Trump's 'Big' China Trade Deal Has Some Really Big Problems

February 23, 2020 Topic: Politics Region: Asia Blog Brand: The Buzz Tags: ChinaTrade WarEspionageIntellectual PropertyTrade Deal

Trump's 'Big' China Trade Deal Has Some Really Big Problems

The remaining issues, such as cyber theft, cyber security, and standardization, are untouched by the Agreement and could be the source of tension in the future.

There are provisions in the Agreement that deal with private behavior, as Article 1.4 requires China to “enumerate additional acts constituting trade secret misappropriation, especially: (a) electronic intrusions.” China’s Law Against Unfair Competition already has language that restrains individuals or companies from stealing information through cyber intrusion.

However, the Agreement fails to include specific commitments on cyber theft at the government level. It is probably because the two nations are still at odds on the terms of cyber espionage: China considers it to be the same as the spying that every country is doing and that the same rules should be applied to all government-led cyber intelligence activities, while the United States insists on a difference between economic espionage that targets companies and intelligence work for national security purposes. The conversation on this issue is most likely to happen in other bilateral dialogues.

Domestically, the Trump administration recently launched a China Initiative, led by the Department of Justice and the Federal Bureau of Investigation. One of the objectives of the China Initiative is to identify and prosecute trade secret theft and cyber espionage from China. This will help curb cybertheft activities by China.

Other acts, policies, and practices

The Section 301 report also raises concerns over other acts, policies and practices related to technology transfer, intellectual property, and innovation. These concerns include activities and policies on national security, cyber security, inadequate IP protection, anti-monopoly law and practice, standardization law, and talent acquisition policy. Some of these issues are addressed in the Agreement, mainly in the area of IP protection, including counterfeit internet products, bad faith trademarking, and IP enforcement, including civil, criminal and administrative enforcement.

To this end, China makes some promises in the Agreement to strengthen its IP protection. This blog post will only mention a few examples. For instance, China agrees to grant patent term extensions (Article 1.12) for new pharmaceutical products and methods of making or using a new pharmaceutical product. Patents offer patent holders the right to exclude others from making, using or selling the products, but the effective patent term may be shortened by a lengthy administrative process, including the patent examining procedure at the patent office and a market approval process by related agencies (it is the Food and Drug Administration in the United States and the State Administration for Market Regulation in China). To make up for the time lost and ensure patent holders’ profit, the Agreement requires China to extend patent term to make up for “unreasonable delays” that occur during the administrative process.

Previously, China’s Patent Law granted a 20 year-patent term for pharmaceutical products without any possibility of extension. When China started to revise its Patent Law a couple years ago, the proposed Patent Law amendment allowed the patent term to be extended by the State Council for pharmaceutical products (the extension would be five years at maximum, and the total effective patent term would be no more than 14 years after the marketing approval.) The proposed revision only covers pharmaceutical products. But the Agreement requires patent extension to be available for methods of making or using a new pharmaceutical product, as well as new pharmaceuticals. This will require China to further revise its proposed law to fulfill its commitment under the Agreement.

China also agrees to help IP holders safeguard their rights. For instance, China promises to make or amend laws with regard to preliminary injunctions, the burden of proof in some cases, and a mechanism for early resolution of patent disputes. All of these should help boost IP protection in China.

Commentary on the Agreement has highlighted the shifting the burden of proof in trade secret civil cases. Traditionally, the plaintiff would have to provide proof for its claims in civil cases. Under the Agreement, to prove it is a trade secret, a right holder would only need to prove that measures have been taken to protect the confidentially of such information. Then the burden of proof shifts to the accused party to prove such information is generally known and not confidential. In addition, a right holder needs to prove that the accused party has the opportunity for access to such information, which is the same as the information used by the accused party; or the trade secret has been or risks being disclosed or used by the accused party; or other evidence of misappropriation by the accused party. After that, it is up to the accused party to prove there is no trade secret misappropriation, such as the information being obtained through other means (Article 1.5). The provisions are similar to China’s Law Against Unfair Competition (Article 32), which was recently revised in April 2019. The Law Against Unfair Competition also requires the right holder to prove the trade secret has been misappropriated. This is not explicitly required in the Agreement, but one may argue it is implied in the text. How this provision will be implemented and whether it helps trade secret right holders to protect their interests in practice remain to be seen.

China also makes some commitments to deter IP infringement. For instance, China agrees to increase penalties for IP infringement in the Agreement (Article 1.27). China’s current law stipulates that in patent infringement, the compensation amount should be determined according to the patentee’s actual losses, or unlawful gains of the infringer, or a reasonably multiplied amount of the royalties. If all the above are hard to determine, the court will determine the amount within the range of 10,000 Yuan and 1 million Yuan (Article 65 of Patent Law). For the past couple years, China has been in the process of amending its Patent Law. The proposed amendment would raise this range to 100,000 Yuan and 5 million Yuan. This means that when the amount of actual losses, unlawful gains and royalties are hard to determine in a patent infringement case, the infringer will face a much higher fine than before, raising the cost for patent infringement. Such change is in line with China’s commitment under the Agreement. Once finalized and passed, it will make IP infringement more costly and consequential.

Summing up, the Agreement, in combination with some other legislative and administrative actions by either China or the United States, addresses a fair number of the issues raised in the Section 301 report. But the actual implementation remains to be seen. Some issues are still waiting for China’s amendment of its current laws. For the issues left out of the Agreement, some are addressed through unilateral actions either by China or the United States. The remaining issues, such as cyber theft, cyber security, and standardization, are untouched by the Agreement and could be the source of tension in the future.

This article by Simon Lester and Huan Zhu first appeared at CATO.