China Pledges Fair Treatment Of Foreign Auto Firms In NEV Program


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Article from Nov. 23, 2011 US-China Trade News highlighting EV and auto policy direction.

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China Pledges Fair Treatment Of Foreign Auto Firms In NEV Program

  1. 1. from the publishers of Inside U.S. Trade Inside US-China Trade the exclusive weekly news service of Vol. 11, No. 46 - November 23, 2011Respondents, U.S., China Advance On IPR, Innovation At JCCTPetitioners Battle But Fall Short ElsewhereOver SolarWorld’s In this week’s Joint Commission on Commerce and Trade (JCCT), ChinaCharges Of Injury agreed to new deadlines for implementing previous Chinese commitments on intellectual property rights enforcement and cutting the link between indig- Respondents in a trade remedy enous innovation policies and government procurement, but made fewcase brought by SolarWorld against concessions on agricultural market access and investment rules.Chinese crystalline silicon photovol- “The U.S. government gets an A+ for being focused on the right issues,”taic (CSPV) cells and modules have said a U.S. industry source who nonetheless described the overall results onstrongly attacked the petition in the those issues expressed in the JCCT outcomes document as “modest.”context of the International Trade U.S. Trade Representative Ron Kirk, who led the U.S. side of the bilateralCommission’s deliberations for commercial talks along with Commerce Secretary John Bryson, also indicatedmaking a preliminary injury determi- that the Nov. 20-21 JCCT held in Chengdu, China fell short of U.S. expecta-nation early next month. tions. Respondents, both in their “The JCCT gives us a mechanism to address the toughest issues in ourcomments at a Nov. 8 staff conference trade relationship, and we must judge it by our ability to make concreteand in subsequent briefs submitted by progress,” Kirk said in a Nov. 21 statement. “We have reached agreement on aNov. 15, are focused on three key number of important outcomes, though we had hoped to accomplish evenfactors that the ITC will consider in its more. In our discussions with our Chinese counterparts, we spoke franklypreliminary injury determination to be about the need to redouble our efforts going forward.”issued on Dec. 2. On the link between indigenous innovation and government procurement, They are seeking to expand the China announced at the JCCT that its ruling State Council “has issued adefinition of the domestic like product measure requiring governments of provinces, municipalities and autonomousto include cells and modules based on regions to eliminate by December 1, 2011 any catalogues or other measuresthin-film technology, which the linking innovation policies to government procurement preferences.petitioner has said should be excluded The measure issued by the State Council addresses the demands by thebecause they are manufactured to U.S. government and industry that the Chinese federal government send aseparate standards and differ fromCSPV cells in their physical character- continued on page 5istics to the point of often not beinginterchangeable. China Pledges Fair Treatment Of Foreign Auto Respondents also refute the Firms In NEV Programpetitioners’ charges that the U.S. solar At the Joint Commission on Commerce and Trade (JCCT), China thisindustry has suffered injury and that it week offered a number of confirmations and clarifications with respect tois caused by unfairly traded imports forced technology transfer and availability of subsidies that would mean fairfrom China. treatment of foreign auto firms as they seek to compete for market share and Respondents in their presenta- set up production facilities for electric vehicles, according to a fact sheettions acknowledged that imports from issued at the conclusion of the Nov. 20-21 meeting in Chengdu, China.China increased substantially during China is projected to manufacture five million of these new energythe period of investigation, gaining vehicles by the year 2020. An auto industry source said the statements in thesignificant market share in the United fact sheet — if they are implemented as written — “on the surface” wouldStates. But they insisted that this seem to suggest that “Christmas done come real early this year.”increase was largely driven by the In the joint fact sheet, China “confirmed that it does not and will notsignificant increase in demand for maintain measures that mandate the transfer of technology.” It also “clarified”solar products in the United States, a that “‘mastery of core technology’ does not require technology transfer forpoint strongly refuted by SolarWorld. NEVs,” according to the fact sheet SolarWorld said in its post- The Chinese further confirmed that “the establishment of brands is ahearing brief said that Chinese corporate decision and that the Chinese government does not and will notproducers and exporters targeted the impose any requirements for foreign-invested companies to establish domestic continued on page 8 continued on page 6
  2. 2. News Briefs Obama: U.S. Would Welcome Chinese Interest In Senator Urges JCCT Focus On Currency, IP Theft, Joining TPP Rare Earth Controls President Obama, speaking at a Nov. 16 press conference Sen. Bob Casey (D-PA) has urged the Obama administra-in Australia, said that the United States is not looking to “ex- tion to press China at the Nov. 20-21 Joint Commission on Com-clude” China from initiatives in the Asia-Pacific region, such merce and Trade (JCCT) on key issues that impact manufactur-as the Trans-Pacific Partnership (TPP) negotiations. ing firms in Pennsylvania, specifically highlighting currency “The notion that we are looking to exclude China is mis- undervaluation, intellectual property protection and rare earthtaken. And I’ll take TPP as a perfect example of this. We haven’t export restraints.excluded China from the TPP,” he said. “Now, if China says, In a Nov. 17 letter to U.S. Trade Representative Ron Kirkwe want to consult with you about being part of this as well, we and Commerce Secretary John Bryson, the co-chairman of thewelcome that,” the president said, according to a transcript of Joint Economic Committee said he is “certain” that sufficienthis remarks. support can be garnered to pass currency legislation out of Con- “The United States is going to be a huge participant in both gress if “meaningful appreciation” of the renminbi is not forth-economic and security issues in the Asia-Pacific region, and coming by China. He also expressed worry that the administra-our overriding desire is that we have a clear set of principles tion has not used the “limited tools at our disposal to aggres-that all of us can abide by so that all of us can succeed. And I sively confront” currency undervaluation.think it’s going to be important for China to be a part of that,” Casey underscored the negative impact that Chinese IPRhe said. “I think that’s good for us.” violations have on Pennsylvania companies, including telecom But Obama made clear that China would have to rethink giant Comcast Corporation, lighter-maker Zippo Manufactur-its economic policies if it were to join the TPP talks. “It will ing Company, and guitar-maker C.F. Martin & Co. And he saidrequire China to rethink some of its approaches to trade,” he Chinese “price controls” on rare earth elements and other rawsaid. “But it’s going to require China, just like all the rest of us, materials are impacting the cost of production for Kennametal,to align our existing policies and what we’ve done in the past a Latrobe, Pa., manufacturer that uses as key inputs tungsten,with what’s needed for a brighter future.” tungsten carbide and tungsten oxide. Obama did not cite specific areas that could pose particu- Casey said he wants to work with USTR and Commercelar