The 25th US-China Joint Commission on Commerce and Trade (JCCT)—an annual, high-level economic summit1—took place December 16-17, 2014 in Chicago, with US and joint China-US "Fact Sheets" released afterwards listing China's commitments.2 Coming on the heels of several bilateral accords reached during President Obama's November 2014 visit to Beijing, the 2014 JCCT yielded several additional commitments by China that have the potential to further ease market access barriers for a wide range of US companies, including those in the high-tech, pharmaceuticals, medical devices and biotechnology sectors. As always, companies whose business interests are potentially affected should closely monitor China's implementation of these commitments and get involved in preparations for future US-China bilateral summits.
Outcomes of the 2014 JCCT
US officials cited "dozens" of JCCT outcomes that would enhance US companies' access to China's market.3 Among these are the five categories of outcomes discussed below, pertaining to technology localization requirements, pharmaceuticals and medical devices approvals, trade secrets, the Anti-Monopoly Law (AML), and agricultural biotechnology approvals.
- Technology Localization Requirements: China
has made the receipt of certain tax preferences and other benefits
contingent on the transfer of technology to a Chinese company. For
example, the High and New Technology Enterprise (HNTE) program
offers qualified companies a 15% corporate income tax rate (versus
the standard 25% rate), provided they either own IP rights to core
technology in China, or provide an exclusive global license for
such IP to a Chinese entity for at least five years. In addition,
as the Administration has noted, US and other foreign companies
operating in China sometimes face pressure to relocate R&D
activities to China.
Through the 2014 JCCT, China committed to "treat intellectual property rights owned or developed in other countries the same as domestically owned or developed intellectual property rights. Enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises." This apparently broad market access commitment should go a long way in resolving concerns regarding technology localization requirements although much, as always, will depend on how the commitments are implemented on the ground, and continued vigilance—as well as future action within the JCCT and other bilateral summits, such as the annual US-China Strategic & Economic Dialogue (S&ED)—will be key.
- Pharmaceuticals and Medical Devices Approvals:
China maintains a number of regulatory requirements for
pharmaceuticals and medical devices that limit US companies'
market access. For example, China's clinical trial approval
process typically takes 12-18 months, versus 30-60 days in the
United States. In addition, China requires local clinical trials
for new pharmaceutical products and variants of existing
pharmaceutical products, even though global clinical trial data can
provide a sufficient scientific basis to ensure product safety for
the Chinese public.
Through the 2014 JCCT, with respect to pharmaceuticals, China addressed such concerns by committing to: (i) "make great efforts to eliminate the drug application backlog within 2-3 years," (ii) grant clinical trial waivers for companies that use multi-regional clinical trial (MRCT) data that includes data from China, in order to prevent duplicative testing—provided that applications comply with technical review requirements; and (iii) implement measures that allow simultaneous clinical trials in China and other countries.4 In addition, with respect to medical devices, China committed to "expand the scope of medical devices that can be exempted from conducting clinical trials in China."5,6 In principle, these commitments should ease market access barriers for both pharmaceuticals and medical devices. However, it remains unclear to what extent China will reduce the drug application backlog within the stipulated timeframe of 2-3 years, and also whether China will take further steps to embrace the MRCT paradigm.
- Trade Secrets: Many US businesses are
concerned about the level of protection afforded to trade secrets
in China. One particular area of concern is the adequacy of legal
safeguards for trade secrets handled by government officials, who
often have access to companies' trade secrets and proprietary
information in connection with regulatory, administrative and
judicial proceedings.
In the 2014 JCCT, China committed that "trade secrets submitted to the government in administrative or regulatory proceedings are to be protected from improper disclosure to the public and only disclosed to government officials in connection with their official duties in accordance with law." China also agreed to study how to "optimize . . . relevant administrative and regulatory procedures . . . including by strengthening confidentiality protection measures, limiting the scope of government personnel having access to trade secrets, limiting the information required from companies to include only information reasonably necessary for satisfying regulatory purposes, and stipulating that any requirements on government agencies to publicly disclose information appropriately allow for the withholding of trade secrets."7 These commitments present a further development beyond what was agreed to in the July 2014 S&ED. Much, however, will depend on China's actual implementation.
- Anti-Monopoly Law: Foreign industry has voiced
concern that China's enforcement of the AML—China's
first comprehensive competition law—functions as a market
access barrier. This is because Anti-Monopoly Enforcement Agency
(AMEA) investigations (including both abuse of market dominance
investigations and merger reviews)8 arguably focus
disproportionately on foreign companies, leading to outcomes that
sometimes appear linked to industrial policy objectives such as
encouraging the growth and consolidation of domestic industry. In
addition, foreign industry has complained that due process
deficiencies—e.g., lack of access to counsel and the
absence of written penalty decisions for abuse of dominance
investigations—aggravate the AML's market-restricting
effects. The industries affected by China's enforcement of the
AML include high-tech, agriculture, mining, medical devices,
pharmaceuticals and automobiles, among others.
Through the 2014 JCCT, China made several commitments which, in principle, should ease foreign industry concerns:
-
- Access to Counsel: China will allow local counsel to
participate in meetings with AMEAs without restrictions. In
addition, China will allow qualified international counsel to
participate subject to approval by the relevant AMEA, "which
shall be granted as normal practice."
