MIAMI UNIVERSTIY The Graduate School

Certificate for Approving the Dissertation

We hereby approve the Dissertation

of

Yinan Wang

Candidate for the Degree:

Doctor of Philosophy

Director (Dr. John M. Rogthgeb, Jr.)

Reader (Dr. Walter Arnold)

Reader (Dr. Abdoulaye Saine)

Graduate School Representative (Dr. Stephen M. Norris)

ABSTRACT

HANDLING THE U.S.- RIGHTS DISPUTE – THE ROLE OF WTO’S DISPUTE SETTLEMENT SYSTEM

by Yinan Wang

This research examines issues in the U.S.-China trade dispute over China’s intellectual property rights (IPR) infringement. The massive scale of IPR infringement in China is a long-term problem that the has been dealing with ever since the two countries normalized their trade relations. China’s infringement of U.S. intellectual property rights becomes even more salient given the overall background, where the U.S. economy was hit hard by the worst economic downturn since the Great Depression, and the country is running an increasingly huge trade deficit with China. American businesses accuse China for losing billions of dollars due to piracy, counterfeiting, and other forms of IPR infringement. This dissertation attempts to answer an important question in the U.S.-China IPR dispute. That is how China’s (WTO) membership has changed the U.S. strategy in handling its IPR dispute with China. It was widely anticipated that China’s accession to the WTO could markedly improve the situation of IPR protection, because China would have to comply with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), and the U.S. could potentially ask the WTO to authorize retaliations against China for its failure of enforcing the TRIPS Agreement by filing a formal dispute with the WTO’s dispute settlement mechanism. Based on research of primary documents and interviews conducted with U.S. government officials and business representatives, this dissertation argues that the U.S. did benefit from the WTO during its long battle against IPR infringement in China. However, the WTO by itself is far from enough to address the issue.

HANDLING THE U.S.-CHINA INTELLECTUAL PROPERTY RIGHTS DISPUTE – THE ROLE OF WTO’S DISPUTE SETTLEMENT SYSTEM

A DISSERTATION

Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science

by

Yinan Wang Miami University Oxford, Ohio 2012

Dissertation Director: Dr. John M. Rothgeb, Jr.

© Yinan Wang 2012

Table of Contents LIST OF TABLES ...... v LIST OF ABBREVIATIONS ...... vi ACKNOWLEDGEMENTS ...... vii Prelude ...... 1 Chapter 1 Introduction ...... 2 REVIEW ...... 4 Literature on U.S. Trade Policy Pertaining to IPRs ...... 4 Literature on WTO Dispute Settlement Procedure ...... 9 Existing Studies on U.S.-China IPR Dispute under the WTO Framework ...... 13 RESEARCH QUESTION AND METHODOLOGY ...... 15 ORGANIZATION OF THE STUDY ...... 18 Chapter 2 The U.S. Laws Governing Foreign Intellectual Property Infringement ...... 20 INTRODUCTION ...... 20 THE GENERAL BACKGROUND ...... 20 SECTION 301 AND THE USTR ...... 24 The 1974 Version of Section 301 ...... 25 The 1979 Amendments ...... 27 The 1984 Amendments ...... 28 The 1988 Amendments ...... 29 Section 301 Procedures ...... 32 Special 301 Procedures ...... 34 Section 301 and the USTR ...... 35 CHAPTER SUMMARY ...... 37 Chapter 3 Enforcing Intellectual Property Rights at the WTO ...... 39 INTRODUCTION ...... 39 THE TRIPS AGREEMENT ...... 39 What Are Intellectual Property Rights? ...... 40 Pre-TRIPS International IPR Regime ...... 41 Content of the TRIPS Agreement ...... 45 Summary ...... 52 THE WTO DISPUTE SETTLEMENT MECHANISM ...... 52 Dispute Settlement Procedures ...... 55 iii

Summary ...... 58 U.S. IPR CASES AT THE WTO ...... 58 WHAT DOES IT MEAN FOR THE U.S. IPR DISPUTE WITH CHINA...... 60 Chapter 4 The U.S.-China Intellectual Property Rights Dispute ...... 63 INTRODUCTION ...... 63 U.S.-CHINA IPR DISPUTES IN THE 1990s ...... 63 Early Negotiations ...... 64 The First Clash: 1989-1992 ...... 66 The Second Clash: 1993-1995 ...... 72 The Third Clash: 1995-1996 ...... 79 U.S.-CHINA IPR DISPUTE GOES TO THE WTO ...... 81 The Origins...... 81 The Dispute ...... 83 The Rulings ...... 85 Results and Summary ...... 90 CHAPTER SUMMARY ...... 91 Chapter 5 Interview Results and Findings ...... 94 INTORDUCTION ...... 94 FINDINGS FROM REVIEWING PRIMARY DOCUMENTS ...... 95 Government Agency and Industry Group Researched ...... 95 Findings from Reviewing Primary Documents ...... 96 INTERVIEW RESULTS ...... 109 Summary of Interview Results ...... 111 CONCLUSION AND CHAPTER SUMMARY ...... 118 Chapter 6 Conclusion ...... 120 U.S.-CHINA IPR DISPUTE IN RETROSPECTIVE ...... 121 THE IMPACT OF WTO ON U.S. HANDLING OF IPR INFRINGEMENT IN CHINA ..... 124 THEORETICAL IMPLICATIONS ...... 126 WHY IS THERE A LACK OF IP ENFORCEMENT IN CHINA? ...... 127 POLICY RECOMMENDATIONS ...... 128 Appendix: Interview Questions ...... 131 Bibliography ...... 133

iv

LIST OF TABLES

Table 1: U.S. Industries Percentage to GDP ...... 22 Table 2: U.S. Copyright Industries Percentage to National Employment ...... 22 Table 3: Export Market Share in Technology-Intensive Products (percent) ...... 26 Table 4: Special 301 Priority Foreign Countries, 1989-1995 ...... 35 Table 5: A Timetable for a Dispute to be Settled by WTO ...... 57 Table 6: A List of U.S. Involved TRIPS Cases (as of October 2011) ...... 60 Table 7: List of Major Events in U.S.-China IPR Disputes, 1989-2009 ...... 92

v

LIST OF ABBREVIATIONS

AB BSA Business Software Alliance DSB DSM Dispute Settlement Mechanism DSU Understanding on Rules and Procedures Governing the Settlement of Disputes GATT General Agreements on Trade and Tariffs GDP Gross Domestic Product IIPA International Intellectual Property Alliance IPR Intellectual Property Rights JCCT Joint Commission on Trade and Commerce JI Judicial Interpretations MFN Most-Favored-Nation MOFERT Ministry of Foreign Economic Relations and Trade MOFTEC Ministry of Foreign Trade and Economic Cooperation MOU Memorandum of Understanding MPAA Motion Picture Association of America NIE Newly Industrialized Economy NTE National Trade Estimate Report on Foreign Trade Barriers PRC People’s Republic of China S&ED Strategy and Economic Dialogue TRIPS Trade-Related Aspects of Intellectual Property Rights USITC United States International Trade Commission USTR United States Trade Representative UN United Nations WIPO World Intellectual Property Organization WTO World Trade Organization

vi

ACKNOWLEDGEMENTS There are a number of people I am thankful for helping me achieve this important milestone of my life. First and foremost, I want to express my sincere gratitude from the bottom of my heart to my dissertation advisor, Professor John M. Rothgeb, Jr. Without his guidance, encouragement, and patience, this dissertation would not have been possible. I want to thank him for helping me get through the toughest and darkest periods both when I was writing my dissertation and when I was a graduate student at Miami. I am also indebted to Professor Walter Arnold, an awesome educator, mentor and a best friend of mine. Professor Arnold provided detailed, chapter-by-chapter comments to this dissertation. He took almost half of the time during the defense offering me valuable and inspiring suggestions on what to do to elaborate this dissertation into something big. I would also like to extend my appreciation to other members of the committee, Professor Abdoulaye Saine and Professor Steven Norris of the History Department for their time and efforts in serving as members of my dissertation committee. I am particularly grateful for the constructive comments that Professor Norris had offered to me. He was meticulous, and even willing to correct grammatical errors in my dissertation. I must also recognize Mrs. Betsy Burger, Senior Program Assistant of the Department of Political Science, for preparing my forms and documents, taking care of my record, and reminding me all the deadlines. Finally, I would like to thank members of my family for their unconditional love and support throughout the long years of writing my dissertation. My mom and dad are typical Chinese parents. They are demanding and always setting higher standards for me. For that matter, I thank them for their steadfast faith in my abilities. I also want to thank them for doing whatever possible to help raise my daughter Jiayi Wang, though I am afraid that she is a little too spoiled. My greatest debt of gratitude goes to my wife Xuan Zhao. She never fails to send me encouragements when they were mostly needed. I owe a great deal to her for her love, sacrifice, and strong belief in me that I could get this job done. Thank you all for everything!

vii

Prelude On a street of Kunming, the capital of Yunnan province, located in China’s southwestern hinterland, a modern upscale consumer electronics store will probably surprise you: classic winding staircase and weird upstairs sitting area; friendly employees wearing blue t-shirts; and a glowing bitten apple logo. This is the store that can be almost immediately recognized by young generations around the world—yes, it's an Apple Store! Is it? Wait a second... If you take a closer look, you will find the name of this Apple Store on its sign is misspelled, probably intentionally, as “Apple Stoer”; the name tags around the necks of its employees don’t have names on them; and you won’t find this Store’s information on Apple’s official website. Yes, this is not an authentic Apple Store. This is a near perfect knockoff Apple Store, not in Shanghai, not in Beijing, but in a so-called “secondary city” in China's vast southwestern hinterland.1 Welcome to Piracy 2.0, the modern era of copying in China! Yes, this is the issue to be addressed in this dissertation—China’s infringement of U.S. intellectual properties.

1 An American woman living in Kunming first reported this fake Apple Store on her blog BirdAbroad (http://birdabroad.wordpress.com/). She writes that “a 10-minute walk around the corner revealed not one, but TWO more rip-off Apple stores.” The fake Apple Stores story was widely reported later by Western and Chinese media. Burkitt and Chao reported that knockoff stores are widespread in China, for example, knockoff IKEA stores, knockoff Dairy Queen stores and knockoff Subway stores in China. See Laurie Burkitt and Loretta Chao, “Made in China: Fake Stores,” The Wall Street Journal, August 3, 2011, accessed August 3, 2011, http://online.wsj.com/article/SB10001424053111904292504576484080863377102.html. 1

Chapter 1 Introduction

The economic ties between the United States and China have never been closer. In 2006, China overtook Mexico and became the second largest trading partner of the United States only after in terms of trade in total volume.2 In the meanwhile, the United States was ranked number one on China’s top export destinations list.3 Indeed, the economic structures of the two countries in which China enjoys advantages in low-tech and labor-intensive sectors, and the U.S. in high-tech and capital-intensive ones have formulated a strong economic symbiosis. China’s accession to the World Trade Organization (WTO) in 2001 has greatly strengthened this trend. For example, the U.S. imports of goods and services from China more than tripled from $100 billion in 2000 when China was yet a member of the WTO to $337.8 billion in 2008.4 The increase of the U.S. exports was also significant, although non-comparable with imports, from $16.3 billion to $71.5 billion during the same period.5 However, as any countries with large volume of trade, high frequency of trade frictions is inherent and inevitable. The United States is confronting a host of trade and trade-related issues with China, such as China’s deliberately undervalued currency, low labor standard, inadequate protection of foreign intellectual properties, unfair export subsidies, market access barriers in entertainment, financial and insurance sectors, and export restrictions of raw materials, such as rare earth. These disputes are exacerbated by a mounting bilateral trade deficit with China. In 2010, the U.S. trade deficit with China hit a new record high of $273.1 billion, accounting for 42.3 percent of the U.S. total trade deficit of $645.9 billion6. This astronomical figure is remarkably greater than its deficit with at the peak of $85 billion in 2000.7 Against this background is the issue of China’s intellectual property rights (IPR) infringement. American businesses and officials are convinced that the lack of effective protection of intellectual property contributes significantly to the trade deficit and the loss of jobs, because industries that rely heavily upon intellectual property (IP) protections, such as

2 U.S. Census Bureau, 2007. 3 The US-China Business Council, “US-China Trade Statistics and China’s World Trade Statistics,” The US-China Business Council, accessed January 23, 2008, http://www.uschina.org/statistics/tradetable.html. 4 Ibid., Table 1, US-China Business Council, 2011, http://www.uschina.org/statistics/tradetable.html. 5 Ibid. 6 Percentage is calculated based on the U.S. Census Bureau data, 2011. 7 Gary Clyde Hufbauer, Yee Wong, and Ketki Sheth, US-China Trade Disputes: Rising Tide, Rising Stakes (Washington, DC: Institute For International Economics, 2006), 8. 2 computer software, music and movies, and pharmaceuticals are those that America has comparative and competitive advantages. For instance, the U.S. Department of Commerce has reported that since mid-1940s, three-quarters of America’s average annual economic growth has been associated with technology innovations.8 American IP-intensive firms also employ a considerable portion of workforce.9 A recent report that analyzes the economic contribution of American copyright industries to U.S. economy says that U.S. copyright industries employed nearly 11.7 million workers in 2007, accounted for 8.51 percent of all U.S. employees.10 However, as an official report indicates, the U.S. copyright industry alone each year loses $2.5 to $3.8 billion due to piracy.11 China is accused of being responsible for up to 70 percent of global counterfeit goods, the value of which equals to $650 billion a year.12 That means counterfeits and pirated CDs and DVDs are not only in the Chinese market, but also sold overseas. According to some analysts, IPR infringement is considered the second most important source leading to U.S- China trade conflicts.13 However, it was not until April 10, 2007, almost six years after China’s accession to the WTO that the United States finally brought its first IP-related case to the WTO’s Dispute Settlement Body (DSB).14 The puzzle comes to the surface. That is, why being the victim of IPR infringements, but in the meanwhile one of the most sophisticated players of the WTO’s litigation procedures, the United States did not turn to the WTO’s dispute settlement mechanism (DSM) soon after China became a WTO member. Before China’s WTO accession in 2001, the United States had largely maintained a tough position, utilizing aggressive measures such as making threats of trade wars

8 U.S. International Trade Commission (USITC), “China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy,” USITC Publication No. 4226, May 2011, xxi. 9 See Table 1.1. 10 Stephen E. Siwek, “Copyright Industries in the Economy: the 2003-2007 Report,” Economists Incorporated, 2009. 11 U.S. Trade Representative, 2005 ,” accessed January 6, 2008, http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_Special_301/asset_upload_file_file 9577636.pdf. International Intellectual Property Alliance (IIPA), a private sector coalition of U.S. copyright-based industries, estimated that total trade loss due to piracy in China in 2006 was $2.4 billion. See IIPA, “USTR 2007 ‘Special 301’ Decisions”, accessed January 29, 2008, http://www.iipa.com/pdf/IIPA2007TableofEstimatedTradeLossesandPiracyLevelsfor2006ASIA060607.pdf. 12 This figure comes from the US-China Economic and Security Review Commission 2006 Annual Report, based on estimations furnished by industries suffered from IPR infringement. Exact figure of loss is not available because consumers might decide not to purchase the copyrighted products at all should the pirated goods were not in existence. Therefore, the figure of estimated loss provided by victim industries could be biased toward their interest. 13 According to Bergsten et al., China’s currency manipulation is ranked number one, see C. Fred Bergsten, Bates Gill, Nicholas R. Lardy, and Derek Mitchell, China: The Balance Sheet, (New York: PublicAffairs, 2006), 95. 14 Steven Weisman, “U.S. Toughens Its Position on China Trade,” The New York Times, April 10, 2007, accessed December 10, 2008, http://www.nytimes.com/2007/04/10/business/worldbusiness/10trade.html. 3 or economic sanctions, and terminating China’s most-favored-nation (MFN) status to elicit China’s concessions on better IPR protections. The aggressive approach achieved a partial success. China did rebuild its IPR regime to make it in line with the international standards, yet the enforcement of IPR laws lagged far behind, even today. In a stark contrast, for a very long period of time the U.S. approach to address China’s IP infringement since its WTO accession was strikingly conservative, featuring heavily reliance on diplomatic measures, such as high level summits, and bilateral talks and negotiations on a regular basis.15 However, it appeared that these summits and negotiations accomplished no more than some high-profile raids on factories producing pirated CDs and DVDs and vendors distributing those pirated products. It also seemed to the U.S. trade officials and intellectual property rights holders that the Chinese government continued to pay only lip service to strengthening IP enforcement. In April 2007, the United States finally filed a formal complaint against China on IPR infringement before the WTO’s Dispute Settlement Body. The question thus is why the United States did not use the rule-based dispute settlement mechanism in the first place. This dissertation examines issues revolving around the U.S.-China IPR dispute. The purpose is to scrutinize the U.S. strategy on China’s IP infringement since 2001 when China joined the WTO. Specifically, this dissertation reviews the (in)effectiveness of the WTO’s dispute settlement mechanism in resolving the U.S. IPR dispute with China. In the following pages of this chapter, I shall first review a body of literature on the U.S. trade policy with an emphasis on intellectual property, and the WTO dispute settlement system. Followed by literature review is the statement of research question for this dissertation. Next, I discuss the methodology to be applied in this research. The last part is the organization of this dissertation.

