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

42 Pages Posted: 15 Feb 2020 Last revised: 20 Feb 2020

See all articles by Alan Sykes

Alan Sykes

Stanford University - Law School

Date Written: January 17, 2020

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, of course, 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 “forced” technology transfer, or FTT.

FTT policies as defined here do not violate China’s commitments to the United States under international law. At present, the United States and China do not have a bilateral investment treaty (BIT), which would prohibit FTT if it followed the model of other U.S. BITs. Instead, U.S.-China economic relations are governed only by the trade treaty framework of the WTO, which does not prohibit FTT by WTO members in general or China in particular (despite some China-specific obligations in its WTO accession Protocol), and by the newly signed “Phase One Trade Agreement” between the United States and China, which contains provisions on forced technology transfer but does not rule out corporate structure requirements. These observations suggest the central positive puzzle of this essay – why do many investment agreements tend to prohibit FTT, while trade agreements do not? Closely related is the core normative question of this essay – when, if at all, is FTT economically undesirable?

To answer these questions, the analysis to follow examines the economics of FTT from both the national and global welfare perspectives. It indicates how FTT may undercut the national welfare of the United States even if it is profitable for U.S. investors. The global welfare implications of FTT, however, are much less clear, which offers an explanation for the absence of any constraints on FTT in typical trade agreements. A clear role for restrictions on FTT 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 current dispute with China. If a U.S.-China BIT is politically infeasible in the current climate, it is questionable whether eliminating FTT would generate mutual gains for the two countries, and thus questionable whether such a deal can be struck. The omission of corporate structure requirements from the forced technology transfer section of the Phase One Trade Agreement is thus unsurprising. Given the potentially detrimental effects of FTT on U.S. national welfare and the absence of legal constraints on U.S. investment policy toward China, the United States might deploy its own investment restrictions aimed at limiting technology transfer. This approach would not violate international law and could benefit the U.S. economy, and thus appears preferable to the punitive tariff policies of the current administration.

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 (FTT) and Its Implications for Trade and Investment Policy (and the U.S.-China Trade War) (January 17, 2020). Stanford Law and Economics Olin Working Paper No. 544, 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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