DISCLAIMER:
Neither the author nor Babelcom makes any express or implied warranty to the accuracy or completeness of the information contained herein. Neither the author nor Babelcom shall be liable for any direct, indirect, incidental, consequential or special damages resulting from use of materials contained herein.
COPYRIGHT NOTICE:
All Rights Reserved, Babelcom, 2002. No part of this work may be reproduced or transmitted in any form or by any means, including photocopying, recording, or by any information storage and retrieval system, without written permission from Babelcom.
By John Jiang
February 1, 2002
Since China officially opened its doors to the outside world in late 1970s, its policy on economic cooperation with foreign businesses places a strong emphasis on the transfer of technology to Chinese enterprises. Consequently, in the past two decades technology transfer was a prominent component of foreign trade and investment projects in China.
China's emergence as both a global manufacturing base and potentially the largest market has spurred technology transfer (usually in the form of technology licensing) by multinational corporations to their invested enterprises and contract manufacturers in China. Moreover, as the battle for shares of the Chinese market intensifies among major multinational corporations, they have accelerated the pace of product introduction into the Chinese market, requiring more frequent technology transfer to their China operations. Also, in response to local market requirements and cost advantage, many MNCs have established global research and development centers in China, further increasing the volume of technology flow into China.
Until China's accession to the WTO, its technology import regulatory framework was designed primarily to protect Chinese domestic enterprises (most of which were state-owned and relatively inexperienced in technology transfer matters) from possible unscrupulous conducts from technology transferors. As a result, a number of requirements were imposed on foreign technology transferors. Some of these requirements were considered onerous by transferors of technology, such as limited royalty period, strict warranty obligations, and elaborate regulatory approval procedures. Despite these imperfections, the required legal framework and basic assurances were in place in the last two decades for foreign businesses to engage in substantial technology transfer activities with their Chinese counterparts.
With China's accession to the WTO on December 11, 2001, the government of China committed to the elimination of various regulatory measures which imposed onerous obligations and restrictions on foreign technology transferors. In late December of 2001, the State Council and the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") issued a slue of new regulations and rules in an effort to conform China's technology import/export regulatory regime to the requirement of WTO. Therefore, in effect a Post-WTO Scheme has emerged shortly after China's accession to the WTO. Under the Post-WTO regime, technology import transactions are subject to less government control both procedurally and substantively.
Although many of the obstacles to technology import which existed under the Pre-WTO regime have been eliminated, a few measures withstood the WTO tide and slipped into the new regulatory system, and will likely continue to cause discomfort to foreign technology transferors. In addition, some new issues have surfaced under the new regime, creating potential regulatory and enforcement uncertainties, which can only be sorted out as a new set of regulatory practices is established.
This article provides a comparative overview of China's technology import regulatory regime in the pre-WTO and post-WTO eras; it also discusses several issues confronting foreign technology transferors in China's post WTO regulatory environment.
Prior to January 1, 2002, China's national regulatory framework for technology transfer transactions was mainly built upon one set of administrative regulations and two sets of administrative measures. The set of regulations was the Regulations of the People's Republic of China for the Administration of Technology Import Contracts promulgated by the State Council, and taking effect on May 24, 1985 (the "Technology Import Regulations"). The first set of administrative rules was the Detailed Implementing Rules for the Regulations of the People's Republic of China for the Administration of Technology Import Contracts, promulgated by the predecessor of MOFTEC, which entered into effect on January 20, 1988 (the "Technology Import Rules"). On March 22 of 1996, MOFTEC issued the Provisional Measures for the Administration of Technology and Equipment Import Matters ("Provisional Technology Import Measures"), prescribing, inter alia, technology import contract registration procedures. Together these regulations and rules are labeled hereinafter as the "Pre-WTO Rules" or "Pre-WTO Scheme".
Technology Import Regulations and Technology Import Rules, promulgated in a relatively early phase of China's economic reform, were somewhat crude by current standards. A significant portion of the provisions dealt with basic contract issues, such as the contract parties, the format and required clauses, etc. Nonetheless, they did provide a rudimentary roadmap for foreign technology transferors and the Chinese transferees by specifying the required and prohibited contents and fixing the maximum contract term, prescribing approval and registration procedures, and setting forth protections and remedies available to technology transferors.
Outlined below are some of the noteworthy features and requirements under the Pre-WTO Scheme, which will be explored in more detail in Section III in comparison to the Post-WTO Scheme. These features include:
In the absence of a comprehensive contract law during the early years of China's reform, these Pre-WTO Rules served their purpose and filled a legal and regulatory void. However, as China's economy has transformed itself from a state sector dominated economy to an increasingly market-oriented economy, the government has been trying to reduce its participation in the daily economic activities and to assume the role of macro-manager of the national economy and impartial regulator of market activities. Further, as part of its WTO commitments, the Chinese government confirmed that upon accession, China would only impose, apply or enforce laws, regulations or measures relating to the transfer of technology that were not inconsistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPS Agreement") and the Agreement on Trade-Related Investment Measures ("TRIMs Agreement"). Both TRIPS and TRIMs Agreement have strong emphasis on the impartiality and non-discrimination of government regulations in international economic transactions. Therefore, the existing technology import regulatory regime was in need of a major overhaul.
