intellectual property

Cybertheft of intellectual property – do there need to be greater trade deterrents?

· January 17, 2022 · Uncategorized · , , · No Comments

Cybertheft is a tremendous problem for governments, companies and individuals. While actors in the space are pursuing a range of objectives, this post looks at cybertheft of intellectual property and its effects on industry. Thus, the huge losses incurred by governments and by individuals outside of the business arena are not addressed nor are the misinformation campaigns of recent years.

In 2011, The Council on Foreign Relations published an interview with Dmitri Alperovitch, then McAfee’s vice president of threat research. The interview was titled “Cybertheft and the U.S. Economy”. See Council on Foreign Relations, Cybertheft and the U.S. Economy, August 11, 2011, https://www.cfr.org/interview/cybertheft-and-us-economy. The summary introduction paragraph summed up the situation as follows:

“In August 2011, the cybersecurity firm McAfee released an eye-opening report (PDF) detailing its investigation into a multi-year, most likely state-sponsored cyberattack that includes intrusions into the U.S. federal government and defense contractors, resulting in the theft of massive stores of intellectual property. The report’s author and McAfee’s vice president of threat research, Dmitri Alperovitch, describes these attacks, known as Operation Shady RAT, as a profound threat, indicative of a larger trend that may result in ‘the complete destruction’ of the U.S. economy. Rather than focus on the potential for a theoretical ‘cyber Pearl Harbor,’ he says that U.S. policymakers should use all of the nation’s power to stem the steady theft of national secrets.”

A 2019 report prepared by Price Waterhouse Cooper for the European Commission examined the scope of the cybertheft problem for businesses in the EU. See PWC, Study on the Scale and Impact of Industrial Espionage and Theft of Trade Secrets through Cyber, 2019, https://www.pwc.com/it/it/publications/docs/study-on-the-scale-and-Impact.pdf. The estimated cost to EU industry was summarized in the conclusion on the last page:

“Estimates of February 2018 provide details of the negative impacts at the European level of cyber theft of trade secrets: about €60 billion lost in economic growth, resulting in a loss of competitiveness, jobs and reduced R&D investments. More specifically, 289,000 jobs could be at risk in 2018 in Europe and 1 million jobs could be at risk by Stakeholders emphasized that direct impacts account for about 10% of costs the company will have to face. Therefore, the remaining 90% of costs are due to indirect impacts that are effectively measured and assessed 5-6 years after the cyber-intrusion.”

There have been many other reports looking at the costs and problems from cyber theft. See, e.g., U.S. Department of Justice, REPORT OF THE ATTORNEY GENERAL’S CYBER DIGITAL TASK FORCE, 2018, https://www.justice.gov/archives/ag/page/file/1076696/download.

But efforts at cybertheft have continued and intensified. See, e.g., New York Times, U.S. Accuses Hackers of Trying to Steal Coronavirus Vaccine Data for China, July 20, 2020, https://www.nytimes.com/2020/07/21/us/politics/china-hacking-coronavirus-vaccine.html, (“The Justice Department accused a pair of Chinese hackers on Tuesday of targeting vaccine development on behalf of the country’s intelligence service as part of a broader yearslong campaign of global cybertheft aimed at industries such as defense contractors, high-end manufacturing and solar energy companies.”).

Existing deterrents

Theft of intellectual property and other cybertheft actions face civil and criminal penalties in many countries, including the U.S. and other WTO Members. U.S. law also permits blockage of imports that violate IP holders rights (e.g., patents). The WTO since its launch in 1995 has had a Trade Related Aspects of Intellectual Property Rights Agreement, which incorporates provisions from a range of IP conventions, and requires WTO Members to provide adequate enforcement of such rights. The WTO has dispute settlement provisions which permit challenging trading partners who are not enforcing intellectual property rights. In addition, the U.S. has worked through its Special 301 authority to work with governments where the U.S. doesn’t perceive adequate enforcement occurring. It has also entered into bilateral agreements (e.g., U.S.-China Phase I Agreement) to address enforcement concerns including on cybertheft of intellectual property.

