Tricks of the Trade: Section 301 Investigation of Chinese Intellectual Property Practices Concludes (Part I)

Tricks of the Trade: Section 301 Investigation of Chinese Intellectual Property Practices Concludes (Part I)

Legal Sidebar

Tricks of the Trade: Section 301 Investigation
of Chinese Intellectual Property Practices
Concludes (Part I)
Updated March 29, 2018
In the latest in a series of international trade-related investigations conducted by the Trump
Administration, the Office of the U.S. Trade Representative (“USTR”) recently concluded its
investigation under Section 301 of the Trade Act of 1974 (the “Section 301 Investigation”) “to determine
whether acts, policies, and practices of the Government of China related to technology transfer,
intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S.
commerce.” Thereafter, on March 22, 2018, President Trump issued a memorandum (the
“Memorandum”) in response to the investigation’s findings, directing the USTR (1) to determine whether
to increase tariffs on certain goods from China and (2) to pursue dispute settlement before the World
Trade Organization (“WTO”) to address China’s allegedly discriminatory intellectual property licensing
practices. The Memorandum also directed the Secretary of the Treasury to propose possible investment
restrictions in response to China’s alleged systematic investment in and acquisition of U.S. companies in
order to obtain technologies and intellectual property.
There are several notable legal distinctions between this Section 301 Investigation and other recent trade-
related investigations that led to increased tariffs on imports of certain solar energy related products,
washing machines, and steel and aluminum. First, unlike the prior trade investigations, which were not
country-specific under the relevant statutes, the Section 301 Investigation involved China in particular,
and any resulting trade measures will apply only to China. Second, investigations under Section 301,
unlike other recently used trade statutes, require consultation and negotiation with the country under
investigation. Here, such negotiations are reportedly ongoing with China. Third, Section 301
investigations are governed by a complex set of statutory provisions that interplay with dispute settlement
mechanisms at the international level. As one commentator notes, Section 301 “marks a point of
intersection between the international trade agreements regimes and the domestic trade laws.”
Consequently, investigations under Section 301 can result in multiyear negotiations (much of which occur
away from the public eye), proceedings before the U.S. courts, and proceedings before dispute settlement
tribunals, such as the WTO’s Dispute Settlement Body.
Congressional Research Service
https://crsreports.congress.gov
LSB10108
CRS INSIGHT
Prepared for Members and
Committees of Congress

Congressional Research Service
2
Part I of this two-part Sidebar describes the legal framework governing Section 301 investigations
generally, including the domestic statutory framework, its relationship to international dispute settlement
before the WTO, and domestic court challenges to trade measures resulting from Section 301
investigations. Part II applies this legal framework to the recently concluded Section 301 Investigation
specifically, by first describing the USTR’s findings and the President’s directives and then discussing the
legal issues that lie ahead. (For a discussion of the policy considerations in Section 301 investigations and
the history of their use with regard to China specifically, see this CRS post.)
Legal Framework
The complex statutory framework governing Section 301 investigations is based in Section 301 through
310 of the Trade Act of 1974. Section 301 defines two types of executive action—mandatory or
discretionary—that can result from Section 301 investigations. Under Section 301(a)—the “mandatory
action” provision—the USTR must take action as specified by the statute, subject to certain exceptions, if
he determines that:
 “the rights of the United States under any trade agreement are being denied,” or
 “an act, policy, or practice of a foreign country . . . violates, or is inconsistent with, the
provisions of, or otherwise denies benefits to the United States under, any trade
agreement,” or
 “an act, policy, or practice of a foreign country . . . is unjustifiable” (defined to mean
conduct that “is in violation of, or inconsistent with, the international legal rights of the
United States”) “and burdens or restricts United States commerce.”
Thus, the mandatory action provision generally applies in the context of a trade agreement provision, or
when a foreign country’s conduct violates or is inconsistent with international legal rights (which likely
are the product of a trade agreement).
By contrast, under Section 301(b)—the “discretionary action” provision—the USTR may take certain
actions enumerated in the statute if he determines that:
 “an act, policy, or practice of a foreign country is unreasonable or discriminatory and
burdens or restricts United States commerce, and . . . action by the United States is
appropriate.”
The statute further specifies that conduct “is unreasonable if the act, policy, or practice, while not
necessarily in violation of, or inconsistent with, the international legal rights of the United States, is
otherwise unfair and inequitable.” Thus, the discretionary action provision can operate outside of the
context of a trade agreement or established “international legal rights.” Conduct is discriminatory under
the statute when “any act, policy, and practice . . . denies national or most-favored-nation treatment to
United States goods, services, or investment.” (“Most-favored-nation treatment” is a commitment on the
part of trading partners to treat another country’s goods no less favorably than domestic goods or the
goods of other trade agreement countries).
With respect to Section 301(b), the statute provides examples of “unreasonable” conduct, including
examples relevant to the current investigation. For example, the statute defines as unreasonable any act,
policy, or practice (or combination thereof) that denies “provision of adequate and effective protection of
intellectual property rights notwithstanding the fact that the foreign country may be in compliance with
the specific obligations of the Agreement on Trade-Related Aspects of Intellectual Property Rights.” That
WTO agreement establishes the minimum standards of protection for and enforcement of intellectual
property rights for WTO members. Another example the statute defines as “unreasonable” is any act,
policy, or practice (or combination thereof) that denies “nondiscriminatory market access opportunities
for United States persons that rely upon intellectual property protection.”

