Reform of China’s ‘Forced’ Technology Transfer Policies

The US-China ‘trade war’ has captured headlines for more than a year now. One of the primary justifications given by the US government for this onslaught—including a WTO case, tariffs, export restrictions, and other measures targeted at China—is China’s persistent use of so-called ‘forced’ technology transfer (FTT) policies. Building on several recent works of mine (at TFSC, at JIM, with Springer, at MIT SMR, and at JWB), this article outlines five main types of policies in China that foreign multinational corporations (MNCs) have characterized as ‘forcing’ technology transfer[1] and highlights how they have been reformed in 2018 and 2019, largely as a result of the trade war and to the benefit of foreign MNCs.

First, foreign MNCs have long expressed concern about de jure and de facto measures in China that require foreign firms to transfer technology to local firms or be denied market access—so-called ‘technology for market access’ requirements. Perhaps the most well-known of these required that foreign MNCs transfer their technology to a foreign-Sino JV as a precondition for market access (e.g., a business license) and/or access to state support (eg, public procurement and other financial resources) in the traditional auto industry and high-speed trains industry. Similar requirements have been reported in other industries such as the big-power-generation turbines industry. Most recently, firms have complained about a Chinese regulation in the new energy vehicles (NEVs) industry that came into effect in 2009 and was tightened in 2017. The 2009 regulation required ‘mastering’ of one of three core NEV technologies within a foreign-Sino JV in order to receive an NEV production license and access to government procurement and subsidies; and the 2017 regulation required mastering of all (not just one of three) core NEV technologies. Other Chinese state policies have been reported to directly or indirectly require transfer of technology as a precondition for market access, such as (the now revised) local content requirements for operating in and winning government procurement contracts in the wind turbine industry, among other foreign investment restrictions (eg, being required to set up an R&D center in China as a precondition for entering a JV in industries in which a JV was the requisite mode of entry, and provisions in Chinese law requiring data servers to be localized in China as a precondition for receiving and maintaining certain business licenses).

Among this group of policies, foreign MNC’s concerns over technology transfer requirements in the NEVs industry were some of the first to be addressed amidst the trade war. Although the 2017 NEVs regulation still appeared to be in effect in early 2019, its impact on foreign MNCs has been largely counteracted by changes to Chinese law in 2018. Specifically, the Special Administrative Measures for Admittance of Foreign Investment, effective as of July 28th 2018, removes foreign ownership restrictions on NEV operations in China as of 2018.

A second main concern of foreign MNCs involves requirements to disclose excessive amounts of trade secrets directly to the state and to experts on state-organized panels as a precondition for receiving regulatory approvals (e.g., in the pharmaceuticals, chemicals, and other industries). Judged by any reasonable standard, such disclosure should not be necessary to grant regulatory approvals; worse, the confidential business information disclosed is sometimes leaked to local competitors.

These concerns have recently been addressed by revisions to China’s Foreign Investment Law (FIL) on March 15th 2019. Article 22 of the new FIL now mandates that ‘administrative agencies and their staff must not use administrative methods to force [强制] assignment [ownership transfer] of technology’. This article builds on a similar provision in Part IV, Article 14 of the Notice of State Council Document No. 19 (2018), effective in June 2018. Article 23 of the new FIL requires that Chinese government officials maintain the confidentiality of trade secret information they are exposed to during regulatory approval proceedings. Also, Article 39 of the new FIL sets-forth the grounds for penalties, including criminal ones, for the involvement of government officials in misappropriating trade secrets.

Further, on April 23rd 2019, the Administrative Licensing Law, which governs business licenses/certain regulatory approvals in China, was revised in a way complementing the new FIL. Article 5 was revised to prohibit the individuals (including not only government officials, but also external experts, among others) involved in licensing procedures to disclose applicants’ trade secrets and other confidential business information without the applicants’ consent, except in situations required by law or justified under national security or public interest grounds. Further, presumably in an attempt to limit the uncertainty created by the aforementioned exceptions, Article 5 specifies that applicants can object to the sharing of their information under such exceptions and that an applicant has equal rights to obtain administrative licenses and the state should not discriminate against applicants. Article 31 of the revised law stipulates that government bodies and their personnel must not make technology transfer a prerequisite for administrative licensing, and in the process of governing the licensing should not indirectly or directly require applicants to assign (transfer ownership of) their technology.

A third main concern of foreign MNCs involves several provisions of China’s Technology Import-Export Regulation (TIER). In particular, Article 27 of the TIER required that subsequent improvements on technology developed in contractual relationships are owned by the party making the improvements. Article 24.3 mandated that foreign technology licensors bear liability for any accusation of infringement that may be brought against a technology importer in relation to the use of their licensed technology. Article 29.3 also specified that a technology import contract must not contain provisions that prevent the importer from improving upon the technology they are supplied with or otherwise restrict the receiving party from using improved technology. These concerns have been addressed by provision 38 in State Council Order No. 709 (Decision of the State Council to Revise Several Regulations), issued and effective on March 2nd 2019, which abolishes all of the aforementioned articles in the TIER.

A fourth area of concern to foreign MNCs, although less controversial than the aforementioned measures, involves China’s Sino-Foreign Equity JVs Regulation. In particular, Article 43.3 of the regulation stipulated that technology contracts are ‘generally’ restricted to a duration of ten years and Article 43.4 stipulated that the technology importing party in the JV should be granted the right to use such technology ‘continuously’ after the term of the contract expires. Provision 33 of the aforementioned State Council Order (No. 709) abolishes these articles.

A fifth issue of concern to foreign MNCs involves court rulings in intellectual property (IP) infringement cases that unfairly favour local firms. Even one protectionist IP judgment can result in significant misappropriation of a foreign firm’s technology. Specialized intellectual property IP courts have recently been established in China that hear cross-regional appeals and therefore can help correct local protectionist tendencies in first-instance judgments. Further, on January 1st 2019, a new, national-level specialized IP appellate tribunal in China’s Supreme People’s Court was established which should act as a counterweight to local judicial protectionism.

Despite some ambiguity in the language of some of the aforementioned reforms, they should generally help lessen appropriability risks faced by foreign MNCs in China. Combined with other recent reforms to China’s IP regime, the revisions should give foreign MNCs more confidence in China’s legal regime governing IP and technology transfer.

Dan Prud’homme is an associate professor at EMLV Business School.