challenges for China were it to seriously consider joining to develop a “comprehensive policy response” to the issuethe TPP talks. However, there are a number of areas, including of rare earth and raw material supplies, noting that the Euro-disciplines for state-owned enterprises, that TPP partners are pean Union has responded to price hikes by removing im-considering and which could prove difficult for China. port duties. SUBSCRIPTION ORDER FORM Sign me up to receive ChinaTradeExtra, including the newsletter Inside US-China Trade, at $595 per year in the U.S. and Canada; $645 per year elsewhere (air mail). Lower prices are available to subscribers of Inside U.S. Trade and World Trade Online. Call for details. To order by mail: Send this coupon to ChinaTradeExtra, Name __________________________________________________ P.O. Box 7167, Ben Franklin Station, Washington, DC 20044. Affiliation _______________________________________________ To order by phone, fax or e-mail: Call 800-424-9068 (in the Washington, DC area, 703-416-8500). Fax to 703-416-8543. Address _________________________________________________ E-mail at City/State/Zip ____________________________________________ Please check one: Visa Bill me Phone __________________________________________________ MasterCard Check enclosed Card number _________________________________________ E-mail __________________________________________________ Name on the card _____________________________________ Signature _______________________________________________ Exp. date ____________________________________________2 INSIDE US-CHINA TRADE - - November 23, 2011
  3. 3. U.S., China Agree To Strengthen Dialogue On Patent Protection In JCCT The United States and China this week pledged to ramp up a bilateral dialogue on patent issues that is part of a largerworking group on intellectual property rights (IPR), as U.S. companies continued to highlight challenges they face inenforcing their patents in China. At the U.S.-China Joint Commission on Commerce and Trade (JCCT), held Nov. 20-21 in Chengdu, China, officialsfrom both countries agreed to deepen their dialogue in the IPR working group on issues related to patent quality andexamination times for Chinese patents in order to address “specific issues of concern for U.S. and Chinese companies,”according to a fact sheet from the Office of the U.S. Trade Representative. The three types of patents in China areinvention, utility model, and design patents. In comments submitted to the U.S. Patent and Trademark Office (USPTO) earlier this month, the Motor and Equip-ment Manufacturers Association complained that it is easy for Chinese companies to obtain utility model and designpatents even if they infringe on previously existing patents. That is because these patents can be obtained in 12 to 18months, and no substantive examination is required prior to the patents being granted (Inside US-China Trade, Nov. 16). During two industry roundtables organized by USPTO in China earlier this year, U.S. industry groups recommendedthat China’s State Intellectual Property Office (SIPO) step up the fight against low quality utility model patents andpenalize applicants who submit utilitiy model filings in bad faith, according to a summary of industry views submitted bythe Biotechnology Industry Organization (BIO) along with its comments to USPTO. They also recommended that SIPOcreate a separate opposition proceeding specifically for utility model patents and that China cancel policies thatincentivize excessive utility model filings in the first place. MEMA, BIO and other industry groups submitted comments to USPTO in response to an Oct. 17 Federal Registernotice requesting public comment on China’s patent enforcement system (Inside US-China Trade, Oct. 26). USPTO,which publicly released the comments on Nov. 17, intends to use the comments as a basis for a report detailing thechallenges faced by U.S. innovators and recommendations for improving the Chinese patent enforcement system. Oncethese problems are identified, the U.S. government would then seek to address them with Chinese authorities. The acquisition and enforcement of UM and design patents were one of five problem areas in which USPTO hadrequested comments, but this area does not appear to be a priority for biotechnology or pharmaceutical companies. The other areas are: the collection and preservation of evidence in Chinese courts; obtaining injunctions and dam-ages; the acquisition and enforcement of utility model and design patents; the enforceability of court orders; and adminis-trative patent enforcement. In its comments, BIO flagged several difficulties with patent litigation in Chinese courts, including with respectto obtaining a preliminary injunction, insufficient damages and evidence collection. Those areas were also emphasized incomments from PhRMA and Interpat, a group of U.S., European and Japanese pharmaceutical companies. In addition, BIO said some Chinese manufacturers of generic drugs are exploiting a loophole in Chinese law thatallows them to successfully export infringing products without being subject to patent litigation. That is because Chineselaw requires a sale within China (and not an export sale) in order to infringe a patent, and companies take advantage ofthat by only shipping abroad, according to BIO. BIO also argued that Chinese government policy has undermined U.S. patent rights in China through a nationalprogram that funds the manufacture of generic versions of U.S. patented pharmaceuticals. In addition, BIO said itsmembers report they are consistently threatened with compulsory licenses in the context of pricing negotiations. The Business Software Alliance, which submitted comments to USPTO on Nov. 4, noted that its members have onlyrecently begun filing patents in China and therefore have limited experience with patent enforcement there. However, ithighlighted that software companies have a great deal of experience in defending copyrights in China, and are aiming toapply lessons they have learned in that area to patent enforcement. BSA said it is “imperative” that the Chinese system for enforcing patents be transparent, and recommended a clearlyarticulated standard for determining whether a court will accept or reject a case, among other things. It also stressed thatthere need to be adequate remedies for bringing a case against an infringer, including sufficient damages, clear criteria forissuing preliminary injunctions, and effective mechanisms for enforcing court judgments. Three additional companies submitted comments to USPTO outlining their specific experience in defending theirpatents in Chinese courts. They were Huntsman Advanced Materials, based in Switzerland; Osborne Industries, based inKansas; and an anonymous biotechnology company.Ways And Means Presses For New Measure Of JCCT Success With China Led by their chairman and ranking member, all members of the Ways and Means Committee late last week urged theObama administration to develop a new way of measuring its success in removing China’s wide-ranging trade barriersthat does not focus solely on the number of laws China repeals. Instead, the administration should develop “commercially meaningful metrics” to measure the effectiveness ofcommitments, such as increased market access opportunities for U.S. exports and sales in China, which would increaseINSIDE US-CHINA TRADE - - November 23, 2011 3
