The Week Ahead in the European Parliament – April 20, 2018

Summary

Next week will be a committee week in the European Parliament.

Interesting votes, discussions and events will take place.

On Tuesday, the European Parliament’s Committee on International Trade (“INTA”) will debate the draft parliamentary report on the Commission’s proposal for macro-financial assistance to Ukraine.  The Commission proposes that the EU provide additional financial assistance to Ukraine (caped at €1 billion) with a view to supporting Ukraine’s reform agenda and contributing to its economic stability.  The EU’s contribution would take the form of loans with a maximum duration of 15 years.  The assistance will be subject to certain conditions, such as Ukraine’s commitments to abide by the rule of law, respect effective democratic mechanisms and guarantees the protection of human rights.  INTA members are likely to be in favor of the Commission’s proposal.  See the Commission’s proposal here and the draft parliamentary report here.

Also on Tuesday, in the Parliament’s Committee on Development (“DEVE”), MEPs will discuss the reform of the African Union with Ambassador Awad Sakine Ahmat, Permanent Representative of the African Union to the European Union, and the Delegation for relations with the Pan-African Parliament (“DPAP”).

On the same day, the Committee on Economic and Monetary Affairs (“ECON”) will vote on its position on the decision to enter into institutional negotiations on the proposal for a Regulation amending Regulation 648/2012 on over-the-counter derivatives, central counterparties and trade repositories, “EMIR”.  The proposal’s objectives include: simplifying EMIR’s rules and eliminating unnecessary costs and burdens, especially on certain derivatives counterparties, such as non-financial counterparties.  See the proposal for a Regulation here, the draft parliamentary report here and the amendments tabled to the draft report here.

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Tech & Security Companies Sign Cybersecurity Tech Accord

Today, 34 global technology and security companies announced that they have signed a Cybersecurity Tech Accord, which publicly commits them “to protect and empower civilians online and to improve the security, stability and resilience of cyberspace.”  The signatories include Cisco, Dell, Facebook, HP, Intuit, and Microsoft.The text of the Accord references recent events that have put online security at risk, and sets forth four principles:

  1. Protect all of our users and customers everywhere. The companies commit to protect their users and customers from cyberattacks, and to design, develop and deliver products and services that prioritize security, privacy, integrity, and reliability.
  2. Oppose cyberattacks on innocent citizens and enterprises from anywhere. The companies commit to protecting against tampering with or exploitation of their products and services.  They further commit not to help governments launch cyberattacks against innocent citizens or enterprises.
  3. Help empower users, customers and developers to strengthen cybersecurity protection. The companies commit to provide their users, customers, and developers with information and tools to understand and protect against cybersecurity threats, and to support civil society, governments, and international organizations to advance cybersecurity globally.
  4. Partner with each other and with likeminded groups to enhance cybersecurity. The companies commit to work with each other and establish formal and informal partnerships with other industry and civil society groups to improve technical collaboration, vulnerability disclosure, and threat sharing.

The first meeting of the Accord companies will occur during the RSA Conference in San Francisco, and will “focus on capacity building and collective action.”  The companies will report publicly on their progress toward achieving the goals of the Accord.  The Accord is also open to additional signatories, and Microsoft President Brad Smith noted that the company is confident that additional companies will sign on.

Senate Democrats Propose CONSENT Act

On April 10, Senators Richard Blumenthal (D-CT) and Ed Markey (D-MA) introduced new privacy legislation titled the Customer Online Notification for Stopping Edge-provider Network Transgressions (CONSENT) Act.  In a statement published on his website, Senator Markey referred to the legislation as a “privacy bill of rights” and explained that “[t]he avalanche of privacy violations by Facebook and other online companies has reached a critical threshold, and we need legislation that makes consent the law of the land.”

The CONSENT Act directs the Federal Trade Commission (FTC) to “establish privacy protections for customers of online edge providers.”  These protections include requiring edge providers to notify customers about the collection and use of “sensitive customer proprietary information,” which the Act defines to include, among other things, financial and health information, the content of communications, and web browsing and application usage history.  Customers must also be notified about the types of sensitive customer proprietary information that the edge provider collects, how the information will be used and shared, and the types of entities the edge provider will share the information with.

