U.S. Policy Roadmap: Moving China from a Haven for Pirates to a Country of IPR Stakeholders
by Tom Thomson
Executive Director, Coalition for Intellectual Property Rights (CIPR)
15 September 2006
The protection of intellectual property owned by American businesses is a long-standing policy priority of the U.S. government in its commercial relationship with the People’s Republic of China (PRC). Prior to the PRC’s entry into the World Trade Organization (WTO), in 1999, American businesses claimed losses estimated to be hundreds of millions of dollars per year in revenues and jobs from intellectual property rights (IPR) violations in the form of copyright piracy, product counterfeiting and patent infringements originating in the PRC. During the WTO negotiations, IPR protection was a key issue in the U.S. bilateral with the PRC and later in the multilateral process that brought the world’s most populous country into the WTO.
The United States has been a forceful advocate for compliance with the legislative and enforcement standards set forth in the WTO’s Trade Related Intellectual Property Rights Standards (TRIPS). A central element of the WTO accession agreement with the PRC was a five-year post accession plan to measure progress in meeting TRIPS requirements through legislative improvements and more effective law enforcement. While some notable improvements have been made, IPR violations in the PRC are still said to be at epidemic levels by major U.S. business groups and trade organizations. Moreover, the PRC is considered the number one source of pirated and counterfeit goods flowing into markets around the world.
The failure of the post-WTO accession agreement to protect intellectual property is having far reaching consequences. The American business community is demanding that the U.S. Congress pass stronger laws to convict and punish copyright pirates and product counterfeiters and to put pressure on the Bush Administration to address this issue with the senior leadership of the PRC. In April 2006, President Bush raised IPR concerns during his summit meeting with PRC President Hu, and received assurances that IPR protection is a major priority of the PRC from his counterpart. But more policymakers are calling for the United States to initiate a WTO investigation into the PRC’s poor compliance on IPR issues. This as well as the U.S. trade deficit with the PRC and the perception that the PRC is “stealing” American jobs will fuel cries for tariffs and other trade restrictions against China. Other countries pursuing WTO accession are experiencing fallout, most notably Russia. U.S. legislators and business leaders alike point to experience of the China WTO negotiations as an example that the U.S. should not follow in evaluating WTO membership for Russia.
Nonetheless, the political leadership of the PRC has been relatively consistent in supporting stronger IPR laws and enforcement. Law enforcement actions to interdict copyright pirates and product counterfeiters, often in cooperation with international governments and the private sector, have significantly increased. In March 2006, U.S. Attorney General Gonzales announced plans to base U.S. prosecutors in Hong Kong to facilitate law enforcement cooperation on IPR issues with China and other Asian countries. As a follow-up to the April 2006 meeting of the U.S-China Joint Commission on Commerce and Trade (JCCT), Assistant U.S. Trade Representative Timothy Stafford reported in May 2006 to the U.S.-China Economic and Security Review Commission that his meetings with Chinese officials “yielded positive results, including discussion of cooperation on optical disk piracy and software asset management for government offices and state-owned enterprises.”
But why hasn’t the rate of IP violations started to drop? Recently the PRC released its IPR Action Plan for 2006, which includes legislative, enforcement, and training and public education initiatives. Will this positive step be backed up with sustained political will to effectively implement a policy decision from the pinnacle of the PRC leadership down through the notoriously large, opaque and often corrupt bureaucracy in the regions to achieve long lasting results? Going forward, what strategy and tactics can the U.S. government employ to encourage a serious and sustained effort to create legal and market disincentives for copyright pirates, product counterfeiters and patent violators in the PRC?
To answer these questions, other questions need to be asked. How effective has the U.S. government’s past attempts to encourage the PRC to improve IPR protection compliance (trade incentives (WTO membership), international pressure (USTR 301 Review Process, U.S. government and other national and international inter-governmental legislative and enforcement cooperation; and, U.S. government sponsored IPR protection capacity building training)? Have the efforts of the private sector to work directly with policymakers, regulators and law enforcement authorities had a positive impact? Are there parallels and insights to the IPR issue facing the U.S. in Russia and in other countries?
The factors above and other important issues will continue to impact the U.S. government’s efforts to influence the PRC’s efforts to protect IPR, including the larger geopolitical issues where the US and the PRC have common interests or are in competition, as well as the PRC’s ongoing struggle with engrained corruption and cultural dynamics effecting IPR policy.
While critics have claimed the U.S. government’s policies toward the PRC are not achieving substantive results quickly enough, the U.S. government’s strategy of using the “carrot and stick” to effect improvements in IPR protection has in fact resulted in substantial improvements in the PRC’s legal framework and growing improvement in enforcement. Recognizing the challenges facing the PRC in addressing IPR protection, including corruption and, most importantly, a national lack of IP awareness at all levels of society should not be considered an apology for China, but a reality check for the task ahead. Raising awareness of the value of IP among Chinese political and business leadership and, more importantly, the entrepreneur and business operator may in fact be the most important goal. The timeline for this process is not a year, but five to ten years. The U.S. government will need a long-term policy towards the PRC in which it act as both a strong and pro-active defender of IPR and a partner to the PRC to advance IPR protections for American business.