Despite these tools and the vast sums spent by industry trying to protect its intellectual property, the problems continue and in many ways are intensifying.

Experts like Dmitri Alperovitch have put forward a series of proposals for U.S. Congressional and Executive Branch action in 2022 to improve the situation for U.S. companies. See January 14, 2022 email from Silverado Policy Accelerator, Inc. (Mr. Alperovitch is Co-founder and Executive Chairman), Silverado’s 2022 Cybersecurity Policy Priorities for the Legislative and Executive Branches. The contents of the email are copied below (NOTE: I serve as one of a number of strategic advisors to Silverado but was not involved on the cybersecurity issues).

“To the friends of Silverado Policy Accelerator,

“The past year witnessed several notable bipartisan policy advances in the cyber arena. In March, Congress authorized $1 billion for the Technology Modernization Fund as part of the bipartisan American Rescue Plan to support new investments in federal agencies’ cybersecurity infrastructure. In May, the Biden administration released its Executive Order on Improving the Nation’s Cybersecurity, which included provisions to increase security standards for vendors who supply high-risk software through the government acquisition process and a number of critical technology implementation requirements that raise the bar for security across federal government networks. Finally, the Infrastructure Investment and Jobs Act, passed by Congress in November, included $1.9 billion for a range of cyber-related investments. 

“Although these bipartisan initiatives collectively represent a historic investment in the nation’s cybersecurity, there is much still to do to ensure that government agencies—as well as American companies and organizations—are protected from cyber attacks. As the legislative and executive branches look ahead to the coming calendar year, Silverado Policy Accelerator has compiled its own list of six policy priorities that deserve particular attention in 2022 (included below).

“Additionally, please join us tomorrow, January 13 from 9:00-10:00 am ET as Silverado’s Co-Founder and Executive Chairman Dmitri Alperovitch sits down with Congresswoman Yvette Clarke (D-NY), Congressman John Katko (R-NY), DHS Under Secretary for Policy Robert Silvers, and the FBI Cyber Division’s Assistant Director Bryan Vorndran to hear their perspectives on cybersecurity policy priorities for the coming year. You can register for tomorrow’s event here.

“A recording of tomorrow’s event will be available on Silverado’s website following the live broadcast. 

“* * *

“Silverado’s 2022 Cybersecurity Policy Priorities for the Legislative and Executive Branches 

“1. Passage of a comprehensive federal cyber incident reporting law

“In light of the 2022 National Defense Authorization Act not including provisions requiring companies to report hacks and ransom payments to the government, Congress should consider alternative paths to enacting a mandatory cyber incident reporting requirement in 2022. Such a law should require major private companies, including critical infrastructure entities, to report technical indicators associated with breach attempts to the Cybersecurity and Infrastructure Security Agency (CISA).  CISA should also build the architecture to immediately pass the information on to other agencies with a need to know, such as the FBI and sector-specific relevant agencies. Rapid access to these incident reports by CISA and FBI, among others, is necessary to allow the government to have a clear view into adversary campaigns targeting the U.S. and to support timely federal action. Such legislation is critical to provide insights to the government about the true nature of the threat to the private sector in order to take appropriate deterrent action (criminal investigation, cyber offense, sanctions, etc), as well as to help warn and notify other victims or vulnerable organizations who may not be aware that they had been targeted.

“2. Provide CISA with the appropriate authorities and resources to eventually become the operational federal CISO, or Chief Information Security Office, for the civilian federal government (excluding DoD and IC)

“Congress took an important step toward centralizing federal cybersecurity strategy by creating CISA in DHS in 2018, but the next step is to give CISA both the authority and the resources that it needs to effectively execute its mission. The long-term goal for CISA should be to evolve into an operational cybersecurity shared services provider for most civilian federal government agencies, taking over fully or partially their cybersecurity operations. Achieving this objective would result in streamlined and more effective cybersecurity efforts, centralized accountability and a higher standard for security across the government.