As a result of China's economic transformation and its WTO commitment, a new set of regulations entitled Regulations of the People's Republic of China on Import and Export of Technology (the "Technology Import/Export Regulations") was promulgated by the State Council and took effect on January 1, 2002. The Technology Import Regulations and Technology Import Rules were simultaneously repealed. In conjunction with the promulgation of the Technology Import and Export Regulations, a series of rules and measures were promulgated by MOFTEC and other relevant departments under the State Council to provide detailed guidance for matters relating to technology import, such as contract registration, procedures for application of import/export of restricted technologies, catalogues of technologies subject to import/export restriction or prohibition. These regulations and measures will be labeled hereinafter as "Post-WTO Rules" or "Post-WTO Scheme".
While the Post-WTO Rules inherited a substantial number of features from the previous regime, they differ in many important aspects. Below are the major regulatory aspects which have undergone significant changes as a result of the establishment of the Post-WTO Scheme.
The spirit of the Post-WTO Scheme is to promote free cross-border technology transfer with relatively few criteria and restrictions imposed by the government. Reflecting the government's changing emphasis on its role as a regulator of foreign economic transactions, the Post-WTO Rules provide for a much less active role of the government in the contracting process. In the Post-WTO Rules, political rhetoric emphasizing the obligations of foreign technology transferors is reduced. The previous requirement that imported technology MUST be advanced and appropriate is replaced with the milder language to the effect that importation of advanced and appropriate technology is encouraged by the government. Although there is still a general statement that technology import should be conducive to China's development and the Chinese rights and interests should be protected, the detailed criteria for imported technology listed in the Pre-WTO Scheme have disappeared from the Post-WTO Scheme.
Moreover, a new article has been added to the Technology Import/Export Regulations. This article states that the state shall implement a uniform regulatory system to safeguard a fair and free trade order in accordance with the law. This further signals a shift of Chinese government's self-perception as the vigilant watchdog of Chinese interests toward that of an impartial referee, allowing economic actors greater freedom to negotiate their own terms of a technology transfer transaction.
Under the Pre-WTO Scheme, all technology import contracts were subject to a cumbersome three-step procedure of preliminary approval, formal approval, and subsequent registration, which in aggregate took at least several months to complete. The approval authority was required to undertake substantive review of the contracts and often times did not hesitate to demand substantive changes in its review process. This often amounted to a de facto round of negotiation between the technology transferor and the approval authority after the transferor and transferee had formally signed the contract.
The Post-WTO Rules have significantly streamlined the regulatory procedures. Technologies are put into three general categories: unrestricted, restricted, and prohibited. MOFTEC is charged with the responsibility to issue a catalogue listing the technologies falling into either the restricted or prohibited category, which can be amended from time to time. A catalogue of prohibited technology and restricted technology for import, consisting of only two pages, was issued by the MOFTEC on December 30, 2001. The scope of prohibited and restricted technologies is quite narrow, covering less than a dozen of technology categories. Prohibited technologies are mainly pollution causing low-tech metallurgical and chemical technologies, and restricted technologies include a few of the outdated technologies in traditional industries.
Importation of unrestricted technologies is no longer subject to prior government approval, but only a subsequent registration is required. For a technology transfer contract involving unrestricted technology, its effectiveness is no longer conditioned upon grant of registration of the contract by the government. The new regulations mandate that the foreign trade authority must conclude registration within three days after the appropriate registration materials are submitted. Importation of restricted technologies is still subject to a licensing and approval procedure administered by the MOFTEC or the local foreign trade authorities.
In contrast to the Pre-WTO Rules, the Post-WTO Rules no longer expressly require that a Chinese version of the contract be submitted to the regulatory authority in the case of importation of unrestricted technology.
Article 8 of the Technology Import Regulations prescribed a maximum term of 10 years for all technology transfer contracts (except on certain extraordinary occasions where the technology was especially needed by China). Article 9(viii) further mandated that except prior regulatory approval is granted, after the contract term expired, the transferee would be free to exploit the technology without further royalty obligation.
Under the Post-WTO Scheme, technology transfer contracts are no longer subject to a maximum contract term of 10 years and the parties are free to prescribe their own term. There is no longer any requirement that the transferor allow the transferee to use the technology for free after contract term expires. Instead, upon expiration of the technology import contract, the transferor and transferee may negotiate the continued use of the technology in accordance with the principles of fairness and reasonableness.
While we see significant regulatory liberalization under the Post WTO-Scheme, two mandatory warranty obligations of the transferor under the Pre-WTO Scheme survived:
(1) The transferor is required to warrant that he is the lawful owner of the technology provided, or that it has the right to assign or license such technology.
(2) The transferor is required to warrant that the supplied technology is complete, accurate and effective, capable of reaching the technical goals agreed upon between the parties.
