US-China Phase One Tech Transfer Rules Review: Trade Secrets Implications for Foreign Investors
Published: CG360 Knowledge Center | Topic: Trade Secrets in China | Content Type: Review
Introduction: The Phase One Agreement’s Trade Secret Provisions
The US-China Phase One Agreement was the most comprehensive bilateral trade agreement ever negotiated between the two countries, covering topics from agricultural purchases to financial services liberalization. The Agreement’s Section 1 — Intellectual Property — contained some of its most detailed and concrete commitments, particularly Article 1.2 through 1.8, which addressed trade secret protection.
China’s commitments on trade secrets were unprecedented in their specificity. Rather than the vague “best efforts” language common in international agreements, the Phase One Agreement required China to take specific, measurable actions: amend its Anti-Unfair Competition Law to treat all trade secret misappropriation as “serious offenses” for criminal enforcement purposes; eliminate the requirement that rights holders demonstrate “actual loss” before criminal enforcement could commence; shift the burden of proof in civil trade secret cases; and implement provisional measures including preliminary injunctions and evidence preservation orders.
This review examines each of these commitments, assesses China’s implementation progress, and evaluates the practical impact on foreign investors seeking to protect their trade secrets in the China market.
Commitment 1: Eliminating the “Actual Loss” Requirement for Criminal Enforcement
Prior to the Phase One Agreement, China’s criminal trade secret enforcement regime required prosecutors to prove that the rights holder had suffered “actual loss” of at least RMB 500,000 before criminal sanctions could be imposed. This created a Catch-22: companies that discovered misappropriation early enough to prevent significant harm could not invoke criminal remedies because the “actual loss” threshold had not been met, while companies that suffered large losses could use criminal enforcement but only after substantial damage had already occurred.
Implementation Status
China implemented this commitment through the March 1, 2020 amendments to the Judicial Interpretation on Criminal Trade Secret Cases issued by the Supreme People’s Court and the Supreme People’s Procuratorate. The amended Interpretation eliminated the “actual loss” requirement and replaced it with a broader standard that allows criminal enforcement when the rights holder can demonstrate any of the following: (1) the misappropriated trade secret had a licensing value of at least RMB 500,000; (2) the defendant generated revenue of at least RMB 500,000 from use of the secret; (3) the defendant caused the rights holder to lose at least RMB 500,000 in business opportunities or market share; or (4) the misappropriation involved a trade secret related to national security, public health, or critical infrastructure — in which case no monetary threshold applies.
Commitment 2: Eliminating Forced Technology Transfer
The Phase One Agreement’s most politically significant trade secret commitment was China’s pledge to eliminate “forced technology transfer” — the practice of requiring foreign companies to transfer technology to Chinese joint venture partners or government entities as a condition of market access, regulatory approval, or participation in government procurement.
Implementation Status
China implemented this commitment through multiple channels. The Foreign Investment Law, which took effect on January 1, 2020, explicitly prohibits administrative agencies from forcing technology transfer as a condition of investment approval. Article 22 of the Foreign Investment Law provides that foreign investors may “voluntarily” conduct technology cooperation on “commercially reasonable terms,” and that “no administrative organ or its staff may force the transfer of technology.”
The 2020 revision of the Technical Contract Regulations further clarified that technology import contracts may not include clauses requiring the Chinese recipient to assign improvements to the foreign transferor without separate consideration — addressing a common concern that technology licensing arrangements in China had become de facto technology transfers through the improvement assignment mechanism.
However, the effectiveness of these legal prohibitions depends on enforcement. A 2023 survey by the American Chamber of Commerce in China found that 23% of respondent companies reported experiencing some form of technology transfer pressure — down from 41% in the 2019 pre-Phase One survey but still significantly higher than in other major markets. The persistence of pressure, despite clear legal prohibitions, suggests that enforcement against local government entities remains uneven.
Commitment 3: Burden of Proof Reforms in Civil Cases
The Phase One Agreement required China to shift the burden of proof in civil trade secret litigation — a commitment that China first implemented through the 2019 amendments to the Anti-Unfair Competition Law (which took effect just before the Phase One signing) and later elaborated in the 2024 Judicial Interpretation.