The centerpiece of the CONSENT Act is its “opt-in” requirement for edge providers to obtain consent from customers for the use of “sensitive information.”  This differs from the model currently employed by most online companies, under which customers may opt out of data collection.  The Act also prohibits an edge provider from refusing to serve customers who do not consent to the use and sharing of their sensitive proprietary information for commercial purposes.

Other features of the CONSENT Act include the implementation of protections to prevent the restoration of sensitive customer proprietary information that has been de-identified, the requirement that edge providers disclose plans that provide discounts in exchange for the customer’s consent to use their sensitive customer proprietary information, the requirement that providers develop “reasonable data security practices,” and the implementation of data breach notification requirements.  The Act would be primarily enforced by the FTC, but also provides civil enforcement authority to state attorneys general.

Today, Senators Amy Klobuchar (D-MN) and John Kennedy (R-LA) announced that they too plan to introduce privacy legislation.  Several House members have also recently introduced bills aimed at bolstering consumer privacy protections.  Last May, Rep. Marsha Blackburn (R-TN) introduced the Balancing the Rights of Web Surfers Equally and Responsibly (BROWSER) Act of 2017, which would authorize the FTC to enforce privacy protections including opt-in consent for the use of sensitive information.  In October, Rep. Jan Schakowsky (D-IL) introduced the Secure and Protect Americans’ Data Act, which would require providers to reasonably secure customers’ personal information and provide notice in the event of a data breach.  Both bills are currently pending before the Subcommittee on Digital Commerce and Consumer Protection in the House Committee on Energy and Commerce.

The Week Ahead in the European Parliament – April 13, 2018

Summary

Next week, there will be a plenary sitting of the European Parliament in Strasbourg, France. Several significant debates, votes and committee meetings will take place.

On Monday, Members of the European Parliament (“MEPs”) will debate a report by Norbert Lins MEP (DE, EPP) on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry in the 2030 climate and energy framework, following amendments resulting from the interinstitutional negotiations. Under the new rules, carbon dioxide emissions from farming, transport, waste and buildings must be lowered by 30% by 2030. This new set of rules would ensure that the EU meets its obligations under the Paris Agreement on climate change. See the draft report here.

On Tuesday, MEPs and European Commission President Jean-Claude Juncker will debate the Future of Europe together with special guest, French President Emmanuel Macron. This is the fourth discussion in a series between MEPs and EU leaders on the future of the EU.

On the same day, MEPs will debate a report by Martin Häusling MEP (DE, Greens/EFA) on the organic production and labelling of organic products. Under the new rules, farmers will be able to switch to the production of organic foods in an easier manner, which would increase overall yield in the EU, while maintaining the highest quality standards. See the report here.

On Wednesday, MEPs will discuss Cambridge Analytica’s abuse of Facebook’s user data and its interplay with EU data protection and online privacy rules. MEPs will debate whether current EU laws adequately protect online users from online abuse and the manipulation of election results.

Also on Wednesday, MEPs will debate and vote on the “waste package”, which is a set of four legislative proposals on the circular economy, whose objective is to increase recycling and diminish landfilling. The proposals have already been formally agreed by Member State representatives and European Parliament negotiators. The four files can be found here, here, here and here.

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The Congressional Agenda for April

Today a three-week work period begins for Members of Congress arriving back in Washington, where President Trump has remained active (including via his Twitter account). The President has announced initiatives to address a host of topics, from immigration reform to international trade, as well as personnel changes within his Cabinet and White House staff. With the midterm elections now firmly in its sights, Congress is more likely to react to the President’s actions through its confirmation and oversight responsibilities, than through legislation requiring compromise and bipartisanship.

After negotiating a two-year, bipartisan budget deal in early March and passing a massive $1.3 trillion omnibus spending bill that funds the government through the remainder of Fiscal Year (FY) 2018, in a dramatic, eleventh hour tweet, President Trump toyed with the idea of vetoing the massive spending package after House and Senate passage last month, which would have caused the government to shut down.  He eventually signed the bill into law, after announcing his reservations with the legislation, stating he would “never sign another bill like this again.”  In particular, the President said he had wanted more funds for his proposed border wall with Mexico.  The chaos this surprise veto threat caused for congressional leadership demonstrates how volatile the political process has become even as Republicans control both the Executive and Legislative branches. Congressional Republicans may have learned that they can cut deals on Capitol Hill, but they cannot leave out the White House without risking a veto threat.

