“As detailed in this update, China fundamentally has not altered its acts, policies and practices related to technology transfer, intellectual property and innovation and indeed appears to have taken further unreasonable actions in recent months,” USTR said.
Among other practices, China continues a policy of cyber-enabled theft and intrusions into U.S. companies’ commercial networks, has persisted in confining foreign investment to drive companies to transfer technology to Chinese entities and maintains discriminatory licensing restrictions, the report says.
Further, China continues to instruct Chinese entities to strategically invest and acquire U.S. companies and assets to obtain cutting-edge technologies and IP and generate “large-scale technology transfer” in industries deemed important by China’s industrial plans, USTR said.
Released on Tuesday, the report comes as President Donald Trump and Chinese President Xi Jinping are preparing to meet during the G-20 summit in Buenos Aires, set for Nov. 30 to Dec. 1.
The U.S. gave China a list of demands, which China has parsed into 142 different items and apparently responded to the U.S. with offers to address its concerns, but the Trump administration doesn’t seem impressed with China’s response, Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies (CSIS), told reporters on Tuesday.
With the G-20 summit just over a week away, it’s still possible for the U.S. and China to work through that list and move talks forward, Goodman said.
“I don’t see any scenario in which the U.S. accepts that list as a solution to the problems and says, ‘OK, we’re done,’” he said. “I think what the U.S. is looking for is an indication, a signal from the Chinese government that it takes the U.S. concerns seriously and is ready to have a serious conversation about taking on some of those issues.”
USTR noted that China in June threatened “consequences” if state-run media outlets don’t stop using the term “Made in China 2025,” the official name for a 2015 Beijing industrial policy that seeks to establish Chinese dominance in advanced manufacturing.
China’s Industrial Transformation and Upgrading Fund still targets the same high-tech industries to provide financing, even though its May project guide doesn’t reference “Made in China 2025” by name, the report says.
A Chinese government committee in February published an updated roadmap for “Made in China 2025” setting “explicit market share and other targets” to be filled domestically and globally by Chinese producers in several high-tech industries, USTR said.
In addition to continuing technology policies like “Made in China 2025” and a heavily subsidized “Strategic Emerging Industries” policy, China conducts and supports cyber-enabled theft and intrusions into U.S. companies’ commercial networks, affording the Chinese government unauthorized access to IP, trade secrets, confidential business info, technical data, negotiating positions and internal business communications, USTR said.
“China’s cyber-enabled theft against the United States has increased in frequency and sophistication since the March 2018 issuance of USTR’s [Section 301] findings,” the report says.
For instance, cybersecurity firm Carbon Black this month found that cyberattacks against manufacturing companies had sharply risen in the third quarter, a type of attack frequently tied to Chinese economic espionage, as the firm reported 68 percent of surveyed cyber incident professionals flagged China as the source of the observable cyberattacks, more than any other nation, USTR said.
USTR also mentioned a study published in October by experts affiliated with the U.S. Naval War College and Tel Aviv University finding that China Telecom may be using points of presence servers to hijack internet traffic in the U.S. and Canada and divert it through China, “where it could be copied.”
“These acts by a Chinese entity suggest, in these experts’ words, ‘malicious intent, precisely because of their unusual transit characteristics’ of routing traffic through abnormally long paths that always go through China,” USTR said.
U.S. intelligence and law enforcement assessments dovetail with industry assessments; for instance, Robert Joyce, senior adviser for cybersecurity at the National Security Agency this month reported the U.S. government has seen a “resurgence” of hacking and IP theft attempts by people based in China and sometimes by the Chinese government, the report says.
USTR mentioned the U.S. is pursuing dispute settlement at the World Trade Organization over China’s discriminatory technology licensing requirements, as the agency requested formation of a dispute panel on Oct. 18, after consultations requested by the U.S. on March 23 and held in July failed to resolve U.S. concerns.
In the consultations request, the U.S. complains that China imposes mandatory adverse contract terms that disfavor imported foreign technology and denies foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends, the report states.
In addition to its strategic investment plans, cyber-enabled theft and discriminatory licensing requirements, China has made only incremental changes to its foreign investment restrictions in 2018, such as removing foreign equity caps and certain other restrictions for industries, including the automotive, aircraft and shipbuilding sectors, USTR said.
China still maintains foreign ownership restrictions, in conjunction with administrative review and licensing processes, that pressure technology transfer from foreign companies in several ways, USTR said.
The report notes a September Wall Street Journal article describing Chinese actions to obtain technologies from companies including DuPont, General Electric, Advanced Micro Devices, Huntsman Corp. and Micron Technologies.
Chinese officials applied coercive pressure to several of these companies, as the article indicated Chinese tactics included pressuring U.S. partners in joint ventures to relinquish technology, using local courts to invalidate U.S. firms’ patents and licensing arrangements, dispatching antitrust investigators, and filling regulatory panels with experts who may pass secrets to Chinese competitors, USTR said.
“We completed this update as part of this administration’s strengthened monitoring and enforcement effort,” U.S. Trade Representative Robert Lighthizer said in a statement. “This update shows that China has not fundamentally altered its unfair, unreasonable and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”