LITERATURE REVIEW

Literature on U.S. Trade Policy Pertaining to IPRs Michael Ryan, in Knowledge Diplomacy asserts that the protection of intellectual property rights is crucially important to U.S. economic and strategic interests.16 This is because the U.S. export relies heavily on the performance of IPR-based industries. However, piracy and

15 For instance, the U.S.-China Joint Commission on Trade and Commerce (JCCT), established in 1983, provides an institutionalized mechanism for the two governments to negotiate and resolve issues related to trade and commercial activities. 16 Michael Ryan, Knowledge Diplomacy, (Washington, DC: Brookings Institution Press, 1998). 4 counterfeiting of many IPR-based products such as computer software, music CDs, and pharmaceuticals are easy and profitable. Therefore in a post-industrial era, global trade necessitates a better regulatory system governing the protection of intellectual property rights. The focal point is the Office of the United States Trade Representative (USTR). Ryan argues that The USTR, representing the business interest of the leading U.S. industries, is conducting “knowledge diplomacy” on both bilateral and multilateral basis to establish and maintain an international IPR regime. Ryan’s study makes several important contributions. First, the USTR has been most responsive to demands from IPR-based industries to initiate actions against foreign governments in stopping violations of IPRs. In the meanwhile, the USTR relies on businesses to provide information, data, and policy recommendations. Business mobilization led to two amendments of the Section 301 of U.S. trade law, and the signing of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which institutionalized the international IPR laws under the framework of the WTO. Second, although the USTR has been largely successful in inducing targeting countries to change policies through negotiations and aggressive unilateral actions, implementation of new rules depends on a state’s capacity to enforce such rules at local level. Third, developing countries are changing their attitudes toward the protection of intellectual property rights but at different paces. Their usually weakly institutionalized judiciaries pose enforcement problems of TRIPS Agreement. Thus, TRIPS provides an initiative for developing countries to reform their legal systems. With regard to the USTR, in an earlier work by Michael Ryan studying the use of the U.S. Section 301 policy by the Office of the United State Trade Representative to open markets in Japan, South Korea, Taiwan, and China over the period of 1976-1990, the , based on his analyses of forty cases involved with these counties, finds that the USTR initiates actions to change targeting countries’ trade practices with two priorities.17 The first priority is that the U.S. industries shall be those with “high commercial competitiveness.” The second priority is that the cases to be brought about shall have “high GATT regime utility,” meaning that the cases shall contain clear signs of violating existing GATT (General Agreements on Trade and Tariffs) rules, or in some occasions the cases are built upon strong intensions of the U.S. government to change or create new world trade rules. In the process-tracing case studies of nine of forty cases, Ryan also finds that the USTR pursues both rule-oriented (in six of nine cases) and power-oriented (in

17 Ryan, Playing By the Rules, (Washington, DC: Georgetown University Press, 1995). 5 three of nine cases) trade policies. The rule-oriented trade policy refers to the settlement of disputes based upon norms and rules on which the two parties have previously agreed. On the other hand, the power-oriented trade policy refers to the settlement of disputes in which the United States uses its geopolitical strength to overcome market barriers when there is no international agreement to follow. Among these two types of trade policies, the rule-oriented cases appear to be more successful in terms of compliance with settlement agreement by targeted countries. Non-compliance is more likely to happen when disputes are settled through a process of power-oriented negotiations, because responding states do not have pressures for international reputation of compliance with international law and maintaining international regime. In conclusion, Ryan argues that the USTR selects cases against foreign countries when the two prior conditions are met. Bayard and Elliott were also among those who thoroughly analyzed the effectiveness and impact of Section 301 of U.S. Trade Act.18 In the 1980s, in response to the changing international environment of trade and domestic demands, Congress twice amended the U.S. trade law which substantially empowered Section 301. In the eyes of many foreign countries and trade analysts, this became the symbol of the so-called “aggressive unilateralism”. Bayard and Elliott’s book, in particular, addresses three questions related to this emerging aggressive unilateralism in the U.S. First, how effective was the Section 301 in opening foreign markets? Second, what has been the broader impact of aggressive unilateralism on multilateral trading system? Third, in the likely event of completion of the Uruguay Round19 of multilateral trade negotiations and the creation of the WTO, what would be the proper position that the U.S. should take in using threats of retaliation to correct unfair trade practices by foreign countries? To answer these questions, their studies utilize both large-N statistical analysis of 72 completed 301 cases and 12 detailed case studies of U.S. trade disputes with other countries. Bayard and Elliott argue that Section 301 was both rational and necessary not only for the U.S. domestic interest, but also to defend and advance the GATT-based multilateral trading system. Several factors are of special importance to the success of Section 301 cases: the U.S. domestic unity and commitment; when the targeting country is vulnerable to U.S. threats; domestic political support

18 Thomas O. Bayard, and Kimberly Ann Elliott, Reciprocity and Retaliation in U.S. Trade Policy, (Washington, DC: Institute for International Economics, 1994). 19 The of multilateral trade negotiations was conducted within the framework of the General Agreement on Tariffs and Trade (GATT). A total of 123 countries participated as “contracting parties”. The round transformed the GATT into the World Trade Organization. 6 in targeting countries for changes in trade practices; transparency of trade barriers in targeting countries; GATT-consistency; and timing. They conclude that since 1985, Section 301 has been reasonably successful in opening foreign markets. However, such success became much weaker when dealing with “Super 301” and “Special 301” cases. This was because regular 301 cases were generally rule-based and GATT-compatible, while “Super 301” was more of power- oriented and usually incurred resentment from targeting countries. They write, “Super 301 is not necessary for an effective US trade policy because it adds very little negotiating leverage to that which already exists under regular section 301…and is undesirable because the potentially significant—and unnecessary—costs outweigh the limited benefits.”20 With regard to “Special 301”, which is applicable to IPR violations, it was difficult for the U.S. to prevail, because barriers to enforcing IPR laws were usually not easy to identify, and there was typically little domestic support for better protection of IPR in targeting countries (usually developing countries). Thus, the exercise of Section 301 policy prior to the WTO did exert some positive influence to the world trading system. One of the reasons is that the U.S. aggressive unilateralism did bring about the completion of Uruguay Round and the creation of the WTO. The WTO has significantly broadened issue areas covered under the GATT framework, such as trade in services, intellectual property rights, and trade-related investment measures (TRIMS). In particular, the new dispute settlement system dramatically improved the old one, and Bayard and Elliott comment these new developments the internationalization of Section 301. Finally, the suggest that the United States should switch back from aggressive unilateralism to aggressive multilateralism under the WTO framework actively using the WTO’s dispute settlement mechanism to pursue its interests. Inspired by Bayard and Elliott, Ka Zeng’s book Trade Threats, Trade Wars focuses on the result of American aggressive trade diplomacy during the 1980s and early 1990s (pre-WTO period).21 In particular, she examines the effectiveness of the use of trade threats in soliciting foreign concessions on trade agreements. The most important contribution of Zeng’s study comes from her argument that states that the trade structure (either complementary or competitive) between two countries affects the effectiveness of coercive trade diplomacy. Specifically, she argues that when the United States has complementary trade relations with its

20 Bayard and Elliott, Reciprocity and Retaliation in U.S. Trade Policy, 317. 21 Ka Zeng, Trade Threats, Trade Wars – Bargaining, Retaliation, and American Coercive Diplomacy, (Ann Arbor, MI: The University of Michigan Press, 2004). 7 trading partners, for example, the kind of trade structure between the U.S. and China, where the United States mainly export high-tech, capital-intensive products, and China exports low-tech, labor-intensive products, the use of threats generally becomes ineffective because of higher levels of division of domestic interest. However, when the trade structure is competitive, for example, trade between most industrialized democracies, the U.S. coercive trade diplomacy is more likely to gain concessions from its trade partners because of the unity of domestic support from both import-competing and export-seeking groups. In the former situation, for instance, the threat to revoke China’s MFN status encountered opposition from industries making use of cheap imports from China such as textiles, toys, and furniture. The U.S. exporting industries such as airplanes, high-tech electrical equipments, and computer processors might also oppose unilateral sanctions for the fear of losing market due to Chinese retaliation. In the U.S.-Japan semiconductor case, the sanction threat on Japan-made computers and some consumer electronic products was largely successful because domestic interests were unified as both import- competing consumer electronic industry and export-seeking semiconductor industry supported sanctions. In one of her case analyses related to current study, Zeng has demonstrated that threats to impose sanctions on Chinese imports failed to extract desired Chinese concessions for better protections of U.S. intellectual property. Although U.S. copyright and industries were pleased to see a strong punitive government action to stop piracy in China, those who benefit from trade with China voiced their deep concerns that threatened sanctions might incur seriously adverse effects on their business interest. For instance, China would retaliate by suspending investment projects by big U.S. businesses. Therefore, the complementary trade structure, which is the key source of the division of domestic interest, eroded the credibility of imposing sanctions. In actuality, the administration has a strong incentive to avoid confrontation with China because it could jeopardize broader U.S. strategic and commercial. The patterns for several rounds of IPR negotiations were similar that the U.S. negotiators had to back up from tough positions and accept compromised deals from China. Since Zeng’s study deals exclusively with pre-WTO cases, in the concluding chapter she suggests—though without detailed empirical evidence—that the newly instituted WTO dispute settlement mechanism will not eliminate aggressive unilateral trade policies, although it does discourage unilateral retaliations between member countries. For example, she mentions that the frequency of the pursuit of aggressive

8 unilateral trade policies by the USTR under Section 301 is even higher than that in the GATT period. In the meantime, the WTO will change little of the nature of trade structures in determining the degree of unity for policy preferences by domestic interest groups, which in the end affect trade negotiations. As such, Zeng leaves the question open that how the WTO dispute settlement mechanism has fundamentally changed the way the United States and China settle their trade disputes. While it doesn’t fit into either categories of international political economy or comparative politics, Andrew Mertha’s book The Politics of Piracy presents a different view from that of Zeng, in which he argues that as far as IPR concerned the U.S. aggressive trade policy did exert some positive effects.22 The implication is that China would otherwise not have revamped its IPR regime if the U.S. pressure did not exist. The bulk of the book is essentially an exhaustive account of the development of the IPR regime (i.e. , , and ) in China as a direct result of foreign (primarily the United States) pressure. Unfortunately, foreign pressure always loses its momentum when it comes to enforcement. This is because enforcement of IPR laws and regulations would require cooperation from local governments. Therefore, the author suggests that it is not so much that China’s central government doesn’t want to enforce the law but rather the rigidity and complexity of China’s bureaucratic system prevent the law to be effectively enforced at localities. For example, different bureaucratic structures governing copyrights, patents, and trademarks respectively have produced contrasted enforcement results. An important finding which needs to be reemphasized is the pivotal role of the USTR as the nexus between domestic voices for the change of foreign practices pertaining to trade and the U.S. foreign trade policy. In the second chapter of the book, Mertha points out that the thinly staffed USTR determines that most of the U.S. demands in trade negotiations are initiated by private industries and trade associations, which are the main driver of U.S. trade policy direction that the USTR pursues.

Literature on WTO Dispute Settlement Procedure The former WTO Director-General Renato Ruggiero once referred to the WTO’s dispute settlement mechanism as “the most individual contribution” to the world trading system and the

22 Andrew Mertha, The Politics of Piracy, (Ithaca, NY: Cornell University Press, 2005). 9 prosperity of the global economy.23 Such a view has been widely supported. The origin of the DSM can be traced back to the beginning years of GATT. However, as GATT was not intended to be a formal organization, there were only a few paragraphs contributed to this topic in the agreement. In 1995, the GATT DSM was replaced by Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) of the WTO. The new dispute settlement system has been significantly elaborated and improved. The most notable features of the new dispute settlement system include explicit timeframes for the dispute settlement procedure, automatic initiation of a panel upon the request of complaint party, automatic adoption of panel reports unless consensus that decide not to adopt it is reached, the establishment of a standing Appellate Body to hear appeals from panel reports, and stronger procedures for the implementation of panel and/or Appellate reports. 24 Many observers of the GATT/WTO agree that the innovation of the new DSM could minimize the “power politics” effect on the world trade system, and therefore encourage the use of DSM by all members. John H. Jackson comments that the new dispute settlement mechanism under the WTO is more rules-oriented relative to the power-based system under GATT. According to him, one of the most notable improvements of the WTO DSM is that member countries can no longer blockade rulings.25 The Panel report will be considered adopted unless there is a consensus against it. The party who is not satisfied with the Panel ruling can appeal to an appellate panel. The Appellate report is again, adopted automatically, unless there is a consensus against it. Therefore, the entire procedure is almost automatic and the losing party is obligated to carry out the recommendations. On another occasion, Jackson remarked that the DSM had been dramatically improved at least in the following four areas. First, the DSM provides a unified dispute settlement system that covers all parts of the WTO agreements, including trade in services and intellectual property. Second, it clarifies in all Uruguay Round legal texts that once a dispute arise Members may resort to the DSM for resolution. Third, the new system reassures complaining parties that the blockade to establish a panel is no longer possible. Fourth, it establishes an appellate procedure, where either party to the dispute may submit its request to appeal rulings made by the panel.

23 “The WTO’s Most Individual Contribution,” WTO, accessed November 22, 2007, http://www.wto.org/english/thewto-e/tif-e/disp0-e.htm. 24 Michael Trebilcock, and Robert Howse, The Regulation of International Trade, 2nd Ed, (London: Routledge, 1999). 25 John H. Jackson, The World Trading System, 2nd Ed (Cambridge, MA: The MIT Press, 1997), Chapter 4. 10

Unless there is a consensus within the DSB to disapprove the Appellate Body’s (AB) decisions, the AB rulings are considered final and they must be complied.26 Through the examination of the first several years of the DSM, Jackson observed that countries do bring cases to the DSM, and the losing countries generally comply with either the panel or the AB rulings. Jackson argued that the DSM brings whole new practices centered on legal/institutional aspects to the world trading system in which smaller countries can find their ways to challenge bigger and much stronger players. However, more than ten years ago Jackson soberly pointed out that the WTO, like many other human institutions must evolve to cope with new factors, new policies, and new subject matters. Otherwise, sooner or later it will be marginalized. He went on to argue that the WTO treaties contain considerable gaps and ambiguities. These ambiguities are particularly significant in new areas that are not covered by GATT, such as TRIPS Agreement for intellectual property and trade in service. However, Jackson put it clear that the dispute settlement system under the WTO is less adaptive than it was under GATT to changes and emerging issues, nor the DSM is designed as the legal systems in many countries to provide interpretations of treaty texts, which have ambiguities and gaps. An earlier reservation regarding to the WTO dispute settlement mechanism according to many analysts is that the system could favor developed members more than members. This is because developing countries usually lack financial, legal, and institutional resources to compete with their developed opponents within the DSM. Statistics show that until year 2000, developed countries claimed 154 out of 207 requests for consultations. Among 154 cases, 89 of which were against other developed countries, and 65 were against developing countries. In comparison, developing members filed only 53 cases, 35 of which involved developed members and 18 with other developing members.27 Park and Umbricht and Park and Panizzon’s two statistical studies largely confirm this view. In their studies, the authors examine the most frequent users of the DSM.28 Park and Umbricht observe that the share of cases brought by developed countries between 1995 and 2000 was 71 percent, whereas the proportion of cases against developed members was 56 percent.

26 Jackson. “Dispute Settlement and the WTO,” Journal of International Economic Law 1, no. 3 (1998): 339. 27 Ann Weston, and Vallentina Delich, “Settling Trade Disputes after the Uruguay Round: Options for the Western Hemisphere,” Latin American Trade Network Working Papers (2000). 28 Young Duk Park, and Georg C. Umbricht. “WTO Dispute Settlement 1995-2000: A Statistical Analysis,” Journal of International Economic Law 4 no. 1 (2001): 213-230. Young Duk Park, and Marion Panizzon, “WTO Dispute Settlement 1995-2001: A Statistical Analysis,” Journal of International Economic Law 5, no. 1 (2002): 221-244. 11

Developing members, on the other side, were the targets of 40 percent of cases and filed only 26 percent. Park’s and Panizzon’s statistics show that the U.S. has been the most active complainant as well as the most frequent target. Until 2002, the United States and the EU combined initiated 120 cases (51% of 235 complaints) and responded in 104 cases (43% of 242 complaints). Developed members initiated twice as many cases as non-industrialized countries. However, the situation changed in the second five years since the birth of the WTO. William Davey conducts a review of the operation of the WTO’s dispute settlement system in its first ten years. Davey divides the first ten years of the DSM (1995-2004) into two five-year periods. He basically reaffirms previous views that members dominated the DSM during the first five-year period, but he notes that many cases in this period were leftover from the old GATT days and the new cases initiated under the WTO focused primarily the implementation of Uruguay Round results. A large number of these cases usually involve very controversial issues dealing with systemic concerns or specific fact situations carried over from GATT. Ultimately, the DSM survived its first five years as it successfully handled a number of controversial cases. Members used the new dispute settlement system fairly frequently without major complaints. The second period has seen a considerable increase of the developing countries members using the dispute settlement system. However, an important fact is that the majority of cases initiated by developing countries during this period were targeting other developing countries not so much the developed country members. Davey notes, the United States has been successful in brining cases challenging trade barriers of other countries, particularly in two areas of special interests to the U.S. trade policy—TRIPS Agreement and Sanitary and Phytosanitary (SPS) Agreement.29 Donald McRae conducts another periodic review of the first ten years of the WTO’s dispute settlement mechanism. He summarizes that both developed and developing members have used the DSM quite frequently, and losing parties have maintained a relatively good record of compliance. However, the DSM is not without problems. McRae enumerates a list of major problems that the DSM is facing. One set of complaints has centered on that the system is too rigid in adherence to legal texts, which inhibits the ability of using diplomatic means to address the issue. Another major concern is the lack of transparency that the public is not allowed to

