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CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS Trade Lawyers Advisory Group Terence P. Stewart, Esq. Amy S. Dwyer, Esq. Elizabeth A. Argenti, Esq. Philip A. Butler, Esq. Stewart and Stewart September 2007 Acknowledgements: Exhibit 19 - (Selected Trade Statistics) was prepared by Carl Moyer and Catherine Chen of Stewart and Stewart. Additional research and assistance provided by Patrick J. McDonough, Esq., of Stewart and Stewart Copyright © 2007 by The Trade Lawyers Advisory Group LLC This project is funded by a grant from the U.S. Small Business Administration (SBA). SBA’s funding should not be construed as an endorsement of any products, opinions or services. All SBA-funded projects are extended to the public on a nondiscriminatory basis. CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS TABLE OF CONTENTS PAGE EXECUTIVE SUMMARY.............................................................................................. 1 PART 1: TRADE-RELATED INVESTMENT MEASURES (TRIMS) AND SUBSIDIES I. INTRODUCTION ....................................................................................................... 5 II. CHINA’S ACCESSION TO THE WTO........................................................................ 12 III. POLICIES AND SUBSIDY PROGRAMS THAT POTENTIALLY VIOLATE CHINA’S COMMITMENTS ........................................................................................ 15 A. Enforcing Technology Transfer Agreements ........................................ 17 B. 11th Five-Year Plan for Utilizing Foreign Investment ........................ 21 C. 2004 - Revised Automobile Policy ............................................................ 23 D. Steel and Iron Industry Development Policy........................................ 29 E. Programs Appearing in China’s Notification of Government Subsidies ............................................................................... 32 IV. WTO PROVISIONS THAT ARE POTENTIALLY VIOLATED BY CHINESE POLICIES AND PROGRAMS..................................................................................... 35 A. Agreement on Trade-Related Investment Measures............................ 36 1. Interpreting TRIMs Under GATT ................................................. 42 2. Interpreting TRIMs at the WTO.................................................... 44 B. Article III:4 of the General Agreement on Tariffs and Trade 1994.................................................................................................... 46 C. Article XI:1 of the General Agreement on Tariffs and Trade 1994................................................................................................................ 49 D. Article 3.1 of the Agreement on Subsidies and Countervailing Measures.......................................................................... 53 i CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS TABLE OF CONTENTS PAGE E. Relationships and Conflicts Between the TRIMs Agreement, the SCM Agreement and Article III of GATT .................. 55 1. Article III of GATT 1994 and the SCM Agreement.................... 55 2. The SCM Agreement and the TRIMs Agreement ...................... 56 3. The TRIMs Agreement and Article III of the GATT 1994 ...................................................................................................... 58 F. Addressing Allegations Made Under Several Provisions .................. 59 V. U.S. ACTION AT THE WTO ..................................................................................... 61 A. Measures Affecting Imports of Automobile Parts................................ 62 B. Certain Measures Granting Refunds, Reductions or Exemptions from Taxes and Other Payments ...................................... 70 VI. FURTHER ACTION AGAINST CHINA AT THE WTO FOR POTENTIAL VIOLATIONS ............................................................................................................ 84 A. Technology Transfer .................................................................................. 84 1. China Continues to Require Technology Transfer Provisions in Contracts Contrary to Paragraph 7.3 of its Accession Protocol...................................................................... 86 2. China Continues to Enforce Technology Transfer Provisions Made Effective Through Law, Regulations or Other Measures that are Contrary to Paragraph 7.3 of its Accession Protocol...................................... 89 3. Article 3.8 of the Dispute Settlement Understanding.............. 91 B. Additional VAT Programs........................................................................ 92 ii CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS TABLE OF CONTENTS PAGE 1. China’s Circular about VAT Exemption Policy for Certain Farming Materials (No. 113/2001), jointly issued by the Ministry of Finance and the State Administration of Taxation on July 20, 2001 ............................. 92 a. Article III:2 Violation ........................................................... 93 i. Article III: First Sentence ............................................ 94 (a) Likeness of products; products’ properties, nature and quality; products’ end-uses......................................... 95 (b) Consumers’ tastes and habits........................ 97 (c) Tariff classification.......................................... 97 ii. Article III: Second Sentence........................................ 101 b. Article XXIII........................................................................... 103 2. Consumption Taxes on Various Products .................................. 106 PART 2: TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS) I. INTRODUCTION ....................................................................................................... 110 II. CHINA’S WTO OBLIGATIONS WITH RESPECT TO INTELLECTUAL PROPERTY RIGHTS................................................................................................. 112 A. China’s Accession to the WTO.................................................................. 112 B. Chinese IPR Laws Post-WTO Accession................................................. 116 III. CHINA’S TRADING PARTNERS UTILIZE WTO PROVISIONS TO SEEK ADDITIONAL PROGRESS IN CHINA’S INTELLECTUAL PROPERTY REGIME.................................................................................................................... 117 iii CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS TABLE OF CONTENTS PAGE A. United States Requests Information Pursuant to TRIPS Article 63.3 ................................................................................................... 118 B. U.S. Requests Formal Consultations With China Through WTO to Address Intellectual Property Laws and Protection............ 121 IV. OTHER PROBLEMS WITH CHINA’S INTELLECTUAL PROPERTY LAWS AND REGULATIONS: THE CASE FOR ADDITIONAL WTO CHALLENGES............. 129 A. Key Enforcement Provisions in TRIPS Agreement: General Obligations and Civil Procedures .......................................................... 131 B. Low Damage Awards in Civil IPR Disputes ......................................... 137 1. Low Damages Do Not Act as a Deterrent to Future Infringements .................................................................................... 138 2. Effective Enforcement of Intellectual Property Rights Requires Adequate Compensation When Those Rights Are Infringed............................................................ 147 C. China’s Evidentiary Requirements May Be Applied in a Way That is Overly Burdensome and Limits the Right Holder’s Ability to Effectively Enforce Their Rights........................... 152 D. Destruction of Infringing Goods and Materials .................................. 160 iv CHINA’S LAWS, REGULATIONS AND PRACTICES IN THE AREAS OF TECHNOLOGY TRANSFER, TRADE-RELATED INVESTMENT MEASURES, SUBSIDIES AND INTELLECTUAL PROPERTY PROTECTION WHICH RAISE WTO COMPLIANCE CONCERNS EXECUTIVE SUMMARY When China joined the World Trade Organization (“WTO”), the Chinese government committed to far-reaching reforms to bring its laws and regulations into conformity with the WTO Agreements. China’s final “accession package” also included specific commitments made during the Working Party to address particular concerns of negotiating Members. The commitments addressed the market access of goods and services and included commitments related to investment, intellectual property, and subsidies. While China has made extensive revisions to its laws and regulations since joining the WTO, many of its laws, regulations, and practices appear to be inconsistent with certain WTO provisions and specific commitments made by China. This paper reviews some of the problems China has had with respect to technology transfer, investment measures, subsidies, and