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A Reformed Section 337 Is the Tool for USTR to Mitigate China’s Unfair Trade Practices

A Reformed Section 337 Is the Tool for USTR to Mitigate China’s Unfair Trade Practices

March 8, 2023

Despite over a decade of policy debates and changes, the United States is still in dire need of tools to limit China’s ability to profit from industrial predation. China’s use of IP theft, subsidies, and other unfair trade and economic tools continues largely unabated. Not surprisingly, United States Trade Representative (USTR) Tai is in the market for new ideas. One that she should support gets to the heart of the issue—reforming Section 337 of the Tariff Act to change the game by making unfair trade practices less profitable. When China violates global rules or norms to benefit particular firms, they would be denied access to U.S. and (ideally) allied markets. The proposal has some congressional support but needs a concerted push from USTR Tai and the rest of the Biden administration.

Understandably, USTR Tai isn’t impressed with her toolkit. The old bilateral engagement, negotiation, and selective enforcement policy toolkit has been unsuccessful. It’s handheld saws and hammers in an age of 3D printed houses and automation. And as time goes on, the impact of this gap only grows. ITIF’s “Hamilton Index” assessment of competition for advanced industries shows that compared to major competitors, U.S. output in key advanced industries is weak and declining in large part due to China. USTR’s 2023 Trade Policy Agenda and Annual Report references the possibility that “new tools” are needed to meet current trade challenges. A reformed and reinvigorated Section 337 of the Tariff Act should be one of them.

USTR should support discussions in Congress about amending the Tariff Act of 1930 to enable stronger use of the U.S. International Trade Commission’s (USITC) Section 337 statute to make it easier to exclude goods and services from China supported by systemically unfair trade practices. ITIF lays out the reforms needed in “How to Mitigate the Damage From China’s Unfair Trade Practices by Giving USITC Power to Make Them Less Profitable.”

Even though Section 337 was initially envisioned to help address unfair foreign trade practices, it is generally not seen as a tool to address Chinese industrial predation. Rather, over the last several decades, it has evolved into a secondary patent “court” in which multinationals from allied countries bring patent cases, often against each other. Instead, it should be used much more vigorously to prevent the import of products from firms in other non-market, non-rule-of-law economies, such as China’s, that systemically benefit from unfair government policies and practices.

Section 337 needs several critical updates to be an effective tool for addressing unfair Chinese trade practices. For example, Section 337 does not discuss forced technology transfers, closed domestic markets, subsidies, or other unfair practices. It should. Ideally, Congress would make it clear that these and related unfair trade practices are eligible for Section 337 investigations, but only against companies from non-market, non-rule-of-law economies. In addition, exclusion orders should be able to be issued not against a particular product (e.g., 12-inch steel pipe) but instead on all products or services from a firm in a non-market, non-rule-of-law economy found to have benefited from unfair trade practices.

Section 337’s critical “injury” standard should also be removed. It should be irrelevant if the domestic company is harmed in the here and now. The point is that unfair practices should not be rewarded, period. The other issue is that all too often, especially in technologically complex industries, it is too late by the time harm is determined: The company has already suffered an irreversible decline in its competitive position. Adjudicating blame becomes a coroner’s inquest over dead U.S. companies. For instance, the $42 billion in subsidies for solar photovoltaic (PV) cells the Chinese government provided from 2010 to 2012 helped China’s global share of production of PV cells (the industry’s core technology) surge from 14 to 60 percent between 2006 and 2013. The effect of this surge was to knock some 200 to 300 U.S. solar start-up companies out of business.

Congress should also reduce the legal standard for winning cases against firms in non-market, non-rule-of-law economies that benefit from unfair trade practices. The reason is the non-rule-of-law nature of the Chinese system means it can be hard to meet a high evidentiary standard that would be appropriate in a rule-of-law nation. One way to do this would be to apply a “rebuttable presumption,” something the Uyghur Forced Labor Prevention Act (UFLPA) contains. “Rebuttable presumption” should also be applied to unfair trade practices from non-market, non-rule-of-law countries. This would not ban imports per se but would shift some of the burdens of proof to the Chinese firm facing a 337 exclusion order.

Ideally, U.S. negotiators would work with democratic allies to encourage and help them institute a similar system. The most allied nations can hope for, absent some dramatic leadership change in China, is for China to continue to engage in IP theft and coerced technology transfer, massive subsidies and other predatory practices, and closed markets, but with allied nations not allowing Chinese firms benefiting from those actions to gain access to their own domestic markets.

Absent other significant changes, time is on China’s side because it is making faster progress than the United States in supporting its own advanced technology sectors. Nothing can stop Chinese firms involved in the next generation of advanced technologies from accessing the U.S. market despite benefiting from unfair Chinese trade policies.

China remains one of the few areas of bipartisan support in Congress, with significant overlap with Biden administration interests. For example, in February, Deputy Secretary of State Wendy Sherman said the administration was working closely with Congress (especially Sens. Todd Young (R-IN) and Chris Coons (D-DE)) on a recently reintroduced bill to develop new tools to combat economic coercion. USTR Tai stated that she will continue “to work with Congress to fully evaluate the efficacy of our current trade tools and identify areas where new tools may be needed.” She should tap into interest in Section 337 reform to give U.S. trade policy a new tool that it has long needed to address the central, broad impact of unfair Chinese trade policies.

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