Has the “Carrot and Stick” Policy of the U.S. Goverment Improved IPR Protections in China?
The hallmark of U.S. policy has been its ability to use the “carrot and stick” to cajole the PRC on its deficiencies in IPR protections and to provide incentives for the PRC to implement a robust IPR regime.
Following the release of the USTR’s Special 301 Report in April 2006, Former US Trade Representative Rob Portman said “As one of the world’s leading innovators, the United States places significant emphasis on intellectual property protection and enforcement. Safeguarding our creations is a key element of our trade competitiveness, but it is also in the interest of our trading partners to strengthen their IPR regimes.” With reference to China, Portman added: “The Administration continues to use our trade tools in strong and innovate ways to press China for better progress on IPR problems.”
The Special 301 Report” called not only for increased improvements in China’s IPR regime, but that WTO dispute settlement options would be considered and that “for the first time scrutinize IPR protection and enforcement at China’s provincial level by conducting a special review in the coming year.” 3A week earlier, President Hu held a summit meeting with President Bush in Washington, DC. One of the major items on the summit agenda was improving IPR protections.
The IPR protection message was certainly not lost on the Chinese. On May 27, 2006, in an address to the CCP Central Committee’s Political Bureau, President Hu stated:
“Strengthening the establishment of China’s intellectual property rights system and vigorously improving it ability to create, manage, protect and apply intellectual property rights is an urgent need for augmenting China’s creativity and building a creative country; is an is urgent need for perfecting the socialist market economic system, standardizing the market order, building a trustworthy society, strengthening our enterprises’ market competitiveness, and enhancing the country’s core competitiveness; and is also an urgent need for widening the opening up scope and achieving reciprocal win-win results. There is a need to full display the important role of intellectual property in improving the country’s economic, scientific and technological competitiveness and in safeguarding national interests and economic security, so as to provide powerful support for China in joining the ranks of creative countries.”The US government has continued to reinforce the message that a key element of the US-China relationship is to improve IPR protections. The comments of U.S. Undersecretary of Commerce for International Trade Frank Lavin, following an official visit to the PRC this past July, illustrates the “carrot and stick” of U.S. policy on IPR protection. Mr. Lavin pointed to the PRC’s progress on IPR protection in the last few years, and at the same time reaffirmed that the U.S. might file a complaint against the PRC at the WTO on the high level of IPR violations against American rights holders. 5 He linked IPR issues to other concerns by stressing that the U.S. is pleased with growing level of trade between the two countries, he cautioned that the PRC is in danger of a “policy drift”, which is allowing growing state intervention and restrictions on foreign investment, which could undercut the PRC’s efforts to open its markets, as required by the 2001 WTO accession agreement.
Challenge to international reputation via USTR 301 Process and Possible Trade Sanctions
The Office of the United States Trade Representative (USTR) is the U.S. government agency responsible for managing U.S. policy on IPR. The USTR’s 301 Report process is one of the US government’s most effective tools to motivate its trading partners to improve IPR protections through frank feedback and incentives to improve IPR protections. The 301 Reports and out of cycle Special 301 reports are viewed by the community of nations as benchmarks to measure progress on protecting IPR in the developed and undeveloped world.
Countries with consistently high piracy and product counterfeiting rates, and poor law enforcement are subject to placement on the USTR watch list and, if improvements in IPR protection are not made, the possible imposition of GSP trade sanctions. Besides the financial losses in trade with American companies, the damage suffered to the violator’s reputation with the international business and investment community is often enough to instill renewed political will and actions to improve IP protection.
While it took some time, Ukraine is one of the best recent examples of how the USTR 301 process can have positive results. As a long-time center for the production and distribution of pirated optical disks and other counterfeits, Ukraine was placed on the USTR’s priority watch list and given frequent warnings that GSP trade benefits would be lifted if the Ukraine government did not provide evidence of progress in stopping the pirates and counterfeiters. In fact, GSP trade benefits were taken away because no discernible progress against pirates and counterfeiters were made. The combination economic disincentives and a sullied international reputation were enough to motivate Ukraine to make remedial steps to improve IPR enforcement against the fakes trade. As the result, the U.S. restored GSP trade benefits to Ukraine in 2005. Today, Ukraine is continuing to strengthen its IPR legislative and enforcement, and is likely to be put on a fast track for WTO accession next year.
But are threats of U.S. economic sanctions, negative WTO rulings and a tarnished international reputation effective enough to motivate the Chinese leadership to take stronger actions to protect IPR? The record indicates that they will, but to a point. In testimony to the U.S. Senate in June 2006, Assistant U.S. Trade Representative Timothy Stafford reported that concerns about IPR protection was a priority item raised with Vice Premier Wu Yi at the annual meeting of the U.S.-China Joint Commission and Trade (JCCT), co-hosted by US Trade Representative and the Secretary of Commerce. As the meeting was held nine days before President Hu’s visit to Washington, DC., Stafford characterized the JCCT meeting as giving “China a timely opportunity to demonstrate in concrete terms to the American people its commitment to following the rules of international trade.”
In the backdrop of these high-level discussions, the USTR 301 Report and a potential WTO filing against China for non-compliance with IPR commitments had been raised with the PRC. In response, the PRC committed to taking immediate action against plants that produce optical disks, to develop new rules to require new computers to be pre-installed with licensed operating system software, to enforce laws against infringing products at major consumer markets and to ensure that legal software is being used in Chinese enterprises and government.