29 William J. Davey. “The WTO Dispute Settlement System: the First Ten Years,” Journal of International Economic Law 8, no. 1, (2005): 17-50. 12 access panels as well as Appellate Body hearings, as well as the pleadings of the parties, which undermines the legitimacy of the DSM. In the long run, McRae fears that a high volume of cases involving controversial issues may overwhelm the system as new and sometimes “unexpected” interpretations of the WTO agreements could have an adverse impact on compliance. Finally, McRae argues that the international multilateralism may have reached a point of diminishing return, where regionalism has been thriving. He claims that the resort of bilateral actions in the form of preferential trade agreements or regionalism in the form of regional free trade area could ultimately make the multilateral-based WTO dispute settlement system obsolete.30 Wilfred Ethier asserts that the role of the WTO dispute settlement system is not to facilitate punishment, but rather to contain it. He argues that the DSM’s nature is to maintain reciprocity through potential suspensions of concessions. In this sense, the DSM helps level the power and resource asymmetry between developing and developed countries, in which it has provided a mechanism where countries with less economic resources can compete with more powerful developed countries. For example, a small may suspend its commitments in TRIPS Agreement to respond a developed country’s violation of trade in goods.31

Existing Studies on U.S.-China IPR Dispute under the WTO Framework Hanson Hu Li noted that the United States’ aggressive policy toward China had played an important role in inducing China to build an up-to-date IPR legal system. However, world standard IPR laws did not eradicate widespread counterfeiting and piracy in China because of weak enforcement. He pointed out that the ineffectiveness of the U.S. policy lies in ignoring the forces within China to “‘generate the type of domestic rationale and conditions needed to produce enduring change’ and to promote the underlying values that support voluntary compliance with the law.” Li argued that it is important to also educate domestic players to align with foreign firms that protection of intellectual property is also to their best interest.32 Tobias Bender presented a concise analysis to the problems and potential solutions to China’s weak enforcement of the TRIPS Agreement. He argued that it is not in China’s interest

30 Donald McRade. “What Is the Future of WTO Dispute Settlement?” Journal of International Economic Law 7, no. 1, (2004): 3-21. 31 Wilfred J. Ethier. “Intellectual Property Rights and Dispute Settlement in the World Trade Organization,” Journal of International Economic Law 7, no. 2, (2004): 449-458. 32 Hanson Hu Li. “Piracy, Prejudice and Profit: A Perspective from US-China Intellectual Property Rights Disputes,” Journal of World Intellectual Property 9, no. 6 (2006): 732. 13 to enforce IPR laws and its TRIPS commitments because China has seen quick technology transfer as a means to boost its industrial capability. Bender summarized that China’s administrative penalties for IPR infringements were too low, and thresholds to incur criminal procedures were too high, which had prevented effective enforcement. He claimed that such problems were due to the lack of a sound legal system in China, i.e. the rule of law. Also, local governments played an important role, as they tacitly allowed pirating facilities to operate within their constituencies to bring about lucrative economic benefits and employment opportunities. He concluded that China would probably not genuinely enforce IPRs until it reaches a point where the benefits of stronger IPR protection outweigh gains associated with knowledge appropriation. However, Bender did suggest a list of measures that can limit the damage. For enterprises, Bender suggested that it is important that companies build a business-related network composed of Chinese managers, scientists and competent government officials. It may also be useful to engage with local partners through licensing and/or joint ventures. This is because Chinese partners are more familiar with the Chinese system of law and bureaucracy. Therefore, they are better at dealing with Chinese officials, and more importantly the Chinese authorities tend to be more willing to enforce IPRs if Chinese ownerships are involved. With regard to the U.S. government, Bender recommended that Congress must vigilantly monitor China’s compliance with its WTO commitments. In the meantime, the U.S. government should actively engage in bilateral consultations with the Chinese through multiple mechanisms, such as the U.S.-China Joint Commission on Commerce and Trade (JCCT), and U.S.-China Strategic and Economic Dialogue. For Bender, a formal WTO case with respect to China’s weak enforcement of IPRs is the last resort, because the vague language within the TRIPS Agreement would make it very difficult for the U.S. to prevail. Also, filing a formal complaint at the WTO’s Dispute Settlement Body would likely spark China’s resentment and it might disrupt the ongoing bilateral negotiations for retaliation.33 Peter Yu in his paper argued that the past U.S. “Special 301” procedures with regard to China’s rampant intellectual property infringement ended up in a “cycle of futility”. He predicted that a formal complaint filed by the U.S. with the WTO’s Dispute Settlement Body would present a very weak case against China’s inadequate enforcement of intellectual property

33 Tobias Bender. “How to Cope with China’s (Alleged) Failure to Implement the TRIPS Obligations on Enforcement,” Journal of World Intellectual Property 9, no. 2 (2008): 230-250. 14 rights. The reasons are the following. First, Yu argued that the TRIPS Agreement lacks clarity to the definition of effective enforcement. Second, bringing a case to the WTO, the United States needs to bear the burden of proof. However, Yu claimed that it would be very difficult for the U.S. to find sufficient non-anecdotal evidence. In addition, some U.S. companies in China might be reluctant to provide information on counterfeiting and piracy to the USTR, because they fear taking formal WTO action against China is counterproductive and may endanger their established business networks in China. Third, Yu argued that even if the U.S. were managed to collect the needed evidence, the TRIPS Agreement provisions could still be in favor of China. This is because China’s current IPR laws are almost in full compliance with the TRIPS Agreement and therefore pursuing the case on the ground of weak enforcement would be extremely difficult. In particular, the TRIPS Agreement does not require member countries to devote more resources on intellectual property enforcement than other areas of law enforcement. As such concerns, Yu noted the United States could encounter setbacks should it decide to bring a formal complaint before the WTO’s Dispute Settlement Body. He asserted that such setbacks could have devastating impact to other areas of trade where the U.S. is challenging China, such as dumping, subsidies, and market access barriers in service sector.34

RESEARCH QUESTION AND METHODOLOGY Several conclusions can be drawn from the literature review. First, the issue of protecting American intellectual properties overseas is crucially important to U.S. economic as well as strategic interests. Also, protecting IP plays a key role in U.S. trade policy-making. This can be seen from American business and trade policy-makers’ resolve and tireless efforts to build and constantly improve an international system that lends itself to better promotion and protection of IP. Such efforts include achieving Special 301 domestically, and TRIPS Agreement on the international front. Second, the WTO’s dispute settlement mechanism has helped create a rule-based system to settle trade disputes among its members vis-à-vis a more power-based dispute settlement system under the GATT. The new system is believed to be more fair and efficient that it streamlines the litigation procedure and makes compensation and retaliation possible. Earlier

34 Peter K. Yu. “From Pirates to Partners (Episode II): Protecting Intellectual Property in Post-WTO China,” Michigan State University Legal Studies Research Papers, no. 03-15 (2006), accessed March 24, 2009, http://ssrn.com/abstract=578585. 15 observation about the DSM showed that developed members made more frequent and active use of the system. However, as it progressed into the second five years, developing members had picked up their uses of the DSM on a wide variety of trade issues. Third, it is intrinsically against China’s interest to improve IPR protections, and the lack of rule of law resulted from China’s one-party rule political system makes the Chinese law enforcement authorities either unable or unwilling to pursue IP infringers. Existing studies also suggest that it could be very difficult, if not totally impossible for the United States to challenge China’s weak IPR enforcement through the WTO’s Dispute Settlement Body, because the provisions in the TRIPS Agreement seem to be more in favor of China than the United States. However there have been no published studies so far examine in detail how the WTO’s DSM handled the cases that the United States filed against China on IP infringement. There also have been no known studies that comprehensively examine how the U.S. government and affected industries perceive the role of the DSM and the effectiveness of the overall U.S. strategy to minimize the losses associated with the Chinese infringement of U.S. intellectual properties. This dissertation attempts to fill these gaps. There are several reasons why it is important that these gaps need to be filled. First and foremost, U.S. IP-intensive industries have played an increasingly crucial role in the American economy. Companies like Apple, Google and Disney represent the sectors that the U.S. enjoys both comparative and competitive advantages in global competitions. The United States relies on the prosperity of these industries to maintain its economic and ultimately strategic supremacy in the 21st century. Second, because of their position in the U.S. economy, U.S. IP-intensive firms are also important source of jobs. It is estimated that core IP-intensive firms and the associated businesses combined could hire hundreds of thousands of new workers here in American soil if the level of IP infringement is substantially lowered in China. A recent study conducted by the U.S. International Trade Commission (USITC) shows that if IPR protection and enforcement in China is improved to the levels of the United States, U.S. firms would likely to increase employment in their U.S. operations by 2-5 percent, which is about 923,000 new jobs.35 Third, the WTO’s dispute settlement mechanism has opened a new window of opportunity for the U.S. to address the issue of IP infringement with China. So far, the United States brought two cases against China—one

35 USITC, “China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy,” xvii. 16 on enforcement of IP, and the other one issues related to IP. Both cases were now concluded with mixed results. Now is the time to review how the U.S. performed in this two cases, and how successful the U.S. has incorporated the WTO dispute settlement mechanism into its overall strategy against IP infringement in China. The purpose of this dissertation is to examine the role of WTO’s dispute settlement mechanism in reshaping the U.S. strategy against IP infringement in China. To accomplish this goal, this dissertation explores views and positions from important players in the U.S. trade policymaking—relevant U.S. government agencies and private sector organizations. John Rothgeb in U.S. Trade Policy neatly spells out four major factors that influence the development and implementation of U.S. trade policy. These factors are: (1) the strategic and competitive environment the United States confronts in the international arena; (2) the ideas policymakers and influential private citizens have about the role trade plays in handling American problems; (3) the beliefs special-interest groups have about how they are affected by the rules and procedures set up to regulate trade; and (4) the institutional rivalries that exist among elements of the U.S. government.36

Among these factors, the U.S. government, including U.S. Congress and the agencies within the executive branch, and private sector entities, such as special-interest groups are the actual players in formulating U.S. trade policy. Cohen, Blecker and Whitney also agree that the executive branch, Congress, and the private sector are the most important players in formulation and administration of U.S. trade policy.37 Within the executive branch, the most important cabinet-level bureaucratic agency is the USTR. The USTR holds many roles and responsibilities – it oversees overall trade policymaking, negotiates trade agreements, and represents the U.S. government in international trade organizations. It also serves as chief liaison between the executive branch and Congress with trade matters concerned. Cohen et al. describe that the USTR as a “policybroker and also a problemsolver”. They note that the USTR enjoys a special position between the executive branch of the government and Congress that even though it located within the executive branch, the USTR bears more pressure from Congress than from the President. Although Cohen et al. also agree that Congress is another important player in trade

36 John M. Rothgeb, Jr., U.S. Trade Policy, Balancing Economic Dreams and Political Realities, (Washington, DC: CQ Press, 2001), 3. 37 Stephen D. Cohen, Robert A. Blecker, and Peter D. Whitney. Fundamentals of U.S. Trade Policy, 2nd Ed. (Boulder, CO: Westview Press, 2003), Chapter 5. 17 policymaking, they do point out that Congress’s role is diminishing as it has subcontracted much of its authority to the executive branch as far as the trade issues are concerned. Congress is not directly involved in day-to-day duties of foreign trade, but rather it makes broader directions (i.e. passage of trade legislation) for the executive branch to follow, and it constantly reviews and evaluates existing trade policies and programs. Despite its informal position, the private sector also plays a decisive role. Cohen et al. summarize that the private sector provides two sources of policy input. The first is that the private sector keeps the U.S. trade officials informed about the current status of trade barriers overseas. For example, trade associations representing different industries participate in a variety of hearings held by Congressional committees to have their voice heard. These groups also publish their own investigative reports about the trade issues they confront in foreign countries. The second source of policy input is through lobbyists hired by special interest groups. These lobbyists, usually former government officials, representing a trade association or an industry group, come to Washington to lobby for a particular policy or regulation. According to the above described, this research examines selected key players in U.S. trade policymaking process pertaining to China’s IPR issues through extensive reviews of primary documents, such as reports issued by relevant government agencies and private industry groups. In addition, several confidential interviews were conducted in 2009 and 2010 with American government officials and nongovernmental trade association representatives who have first-hand knowledge about U.S. IP disputes with China. The interview findings are presented in Chapter 5 to supplement the archival research and fill the information gap.

ORGANIZATION OF THE STUDY The remainder of this dissertation is arranged as follows. Chapter 2 reviews the evolution of U.S. domestic trade laws in defending against foreign infringement of U.S. intellectual properties. It shows that the United States has a long tradition and vested interest in protecting its intellectual properties overseas. Chapter 3 provides a detailed account of the TRIPS Agreement and dispute settlement mechanism of the WTO. Chapter 3 also reviews three cases initiated by the United States at the WTO’s Dispute Settlement Body citing violations of the TRIPS Agreement. Chapter 3 introduces TRIPS Agreement, and the WTO dispute settlement mechanism with regard to violations of TRIPS. Chapter 3 also reviews two cases brought by the United Sates to the WTO regarding violations TRIPS Agreement. It demonstrates that the United

18

States is indeed a frequent user of the DSM to address IP issues. However, the U.S. had never submitted a case against a non-developed country member to the DSM with regard to inadequate IP enforcement before its two disputes with China. Chapter 4 reexamines US-China IP disputes – their origin, the development, and how the U.S. used Special 301 to settle them with China. The second part of the chapter reviews the WTO case brought by the United States against China on lack of IP enforcement. Chapter 5 presents findings from reviewing primary documents and interview results conducted with U.S. officials and private sector representatives. The last chapter concludes this study. A policy recommendation will also be provided in the concluding chapter.

19

Chapter 2 The U.S. Laws Governing Foreign Intellectual Property Infringement

INTRODUCTION The purpose of this chapter is to examine the U.S. trade laws that deal with foreign infringements of American intellectual properties that restrict American exports and market access. In terms of trade related intellectual property protections, the two most important pieces of legislations are Section 301 of the Trade Reform Act of 1974 and Section 337 of the Tariff Act of 1930 (although none of them addresses exclusively to IP infringement).38 Since Section 337 is concerned with the import side of the U.S. trade, in other words, it bars infringed foreign products from coming into the U.S. market, which is beyond the focus of this dissertation, this chapter introduces only Section 301 and its derivative – Special 301. The next section of this chapter reviews the evolution of Section 301 and Special 301. This section also examines the important role and functions of the Office of the United States Trade Representative (USTR) as the representative of the U.S. government in trade negotiations, and the administrator of Section 301 provisions. The second part of this chapter provides an in-depth review of three major U.S.- China IPR clashes occurred in the 1990s, and an analysis of the performance of U.S. trade laws in handling the IPR dispute with China.

THE GENERAL BACKGROUND The United States has a long history of actively protecting intellectual properties. It is one of the first few countries in the world that established a comprehensive legal system protecting intellectual property rights. In the Article 1 Section 8 of the U.S. Constitution, it writes that “the congress shall have power to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”. As early as 1790, the United States enacted its first IPR-related law—the copyright law, which provided protection for written works. Behind the U.S. emphasis on IPR protections as mentioned in the first chapter is the assumption that intellectual property is one of the key

38 Sections 301 through 309 of the Trade Act of 1974 (as amended) address unfair foreign trade barriers including unreasonable and/or unjustifiable measures or practices to U.S. exports of goods or services. Section 337 covers all unfair trade actions with regard to imports. 20 ingredients to maintain the U.S. global supremacy because the U.S. economy in post-industrial period relies heavily upon IP-intensive industries, such as pharmaceutical, biotechnology, sound recording, film, television, semiconductor and computer software industries. Since the mid- 1970s, the American business landscape has completed the evolution from being a manufacturing economy to one that is based on services. This development has made intellectual property one of the most valuable assets in the U.S. economy. Both government officials and business leaders had acknowledged the importance of intellectual properties to the U.S. economy and foreign trade, and how the infringement of IP could damage relevant industries and even challenge America’s leading position in global economy. For instance, in his report to the House Foreign Affairs Committee, Harvey Bale, then Assistant U.S. Trade Representative asserted, “American competitiveness is increasingly dependent on our technological innovation…, [which] requires adequate and effective protection for patents, copyrights and trademarks.”39 According to a survey by American Copyright Council, in 1982 American copyright industries including motion pictures, sound recordings, book publishing, computer software, and others contributed to some 5% of U.S. gross national product (GNP). They produced more than $150 billion in final demand expenditures.40 In a study sponsored by the International Intellectual Property Alliance (IIPA)41, the core copyright industries – “those who actually create the products and are virtually 100% copyright dependent” – earned $190.1 billion in revenue, accounted for approximately 3.3% of the gross domestic product (GDP) in 1990. The total copyright industries – core industries plus other industries that depend partially on copyright – accounted for $331.5 billion, or 5.8% of the U.S. GDP.42 (See Table 1) The study also shows that the core copyright industries employed new workers at an average annual rate of 4.2% from 1987 to 1990, which was almost three times of the overall economy (1.6%). Employment in total copyright industries in 1990 was 5.6 million.43 (See Table 2) In terms of foreign sales, the study

39 Statement of Harvey E. Bale, Jr., Assistant U.S. Trade Representative for Trade Policy and Analysis before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs, House of Representatives, Ninety-ninth Congress, Second Session (July 31, 1986). 40 American Copyright Council, quoted from Jack Valenti, Statement before the Subcommittee on Trade, Productivity, and Economic Growth of the Joint Economic Committee, Congress of the United States, Ninety-ninth Congress, Second Session (March 31, 1986). 41 The IIPA represents 1,600 companies that produce and export copyrighted products. For details about the IIPA, see Chapter 3. 42 Stephen E. Siwek and Harnold Furchtgott-Roth, Economists Incorporated, “Copyright Industries in the U.S. Economy: 1977-1990,” International Intellectual Property Alliance. (September 1992). See also Table 2.1. 43 Ibid. Also see Table 2.2. 21 suggests that the core copyright industries contributed at least $34 billion in 1990, only behind agricultural ($39.3 billion) and aircraft ($37.7 billion) industries.