“Congress should support CISA’s ongoing efforts in the following ways: 

  • Provide CISA with the resources and authority to create a 24/7 threat hunting operation center to search for intrusions on federal networks. 
  • Authorize CISA to conduct a trial in which it assumes responsibility for running cybersecurity operations of a small executive agency. The trial would allow the government to gauge what sort of additional resources CISA would need to be able to evolve into an operational Chief Information Security Office (CISO) for the civilian federal government.
  • Create budgetary and FISMA compliance incentives for federal agencies to outsource their cybersecurity operations to CISA, turning it into a Shared Service Provider for cybersecurity.
  • Provide CISA with the appropriations that are commensurate with its growing importance by reallocating resources from agencies that opt into the Shared Service Provider model. 

“3. Adopt speed and outcome-based metrics to measure agencies’ response time to cyber threats

“In cyberspace, the only way to reliably defeat an adversary is to be faster than they are. For this reason, Congress should require federal agencies to adopt speed-metrics that measure agencies’ response to cyber threats based on the time it takes to begin and complete fundamental defensive tasks. ​

“Through legislation, Congress could require agencies to adopt speed-based metrics by mandating that they collect data on the average time it takes to perform three fundamental defensive actions: (1) detecting an incident; (2) responding to an incident; and (3) fully mitigating the risk of high-impact vulnerabilities. Taking these measurements should be as simple as recording the times of the initial discovery of the event (intrusion or vulnerability) and the time when the investigation or mitigation action is finished. Thus, it should require minimal additional resources to implement. Congress could also include a “recoverability metric” to measure agencies’ ability to recover data in the event of a ransomware attack or major cyber incident.

“Over time, these metrics would provide objective and diachronic measurement of an agencies’ incident response capabilities that they could report to CISA, OMB, and the relevant oversight committees in Congress. If the metrics prove effective at driving the right behavior to decrease agencies’ response time to cyber threats, Congress should also consider models to extend their adoption by the private sector.

“In addition to these fundamental intrusion and mitigation metrics, CISA should also be given the authority to develop new metrics beyond these fundamental intrusion and mitigation ones to respond to changes in the threat and defense landscape. To incentivize agencies to drive down the times it takes to discover and respond to intrusions or vulnerabilities, CISA should also implement a civilian-government-wide annual awards program to publicly acknowledge agencies and their leaders who achieve the best metrics.

“4. Strengthen the executive branch’s authority to sanction foreign cryptocurrency exchanges that fail to comply with basic “Know Your Customers” and anti-money laundering requirements

“Ransomware criminals rely on widely-available and largely anonymous cryptocurrency such as Bitcoin to collect hundreds of millions of dollars in ransom payments each year and to launder ransom payments into fiat currencies without risk of disclosing their identities to victims or law enforcement. Although U.S.-based exchanges are required by law to comply with robust “Know Your Customer” (KYC) and other anti-money laundering regulations, foreign exchanges have been slow to adopt similar requirements. The lack of widespread compliance undermines the efficacy of the U.S.’s and other like-minded governments’ efforts to clean up the global cyber ecosystem, since malicious actors can easily circumvent security requirements simply by using less secure foreign exchanges.

“The United States should pursue a two-pronged strategy to level the international playing field. First, it should work with existing and new trading partners to ensure they have adequate KYC and AML safeguards in place for cryptocurrency exchanges based in their jurisdictions. Second, the executive branch should explore its ability to sanction foreign cryptocurrency exchanges that fail to comply with minimum KYC and other anti-money laundering requirements or that refuse to cooperate with U.S. law-enforcement on investigations. 

“The Treasury Department currently has broad authority to sanction specific foreign exchanges based on evidence that they cooperate with prohibited nations or entities, but it does not have the authority to sanction exchanges for non-compliance with KYC and AML regulations. Granting them such authority explicitly would likely encourage foreign institutions to implement these regulations in order to avoid the prospect of sanctions.