- More Transparent Penalty Procedures: China committed
that before imposing penalties, AMEAs will "notify the parties
of the facts, grounds, and basis according to which the
administrative penalties are to be decided, notify the parties of
the rights that they enjoy in accordance with the law, and provide
the parties with the right to state their cases and to defend
themselves." In addition, China committed that all penalty
decisions "will be provided in writing to the party and
include the facts, reasons, and evidence on which the decision is
based."
- Competition-Oriented Remedies: China committed that
AML remedies would "address the harm to competition"
rather than "impose enforcement measures designed to promote
individual competitors or industries."9
- Access to Counsel: China will allow local counsel to
participate in meetings with AMEAs without restrictions. In
addition, China will allow qualified international counsel to
participate subject to approval by the relevant AMEA, "which
shall be granted as normal practice."
- Agricultural Biotechnology Approvals: For
several years China has delayed, and in some cases denied, approval
for certain US genetically modified crop exports. The result is
that China's very large market has effectively been closed to a
range of US biotech agricultural products.
Through the 2014 JCCT, China partially addressed these concerns by agreeing to grant three pending approvals of biotechnology products in 2014.10 In addition, China and the United States agreed to conduct an annual Strategic Agricultural Innovation Dialogue, which could pave the way for faster approvals and greater market access. This dialogue has the potential to lead to a comprehensive framework agreement for ensuring timely approvals of all pending applications for US genetically modified crop exports, which the US biotech industry had called for in advance of the JCCT.11 However, it remains to be seen whether and how quickly pending and future applications will be approved.
Other 2014 JCCT commitments by China relate to issues such as
geographical indications; inventor remuneration; sale of
IP-intensive goods and services; online infringement; government
procurement regulations; treatment of IP in standards setting; bad
faith patent litigation; illegal, unreported or unregulated
fishing; legal services; and a range of cooperative activities.12
The full English-language 2014 JCCT Fact Sheets are available at http://www.commerce.gov/news/fact-sheets/2014/12.
Next Steps
The 2014 JCCT outcome potentially represents a significant step
forward in a number of areas that are of key concern to US and
other non-Chinese companies in particular. Companies and other
stakeholders should actively monitor implementation and, to the
extent they may be affected, get involved in preparations for
future bilateral summits such as the 2015 S&ED and JCCT to
ensure that their concerns are taken on board and placed as high on
the bilateral agenda as possible.
1 The 2014 JCCT was co-chaired by US Secretary of
Commerce Penny Pritzker, US Trade Representative Michael Froman,
and Chinese Vice Premier Wang Yang.
2 The US Fact Sheet was initially released December 18,
2014, and the Joint US-China Fact Sheet was released December 29,
2014. See http://www.commerce.gov/news/fact-sheets/2014/12.
3 Inside U.S. Trade, "U.S. Officials Announce JCCT
Progress On AML, GMO Approvals, GIs" (Dec. 18, 2014).
4 In addition, with respect to the supplementation of
data submitted for pharmaceutical product patent applications,
China and the United States "affirm[ed] that continued
exchanges and engagement exchanges and engagement on specific cases
are beneficial."
5 The September 2014 Regulations on Supervisory
Management of Medical Devices requires clinical trials for all
Class II and Class III medical devices unless specifically
exempted. This requirement has the potential to significantly
restrict medical devices' market access in China. However,
China's 2014 JCCT commitments regarding medical devices suggest
that China will grant exemptions to mitigate restrictions on market
access.
6 In addition, with respect to both pharmaceuticals and
medical devices, China committed that "for all draft . . .
rules and regulations where notifications are required under the
relevant WTO rules, a comment period will be provided that will be
no less than 60 days."
7 The 2014 JCCT Fact Sheet also contains the following
commitments: "Government officials who illegally disclose
companies' trade secrets are to be subject to administrative or
legal liability according to law. The United States and China agree
to exchange information on the scope of protection of trade secrets
and confidential business information under their respective legal
systems. China acknowledges that it is to conduct a legislative
study of a revised law on trade secrets."
8 Investigations of abuse of market dominance are
carried out by the National Development and Reform Commission
(NDRC) (in the case of price-based investigations) and the State
Administration for Industry and Commerce (SAIC) (in the case of
non-price-based investigations), while merger reviews are performed
by the Ministry of Commerce (MOFCOM). These are the three
Anti-Monopoly Enforcement Agencies (AMEAs). Each AMEA's
regional counterparts also participate in AML enforcement.
9 China made a similar commitment at the 2014 S&ED
"that the objective of competition policy is to promote
consumer welfare and economic efficiency rather than promote
individual competitors or industries." US Department of the
Treasury, Press Release, "UPDATED: U.S.-China Joint Fact Sheet
Sixth Meeting of the Strategic and Economic Dialogue" (July
11, 2014), available athttp://www.treasury.gov/press-center/press-releases/Pages/jl2561.aspx.
10 The products were genetically modified varieties of
soybeans and corn. See Inside U.S. Trade, "U.S.
Officials Announce JCCT Progress On AML, GMO Approvals, GIs"
(Dec. 18, 2014).
11See Letter from U.S. Biotech Crops Alliance
to US Trade Representative Michael Froman, US Secretary of Commerce
Penny Pritzker, and US Secretary of Agriculture Tom Vilsack (Dec.
10, 2014).
12 The US-China Bilateral Investment Treaty was not
cited in the 2014 JCCT, even though it was cited in the 2014
S&ED Joint Fact Sheet http://www.treasury.gov/press-center/press-releases/Pages/jl2561.aspx.
The reason for this omission is unclear.
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