U.S. Trade Representative Issues Report on China's Compliance with WTO and TRIPS

Intellectual Property called a "Priority Issue"

By Kevin E. Noonan --

The U.S. Trade Representative (USTR) issued a Report on the extent to which China is in compliance with its obligations under the TRIPS provisions of the General Agreement on Tariffs and Trade (GATT), as required for membership in the World Trade Organization (WTO).  The Report acknowledges that China has "put in place a framework of laws and regulations aimed at protecting the intellectual property rights of domestic and foreign right holders" in compliance with its obligations under TRIPS.  However, the report maintains that "some critical changes to China's legal framework are still needed in a few areas, such as further improvement of China's measures for copyright protection on the Internet, and correction of continuing deficiencies in China's criminal IPR enforcement measures."  And enforcement of intellectual property rights remains a "challenge" despite "repeated antipiracy campaigns."  The Report asserts that counterfeiting activities and piracy remain at "unacceptable high levels," harming U.S. interests and businesses.  In this regard, this Report cites the USTR study from last May that estimated a total of $48 billion lost in sales, license fees, and royalties in 2009 alone stemming from Chinese piracy, noting that this is more than 2/3rds (almost 70%) of the total ($69 billion) of goods exported from the U.S. to China in that year.

The Report also references China's status in the USTR's Special 301 Report, issued earlier this year, that placed China on the Priority Watch List as well as its status as a "Notorious Market" in both virtual (Internet) and physical goods.  Attesting to the efficacy of U.S. efforts in "encouraging" TRIPS compliance, this Report cites the "precedent-setting" licensing agreement between the website Baidu and foreign rights holders regarding music downloads.  The Report also notes that China itself has an incentive for improving enforcement on intellectual property rights, in view of official government efforts at developing innovative technologies.  These incentives were also cited with regard to bilateral "discussions" between the various U.S. agencies and the Chinese government that resulted in "progress" albeit with "much more work remain[ing] to be done."  In addition to such efforts at persuasion, the Report sets forth use of the U.S.-China Joint Commission on Commerce and Trade (JCCT) process to make permanent establishment of a "high level central government [IPR] enforcement structure" at the Vice-Premier level; this initiative includes "increased resources for software audits and inspections" and "further actions to improve the scope, efficiency and accuracy of this work.  U.S. efforts included discussions between President Obama and Chinese President Hu during a state visit in January 2011.  Future prospects include both negotiated agreements and enforcement activities under the auspices of the World Trade Organization and the TRIPS agreement.

In a more detailed section of the Report, the USTR details both the efforts China has taken to reform its intellectual property laws and the continuing difficulties encountered in enforcement of those rights by both foreign and domestic rights holders.  Citing "little success " in these efforts, the Report states that there continues to be "widespread counterfeiting, piracy and other forms of infringement."  Specific weaknesses in China's IPR protections cited in the Report include "underutilization of deterrent criminal remedies" that creates a "safe harbor" for infringers.  (Alternatively, this complaint may simply illustrate cultural differences between Western practices of using the legal system to enforce rights versus traditional Chinese concepts that emphasize social (not necessarily socialist) solutions to such problems.)  On the other hand, as the Report notes the U.S. obtained a favorable ruling from a WTO panel in 2009 on two of three claims regarding "WTO-inconsistent China's denial of copyright protection to works that do not meet China's content review standards as well as China's handling of border enforcement seizures of counterfeit goods," resulting in changes to Chinese practices that brought the regime into compliance with the relevant TRIPS provisions.  Theatrical releases continue to be an area where Chinese law is not compliant according to the Report, and these issues are the subject of current discussions.

Regarding the JCCT, the U.S. sought to get China to agree to "(1) increase prosecutions of IPR violators, (2) improve enforcement at the border, (3) counter piracy of movies, audio visual products and software, (4) address Internet-related infringement, (5) ensure that all levels of China's government and Chinese enterprises use only legally authorized software and (6) assist small and medium-sized U.S. companies experiencing China-related IPR problems, among other things."  While some of these goals have been addressed, the Report states that others remain unfulfilled.

While the majority of the Report is focused on copyright issues and Internet and "real" goods counterfeiting, one section notes that the U.S. also has concerns over patent rights in the pharmaceutical area.  Specifically, the Report states that U.S. trade negotiators have urged China to "provide more effective protection against unfair commercial use for undisclosed information, test data and other data generated to obtain marketing approval for pharmaceutical products" and to "provide an effective system to expeditiously address patent issues in connection with applications to market pharmaceutical products," as well as addressing delays in regulatory approval for pharmaceuticals that create incentives for counterfeiting.

Finally, despite Chinese efforts acknowledged and detailed in the Report, it characterizes IPR infringement as a "serious problem" and states that IPR enforcement has "not been achieved" in China, detailing these statements with examples of difficulties encountered in enforcing intellectual property rights in China.  Chief among the impediments to enforcing IPR in China enumerated in the Report are "lack of coordination among Chinese government ministries and agencies, lack of training, resource constraints, lack of transparency in the enforcement process and its outcomes, and local protectionism and corruption."  These deficiencies affect seemingly all areas of technology and IPR-based industries' specifically noted are "films, music and sound recordings, publishing, business and entertainment software, pharmaceuticals, chemicals, information technology, apparel, athletic footwear, textile fabrics and floor coverings, consumer goods, food and beverages, electrical equipment, automotive parts and industrial products."  Levels of piracy of copyrighted products (except, oddly, business software) are estimated to be 90-95% of all sales; business software piracy rates were only estimated to be 80%.  Efforts to stem this piracy are characterized in the Report as having only "modest success."  (And piracy extends even to use by the Chinese government as well as state-owned and state-invested industries, according to the Report.)  These statistics are troubling in view of the extensive commitment the Report described by the Chinese government to reduce counterfeiting and IPR infringement, especially in view of estimates in the Report that such activities cost China's domestic economy $3.2 billion in 2002, an amount that should be much higher in view of the last decade's increase in China's domestic economy.

This section of the Report is perhaps the most relevant to Western companies dependent on IPR to protect their products, particularly in answering the question of whether pursuing intellectual property rights in China is cost effective and likely to provide sufficient protection to warrant the time, effort and expense of obtaining such rights.

Comments

[EG]

Kevin,

Frankly, the US needs to put more "teeth" into getting compliance from China with respect to protecting our IP (and that of other foreign nationals) and complying with TRIPS. Unfortunately, the LARGE amount of our DEBT held by China makes getting compliance very complicated.