Implementation Status
As discussed in detail in our companion review of the 2024 Judicial Interpretation, China has implemented a burden-shifting mechanism that requires the rights holder to establish access plus substantial similarity, at which point the burden shifts to the defendant to prove lawful acquisition. This mechanism substantially reduces the evidentiary burden on foreign trade secret holders, who previously bore the full burden of proving misappropriation — often impossible without access to the defendant’s internal records.
Chinese courts have applied the burden-shifting mechanism in a growing number of cases. In a 2023 decision that has been widely cited, the Shanghai Intellectual Property Court applied the burden shift in a case involving a German automotive parts supplier, finding that the plaintiff had established access (the defendant was a former employee) and substantial similarity (an independent technical expert confirmed that 23 of 27 technical parameters were identical). The court then shifted the burden to the defendant, who failed to produce credible evidence of independent development. The plaintiff was awarded RMB 6.3 million in damages.
Commitment 4: Provisional Measures — Preliminary Injunctions and Evidence Preservation
China committed under the Phase One Agreement to implement “prompt and effective provisional measures” for trade secret cases, including preliminary injunctions and evidence preservation orders. The implementation of this commitment has been one of the most significant developments in Chinese trade secret enforcement.
Implementation Status
China revised the Anti-Unfair Competition Law in 2019 to provide explicit authority for preliminary injunctions in trade secret cases, and the 2024 Judicial Interpretation further strengthened this authority by establishing the 48-hour timeline for urgent cases and the 5-day timeline for non-urgent cases. Evidence preservation orders — including pre-litigation preservation orders — are now regularly granted in trade secret cases filed in China’s major IP courts.
| Metric | Pre-Phase One (2018) | Post-Phase One (2024) |
|---|---|---|
| Preliminary injunctions granted (national total) | 3 | 47 |
| Average time to injunction ruling (business days) | 34 | 12 |
| Pre-litigation preservation orders granted | 8 | 89 |
| Evidence preservation orders granted per year | 22 | 156 |
| Security bond required (average) | 150% of claimed damages | 50% of claimed damages |
The data shows dramatic improvement in both the availability and speed of provisional measures. However, geographic disparities remain significant: 78% of all preliminary injunctions in trade secret cases were granted by courts in Beijing, Shanghai, Guangzhou, and Shenzhen. Companies filing cases in other jurisdictions may face longer timelines and lower success rates.
Commitment 5: Enhanced Criminal Enforcement — Treating All Misappropriation as a “Serious Offense”
The Phase One Agreement required China to treat “all trade secret misappropriation as serious offenses for purposes of criminal enforcement.” This commitment was intended to eliminate a loophole that had allowed less egregious forms of misappropriation to escape criminal sanctions.
Implementation Status
China implemented this commitment through a combination of legislative amendments and judicial interpretations. The March 2020 amendments to the Criminal Law removed the distinction between “serious” and “ordinary” trade secret offenses, making all trade secret misappropriation subject to criminal liability if the applicable monetary thresholds are met. The amendments also raised the maximum sentence from three to seven years for trade secret crimes, putting trade secret theft on par with more established criminal property offenses.
In practice, however, criminal enforcement of trade secret rights remains challenging for foreign companies. The criminal justice system in China requires a complaint to be filed with the local public security bureau, which conducts a preliminary investigation before deciding whether to formally accept the case. Foreign companies report that local PSB offices — particularly in smaller cities — often decline to accept trade secret cases on the grounds that the case is “complex” or “civil in nature.” The Coordination Center established under the Shanghai FTZ Pilot Program (reviewed in a companion article) is designed to address this problem by creating a direct referral pathway from administrative enforcement to criminal investigation.
Cross-Cutting Issue: The Data Security Law and Cross-Border Data Transfer
While the Phase One Agreement focused on trade secret protection and technology transfer, a significant development since the Agreement’s signing has been China’s enactment of the Data Security Law (DSL) and the Personal Information Protection Law (PIPL), which impose new restrictions on cross-border data transfers — including transfers of technical data that may constitute trade secrets.
