Month: June 2019

Limitations of the New Intellectual Property Reforms

Though reforms in IP remain a strong demand of the Trump administration, there exists a significant gap in the Chinese understanding of US requirements and the actual reforms being undertaken by the Chinese government towards that end.

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Beijing Intellectual Property Court

Kuldeep Saini, Research Intern, Institute of Chinese Studies, Delhi

One of the major catalyst for the ongoing trade war between China and the United States is the question of Intellectual Property rights (IPR) protection to foreign firms in China. Even after months of discussions and negotiations, an agreement seems elusive. China recently imposed tariffs worth US$60 billion in retaliation to the tariff hike that had been imposed on Chinese goods by the US. The investigation report submitted by United States Trade Representative (USTR) Robert Lighthizer on 22nd March 2018 cited Section 301 of the US Trade Act of 1974[1] to discuss China’s engagement in policy of transfer and theft of Intellectual Property (IP) technology from foreign firms. Ever since, China has committed to enhance its IP protocols by 2020 through the attainment of high levels of IP regulations on utilisation, administration, protection and creation.

The latest step in this regard are the amendments made to the Trademark Law of the People’s Republic of China (PRC) on 23 April 2019 at the 10th session of the Standing Committee of the 13th National People’s Congress (NPC). Though reforms in IP remain a strong demand of the Trump administration, there exists a significant gap in the Chinese understanding of US requirements and the actual reforms being undertaken by the Chinese government towards that end.

This article discusses the constraints faced by the Chinese Government in deescalating the ongoing trade war with the US despite the it having undertaken three major intellectual property reforms. A discussion of the three reforms undertaken by the Chinese government follows.

First, the measures governing the transfer of intellectual property rights overseas were issued on 18 March 2018 by the State Council’s General Office. These reforms state the complete opposite of what the world understood by Trump’s claim of IP theft by China. The changes mandate the reduction in IP related theft by putting the onus on US firms that are in a merger with domestic Chinese companies. They fulfil the purpose of implementing the regulations and setting forth the procedures for overseas transfer of intellectual property for the foreign companies having mergers with the domestic companies. However, while China’s State Intellectual Property Office (SIPO) claims transfer of more than USD 4 billion intellectual properties from China, the numbers fail to reflect the home conditions for foreign companies. These structural changes fail to focus on the internal regulations of IP in China while considering the export of technology as a priority concern for the Chinese government.

The significant change is the involvement of relevant governmental departments like Forestry and Ministry of Commerce (MOFCOM) and departments looking at technology and agriculture in a more orderly and legal manner. This increases the processing time in receiving the patent rights. As of 2017, the total numbers of patent applications received in China were 1.2 million out of which only 3,26,000 were approved. These reforms further discourage the trade incentives of foreign companies to establish themselves in the Chinese market.

Second, the establishment of the appellate-level intellectual property tribunal on 1 January 2019 by the Supreme People’s Court of China (SPC) reflects the concrete structural steps undertaken to strengthen the IP protection laws. According to Zhou Qiang (Chief Justice of SPC) there has been an increase of 41.8 per cent in the IP cases resolved in 2018 and the new IP court will add to these numbers. The major point of contention in the first quarter of the year highlights the lack of resources, enlisting of powers, persistence and professionalism in handling the IP cases of foreign companies. Another concern with the new IP court as stated is the unknown statistics about the IP cases of foreign firms that are currently under review. This creates an asymmetry of information for scholars and other countries attempting to analyse the efficiency of China’s IP Court.

The verdict of the first case in IP Court came out in just two trials embodying the idea of “protecting innovation innovatively”. However, the speed at which the decision was made led the foreign companies to fear that the verdict was pre-decided. This also raises the question of which court’s verdict has the final say in the IP matters as these cases are still being directed to the earlier SPC and not to the new IP Court. The development of a national level appeals court might prove to be insufficient to tackle the current situation for international businesses fear that their proprietary technology could be stolen at a regional level.

Third, the reforms in the Trademark Law and Anti-Unfair Competition Law issued on 23 April 2019 did not follow the usual process for public comments. The primary concern regarding these positive changes is whether they will be followed by the necessary laws on transparency of the enforcing and implementing agencies like National Intellectual Property Administration (CNIPA) that still awaits additional clarifications related to administrative procedure regulations. This concern arises due to the inability of IP related cases that involve technical, confidential or business information that are not reported on public databases. It is hard for foreign companies to comply with the requirements raised by the new NPC reforms resulting in the current slowdown of foreign related cases. The reforms further fail to restrict the fraudulent activities such as claims of trademarks (TM) with bad faith and no commercial usage. The use of language in the recent reform of Article 4 highlights the need for commercial use of the trademark while applying. Thus, the US government and firms see these reforms as a state encouragement for violating international intellectual property rights.

Overall, it can be accepted that China is firmly aiming to be the hub of technological innovation. But with the escalation of trade war with US (increasing tariffs to 25 per cent) has added heavy pressure on the Chinese government to negotiate the opening of the Chinese economy with effective protection to foreign technology. However, one has to agree that the current reforms fail to address the major US concern with respect to forceful technology transfers. The Chinese government needs to accommodate the international guidelines of relaxing contractual norms with respect to foreign companies in order to prevent the slowdown of its economy due to trade war.

[1] Section 301 authorizes the US President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement. Section 301 cases can be self-initiated by the (USTR). Thus, Trump initiated the tariff imposition on China.