The high level of cooperation continued with Bush-Hu summit. A top agenda item in President Bush and President Hu’s summit meeting was how to strengthen the lucrative trade partnership between both countries, especially IPR protections for American companies. In his public address on the White House lawn, President Hu reaffirmed his country’s commitment to protecting IPR, and announced a new program of enforcement activities. One week later, USTR issued its Special 301 annual report, which highlighted the growing IPR protection problem in the PRC. According to Stafford, in subsequent meetings with his Chinese counterparts, the level of cooperation had improved even further.
Building international coalitions
The U.S. policy of pro-active engagement with the PRC on IPR and other trade issues within the WTO’s multi-lateral framework and with the PRC’s other major trading partners will continue to be vital to advancing IPR protections. The European Union, in particular, has similar IPR problems and enjoys a strong trade relationship with the PRC. The EU has actively sought relief on pirated and counterfeit goods bound for the European markets. In a June 2006 visit to China, EU Trade Commissioner Peter Mandelson praised the PRC for working with the luxury brand industry to root out vendors in the major markets who sell fake goods.
Despite major differences on key Doha Round trade issues, the EU and U.S. together successfully challenged the PRC on automobile tariffs in a WTO complaint. On IPR, the U.S. and EU have a formal agreement of cooperation on improving IPR in third countries, such as Russia and China. Both have communicated a consistent message to the PRC on the importance of compliance to the WTO agreement on IPR protection. Japan has also taken a leadership role and has repeatedly raised IPR concerns with the PRC and may join the U.S. in a possible WTO complaint filing against the PRC later this year.
Provide economic incentives through greater integration into the international economic community and greater in-bound direct foreign investment
The volume of trade between the US and the PRC is already significant, and certainly will continue to grow. This will be mirrored by an accelerated demand in the US for a wide range of consumer goods produced more economically in the PRC. The PRC has become a leading trading partner with the United States, and with great potential to expand and include more in-bound foreign investment in the PRC.
A real concern for U.S. policy should be the development of a groundswell of anti-China sentiments over a lack of timely improvements in IPR protections and in other trade issues. The resulting political pressures from the U.S. Congress to impose economic sanctions and other punitive actions could impinge on other key policy issues in the U.S. –PRC relationship. The political climate for such a situation is already developing. At a recent U.S.-China trade conference, U.S. Senator Patty Murray of Washington State expressed her concerns about the hardening attitudes in Congress on trade issues with China and the focal point of American concerns about globalization. “China has become what Japan was in the 1980s. The foreign scapegoat for our economic fears. Instead of demonizing China, the U.S. needs to keep an open door, stay engaged, hold it accountable for trade violations and strengthen U.S. competitiveness.”
On September 14, 2006, U.S. Senators Schumer and Graham formally requested the Senate leadership for a vote on the Schumer-Graham Free Trade Act on September 30, 2006. The bill would enact a 180-day negotiation period with the PRC on currency reevaluation. If an agreement is not reached, a temporary tariff of 27.5% will be applied to all Chinese goods entering the United States. The President of the United States would have the power to delay the imposition of the tariffs if the PRC is judged to have made good faith progress on resolving currency reevaluation during any point of the negotiations or following the negotiations.
“Senator Schumer and I have been patient and flexible,” said Senator Graham. “We agreed to delay a vote on our legislation on three separate occasions. Most recently, in March we agreed to delay a vote for six additional months to give the Chinese additional time to revalue their currency. We have been determined and we have been reasonable. Now, the date of our promised vote is approaching and we are sorely disappointed with China’s pace of reform.”
What started as a serious concern over the presence of counterfeit goods in the marketplace during the WTO accession negotiations has become an issue of extreme concern to American business five years later and a major problem in the bilateral commercial relationship between the U.S. and the PRC. Add to this the already sensitive domestic issues of trade deficit, Chinese currency reevaluation, out-sourcing jobs and manufacturing to the PRC, and competition from cheaper imported Chinese products, the business community is at odds with itself over the benefits of the US-PRC relationship. Well-funded lobbying campaigns are attempting to influence the Administration and U.S. Congress on each side of this debate.
US private sector engagement with China to improve IPR laws and enforcement practices
On the positive side, the American business community and wide range of stakeholder interest groups have been perhaps the most effective change agents in the effort to improve intellectual property protections in the PRC. Companies large and small are trading and investing in the PRC, and have first hand experience with the system of laws, regulations and enforcement practices, and their effectiveness in protecting their IPR. The American business community has actively engaged the PRC government and business community through public-private partnerships, trade groups and IPR organizations to address problems in IPR laws and with enforcement practices. A coalition of international companies, the Quality Brands Protection Committee (QBPC), has been one of the effective public-private partnerships to address IPR issues in the PRC. QBPC and other private sector organizations, including the International Trademark Association (INTA), among others, have sponsored IPR trainings and seminars for lawyers, judges and law enforcement officers over the past five years. Most importantly, these organizations build and maintain relationships with national and regional PRC government officials responsible for IPR protections.Were U.S. Policmakers too Optimistic about China’s Capabilities to achieve IPR Compliance whith IPR Protections?
