As of this writing, the United States recently halted trade negotiations with China particularly as related to trade tariffs for alleged “unfair trade practices” under Section 301. Though it may be popular to label the Trump administration’s latest tariffs on China as part of an ongoing “trade war”, the response elides a significant point: that imposing tariffs may be one of the only “strong ways” to force China to stop what the U.S. President alleges are “unfair trade practices” by improperly taking valuable U.S. intellectual property (IP).
Much of these trade tariff enforcement actions by the U.S. President are in efforts to force China to implement more fair laws and procedures for U.S. entities operating within China’s borders and to reduce improper actions by China individuals or entities within the U.S. borders.
The “unfair trade practices” by China with respect to alleged intellectual property theft are estimated to cost the U.S. between US$22.5 and US$60 billion dollars a year — whether it is a Beijing-based wind turbine company stealing trade secrets from a Massachusetts company or a string of large U.S. chemical companies investing in China with the risk of losing their IP rights as part of current Chinese law.
Of late, China has given exceptions to certain industries in areas where it believes it lags behind — electric vehicles or downstream petrochemical companies, for instance — but energy companies investing in China need to be up to date on these exceptions. There also are ways in which organizations can structure investments so as to reduce the risk of losing significant IP rights to China. For one, when negotiating joint ventures (JV), companies need to consider terminating the JV when it wants to withdraw and thereby terminating any associated IP license associated with the venture — otherwise, Chinese law dictates that the JV may be able to continue to be able to use the IP brought in during the JV formation.
A second way to consider reducing risk would be to license the IP into your own company in China to the extent China allows the formation of your own entity there, so as to avoid licensing into a problematic Chinese JV. And lastly, companies can try and keep the applicable law and arbitration of these issues outside of China altogether — arbitrating disputes in Hong Kong, Singapore, or London, for example.
Meanwhile, at home, organizations need to conduct audits, manage technology, provide important employee guidelines and policies, and implement other strong internal trade secret and IP protection.
Tariffs will undoubtedly cause short term pain, including higher prices for mineral (e.g., barite), materials (e.g., steel), parts, overseas assemblies, and the like in the energy sector, as well as potentially changing trade and supply patterns.
It is uncertain how long this pain may last, and this may cause some U.S. energy industry products to be less competitive on a global level, especially where reliance on China goods may be an issue.
In the long term, it is to be seen whether it will be an effective strategy. But until now, the U.S. Department of Commerce has not been able to move the needle on Chinese IP issues. And “To Tariff”, despite its drawbacks, is a chance for success that this U.S. administration desires to pursue.
For more on how to navigate your company through the changes in the energy industry, click here.