Table 1: U.S. Copyright Industries Percentage to GDP Year Core Partial Distribution Related Total Remainder 1977 2.09% 0.30% 0.89% 0.51% 3.80% 96.20% 1987 3.10% 0.40% 1.32% 0.75% 5.54% 94.46% 1988 3.28% 0.42% 1.37% 0.70% 5.76% 94.24% 1989 3.27% 0.42% 1.36% 0.68% 5.73% 94.27% 1990 3.33% 0.42% 1.47% 0.58% 5.80% 97.20% Source: Stephen E. Siwek and Harnold Furchtgott-Roth, Economists Incorporated, “Copyright Industries in the U.S. Economy: 1977-1990,” International Intellectual Property Alliance. (September 1992).

Table 2: U.S. Copyright Industries Percentage to National Employment Year Core Partial Distribution Related Total Remainder 1977 1.61% 0.52% 0.81% 0.36% 3.30% 96.70% 1987 2.17% 0.54% 1.30% 0.52% 4.52% 95.48% 1988 2.20% 0.55% 1.36% 0.51% 4.63% 95.37% 1989 2.26% 0.58% 1.37% 0.50% 4.71% 95.29% 1990 2.34% 0.59% 1.41% 0.47% 4.81% 95.19% Source: Stephen E. Siwek and Harnold Furchtgott-Roth, Economists Incorporated, “Copyright Industries in the U.S. Economy: 1977-1990,” International Intellectual Property Alliance. (September 1992).

From mid-1970s, industry groups begun to contact the U.S. government about the issue of intellectual property infringement overseas. Initially, the complaint was from the agricultural chemical industry on the illegal copy of U.S. agrochemical products in .44 However, rampant piracy of U.S. intellectual property quickly spread to a wide range of other industrial sectors – from agricultural chemicals and pharmaceuticals to sound recordings, films, and computer software. Until mid-1980s, the number of complaints on trade-related problems associated with foreign IP infringement received by the Office of the United State Trade Representative (USTR) had increased substantially.45 In August 1985, the IIPA submitted a report to the USTR titled “Piracy of U.S. Copyrighted Works in Ten Selected Countries”. In that report, the IIPA estimated that the U.S. copyright industries including motion pictures, sound

44 Charan Devereaux, Robert Z. Lawrence, and Michael D. Watkins. Case Studies in US Trade Negotiation, Vol. 1: Making the Rules (Washington, DC: Institute for International Economics, 2006): 48. 45 Statement of Harvey E. Bale, Jr., Assistant U.S. Trade Representative for Trade Policy and Analysis on Intellectual Property and S. 1860 before the Subcommittee on International Trade, Committee on Finance, U.S. Senate, Ninety-ninth Congress, Second Session, (May 14, 1986). 22 recordings, books, and computer software suffered over $1.3 billion annually in piracy losses in the ten countries alone.46 In particular, record and music industry lost over $600 million annually, book publishing over $400 million, movie industry over $130 million and the computer software industry over $125 million.47 U.S. International Trade Commission (USITC) in 1987 conducted an investigation into foreign infringement of intellectual property rights and its effect on U.S. industry and trade. Specifically, USITC was asked to determine the revenue loss due to counterfeit and other infringing products sold in the U.S. as well as foreign markets. USITC was also asked to identify the products, origin countries, markets, and protection deficiencies that represent the most serious problems for U.S. businesses. In February 1988, USITC published the results of its investigation. The aggregate worldwide losses as a result of inadequate protection of intellectual properties were estimated (by survey respondents) at $23.8 billion, or 2.7% of sales affected by intellectual property in 1986. Major industries affected were scientific and photographic goods, computer and software, electronics, motor vehicles and parts, entertainment, and pharmaceuticals.48 Based on USITC numbers, the USTR placed all U.S. companies’ losses at $43 to $61 billion in 1986.49 A 1984 USITC report on the effects of foreign counterfeiting put an estimated 131,000 U.S. jobs loss in five industrial sectors due to foreign counterfeiting and similar unfair trade practices.50 Experiencing the ever increasing loss of revenue and jobs due to piracy and counterfeiting, U.S. business complained that the protection level of intellectual property in some countries (mostly developing countries) was “laughably low”, or even non-existent. For instance, didn’t have a patent law; in Malaysia, penalties for piracy were too low to deter infringers and contingent on income levels; in South Korea, because the country did not belong to an international copyright convention nor had bilateral copyright agreement with the United States, its copyright law did not cover U.S. copyrighted works; and Mexico was restricting the

46 These ten countries are Singapore, Taiwan, Indonesia, South Korea, the , Malaysia, Thailand, Brazil, Egypt, and Nigeria. International Intellectual Property Alliance. “Piracy of U.S. Copyrighted Works in Ten Selected Countries,” (August, 1985). 47 Ibid. 48 U.S. International Trade Commission. “Foreign Protection of Intellectual Property Rights and the Effect on U.S. Trade and Industry,” USITC Publication 2065, (February, 1988). 49 Statement of Carla A. Hills, U.S. Trade Representative, before the Subcommittee on Courts, Intellectual Property , and Administration of Justice, the Committee on the Judiciary, House of Representatives, One Hundred First Congress, First Session, (July 25, 1989). 50 U.S. International Trade Commission. “The Effects of Foreign Product Counterfeiting on U.S. Industry,” USITC Publication 1479, (January, 1984). 23 use of well-known U.S. trademarks. Another common problem was that although in some countries IPR laws seemed adequate on surface, they were not effectively enforced. The enforcement problem in developing countries usually stemmed from the lack of technical expertise and/or a country’s ineffective judicial system. In addition, the legal status of emerging technologies in other countries, such as computer software, semiconductor chips and biotechnologies was also one of the major concerns of the U.S. However, the most important problem was a conceptual one. Many developing countries and newly industrialized economies (NIEs) were reluctant to adopt stronger measures on IPRs because of the fear that economic development would be hindered and infant industries endangered if piracy and counterfeiting were controlled. For these countries, theft of foreign intellectual property was considered a “shortcut” to modernization.51 In response to the IP infringement problems that U.S. businesses confronted overseas, the United States adopted a dual-track trade policy, which became the foundation of later U.S. IPR- related trade policies. In particular, the Trade Reform Act of 1974 replaced Section 252 of the Trade Expansion Act of 1962 with the new Section 301 (the export track), and revised Section 337 of the Tariff Act of 1930 (the import track). The following sections introduce section 301 and section 337 of U.S. trade laws.

SECTION 301 AND THE USTR It is not possible to discuss provisions in U.S. laws that address foreign IP infringement issues without first going over Section 301. Section 301 was originated from section 252 of the Trade Expansion Act of 1962. The original purpose was to give the president authority to retaliate countries that impose unreasonable and/or unjustifiable restrictions on U.S. imports by limiting imports from targeting countries.52 It received its current title from the Trade Reform Act in 1974 (hereinafter Trade Act of 1974), which said that the United States may impose sanctions against foreign countries when their trade practices, policies, and conducts violate or deny U.S. rights and benefits in international commerce, if they are unreasonable or discriminatory. One of the most important advantages of Section 301 is that it empowers the

51 Statement of Alexander H. Good, Director General, U.S. and Foreign Commercial Service, Department of Commerce, before the Subcommittee on Trade, Productivity, and Economic Growth of the Joint Economic Committee, the U.S. Congress, Ninety-ninth Congress, Second Session, (March 31, 1986). 52 A. Lynne Puckett and William L. Reynolds. “Rules, Sanctions and Enforcement under Section 301: At Odds with the WTO?” American Journal of International Law. 90 (1996): 676. 24 president of the United States to take unilateral actions without observing international obligations in the first place.53 The president was also provided with enhanced authority to impose sanctions against target countries. Section 301 also sets time limits (12-18 months) for the USTR to investigate and take actions. In addition to regular Section 301, which articulates a formal procedure for the administration to follow to stop a foreign unfair trade practice with the threat of imposing sanctions, there are also Super 30154 and Special 301. A minor difference between regular 301 and Super 301 is that Super 301 requires the USTR to identify on an annual basis both the major trade barriers to the U.S. exports and countries maintaining those barriers, and it requires the USTR to take actions against such countries. Special 301 is similar to Super 301 but it focuses exclusively on violations of U.S. intellectual property rights as barriers to U.S. exports. The administrator of Section 301 is the Office of the United States Trade Representative. Its predecessor, the Office of Special Representative for Trade Negotiations (hereinafter Special Representative) was created in 1962 by the Trade Expansion Act. The idea was to create an institution within the executive branch to oversee trade matters on the basis of balancing domestic and international concerns in negotiating trade agreements. The 1974 Trade Act made the Special Representative cabinet status directly accountable to both the president and Congress. In 1979, Congress reorganized the institution with increased size and authority and renamed it the Office of the United States Trade Representative.55 These moves helped Congress create a powerful and institutionalized advocate for trade.56

The 1974 Version of Section 301 The reasons for the enactment of Section 301 in early 1970s were multifold, though the original purpose was not merely to contain international piracy. One of the most important ones was the relative decline of U.S. economic power. Since the end of the World War II, the United States had dedicated to building a liberal world economic order. It hoped that its major allies in

53 Ibid. 54 The original Super 301 provisions expired in 1990, but it was revived several times during the Clinton administration. Super 301 was reinstated again and revised in March 1999. It required the USTR to identify priority foreign trade practices and initiated Section 301 procedures against such practices, if agreement is not reached within 90 days. 55 USTR. “History of the United States Trade Representative,” (http://www.ustr.gov/Who_We_Are/History_of_the_United_States_Trade_Representative.html, accessed July 20, 2008). 56 Greg Mastel. American Trade Laws After the Uruguay Round. (Armonk, NY: M.E. Sharpe, 1996): 17. 25

Western Europe and the Pacific Rim could quickly recover from the war through the promotion of free trade. It also hoped that trade promotes economic development and ultimately democratization. The strategy itself seemed to be very successful. However, the unintended consequence was the relative decline of U.S. position in the global economy. By 1970s, not only did most of Western European countries recover from the war, they also became major competitors of U.S. industries and products for world markets. These countries were also joined by NIEs such as Japan, South Korea, and Taiwan. For instance, although the value of world exports almost quadrupled from $129.6 billion in 1960 to $575 billion in 1973, the U.S. share declined steadily from 15.9% in 1960 to 12.4% in 1973.57 Another sign was the decline of U.S. export market share in technology-intensive products, which shrank from 28.3% in 1970 to 24.1% in 1980. (See Table 3) U.S. Congress attributed the decline to preferential and discriminatory trade practices.58 The United States started to run trade deficit in 1971. With only two exceptions in 1973 and 1975, the U.S. trade deficit has been growing exponentially.59 In response to these problems, Congress enacted the Trade Act of 1974, and the 1974 version of section 301 was subsequently born against this background.

Table 3: Export Market Share in Technology-Intensive Products (percent) Country 1970 1980 1990 United States 28.3 24.1 25.6 Japan 12 16.8 24.5 West 16 15.6 12.9 France 7 7.7 6.9 United Kingdom 9.5 10.8 8.3 Source: Organization for Economic Co-operation and Development (OECD), Science and Technology Indicators (Paris: OECD, 1986) in Robert L. Ostergard, Jr. The Development Dilemma: the Political Economy of Intellectual Property Rights in the International System (New York, NY: LFB Scholarly Publishing LLC, 2003).

The 1974 version of Section 301 was originated from Section 252 of the Trade Expansion Act of 1962, which allowed the president to retaliate countries that impose unreasonable and/or unjustifiable restrictions on U.S. imports by limiting imports from targeting countries.60 However,

57 Report of the Committee on Finance, U.S. Senate together with Additional Views on H.R. 10710, Ninety-third Congress, Second Session, (November 26, 1974): 5. 58 Ibid. 59 I. M. Destler. American Trade Politics, 4th ed. (Washington, DC: Institute for International Economics, 2005): 46. See also Table 2.2. 60 A. Lynne Puckett and William L. Reynolds. “Rules, Sanctions and Enforcement under Section 301: At Odds with the WTO?”, 676. 26 the president’s retaliatory authority under Section 252 was limited in both form and scope. Section 301 of the Trade Reform Act of 1974 (hereinafter, the Trade Act of 1974, or the 1974 Act) substantially broadened that authority. The purpose was to assure a swift and certain response to foreign “unreasonable” or “unjustifiable” import restrictions, export subsidies, and price discrimination (dumping) and other forms of unfair foreign trade practices. The 1974 Act also provided the president with the authority to retaliate countries which maintained such restrictions against U.S. services as well as trade in goods. Discrimination against U.S. services included but was not limited to shipping, aviation, and insurance industries. Additionally, the 1974 Section 301 allowed for the first time the retaliatory actions against both foreign merchandise and services. In short, Section 301 authorized the president to suspend concessionary treatment for, and to impose duties or other import restrictions on, imports of any foreign country that maintained unjustifiable or unreasonable trade practices including import restrictions, discriminatory or other acts or policies, or subsidies on exports to third countries which burden or discriminate against U.S. exports.61 Although the 1974 Section 301 did not have a specific time frame to force a decision on unfair foreign trade practices, it did provide a complaint procedure whereby interested parties can petition the Special Representative to conduct a review with public hearings on such alleged practices and policies. The 1974 Section 301 required the Special Representative to report to Congress semiannually concerning the status of such reviews. However, the final decision was at the president’s discretion. If he decided to take actions against unfair foreign trade practices, a public hearing would be required for any interested person prior to the taking of the action.

The 1979 Amendments In order to implement the results of the Tokyo Round of multilateral trade negotiations under the GATT framework, Congress passed the Trade Agreement Act in 1979 (hereinafter the Trade Act of 1979). The Trade Act of 1979 moderately amended Section 301 of the Trade Act of 1974. Principally, it established specific time limits on the handling of petitions, investigations and the final settlement process. The 1979 Section 301 amendment reflect the dissatisfaction at least from Congress with the way the president had used this remedial procedure. The feeling

61 Trade Reform Act of 1974, Section 301, Public Law No. 93-618, (January 3, 1975). 27 was that the president had been too soft on foreign unfair trade practices.62 In fact, since its inception, the Section 301 procedure had never been effectively used. Specifically, the 1979 amendment required the following. With regard to cases petitioned by private industries, the Special Representative would have 45 days after the date upon the receipt of a petition to review the allegations, and to determine whether the case should proceed to an investigation. If an affirmative decision is made, an opportunity for presentation of views including a public hearings must be provided with 30 days (or a timely date agreed by petitioners) after the date of the determination. Also, the Special Representative should request consultations with the foreign government concerned regarding the raised issues. The Special Representative would have no more than 12 months since the initiation of investigations to make recommendation to the president what action, if any, he should take under Section 301 with regard to the issues raised in the petition. Upon receipt of the Special Representative’s recommendations, the president would have up to 21 days to determine what action, if any, he would take.63

The 1984 Amendments The Trade and Tariff Act of 1984 (hereinafter the Trade Act of 1984 or the 1984 Act) made several important amendments to the 1974 Section 301. First, it enormously broadened the areas where Section 301 could cover by placing service and investment under Section 301 surveillance. Second, the 1984 Act made procedural changes in section 301 to strengthen the authority of the USTR.64 Third, it expanded the president’s retaliatory power, in which he could literally pick any goods or sectors to retaliate a foreign country that restricted U.S. export. Fourth, the 1984 Act transferred the authority of self-initiation of investigations from the president to the U.S. Trade Representative. The Act also enhanced the USTR’s authority to enter into consultations and negotiations with the foreign country or even impose duties. The most important change was that the 1984 Act made it explicit that services and foreign direct investment would be covered by Section 301. For instance, Section 307 of the 1984 Act specified that the term “international trade” includes trade in both goods and services, and

62 Patrick Low. Trading Free: the GATT and U.S. Trade Policy (New York: The Twentieth Century Fund Press, 1993): 59. 63 Trade Agreements Act of 1979, S. 1376: A Bill to Approve and Implement the Trade Agreements Negotiated under the Trade Act of 1974, and for Other Purposes, section 901. 64 The Special Representative for Trade Negotiations was renamed the Office of the United States Trade Representative by the Reorganization Plan No.3 of 1979and Executive Order 12188 of 1980. 28 foreign direct investment by U.S. citizens or entities, “especially if such investment has implications for trade in goods and services.”65 In addition, the Trade Act of 1984 slightly modified Section 301 initiation procedures. With regard to self-initiated cases, Section 302 (c) (2) requires the U.S. Trade Representative to consult with relevant committees before initiate Section 301 investigations. Section 302 (b) allows for up to 90 days of delay of request for consultations by the USTR for the purpose of verifying and improving the petition to ensure adequate basis for consultations. The most important change of the Trade and Tariff Act of 1984 came from the establishment of National Trade Estimates (NTE) reports. The NTE requires the U.S. Trade Representative on an annual basis to identify and analyze foreign acts, policies, or practices that constitute significant barriers or distortions to the U.S. exports of goods and services (including agricultural and intellectual property protected products) and foreign direct investment. The USTR shall also estimate the impact of such acts, policies, or practices on U.S. commerce. Additionally, the USTR must submit the NTE report including the information with respect to actions being taken (to eliminate unfair foreign trade practices mentioned in the NTE) each year to the Finance Committee of the Senate and the Committee on Ways and Means of the House. The purpose of the NTE is to set priorities for future bilateral or multilateral trade negotiations, and to encourage the executive branch to initiate more section 301 investigations.66 The significance of the 1984 Section 301 for the protection of U.S. intellectual properties was that it made it straightforward for the first time that failure to protect intellectual property rights was actionable under Section 301 and could face possible retaliations. This was the first time that the U.S. government was authorized to take retaliatory actions against foreign countries for not adequately and effectively protecting U.S. intellectual properties. Private companies or trade associations could file formal complaints with the USTR for investigations. The USTR might also initiate investigations on its own will against international offenders of IP.

