On December 30, 2020, after seven long years of negotiations, China and the EU concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI). The frayed political and trade relations with the US, as well as Brexit, convinced the EU members to put aside objections related to human rights violations and close the deal with China, now their major trade partner. The Chinese, hard pressed to offset the 2020 diplomatic set-backs, including the mishandling of the initial Covid-19 crisis, the Xingjian labor camps issue, and the Hong Kong crisis, and in need of alternatives to their strained relations with the US, were willing to make concessions — including some key provisions concerning China’s forced technology transfer.

If really and properly implemented by China, those provisions could advantage EU businesses against their US competitors. We review the provisions, compare them to similar commitments recently made by China with the US, and assess their possible impact on EU and US IP holders in China.

Forced Technology Transfer

In recent years, China has been accused by the US and the EU of pursuing and enacting a number of policies and practices allowing, if not directly supporting, forced technology transfer, IP disclosures and innovation theft.

For example, in a WTO Dispute, the US accused China of (i) enacting regulations that require or pressure foreign companies to transfer technology by forcing them to do joint ventures with local competitors, (ii) restricting technology licensing terms, (iii) allowing unprotected and unchecked technology disclosures and transfer in administrative licensing and permit proceedings, and (iv) indirectly covering and supporting acts of industrial and cyber espionage. Due in part to these alleged illicit practices, the US initiated a Section 301 investigation and trade sanctions against China in 2018, starting the trade wars.

The above accusations are very serious and present the current biggest challenge facing US and EU right holders doing business in China. This is especially the case because of China’s new innovation policies started by Xi Jinping administration, including the ambitious goal of making China technologically independent, especially from the US, by 2025.

The CAI Provisions on Forced Technology Transfer

The CAI sets forth very clear rules against the forced transfer of technology. The provisions consist of: (a) the prohibition of several types of investment requirements that compel transfer of technology, such as requirements to transfer technology to a joint venture partner; (b) prohibitions against interfering in contractual freedom in technology licensing; (c) protection of confidential business information collected by administrative bodies (for instance in the process of certification of a good or a service) from unauthorized disclosure.

If these commitments were to be effectively translated into laws and regulations, they would provide companies with a much safer environment for conducting their business, especially in those key sectors listed in the CAI. These include general manufacturing industries, automotive, financial and banks, hospitals and health businesses, R&D on biological resources, telecommunications, cloud and computer services, air and maritime transport, business and environmental services and construction.

In practice, implementation of these commitments would meet the demands of the EU and the US — but only if they applied equally to EU and US companies. This advantage would favor EU companies if China implemented these commitments only in favor of EU right holders.

Cautionary Tale

As promising as the commitment taken by China with the CAI seems on paper, this is not the first time China has taken such commitments. In the US-China Trade Agreement of January 15, 2020, ending the trade wars, China made a very similar commitment. China stipulated that, “[t]o further strengthen the protection of trade secrets, as well as better encourage various enterprises to innovate . . . ”

1. China shall prohibit the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third party experts or advisors in any criminal, civil, administrative, or regulatory proceedings conducted at either the central or sub-central levels of government in which such information is submitted.

2. China shall require administrative agencies and other authorities at all levels to:

(a) limit requests for information to no more than necessary for the legitimate exercise of investigative or regulatory authority;

(b) limit access to submitted information to only government personnel necessary for the exercise of legitimate investigative or regulatory functions;

(c) ensure the security and protection of submitted information;

(d) ensure that no third party experts or advisors who compete with the submitter of the information or have any actual or likely financial interest in the result of the investigative or regulatory process have access to such information;

(e) establish a process for persons seeking an exemption from disclosure and a mechanism for challenging disclosures to third parties; and

(f) provide criminal, civil, and administrative penalties, including monetary fines, the suspension or termination of employment, and, as part of the final measures amending the relevant laws, imprisonment, for the unauthorized disclosure of a trade secret or confidential business information that shall deter such unauthorized disclosure.

In the last 12 months, China has enacted several provisions implementing many commitments made in the January 2020 Trade Agreement. Some very critical issues for intellectual property found implementation in the new patent law of 2020 or in key interpretations of the Supreme People’s Court. However, there is no provision or apparent attempt at addressing the specific commitments noted above on forced IP handover. China’s failure to tackle this specific issue while becoming very active in taking care of all others suggests Chinese reluctance to address the trade secret issues.

This does not bode well for the implementation of the CAI provisions on forced transfer of IP. Aside from the fact that the agreement may never come to exist if not ratified by the EU parliament, the concrete implementation of the mentioned commitments may take long time and may never meet the full range of the demands from the EU and the US.

Takeaway

Tackling the issue of forced technology transfer requires more than just changing a law or two. It will require China to implement complex regulations involving the overlapping and confusing jurisdiction of different administrations jealous of their privileges, and redefine and further reform State Owned Enterprises in order to guarantee their competitiveness in a more opened and fairly regulated market and the overall innovation system (from education, talent acquisition and state subsidized research). As often in the past, even a normative reform at the top will not be necessarily followed by its consistent implementation.

For all of these reasons, steps taken by China with the CAI should viewed with caution and expectations will need to be realistic. Real change on the issue of forced technology transfer and acquisition is not yet here. A more coordinated approach between the EU and the US on this matter, as suggested by the upcoming Biden administration, could speed up the process.