In 2001, the PRC was admitted into the WTO and committed to achieving a list of requirements to improve IPR protections over a five-year period, which is due to close later this year. The generally held view of the American government and the business community is that the PRC will not be close to reaching a satisfactory level of IPR protections before this deadline.
In the halls of the U.S. Congress, China is used as the example of how the US and its trading partners should not manage applicants to the WTO, particularly other large transitional economies, such as Russia. In essence, the PRC has become the poster child that epitomizes failed attempts to integrate a major trading partner into the international economic community.
Is this a fair assessment? Did U.S. and WTO officials establish unrealistic goals for the PRC to achieve in the five-year follow-up period? They were realistic on a political level. The final WTO agreement would never have been completed or approval of the Permanent Normalized Trade Relations (PNTR) with the PRC by the US Congress without a fixed timetable. For the PRC, the practical reality of achieving all of its WTO’s IPR mandates in five-years has evidently proven to be difficult. Entrenched political and business interests, corruption, lack of public awareness and resistant regional bureaucracies would be major hurdles for any government set on reform, especially a country China’s size. However, the PRC has made rapid and radical changes in the past that were a national priority, such as moving from a socialist to a market economy. In light of this, does the PRC have the political will to stand behind its commitments and to enforce them in the face of these challenges?
Inconsistent Political Will
The past behavior of the PRC political leadership suggests that it will respond to U.S. pressure and implement changes in policy, as it has with the issuing of the 2006 IPR Plan, and showcase several high profile enforcement actions in the run up to a summit with U.S. officials or a USTR 301 Report. The big question is, however, is the PRC willing and able to sustain these efforts to achieve lasting results? As a matter of self-interest, the PRC have everything to gain by making IPR protection a national priority. WTO accession was a necessary, but complicated gateway into the international economy, which can expand trade and in- and out-bound investment into markets throughout the world. The PRC is on a huge economic and political upswing. Rapidly increasing productivity is fueling a booming economy and creating a middle-class.
This view is, however, undercut by the PRC’s political and economic realities. The PRC is now a member of the WTO, which was the international community’s most compelling incentive to achieving improvements in IPR protections. The production and distribution of pirated and counterfeit goods are speculated to be a significant percentage of the GNP of several of the PRC’s key regions. Disrupting the economies of key regions, despite their illegal nature, would not be popular, particularly if there are any concerns about political stability. Exposing the ties between the leadership of regional governments and the criminal organizations producing fake goods could be politically explosive.
The PRC’s economic achievements have come as the result of a delicate political balancing act between the government’s free market policies and it’s natural inclination towards authoritarian control of all aspects of society. Historically, IPR protection has been primarily the concern of foreigners, and only recently has it become an important issue among some elements of the Chinese business and scientific communities. In addition, there are conflicts of interest that involve government officials and businesses involved in the fake goods trade that can influence IPR policy and its enforcement.
A large-scale crackdown against pirates and counterfeiters would have several risks. It would be very unpopular and probably require publicly exposing several key national and regional political and officials and business leaders involved in criminal activities. The wholesale rolling up of several criminal enterprises involved in the production, distribution and sale of fake goods in regions where this illegal activity makes up a large portion of the economy is also unlikely. Unrest, particularly in the regions, could result in outright challenges to civil authority and potential violence. The internal forces that led university students to make a direct challenge to the authority of the PRC’s leadership, and led to the violence on Tiananmen Square and condemnation by the international community, has not been forgotten. Instead, the arrest and trial of a few targeted officials and criminal gangs would be the more likely and manageable scenario.
The use of legislative and legal means to improve IPR laws and enforcement, and address public corruption and unresponsive government bureaucracies directly or indirectly involved in the trafficking of fake goods, would be the favored option, but is an approach that will not produce fast results. China’s IPR enforcement regime relies on an administrative court system to adjudicate complaints against pirates and counterfeiters, which can issue only small fines, no jail time and, in essence, no deterrents against recidivism. After WTO accession, the shortcomings of the administrative courts became apparent, particularly to foreign rights holders.
Pressure from the US and the international community has resulted in proposed changes to increased penalties for IPR criminals convicted in the administrative courts and the development of IPR criminal laws where violators can be brought to criminal courts, pay heavy fines and be sent to prison. Infringed rights owners now have more opportunities to seek criminal investigations against pirates and counterfeiter. Fifty IPR Trial Chambers are being opened throughout the country. The PRC’s new IPR Action Plan indicate new regulations are in place to allow for more efficient transfers of counterfeiting and piracy cases from administrative enforcement authorities to the Public Security Bureau for criminal investigations.
The Key Elements of the U.S. Policy Roadmap
The multi-dimensional U.S.-China relationship is complex, with intertwining national economic interests and international issues of joint concern, such as North Korea, Iran, energy security, among others. It is also a competitive relationship. The PRC is an aggressive challenger to American political influence on the global stage, particularly in Asia. Mindful of these factors and of the potential flashpoints that could lead to conflict, such as Taiwan, the U.S. has attempted to build a relationship with the PRC based on cooperation and common interests, and has strived to assist it to fully integrate into the international economic community. The longevity of this relationship building effort speaks to both the U.S. and China’s recognition of its mutual importance.