The 1988 Amendments In the summer of 1988, Congress passed, and President Reagan signed into law the Omnibus Trade and Competitiveness Act (hereinafter the Trade Act of 1988, or the 1988 Act).

65 Trade and Tariff Act of 1984, Section 308 (a). 66 Thomas O. Bayard and Kimberly Ann Elliott. Reciprocity and Retaliation in U.S. Trade Policy (Washington, DC: Institute for International Economics, 1994): 29. 29

The Trade Act of 1988 made several important changes to Section 301, which helped create the modern version of Section 301. One of the most significant changes was that the 1988 Act transferred Section 301 authorities from the president to the U.S. Trade Representative. These authorities include determination based on prior investigations and consultations with foreign government on whether foreign acts, policies, or practices were actionable under Section 301 (i.e. unjustifiable, unreasonable, or discriminatory); and implementation of actions the USTR deemed appropriate to eliminate unfair foreign trade practices including authorization for retaliation; and monitoring foreign compliance.67 However, the president still controls the timing and content of retaliatory measures.68 The other important change was that the 1988 Act specified under what conditions retaliation would be mandatory. Section 1301 (a) of the Trade Act of 1988 provided that the U.S. Trade Representative must take actions if it determines that an act, policy, or practice of a foreign country violates or is inconsistent with a trade agreement involving the United States which denies U.S. rights or benefits, or the act, policy, or practice of that foreign country is unjustifiable which burdens or restricts U.S. commerce.69 A trade agreement could be either a multilateral trade agreement under GATT, or regional trade agreement, such as North America Free Trade Agreement (NAFTA). It could also be any bilateral trade agreement the United States signed with its trade partners. The Trade Act of 1988 authorized the USTR to suspend, withdraw, or prevent the application of benefits of trade agreement concessions. The USTR was also allowed to impose duties or other import restrictions on goods of a foreign country; or enter into binding agreements with such foreign country to eliminate or phase out the act, policy, or practice that is the subject of the action taken by the USTR. Mandatory retaliation is waived if 1) the GATT dispute settlement panel rules that the U.S. rights or benefits is not being denied, or the foreign trade practice is not violating or inconsistent with the U.S. rights; 2) the USTR finds that the foreign country is making satisfactory progress, or agrees to eliminate or phase out the unfair

67 Omnibus Trade and Competitiveness Act of 1988, Public Law No. 100-418. 68 Edward S. Kaplan. American Trade Policy, 1923-1995. (Westport, CT: Greenwood Press, 1996): 116. 69 The Trade Act of 1988. 30 trade practice; 3) the foreign country agrees to provide compensation; and 4) retaliation would seriously endangers the U.S. national security.70 The Trade Act of 1988 also reduced the maximum time limits by which the USTR must decide on and take action following an investigation. The USTR would have no more than 150 days after the date on which it enters into consultations with the foreign government to request proceedings on the issue concerned under the formal dispute settlement procedures provided under GATT, or a relevant regional or bilateral trade agreement. The maximum time limit for determination based upon investigations and consultations is 18 months for cases involving a trade agreement (excluding agreements on subsidies and countervailing measures), and 12 months in cases not involving a trade agreement. For cases where formal dispute settlement procedures were involved, the time limit is 30 days following the conclusion of the dispute settlement procedure. After determining what action to take after investigation and consultation, the USTR must implement such action within 30 days.71 Making 301 “Super” It is also worth noting that in addition to the amendments mentioned above, Section 1302 of the Trade Act of 1988, more famously known as “Super 301” required the USTR in 1989 and 1990 to identify priorities in removing hurdles to U.S. trade, including priority unfair trade practices and priority foreign countries implementing those practices. Priority practices consist of major trade barriers and trade distorting practices. Their elimination could presumably increase U.S. exports significantly. As soon as the priority practices and foreign countries are identified, the USTR must also initiate Section 301 procedures against the priority foreign countries identified. Making 301 “Special” With respect to intellectual properties, the most important change from the 1988 Act is Section 1303, or the so-called “Special 301”. The purpose of creating Special 301 is to develop a more effective strategy to ensure that U.S. intellectual properties are adequately protected by its trading partners and in the meanwhile to keep foreign markets accessible to U.S. corporations relying on adequate IP protections.72 Similar to Super 301, Special 301 also requires the U.S. Trade Representative to identify each year countries that deny adequate protection of intellectual

70 Omnibus Trade and competitiveness Act of 1988, section 1301 (a). 71 Omnibus Trade and Competitiveness Act of 1988, section 1301. 72 Omnibus Trade and Competitiveness Act of 1988, section 1303 (a). 31 properties, or market access, and invoke Section 301 procedures against such countries.73 Countries designated by the USTR as priority foreign countries could suffer U.S. retaliations. Priority foreign countries are those whose acts, policies or practices are the most onerous and egregious and have greatest adverse impact on relevant U.S. products, and that have not entered into, or are not making significant progress in negotiations to provide adequate and effective IPR protection.74 Countries not designated as “priority foreign countries” may be placed on “priority watch” or “watch” lists if their intellectual property laws or enforcement practices are of major concerns to the United States. Countries on “priority watch list” are those that provide insufficient IPR protections but are not subject to investigation and retaliation if possible, under a specific deadline. Countries on “watch list” are those that lack adequate IPR protections but have been making substantial progress in ongoing talks with the USTR.75 Recent major revisions of Section 301 since the Uruguay Round have been 1) to urge the administration to continuing aggressive use of Section 301 in areas not covered or weakly covered by Uruguay Round agreements and lately the WTO; and 2) to bring the Section 301 time limits into compliance with the new WTO dispute settlement system.76

Section 301 Procedures Section 301 procedures start with a formal petition by an affected industry or a self- initiation by the USTR. Any affected parties including businesses, individuals, exporters of U.S. merchandise, and industrial users of affected products could file a Section 301 case with the USTR. The USTR has 45 days to decide whether or not to initiate investigations. The actual process however, usually starts before a formal petition is filed with an informal meeting between representatives of the USTR, representatives of the petitioning industry, and their lawyers.77 If the USTR decides to take the case, it also needs to initiate consultations with foreign government(s) involved in the dispute on the day of investigation. The main purpose of

73 The major difference between Special 301 and Super 301 is that Special 301 is a permanent law with no expiration date. 74 Omnibus Trade and Competitiveness Act of 1988, section 1303 (a). 75 Andrew Mertha, The Politics of Piracy: Intellectual Property in Contemporary China. (Ithaca, NY: Cornell University Press, 2005): 41. 76 Mastel, 1996: 18. 77 Ryan, Playing By the Rules, (Washington, DC: Georgetown University Press, 1995): 37. 32 consultations is preferably to settle the dispute without going further into the Section 301 procedures. However, the USTR is allowed to postpone consultations up to 90 days in certain circumstances. The USTR must also publish its determination for investigation or reasons not to initiate an investigation on the Federal Register. In addition, an opportunity for public comments must be available, and public hearing(s) shall be held if requested. If the case incurs an alleged violation of a trade agreement, the USTR must follow the dispute settlement procedures provided by that trade agreement. Once the investigation is concluded, the USTR shall decide whether retaliatory measures are needed. If it does, the details of the retaliatory measure must be made public. Retaliatory measures usually fall into one of the following categories – the USTR may decided either 1) terminate, suspend, or withdraw concessions the U.S. made in a trade agreement; or 2) impose punitive duties and restrictions on foreign goods and/or services. Retaliation is mandatory when a foreign unfair trade practice is unjustifiable. In other words, the practice in question has violated a trade agreement that was signed between that country and the United States. Unjustifiable trade practices include denial of national treatment to U.S. goods and services, denial of the right to establish U.S. enterprises, and denial of the protection of U.S. intellectual property rights. The mandatory retaliation may be waived if any of the following conditions is met: 1) the WTO dispute settlement system ruling has found that foreign trade practice does not violate U.S. rights; 2) the USTR determines that the foreign country is taking satisfactory measures to conform with the trade agreement; 3) the foreign country has agreed to eliminate or phase out the unfair trade act, policy, or practice; or the foreign country has agreed to take a satisfactory solution; 4) the foreign country has agreed to offer compensation; 5) the USTR finds that the U.S. retaliation would adversely impact U.S. economy; and 6) the retaliation would severely imperil U.S. national security. Retaliation becomes discretionary if the foreign practice is unreasonable or discriminatory. Unreasonable foreign acts, policy, or practices include denial of fair and equitable opportunities to establish U.S. enterprises, denial of adequate protection of IPRs, denial of fair and equitable market opportunities, export targeting, and denial of workers rights. When a retaliation decision is made, the USTR shall prepare and publish a retaliation list for public comment. A final retaliatory action is decided based on public comments. Within 30 days, the USTR must implement its retaliatory measures. However, if one of the following two

33 conditions is met, the USTR may decide to defer the actual implementation for up to 180 days. These conditions are: 1) petitioner(s) have asked for the postponement; 2) the USTR is determined that substantive improvement in targeting country is taking place, or postponement is necessary and feasible to protect U.S. rights and interests. Section 301 retaliatory action automatically terminates after four years since its inception unless petitioner or other representatives from that industry request for renewal. According to year 2000 amendment to Section 301 provisions, in cases a foreign country has failed to comply with the WTO dispute settlement rulings, the USTR is required to review and revise retaliation list if necessary after 120 days of initiation of retaliation, and 180 days thereafter.78

Special 301 Procedures Special 301 procedures begin with the release of National Trade Estimate report each year. The USTR is required to submit NTE report to the president and Congress each year by no later than March 31. The NTE lists major foreign trade barriers, the impact of those trade barriers to U.S. commerce, and measures the U.S. has taken to eliminate them. One of the most important sections in NTE reports is the discussion of infringements of U.S. intellectual properties in foreign countries and market access barriers pertaining to IPR violations. According to Special 301 provisions, within 30 days of the release of NTE, the USTR must identify “priority foreign countries”, as well as priority watch countries, and watch countries.79 Investigations of priority foreign countries must be initiated within 30 days the priority foreign countries are identified. Unlike regular Section 301, Special 301 investigations are self- initiated by the USTR. Consultations with foreign governments are also required, which start from initial investigations and may continue even after decision for retaliation is made. Special 301 investigations usually conclude within six months. The USTR makes decisions on whether or not to retaliate at the end of investigations. Decisions of retaliation may also be extended but no longer than three months. When cases involve TRIPS Agreement with another WTO member, the USTR shall make decisions within 30 days since the release of WTO dispute settlement system rulings, or 18 months since the initiation of investigation.

78 Jean Heilman Grier. “Section 301 of the 1974 Trade Act,” The Office of the Chief Counsel for International Commerce, U.S. Department of Commerce. (March 2005, http://www.osec.doc.gov/ogc/occic/301.html, accessed on April 4, 2008). 79 For a list of priority foreign countries between the inception of Special 301 in 1989 and the formation of the World Trade Organization in 1995, see Table 4. 34

As soon as a case is settled, the USTR needs also to monitor the implementation of the settlement agreement by the foreign government. If the USTR finds that the foreign country does not comply with commitments it made to the United States fully or in part, it may directly impose Special 301 retaliation without going through the Special 301 procedures.80

Table 4: Special 301 Priority Foreign Countries, 1989-1995 Year 1989 1990 1991 1992 1993 1994 1995 Priority None None India India India Foreign China Thailand Thailand China Country Thailand Taiwan Brazil Priority Brazil Brazil Brazil Brazil Argentina Japan Brazil Watch Indian India Australia Australia Taiwan Thailand India List Mexico China EC EC Australia EU EU China Thailand South EC South Greece Korea Korea South Korea Saudi Saudi Egypt Korea Arabia Hungary Saudi Arabia Japan Taiwan Philippines Arabia South Thailand Egypt Korea Hungary Turkey Poland Turkey Source: Greg Mastel, American Trade Laws after the Uruguay Round. (Armonk, NY: M.E. Sharpe, 1996): 44-45.

Section 301 and the USTR The Office of the United States Trade Representative is the administrator of Section 301. Section 301 requires that the USTR must take actions in any of the following two circumstances. One is the violation of a trade agreement by a foreign country that causes loss to the United States. The other is unfair foreign trade practice. However, the USTR may take action if it judges that an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts U.S. commerce. The foreign discriminatory act, policy, or practice refers to actions that deny the equal opportunity of the U.S. merchandise, service, and investment into the host country, and those that deny national or most-favor-nation (MFN) treatment of the U.S. goods and services.

80 Ibid. 35

Concerning intellectual properties, in addition to conducting Special 301 investigations, the USTR is also responsible for compiling and publishing annual Special 301 Report. This report discloses actions the USTR have taken during the previous year, and the lists of Priority Foreign Countries, Priority Watch Countries, and Watch Countries. The countries on these lists are those that deny adequate and effective protection of intellectual property rights, or deny the free and fair access of their markets by Americans who rely on protections of intellectual properties. Since the passage of the Uruguay Round Agreements Act of 1994, the Special 301 Report shall also include actions taken by the USTR with regard to TRIPS Agreement. Additionally, portions of the NTE Report on Foreign Trade Barriers also cover issues foreign infringement of U.S. intellectual properties. The NTE Report as noted above, surveys significant foreign trade barriers to U.S. exports. The report provides, where feasible, quantitative estimates of the impact of these foreign practices on the value of U.S. exports. It also includes actions that have been taken to eliminate those barriers. The USTR was originated from the Trade Expansion Act of 1962, in which Congress established the position of Special Representative for Trade Negotiations. One of the goals for such a position was to transfer the jurisdiction of trade policy from the State Department to the direct control of the president, and in the meanwhile keep Congress within the trade policymaking circle.81 To follow such a tradition, the USTR maintains close ties with Congress, although it is a government agency under the executive branch. A former trade negotiator even considered the USTR an extension of Congress. “[T]he USTR essentially puts the Congress inside the Cabinet,” he said.82 Each year USTR officials and staff join hundreds of congressional conversations on trade-related subjects. Moreover, the USTR provides detailed briefings to the Congressional Oversight Group, an organization made up by members from a wide range of congressional committees on a regular basis. The USTR is composed of five categories of offices: bilateral negotiations, multilateral negotiations, sectorial activities, analysis, legal affairs and policy coordination, and public outreach. Offices responsible for bilateral negotiations are structured according to regions: Americas, Europe and the Mediterranean, North Asia, South Asia, Southeast Asian and the Pacific, and Africa. Staff on multilateral negations is responsible for WTO and any issues related

81 Susan C. Schwab, Trade-Offs: Negotiating the Omnibus Trade and Competitiveness Act. (Boston, MA: Harvard Business School Press, 1994): 37. 82 Quotes from an interview conducted by Mertha: 53. 36 to multilateral affairs, Generalized System of Preferences (GSP) and the United Nations Conference on Trade and Development (UNCTAD). Sectorial offices include: agriculture, services, investment, intellectual property, manufacturing and industrial affairs, government procurement, environment, and labor. Analysis, legal affairs and policy coordination includes offices of General Counsel, Economic Affairs, and Policy Development and Coordination. Finally, the Public Outreach staff is responsible for congressional affairs, public/media affairs, and intergovernmental affairs and public liaison. In addition, the USTR must consult with a group of advisory committees from the private sector when negotiating trade agreements. Congress in 1974 established the system of private sector advisory committees in order to guarantee that U.S. commercial and economic interests are adequately reflected in trade policies and trade negotiations objectives. The role of these advisory committees was enhanced by subsequent trade legislations since 1974. These advisory committees provide information and recommendations with regard to negotiating objectives and bargaining positions for negotiations of trade agreements, operations of existing trade agreements, and issues associated with the development, implementation, and administration of U.S. trade policy. There are currently 26 of such committees and staffed by up to 700 advisors. These committees are structured along three tiers: the President’s Advisory Committee for Trade Policy and Negotiations (ACTPN); four policy advisory committees; and 22 technical and sectorial advisory committees.83

CHAPTER SUMMARY America has a long tradition of active protection of intellectual properties. This is because core American industries such as information technologies, computer software, pharmaceuticals, and entertainment, which representing America’s economic supremacy and soft power have increasingly relied upon effective protection of intellectual properties. In late 1970s, representatives of the IP-intensive industries began to demand Congress to take actions against the growing problem of copyright piracy overseas. In response, Congress recycled Section 252 of Trade Expansion Act of 1962 and made it a much more powerful and renamed it Section 301 in the Trade Reform Act of 1974.

83 USTR. “Mission of the USTR,” USTR.(http://www.ustr.gov/Who_We_Are/Mission_of_the_USTR.html, accessed April 2, 2008). 37

However, it was not until 1984 when the Trade and Tariff Act of 1984 made it straightforward that failure to protect intellectual property rights was actionable under Section 301 provisions with the threat of retaliation. In the meantime, the U.S. industries were also pushing for a more stringent international IPR standard by linking IPR protections with trade. As the multilateral approach to promote foreign IPR protections stalled, Congress amended Section 301 for the third time. The Omnibus Trade and Competiveness Act of 1988 ultimately created two derivatives of Section 301, “Super 301” and “Special 301” (which covers foreign IPR violations). The Office of the United States Trade Representative is the administrator of Section 301. Section 301 and its derivatives bestow the USTR important power to self-initiate cases against countries violating U.S. rights and interests and the power to retaliate if it deems retaliatory actions are necessary. It also represents the United States in bilateral and multilateral trade negotiations. Therefore the USTR plays a crucial role in defending the U.S. interests in trade. Although the USTR is a government agency under the executive branch, it maintains closer ties with Congress, and it works and coordinates with a wide variety of other government agencies. In the next chapter, I examine the trade-related aspects of international IPR regime under the World Trade Organization. In particular, Chapter 3 looks at how the United States may use the WTO’s dispute settlement system against countries that are engaged in infringement of American intellectual properties.