The President’s disappointment with the omnibus appropriations bill has reportedly resulted in discussions with GOP leadership about a potential rescission request, which would roll back portions of the spending bill even though it has already become law.  While it is unlikely that a majority of members would support a rescission request from the Administration, the fact that GOP leaders are even engaging in the conversation with the President shows that he can impose his own frame on Congress’s agenda. A rescission request could jeopardize the FY 2019 appropriations process that is underway, set to the topline numbers established by the March budget agreement.

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Political Law Potpourri—The Consolidated Appropriations Act of 2018

While the din over a possible government shutdown dominated the headlines, political law played a supporting role in the recently enacted Consolidated Appropriations Act (Pub. L. No. 115-141).  The content and omissions of the so-called “Omnibus” spending bill will be of interest to political actors in all sectors, but particularly those operating nonprofit entities engaged in political activity.  The Act also continues to prohibit government agencies from requiring corporate political activity disclosure, including from government contractors.  Below, we summarize these and other political law provisions.

Tax-exempt Organizations

First, the Act takes particular aim at the Internal Revenue Service (“IRS”), attempting to, at least rhetorically, reign in review of certain organizations that some believe were unfairly targeted in the past.  As a result, the Act prohibits the IRS from using appropriated funds: (1) “to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States,” § 107; (2) “to target groups for regulatory scrutiny based on their ideological beliefs,” § 108; or (3) “to issue, revise, or finalize any regulation, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4),” § 125.

Despite their sweeping rhetoric, none of these provisions limits the IRS’s current authority to oversee tax-exempt organizations, including its authority to take enforcement action against 501(c)(4) organizations that engage primarily in political activity.  Moreover, existing guidance issued by the IRS concerning the political activity of exempt organizations remains fully intact.

Equally interesting is what political law provisions were omitted from the Act.   For example, the bill did not include a repeal of the so-called Johnson Amendment, which prohibits 501(c)(3) nonprofit organizations from engaging in partisan political activity.  A repeal, which was opposed by the National Council of Nonprofits, would have permitted charitable organizations, including churches and foundations, to engage in partisan politics without endangering their tax-exempt status.

Efforts to repeal the Johnson Amendment have a long history, including an Executive Order by President Trump last May instructing the Treasury Department “to the greatest extent practicable” not to take adverse action against religious organizations for speech on “political issues.”  While concerns about the rise of “educational” entities with large political operations did not result in new restrictions in this legislation, this issue is likely to re-emerge and remain a focus for campaign finance reform lobbyists and others.

Corporate Political Disclosure

In welcome news for corporations and trade associations, Section 631 of the Act prohibits the Securities and Exchange Commission (“SEC”) from using any appropriated funds “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax-exempt organizations, or dues paid to trade associations.”

We have previously reported on efforts to require more disclosure of corporate political activities.  The SEC formally dropped corporate political disclosure as one of its regulatory priorities in 2014 and appropriations bills have continued to formally deny the SEC funds to adopt and enforce political disclosure rules, effectively prohibiting the agency from changing its mind.  While over the past few years activist shareholders have been successful in extracting additional disclosure from public companies, recent data suggests that momentum for additional disclosure has waned.  By preventing the SEC from taking action in this space, Congress continues to ensure that the SEC will not force companies to disclose their political activities.

The Act also enacts into law language from previous appropriations bills prohibiting the SEC from requiring disclosure of trade association dues.  Corporations remain free to join trade associations without disclosing to the public the value of their dues payments, including the portion that may be spent on trade association lobbying efforts.

The Act limits the government’s authority to require disclosure of political activity by federal contractors.  Section 735 of the Act prohibits any appropriated funds from being used to “recommend or require” any potential federal contractor to disclose any political contributions, expenditures (including independent expenditures), or disbursements for electioneering communications made by the entity, its officers or directors, or any of its affiliates or subsidiaries, with respect to a federal office.  This provision also goes one step further, and also prohibits the use of appropriated funds for the purpose of requiring disclosure of any other disbursement of funds made “with the intent or reasonable expectation” that the person receiving the payment will use the funds to make a contribution or expenditure.  These provisions together ensure that federal contracting agencies cannot, as a condition of awarding a contract, require disclosure of the political activities of the contractor or its officers or directors.