  4. 4. U.S. jobs, the committee members said in a Nov. 17 letter to U.S. Trade Representative Ron Kirk and Commerce Secre-tary John Bryson. Success in tackling China’s trade barriers should be measured against these metrics and where sufficient progressfails to materialize, the administration should develop a new way of fighting Chinese trade barriers, according to theletter. “Where progress fails to materialize, the Administration, working with Congress and stakeholders, should seek todevelop new approaches to these long-standing issues,” the letter said. One House aide said that the committee’s message with respect to developing “new approaches” to dealing withChina’s trade barriers is a significant one though there has been no discussion as to what that might mean. But anotherHouse aide that this does not necessarily mean a call for a different approach to China’s trade barriers. The letter highlighted that China imposes a wide range of trade barriers, including indigenous innovation policies,persistent failure to protect intellectual property, currency undervaluation and failure to liberalize the capital account, lackof regulatory transparency, export restraints, and adoption of sanitary and phytosanitary measures that are not based onscience and block U.S. agriculture exports. A House aide said that that the current approach of measuring progress by removal of the number of Chinese lawswithout taking into account the commercial impact leads to a situation where China removes one barrier only to imposeanother.With New Chinese Offer Due By Year’s End, GPA Parties Set Out Demands Signatories to the Government Procurement Agreement (GPA) last week signaled that China’s planned accession tothe agreement remains a long way off, but they also indicated that the expected submission by the end of the year of asecond revised offer will help drive the process forward in 2012. “Significant further work remain[s] to be done before the conclusion of China’s accession could be foreseen,” theGPA parties said in an annual report approved at a Nov. 15 meeting of the Government Procurement Committee inGeneva. They said the committee hopes for “significant further movement on this matter in 2012,” while stressing thatChina needs to offer a level of coverage comparable with that of existing signatories. “The Committee considers that China’s GPA accession, on terms that are comparable to those of the existing Parties,is a matter of tremendous significance for the Agreement and for the world economy, and a very important signal for otheremerging economies,” according to the report. In the report, the GPA parties said they expect the forthcoming offer to fulfill China’s commitments to includecoverage of sub-central entities and also address other requested improvements. These include requests for China to reduce the thresholds above which the GPA’s non-discrimination market accessrules apply, expand its coverage of services, and remove general notes at the end of its proposed schedule that restrictcoverage. GPA parties have also pressed for China to bind state-owned enterprises (SOEs) to the agreement. But sources have said the primary improvement in China’s forthcoming offer will be the addition of sub-centralentities, and that major improvements in these other areas are not expected (Inside US-China Trade, Sept. 28). The U.S.has already acknowledged that the SOE issue will not be dealt with in the forthcoming offer, and has pushed for thematter to be addressed in a subsequent offer that China may table in 2012. The annual report also reiterated the importance of China bringing its national procurement legislation in line withthe requirements of the GPA. In addition to an update on China’s accession, the report gives an overview of the committee’s work over the pastyear, including updates on the renegotiation of the GPA and other pending accessions to the agreement. It also includes asummary of notifications by GPA members of changes in their schedules as well as statistics they have reported. The current GPA parties are trying to wrap up the renegotiation of the agreement in time for a December meeting oftrade ministers at the World Trade Organization in Geneva, although outstanding coverage issues between the EuropeanUnion and Japan are now the major obstacle to closing a deal. SUBSCRIPTIONS: Publisher: Jutta Hennig Chief Editor: Scott Otteman 703-416-8500 or Contributing Editors: Jamie Strawbridge, Adam Behsudi, Matthew Schewel, 800-424-9068 Alex Lawson, Ben Hancock Production Manager: Lori Nicholson Production Specialists: Daniel Arrieta, Sharonel Pedronan, Andrew Leonard Inside US-China Trade is a service of and is published every Wednesday by Inside NEWS OFFICE: Washington Publishers, P.O. Box 7167, Ben Franklin Station, Washington, DC 20044. © Inside Washington 703-416-8539 Publishers, 2011. All rights reserved. Contents of Inside US-China Trade are protected by U.S. copyright laws. No part of this publication may be reproduced, transmitted, transcribed, stored in a retrieval system, Fax: 703-416-8543 or translated into any language in any form or by any means, electronic or mechanical, without written permission of Inside Washington Publishers.4 INSIDE US-CHINA TRADE - - November 23, 2011
  5. 5. JCCT Progress Limited . . . begins on page onehigh-level instruction to the sub-central governments to abandon the use of discriminatory accreditation lists and productcatalogues that have been used to identify firms and products that qualify for government contracts. The U.S. had previously secured a commitment from Chinese President Hu Jintao to delink China’s promotion ofdomestic innovation from its government procurement programs. “State Council directives to eliminate any catalogues linking indigenous innovation to government procurementand lead new intellectual property rights (IPR) enforcement across China are very positive developments for U.S.companies operating in China,” said US-China Business Council President John Frisbie on Nov. 21. “... Moredetails will be needed in the coming days, but today’s announcements are a positive step forward for US-Chinacommercial relations.” On its commitment to legalize software used in government agencies, a fact sheet issued after the Nov. 20-21JCCT specifically says Vice Premier Wang Qishan, who leads the Chinese side of the talks, personally commits that bythe “middle of 2012... the provincial legalization program for all the 31 provincial entities will be completed, and by2013, the software legalization program for the municipal and county level governments will also be completed.” “These are encouraging commitments that have the potential to reduce software piracy,” said BSA President andCEO Robert Holleyman in a Nov. 21 reaction. “How the plans are implemented in practice will be critically important,but we are pleased that the State Council, China’s chief governing body, has been put directly in charge. We need to seetangible results in the short term and long term, because the scale of piracy in China is enormous.” On making IPR enforcement a continuing priority, China announced it has made permanent the “leadership structure”that was put in place for the earlier Special IPR Campaign, according to the fact sheet. China also for the first time publicly stated that it will not discriminate against foreign auto companies in the newenergy vehicle (NEV) industry (see related story). One area where notable progress was clearly lagging was the agricultural sector, where Chinese restrictions on U.S.beef and poultry access are ongoing, along with U.S. curbs on imports of cooked poultry from China, as well as otheroutstanding issues. The only agricultural outcome announced in the Nov. 21 fact sheet was that the U.S. Department of Agriculture andChina’s General Administration of Quality Supervision, Inspection and Quarantine are “finalizing the framework of a fiveyear strategic plan focused on food security, food safety and sustainable agriculture to build a stronger foundation forcritical cooperation in agriculture.” Similarly, U.S. calls for China to do away with its multiple restrictions on foreign investment in a more wholesaleway apparently were rejected by China, according to industry sources. These included abandoning or substantiallyexpanding