The rising political and economic ascendancy of the PRC in the world has elevated its international prestige and national pride to its highest levels since the end of the Cold War. With its booming market economy, the PRC has attracted levels of foreign investment that other countries with transitional economies, such as Russia. China is also a country that is seeking to be treated as an equal among peers. It has a long and proud history. For centuries the “Middle Kingdom” was an empire of great power, culture and technological achievements. The memory of political enfeeblement during the foreign occupations of the 19th and 20th centuries has not been forgotten. China’s return to national greatness during the Communist period is a matter of national pride, even if today the Maoist period is being increasingly marginalized.
U.S. policy towards the PRC has underscored the importance of building a peer relationship on the same basis that it has with its other major trading partners. The U.S. has been patient, but direct with the PRC as it addresses its problems with corruption, bureaucracy and rampant piracy and counterfeiting. A cooperative dialogue has been established between the U.S. and the PRC, which has resulted in some progress in IPR protections.
Lessons learned from other countries
The US government’s experiences with other trading partners would be important to take into consideration when analyzing the IPR problems in the PRC. In Russia, WTO accession talks have stalled over issues involving the financial markets, agriculture and IPR. The American copyright industry has repeatedly urged the U.S. to raise with the Russian government the fact that several illegal optical disk plants are located on military bases and that an illegal MP3 site for downloading music was still operating after several reassurances from the Russian government that it would be shut down. The U.S. has raised the issues on several occasions with the Russian government and has been provided assurances that this matter would be investigated, but the issue remains unresolved.
To complicate matters further, in September 2006, the Russians introduced to the State Duma, the lower house of parliament, a new draft Part IV of the Civil Code on IPR, which the US government, EU and numerous IPR organizations, including the organization I represent, the Coalition for Intellectual Property Rights, have informed the Russian Federation that adopting this new code would place them out of TRIPS compliance. Despite the concerns of its foreign trading partners, Russia will probably pass Part IV of the Civil Code in fall 2006 or in 2007. The outlook for Russia to receive US support for WTO accession in 2007 is now very unlikely.
The US-Russia relationship has been strained by Russia’s apparent intransigence on IPR protection matters, but the U.S. has not lost its perspective of the same bigger picture issues in this important bilateral relationship that it has with China. The Russians, like the Chinese, have demonstrated inconsistent political will, and have serious problems with public corruption and government links to organized crime groups involved in the fakes trade. The political leadership has demonstrated little appetite for confronting these problems, and not likely to respond much differently to pressure from the US than the Chinese.
Unlike Russia, the PRC’s actions have appeared to be more forthright than the Russians about acknowledging and addressing corruption, bureaucracy and defects in the IPR legal regime and in enforcement practices. This attitude will continue to build a framework of cooperation, which is increasingly under threat in Russia. While promising, the scope of the IPR problems in China are of a magnitude that major advances in the short-term to satisfy the American policy-making and business communities are unlikely. How can U.S policymakers handle this situation in the face of a restive U.S. Congress, an angry business community and an increasingly hostile public towards job losses to foreign outsourcing? The key elements of a U.S. policy roadmap to improving IPR protection in the PRC are:
Establish realistic goals and timelines for achieving IPR protections. The Chinese legal system, which from an IPR standpoint is quite good, took twenty-five years to develop. To expect large scale, and decades-old problems to be corrected in only five years was probably not realistic. Reviewing and assessing the accomplishments and tasks yet to be completed in the five-year post WTO accession plan will be critical to understanding what has to be done, but, more importantly, to recognize what has already been achieved by the PRC. Choosing the “half full glass” view over the “half empty glass” supports an incentive-based approach to the U.S.-China relationship, which underscores cooperation and candor. The carrot and stick policy of the U.S. has resulted in improvements in IPR protection. Recognizing and supporting the efforts of Chinese officials who embrace the importance of IPR protection and are working towards this goal will continue to be vital, and that alienating them by neglect or disengagement are not options. The benchmarks for measuring IPR improvements should be achievable and reflect the reality of the situation.
Manage expectations of IPR stakeholders. As the potential for the PRC to fulfill its IPR obligations in the post-WTO accession five-year plan continues to fade, the U.S. is faced with the challenge of managing the perceptions of US domestic IPR stakeholders. The US will need to have a strategy going forward to address these realities, and doing all of this without igniting an unhelpful knee-jerk political reaction in the US or alienating the Chinese into a position of indifference or opposition. This will not be easy.
The U.S. government will likely be under intense pressure from segments of the private sector and the US Congress to remove China’s GSP benefits. Or the U.S. Congress could enact the Schumer-Graham China trade bill. Imposing economic sanctions or retaliatory legislation would indeed communicate to American business the U.S. government’s commitment to solving the IPR protection problem in China. However, will the PRC view economic sanctions as the normal course of handling trade disputes or a national insult? In an article published in June 2006 on the China Daily website by an unnamed researcher from Wuhan University in China, the author writes that U.S. trade policies, particularly IPR, are designed to interfere more into China’s internal affairs, to intensify discrimination against China and “to contain China through economic diplomacy.” Whether this view carries weight within the PRC political leadership circles is not clear.
