18 May 2005

Intellectual Property Enforcement High on U.S.-China Agenda, May 18, 2005

(Infringements explode along with booming trade, Bush administration says)

By Berta Gomez and Peggy B. Hu
Washington File Staff Writers

This article is one in a series on U.S.-China economic relations.

Washington -- The production and export by Chinese manufacturers of products that violate patents, trademarks and copyrights have become a key problem in U.S.-China trade relations, the Bush administration says.

The United States is seeking determined and forceful actions by China to considerably and measurably reduce crime related to intellectual property rights (IPR).  The administration has raised its concerns at the highest levels, and new U.S. Trade Representative Rob Portman has made curtailing IPR theft a top priority.  Without progress, U.S.-China trade relations will suffer.

IPR protection has long been a U.S. concern, but the explosion of U.S.-China trade over the past decade and mounting IPR infringements by Chinese producers have raised the stakes considerably, U.S. officials say.

"An unfortunate consequence of market reforms in China is that unscrupulous actors seize opportunities afforded to manufacture, sell or export counterfeit or pirated goods," said Mark Cohen, the U.S. Patent and Trademark Office's attaché in Beijing for IPR-related issues.

Although international seizures of counterfeit and pirated goods from China have been rising continuously since the country's accession to the World Trade Organization (WTO) in 2001, and China's administrative, civil and criminal justice systems have reported increased enforcement activities, Cohen said, "the current level of enforcement ... has not been enough to significantly deter the rise in counterfeiting and piracy that many companies, countries and rights holders have experienced over the past several years."

The Bush administration's annual National Trade Estimate Report on Foreign Trade Barriers (NTE), released in March, found that IPR violations in China continue to affect films, music, publishing, software, pharmaceuticals, chemicals, information technology, textiles and floor coverings, consumer goods, electrical equipment, automotive parts and industrial products, among many other products.

Lack of enforcement produced infringement levels of 90 percent or above "for virtually every form of intellectual property" in China during 2004, the Office of the U.S. Trade Representative (USTR) said in an April review of China's IPR practices.  Estimated U.S. losses to Chinese copyright piracy alone range between $2.5 billion and $3.8 billion annually, USTR said.

In 2004, the value of Chinese counterfeits seized before entering U.S. markets rose from $94 million to $134 million, and products originating in China accounted for 67 percent of all IPR-related seizures by U.S. customs agents, USTR said in the review.

Conducted under provisions of U.S. trade law known as "Special 301," the USTR review coincided with numerous bilateral contacts and capacity-building efforts designed to improve China's IPR enforcement.  Those efforts include an IPR working group within the U.S.-China Joint Commission on Commerce and Trade (JCCT), improved co-ordination between Customs Services, and technical assistance, such as focused training of Chinese judges and officials to strengthen China’s ability to detect and prosecute IPR thieves.  Washington hopes China will be able to report robust, measurable results on IPR at the 2005 meeting of the JCCT.

Chinese leaders have raised the profile of IPR issues at the national level. In April 2004, China's Vice Premier Wu Yi presented an "action plan" calling for measures to facilitate criminal prosecution of IPR violations, increased enforcement activities and a national education campaign.

Although U.S. officials recognize those and other signs of progress, the USTR review concluded that China's enforcement efforts remain deficient and left open the possibility of future U.S. action in the WTO.

TRADE-RELATED ASPECTS OF PROPERTY RIGHTS

Most of the major improvements in China's IPR laws were made as the country prepared for becoming a member of the WTO and meeting its obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).

By the end of 2001, China had completed amendments to many of the relevant laws, and after WTO accession the country continued to issue regulations that implement and guide interpretation of the laws. Those legal changes represent "major improvements that have moved China generally in line with international norms in most key areas," NTE says.

However, new legislation might be required in certain "cutting edge" areas such as Internet-related copyright infringement -- an issue of growing importance given China's status as the world's second-largest user of the Internet, the NTE says.

On the issue of the Internet, the Bush administration is pressing China to join two World Intellectual Property Organization (WIPO) treaties -- the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty.

Commonly known as the "WIPO Internet treaties," the pacts entered into force in 2002 and have been ratified by many developed and developing countries.  "The United States considers the WIPO treaties to reflect many key international norms for providing copyright protection over the Internet," USTR says.

Overall, though, U.S. officials and industry representatives say their chief concern is the range of problems that continue to plague China's enforcement of IPR laws.

ENFORCEMENT PROBLEMS

Laws and regulations accomplish little without effective enforcement, which must include tough penalties to deter IPR crimes.  IPR-related enforcement problems cited in the NTE include poor coordination among Chinese government ministries and agencies, local protectionism and corruption, high thresholds for initiating investigations and prosecuting cases, and inadequate and nontransparent administrative penalties.

Although China continues to take a large number of administrative enforcement actions against IPR violators, "these actions do not appear to deter further IPR infringement," the NTE said.

The central government's anti-counterfeiting and anti-piracy campaigns in 2004 produced large seizures of infringing materials, but the cases subsequently brought by the administrative authorities "usually result in extremely low fines," according to the NTE.

One problem is that fines are sometimes based on the price charged for the fakes rather than the value of the genuine articles, USTR said.  In addition, as warehousing of fake goods by itself is not considered proof of intent to sell, administrative authorities will not include the value of those goods in determining fines, the NTE says.  As a result, IPR thieves are neither effectively deterred nor effectively punished, and the cost of enforcement can be greater than the amount recouped in fines.

During a press conference in Beijing in April, Assistant Secretary of Commerce William Lash said that China's State Administration for Industry and Commerce had seized, for example, 40,000 counterfeit Zippo lighters in a raid.  However, because they valued these lighters at 0.5 to 1.2 RMB (6 to 15 cents), the case "fell under the criminal threshold," he said.

Compounding the problem, administrative authorities rarely forward a case to the Ministry of Public Security for criminal investigation, even for commercial-scale counterfeiting or piracy, according to the NTE.  Infringers thus consider the seizures and fines to be a cost of doing business and are usually able to resume their operations without much difficulty, the NTE said.

Regarding criminal enforcement, USTR says that such actions have "virtually no deterrent effect" on infringing activities because of the relatively small number of cases prosecuted and because nontransparent reporting can make it hard to determine whether criminal penalties were imposed and carried out.

LOOKING AHEAD

The United States is stepping up its efforts to work with China to improve the recognition, protection and enforcement of IPR, and is looking for a positive and vigorous response from Beijing.

China has taken some positive steps.  To address issues surrounding IPR-related criminal prosecutions, China's Supreme People's Court and Supreme People's Procuratorate in December 2004 issued a judicial interpretation that reduced monetary thresholds for criminal prosecutions of counterfeiting and piracy and added provisions addressing online piracy and accomplice liability, including the import and export of counterfeit goods.

Bush administration officials say it is too early to tell how effective the judicial interpretation will be in improving China's criminal enforcement record.  "As drafted, the judicial interpretation is only an initial step in rectifying China's deficient criminal enforcement system," the NTE says.

On the positive side, the Bush administration reports a rise in civil actions for monetary damages, most brought by Chinese rights-holders.  "This increased use of civil actions has coincided with an increasing sophistication on behalf of China's IPR courts, as China continues to make efforts to upgrade its judicial system," the NTE says.

Nonetheless, IPR theft remains unacceptably high in China, a situation the United States insists must be reversed.