China came under fire for its “unfair” and “backward” intellectual property (IP) laws on Friday, as the office of the US trade representative (USTR) spoke out about the conditions that are causing Washington to edge closer to a trade war with the country. 

The USTR is keeping China on a “priority watch list” of 12 countries with problematic or deteriorating environments for IP in its annual global violations report. Other countries include Canada, which was given the designation for the first time, as well as India, Indonesia, Russia and Venezuela. 

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China continues to take steps backward … [and it is placing] a great strain on our trade relationship
US Trade Representative official

“China continues to take steps backward as it requires US and other foreign firms wishing to do business in China to transfer IT to domestic firms as a precondition,” said a USTR official briefing journalists about the report.

“These unfair requirements in pursuit of China’s industrial policy goals place a great strain on our trade relationship.” 

The Special 301 Report, which has been published for three decades, is separate from a Section 301 investigation the trade representative’s office initiated on China’s IP regulations last year.

That inquiry prompted US President Donald Trump to announce punitive tariffs earlier this month on US$50 billion worth of annual imports from China and to threaten to target a further US$100 billion worth of trade. 

The USTR’s special investigation was triggered by the long-standing IP requirements, in addition to Beijing’s “Made in China 2025” plan to support the development of advanced technologies by domestic companies through massive state-coordinated funding, which was launched three years ago. 

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This year’s 301 report is another irritant among mounting threats to the world’s most valuable trade relationship, which came to US$636 billion in goods last year.  China has been on the report’s priority watch list since at least 2007, the oldest edition available on USTR’s website.

USTR slapped tariffs on imports of aluminium and steel last month, and gave exemptions to most major US trading partners except China. Last week, the US commerce department activated sanctions on ZTE, a Chinese telecom equipment manufacturer, by banning US entities from selling to components to the company. Meanwhile, several bills circulating in Congress aim to expand scrutiny of Chinese acquisitions in the US.

Congress assigned the trade representative’s office to produce the annual 301 report because “IP-intensive industries support 45.5 million American jobs and contribute to 30 per cent of US gross domestic product,” the USTR official said.

US Trade Representative Robert Lighthizer and other high-ranking Trump administration officials are scheduled to visit Beijing next week to try to avert an all-out trade war.

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Beijing responded to USTR’s list of Chinese goods facing tariffs, mostly electronics and machinery, by announcing punitive taxes on imports of US goods including soybeans, the largest single commodity America sells to China. 

Chinese officials have recently been pledging to announce significant reforms in how foreign companies operating in the country are treated, including President Xi Jinping, who delivered a keynote speech at the Boao Forum for Asia – also known as Asia’s Davos – to pledge support for globalisation and free trade.

China’s newly appointed central bank governor, Yi Gang, said at Boao that China would allow foreign investors to take a maximum 51 per cent equity stake in brokerage firms, futures companies and fund management firms and will remove foreign equity ceilings totally in these sectors within three years. 

These pledges did not have any bearing on the trade representative’s annual report, which drew heavily on testimony earlier this year from trade groups including the National Association of Manufacturers, the US Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America, all based in Washington. 

“As noted in this latest report, there are several areas of ongoing concern in the global innovation marketplace. China remains a major challenge for innovators,” Patrick Kilbride, senior vice president of the Chamber of Commerce’s Global Innovation Policy Center, said in a statement after the report’s release.

“The creation of intellectual capital through innovation and creativity is one of America’s core strengths, so our workers and industries are harmed when our trading partners fail to respect IP rights.”

USTR noted signs that China is considering remedies for some of the concerns raised in the report, but cautioned that execution is a question mark. 

“China’s expansion of specialised IT courts and tribunals may be positive if it leads to greater expertise and decision-making, but it is critical that China’s decision making is free of political or other influence,” the USTR official said. 

“We’ve also seen some positive preliminary concepts announced in terms of regulatory data protection and early notification and resolution of pharmaceutical patent disputes, but these concepts must be put into effect.”

White House trade adviser Peter Navarro, Treasury Secretary Steven Mnuchin and National Economic Council head Larry Kudlow will be with Lighthizer when he meets Chinese officials, including Xi and vice-president Wang Qishan, on May 3 and 4, according to a source familiar with the planning.

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