“5. Incorporate cyber-specific details into OFAC’s SDN list

“The most difficult task facing many foreign cyber threat actors is procuring anonymous, reliable, fast, and long-lasting infrastructure (such as domains and cloud servers) to support malicious cyber attacks. These actors frequently go to great lengths—including registering shell companies and developing complex anonymous payment mechanisms—to disguise their activity, since using stolen bank accounts and credit cards for payment often results in the rapid shutdown of their infrastructure once the chargebacks start being reported. In addition, threat actors are increasingly taking advantage of legal constraints on the U.S. intelligence community’s ability to monitor domestic networks to gain access to the U.S.-based cyber infrastructure needed to carry out attacks against both private sector companies and U.S. government agencies. 

“The United States needs stronger mechanisms to deter cyber threat actors from leveraging U.S.-based cyber infrastructure to carry out cyber attacks. The Treasury Department’s Office of Foreign Assets Control (OFAC) already maintains a Specially Designated Nationals and Blocked Persons List (SDN), but the list only contains names of cyber criminals and other threat actors and does not include bank account information, credit card numbers or cryptocurrency wallets. As a consequence, the list is not always effective at identifying and blocking cyber threat actors, who almost always use fake names to procure infrastructure. 

“The Treasury Department should consider how to add these other identifying financial elements to the SDN to allow payment processors and cryptocurrency exchanges to block adversary-initiated transactions at the point of sale.

“6. Require threat hunting on Defense Industrial Base (DIB) networks

“In March of 2020, the Cyberspace Solarium Commission recommended that Congress direct regulatory action that the executive branch could pursue in order to require companies that make up the Defense Industrial Base, as part of the terms of their contract with DoD, to create a mechanism for mandatory threat hunting on DIB networks. This recommendation was partially authorized in Section 1739 of the FY21 NDAA, but that article only required DoD to conduct an assessment on the feasibility and suitability of a DIB threat-hunting program without requiring DoD to establish the program after the report is issued. Congress should pass the necessary legislation to fulfill the intent of the initial proposal and enable DoD to execute threat hunting operations on the networks of cleared defense contractors that hold sensitive national security information.”

Are other trade remedies needed?

When the only remedies available to companies are individual or company specific and require the cooperation of the country from which cybertheft is occurring (if offshore), there is often a reluctance of companies who have been harmed to identify the problem or pursue legal actions. Fear of retaliation by foreign governments can also reduce the willingness of companies to defend their commercial interests in such situations.

This raises the question whether broader-based remedies should be available to deter such activity and provide a major incentive better behavior by trading partners where such conduct is not being addressed adequately.

For example, where a country provides notice to a trading partner of problems and there is no resolution in a relatively short period (e.g., 90 days), should the complaining party block imports of products in the same general category, prohibit investments in the sector, and/or other actions?

If the cybertheft from companies appears to be for the benefit of a foreign government or at the direction of a foreign government, should there be a loss of MFN treatment for the sector or more broadly?

The concerns around cybertheft could be addressed within the WTO or within bilateral or regional agreements. Considering the length of time that cybertheft has been harming many economies, unilateral action may be warranted pending broader agreement.

COVID-19 — the race for diagnostics, therapeutics and vaccines and availability for all

· May 6, 2020 · COVID-19 · , , , , , , , · No Comments

With the mounting global death toll, with confirmed infections of over 3.6 million and continuing to climb, with no known effective vaccine and just the beginnings of finding possible therapies to reduce the severity or length of illness from the infection, it is clear to most that there is no full return to normalcy until effective vaccines are developed and made available to all in the world community. Because the costs to the global economy from the pandemic are measured in trillions of dollars and job losses in the hundreds of millions, there is a global urgency to advance medical solutions, despite a history with prior infectious disease outbreaks which would suggest that solutions could be years away.

