The Law and Economics of 'Forced' Technology Transfer and Its Implications for Trade and Investment Policy (and the U.S.-China Trade War)

45 Pages Posted: 15 Feb 2020 Last revised: 3 Aug 2021

See all articles by Alan Sykes

Alan Sykes

Stanford University - Law School

Date Written: January 17, 2021

Abstract

“Forced technology transfer” is a central issue in the ongoing U.S.–China trade row. The
phrase encompasses a number of different practices, but the most significant according to
various commentators involve measures that require foreign investors in China to partner
with domestic entities as a condition of making an investment, either by forming a joint
venture or affording Chinese investors a controlling equity stake. These “corporate structure
requirements” empower prospective Chinese partners to bargain for technology
transfer as a condition of forming a new venture or otherwise enable them to learn the
details of foreign technology through participation in the business enterprise. Foreign
investors are free to reject such requirements and forego the associated investment opportunities,
and in this sense any technology transfer pursuant to China’s requirements is
“consensual.” For ease of reference, this essay refers to these corporate structure requirements
as CSR. The analysis to follow examines the economics of CSR from both the national
and global welfare perspectives. It indicates how CSR may undercut the national welfare
of the USA even if it is profitable for U.S. investors. The global welfare implications of CSR,
however, are much less clear, which offers an explanation for the absence of any constraints
on CSR in typical trade agreements. A clear role for restrictions on CSR does
emerge, however, in investment agreements that seek to eliminate investment protectionism
by requiring “pre-establishment national treatment” for foreign investors. This analysis
has immediate policy implications for the ongoing trade dispute with China.

Keywords: international trade, international investment, China, trade war, technology transfer

JEL Classification: F10, F13, F21, F53

Suggested Citation

Sykes, Alan, The Law and Economics of 'Forced' Technology Transfer and Its Implications for Trade and Investment Policy (and the U.S.-China Trade War) (January 17, 2021). Stanford Law and Economics Olin Working Paper No. 544, Journal of Legal Analysis, 2021, Available at SSRN: https://ssrn.com/abstract=3523284 or http://dx.doi.org/10.2139/ssrn.3523284

Alan Sykes (Contact Author)

Stanford University - Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

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