Both Pre-WTO and Post-WTO Rules contain a general statement prohibiting technology transferor from forcing a transferee to accept unreasonably restrictive requirements. The Pre-WTO Rules further enumerated nine types of clauses which may not be included in a technology transfer contract without special approval by the approval authority:
(i) requiring the transferee to accept tying conditions unrelated to technology import, including purchase of any unnecessary technology, technical service, raw materials, equipment or product;
(ii) restricting the transferee's freedom to choose to purchase raw materials, parts and components, or equipment from different sources;
(iii) restricting the transferee's development and improvement of the imported technology;
(iv) restricting the transferee's acquisition of similar technology or technology of the same kind from other sources;
(v) non-reciprocal conditions for exchange of improved technology between the parties;
(vi) restricting the quantity, variety or sale price of the products produced by the transferee using the imported technology;
(vii) unreasonably restricting the transferee's sales channels or export market;
(viii) prohibiting the transferee to continue using the imported technology upon the expiration of the term of the Contract.
(ix) requiring the transferee to pay compensation for, or bear obligations with respect to, patents which are not used or have expired.
The Post-WTO Rules dropped two of the above clauses and inherited the rest with some minor modifications. The two dropped clauses are the prohibition against non-reciprocal conditions for exchange of improved technology between the parties and the requirement prohibiting the transferee to continue using the imported technology upon the expiration of the term of the Contract (Item (v) and (viii) above).
In the Post WTO-Rules, the seven prohibited clauses are:
(i) requiring the transferee to accept tying conditions unrelated to technology import, including purchase of any unnecessary technology, raw materials, products, equipment or services;
(ii) requiring the transferee to pay compensation for, or bear obligations with respect to, patents which have expired or have been invalidated.
(iii) restricting the transferee's improvement of the imported technology or restricting the use of the improvement by the transferee;
(iv) restricting the transferee's acquisition from other sources of technology similar to, or competitive with, the technology of the transferor;
(v) unreasonably restricting the transferee's channels or sources for purchase of raw materials, parts and components, products or equipment;
(vi) unreasonably restricting the quantity, variety or sale price of the products produced by the transferee;
(vii) unreasonably restricting the export channels for products produced by transferee's using the technology imported.
While under the Pre-WTO Scheme, the approval authority had the discretion to decide whether to approve or reject any of the nine restrictive clauses, the seven types of clauses are banned all together under the new regime. Since the vast majority of technology contracts are no longer subject to prior approval, it will likely be left to the court or arbitration panel to decide whether a particular technology contract clause falls into one of these categories after a dispute arises between the contract parties.
IV. Potential Regulatory Conflicts Concerning Foreign Invested Enterprises
As mentioned before, China's accession to the WTO brought with it new opportunities but also potential conflicts between existing regulations newly promulgated regulations. One example is the conflicts between the provisions of the Post-WTO Scheme on technology import and the current technology import regulatory regime for foreign invested enterprises, specifically joint ventures, which is the most prevalent vehicle for foreign investment in China. The vast majority of joint ventures contain a technology transfer element, which is subject to both the regime governing technology import and the regime governing foreign invested enterprises.
Article 22 of the Technology Import/Export Regulations provides that for the establishment of a foreign invested enterprise, where the foreign party contributes its technology as investment, the importation of such technology shall be subject to review or registration in accordance with the procedure for approval of establishment of foreign invested enterprises. The Implementing Regulations of the Law of the Peoples' Republic of China on Sino-foreign Equity Joint Venture Enterprises contains a Chapter Six entitled "Technology Import". This chapter deals with acquisition of technology by the joint venture from either of the joint venture partners or unrelated third parties. Under most circumstances, the technology transferors are foreign parties. According to this chapter, all acquisition of foreign technology by the joint venture is subject to approval by the original approval authority, and a number of restrictions which have been lifted under the Technology Import/Export Regulations would still apply to joint ventures, such as a 10 year term limit (with exceptions), the requirement that technology be advanced and appropriate, etc. So in the case of technology import by joint venture enterprises, it is unclear whether the newly promulgated Technology Import/Export Regulations would take precedent over the restrictive provisions under Chapter Six of the Equity Joint Venture Implementing Regulations.
China's accession to the WTO has prompted it to undertake a major overhaul of its foreign trade and investment regulatory regime. In the area of technology import, there seems to be a coordinated and timely effort made by the State Council and MOFTEC to attempt to conform its regulatory regime with the WTO requirements. Unlike past practice whereby there was usually a significant time lag between the promulgation of a set of administrative regulations and the subsequent issuance of various subsidiary rules (For instance, it took almost three years from the time of promulgation of the Technology Import Regulations before the Technology Import Rules were issued), the series of regulations and rules pertaining to technology import were issued at around the same time as the Technology Import/Export Regulations.
The Post-WTO Scheme also removes a number of obstacles to technology import which existed under the Pre-WTO Scheme. However, the surviving restrictions and new issues under the Post-WTO Scheme entail significant regulatory and enforcement uncertainties, which can only be sorted out as time goes by and a new set of regulatory practices is established. In the meantime, the prudent approach for potential foreign technology transferors is to exercise due diligence in negotiating technology import contracts, so that existing and new regulatory and contractual risks are taken into account and properly addressed in the contracts.