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Chapter 3 Enforcing Intellectual Property Rights at the WTO

INTRODUCTION This chapter examines the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (more commonly known as the TRIPS Agreement), and the institution helps enforce the TRIPS Agreement—the WTO’s dispute settlement system. The purpose of reviewing the WTO’s IPR system is that since China joined the WTO, the pursuit of the China’s infringement of American intellectual properties must be conducted in a way that is consistent with the WTO rules and procedures. One of the most important contributions of the TRIPS Agreement is that it sets the minimum acceptable trade-related intellectual property protection standards for members of the WTO. It requires member countries to bring their IPR laws to be in conformity with the TRIPS Agreement. It also specifies enforcement, remedies, and dispute resolution procedures. The WTO’s dispute settlement mechanism makes TRIPS no longer like its predecessor that effective enforcement was simply not exist. That means the WTO has provided an important and crucial venue for the U.S. to challenge China’s IP infringement. However, one should be mindful that the WTO cannot guarantee U.S. success, not only because the TRIPS Agreement is not perfect, but if the case is poorly prepared, the WTO dispute settlement could even fail the U.S. The remainder of this chapter is divided into three sections. The first section describes the TRIPS Agreement in details including its origins and the content of the Agreement. The next section reviews the WTO’s dispute settlement mechanism, and the dispute settlement procedures. The last section presents an analysis about how the U.S. performed at the WTO dispute settlement procedures with regard to the TRIPS-related cases it had involved.

THE TRIPS AGREEMENT The TRIPS Agreement requires WTO members to adopt policies that provide at least minimum protection of intellectual property rights. The Agreement also contains provisions dealing with procedures and remedies for the enforcement of intellectual property rights. In addition, the TRIPS Agreement makes disputes over intellectual properties subject to the WTO’s dispute settlement procedures.

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What Are Intellectual Property Rights? In short, intellectual property is “information with commercial value.”84 Primo Braga defines intellectual property rights as “a composite of ideas, inventions, and creative expressions and the public willingness to bestow the status of property on them.”85 The WTO has divided intellectual property rights into two broader areas—copyright and rights related to copyright; and . Copyright protects “[t]he rights of authors of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films)… for a minimum period of 50 years after the death of the author.”86 Copyright also covers the rights of performers, such as singers, actors, and musicians, phonograms producers, and broadcasting organizations. Industrial property consists of trademarks (as well as service marks) and patents. Maskus defines as “a symbol or other identifier that conveys information to the consumer about the product.”87 Trademark is the protection of distinctive signs which identify a product, company or service. If consumers believe that the mark is a reliable indicator of desirable characteristics of a good or service, they would be willing to pay a premium for the good or service. Related to trademarks is geographic indications, “which identify a good as originating in a place where a given characteristic of the good is essentially attributable to its geographical origin”.88 Other types of industrial property include primarily patents, but also industrial designs and trade secrets. According to Mertha, “[p]atents provide inventors with the right of exclusion from the use, production, sales, or import of the product or technology in question for a specified

84 Charan Devereaux, Robert Z. Lawrence, and Michael D. Watkins. Chapter 3: Trade-Related Aspects of Intellectual Property Rights. Case Studies in US Trade Negotiation, Vol. 1: Making the Rules. (Washington, DC: Institute for International Economics, 2006): 43. For the analysis on the impact of intellectual property rights on economic development, see Carsten Fink and Keith E. Mauskus (eds) Intellectual Property and Development: Lessons from Recent Economic Research. (Washington, DC: World Bank, 2005). 85 Carlos A. Primo Braga. Chapter 12: Trade-Related Intellectual Property Issue: The Uruguay Round Agreement and Its Economic Implications. The Uruguay Round and the Developing Economies. Will Martin, and L. Alan Winters eds, (Washington, DC: World Bank, 1995), 382. 86 WTO, “What are intellectual property rights?” accessed January 15, 2009, http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm. 87 Keith E. Maskus. Intellectual Property Rights in the Global Economy. (Washington, DC: Institute for International Economics, 2000): 47. 88 Ibid. 40 period of time”.89 Protection of these types of industrial properties is to “stimulate innovation, design and the creation of technology.”90 According to Hoekman and Kostecki, a number of factors have transformed the global IP problem into a trade issue.91 The first is the substantial increase of international trade in IP- intensive goods. In the meanwhile, technologies for pirating and counterfeiting were widely available at much cheaper cost. For example, the birth of VCRs (video cassette recorder) and sound recorders paved the way for the piracy of copyrighted sound recordings and films. Second, exporting countries of IP-intensive products (mostly industrialized countries) have increasingly perceived that inadequate protection of IPRs in importing countries (mostly developing countries) unfairly countervailed their competitive advantages. The absence of an effective global enforcement mechanism of IP and the widespread IP infringement in developing nations urged businesses primarily in developed nations to mobilize their governments to place the intellectual property issue on the agenda of multilateral trade negotiations.

Pre-TRIPS International IPR Regime The international legal and institutional framework for IP protections existed before the TRIPS Agreement was mainly composed of international treaties administered by the World Intellectual Property Organization (WIPO). The WIPO was established in 1967, and joined the United Nations (UN) system and became one of fifteen UN agencies in 1974. Its major responsibility is the promotion of worldwide intellectual property protections through cooperation among member states and collaboration with other international organizations.92 The other major function of the WIPO is assisting developing countries and least developed countries in drafting their IPR laws, and it also provides financial and technical support for that purpose. The WIPO before the TRIPS Agreement administered most of multilateral treaties on intellectual property, among which two have been the most important—the Paris Convention for the Protection of Industrial Property (1883), and the for the Protection of Literary and Artistic Work (1886). The latest amendments to these two treaties were completed

89 Mertha: 17. 90 WTO, ibid. 91 Bernard M. Hoekman and Michel M. Kostecki. The Political Economy of the World Trading System 2nd ed (Oxford, UK: Oxford University Press, 2001): 277-279. 92 WIPO. “What Is WIPO?” (WIPO), http://www.wipo.int/about-wipo/en/what_is_wipo.html (accessed March 22, 2008). 41 in 1967 and 1971, respectively. The Paris Convention is the major international law that covers issues mostly related to patents, trademarks, industrial designs, and trade names. The most important aspect about the Convention is the national treatment principle. Article II (1) provides that “Nationals of any country of the Union shall, as regards the protection of industrial property, enjoy in all the other countries of the Union the advantages that their respective laws now grant, or may hereafter grant to nationals.”93 In addition, Article II (1) also provides that nationals of other member countries shall bear “the same legal remedy against any infringement of their rights, provided that the conditions and formalities imposed upon nationals are complied with.”94 The other important aspect of the Convention is that it sets some minimum standards with regard to protections of patents and trademarks. For instance, in Article IV it says if a patent or trademark is filed in one member country, nothing which occurs within a 12-month period that runs from the first filing will affect the right to a patent or trademark in other member countries. With regard to trademarks and trade names, the Convention requires its member countries to accept a trademark or for registration and fully protection if the trademark or trade name is legally registered in the country of origin. Article IX requests members to seize, upon importation, all goods bearing unlawful trademarks or trade names entitled to legal protection in the importing country. The other important WIPO administered IPR treaty is the Berne Convention. The Convention governs copyright related issues, and it also sets minimum standards of protection. Article 2 of the Convention defines the scope of “literary and artistic works. It articulates that these literary and artistic works “enjoy protection in all countries of the Union”.95 National treatment is also a major theme in the Berne Convention. For example, Article 5 states, “[W]hen the author is not a national of the country of origin of the work for which he is protected under this Convention, he shall enjoy in that country the same rights as national authors.” However, Article 5 also stipulates that “the extent of protection, as well as the means of redress afforded to the author to protection his rights, shall be governed exclusively by the laws of the country where protection is claimed.” Article 7 provides that the minimum length of protection is the author’s life plus fifty years. During the period of protection, the author has exclusive right to

93 Paris Convention for the Protection of Industrial Property, (WIPO), http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html#P77_5133 (accessed March 22, 2008). 94 Ibid. 95 Berne Convention for the Protection of Literary and Artistic Works, (WIPO), http://www.wipo.int/treaties/en/ip/berne/trtdocs_wo001.html (accessed May 27, 2008). 42 authorize reproduction or communication of the work(s) he/she created. In Article 13, the exclusive rights of authors are restrained by national governments which have the discretion to determine under which conditions such rights can be exercised. In addition, Article 17 provides that “[t]he provisions of this Convention cannot in any way affect the right of the Government of each country of the Union to permit, to control, or to prohibit, by legislation or regulation, the circulation, presentation, or exhibition of any work or production in regard to which the competent authority may find it necessary to exercise that right.” There are other WIPO administered treaties. For example, the Rome Convention for the Protection of Performers, Producers of Phonogram and Broadcasting Organizations, signed in 1961, provides national treatment to performers, producers of phonograms, and broadcasters; the Hague Agreement Concerning the International Deposit of Industrial Designs, signed in 1925, amended through the years, allows nationals of any contracting countries to obtain protections for the industrial designs in all contracting countries by depositing their designs in WIPO’s International Bureau; and the Madrid Agreement Concerning the International Registration of Marks, signed in 1891 and amended several times, provides nationals of any contracting parties with trademark protections in all contracting parties by filing their marks with WIPO’s International Bureau. Critics of the WIPO and its administered treaties contended that the system was incapable and toothless. Policymakers and business leaders of industrialized countries complained that international IPR conventions under the WIPO umbrella, particularly, the Paris Convention and the Berne Convention paid too much attention to national treatment but failed to provide appropriate and consistent level of minimum standards for protections of patents and copyrights.96 For example, in patent area countries might grant patents for as short as five years without violating any international conventions. The biggest complaint about the national treatment principle without adequate minimum standards is that “a member state may offer no patent protection for certain product groups, provided that the absence of protection applies equally to nationals and non-nationals.”97 In fact, this was the strategy widely used among

96 Michael P. Ryan. Knowledge Diplomacy: Global Competition and the Politics of Intellectual Property. (Washington, DC: Brookings Institution Press, 1998): 104. 97 William Lesser. “An Overview of Intellectual Property Systems,” in Wolfgang E. Siebeck (ed.) Strengthening Protection of Intellectual Property in Developing Countries: A Survey of the Literature. (Washington, DC: World Bank, 1990): 11. See also USTR. “Administration Statement of the Protection of U.S. Intellectual Property Rights Abroad,” (April 7, 1986): 3. 43 developing countries in the cases of pharmaceutical, chemical and biotechnical industries before TRIPS. It allows countries to exempt from protection products where they have no comparative advantage in technological development and innovation. The other major problem was that the WIPO treaties lacked detailed rules on enforcement to be carried out by national governments.98 Maskus notes that the WIPO system was “largely incapable of disciplining even the most egregious forms of trademark and ”.99Apart from technical flaws were institutional ones. For example, the WIPO does not have a court-like mechanism of dispute resolution to settle IPR disputes arose between members. Kenneth Dam, the Vice President of IBM complained, “[the WIPO] conventions were never intended to be used as enforcement mechanism for bilateral disputes and thus have no dispute settlement provisions.”100 In addition, the system was rigid in rapidly and flexibly renegotiating the existing conventions to meet the demands of emerging of new technologies, such as computer software, integrated circuits, and electronic database. The General Agreement on Tariffs and Trade (GATT) also played a role in the pre- TRIPS era, though it was much smaller compared with its successor – the WTO. That is exactly the reason why developed countries insisted that intellectual properties must be an integral part of the new world trading system. Only a handful of provisions in GATT asked contracting parties to pay attention to certain aspects of IP protections. For example, Section 6 of Article IX said that “contracting parties shall co-operate with each other with a view to preventing the use of trade names in such manner as to misrepresent the true origin of a product, to the detriment of such distinctive regional or geographical names of products of the territory of a contracting party as are protected by its legislation.”101 Section (d) of Article XX provided that contracting parties are allowed to take measures “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to…the protection of patents, trade marks and copyrights, and the prevention of deceptive practices.”102

98 Matthews: 11. 99 Keith Maskus. “Intellectual Property,” in Jeffrey J. Schott (ed) In Completing the Uruguay Round: A Result- Oriented Approach to the GATT Trade Negotiations. (Washington, DC: Institute for International Economics, 1990):168. 100 Kenneth W. Dam. Statement of Kenneth W. Dam, Vice President, Law and External Relations, IBM Corp., Armonk, NY, Representing the Intellectual Property Committee, The Committee on Finance, United States Senate, July 23, 1986. 101 WTO. “The General Agreement on Tariffs and Trade (GATT 1947),” (WTO), http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleIX (accessed February 22, 2008). 102 Ibid. http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXX (accessed February 22, 2008). 44

Some analysts argue that Article III, National Treatment on Internal Taxation and Regulation could be associated with intellectual properties.103 For instance, Article III required contracting parties not to use internal measures to discriminate between domestic goods and those imported from other parties. This provision was more likely to affect the . Article XXII Consultation and XXIII Nullification and Impairment were applicable to IP related dispute settlement.

Content of the TRIPS Agreement To some extent, the new TRIPS Agreement is built on WIPO conventions, but it goes far beyond the WIPO. For one thing, the reach of TRIPS Agreement is broadened so that it covers the whole spectrum of intellectual properties. For another, it is the first time that members of the WTO are obligated to provide minimum protections to intellectual properties. In particular, the enforcement mechanism, requirement for transparency, and the dispute settlement procedures of the WTO have made important additions to the existing international IPR system under the WIPO. The TRIPS Agreement consists of seven parts: 1) general provisions and basic principles; 2) substantive standards on the protection of various forms of intellectual property rights; 3) domestic enforcement of intellectual property rights; 4) acquisition and maintenance of intellectual property rights and related inter-partes procedures; 5) dispute settlement; 6) transitional arrangements; and 7) institutional arrangements. General Provisions and Basic Principles: The TRIPS Agreement set minimum standards for the protections of intellectual properties. However, Article 1.1 provides that it is at the member’s discretion to implement laws for more extensive protection than required by the Agreement. Article 1.1 also provides that members have the authority to decide how to implement TRIPS Agreement provisions within their own legal system and practice. Article 1.3 requires Members to “accord the treatment provided for in the Agreement to the nationals of other Members,”104 provided that nationals in the Agreement are referred to natural or legal persons. Article 1.3 makes it clear that WTO

103 See Hartridge and Subramanian. “Intellectual Property Rights: the Issues in GATT,” Vanderbilt Journal of International Law 22 (1989), and Michael J. Trebilcock and Robert Howse, The Regulation of International Trade 3rd ed. (London: Routledge, 2005): 402. 104 Unless otherwise specified, quotations in this section are from the Agreement on Trade-Related Aspects of Intellectual Property Rights. 45 members are automatically members of the Paris Convention, the Berne Convention, the Rome Convention, and the Treaty on Intellectual Property in Respect of Integrated Circuits (also known as the Washington Treaty). Article 3 is about national treatment. Article 3.1 stipulates that each member shall grant treatment of nationals of other members with respect to intellectual property protections no less favorable than its own nationals. National treatment is subject to exceptions already provided in the Paris, Berne, and Rome Conventions and the Washington Treaty. Articles 3.2 further clarifies exceptions to national treatment that exceptions are only permitted when they are related to “judicial and administrative procedures… where such exceptions are necessary to secure compliance with laws and regulations which are not inconsistent with the provisions of this Agreement” and do not constitute a disguised restriction on trade. Article 4 sets out most-favored-nation measures. It requires that any advantage, favor, privilege or immunity with regard to intellectual property protections granted by a member to nationals of any other country must unconditionally and instantly be accorded to nationals of all other members. Exemptions are allowed for any advantage, favor, privilege or immunity derived from international agreements on judicial assistance or law enforcement of a general nature not confined to intellectual property protection; granted by the provisions of the Berne Convention or the Rome Convention; in order to protect rights of performers, producers of phonograms and broadcasting organizations not provided by TRIPS Agreement; and derived from previously enforced international agreements on the protection of intellectual properties given that such agreements do not constitute an arbitrary or unjustifiable discrimination against nationals of other members. Article 7 states that the objectives of the TRIPS Agreement are first, to promote technological innovation and the transfer and dissemination of technology; second, for “the mutual benefits of producers and users of technological knowledge;” third, for “social and economic welfare”; and finally, to “balance rights and obligations.” Article 8 shows the compromise made by developed countries to accommodate developing members. Article 8.1 articulates that members in formulating or amending their laws and regulations governing intellectual properties may take measures necessary to protect public health and nutrition, and to promote public interests in sectors of vital importance to their socio- economic and technological development. However, Article 8.1 leaves it open on what

46 constitutes such necessary measures. Similarly, Article 8.2 provides that appropriate measures may be needed to prevent of IPRs by rights holders or the resort to unreasonable practices which restrain trade or adversely affect the transfer of technology among nations. Again, it does not specify what constitute appropriate measures. Standards of Protection: A. Copyright and Because it was agreed during the Uruguay Round negotiations that the Berne Convention already provided substantial basic standards for copyright protection, TRIPS provisions on copyright take the Berne Convention as the point of departure. Article 9.1 states that members shall comply with Articles 1 through 21, as well as Appendix of the Berne Convention (1971). These provisions of the Berne Convention deal with such issues as “subject-matter to be protected, minimum term of protection, and rights to be conferred and permissible limitations to those rights.”105 However the TRIPS Agreement does not require members to comply with Article 6bis of that Convention in respect to moral rights, i.e. “the right to claim authorship and to object to any derogatory action in relation to a work, which would be prejudicial to the author’s honor or reputation.”106 Beyond traditional copyrights, the TRIPS Agreement extends protection of copyrights to computer software and programs. Article 10.1 requires that computer programs “shall be protected as literary works under the Berne Convention.” Article 10 also extends protection to compilations of data or other material which constitute intellectual creation. However, Article 10.2 specifies that such protection covers only intellectual creations instead of the data or material itself. Article 11 grants authors and their successors of literary and cinematographic works “the right to authorize or prohibit the commercial rental to the public” of their copyrighted works. Though, rental rights do not apply to computer programs “where the program itself is not the essential object of the rental.” In addition to computer programs, Article 14 provides protection to performers, producers of phonograms (sound recordings) and broadcasting organizations. Article 14.2 provides that phonogram producers shall have the right to authorize or prevent the reproduction of their phonograms. In Article 14.3, broadcasting organizations shall have the right to authorize