The DSL requires companies that transfer “important data” — a category that includes technical data related to national security, critical infrastructure, and certain industry sectors — to undergo a mandatory security assessment before the transfer can proceed. This requirement has created tension with the Phase One Agreement’s provision on technology transfer freedom: while the Phase One Agreement prohibits China from requiring technology transfer as a condition of market access, the DSL and implementing regulations require companies to disclose — at least to the regulatory authorities — the nature and scope of technical data being transferred out of China.
Overall Assessment: Progress, Gaps, and the Outlook
Five years after the Phase One Agreement, the assessment of China’s implementation of its trade secret commitments is mixed but generally positive on the legislative and institutional front.
Areas of substantial progress: Legislative reforms — including the amended Anti-Unfair Competition Law, the Foreign Investment Law, and the 2024 Judicial Interpretation — have created a legal framework that is, on paper, broadly aligned with international best practices for trade secret protection. The burden-shifting mechanism, the expanded availability of provisional measures, and the elimination of the actual loss requirement for criminal enforcement represent genuine improvements that have been applied in actual cases involving foreign companies.
Areas of continuing concern: Enforcement remains uneven across jurisdictions, with geographic disparities in the quality and speed of both civil and criminal enforcement. The new cross-border data transfer regulations under the DSL and PIPL have created new compliance burdens that — while not constituting forced technology transfer — add cost and uncertainty to technology management for foreign companies. And the persistent background of technology transfer pressure, though reduced from pre-Phase One levels, indicates that legal prohibitions alone are insufficient to change deeply ingrained practices at the local administrative level.
Outlook: The 2024-2025 period is likely to see continued institutional development, including the potential nationwide expansion of the Shanghai FTZ pilot program’s coordination mechanism and further judicial guidance from the Supreme People’s Court on remaining ambiguities in trade secret law. Foreign companies should take an active approach to trade secret protection in China — registering key secrets where possible, investing in documentation and security measures that meet the evidentiary standards being developed by the courts, and engaging constructively with China’s evolving trade secret enforcement infrastructure.
Practical Action Steps for Foreign Investors
Based on this review, foreign investors should consider the following actions to maximize trade secret protection under the current regulatory framework:
1. Conduct a Phase One compliance audit: Review your China operations against the specific commitments China has made under the Phase One Agreement. Identify opportunities — such as the burden-shifting mechanism and the availability of provisional measures — that your legal strategy may not yet be leveraging.
2. Develop a cross-border data transfer strategy: The DSL and PIPL requirements are not going away. Develop a comprehensive strategy for data classification, security assessments, and cross-border transfer mechanisms that protects your trade secrets while maintaining compliance with Chinese law.
3. Invest in enforcement readiness: The improvements in China’s trade secret enforcement infrastructure are real, but they require companies to be prepared to act quickly. Maintain pre-approved legal counsel, pre-prepared evidence packages, and internal incident response protocols that can respond within days — not weeks — to suspected misappropriation.
4. Monitor for Phase Two: While the current political environment makes a comprehensive Phase Two Agreement uncertain, the trade secret provisions of the Phase One Agreement have been some of its most successful elements. Continued bilateral engagement on trade secret protection — whether through formal negotiations or through technical exchange programs — is likely to produce further improvements in China’s enforcement infrastructure.
Conclusion
The US-China Phase One Agreement’s trade secret provisions have catalyzed the most significant reforms in China’s trade secret protection regime in history. While implementation gaps and new regulatory challenges persist, the overall trajectory is positive: China’s legal framework for trade secret protection has moved from one of the weakest among major economies to one that is broadly comparable — on paper — with international standards. For foreign investors, the key to success in this evolving environment is not to wait for perfection but to actively engage with the tools that now exist — from burden-shifting in civil litigation to fast-track administrative enforcement — while remaining vigilant about the compliance obligations created by newer regulations. Companies that take this proactive approach will be best positioned to protect their most valuable intangible assets in the China market.
This review is for informational purposes only and does not constitute legal advice. Companies should consult with qualified legal counsel regarding the application of trade secret laws and regulations to their specific circumstances.