The severity of the pandemic has led to some extraordinary efforts to have international organizations, pharmaceutical companies, universities and government labs work collaboratively and share data. There have also been a wide range of statements made by international organizations such as the World Health Organization, governments, NGOs, and the pharmaceutical industry that diagnostics, therapeutics and vaccines developed to address the COVID-19 pandemic must be developed on an expedited basis, be available equitably and be affordable. The phrase “no one is safe until everyone is safe” sums up what many leaders are saying is the goal.

Many countries with a pharmaceutical industry, university research center invloved in medical research, government agency that addresses disease control and prevention or the safety of medical supplies are engaged in research that may be company specific, university or lab specific or collaborative within the country and across countries. Governments are providing substantial financial assistance to spur research and development.

With the various infectious disease outbreaks of the last few decades, there are also groups which focus on improving the healthcare infrastructure in developing countries and least developed countries and in working to get needed tests, medicines and vaccines to countries unable to address such needs on their own. Groups like CEPI, GAVI, FIND, UNITAID are involved and are supported by the generosity of various governments and other organizations. They are all actively engaged in the response to COVID-19.

G20 Involvement

The G20 countries issued a statement on COVID-19 after an Extraordinary G20 Leaders’ Summit on March 26, 2020 which stated in part,

“We further commit to work together to increase research and development funding for vaccines and medicines, leverage digital technologies, and strengthen scientific international cooperation. We will bolster our coordination, including with the private sector, towards rapid development, manufacturing and distribution of diagnostics, antiviral medicines, and vaccines, adhering to the objectives of efficacy, safety, equity, accessibility, and affordability.”

https://g20.org/en/media/Documents/G20_Extraordinary%20G20%20Leaders%E2%80%99%20Summit_Statement_EN%20(3).pdf.

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The G20 presidency on April 24, 2020 noted its support of the Access to COVID-19 Tools (“ACT”) Accelerator whose purpose is to speed development, production and equitable distribution of new COVID-19 diagnostics, therapeutics and vaccines. The initial cost estimate for the early research and development efforts was estimated at $8 billion. The statement is embedded below

G20SS_PR_G20-ACT-Initiative-Launch_EN

European Union led initiative to obtain pledges for $8 billion

The European Union and a number of individual countries co-led an international pledging event, the Coronavirus Global Response, on May 4 which developed pledges of 7.4 billion Euros ($8 billion) The countries co-leading with the EU were France, Germany, Japan, Norway, Canada, Italy, Spain and the United Kingdom. European Commission President Ursula von der Leyen moderated the event. Her opening statement is below and reflects the reality that “we will have to learn to live with the virus – until and unless we develop a vaccine”. Collaboration is critical and the objective is to see that vaccines, diagnostics and treatments against coronavirus are deployed “to every single corner of the world. And we must ensure that they are available and affordable for all.” https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_20_804.

Opening_remarks_by_President_von_der_Leyen_at_the_Coronavirus_Global_Response_international_pledging_event

Besides comments from the EC’s president, other speakers included leaders from the European Council; the United Nations; the UN World Health Organization; France; Germany; Japan; Norway; Canada; Spain; United Kingdom; Saudi Arabia (2020 G20 Presidency); Jordan; South Africa (on behalf of African Union); Monaco; Turkey; Italy; Switzerland; Israel; the Netherlands; the Bill and Melinda Gates Foundation; Luxembourg; Sweden; Portugal; Croatia; Estonia; the Global Preparedness Monitoring Board; Bulgaria; Ireland; Serbia; Czechia (for itself, Slovakia, Hungary and Poland); Poland; Australia; Denmark; Greece; Austria; Malta; Belgium; Wellcome Trust; Latvia; South Korea; Mexico (for Latin America); Kuwait; Slovenia; Lithuania; Oman; Romania; Finland; United Arab Emirates; China; World Economic Forum; European Investment Bank; World Bank; CEPI (Coalition for Epedemic Preparedness Innovations); GAVI, the Vaccine Alliance; FIND (Foundation for Innovative New Diagnostics); UNITAID; IFPMA (International Federation of Pharmaceutical Manufacturers & Associations), and the DCVMN (Developing Countries Vaccine Manufacturers Network).