Campaign Finance—The Things Not Seen

Although other proposed appropriations bills have contained language relaxing rules on coordinated spending between candidates and political parties, or prohibiting the Federal Election Commission from enforcing rules on trade association PAC fundraising, none of these provisions were enacted into law.

However, the Act does contain a provision that requires the national political party committee of the incumbent president to maintain a $25,000 deposit for the cost of reimbursable political events held at the White House.  The statute also requires all other persons who sponsor a reimbursable political event at the White House to pay the estimated cost of the event in advance of the White House incurring the expenses.

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While the omnibus ultimately did not include sweeping changes to tax-exempt organization and campaign finance law, these issues will remain the subject of future policy discussions, and could reemerge as riders on future bills.  Covington will continue to monitor future legislation for developments.

 

The Week Ahead in the European Parliament – April 6, 2018

Summary

Next week will be a political group week in the European Parliament.

Members of the European Parliament (“MEPs”) will return from their Easter break and gear up for the Parliament’s plenary session that will be held from April 16 to 19, in Strasbourg.  A few interesting meetings will also take place in committee.

On Monday, the members of Parliament’s Special Committee on Terrorism (“TERR”) will hold discussions on the fight against terrorism financing with Mr. Raphaël Malagnini of the Belgian Prosecutor’s Office.

On Thursday, the Committee on Environnement, Public Health and Food Safety (“ENVI”) will discuss its draft opinion on the report on dual quality of products in the Single Market.  The report is being prepared by the Committee on Internal Market and Consumer Protection (“IMCO”).  The objective is to prevent the same branded products from being sold with different characteristics (e.g., lower quality ingredients or less product in the same packaging) depending on the Member States or the regions in which they are placed on the market.   Among others, the report calls on the Commission to amend Annex I of the Unfair Commercial Practices Directive (“UCPD”) to include dual quality as a blacklisted practice under the UCPD.  See ENVI’s draft opinion here, and IMCO’s draft report here.

On the same day, members of the Parliament’s Committee on Transport and Tourism (“TRAN”) will exchange views on a report on the deployment of infrastructure for alternative fuels in the EU.  TRAN members will discuss possible parliamentary initiatives in the context of the Commission Action Plan, “Towards the broadest use of alternative fuels – an Action Plan on Alternative Fuels Infrastructure.”  The objective would be to speed up the roll-out of infrastructures for the distribution of alternative fuels in the EU.  See the Commission Action Plan here.

Meetings and Agenda

Monday, April 9, 2018

Special Committee on Terrorism

15:00 – 18:30

  • Evolution of the terrorist threat in Europe and the new challenges in the fight against terrorism – Discussion with Jean-Charles Brisard, Centre for the Analysis of Terrorism (CAT) (15.00 – 16.30)
  • Discussion on judicial cooperation in the fight against terrorism financing – Discussion with Raphaël Malagnini, Federal Magistrate, Prosecutor’s Office, Belgium (16.30 – 17.30)
  • Discussion with Commissioner Pierre Moscovici (17.30 – 18.30)

Committee on Budgetary Control

15:00 – 18:30

  • Joint debate with the committee on budgets (BUDG) – Financial rules applicable to the general budget of the Union
    • Rapporteurs: Richard ASHWORTH (EPP, UK) and Ingeborg GRÂSSLE (EPP, DE)

Committee on Economic and Monetary Affairs

15:00 – 18:30

Debate

  • European Central Bank Annual Report for 2017 – Discussion following the presentation of the Annual (15.00-16.30)
  • Report by the ECB Vice-President, Vitor CONSTÂNCIO

Committee on Civil Liberties, Justice and Home Affairs

15:00 – 18:30

  • European Union Agency for Fundamental Rights – Report on “Challenges facing civil society organisations working on human rights in the EU” – Presentation Michael O’Flaherty, Director of the European Union Agency for Fundamental Rights (16.00 – 17.00)
  • Controls on cash entering or leaving the Union (COD) (17.00 – 17.10) Reporting back to committee on the state of play of trilogue negotiations
    • Rapporteurs: Mady DELVAUX (S&D, LU), Juan Fernando LÓPEZ AGUILAR (S&D, ES)

