“The real question is so we do a memorandum of understanding, …. How long will that take to put into a final binding contract” (President Trump)
“From now on … we are going to use the term ‘trade agreement’” (Amb. Robert Lighthizer)
This week President Trump and Amb. Lighthizer debated whether the administration will be concluding an “Memorandum of Understanding” or a “Trade Agreement” with China to resolve the current trade dispute, as detailed in Bloomberg. However, both countries cannot enter into treaties or agreements ratified by their legislatures in the short time available to them. The more meaningful question is not whether an “agreement” is binding, but whether the underlying commitments require actions that are binding.
US-China trade agreements have often had the staying power of the dew on a summer’s rose. One reason was that the underlying commitments did not require clear, binding legal action. A good example of such a non-binding commitment was the 2010 JCCT agreement on government procurement of indigenously innovated products:
China and the United States will not adopt or maintain measures that make the location of the development or ownership of intellectual property a direct or indirect condition for eligibility for government procurement preferences for products and services. China and the United States will continue to discuss whether this principle applies to other government measures.
What was the “measure” that China was not supposed to adopt or maintain? To someone unaware of its background, it appears that the United States had a similar problem as China. Furthermore, a US reader may think that we asked China to enact a “law” to address discriminatory government procurement. Oxford defines “measure” as a “legislative bill.” By contrast, Chinese legal scholars know the term “measure” as vague and not binding. As an example: the word “measure” appears 32 times in China’s accession documents to the WTO in a descending hierarchical order as “law regulations and/or [other] measures. ” As an ambiguous term, it could mean either a type of law or regulation (both of which or binding) or a non-binding administrative rule.
The 2010 commitment predictably led to problems in implementation by localities who did not believe they were bound by this negative commitment. As my colleague Stanley Lubman noted in a Wall Street Journal blog in July 2011:
[W]hile government policy on procurement has receded from the original position and “indigenous innovation” has been “delinked” from government procurement requirements, implementation of this shift is problematic because acceptance and commitment by sub-central (provincial and municipal) governments are needed to make it meaningful.
The 2016 JCCT Commitment on innovation of indigenous innovated products attempted to clean up the vague language from the 2010 JCCT by acknowledging issuance of a State Council document was required:
The General Affairs Office of the State Council issued a document recently, requiring all local regions and all agencies to further clean up related measures involving linking the indigenous innovation policy to the provision of government procurement preferences, so as to practically implement the commitment made by the Chinese side. The U.S. side welcomes this development.
This commitment, in its legal terms, is a vast improvement over the 2010 JCCT commitment. It clarified that the obligation was not a bilateral one. It also required the State Council, an authoritative agency with the power to bind inferior agencies, to issue a “document” (presumably a regulation in the heirarchy noted above). Finally, it required local governments to “clean up” conflicting “measures” with an identified offending policy. Using a high level document to address inferior legislative acts also made the commitment more easily verifiable.
This problem of binding commitments and conflicts with local policy is nearly identical to current issues of “forced technology transfer” where local governments may sense that there is currently no national law that doesn’t prohibit them from demanding that foreign technology owners relinquish their rights. China’s proposed adoption of a Foreign Investment Law that prohibits forced technology transfer would be one positive step in the direction of addressing that issue. However that law and its enforcers should specifically address contrary policies and incentives that exist throughout the country. To further ensure enforcement, at a minimum the new national appellate IP court should have original jurisdiction over challenges brought by foreign businesses against these local practices. The court could provide transparent, verifiable, professional and fast resolution by accountable authorities independent of direct local influence.
A 2016 GAO report on clean energy cooperation with China provides another example of a meaningless trade commitment. That reported stated:
The U.S. Patent and Trademark Office has identified a potential discrepancy between Chinese law and the bilateral U.S.-China Science and Technology Agreement upon which the IP Annex to the CERC [Clean Energy Research Center] Protocol is based, according to U.S. Patent and Trademark Office officials. These officials stated that the potential discrepancy is related to ownership of any improvements made to IP licensed between U.S. and Chinese entities.
This language underscores the problem that a bilateral MOU or “agreement” may have no legal significance when there is a contrary State Council regulation, namely China’s Administration of Technology Import-Export Regulations (TIER). The TIER mandates that the Chinese side own any improvements to technology licensed in bilateral science cooperation projects, and is therefore at odds with the inferior negotiated agreement. This text leaves the dispute open to future diplomacy, which is not a realistic approach for private business disputes.
There are numerous other examples of poor drafting or drafting of IPR commitments that at best would accomplish only short term goals. USG and Chinese negotiators in their haste to resolve a difficult set of issues should not lose sight that the underlying commitments of any agreement that meaningfully address US concerns must be phrased in terms of legally binding actions. These legally binding actions must also be durable, and should not be be countermanded by local measures. They should also be easily susceptible to USG verification.