Agricultural Industry amidst the 2018 US-China Trade War

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses.

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VIDUSHI R SINGH, Research Intern, Institute of Chinese Studies

The US-China trade war of 2018 began with tariffs being imposed on core sectors, such as industry inputs (steel, aluminium tariffs by the US) and agriculture (grain and seed tariffs by China). These attacks on primary industries have led to huge outcries on both sides, with several calls for the hurrying up of ongoing trade negotiations so that the political agendas of the leaders do not hurt the ordinary people.

This article discusses the current scenario of the two markets, with a particular focus on soybeans and associated businesses. Both countries have faced losses and market instability as a result of tariffs being put on agricultural commodities this manoeuvre, but while neither of the countries have ‘won’ in this particular sector, China seems to have incurred a lesser loss than the US.

US Agricultural Industry

The first round of the trade war saw China putting a 25 per cent retaliatory tariff on several US goods. One of the most critical commodities in the Chinese list was soybean – produced in regions that were majority supporters of Trump in 2016. The cleverly targeted tariffs have wreaked havoc on the US soybean market, with prices falling by over 13.4 per cent (based on the author’s calculations and data from United States Department of Agriculture) since May 2018. The fall in prices has further been caused by an approximate 78.6 per cent fall in demand from Chinese importers as of April 2019, based on a year on year comparison. The trade negotiations between President Trump and President Xi have included promises by the Chinese government regarding buying of over 5 million tonnes of soybean from the US, but no deadline has been set. It is possible that the unreliability of the US as a supplier of essential commodities to China has encouraged the Chinese populace to look for substitutes elsewhere, and US farmers are unlikely to have the same access to the Chinese market as they once enjoyed. As of now, there has been an almost complete crowding out of US soybean from the Chinese market, due to its inability to compete with local and Brazilian substitutes on prices. If the Chinese tariffs stay in place, the USDA projections have concluded that US soybean exports will not be able to reach pre-trade war levels even by 2024.

Another factor creating problems for the US agriculture industry is the increased costs of farm equipment and machinery. The tariffs on steel and aluminium imposed by Trump have led to a rise in the production costs of farm machinery. This, combined with the low expectations farmers have for the coming planting seasons, has resulted in a situation where farmer bankruptcies are on the rise, and US agricultural trade surplus has hit an unprecedented low, the lowest it has been since 2007. The plantation of soybean has fallen by 5 per cent in the last one year and is anticipated to reduce further, as farmers move away from soybean to other, more profitable crops. While the US Department of Agriculture has promised aid to farmers adding up to USD 12 billion, they have also asserted that this will only be a one-time assistance to help farmers regain control of farm operations.

Chinese Agricultural Industry

As for the Chinese side of the agriculture industry, the scenario seems to be mixed, as opposed to the blatantly negative situation that the US agricultural industry is facing.

The Central Committee of the Communist Party of China and the State Council unveiled its Number 1 Agricultural Document on 19 February 2019. The document focused on agricultural and rural issues and outlined policy goals for 2019 and 2020. Its focus on the “profound changes in the external environment” and ways to mitigate the same highlights China’s wariness with regards to the rising tensions in the trade war. This announcement falls in line with China’s 2015 mission to achieve absolute food security by balancing production and environmental concerns. While the agricultural reforms and the shift to the household responsibility system have helped increase productivity of land, China’s reliability on foreign markets for soybean has become a cause of concern, bringing down the agricultural trade balance, which would otherwise have been positive.

The government has, however, acted commendably fast in the past year to shift all soybean imports from the US to Brazil, which has allowed Chinese consumers some protection from the increased prices of US soybean. This has been followed by government encouragement of increased domestic production of soybean and other feed grains. However, the lower profitability of cultivation of soybean over rice or wheat has created a new need for subsidy and minimum procurement schemes.

Another factor cushioning Chinese soybean market has been the outbreak of African swine fever in various parts of the country since August 2018. The hog population in China has fallen by an estimated 13 per cent, and this has created a consequential fall in demand for feed grains and seeds. Since swine feed in China is 20 per cent composed of soybeans, this fall in demand has allowed for market prices to stabilize at a lower level than previously anticipated.

These steps have also been accompanied by reduced quality restrictions on imports and increased incentivisation for agricultural investment, as announced in the latest Number 1 document. So while there has been an undeniable fall in supply and increased uncertainty in the market, the government’s response has been able to prevent the need for total abstention from the consumption of soybean and several other vital parts of people’s diets as well as livestock feed.

Conclusion

The attempts by the two countries to regain equilibrium in their respective agricultural markets have provided some comfort to the consumers and producers of the tariffed products. The Chinese government, however, seems to have leveraged its position better to create changes very quickly to shield its populace from the worst impacts of the trade war. The US government, on the other hand, has only implemented superficial steps to manage the impact of the trade war in its borders, instead choosing to leave the outcome to market forces.

Irrespective of these safeguarding attempts by the governments, the agricultural markets in both countries are doing worse than previous financial years. Falling demands and accumulating stocks have created an imbalance in the global market. In the absence of intervention, this may result in an economic crash, as US farmers find themselves unable to repay loans and Chinese livestock producers fall short of sufficiently nutritious feed. Relaxing quality controls and giving out aids are sure to help in the short run; however, given the inconsistencies in the market, long-term solutions are necessary.