The U.S. policy challenge will be to find the right combination of negative incentives (the stick) and positive incentives (the carrot) to motivate the PRC to continue producing small, but tangible improvements in IPR protections in China. Addressing the complaint that PRC makes repeated commitments to improve IPR protection but fails to show much progress discernible action or progress will be crucial to managing the expectations of American rights holders.
The US government should not act as an apologist for the PRC, but needs to put the current IPR protection situation into perspective. Improvements in IPR protection are often coming through the engagement between the private sector and Chinese regulators and law enforcement officials, and should be broadly communicated as tangible evidence of progress. Acknowledging these gains publicly will be important to showing the American business community that advances in protecting IPR are taking place and to provide positive reinforcement to the Chinese. Managing the expectations of both the U.S. and Chinese stakeholders will be essential to keeping momentum building to make substantive improvements in IPR protections.
Inculcate self-interest as China’s primary motivation to improve IPR protections. Of equal importance to managing expectations of American and Chinese stakeholders, the US government must reinforce the message that the protection of IPR is in China’s national self-interest, and not just to benefit foreign rights holders. If the Chinese political and business leadership largely view the goal of improving IPR protections as related solely to meeting the demands of foreigners, IPR will be treated as a secondary policy priority, and receive attention only during the 301 Report process or in preparations for a bilateral meeting. In Russia, for example, the level of engagement of the Russian government on IPR issues markedly improved only after several Russian companies raised concerns about IPR violations. The PRC’s political and economic ambitions will require growth in its scientific and technological capabilities, and more domestic companies to develop and promote branded products for domestic and foreign consumption. To encourage this kind of domestic economic growth, strong IPR laws and enforcement practices to protect patents, trademarks and copyrights must be in place.
Build awareness of the value of IPR to Chinese businesses and entrepreneurs. In market economies, government policy is often driven by initiatives from the private sector, which is certainly true in the United States. While the approach to policy-making in the PRC differs from the U.S., the channels of communication between the private sector and government are there and can be used to underscore the importance of IPR protection for Chinese rights holders. However, if Chinese rights holders do not understand the value of their IP assets or trust the existing legal regime to protect their IPR protection, there is little incentive to encourage the government to make IPR protection a priority. Again, the principle of protecting one’s self interest applies, but this time on a nationwide scale.
Heretofore, the main emphasis of efforts of both the US government and the private sector to improve IPR protection has been focused primarily on legal reform and enforcement. Considerable U.S. government and private sector resources have been used for training law enforcement authorities, technical assistance to regulators and policy-makers. While this investment has been important to the IPR achievements in the PRC to date, and should continue, the incidence of piracy, product counterfeiting and patent violations remain very high.
Greater emphasis must be placed on raising awareness among Chinese IP rights holders. Educating the business and entrepreneurial communities to recognize that they have IP assets to protect from infringers and counterfeiters should become a priority. A long-time advocate of this approach, Tim Trainer, the former President of the International Anti-Counterfeiting Coalition and founder of Global IP Strategies, PC, comments in an article on protecting IPR in developing economies “As more local enterprises see themselves as IP asset owners and possible victims, they may be more willing to engage their governments to take more aggressive steps to protect locally owned IP. This should have the side benefits of raising awareness and respect for IP in general that results in better protection afforded multinational corporations”.
The top Chinese political leadership has apparently started to listen to the IPR value message. President Hu’s stop in Seattle after his meetings with President Bush to meet with Microsoft Chairman Bill Gates, one of the world’s wealthiest IPR rights holders, was to reassure Gates that the PRC was serious about IPR protection.
Developing a generation of Chinese entrepreneurs and business leaders that value IPR and advocate for it with their own government will likely be the most significant factor in improving IPR protections for American companies doing business in China and for American consumers.
Lead and Maintain International Pressure on PRC to Continue to Improve IPR Protections. As the world’s largest economy, and one of the PRC’s leading trading partners, the United States already has substantial political influence on the PRC with respect to IPR protection and trade issues. There are, however, limits to what U.S. influence is able to achieve on the policy level and in day-to-day enforcement IPRs. Sir Winston Churchill once said: “The Chinese said of themselves several thousand years ago: China is a sea that salts all the waters that flow into it. There’s another Chinese saying about their country which is much more modern – it dates only from the fourth century. This is the saying: The tail of China is large and will not be wagged. I like that one.”
Churchill points to China’s historic resistance to outside influences. While the PRC has embraced globalization with a vengeance, there continues to be resistance to meeting the requirements and standards set by the WTO. The US has consistently communicated to China that adherence to international trade norms and standards, including IPR protections, is expected. The United States, however, should not be the sole message carrier. The collective concerns of the international community, particularly the regional political and economic blocs of the European Union, Latin America and Asia (Japan, South Korea, Malaysia, India, Singapore, Thailand, Australia, New Zealand, etc.), should be expressed to the Chinese. The U.S. has, for example, used this technique effectively in the PRC during the pre-WTO period and in other large transitional economies, such as Russia
.Continue to build engagement with the PRC on legislative, law enforcement and economic development through the US government, various multilateral bodies and the private sector. The US government has relationships with the PRC on a wide-range of issues and at the highest and lowest levels of government. It will be absolutely essential for the US government to continue building on these relationships to achieve positive results in other areas of economic development, interdicting international terrorism, etc., to establish a track record of success and cooperation. This will be crucial not only to advance the US-China relationship, but also to answer charges that China is not cooperating or acting fast enough on IPR protection issues. The long-term view on the US-China relationship must be maintained in order to advance IPR protections as well as other political and economic policy objectives.