The pledging event goes on through the month of May. The kick-off event lasted just under three hours. The list of speakers was impressive covering international organizations, countries (from Europe; parts of Asia, North America and the Middle East; and South Africa), NGOs, philanthropic groups, pharmaceutical companies.

The message from all was fairly uniform – collaboration is crucial to speed the findings of solutions; solutions must be available to all on an equitable basis that is affordable. The $8 billion is simply the first step in a much larger endeavor once new diagnostics, therapeutics and vaccines are found and one turns to the need for broad production and distribution.

Press accounts have raised questions about some of the countries which did not participate in the May 4th event – the United States, Russian Federation, India, Brazil to name four countries with active pharmaceutical industries — and with whether the pledges largely reflect expenditures already made or committed versus new commitments. For many of the no shows (and for China which was apparently a late addition and only from the Ambassador to the European Union), important pharmaceutical companies were represented by either IFPMA or by DCVMN. Moreover, there is yet time to join. And these countries all have their own research underway which is generally being done in a collaborative effort within country or with others and are making data available to other players.

There is little doubt that the pharmaceutical companies, the university research centers, and the government labs will be important players in the research and development stage. Consider the following document from IFPMA which reviews how major pharmaceutical companies are engaged in various segments of the R&D effort. IFPMA reviews how its member companies are engaged in (1) repurposing existing and testing new treatments, (2) sharing real-time trial data with governments and other companies; (3) speeding up R&D on safe and effective vaccines; (4) developing diagnostic testing and securing supply; (5) securing essential supplies for medicines and vaccines; (6) increasing and sharing capacity for medicines and vaccines; and (7) supporting global health care systems. See https://www.ifpma.org/print/?url=covid19-print&options=–viewport-size%20%221200×50%22%20–zoom%201.5%20–orientation%20%22Landscape%22.

download

Will a global solution available to all present challenges for holders of intellectual property?

There are billions of dollars being spent by private companies, by research universities, government labs, and various NGOs, philanthropic groups and others in the global race to develop new diagnostics, therapeutics and vaccines. Much of the money spent will not result in effective solutions. Some, hopefully, will. Patent rights will arise for those developing the new products and there will thus be questions about how the new products can be made available to all at affordable prices.

Some individuals and companies may make any breakthroughs they are responsible for available to all at no cost (we have seen some of that in the past on medicines and recently on PPE products).

It is also the case, that governments can invoke exceptions to patent rights under certain circumstances and subject to certain limitations. See TRIPS Art. 31 (compulsory licensing).

Some governments (e.g., France) at the pledging event recognized the need to see that the innovators received a fair return on their investment, but also characterized COVID-19 products as “public goods”. The IFPMA in its activities has joined collaborative undertakings and has recognized the need for new diagnostics, therapeutics and vaccines to be available to all at affordable prices. But it is unclear what that means to the company or companies who develop a breakthrough product in terms of patent rights and revenues.

While the U.S. pharmaceutical industry has indicated that they are working with governments and insurers to see that new drugs and vaccines are available to all and affordable, they also have a blog post on the continued importance of intellectual property for pharmaceutical companies ability to tackle COVID-10. See The Catalyst, What they are saying: Intellectual property protections are critical as we work to defeat COVID-19, https://catalyst.phrma.org/what-they-are-saying-intellectual-property-protections-are-critical-as-we-work-to-defeat-covid-19.

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With possible breakthroughs in the next six months or so, how this important trade aspect of rewarding innovation in the fight against COVID-19 plays out could complicate or simplify the core desire of getting effective solutions to all at affordable prices.

Other trade issues

There are already efforts underway to get WTO Members to eliminate customs duties on medical supplies needed to address COVID-19. If not already covered by that effort, one would think it would be doable to get WTO Members to agree to trade any new diagnostics, therapeutics and vaccines for treating COVID-19 as duty-free articles (and presumably add the inputs to such new products).