the foreign equity caps still in place in many sectors, including financial services. It also included ending thegovernment’s reliance on the Guiding Catalogue on Foreign Investment, a document currently under Chinese governmentreview that prohibits, restricts and encourages foreign investment in particular sectors. Going into the JCCT, industry sources described four priority U.S. issue areas: Chinese restrictions on foreigninvestment; indigenous innovation policies’ effects beyond the delink from government procurement now being imple-mented; strengthening intellectual property rights enforcement; and following up on pre-existing Chinese commitmentson indigenous innovation and software legalization. In a related development, all members of the House Ways and Means Committee urged the Obama administration todevelop a new way of measuring its success in removing China’s wide-ranging trade barriers that does not focus solely onthe number of laws China repeals (see related story). The JCCT fact sheet also highlighted the State Council’s previously announced decision to set up a permanent IPRoffice as a nation-wide IPR “enforcement leadership structure.” This office will be headed by Wang, China’s top eco-nomic official who also leads China’s participation in the Strategic and Economic Dialogue (S&ED) (Inside US-ChinaTrade, Nov. 16). The U.S. music industry’s reaction to the permanent IPR office was cautiously optimistic, and stressed the need forfurther action by that office. “We are obviously pleased with the establishment of the Council-level leadership structure under Wang Qishan tocontinue the work commenced under the special enforcement period during which time some positive changes wereemerging,” said Recording Industry Association of America Executive Vice President Neil Turkewitz. “We look to Wang to direct strategic enforcement efforts that facilitate criminal referrals from the administrativeauthorities, enhance criminal penalties and facilitate effective prosecution to create meaningful and systemic deterrence,”he said. Underscoring a long-standing priority of the recording industry, Turkewitz also called on Wang to “quickly redeem”China’s existing commitment to “obtain the early completion of a Judicial Interpretation that will make clear that thosewho facilitate online infringement will be equally liable for such infringement.” Many of China’s piracy problems “have their roots not in the criminal margins of society, but in the open andINSIDE US-CHINA TRADE - - November 23, 2011 5
  6. 6. notorious services operated by major internet actors such as Xunlei and Sougou, who operate services based onproviding access to infringing music,” Turkewitz noted. Under the new arrangement, “that must no longer betolerated,” he said. A former U.S. trade negotiator praised the level of detail of the Chinese JCCT implementation commitments across arange of issues as outlined in the six-page fact sheet. “I’m impressed by the effort of the [U.S. government] to follow-up on previous commitments and drill deeperto ensure more effective implementation,” he said. “The language of the commitments is increasingly detailed, andthe Chinese are agreeing to discuss, throughout the coming year, topics that they have not previously been open todiscuss.” On the legalization of software used in government agencies’ offices, China only restated its earlier commit-ments to conduct audits and inspections of government agencies’ use of legitimate software, and to publish the auditresults “as required by China’s law.” But the language does not include any deadlines for implementing these commit-ments. Likewise, the document restates China’s commitment to promote the use of licensed software in state-owned enter-prises and to conduct “enterprise software management pilot projects, and includes a new commitment to “publishprogress reports about these projects.” But again the fact sheet does not mention any deadline with regard to the pilotprojects or the issuing of reports. “Last year, China committed to ensure its government agencies at all levels use only legal software,” said Holleyman.“We are still assessing the impact of that ongoing program. China’s commitment this week to improve and extend itsgovernment software legalization initiative is a positive step because it acknowledges there is still a great deal of work tobe done.” On the issue of IPR and non-discrimination, which relates to how best to encourage domestic innovation, China andthe U.S. agreed to build on the innovation principles agreed in the 2011 Asia-Pacific Economic Cooperation (APEC)Leaders’ Declaration in work to be conducted by the JCCT Intellectual Property Rights Working Group. That group will study investment, tax, and other regulatory measures outside of government procurement, with a“first phase of study” in 2012 that will focus on investment and tax issues, and a second phase in 2013 that will cover“key measures in other areas.” While the goal of the study is “to determine whether the receipt of government benefits is linked to where intellectualproperty is owned or developed, or to the licensing of technology by foreign investors to host country entities,” the twosides in the working group “will actively discuss removal of these barriers that distort trade and investment,” according tothe fact sheet. — Scott OttemanChina Says No Discrimination On Electric Cars . . . begins on page onebrands in China.” In addition, China pledged that “foreign-invested enterprises are eligible on an equal basis for subsidies or otherpreferential policies for NEVs with Chinese enterprises, and that these subsidies and preference programs will beimplemented in a manner consistent with WTO rules.” The latter public confirmation may mark an advance over what has been explicitly stated in the past abouteligibility for NEV programs, according to Bill Russo, president of the Beijing-based automotive consultancySynergistics Limited. “While it was never stated who would be eligible for subsidies, it was never unambiguously stated whether foreigninvested joint ventures would be eligible, and this apparently clarifies that they are indeed eligible,” he said in a Nov. 21email. Russo noted, however, that the second part of the sentence that mentioned general consistency with WTO rules,“leaves room for future adjustments.” According to another industry source, the test case for Chinese credibility on its JCCT NEV statements will beGeneral Motors’ Chevy Volt, which it can be expected to seek to import into China soon, possibly before the end of 201,even though GM has already agreed to produce a domestic brand NEV, the Baojun, in its joint venture with ShanghaiAutomotive Industry Company (SAIC). China also affirmed at the JCCT that the “views of all stakeholders will be considered,” including those of the UnitedStates, as it develops “possible future NEV support programs.” U.S. auto firms in the past complained that China’s National Development and Research Commission (NDRC) hasinformally been forcing technology transfer by not approving additional production capacity or new plants unless theforeign joint venture partner agrees to establish a domestic brand in the NEV space (Inside US-China Trade, March 16,2011). As a result, nearly all major foreign automakers except Ford have already agreed to produce a domestic NEVbrand. U.S. automakers also had been worried that draft regulations by NDRC and the Ministry of Industry and6 INSIDE US-CHINA TRADE - - November 23, 2011