The US government has effectively used a multi-lateral approach with its other trading partners to communicate common messages on the need for IPR protection to the PRC. However, again the most apparent improvements in IPR protections have often come through the private sector’s engagement with the PRC. The private sector, along with international multi-lateral organization and IPR organizations have not only supported the political efforts of the U.S. but have developed greater cooperation with PRC officials and tangible improvements in enforcement practices at the national, regional and local levels of government.
Regional public-private partnerships, such as the Quality Brands Protection Committee (QBPC), whose members are major American and other international brand-holders doing business in China, have close working relationships with the PRC authorities and Chinese business community. The benefits of these interactions are several. Government and international companies are cooperating on a day-to-day basis on enforcement actions against pirates and counterfeiters. New laws, regulations and precedents are being established in the courts and government ministries as the PRC makes adjustments to China’s changing business climate and influx of international businesses. Moreover, the international and Chinese business communities are drawing closer because of their common interests in protecting their IPR.
The public-private partnership strategy has also been effective in other major transitional economies. The Coalition for Intellectual Property Rights (CIPR) was formed in 1999 as partnership between American and international rights holders and government decision-makers in Russia and in other countries of the former Soviet Union. In Russia, CIPR has worked closely with legislators, regulators and law enforcement authorities to bring IPR laws into compliance with international standards and to address specific enforcement matters involving the courts, customs and police agencies. Both CIPR and QBPC maintain close working relationships with the US government and with several important international multilateral organizations addressing IPR issues with the PRC.
The international multilateral organizations where the PRC are members, such as the World Intellectual Property Organization (WIPO), Interpol, World Customs Organization (WCO) and World Trade Organization (WTO), have played important roles in integrating the Chinese into international efforts to address the problems of piracy and product counterfeiting. In partnership with major international and regional IP and business organizations, the international multilateral community has initiated such as efforts as the Global Congress on Piracy and Counterfeiting to create an international public-private partnership with governments worldwide to address the fake goods trade. The PRC has been an active participant in this effort, along with several other countries with developed and transitional economies.
What are the Consequences to U.S. Policy of not Realizing Improved IPR Protections in China?
As the pace of globalization continues to accelerate, the United States is increasingly moving away from a brick and mortar industry-based economy to an economy driven by technology and innovation. Fueling this growth are patents, trademarks and copyrights. IPR protections in the US and abroad will be essential for the U.S. to maintain its pre-eminent economic and political position in the international community. Central to the success of this transition is for America’s major trading partners to have IPR regimes that comply with international standards and practice effective law enforcement.
The PRC’s incredible market economy has risen to extraordinary heights in a short period of time, and appears to have few limits to achieving even greater results. Lagging behind this amazing growth has been the incorporation of rule of law, corporate governance, business ethics and respect for intellectual property rights. The challenge for the US is to build an even more profitable relationship with this leading trading partner, while at the same time helping them to assume the responsibilities of a mature member of the international community. Both objectives must be managed carefully. The consequences of failure could be high and long lasting.
Derailing US-China Cooperation
The PRC must demonstrate to the international community that it can make improvements to its IPR protections or face possible trade restrictions. In the U.S. concerns about sensitive political issues, such as outsourcing of American jobs overseas, dumping, and consumer fraud from pirated and counterfeit goods will continue to grow and potentially increase the anti-China sentiment in the US Congress. Retaliatory acts by Congress are possible in the form of punitive trade legislation or resolutions to condemn China’s human rights policies, Tibet or other hot point issues.
The impact of this anti-Chinese domestic legislation on the US-PRC relationship, particularly on major geopolitical issues, could be significant. The US-led initiatives to address the developing nuclear capabilities of North Korea and Iran, international terrorism and other vital multilateral issues could be seriously undermined and result in a general deterioration in the US-PRC relationship. Other bilateral issues, such as the currency exchange rate in barriers to US investment in Chinese companies, could also make China’s growing shift towards economic nationalism a fait accompli.
IPR protections in China could be the biggest loser. A damaged political relationship between the US and PRC could also undermine the apparent political will among the senior leadership of the PRC to address IPR protection. Without this motivation, the willingness of the PRC political leadership to make hard decisions and use its authority to enforce them with a large, entrenched bureaucracy, where corruption is rampant, could be replaced with resistance or indifference. Some observers believe that the incentives for the Chinese leadership to clamp down on piracy and counterfeiting are few, because it could undermine the explosive economic growth of the country and be politically unpopular. Would restricting access to pirated business software undermine the development of small businesses? Or would stopping the production, distribution and sale of counterfeit goods cause significant losses of jobs, revenues and exports, and create political instability in key regions where fake goods make up a significant portion of the local GNP? The end result could be the Chinese leadership casts a blind eye to the activities of the fake goods industry, and America sees no change or an increase in IPR violations.