Congressional Research Service
3
If the USTR initiates an investigation, Section 303 requires that, on the date of initiation, the USTR must
“request consultations with the foreign country concerned.” Section 303 also requires the USTR to
determine whether the Section 301 investigation “involves a trade agreement” and, if so, the statute
directs the USTR to follow the formal dispute settlement process of that agreement if consultations with
the other country fail. Thus, under this statutory framework, for purposes of determining whether the
mandatory or discretionary action provisions apply, and whether formal dispute settlement processes must
be followed, the USTR must determine, as a threshold matter, whether the Section 301 investigation
involves a trade agreement. Neither the statute itself nor case law interpreting the statute appears to
provide guidance as to how the USTR is to determine whether an investigation involves a trade
agreement.
Whether falling under the mandatory or discretionary action provisions, the actions that the statute
authorizes the USTR to take include, among others:
 suspending or withdrawing certain benefits of trade concessions in a trade agreement
with the country under investigation;
 imposing duties or other import restrictions on goods from that country; and
 entering into binding agreements with the country that commits it to eliminate or phase
out the act, policy, or practice in question.
Further, once an action has been imposed, the statute requires the USTR to “monitor the
implementation of each measure undertaken” and allows the USTR to modify or terminate such
actions under certain circumstances.
Legal Relationship Between WTO Dispute Settlement and Section 301
After the statute was enacted in 1974, the United States conducted numerous Section 301 investigations
to enforce its trade rights. Following the establishment in 1995 of the WTO’s dispute settlement
procedures under the Understanding on Rules and Procedures Governing the Settlement of Disputes (the
“Dispute Settlement Understanding”), however, the United States has primarily relied on the WTO
dispute settlement process to enforce its trade rights, rather than on Section 301. Accordingly, there have
been fewer uses of Section 301 investigations since 1995, with the principal use being to enforce trade
remedies already authorized by the WTO after formal dispute settlement. (See these CRS posts for more
detail on dispute settlement under trade agreements generally, and on dispute settlement before the WTO
specifically.)
The Dispute Settlement Understanding commits WTO members to bring trade disputes involving the
WTO agreements and against other members to the WTO, instead of resorting to unilateral trade-related
action. As discussed above, however, Section 301 allows the USTR to implement trade-related measures
without following formal international dispute settlement processes if he determines that the conduct in
question does not “involve a trade agreement.” This creates what one legal commentator calls a “tension
between this domestic statute and the WTO system.” This tension was addressed in 1999 by a WTO
dispute settlement panel, which examined Section 301 and determined that while it seemingly appeared to
violate the Dispute Settlement Understanding by allowing the United States to determine unilaterally
whether a trade violation has occurred, a 1994 U.S. Statement of Administrative Action (the “Statement”)
that Congress approved along with the relevant implementing legislation for the WTO agreements
alleviated the panel’s concerns. Specifically, the Statement indicated that the United States would refrain
from applying Section 301 in a manner that would violate its WTO obligations, indicating that if a
Section 301 investigation involves a violation of a WTO agreement, the United States is committed to
pursuing formal dispute settlement before the WTO. And, the Statement’s introduction states “that it is the
expectation of the Congress that future Administrations will observe and apply the interpretations and
commitments set out in this Statement.”

