Cold War of forced technology transfers

Generally, a forced technology transfer imposes multiple regulations on foreign investors to generate mixed corporate participation in their intellectual property rights. These regulations operate as a precondition for granting them national treatment.

Its regulatory variations and commercial practices reflect a surprising legal inventiveness. The dispute over the forced or consensual nature of international technology transfers resembles a Cold War polarized between trade and geopolitics. Misconceived as a market failure void of responsibility, it should not be left to programs promising some stabilization.

The necessary restructuring of the World Trade Organization (WTO) requires standardizing the rules of global production by freely negotiating innovation. Forced technology transfers compel divestment and dilute corporate control in social media companies when they manipulate private data for geopolitical purposes.

Instability of foreign investment

With the aim of preventing these violations, a law came into force in China in 2020, committing to equal treatment for foreign investors in public tenders, industrial policies and standards, and international intellectual property protection. Since then, the Ministry of Commerce and the National Development Reform Commission have regulated protected industries with negative lists, imposing maximum percentages of foreign participation, among other limitations, for numerous industries such as life insurance and automotive. However, the lists are slowly shrinking: in September 2024, 29 prohibited industries remained, out of the 31 listed at the end of 2021. Consequently, foreign investment in China fell by 27.1% in 2024, recording its largest decline since 2008.

During the five-year grace period granted by this law, many foreign companies failed to reform their structures to democratize decision-making. In Sino-foreign joint ventures , for example, they failed to transfer control from the board of directors to the shareholders' meeting, ignoring voting on decisions regarding technology transfer. The text also does not provide for sanctions for compliance with the required adjustments. Variable-interest companies that arrange multiple technology contracts with foreign companies remain unregistered and prevented from listing on a stock exchange.

The national security industry, geopolitically strategic, requires, in addition to national corporate control exceeding 50%, recognition of foreign investors under opaque criteria . Despite these pockets of instability, on February 19, the State Council reiterated its commitment to strengthening foreign investment. All these requirements no longer surprise foreign businesspeople, to the point that some consent to them to maximize their access to the Chinese market.

WTO's Undefined Terms

The dispute over forced or consented imposition against China reached the WTO in July 2018 under DS 549, filed by the European Union, joined by the United States, Taiwan and Japan, under the guise of a violation of paragraphs 7.3 and 2(A)2 of its Accession Protocol, paragraphs 49 and 203 of the Report of the Working Party on its Accession, Articles 3, 28.1, 28.2, 33 and 39 of the TRIPS Agreement; and Article X.3(a) of the GATT 1994.

These countries claim that, through its domestic legislation, China restricts and conditions foreign investment, subjecting it to performance requirements linked to the transfer of its technology through local research. It leaves foreign intellectual property rights unprotected for Sino-foreign joint ventures , discriminating against them with less favorable conditions than those applicable to the same transfers between Chinese companies. Joint ventures with Chinese companies face limits on shareholding, incorporation authorizations, and operating requirements such as certifications, licenses, permits, or other complex administrative approvals. Requirements are applied for the importation of technology or recognition of industrial property rights, but these are never imposed on Chinese companies.

Decentralization of data control in the American justice system

With 170 million users and 5.5 billion videos in the US, TikTok uses artificial and human intelligence to process content from its California subsidiary. ByteDance Ltd., the owner of TikTok's algorithm, is operated from China and is required to cooperate and assist the Chinese government, which controls all companies' private data. In 2020, the Trump administration issued an executive order under the International Emergency Economic Powers Act against ByteDance, requiring it to divest all of its interests in the TikTok subsidiary along with all data acquired in the US.

During 2021 and 2022, ByteDance unsuccessfully attempted to negotiate with the new administration for an alternative to maintain its structure. At the end of that administration in 2024, Congress passed the Foreign Adversary Controlled Applications Act, prohibiting the provision of services to distribute, maintain, or update, directly or indirectly, applications controlled by a foreign adversary in the United States. The penalties include qualified divestment and/or the transfer of foreign interests to local companies, defined at the discretion of the U.S. President.

TikTok and ByteDance sued to have the law declared unconstitutional on the grounds of violating the First Amendment (freedom of speech). The DC Circuit rejected the claim, recognizing the need to protect a foreign government's data collection and content manipulation in the US. On January 17, the US Supreme Court upheld the ruling because:

• The generation, moderation of content and access to social networks of expression, including those associated with a publisher or recipient of information and ideas, are relevant forms and activities of expression;

• Conducted by a foreign adversary designated by Congress, through a media platform, are subject to scrutiny under the First Amendment;

• Government action to suppress freedom of expression is only justified if it demonstrates that it has restricted it in order to serve a public interest in a timely and neutral manner; 

• It is neutral because it prohibits TikTok from having its data controlled by a foreign adversary and can only be corrected through a qualified divestment;

• Specifically, they limit a form of expression that has no relation or preference to the content of expression on TikTok;

• The mandatory divestment requirement is constitutional because TikTok collects relevant personal information, allowing the Chinese government, for example, to track U.S. public employees, as if it were a spying tool.

However, the squeeze-out offer period has already been extended three times. Multiple investors, including Amazon, Oracle, McCourt & O'Leary, Reddit, Onlyfans, and Microsoft, are participating, and the US has agreed to license ByteDance's algorithm to a US company and reinstated the sale of the TikTok app to Apple and Google after its delisting in April 2024. 

Impact of digital commerce on intellectual property

The transfer of intellectual rights has been accelerated by digital trade . Jim Balsillie , founder of the International School of Business at the University of Waterloo, asserted that Canada's main flaw in the negotiation of the USMCA, which replaced NAFTA in 2020, was the complete disregard for that acceleration. He argued that since the postwar period, Canada understood international trade as a way to scale its manufacturing by optimizing costs without friction or tariffs. Its production flourished until the early 1990s, when the US introduced the knowledge industry into regional trade through NAFTA. Concurrently, since 1994, the US led the globalization of intellectual property in the WTO with TRIPS, validating a new source of global income generated by intangibles, generating friction in trade liberalization with a monopoly to protect ideas.

The international opposition between the liberalization of tangible assets and the monopoly of intangibles paralyzed industrial growth, encouraging corporate relocation. Six months after NAFTA, Canada published the Orange Book of patent registration, omitting this monopolistic globalization of intellectual rights. All Canadian industries lost investments by paying royalties abroad. This is reflected today in the SP500 index, which is composed of 90% of powerful US companies that manage their intellectual property globally. Thus, Canada, like other nations, confused the globalized income generated by innovation with new opportunities for efficient employment. Added to this was a thriving judicial interpretation aimed at separating the remuneration of intellectual property between the entrepreneur-investor and the employee-creator, which shifted the registration of intangibles to large markets like the US and the EU, which ultimately captured that income.

This opposition is also confirmed in the USMCA rules. Its Chapter 19 on digital trade radically eliminated restrictions on the transfer of personal data and artificial intelligence. In contrast, Chapter 20 strengthened intellectual property protection by establishing innovative rules that safeguard innovation at the same technical level as in the US. The transfer of Chinese investments to Mexico and Canada enjoys this strong intellectual property protection, fuelling this Cold War and a conflict with the EU over privacy rules. Managing technology transfer to and from countries with authoritarian corporate governance, lack of human rights protections, and data manipulation constitutes the main modern challenge of international trade and integration. Could we frame this Cold War within the framework of the Wassenaar Arrangement of 1996?