United States: ADG Insights | U.S. National Security Developments Regarding China

With or without a trade deal, national security concerns regarding China are here to stay

Since President Trump took office, the U.S.-China trade relationship has been at the center of the administration's foreign policy agenda. While a broader trade deal may grant reprieve to the series of escalating tariffs between the two countries that have defined U.S.-China trade policy over the past year, the Trump administration is unlikely to wholly abandon its forceful approach to containing the growing influence of China in the global economy, which it sees as a direct threat to the national security of the United States.

Distinct from trade disputes of past administrations, President Trump has broadly mobilized the U.S. government to counter this perceived national security threat from China. Multiple government departments and agencies have taken or are considering a range of actions, including:

• Expanding restrictions on foreign investment in the United States from China and other countries on national security grounds.
• Expanding and enforcing restrictions on the transfer of strategic technology and items to China and Chinese persons.
• Designating individual Chinese companies for national security concerns.
• Barring the use of Chinese telecommunication and IT equipment in U.S. networks or by the U.S. government.
• Targeting Chinese companies that engage in intellectual property theft.
• Marshalling the broad trade powers of the U.S. government to counter Chinese influence based on national security concerns.

These actions are primarily aimed at preventing the Chinese government, companies, and individuals from obtaining technology, lawfully or through theft, to support China's development of strategic industries. China's concerted effort to increase its influence over the global economy was put on full display in May 2015 with the unveiling of its Made in China 2025 initiative. The purpose of the Made in China 2025 campaign is to rapidly achieve Chinese dominance in high-technology and advanced manufacturing by acquiring intellectual property from outside of China, subsidizing Chinese industry, and leveraging state-owned enterprises. The Trump administration has taken notice of China's plans to achieve dominance in key strategic industries, labeling the Made in China 2025 initiative as China's "most prominent industrial policy."¹ Going even further, United States Trade Representative Robert Lighthizer has stated that "China's government is aggressively working to undermine America's hightech industries and our economic leadership through unfair trade practices and industrial policies like 'Made in China 2025.'"²

Generally, there remains broad bipartisan support throughout the U.S. government for President Trump's robust approach to China, though some specific actions – such as the use of Section 232 tariffs based on national security grounds (discussed below) – have drawn criticism from Democrats and Republicans alike. Regardless of whether the Trump administration is able to strike a trade deal with China under renewed negotiations, national security concerns will remain, and the U.S. government will likely continue to expand restrictive measures against China and Chinese companies for the foreseeable future.

These actions are having a significant impact on U.S. and global companies that have customers in China or supply chains dependent on Chinese products, components, and technology. In particular, the expansion of restrictions on China could potentially lead to a decoupling of the U.S. and Chinese markets in certain industries (e.g., telecommunications, cybersecurity, and certain advanced technologies) – a significant challenge facing many global companies, including those operating in the aerospace, defense, and government services industry sector.

This article sets forth below (1) a high-level summary of recent U.S. government actions against China based on national security grounds and (2) considerations that global companies should take into account when dealing with Chinese companies to remain compliant with complex U.S. legal restrictions.

U.S. government assessment of the threat from Chinese acquisition of U.S. technology

The Trump administration, certain agencies of the U.S. government, and Congress have all sounded the alarm of the perceived national security threat from China. In particular, the U.S. government has blurred the lines between national security and economic espionage, specifically characterizing Chinese attempts to acquire U.S. technology through intellectual property theft and lawful technology transfers as national security threats.³ The Department of Defense's (DOD) 2018 National Defense Strategy found that "[i]nter-state strategic competition, not terrorism, is now the primary concern in U.S. national security."⁴ In particular, this report stated, "It is increasingly clear that China and Russia want to shape a world consistent with their authoritarian model – gaining veto authority over other nations' economic, diplomatic, and security decisions."⁵

In a January 2018 report, the Defense Innovation Unit Experimental (DIUx), an organization within DOD (now known as the Defense Innovation Unit) which is responsible for evaluating emerging technologies for the DOD, released a report assessing the effects of technology transfers on national security. Among its principal conclusions, the DIUx study found the following:

• Technology transfer to China occurs in part through increasing levels of investment and acquisitions of U.S. companies. China participated in approximately 16 percent of all venture deals in 2015, up from 6 percent average participation rate during 2010-2015.
• Investments are only one means of technology transfer, which also occurs through the following licit and illicit vehicles where the cost of stolen intellectual property has been estimated at US$300 billion per year.
• The United States does not have a comprehensive policy or the tools to address this massive technology transfer to China. The Committee on Foreign Investment in the United States (CFIUS) is one of the only tools in place today to govern foreign investments, but it was not designed to protect sensitive technologies. CFIUS is only partially effective in protecting national security given its limited jurisdiction.
• The U.S. government does not have a holistic view of how fast this technology transfer is occurring, the level of Chinese investment in U.S. technology, or what technologies we should be protecting.⁶

In its March 2018 Section 301 report, the Office of the United States Trade Representative (USTR) accused China of using inbound foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, as well as its administrative licensing and approval process, to coerce U.S. companies to transfer technology.⁷ According to the White House, inadequate intellectual property (IP) protection in China leaves the U.S. economy and other developed economies at significant risk.⁸

Congress has also expressed consistent bipartisan concern over the national security threats posed by China, particularly in relation to supply chains and the telecommunications sector. The Senate Intelligence Committee has emphasized the "national security risks associated with the advent of a domestic 5G network," as well as "the advanced and critical technology transfer campaign that China continues to conduct at the expense of the U.S."⁹ Similarly, the House Appropriations Committee has noted its concern with the "PRC's [People's Republic of China] efforts to dominate the 5G global market," and committed to "a coordinated strategy with allies and partners to provide alternatives to Chinese-financed telecommunication technology."¹⁰ Such actions align with the U.S.-China Commission's recent warning that "technology transfers and IP theft threaten to undermine U.S. technological development and capabilities both now and in the future," noting with distinct concern that China's development of certain foundational technologies, in particular, could have lasting effects.¹¹

Footnotes

1. Office of the U.S. Trade Representative, Update Concerning China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation 7 (Nov. 20, 2018), available here [hereinafter USTR REPORT UPDATE]. Specifically, USTR found industrial sectors including "aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles" contributed to or directly benefited from the Made in China 2025 policy. Id. See also Office of the U.S. Trade Representative, Findings of the Investigation into China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974 (Mar. 22, 2018), available here [hereinafter SECTION 301 REPORT] (explaining USTR's initial investigation findings).

2. Press Release, Office of the U.S. Trade Representative, USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices (June 15, 2018) (quoting United States Trade Representative Robert Lighthizer), available here.

3. SECTION 301 REPORT, supra note 1 (quoting Memorandum of August 14, 2017 Addressing China's Laws, Policies, Practices, and Actions Related to Intellectual Property, Innovation, and Technology, 82 Fed. Reg. 39,007, 39,007 (Aug. 14, 2017)) ("China has implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests.").

4. Department of Defense, Summary of the 2018 National Defense Strategy of the United States of America: Sharpening the American Military's Competitive Edge 1 (2018), available < href="https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf"target=_blank>here.

5. Id. at 2.

6. Defense Innovation Unit Experimental (DIUX), China's Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U.S. Innovation 3-4 (Jan. 2018) (emphasis removed), available here.

7. See SECTION 301 REPORT, supra note 1, at 19.

8. See White House Office of Trade and Mfr. Policy, How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World 6-8 (2018), available here; see also European Chamber, China Manugacturing 2025: Putting Industrial Policy Ahead of Market Forces 24 (2017), available here.

9. S. REP. NO. 116-20, at 11-12 (2019).

10. H.R. REP. NO. 116-78, at 111 (2019).

11. Sean O'Connor, U.S.-China Econ. & SEC. Review Comm'n, How Chinese Companies Facilitate Technology Transfer from the United States 11 (2019), available here.

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