Congressional Research Service
4
On the other hand, the Statement also provides: “Neither section 301 nor the [Dispute Settlement
Understanding] will require the [USTR] to invoke . . . dispute settlement procedures if the [USTR] does
not consider that a matter involves a [WTO] Agreement.” In this vein, the Statement contemplates that
“Section 301 will remain fully available to address unfair practices that do not violate US rights or deny
US benefits under the [WTO] Agreements.” The Statement’s caveat highlights the importance of the
USTR’s threshold determination, described above, as to whether a Section 301 investigation “involves a
trade agreement.” While the 1999 WTO panel determined that the Statement indicated that U.S.
challenges to allegedly unfair trade practices involving WTO agreements would be brought to the WTO,
it did not address the circumstance of a disagreement with a USTR determination that a given Section 301
investigation does not involve a trade agreement and therefore that resort to dispute settlement
proceedings is, in the USTR’s view, unnecessary. In other words, a foreign country under investigation
may disagree as to whether the conduct being investigated during a Section 301 investigation is, in fact,
covered by a trade agreement. This unresolved issue could have international legal implications for the
current Section 301 Investigation, as discussed in Part II of this Sidebar.
Court Challenges to Section 301 Investigations
Because Section 301 investigations became less frequent after the WTO was established, there are few
recent cases challenging actions taken under the statute. However, two notable series of cases involving
long-running disputes—the Gilda Industries cases involving a dispute between the United States and the
European Community and the Almond Brothers cases involving a dispute between the United States and
Canada—spawned numerous lawsuits concerning Section 301 investigations. The Gilda Industries cases
involved a challenge to the United States’ enforcement of trade rights through the imposition of
retaliatory tariffs that the WTO authorized after formal dispute settlement. The Almond Brothers cases, by
contrast, involved a challenge to certain bilateral agreements the United States and Canada negotiated to
resolve Section 301 and other trade investigations. Thus, both lines of cases involve challenges to the
specific measures the USTR took in response to Section 301 investigations. Nonetheless, several general
principles can still be gleaned.
First, it appears settled that “[t]he Court of International Trade ha[s] jurisdiction under 28 U.S.C.
§ 1581(i) to review the [USTR] actions” resulting from a Section 301 investigation. Second, once
jurisdiction is established there, the challenge would be centered on whether the USTR complied with the
Administrative Procedure Act (“APA”). In one of the Almond Brothers cases, however, the court noted
that the APA “precludes review of ‘agency action[s that are] committed to agency discretion by law,’” and
“[a] decision is more likely to be committed to an agency’s discretion when it requires ‘a complicated
balancing of a number of factors which are peculiarly within its expertise.’” In the context of a legal
challenge to an agreement with another country that resulted from a Section 301 investigation, the court
emphasized that “the USTR has discretion to craft whatever relief it deems necessary to resolve the
dispute.” Because “[t]he negotiation and determination of the terms of international agreements is a
paradigmatic example of ‘a complicated balancing of a number of factors which are peculiarly within [the
USTR’s] expertise,’” the court concluded that determining the terms of a trade agreement to resolve a
Section 301 dispute was committed to the discretion of the USTR and therefore not subject to the court’s
scrutiny under the APA.
Moreover, although the dispute in the Gilda Industries cases was resolved through formal WTO dispute
settlement (and not through negotiation of an agreement as in the Almond Brothers cases), the court again
noted the USTR’s discretion in Section 301 investigations. Specifically, in one Gilda Industries case, the
court stated it “affords substantial deference to decisions of the [USTR] implicating the discretionary
authority of the President in matters of foreign relations,” such as the selection of a remedy in response to
a Section 301 investigation. In other words, because Section 301 investigations involve consultations with
other countries and other foreign relations-related issues, a degree of discretion is afforded to the actions

Congressional Research Service
5
the USTR takes. The court emphasized that, “[i]n international trade controversies of this highly
discretionary kind—involving the President and foreign affairs—this court and its predecessors have
often reiterated the very limited role of reviewing courts.” For a court to intervene, “there has to be a clear
misconstruction of the governing statute, a significant procedural violation, or action outside delegated
authority.”
Thus, the case law suggests that the actions the USTR takes in response to a Section 301
investigation will be afforded substantial deference by the courts, perhaps to the degree, as in the
Almond Brothers case, of being unreviewable under the APA. What remains open to challenge
before the courts, however, are allegations of statutory misinterpretations on the part of the
USTR, violations of the statute’s procedures, actions that exceed the authority delegated to the
USTR by statute, and similar claims. For an examination of how these and other complex legal
issues apply to the recently concluded Section 301 Investigation, proceed to Part II of this post.

Author Information

Brandon J. Murrill

Legislative Attorney

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

LSB10108 · VERSION 4 · UPDATED