down that path, so 100% agree.
Yeah. I like your idea of more strategically...
Robert D. Atkinson:
I like your idea of more strategically applied tariffs in assessing what is of real value to us rather than hitting the waterfront.
And my view on 301 is there is some authority there to adjust things and pick particular tariffs for particular reason. And I think it’s a valid thing that USTR needs to keep considering as they go forward, is implementing the 301 retaliation they have in effect now.
Robert D. Atkinson:
All right. Well, great.
Well, thank you so much. We really appreciate your attention and your questions. And I want to thank the three great panelists. Thank you for joining us, and the report and the video will be on the ITIF website, itif.org.