Technology Transfer under China’s Foreign Investment Regime: Does the WTO Provide a Solution?

Abstract

One of the most longstanding and significant issues in the U.S.-China trade war and international trade regulation in general has been the so-called “forced” technology transfer. To contribute to the ongoing debate over this issue, this article reviews the role of technology transfer in the evolution of China’s foreign direct investment (“FDI”) regime over the past four decades and shows that the use of foreign investment to promote diffusion of advanced technology and know-how in the Chinese economy has long been rooted in the heart of China’s FDI policy and remains fundamental for China’s transformation to an innovative economy. This pursuit of economic upgrade and technological advancement is not illegitimate as it is common for countries to use similar policies for similar objectives at different stages of economic development. The question is whether China has done so in breach of its WTO obligations. To answer this question, this article examines China’s new FDI regime and argues that while China has removed the controversial provisions in the relevant legislations, the regime leaves flexibility for China to “force” technology transfer in practice, particularly under the security review and retaliation mechanisms envisaged in the new Foreign Investment Law. It is submitted that the best way to address these outstanding challenges would be through the dispute settlement mechanism of the WTO as opposed to unilateral and confrontational approaches which have proven to be counter-productive. While WTO litigation is likely to be limited to “as applied” claims in specific cases, systemic changes may result from a series of successful “piecemeal” attacks over time. Given China’s broad WTO commitments on technology transfer, we call for an increasing use of the existing rules to address any laws and practices that “force” technology transfer instead of negotiating new rules.