Vote (18:00-18:15)

  • A European Values instrument to support civil society organisations which promote democracy, rule of law and fundamental values within the European Union – vote on a motion for a resolution

Tuesday, April 10, 2018

  • No meetings of note

Wednesday, April 11, 2018

  • No meetings of note

Thursday, April 12, 2018

Committee on Foreign Affairs

09:00 – 12:30

  • A public hearing on EU policy options in case of decertification of the Iran nuclear deal by the US will take place on Thursday 12 April from 9:00 to 10:30 in room JAN 2Q2. MEPs plan to assess the state of play of implementation of the Joint Comprehensive Plan of Action (JCPOA) with Yukiya Amano, Director General of the International Atomic Energy Agency (tbc) and will discuss with experts from think tanks the EU policy options should US decide to withdraw from Iran nuclear deal concluded in 2015.

Committee on the Environment, Public Health and Food Safety

09:00 – 12:30

Debates

  • Dual quality of products in the Single Market – Consideration of draft opinion
    • Rapporteur: Biljana BORZAN (S&D, HR)
  • Exchange of views with the Commission on possible further restrictions on the use of neonicotinoids
  • Exchange of views with the Commission on General Report on the operation of REACH and review of certain elements – Conclusions and Actions

Committee on Transport and Tourism

09:00 – 12:30

Debates

  • Deployment of infrastructure for alternative fuels in the European Union: Time to act! (INI) – exchange of views with Commission representatives
    • Rapporteur: Ismail ERTUG (S&D, DE)

Committee on Women’s Rights and Gender Equality

09:00 – 11:30

  • Gender Mainstreaming Network – Discussions (10.00 – 11.30)

Friday, April 13, 2018 

  • No meetings of note

South Dakota Breach Notification Law Breaks New Ground

Last week, South Dakota became the 49th U.S. state to enact a data breach notification law with the passage of S.B. 62, which sets forth requirements for notifying state residents, the state attorney general, and major consumer reporting agencies in the event of a breach. The law, which will take effect on July 1, 2018, parallels many recently passed or amended state data breach notification laws through its inclusion of an expansive definition of “personally identifiable information” and an explicit deadline for notifying affected residents. However, a few elements of the law push further than comparable laws from other states and have the potential to shift companies’ data breach notification practices.

Under the new law, any person or business conducting business in South Dakota that owns or licenses computerized “personal or protected information” of South Dakota residents must provide notice of the breach unless certain exceptions apply. A “breach” occurs when personal or protected information was, or is reasonably believed to have been, acquired by an unauthorized person. Notably, the law defines an “unauthorized person” to include not only individuals who are not authorized to acquire or disclose personal information, but also individuals who are authorized to do so but have acquired or disclosed personal information “outside the guidelines for access o[r] disclosure established by the information holder.” This specific addition to the law could impact decision-making processes for businesses who encounter potential data security incidents that parallel the characteristics set forth in the statute.

The law defines a breach to include the disclosure of personal or protected information that is unencrypted, or encrypted if the encryption key is also acquired. By implication, a breach of encrypted information without an associated compromise of the encryption key will not be covered within this definition. In order to qualify as encrypted, however, data must be rendered “unusable, unreadable, or indecipherable” either “without the use of a decryption process or key” or in accordance with the Federal Information Processing Standard 140-2 in effect on Jan. 1, 2018. Although it is not free from doubt, this provision indicates that compliance with FIPS may not be strictly required but may instead represent a more explicitly defined safe harbor that companies can implement to take advantage of this exception from disclosure requirements.

The concept of “personal or protected information” expands the scope of the information this law covers beyond other comparable state data breach notification laws. The definition of “personal information” parallels other state data breach notification laws by covering an individual’s name in conjunction with a Social Security number, driver’s license number (or other government-issued identification number), or an account, credit card, or debit card number in combination with any required security code, access code, password, routing number, PIN or any additional information that would permit access to a person’s financial account. However, the definition also covers a name in conjunction with “health information” (as defined under the Health Insurance Portability and Accountability Act) or an employer-assigned identification number in combination with any required security code, access code, password, or biometric data used for authentication purposes.

