The Law and Economics of “Forced” Technology Transfer and Its Implications for Trade and Investment Policy (and the U.S.–China Trade War)

Abstract “Forced technology transfer” is a central issue in the ongoing U.S.–China trade row. The phrase encompasses a number of different practices, but the most significant according to various commentators involve measures that require foreign investors in China to partner with domestic entities as a condition of making an investment, either by forming a joint venture or affording Chinese investors a controlling equity stake. These “corporate structure requirements” empower prospective Chinese partners to bargain for technology transfer as a condition of forming a new venture or otherwise enable them to learn the details of foreign technology through participation in the business enterprise. Foreign investors are free to reject such requirements and forego the associated investment opportunities, and in this sense any technology transfer pursuant to China’s requirements is “consensual.” For ease of reference, this essay refers to these corporate structure requirements as CSR. The analysis to follow examines the economics of CSR from both the national and global welfare perspectives. It indicates how CSR may undercut the national welfare of the USA even if it is profitable for U.S. investors. The global welfare implications of CSR, however, are much less clear, which offers an explanation for the absence of any constraints on CSR in typical trade agreements. A clear role for restrictions on CSR does emerge, however, in investment agreements that seek to eliminate investment protectionism by requiring “pre-establishment national treatment” for foreign investors. This analysis has immediate policy implications for the ongoing trade dispute with China.