  7. 7. Information Technology (MIIT) implementing the NEV policy were aiming to force technology transfer by requir-ing that any NEV joint venture must demonstrate “mastery” of at least one of three key technology areas: electricbatteries, motors or control systems. Given the relative advanced state of foreign firms’ technology in these areascompared to that of potential domestic partners, the fear was that such technology would have to be provided by theforeign firm into the NEV JV. Another JCCT outcome unveiled on Nov. 21 was a Chinese assurance that it will provide “a fair and level playingfield for all companies, including U.S. companies, in China’s newly emerging industries.” Those industries include high-end equipment manufacturing, energy-saving and environmentally-friendly technolo-gies, biotechnologies, new generation information technologies, alternative energy, advanced materials, and NEVs,according to the fact sheet. According to data provided by U.S. industry, China plans to invest $1.5 trillion in those sectors over the next fiveyears. Other JCCT outcomes were announced with respect to medical devices, pharmaceuticals, smart grid technologies,standards and conformity assessment, telecommunications goods and services, and travel and tourism, The document alsooutlines a series of “cooperative activities” the two sides have agreed to pursue under the auspices of the JCCT IPRWorking Group, as well as under the JCCT Commercial Law Working Group and with regard to cloud computing andmotorcycles.Grassley Presses Holder For Details On Next Year’s FCPA Guidance Senate Judiciary Committee Ranking Member Charles Grassley (R-IA) has asked the Department of Justice (DOJ) toclarify the details of the department’s forthcoming guidance on the enforcement of the Foreign Corrupt Practices Act(FCPA). In questions for the record submitted to Attorney General Eric Holder last week, following a Nov. 8 hearing on theDOJ oversight, Grassley pressed for more specificity on what the business community could expect to see in the guid-ance. Assistant Attorney General Lanny Breuer announced on Nov. 8 that the DOJ would issue the guidance sometime in2012. Grassley’s queries largely reflected the business community’s longstanding criticisms of the 1977 law prohibitingbribes to foreign government officials. Grassley supported the release of new guidance, saying it will “help ensure thatbusinesses that want to do the right thing know what the right thing is” in the eyes of DOJ. Specifically, Grassley asked if the guidance would include DOJ’s interpretations of “ambiguous statutory terms” suchas “foreign official” and “government instrumentality.” Businesses, led by the U.S. Chamber of Commerce, have long sought clarity on the definition of those terms,particularly over whether they should apply to employees of state-owned enterprises (SOEs). In the wake of Breuer’s comments, several observers predicted that the guidance would contain clarification of thoseterms (Inside US-China Trade, Nov. 16). The terms’ perceived ambiguity is especially troublesome for businesses pursuing contracts in China, where the linebetween government and commerce is difficult to pinpoint. Grassley also asked Holder whether guidance would clarify the extent to which one company may be held liable forthe enforceable activities of a company it has acquired, even if those activities took place prior to the acquisition. Thisconcept is known as “successor liability,” and has been targeted for removal from the law by the Chamber and othermembers of the business community. When announcing the guidance, Breuer added that the DOJ had “no intention whatsoever” of supporting reforms thatwould weaken the FCPA, and cited the removal of successor liability as one such reform. Finally, Grassley asked Holder if the DOJ’s guidance would clarify to what extent companies would be held respon-sible for the acts of independent subsidiaries and whether it would create a de minimis threshold for the value of gifts andhospitality given out when pursuing business contracts. In addition to these substantive questions about the guidance, Grassley also raised several procedural questions,including when exactly the DOJ anticipates releasing the document; who at DOJ would be primarily responsible forwriting it; and whether the Securities and Exchange Commission (SEC) would have a role in its crafting. The SEC co-enforces the law with DOJ. The questions were submitted to Holder on Nov. 15, and a Judiciary Committee spokeswoman said there is no firmdeadline by which DOJ must respond. Traditionally, answers to questions regarding oversight hearings are given shortlybefore the next scheduled oversight hearing, which has not yet been announced.INSIDE US-CHINA TRADE - - November 23, 2011 7
  8. 8. ITC Hosts Solar Injury Battle . . . begins on page oneU.S. market to use the production capacity that the Chinese government had subsidized into existence. These massivesubsidies created CSPV production capacity that was almost exclusively destined for export, according to SolarWorld. It noted that these dumped and subsidized imports forced U.S. prices to fall between 40 to 50 percent in one year andthat imports in the first nine months of 2011 increased by 194 percent compared to the full year 2010. SolarWorld also charged that respondents at the Nov. 8 staff conference failed to refer to the massive increase inmarket share and volume of imports from China of subject merchandise, as well as to the pervasive Chinese undersellingor the operating losses, closures and bankruptcies of U.S. firms. “Instead, Respondents offered a litany of alternative causes of injury, which range from contradictory to absurd,” theSolarWorld brief said. The brief reminded the ITC that in its preliminary injury finding, imports only have to be more than a “minimal ortangential” cause of injury in antidumping and countervailing duty cases. Seeking to expand the definition of domestic like products to include those using thin-film technology wouldinclude other U.S. manufacturers such as First Solar in the relevant industry definition, according to respondent lawyers .This would make a preliminary injury finding less likely because these solar producers are doing better commerciallythan those producing CSPVcells and modules, according to a respondent lawyer. In their post-hearing briefs, respondents argued that CSPV and thin film products share physical characteristics aswell as end uses and are generally interchangeable. These factors are among the six factors the ITC has to consider whendetermining whether various products comprise a like product. Therefore, CSPV products and thin-film products should therefore be considered part of a single like product,contrary to the petitioner’s claims, respondents argued. CSVP and thin-film products are “ultimately laminated products that capture sunlight and convert its energy intoelectricity by the photovoltaic effect,” according to the post-conference brief filed on behalf of the China Chamber ofCommerce For Import and Export Machinery (CCCME). But the CCCME post-hearing brief acknowledged that CSVP and thin-film products do not meet one of the factorsused by the ITC to determine like product, which is sharing common manufacturing facilities, production processes oremployees. But it said this should not be “detrimental” to the like product finding in light of the other “significantcommonalities.” In its post-hearing brief, SolarWorld said that if all the factors in the ITC’s like product test are considered, it is“clear” that thin-film products differ significantly from CSPV products and are not a like domestic product. To fight petitioners’ claims that the imports in question have caused price suppression and depression for U.S.producers, respondents argued that the decline of CSPV module prices has been a long-term trend that began beforeChinese CSPV cells or modules were exported to the U.S. market. These Chinese imports were not significant before2005, according to CCCME. Instead, the price decline for these cells and modules is due to the fact that polysilicon prices declined drastically in2009 and have continued to decline since then., the CCCME brief said. This allowed