U.S.-China Phase 1 Trade Agreement Signed on January 15 — An Impressive Agreement if Enforced

· January 15, 2020 · Uncategorized · , , , , , , , , · No Comments

There has been a lot of anticipation for what the Phase 1 agreement between the U.S. and China actually contains. Earlier today, following the signing ceremony at the White House, The Economic and Trade Agreement Between the United States of America and the People’s Republic of China, Phase 1 was released. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf

I’ve just finished reading through the agreement.  My first blush read is that the agreement has a lot of positive potential for the United States. While enforcability is always a critical consideration and particularly based on the U.S. experience with other commitments made by China in the past, there are some chapters which have both great specificity on obligations and specific timeline commitments that should make at least those chapters potential important improvements.

A quick overview of the agreement follows.

Intellectual Property

Chapter 1 on intellectual property is quite interesting as it lays out a large number of obligations China is taking on by individual IP issue and confirms that US system already has such obligations.  The chapter is broken into the following topics:

Trade secrets and confidential business information;

Pharmaceutical-related intellectual property;

Patents;

Geographical indications;

Manufacture and export of pirated and counterfeit goods;

Bad-faith trademarks;

Bilateral cooperation on intellectual property protection;

Implementation;

The specificity of commitments and timing for action are important in hopefully making this a really important chapter for companies with intellectual property needs and current concerns in China’s performance on such matters. USTR’s fact sheet on the IP chapter presents the Administration’s view of what was achieved. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-IP_Fact_Sheet.pdf. My own view is that Chapter 1 is an important plus for the U.S.

Forced Technology Transfer

The technology transfer chapter is limited and doesn’t appear to be more enforceable than the multiple laws, etc. China has had for years. While the chapter states the obligations, China has historically been of the view that technology transfer is not enforced in fact. The Administration understandably views the chapter as important, and the pressure of the 301 investigation and tariffs that remain may make the chapter more valuable than the general statements it consists of suggest. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Technology_Transfer_Fact_Sheet.pdf In my view, this is more of a placeholder chapter. Hopefully it will be honored in fact but the past doesn’t show that as a high probability.

Trade in Food and Agricultural Products

The third chapter on agriculture could be very important for changing the U.S. agricultural export scene as the chapter goes through a large number of products, establishes timelines and standards against which US products will be evaluated and or requires acceptance of various US products that have met US standards. The Administration gets straight A’s for the breadth and depth of this chapter in my view. There are seventeen annexes that take up the following topics or products:

Annex 1, agricultural cooperation

Annex 2, dairy and infant formula

Annex 3, poultry

Annex 4, beef

Annex 5, live breeding cattle

Annex 6, pork

Annex 7, meat, poultry and processed meat

Annex 8, electronic meat and poultry information system

Annex 9, aquatic products

Annex 10, rice

Annex 11, plant health

Annex 12, feed additives, premixes, compound feed, distillers’ dried grains, and distillers’ dried grains with solubles

Annex 13, pet food and non-ruminant derived animal feed

Annex 14, tariff rate quotas

Annex 15, domestic support

Annex 16, agricultural biotechnology

Annex 17, food safety

The chapter also includes an Appendix which lists beef, pork and poultry products considered not eligible for import into China which US producers will need to review. There are also side letters released with the agreement that address products and producers who will have immediate access to China consistent with the chapter. The Administration has a fact sheet on agriculture chapter in total and then on individual products. The chapter fact sheet’s link follows. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Ag_Summary_Long_Fact_Sheet.pdf

Financial Services

The fourth chapter on financial services is also quite interesting and is the one chapter where there are specific US obligations identified (typically considering expeditiously pending applications by Chinese financial service providers in specific areas).  US companies have had many problems for the last 20 years in terms of China’s permitting access.  Looks to me that the chapter, if implemented (and there are timelines, etc.) could be important for US companies. Subjects covered include banking services, credit rating services, electronic payment services, financial asset management (distressed debt) services, insurance services, and securities, fund management, futures services. The Administration’s fact sheet on financial services provides its views on the importance of the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Financial_Services_Fact_Sheet.pdf