The benefits to the US and China if IPR protections are improved
The benefits to the U.S. for realizing better IPR protections in the PRC will accrue in several areas. As a leading trading partner, China has helped to fuel the U.S. economy through lower cost manufacturing for American business and exports of competitively priced goods for the U.S. consumer market, as well as opening its huge domestic markets to American companies. In return, China has profited greatly. Greater IPR protections in China would also have a rippling effect on other countries with transitional economies and help to reduce piracy and product counterfeiting in other countries that are consumers of fake goods from China. A China that embraces IPR protection will have another issue in common with the U.S., which will be important when other contentious issues, such as Taiwan, threaten to disrupt the U.S.-PRC relationship.
President Nixon’s 1972 visit to China inaugurated the US Open Door policy. In the intervening years, through high and low points, the U.S. and China have remained engaged on a range of political and economic issues, particularly during China’s transition to a market economy following the death of Mao Tse Tung. The longevity of this relationship is a testament to the importance placed on it by both the U.S. and China. In many ways, the U.S. relationship to China has been that of a mentor to guide and support China’s emerging market economy and integration into the international community.
On August 28, 2006, U.S Trade Representative Susan Schwab urged her Chinese counterparts during her first visit to China to “step up” and play a role in reinvigorating the collapsed Doha trade talks, “China is an obvious potential player in this game and has an interest in achieving greater trade liberalization.” Observers viewed this call to action by Ms. Schwab as an attempt to engage China in a key role rather than its usual secondary role in the Doha trade talks. It was also reflective of how the relationship between the US and China has evolved. During this same speech, Schwab also praised the Chinese for making progress on IPR, but cautioned that piracy and product counterfeiting were still big problems.
As Ms. Schwab attempts to prod the PRC to assume a meaningful role in global trade talks, and proffers praise to China on its efforts to protect IPR, her agency is preparing to file a complaint with the WTO against the PRC for not meeting IPR protection commitments in the WTO accession agreement. Again, the “carrot and stick” approach in play, with the overlay of bilateral engagement, has resulted in tangible progress, and will continue to do so in the long-term, barring any major falling out between the US and China over a major issue or international crisis. The challenge facing the U.S. is to generate enough small gains in IPR protection frequently enough to satisfy its public and private sector stakeholders that the war against pirates and counterfeiters is being won.
Conclusion
Communicating a message of progress on IPR protections to the Chinese and to American public and private sector stakeholders will be critical to managing everyone’s expectations. For the PRC, the political leadership will not only need to recognize that stronger IPR protection is in country’s national interest, but China’s businesses and entrepreneurs must also understand the value of their IP assets. The U.S. and the American private sector can play a major role in this process through partnering with the American and Chinese business organizations, international public-private partnerships and the PRC government to conduct ongoing seminars for business owners and entrepreneurs on the value of IP. This will need to be a long-term commitment of resources by the U.S. and Chinese, whose benefits will be incremental, but potentially have long-term positive results in terms of reducing the incidence of IP theft.
The reality is that IPR protections will not be improved using short-term solutions. The U.S. policy roadmap has to be based on a long-term strategy that seeks to improve IPR protections in China through helping the PRC transform itself into a nation of IPR stakeholders. The U.S. policy of carrot and stick incentives will play an important role in this transformation. Being tough when needed and acting as an understanding partner when appropriate will be vital to this change. When Chinese IPR stakeholders embrace the concept that IPR is vital to their self-interest, the impact will be felt worldwide. However, the process to reach this goal will be long. The US and the PRC will need to establish measurable and realistic goals to demonstrate improvements in IPR protections to IPR stakeholders in both countries.
The PRC has continued to astound and impress its most fervent critics by its abilities to transform itself from economic turmoil to an economic miracle, and from dogmatic political policies to embracing economic freedoms. In early September 2006, another shocking announcement was made by the PRC government that all references to the Mao period would be limited to a few paragraphs in all high school history textbooks. As one of the most dynamic nations in the world, the PRC is clearly capable of starting its own internal transition on a massive scale to make IPR protection a priority.
Perhaps an IPR revolution is on China’s horizon. In early September 2006 Chinese Prime Minister Wen Jiabao told foreign journalists:
“China had only recently given priority to protection of intellectual property rights “as a matter of strategic policy”, partly through a push to nurture local technology…This [delay in enforcing IPR] has something to do with the level of development China has achieved, and China should be given some time...But what I wish to stress is that no one should fail to see the Chinese government’s commitment to protecting IPR and the steps it has taken…In short, China’s IPR protection effort will carry the full force of steel, and it will definitely not be something that is soft as bean curd, so to speak.”
The US should not wait to see if Prime Minister Wen’s words are prophetic, but continue to be pro-active to engage the Chinese to make this a reality. The Secretary of Treasury, Hank Paulson, showed on September 12, 2006 that he understands this saying China has become “ a symbol of a threat posed by globalization... if China doesn’t do well, that hurts us rather than helping us.” Paulson points to the potential damage to US-China relations in the long-term if domestic politics in both countries becomes very negative towards each other: “Both in China and in the United States we must not allow ourselves to be captured by harmful political demagoguery…Instead we must realize that the U.S.-Chinese relationship is truly generational and demands a long-term strategic economic engagement.”