105 WTO. “TRIPS: A More Detailed Overview of the TRIPS Agreement,” http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm (accessed April 22, 2008). 106 WTO: ibid. 47 or prevent the fixation, the reproduction of fixations, and the rebroadcasting of their programs. In addition, Article 14.4 requires that WTO members must grant producers of phonograms exclusive rental rights. B. Trademarks Trademarks are defined in Article 15 of the TRIPS Agreement, which are “[a]ny sign, or any combination of signs, capable of distinguishing the goods or services of one undertaking from those of other undertakings.” Such signs, according to Article 15.1, “in particular words including personal names, letters, numerals, figurative elements and combinations of colours as well as any combination of such signs,” are eligible for registration as trademarks. These are basic rules in TRIPS with regard to trademarks. Article 15.5 requires members to publish each trademark either before or quickly after the trademark is registered. Article 16 grants owners of a registered trademark the exclusive authority to prevent others “from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion.” The term of protection as specified in Article 18 is at least ten years for initial registration and renewal thereafter, and there should be no limit for renewals. In the course of trade, Article 20 stipulates that the use of trademarks shall not be burdened unjustifiably by special requirements which might be detrimental to the ability of distinguishing the good or services of one undertaking from other undertakings. C. Patents The area of patents contains largest modification of existing international conventions, in that WTO members shall comply with substantive standards of patent protection.107 Article 27 requires member countries to make patents available for any inventions, whether products or processes if they “involve inventive step and are capable of industrial application.” It prohibits discrimination of patent rights based on place of invention, field of technology, and whether the product is imported or domestically produced. However, the Agreement does allow exclusions under some conditions. Article 27.2 provides that patentability can be denied when it is “necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment”. Patent owners shall have exclusive rights to authorize or prevent third parties from making, using, offering for sale, or importing of

107 Trebilcock and Howse, 413. 48 their patented products or processes. They also enjoy the exclusive right “to assign, or transfer by succession, the patent and to conclude licensing contracts.”108 Article 31 deals with use of patents without authorization of the right holder, also known as compulsory licensing. Compulsory licensing refers to the arrangement usually in developing countries “requiring the patent holder to work the patent locally within a fixed period (normally two or three years) after the patent is granted or be subject to a under which the patent is licensed to a local business in return for reasonable royalty rates.”109 Most patent- reliant industries such as pharmaceuticals, chemicals, and biochemical strongly opposed the requirement of compulsory licensing provided by the Paris Convention. In TRIPS, compulsory licensing is allowed under certain conditions. Article 31 (a) requires compulsory licensing must be based on considerations of individual merits. In addition, unauthorized use of patents can only be permitted if the proposed user has made unsuccessful effort to obtain authorization from the right holder on reasonable commercial terms within a reasonable period of time before the actual use. However, this requirement can be waived “in case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.” Also, the right holder shall be paid adequate remuneration when compulsory licensing does occur, and Article 31(i) requires that the validity of use without authorization are subject to judicial review or other independent review. Finally, Article 33 specifies the term of patent protection to be at least twenty years. D. Other Forms of Intellectual Property Article 25.1 of the TRIPS Agreement obliges members to “provide for the protection of independently created industrial designs that are new or original.” The owner of a protected industrial design shall have the exclusive right to prevent third parties from “making, selling or importing articles bearing or embodying a design which is a copy, or substantially a copy of the protected design.” The protection term for industrial designs is no less than ten years. Related to regular industrial designs, Article 35 requires members to provide protection for the layout- designs (topographies) of integrated circuits in accordance with various articles in the Treaty on Intellectual Property in Respect of Integrated Circuits negotiated under the WIPO framework in 1989.

108 TRIPS Agreement, Article 28. 109 Matthews, 60. 49

Articles 22 through 24 deal with geographic indications. Geographic indications are defined in TRIPS Agreement Article 22.1 as “indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attribute to its geographical origin.” Accordingly, Article 22.2 provides that WTO members shall provide legal means for interested parties to prevent the abuse or misuse of a geographic indication for the good in question not originated in certain territory. The TRIPS Agreement also requires undisclosed information, such as trade secretes to be protected. Article 39.2 notes that natural and legal persons shall prevent disclosure of information acquired by or used by others without their consent. However, it also requires that such information must be secret and has commercial value. E. ENFORCEMENT OF INTELLECTUAL PROPERTY In order to address the failure of the Paris and Berne Conventions in enforcing WIPO- administered IPR treaties, a substantial amount of text of the TRIPS Agreement is dedicated to enforcement. The TRIPS provisions on enforcement attempts to accomplish two goals. The first is to ensure enforcement measures are available to “permit effective action against infringement”110 of IPRs covered by the Agreement. Such actions include prompt remedies to prevent as well as deter current and possible future infringement. The second goal is to ensure such actions are in a manner that would “avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.”111 However, Article 41.5 makes it clear that nothing in this part of the Agreement shall oblige members to put in place a judicial system purely for the enforcement of intellectual property laws that is distinct from that country’s overall judicial system. Article 42 requires WTO members to make civil judicial procedures available to right holders for any IPR issues covered by the Agreement. In order to effectively deter infringement, Article 46 stipulates that member countries’ judicial authorities shall, once found, order disposal of infringing goods outside of commercial channels without compensation of any sort to avoid causing harm to the right holders. Or if such a measure is in contradiction with existing constitutional requirements, infringing goods shall be destroyed. It also requires that in order to

110 Article 41.1 111 Ibid. 50 minimize the risk of future infringement, judicial authorities shall order disposal of materials and implements for the use of making infringing goods outside of commercial channels without compensation of any sort. With respect to counterfeit trademark goods, it requires that the simple removal of trademarks is not sufficient to permit the release of goods in question into commerce channels. Article 50 demands members’ judicial authorities to take prompt and effective provisional measures: 1) to prevent the entry into the channels of commerce of goods, including imported goods immediately after customs clearance in their jurisdiction; and 2) to preserve relevant evidence for the alleged infringement. Provisional measures are also required if any delay is possible to cause irreparable harm to the right holder. In regard to border measures, Article 51 requires member countries to adopt appropriate procedures to enable a right holder to file a written application with administrative or judicial authorities for the suspension of the release of infringing goods into free circulation by customs authorities. Also, members exporting infringing goods shall provide for corresponding procedures concerning the suspension of release of infringing goods by their customs authorities. Remedies to right holders are disposal or destruction of infringing goods. For counterfeit trademark goods, re-exportation of the infringing goods is not allowed if they are in unaltered condition. In addition to civil and administrative procedures, WTO members shall also make criminal procedures and penalties available at least to intentional counterfeiting or piracy for commercial purposes. According to Article 61, “Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity.” In addition to imprisonment and/or monetary fines, remedies in certain cases shall also include “the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence.” F. INSTITUTIONAL ARRANGEMENTS AND DISPUTE SETTLEMENT The TRIPS Agreement established the Council for Trade-Related Aspects of Intellectual Property Rights (the Council for TRIPS, or the TRIPS Council). This new institution is designed to monitor the operation of the Agreement and Members’ compliance with their obligations

51 under this Agreement. Upon request, it also provides assistance to Members on dispute settlement procedures. Article 63 is about transparency, which requires that any laws, regulations, final judicial decisions and administrative rulings of a member country that are related to the issues covered by the TRIPS Agreement must be published or publicly available, so that other member governments and right holders can have access to them. In addition, any in force agreements between one member government and the other concerning issues covered by the TRIPS Agreement shall also be published. Members shall notify any changes of their IPR laws and regulations to the Council for TRIPS. Upon request by another member, each member shall supply information on its IPR laws and regulations, final judicial decisions and administrative rulings. Should dispute regarding to trade-related IPR issues arise between WTO members, Article 65 advises that “the provisions of Article XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding shall apply to consultations and the settlement of disputes.”

Summary The TRIPS Agreement is one of the most important and celebrated achievements from the Uruguay Round of multilateral trade negotiations, which led to the creation of the World Trade Organization. Industrialized countries, particularly the United States, were successful to make protections of intellectual properties a trade issue. The Agreement was built upon existing treaties and conventions administered by the World Intellectual Property Organization. It sets up the minimum acceptable standards for IP protections by WTO members, but it gives members considerable leeway to decide how to implement TRIPS provisions according to their own legal systems and practices. TRIPS also allows members to bring disputes on violations of the TRIPS Agreement to the WTO’s Dispute Settlement Body for adjudication. The next section discusses the dispute settlement procedures in the WTO.

THE WTO DISPUTE SETTLEMENT MECHANISM As discussed in the previous section, there are two institutions within the WTO govern the enforcement of the TRIPS Agreement – one is the Council for TRIPS, and the other is the dispute Settlement mechanism (DSM). The main function of the Council for TRIPS is to review

52 members’ legal and administrative practices and make sure that they are in conformity with the TRIPS Agreement. However once a dispute arises between WTO members, it is the WTO’s dispute settlement mechanism that ensures the TRIPS Agreement is correctly enforced. This section introduces in detail the DSM and the dispute settlement procedures. The origin of the WTO’s dispute settlement procedures can be traced to the beginning years of GATT. However, as GATT was not intended to be a formal international organization, the 1947 version of GATT “made no provision for formal, juridical dispute settlement, nor was there any explicit provision for recourse to the International Court of Justice in resolving disputes.”112 In fact, there were only a few paragraphs in the text of the GATT 1947 that dealt with dispute settlement. Central to the GATT dispute settlement system were Article XXII (Consultation) and Article XXIII (nullification and impairment). These two articles later became the principles of the WTO dispute settlement system. Article XXII (1) asked contracting parties to “afford adequate opportunity for consultation…with respect to any matter affecting the operation of this Agreement.”113 According to Article XXIII, if a contracting party considers that its benefits under the Agreement is impaired or nullified as the result of another party’s failure to carry out its obligations, or any measure by another contracting party that conflicts with the provisions of the Agreement, that party may bring the case to GATT CONTRACTING PARTIES for investigation, recommendations, and/or rulings. Other than that, GATT did not formulate a formal mechanism to settle dispute. This situation was totally reversed during the Uruguay Round of multilateral trade negotiations, which gave birth to the new World Trade Organization and a new dispute settlement system. The new dispute settlement mechanism under the WTO was established by the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) as one of Uruguay Round agreements. There are a number of important features that make the WTO’s DSM distinct from its predecessor under GATT. The first is that the newly established Dispute Settlement Body (DSB) is much more powerful. Article 2 of the DSU makes it crystal clear that the DSB, which consists of all WTO members, is established to administer rules and procedures of the dispute settlement, including consultations and dispute settlements. The DSB has “the authority to establish panels,

112 Trebilcock and Howse, op cit.: 112. 113 The Text of GATT 1947. 53 adopt panel and Appellate Body reports, maintain surveillance of implementation of rulings and recommendations, and authorize suspension of concessions and other obligations under the covered agreements.”114 The second is that the DSU doesn’t intend to transform the new dispute settlement system into an international court for commerce. Article 3.2 says that the DSM serves to preserve the rights and obligations of members, and to clarify provisions of existing agreements under the WTO. It requires that the recommendations or rulings made by the DSB shall aim to achieve satisfactory results to all parties involved, with a proper maintenance of balance between the rights and obligations of members. Article 3.7 reiterates that the ultimate goal of the DSM is to secure a positive and mutually accepted solution to a dispute. It asks a member country to make a judgment before filing a formal dispute as to whether its action under the dispute settlement procedures would be fruitful. As such, retaliatory measures are not encouraged by the DSU, and shall be the last resort. Article 3.10 once again sets out that the use of the DSM shall not be deemed or intended a contentious act, and all members come into the procedures shall have a good faith. The third is that the new system allows members to participate the dispute settlement procedures as third parties. Article 10.1 says that “[t]he interests of the parties to a dispute and those of other Members under a covered agreement at issue in the dispute shall be fully taken into account during the panel process.” Article 10.2 grants third parties the right to be heard by the panel and to make written submissions to the panel. The fourth is that the new dispute settlement mechanism has established a standing body for appeals, known as Appellate Body (AB). The AB is composed of seven members who serve for a four-year term. Appeals are limited to issues of law covered in the panel report and legal interpretations developed by the panel. The rulings made by AB are considered final, which means after the appealing process, losing parties must follow the rulings or recommendations by the AB panel. Otherwise, the DSB may authorize the winning party to retaliate. Finally, the new system encourages the maximum participation by developing country members. A number of provisions in the DSU are particularly designed to attract developing countries. For instance, Article 4.10 asks members to give special attention to the particular

114 Unless otherwise specified, quotations in this section are from the Understanding on Rules and Procedures Governing the Settlement of Disputes. 54 problems and interests of developing countries during the consultation period. Article 8.19 indicates that when a developing country is involved in a dispute, the developing country could request that at least one panelist must be from a developing country. According to Article 12.11, in cases that developing countries are involved, the panel reports shall indicate how the panel applied relevant provisions to provide more favorable treatment for developing countries. Article 21.8 of the DSU also requires the DSB to consider the impact of the rulings on the economy of the developing countries

Dispute Settlement Procedures The dispute settlement procedure started from consultation. Article 4.3 requires a WTO member to reply to the request for consultation within 10 days after the date of receipt and enter into good faith consultations within 30 days after the date of receipt. If consultations fail to resolve the dispute, or if the responding country does not respond to the request for consultations, the complaining member may proceed directly to request the establishment of a panel. Otherwise, the request for the establishment of a panel can be made within 60-day period if both complaining and responding parties agree that consultations are failed. The function of a panel is to investigate the case and make recommendations or give rulings on behalf of the DSB.115 Each panel can have up to five panelists (normally three). The selection of panelists shall ensure their independence, and therefore citizens of members to the dispute and third-party members cannot serve on panels. If the dispute is between a developing country member and a developed country member, the panel shall, if requested by the developing country member, have at least one panelist from a developing country member. Within one week after the panel is established and terms of reference of the panel are agreed, the panelists shall finalize a timetable for panel process. In normal circumstances, a panel has up to six month to conduct investigations.116 At the end of investigations, the panel shall submit the panel report to the DSB listing “the findings of fact, the applicability of relevant provisions and the basic rationale behind any findings and recommendations that it makes.”117 But before the final report is released, the panel shall issue the descriptive sections of its draft report including factual findings and arguments to parties to the dispute. Upon receipt, parties to

115 DSU, Article 11. 116 The investigation period covers the period from the date the panel is established until the date the final panel report is released to the parties to the dispute. 117 DSU, Article 12. 55 the dispute shall submit their comments in writing to the panel. Following the receipt of comments, the panel shall issue an interim report including the descriptive section and conclusions. Within a period of time set by the panel, parties to the dispute shall have the right to request the panel to review particular aspects of the interim. In this situation, the panel shall hold a further meeting with the parties concerning issues highlighted in the written comments. If the panel receives no comments from parties to the dispute, the interim report becomes the final panel report and is circulated to all WTO members. Members who object the panel report must provide reasons in writing to explain their objections at least 10 days prior to the DSB meeting when the panel report will be discussed. In no more than 60 days after the panel report is circulated, the report shall be adopted at a DSB meeting unless either party formally notifies the DSB of its decision to appeal, or the DSB decides unanimously not to adopt the report. If either party submits its decision to appeal within the allowed period of time, the case enters appealing process. In normal situations, proceedings of appeal shall not exceed 60 days from the date a party officially notifies its decision to appeal. However, appellate proceedings could take up to the maximum of 90 days. Once he Appellate Body reaches the conclusion, it submits AB report to the Dispute Settlement Body. The rulings made by the AB are considered final. The AB report shall be adopted by the DSB and accepted unconditionally by the parties to the dispute, unless the DSB decides unanimously reject the report within 30 days following its circulation. If a panel from the AB finds that a member’s conduct has violated one or more covered agreements, it must recommend the losing party in the appeal to bring its measure into conformity with the relevant WTO agreement. Losing countries are expected to follow rulings recommended by panels or the appeals report immediately. They are required to state their intention to do so at a DSB meeting held within 30 days of the panel report or the AB report’s adoption. If immediate compliance is impracticable, the country concerned must have a reasonable period of time to implement panel or AB rulings or recommendations. However, Article 21.4 requires that the period from the date the panel established until the date of a reasonable period of time is determined shall not be more than 15 months.

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If the losing party fails to comply with rulings or recommendations within a reasonable period of time, it must negotiate with complaining party to determine compensation—usually by giving the wining country equivalent market access or tariff reduction. If no satisfactory compensation has been agreed within 20 days after the date a reasonable period of time is expired, the complaining member can ask the DSB to authorize limited trade sanctions (retaliations) including suspension of concessions or other obligations under covered agreements. With regard to the content of concessions or other obligations to be suspended, Article 22.3 (b) states if the complaining party considers that it is impractical or ineffective to suspend concessions or obligations of the same sector(s), it may ask to suspend concessions or obligations of other sectors. Ultimately, the complaining party may request suspending concessions under another covered agreement.118 (See Table 5) To summarize, processing of a dispute—from the date of the formal submission of a case to the DSB to the date the final panel report is adopted may take more than a year, and if the case is appealed, it may be even longer, not mentioning the time to bring panel/AB recommendations into implementation. The panel or AB report contains the legal analysis and recommendations or rulings to the problem. When the recommendations or rulings are not appealed, the verdict is adopted. Yet, it is important to note that the DSB rulings are mere interpretations of whether a Member government has violated any of the WTO’s agreement. They are used to pressure the violating nation only to conform to the agreement concerned, but not to dictate the adoption or exclusion of a particular policy. If the violator refuses to comply, the complainant may seek temporary compensation for export losses or retaliate by imposing tariffs or other measures against the offending nation, when authorized by the DSB.