all producers to lower their pricesfor cells and modules, according to CCCME. In addition, CSPV module prices were being depressed by competition from thin-film producers and the fact that thefederal U.S. government as well as states phased out incentives for solar power generation, according to respondents. As these incentives phase out, the solar industry has to cuts costs at every level of the supply chain, which meansprices for polysilicon, cells and modules decrease, according to respondents. In contrast, SolarWorld argued that Chinese dumped and subsidized imports have decoupled pricing from the growthin efficiencies and raw material price declines to the point that prices of CSPV cells and modules fell “significantlyfaster” than raw material costs. Thus, U.S. producers have been unable to benefit from their investments in design and production efficiencies,according to SolarWorld. Respondents also expressed opposition to what they charge is a significant expansion of product scope in theantidumping and countervailing duty case proposed by SolarWorld one day earlier. SolarWorld noted, in a Nov. 7 filing to clarify the scope of its petition, that its case covers third-country modulesproduced with Chinese CSPV cells anywhere in the world, in addition to modules made in China with foreign CSPVcells. According to the petitioners, this is in addition to covering CSPV cells directly exported to the U.S. from China orincorporated into Chinese solar modules exported to the United States. Several lawyers representing respondents said last week that is an extraordinary expansion of scope and differs fromthe two earlier technical scope clarifications that SolarWorld’s lawyers had filed with Commerce after filing the case.Such technical clarifications filed soon after a petition is filed are customary in trade remedy cases, they said. In the ITC staff conference, respondents said that the scope definition now advanced by petitioners is expanded in8 INSIDE US-CHINA TRADE - - November 23, 2011
  9. 9. such a way that the ITC questionnaire on relevant imports lacks the necessary information to make the preliminary injurydetermination. In their view, the ITC questionnaire failed to collect the correct information from importers about the volume of theirimports due to the expanded definition, their inventories, or their domestic shipments, one lawyer said. This means the ITC willnot be able to tell the trends in these imports and not accurately assess whether there is a “reasonable indication” of injury to thedomestic industry or whether it is threatened with injury by reason of unfairly traded imports, according to respondents. In the view of SolarWorld, the ITC has been able to gather the relevant data because it collected information aboutthe export of CSPV cells from China as well as its module exports. But respondent lawyers emphasized last week that their fight against this Nov. 7 scope expansion is only a small partof their arguments aimed at defeating the SolarWorld case. The expanded scope definition is also at issue before the Commerce Dept.’s Office of Import Administration, whichhas not endorsed it after SolarWorld’s Nov. 7 filing, and has opened it for public comment from interested parties with aNov. 28 deadline, according to its initiation notice dated Nov. 8. In the initiation notice, Commerce said because this change to the product scope definition was filed only one daybefore the statutory deadline for initiating the case, it had neither the time nor the resources to evaluate the proposedlanguage with respect to modules produced in China with third-country CSPV cells or modules produced in third coun-tries with Chinese cells. The petition as initially filed states that the subject merchandise consists of PV cells, “whether or not individually orpartially or fully assembled into other products, including but not limited to, modules, laminates, panels and buildingintegrated materials.” In SolarWorld’s view, the petition’s scope was always meant to cover modules produced in third countries withChinese cells, and those produced in China with foreign cells, according to a private-sector lawyers. He said that SolarWorld’s Europe Unit Gauging Support For Trade Action Against China Germany-based SolarWorld AG is talking with producers of solar cells in the European Union to gauge their level of support for lodging a trade complaint against China with the European Commission, a step that would closely mirror action taken in the U.S. by its Oregon-based subsidiary, according to a company spokesman. Ben Sentarris, spokesman for SolarWorld Industries America, told Inside US-China Trade on Nov. 21 that the company’s European parent is “surveying and marshaling” support for a trade case in the EU. This is because a complainant must show it has the support of at least 25 percent of the industry — and that a larger majority is not opposed — before the commission will agree to launch an investigation, he noted. He would not comment on whether the company was confident it could make those hurdles. “The unfair behavior of Chinese solar manufacturers is similar in the solar markets of the European [Union] and United States,” Sentarris said in an e-mail. “Highly subsidized Chinese companies are selling at dumped prices. Therefore it’s consistent after launching a trade case in the U.S. to do the same in Europe.” Sentarris said the company is focusing on Chinese imports of crystalline silicon photovoltaic cells (CSPV), as it has in the United States. He would not say whether it will ultimately ask the commission to levy both antidumping (AD) and countervailing duties (CVD) like in the U.S., saying only that it is “checking all options.” “We’re interested in reconstituting fair competition in the solar market as one of the most important parts of the fast-growing green-technology industry,” Sentarris added. SolarWorld Industries America and seven other U.S. petitioners in October brought AD and CVD cases against Chinese imports of crystalline silicone cells, in what company officials and lawyers described as the largest trade remedy petition ever brought against China and the first on a renewable energy product. Filed on Oct. 19, the AD petition called for margins ranging from 159 percent to 233 percent on three Chinese producers of CSPV, using the U.S. Commerce Department’s methodology for determining AD duties for non- market economies. In the CVD petition, SolarWorld and the other petitioners charge that imports from China benefit from nine different types of countervailable subsidies, including currency undervaluation. Commerce announced on Nov. 8 that it would initiate an AD/CVD investigation on the basis of the petition, and a preliminary injury determination is due from the U.S. International Trade Commission early next month. If SolarWorld AG were to file a trade complaint in Europe, the commission would have 45 days from the date of submission to decide whether to launch an official investigation. A complaint seeking AD duties must contain evidence that a product is being exported to Europe at dumped prices and that those imports are causing injury to the domestic industry. For an anti-subsidy case, a complaint must similarly contain allegations of injury, and evidence that a product originating in a non-EU country is befitting from a countervailable subsidy, according to an official fact sheet.INSIDE US-CHINA TRADE - - November 23, 2011 9