“Protected information,” on the other hand, does not need to be disclosed in connection with an individual’s name. South Dakota’s new law joins several other states that have recently begun to require disclosure of breaches of a user name or email address, in combination with a password, security question answer, or other information that permits access to an online account. However, South Dakota’s new law also goes farther than other state laws in defining “protected information” to include an account number or credit or debit card number, in combination with any required security code, access code, or password that permits access to a person’s financial account, even in the absence of an individual’s name. Although most state data breach notice laws only cover such information if disclosed in connection with an individual’s name, South Dakota’s law will require disclosure of a breach of this information regardless of whether individuals’ names are involved.

South Dakota also joins a recent trend among other state data breach notification laws in setting explicit deadlines for providing notification to affected individuals, the state attorney general and major consumer reporting agencies. Under the law, an information holder must notify affected individuals of the breach by mail, email or substitute notification measures within 60 days after the discovery or notification of the breach. The law also requires an information holder to disclose the breach to the state attorney general if the breach involves more than 250 South Dakota residents. If an information holder “reasonably determines,” after an “appropriate investigation,” that the breach will not likely result in harm to affected individuals, notification to the individuals is not required, but the information holder must notify the attorney general and maintain documentation of this determination in writing for three years. The notification can also be delayed if a law enforcement agency determines that it will impede a criminal investigation, but must be provided within 30 days after the agency determines that it will not compromise the investigation.

If an information holder must notify individuals of a breach, the law states that the information holder must also notify “all consumer reporting agencies,” as defined under the Fair Credit Reporting Act, and “any other credit bureau or agency that compiles and maintains files on consumers on a nationwide basis.” This expansive requirement differs significantly from other state data breach notification laws, which often only require notification of the three major consumer reporting agencies if a breach impacts more than a specific number of state residents (usually 1,000). No explicit time frame is required for either of these types of notifications.

The new law also includes “safe harbor” provisions for HIPAA- or Gramm-Leach-Bliley Act-regulated entities that notify affected South Dakota residents in compliance with applicable federal laws or regulations. For entities that fail to disclose a breach under the new law, however, such a failure could prove costly. Under the law, the state attorney general can prosecute “each failure to disclose” as a deceptive act or practice under state law and, in addition to any remedy provided for such acts or practices by state law, may recover a civil penalty of up to $10,000 per day per violation, in addition to attorneys’ fees and costs.

South Dakota’s new law may represent the next step in the evolving landscape of compliance with varying provisions of state data breach notification laws, and several unusual provisions could complicate decision-making for businesses required to notify South Dakota residents.

This article was originally published in Law360.

 

China Raises Tariffs on 128 U.S. Imports in Retaliation for U.S. Section 232 Steel and Aluminum Tariffs

The Chinese government has announced that it is raising tariff duties on 128 products imported from the United States into China in retaliation for the Trump Administration’s Section 232 tariffs on steel and aluminum imports into the United States. The new Chinese tariffs went into effect on April 2.

The 128 targeted products fall into the following seven categories, with tariff rate increases of 15 percent and 25 percent as noted:

  1. Fresh fruit, dried fruit, and nut products (78 items, 15 percent)
  2. Wine (5 items, 15 percent)
  3. Modified ethanol (1 item, 15 percent)
  4. Ginseng (3 items, 15 percent)
  5. Seamless steel tubes (33 items, 15 percent)
  6. Pork meat and products (7 items, 25 percent)
  7. Aluminum Waste/Scrap (1 item, 25 percent)[i]

The full list of affected U.S. exports to China is available here, with an unofficial English translation prepared by Covington available here. Companies involved in importing or exporting products within the categories above into China should carefully review the full list to determine the impact on their interests. The official announcement also provides formulas showing how the tariffs are to be applied, and states that existing policies on bonded imports and duty reductions will not be affected.

The final Chinese tariff list is very similar to a draft list that was circulated by the Chinese government on March 23 for public comment, with some modifications to specific items. An initial statement accompanying the March 23 draft list estimated the value of affected U.S. imports at approximately US$3 billion.