Macroeconomic Policies and Exchange Rate Matters and Transparency

The fifth chapter on currency contains four articles. One is on general provisions. The second is on exchange rate practices. The third addresses transparency. And the fourth article covers the enforcement mechanism. While China was widely viewed as engaging in reducing the value of its currency for many years and was last year found by the Trump Administration to be a currency manipulator, most economists have viewed China as less problematic on its currency in recent years.  It is important to have a chapter focused on transparency and currency practices. Unclear how effective the enforcement provisions outlined will be in fact. But hopefully, China’s actions will not raise concerns under this chapter going forward. The Administration’s fact sheet presents its views of what was accomplished in the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Macroeconomic_Fact_Sheet.pdf

Expanding Trade

The sixth chapter is potentially commercially important as it addresses China’s commitments to increase purchases from the United States in both goods and services. The actual text clarifies that the $200 billion additional imports by China over 2017 levels are the combination of increases over 2017 in 2020 and 2021 versus being a requirement for each year.  Such growth is more achievable and less unrealistic in my view.

The targets for growth are presented in four groups – manufactured goods, agricultural goods, energy, services and then the categories that are considered within each of the four groups are shown on pages 6-4 – 6-23 of the Agreement.  The growth above 2017 levels for the four broad categories is shown below.

Products/Services20202021Total
manufactured goods$32.9 BN$44.8 BN$77.7 BN
agriculture$12.5 BN$19.5 BN$32.0 BN
energy$18.5 BN$33.9 BN$52.4 BN
services$12.8 BN$25.1 BN$37.9 BN
Total$76.7 BN$123.3 BN$200.0 BN

A lot of attention will be focused on whether the purchases actually happen.  Actions under Chapter 3 will directly improve US exports of agricultural goods and those of Chapter 4 will improve the financial services portion of the services target.  The IP chapter could be affect manufactured goods, etc. So much of the Phase 1 Agreement should result in a natural increase in imports from the U.S. as longstanding barriers are removed or otherwise overcome.

The Administration’s fact sheet on expanded trade can be found here. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Expanding_Trade_Fact_Sheet.pdf

Bilateral Evaluation and Dispute Resolution

A lot of focus will be given to Chapter 7 because of the importance of enforcement. However, as noted above, enforcement should be easier where there has been the level of detail/specificity as to obligations and timelines for implementing individual obligations that exists in many of the chapters.

On enforcement, Chapter 7, lays out the basic purpose of the bilateral evaluation and dispute resolution arrangement in Article 7.1. Paragraph 2 of that Article provides the objectives, reflecting both the U.S. desire for speed and the Chinese desire for mutual respect and avoidance of escalation.

“The purpose and madate of the Arrangaement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.”

There are various elements to the chapter including a high level Trade Framework Group (USTR and designated Vice Premier of the PRC).  Each country will have a Bilateral Evaluation and Dispute Resolution Office which will, inter alia, handle disputes and includes opportunities for appeals on short time lines, referral to USTR and the Vice Premier and the ability of the complaining party to take action if not resolved with either no retaliation (complained against party views action taken as in good faith) or the need to withdraw from the agreement for the party complained against if the belief is that the action was not taken in good faith.

I believe that the Chapter will effectively help the Parties resolve disputes particularly with regard to the commitments in Chapter 1, 3,  4 and 6. 

Conclusion

The Phase 1 Agreement is an important agreement that will achieve some significant market access opening for U.S. producers into the Chinese market, improved intellectual property protection in China, expanded market access for U.S. financial service providers and hopefully make some progress on reducing or eliminating forced technology transfer and limit concerns about currency misalignment. My hat’s off to the negotiators for an impressive result. There remain important issues not yet addressed bilaterally that will hopefully be taken up in Phase 2 talks, but Phase 1 is an important accomplishment.