  10. 10. SolarWorld only filed the Nov. 7 clarification in response to a request from Commerce. That point is disputed to various degrees by respondents’ lawyers, some of whom read the initial scope definition ascovering only CSPV cells, while others concede they always read the petition as also covering Chinese CSPV modulesusing Chinese cells. But several respondent lawyers agreed that they did not consider the scope of the petition to cover foreign modulesmade in third countries with Chinese solar cells or modules made in China with foreign CSPV cells. Both Import Administration and the ITC look at the scope of a trade case in terms of domestic like product, but fordifferent purposes and pursuant to a different legal authority. The trade remedy statute defines “industry” as the producers of a domestic like product. To determine if a petitionhas the requisite domestic support, Commerce looks at the producers and workers who make the like domestic product. The ITC to determine whether a domestic industry has been injured or is threatened with injury defines what consti-tutes a domestic like product to determine an industry, and how it has been affected by subject imports. The ITC’sdefinition of a like domestic product does not necessarily have to be identical to the scope of products proposed by thepetitioners, a trade lawyer said. If the ITC and Commerce reach a different definition of like product, it does not render the decision of each agency“contrary to law,” according to the Nov. 8 Commerce initiation notice of the cases. Respondents raised their objections to the petitioner’s Nov. 7 scope filing with Import Administration along with arequest that it poll members of the domestic industry to assess their support for the petition instead of acceptingpetitioner’s statement that it meets the legal threshold for standing in a case. U.S. trade remedy law says a petition has to have the support of domestic producers and workers that represent atleast 25 percent of the total production of the domestic like product or more than 50 percent of the production of thedomestic like product produced by the portion of the industry that has expressed an opinion on the petition. In its initiation notice, Import Administration declined to poll the industry to assess the support. Based on theinformation provided by the petitioners, supplemental submissions and additional information obtained by Commerce, itsaid it had determined that the petition has the support of more than 50 percent of the production of the domestic likeproduct produced by those companies and workers who expressed an opinion. Import Administration also announced that the government of China in meetings with Commerce has not offered anyinformation or substantive analysis that would detract from the industry support calculation as it now stands. The standingissue is one where respondents have lost the argument, one respondent lawyer confided last week. But the Chinese government did warn Import Administration in an Oct. 27 meeting that a decision to investigate theclaim that currency undervaluation is a subsidy in the solar case could “derail” the progress of bilateral discussions on theissue, according to a commerce memo on the session — Jutta HennigExperts Debate Impact Of Chinese Policies On Clean Energy Innovation Clean energy technology experts agreed last week that the U.S. must aggressively challenge unfair trade and invest-ment practices that have given China a leg up in the global competition to develop alternative energy sources such assolar, wind and nuclear power. At the same time, these experts differed over how actively the U.S. government and private firms should continue tocollaborate with China on clean energy projects. It would be “ultimately destructive” to the goal of clean energy technological development if the U.S. were to cede toChina dominance on that issue because China is practicing “a very aggressive form of innovation mercantilism,” arguedInformation Technology and Innovation Foundation (ITIF) President Rob Atkinson. China’s strategy of driving down the costs of current green technology platforms is “fundamentally a destructiveone,” he said at a Nov. 17 ITIF panel on U.S.-China clean energy issues. This Chinese policy undercuts incentives for risk-taking and draws research and development away from the UnitedStates, whose innovation-friendly environment is more likely to foster the major breakthroughs still required to bringclean energy on par with the cost of traditional fuel sources, he said. It is “fundamentally wrong” to believe that the main goal of clean energy development should be, as the Chinesemodel calls for, to drive down the costs of the variety of clean energy platforms that have been set up, he argued. Atkinson cited three main ways that the Chinese model discourages innovation. First, he said, is the government’slack of respect for intellectual property rights, whose theft it either willingly abides through lax enforcement, or activelypromotes by requiring technology transfer as a condition for market access. The latest instance of outright theft in the clean energy sector, he said, is a legal dispute filed in China and severalother jurisdictions in September by the U.S. company American Superconductor, which alleges that the software for itswind turbine control technology has been stolen by its main Chinese customer, the Sinovel Wind Energy Group. Similarly, Chinese leveraging of market access to force technology transfer occurred with Spanish and German windturbine companies who invested in China, he said. Although forced technology transfer runs contrary to World TradeOrganization rules and undermines the incentive for global technology leaders to keep innovating, China has been able to10 INSIDE US-CHINA TRADE - - November 23, 2011
  11. 11. get away with this to date because of its “huge, huge” lucrative market, he said. “If China steals intellectual property and technology, the incentive to innovate by these companies systemically goesdown,” Atkinson said. A second innovation-killing aspect of the Chinese model is found in the limits that China places on foreign firmsattempting to sell their products into its government procurement market. To maximize their innovation potential, technology companies ideally seek to sell into a global market, because thatallows them to achieve the scale and profitability required for optimal reinvestment in further research and development.But China’s procurement market is highly protected, he said. Of the 25 contracts that were awarded in a recent govern-ment bid put out for wind turbines, not a single one was granted to a non-Chinese bidder, according to Atkinson. “For-eign companies have essentially given up because they have determined the bidding system is rigged,” he said. The model’s third unique feature is the massive government subsidization that China’s clean energy sector enjoys,said Atkinson, who co-chairs the U.S. side of the U.S.-China Innovation Policy Experts Group. This includes a “40 percent” subsidy provided by currency undervaluation, over $2 billion in direct subsidies and a50 percent value-added tax rebate provided to the wind power sector, clean-energy state-owned enterprises (SOEs) thatare not required to turn a profit and therefore regularly dump products by selling at below cost in the U.S. and othermarkets to win market share, $17 billion in low-interest loans issued to the solar sector, and China Development Bankexport financing that is “twenty times” that available to U.S. firms via the Export-Import Bank. “When you are up against that type of subsidy, you simply cannot compete, and that’s what we have seen over the last year[with] company after company [in the United States] that has gone out of business or [is] cutting back,” according to Atkinson. The notion that a wholesale transfer of the clean energy industry to China is an acceptable outcome from an environ-mental perspective is short-sighted, he said, because major “step-change” innovation will suffer. “I would assert that we are fundamentally the innovators and they are fundamentally the engineering copiers, andthat’s the way it’s going to be for a long, long time,” Atkinson said. “That is the natural order of things, not because I amsome sort of American chauvinist — it’s the natural order of things based on any sort of international economic assess-ment of comparative advantage.” But with China adopting policies that indicate it only views economics through the lens of “absolute advantage,”there is a danger that the clean energy sector could be driven offshore to East Asia in a manner similar to what occurredwith the optical electronics industry, Atkinson warned. Citing a study conducted at Carnegie Mellon university, he noted that in optical electronics Asian-country subsidiza-tion and massive cost reduction had the impact of shifting component-making to East Asia and making U.S.