The March 23 statement also asserted the Chinese government’s position that the U.S. tariffs constitute safeguard measures, and that it would respond in accordance with the WTO Agreement on Safeguards (“SGA”). It specifically stated that China would seek to reach an agreement on trade compensation with the United States, consistent with the SGA. According to comments from a Ministry of Commerce spokesperson, China invited the United States to engage in consultations on March 26, but the U.S. government did not respond. Suggesting it was unlikely that the two sides would reach a consensus, the Chinese government submitted its proposed list of suspended concessions and obligations (i.e., tariffs) to the WTO on March 29.

More Trade Actions to Come

Although they are ostensibly aimed at retaliating against the U.S. Section 232 steel and aluminum tariffs, the newly announced Chinese tariffs also follow news of other U.S. economic policies targeting China. The most significant development to watch will be the Trump Administration’s plans to impose trade and investment sanctions against China as a result of the U.S. Trade Representative’s (“USTR”) Section 301 investigation into Chinese intellectual property and technology transfer policies. That investigation, the results of which were announced on March 22, found at least US$50 billion per year in harm caused to the U.S. economy, and is expected to lead to tariffs against Chinese imports of corresponding value, as well as potential measures targeting Chinese investment. As with its response to the Section 232 tariffs, China’s response to U.S. Section 301 actions will likely be proportional to the size and impact of the U.S. measures.

The Trump Administration is expected to release a list of proposed Section 301 tariffs imminently, followed by a 30-day public comment period. With respect to investment-related measures, President Trump has directed the Secretary of the Treasury to propose within 60 days, in consultation with other agencies, executive action “to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.” While the shape and form of the investment-related measures is currently unclear, they are expected to include restrictions on Chinese investment involving the acquisition or transfer of sensitive technologies. We understand that the U.S. and Chinese governments are currently engaged in high-level negotiations to discuss issues of concern, including ways to reduce the trade deficit and to address issues of reciprocity in China’s treatment of foreign businesses.

Tina Zhang and Alex Wang of Covington & Burling LLP assisted with the research and preparation of this article.

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[i] Note that these category descriptions are drawn from the draft version of the list circulated by the Ministry of Commerce on March 23 for public comment, as they are not explicitly included in the final version.

US-China Trade Tensions Reflect a Battle for Technological Dominance

The arms race was a defining element of the Cold War between the U.S. and its allies, and the Soviet Union.  President Trump’s recent proposal for $60 billion in unilateral actions against China presages a pitched 21st century battle over technological supremacy, with fateful consequences for the world order.

The Trump Administration rightly sees that China’s aggressive efforts for economic domination hurts the competitiveness of U.S. industries – and that of our allies. But its unilateralist response is unlikely to change China’s approach, and could damage U.S. interests. A more comprehensive, coordinated and strategic U.S. approach is necessary.

Since President Carter normalized relations in 1979, China’s economic rise has been staggering. China’s economic reforms took off, culminating in China’s 2001 WTO entry. Today, China boasts the second largest number of Fortune 500 companies and the world’s four largest banks. China is the world’s largest exporter and second largest importer, and will soon surpass the U.S. as the largest economy. China has indeed built itself into the “world’s manufacturer” of consumer goods and industrial products.  Today, China is our largest trading partner in goods, yet the U.S. has a $375 billion annual trade deficit with China.

China charges that the U.S. seeks to limit its rightful economic gains.  But it is not China’s economic growth but its economic model that is the problem – not simply state-driven capitalism, but an all-powerful state and the Communist Party which control, subsidize and finance scores of State Owned Enterprises (SOEs) and create national champions, but with a vibrant private sector, as well.

China turbo-charged its industrial policy in 2015, launching “Made in China 2025”. President Xi’s 2015 strategy specifies ten leading-edge sectors and 5G technologies for China’s global preeminence that will drive the global economy of the future – AI, semiconductors, sensors, broadband, smartphones. Rather than rely upon market-based integration into global markets, China is using government tools and state actions to achieve dominance in key sectors, which may leave the U.S. exporting mainly commodities, not high-tech 21st century products, to China’s huge market.

In its quest, China controls information on platforms such as Facebook, Google, and Twitter; deploys state-subsidized financing for key sectors makes strategic use of import barriers; forces companies to transfer technologies and trade secrets, including by anti-trust and criminal laws; and obliges companies to form joint ventures with Chinese companies. China uses technical standards to block foreign sales; it hacks private U.S. computer networks to steal sensitive technologies. Chinese purchase of technology companies, at times involve corporations with ties to the state or military. And as FBI Director Wray stressed last week, China leads the world in economic espionage.