-baseddesigns no longer profitable, creating a situation where technology leaders had to choose between competing on cost bymoving offshore or competing on performance by staying in the U.S. The impetus to move offshore created by China’s model holds “dire implications for long-term technology develop-ment,” which the yet-incomplete green energy revolution cannot afford, he argued. “The Chinese are subsidizing current technology,” he said. “It’s kind of like how cheap heroin makes us feel good fora while. But fundamentally it’s going to retard the development of this next generation of technology that we really needin order to get clean technology lower than the price of coal and oil around the world.” But another clean energy expert expressed worry at the Nov. 17 ITIF panel that a more aggressive U.S. stanceagainst unfair Chinese practices could threaten productive cooperation on clean energy between the two nations. “We are concerned that the concern about China IP and China WTO [compliance] may freeze some of the beneficialcooperation we see going on,” said Armond Cohan, the executive director of the Clean Energy Task Force. “It’s acomplicated picture and ... if this turns into a trade war and we are put in a position where U.S. companies will take notechnology over to China because of those concerns, I think we are in a bad place.” Although he agreed that China must do more to respect and enforce IPR, Cohan said that projections showing thatChina’s electricity market and CO2 emissions will be ten times greater than those of the U.S. by 2035 mean that the “bigvalue-added” in China for the next 20 years will be the “large-scale build” that is already underway in terms of hugecarbon-capture, wind power and other alternative-energy projects mostly based on known technologies. The U.S. clean-energy companies that are still investing in or selling into China are figuring out how to protect theirintellectual property, he said. At the same time, Cohan said he would “quibble” with Atkinson’s portrait of Chinese projects having an insignificantcapability for innovation. He pointed to a Chinese university project that is building the first-ever “pebble bed hightemperature nuclear reactor,” which, though based on German and American designs, contains engineering contributionsfrom the Chinese side that “could be described as pretty significant, not just tweaking or cost control.” Cohan also argued that Chinese clean-energy innovation is beginning to flow outside its borders through the employ-ment of Chinese-American engineers who are “biculturally fluent” and some “re-shoring” back to the U.S. of “innovationcenters,” such as in the case of the placement of a coal gasification research and development center in Santa Monica, CAby the Chinese firm ENN and a Chinese solar firm putting a solar panel manufacturing plant in Illinois. He also noted that Chinese companies are examining the possibility of a significant investment in the U.S. in carbon-capture plants.INSIDE US-CHINA TRADE - - November 23, 2011 11
  12. 12. Economic & Security Panel Calls For Review Of Policy Approach To China A commission charged with monitoring U.S. economic and security relations with China is urging legislation obligat-ing the Obama administration to conduct a comprehensive policy review “to determine the need for changes to addressthe increasingly complicated and serious challenges posed by China to U.S. international and domestic interests.” In its 2011 annual report, the U.S.-China Economic and Security Review Commission recommends that Congresspush for an “all-agency” review of U.S. economic and security policies by the National Security Council as one of its top10 recommendations. This is a reflection that the 12-person bipartisan commission believes the “imbalance” in the bilateral economicrelationship should be remedied by a policy approach that demands more “reciprocity” in order to achieve more “mutu-ally beneficial” relations, said Commissioner Patrick Mulloy at the Nov. 16 release of the commission’s 10th annualreport to Congress. Other recommendations that the Commission included in its top 10 are that Congress urge the administration to“employ all necessary remedies” authorized by the World Trade Organization to counter the anticompetitive and trade-distorting effects of the Chinese government’s extensive subsidies for Chinese companies operating in China. It also recommended that Congress assess the reauthorization of Super 301, which targets unfair trade practices forpriority action, in order to “assist in the identification of the policies and practices that China pursues that create thegreatest impediment to U.S. exports entering the Chinese market and that “unfairly or unjustifiable harm U.S. producersand workers in the U.S. market.” It also recommends a congressional investigation on whether U.S. sanctions have been imposed on all Chinese firmsthat have “violated the sanction laws by investing in Iran’s petroleum industry or providing Iran with refined petroleumproducts or advanced conventional weapons.” Commission Chairman William Reinsch, who is also the president of the National Foreign Trade Council and aformer Commerce undersecretary for export administration, said this year’s critical tone reflects the fact that “the rela-tionship in some respects is a lot more difficult” than it has been in the past. But he concluded that of the 43 policy recommendations made in the report, Congress is most likely to take up thosethat propose improved and expanded data collection on investment. For instance, the report calls on Congress to instruct the Commerce Department to report annually on Chineseinvestment in the U.S., including on investment by Chinese state-owned enterprises and other state-affiliated entities. The panel also calls for Congress to direct the U.S. Securities and Exchange Commission to develop country-specificdata to address “unique country risks to assure that U.S. investors have sufficient information to make investmentdecisions.” It should do this with a particular focus on state-owned and state-affiliated companies, and “subsidies and pricingmechanisms that may have material bearing on the investment,” according to the report. Another data-focused recommendation is for the U.S. Government Accountability Office to evaluate “investmentsand operations of U.S. firms in the Chinese market and identify what federally supported R&D is being utilized” in suchfacilities. The first of the 406-page report’s four chapters is dedicated to the U.S.-China trade and economic relationship. Inaddition to recommendations, it includes sections on the current status and significant changes in 2011 to that relation-ship, on Chinese SOEs and U.S.-China bilateral investment, on indigenous innovation and intellectual property rights, onChina’s Five-Year Plan and technology development and transfers to China, and on China’s internal dilemmas. Other members of the panel are Vice Chairman Daniel Slane and commissioners Carolyn Bartholomew, DanielBlumenthal, Peter Brookes, Robin Cleveland, Hon. C. Richard D’Amato, Jeffrey Fiedler, Hon. Dennis Shea, MichaelWessel and Larry Wortzel.12 INSIDE US-CHINA TRADE - - November 23, 2011