There is no silver bullet for China’s massive distortions of traditional global market systems. U.S. unilateral tariffs would tax U.S. consumer purchases, undercut household gains promised from recently-enacted tax cuts, and disadvantage some of our own industries. Few if any Chinese exports to the U.S. are made solely of Chinese inputs. China assembles many products from global supply chain inputs, including from the U.S.  While i-phones are assembled in China, for example, less than half their value is from Chinese manufactured products. Moreover, China is hardly without options to retaliate against U.S. agricultural exports, like soybeans and sorghum, and U.S. companies. U.S. tariffs may not even reduce the overall U.S. trade deficit, as buyers will source more products from other low-cost suppliers.

The U.S. needs a multi-pronged policy. We should retain as far as possible our $650 billion in annual trade with China; target limits on Chinese investment carefully and surgically, reflecting clear national security interest; while addressing China’s most damaging improper and illegal actions.

First, the Trump Administration should join with our allies to work effectively against China’s unfair trade and investment practices.. This is harder when U.S. actions target the very allies we need. President Trump’s recent steps to limit imports of steel and aluminum, under Section 232 “national security” provisions, initially targeted our closest allies. President Trump’s withdrawal last year from the 12 nation Trans-Pacific Partnership (TPP), which would have enhanced America’s ability to shape and enforce global trade rules, was a strategic mistake. Throwing into question the future of the North American Free Trade Agreement (NAFTA) and the U.S.-South Korea Free Trade Agreement, until it was resolved last week, complicates working with our allies on China. Canada, rather than joining the U.S. strategically on China, has filed a trade case in the World Trade Organization (WTO) against the United States.

If new U.S. tariffs are necessary, they should be targeted to products with substantial Chinese content, and be designed to limit harm to U.S. consumers and companies. Such actions should be clearly linked to specific Chinese policies and practices which violate China’s WTO commitments.

The administration is beginning to get this message. It has now exempted Canada, Mexico, Australia, the European Union and even Argentina, from Section 232 sanctions, although Japan, crucial to engaging China, is still targeted. We are encouraged that the administration has recently agreed to work cooperatively with the EU and Japan to address China’s damaging practices cooperatively, including in the WTO, OECD, G7, G20, and IMF. It would also strongly signal to China that the U.S. intends to muster with allies if we re-joined TPP negotiations, as President Trump suggested in January in Davos might happen.

Second, the U.S. should have triggered WTO dispute resolution mechanisms, perhaps jointly with key allies, before threatening to impose unilateral tariffs on Chinese goods. Imposing tariffs without having a WTO finding of wrongdoing may complicated united allied efforts to engage China. The administration is absolutely right to call for WTO consultations with China over its theft and coercion of U.S. intellectual property rights. But the administration has repeatedly questioned the WTO’s value rather than working to ensure its effectiveness, and continues to block the appointment of appellate judges needed for WTO dispute resolution.

Certainly, the expectations that joining the WTO would lead China to adopt a market-based approach, and international norms, have not been met. US Trade Representative Lighthizer was right that the WTO is “wholly inadequate to deal with China’s version of a state-dominated economy that rejects market principles”. The WTO can deal effectively with some Chinese misbehavior, but was not designed for the comprehensive economic weapons the Chinese government is using unfairly to dominate civilian and military technology globally. The WTO must adapt to this reality.

Third, the U.S. should reinvigorate the U.S.-China Comprehensive Economic Dialogue (CED), which began under George W. Bush and continued during the Obama administration, but broke down in the Trump Administration in 2017, when China rebuffed America’s legitimate concerns. Hopefully, Treasury Secretary’s Mnuchin’s current efforts with Chinese officials to avert a trade war will bear fruit, and open the way for a productive CED. The U.S. should identify, in consultation with allies and industry, China’s most distortive practices in priority sectors, and let China know that if all else fails, the U.S. will have no choice but to employ “reciprocity”, subjecting Chinese companies to restrictions and regulatory burdens like those China now imposes against U.S. and other foreign firms.

This article was originally published in The Hill newspaper.

 

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