Table 5: A Timetable for a Dispute to be Settled by WTO

60 days Consultations, mediation, etc 45 days Panel set up and panelists appointed 6 months Final panel report to parties 3 weeks Final panel report to WTO members 60 days Dispute Settlement Body adopts report (if no appeal) Total = 1 year (without appeal) 60-90 days Appeals report

118 WTO, DSU, Article 22. 57

30 days Dispute Settlement Body adopts appeals report Total = 1y 3m (with appeal) 15 months Time to implement (maximum without appeal, and up to 18 months with appeal) Total = 2y 6 m (Without appeal) Total = 2y 9 m (With appeal) Source: WTO, “How Long to Settle a Dispute?” http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm (accessed June 8, 2008).

Summary The WTO’s dispute settlement mechanism enjoys the highest authority in resolving trade disputes among its members. The DSM has established a tow-tiered structure of litigation, which means the losing party can ask their case to be heard by the upper level body for appeal, and the Appellate Body makes the final judgment. The system has also streamlined the dispute settlement process so that it helps minimize the role that power plays, which is common in international conflict resolution. That means a smaller or less developed country can potentially present a winnable case against a larger or more advanced country. However, it takes the DSM at least a year just to review a case and decide who is right and who is wrong. It could take up to almost three years for the losing party to bring its measures into compliance with relevant WTO agreements. Moreover, other than correct its wrongdoings, the losing party doesn’t need to compensate the winning party for its losses. Last, the DSM only considers disputes with issues that are already covered by existing WTO agreements. If the issue in question is not clearly defined, the panel or the AB panel will make judgment and attempt to settle the dispute by interpreting specific provisions of on a WTO agreement that are related to the issue.

U.S. IPR CASES AT THE WTO As the major proponent and supporter of the TRIPS Agreement, the United States initiated more cases than those by any other WTO members combined.119 However among the 17 cases initiated by the U.S., less than half were targeted on developing country members. Except the one against China, all cases against developing country members were on patent protections. The rest of cases were brought to challenge measures of developed country members on various IPR issues including copyright, patent protection, trademarks and geographical

119 As of October 2011, the United States initiated 17 out of 29 cases against other WTO members on violations of provisions of the TRIPS Agreement. The initiated six, and Canada, Australia, and Brazil initiated one case each. 58 indications, and TRIPS enforcement. In general, the United States maintains a near perfect record at the WTO dispute settlement mechanism with regard to disputes involving the TRIPS Agreement. As a complainant, it wins almost all 17 cases it initiated, though most of which were settled at the consultation stage.120 Only three cases went through the entire dispute settlement procedures.121 So far, the United States was only involved in four cases as respondent concerning the alleged violations of the TRIPS Agreement, three of which were brought by its traditional trade rival—the European Communities. With two of them are still pending for results, the U.S. lost only partially to the other two cases.122 (See Table 6) Compared with other areas, the number of cases that the U.S. initiated against other WTO members on charges of violations of the TRIPS Agreement is much smaller. Moreover, the United States was able to secure concessions (somewhat easily) from its opponents during the consultation period—the early stage of the dispute settlement procedures, without asking the establishment of panels to review the case. That means when the United States brought its charges against China on the lack of IP enforcement at the DSM, it didn’t have much credible experience that it can use as references. To summarize, the United States has been an active user of the WTO’s dispute settlement mechanism since its inception. As far as the TRIPS Agreement is concerned, it was involved in 21 out of total 29 TRIPS-related cases with 17 cases as the complainant, and only four as the respondent. Not surprisingly, the United States maintains an exceptionally high success rate in challenging other WTO members’ measures affecting the implementation of the TRIPS Agreement. This is in part due to the superiority of U.S. IP-intensive industries, the predominance of the U.S. bargaining power provided by its world largest market for consumer and industrial goods, and the familiarity with the WTO’s dispute settlement procedures backed by the abundance of WTO legal professionals and financial resources. The next chapter discusses in detail the U.S.-

120 The U.S. didn’t win the charges on violations of the TRIPS Agreement in the case against Indonesia (Certain Measures Affecting the Automobile Industry). It did win the rest of charges. However, the TRIPS Agreement was not the focus of the case. 121 These three cases are India – Patent for Pharmaceutical and Agricultural Chemical Products (WT/DS50), Indonesia – Certain Measures Affecting the Automobile Industry, and Canada – Term of Patent Protection (WT/DS170). The other case, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs (WT/DS174) was settled at the panel without appealing. The case against China did not go through the appealing process either. 122 For a complete list of cases involving the TRIPS Agreement with the United States as either a complaint or a respondent, please refer to Table 6f. 59

China dispute on China’s measures affecting protection and enforcement of intellectual properties.

Table 6: A List of U.S. Involved TRIPS Cases (as of October 2011)

Date Case Result United States as the complainant Feb. 9, 1996 Japan – Measures Concerning Sound Recordings Win Apr. 30, 1996 Pakistan – Patent Protection for Pharmaceutical and Agricultural Products Win Apr. 30, 1996 – Patent Protection under the Industrial Property Act Win Jul. 2, 1996 India – Patent Protection for Pharmaceutical and Agricultural Products Win Oct.8, 1996 Indonesia – Certain Measures Affecting the Automobile Industry Partial Win May 14, 1997 Ireland – Measures Affecting the Grant of Copyrights and Neighboring Win Rights May 14, 1997 – Measures Affecting the Enforcement of Intellectual Property Win Rights May 28, 1997 – Measures Affecting the Enforcement of Intellectual Property Win Rights Jan. 6, 1998 European Communities – Measures Affecting the Grant of Copyrights Win and Neighboring Rights Apr. 30, 1998 European Communities – Enforcement of Intellectual Property Rights for Win Motion Pictures and Television Programs May 4, 1998 Greece – Enforcement of Intellectual Property Rights for Motion Pictures Win and Television Programs May 6, 1999 Canada – Term of Patent Protection Win May 6, 1999 Argentina – Patent Protection for Pharmaceuticals and Test Data Win Protection for Agricultural Chemicals Jun. 1, 1999 European Communities – Protection of Trademarks and Geographical Partial Win Indications for Agricultural Products and Foodstuffs May 30, 2000 Argentina – Certain Measures on the Protection of Patens and Test Data Win May 30, 2000 Brazil – Measures Affecting Patent Protection Win April 10, 2007 China – Measures Affecting Protection and Enforcement of Intellectual Partial Win Property Rights United States as the respondent Jan. 26, 1999 Section 110(5) of U.S. (Complaint: European Partial Loss Communities) Jul. 8, 1999 Section 221 Omnibus Appropriations Act of 1998 (Complaint: European Partial Loss Communities) Jan. 12, 2000 Section 337 of the Tariff Act of 1930 and Amendment thereto Pending Jan. 31, 2001 U.S. Patents Code (Complaint: Brazil) Pending Source: WTO, data adapted from the WTO’s website, http://www.wto.org/english/tratop_e/dispu_e/find_dispu_cases_e.htm (accessed October 2011).

WHAT DOES IT MEAN FOR THE U.S. IPR DISPUTE WITH CHINA China’s WTO membership has provided an important but also essential venue for the United States to challenge China’s long-term IP infringement issue, which was not available

60 before China’s accession to the WTO. The WTO offers a new mechanism to settle trade disputes, including consultations, negotiations, dispute settlement, and arbitration. In the meanwhile, the TRIPS Agreement covers almost every aspect of IPRs, and sets the minimum acceptable standards for IPR protection. The significance of the WTO-based IPR system is that with the dispute settlement mechanism, protection and enforcement of IP are effectively tied with receiving trade benefits in other areas. For instance, a member aggrieved by the failure of another to fulfill its obligations under the TRIPS Agreement can potentially be authorized to suspend obligations under a different agreement. The fact that the United States initiated most TRIPS-related cases against other WTO members without confronting too much of resistance had led some to conclude that the TRIPS and the dispute settlement mechanism could be the silver bullet. In fact, U.S. IP-intensive industries and Congress had repeatedly requested the U.S. Trade Representative to formally bring the China case on IP infringement to the WTO. However, those who support pursuing the case against China in the WTO should be cautious that several factors within the TRIPS could make the case against China a difficult one to bring forward. First, although the TRIPS Agreement requires each member to provide effective IP enforcement, it doesn’t define what constitutes effective IP enforcement. For example, TRIPS doesn’t specify what is the maximum allowed percentage rate for piracy. That means if the United States argues that China’s IPR regime fails to provide effective IP protection, China may counter that argument by offering evidence that its legal system provides no worse protection than a country with similar socio-economic conditions, say, India. The second is that the United States could find it’s difficult to collect enough needed hard evidence. The WTO requires that the burden of proof shall be borne on the plaintiff. The Office of U.S. Trade Representative apparently doesn’t have the capability to gather evidence. Instead, it relies on data supplied by U.S. frontline companies doing business in China. However, fearing of being the target of Chinese retaliation, American companies, particularly small and medium companies at one time were reluctant to disclose such information. The biggest challenge confronting the U.S. is a structural one and it is difficult to solve. If the U.S. brings the China case on the ground of ineffective IP enforcement, Articles 41, 46 and 61 are likely to provide the strongest support. Article 41 requires WTO members to “ensure that enforcement procedures…are available under their law so as to permit effective action against

61 any act of infringement of intellectual property rights covered by this Agreement…” Article 46 states that each member’s judicial authorities shall “create an effective deterrent to infringement.” Article 61 requires members to make remedies such as “imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity.”123 Despite these provisions, challenging China on the basis of non-implementation could still be very difficult. This is because China has already fulfilled most of its legislative obligations under the TRIPS Agreement. Moreover, Article 41(5) of the TRIPS Agreement also stipulates that a WTO member is not required to devote more resources to IP enforcement than other areas of law enforcement. That means if China could demonstrate that its IP enforcement is no worse than other problems, then the winner of U.S.- China IPR dispute could be China, instead of the U.S. Even if the U.S. were able to prevail, implementation of panel or Appellate Body recommendations/rulings could still be a headache. It was probably for these concerns that the U.S. did not file its formal complaint against China on IP infringement until April 2007, nearly six years after China acquired its WTO membership. How was the U.S. doing in its first IPR dispute with China? Did the factors mentioned above indeed affect America’s performance? Lastly, how did the WTO facilitate and/or hinder the U.S. to pursue IP infringement in China? The next two chapters attempt to address these questions. The next chapter will first examine in-depth the U.S.-China IPR disputes.

123 The TRIPS Agreement. 62

Chapter 4 The U.S.-China Intellectual Property Rights Dispute

INTRODUCTION The previous two chapters examined how the United States might use its domestic laws as well as the international regulations to guard against practices by foreign countries that deny effective protections of the U.S. intellectual property. This chapter looks in-depth at the United States-China dispute over China’s alleged violation of the U.S. intellectual property rights. The goal that this chapter attempts to accomplish is to provide a detailed review and a historical background of the origin and the development of U.S.-China IPR dispute. The first part of this chapter examines three inter-connected clashes over IPR issues between the United States and China. These clashes set tones for the current U.S.-China intellectual property dispute. The second part of the chapter introduces the current U.S.-China IPR dispute, and how the United States has used the WTO’s dispute settlement system to challenge China’s lax enforcement of its intellectual property laws.

U.S.-CHINA IPR DISPUTES IN THE 1990s The IPR dispute between the United States and China originated in the 1980s when economic activities and the volume of bilateral trade between the two nations grew substantially. The initial stage of U.S.-China IPR relations was generally peaceful. The rebuilding of the economic relationship with China was in conjunction with that country’s economic reform beginning in late 1970s. China quickly accepted the call from the U.S. demanding China to build a Western style IPR regime to protect foreign as well as domestic intellectual properties. China had hoped that such a Western style IPR regime would help push the economic reform, and in the meanwhile attract foreign investment and technology transfer. However, constructing a modern IPR system was never a priority on China’s agenda. Although an IPR regime emulating that of the West was installed, China never faithfully enforced its IPR laws. There are several explanations. Culturally and historically, China does not have a tradition of protecting intellectual properties. Practically, the Chinese leadership believed that intellectual property was a Western idea, which would place China in a disadvantageous position in international competition. As a result, the initial “peace” was followed by three clashes over IP infringement between the late 1980s and the mid-1990s.

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On the other side of the arena, the United States was convinced that among other things, counterfeiting and piracy played a major role in contributing to its trade imbalance with China. The U.S. repeatedly claimed that China’s weak IP enforcement denied American businesses’ fair access to the Chinese market. It cited IPR infringement as one of the most important sources of its growing trade deficit with China. At home, overseas IPR violations caused job loss in industries heavily relied on IP protections, such as pharmaceuticals, computer software, and music and motion pictures. This period also witnessed an increase of unilateral actions by the United States against its major trading partners. Against this background were three U.S.-China IPR clashes during the 1990s.

Early Negotiations The United States and China first touched the issue of intellectual property rights in 1979 when the two countries formally established the diplomatic relationship. Although President Richard Nixon made his ice-breaking visit to China in 1972, building a full diplomatic relationship did not come true until 1979 when Jimmy Carter was the president. Throughout the 1970s, there were very limited commercial activities between the U.S. and China, and intellectual property was never thought to be an issue. In January 1979, less than a month since the U.S. and China established formal diplomatic relations, Deng Xiaoping made a historical visit to the United States.124 This was the first time ever a top ranking Chinese leader visited to the United States since the founding of the People’s Republic of China (PRC). During his visit, Carter and Deng signed the Agreement Between the Governments of the United States of America and the People’s Republic of China on Cooperation in Science and Technology in Washington, DC. The Agreement aimed at facilitating bilateral cooperation in science and technology. In the midst of negotiations, the U.S. requested that a section stating mutual protection of copyrights must be added. The Chinese negotiators were initially surprised by such a request but agreed because before 1980s China did not have any law governing the protection

124 The United States and the PRC announced on December 16, 1978 that they would build diplomatic relations on January 1, 1979. Between January 28 and February 4, 1979, invited by President Jimmy Carter, Vice Premier Deng Xiaoping visited the United States. See “ jianjiao yu 1979 nian Deng Xiaoping fuzongli fangmei,” (Establishment of Diplomatic Relations Between China and the United States and the 1979 Vice Premier Deng Xiaoping Visit to the United States), Xinhua News, (2004) http://news.xinhuanet.com/ziliao/2004-01/12/content_1271175.htm (accessed December 28, 2007). 64 of intellectual property rights.125 During the negotiations of the U.S.-China Bilateral Trade Agreement in March 1979, the issue of protecting intellectual property rights was again being raised, and the United States demanded that protection of IPRs must be emphasized. By the time when the two countries were ready to sign the agreement in July, a section pertaining to the protection of IPRs was appeared in the text of the final Agreement. The initial stage of U.S.-China IPR relations went pretty smoothly if compared with the coming decades of turbulence. The United States did not encounter Chinese resistance for three reasons. First and foremost, the establishment of diplomatic, as well as economic relations between the U.S. and China occurred in the midst of the inception of China’s economic reform beginning in late 1978. The U.S. assistance was much needed to promote its reform programs through trade, investment, and transfer of technological and managerial skills. Therefore, it was very unlikely for China to sacrifice the overall bilateral trade relations for the issue of IPRs. Second, for domestic considerations, China was in the position of transforming the Stalinist command economy to a market-oriented economy. Chinese policymakers recognized that a country that respects IPRs would not only leave a good impression to foreign investors, but also motivate scientific and technological innovation by their own citizens. Last, until late 1970s China had almost zero experience dealing with IPR protections. Innovators at that time were given only nominal rewards and a small amount of monetary compensation. Chinese leadership had largely ignored or underestimated the complexity of the issue, and the kind of impact it to impose on Chinese legal and political system, as well as its economy. As the volume of U.S.-China bilateral trade grew substantially in 1980s, the United States increasingly felt the pressing need to strengthen IPR protection in China. Although China rewrote the Trademark Law in 1982, developed the Patent Law in 1984, and joined the Paris Convention for the Protection of Industrial Property126 in 1985 based on the 1979 bilateral trade agreement, the U.S. was determined that China’s IPR system was weak, and intellectual property should be one of the priority issues in U.S.-China relations. In 1987, the U.S. demanded that China must agree to sign an annex agreement with regard to the IPR issue, and without it the

125 Chengsi Zheng. “Zhishi Chanquan de Guoji Baohu yu Shewai Baohu” (International protection of intellectual property rights and protection of foreign intellectual property rights), Zhongguo Shehui Kexueyuan Yanjiushengyuan Xuebao, 2 (1997). 126 The Paris Convention is an important international IPR treaty governing patents administered by the World Intellectual Property Organization of the United Nations with 172 contracting member countries. See Chapter 3. 65

U.S. could not renew the U.S.-China Agreement on Cooperation in Science and Technology which was due to expire on January 31, 1989.127 By linking the IPR issue to the renewal of this agreement, the United States was able to exert more pressure on the Chinese government to revamp China’s IPR laws. However, until early 1989 no agreement was reached with regard to the IPR annexation. The focus was 1) China’s Patent Law did not grant patents for food, beverages, and condiments; pharmaceuticals and chemicals; and animal and plant products; 2) China had not yet published its copyright law; and 3) China had no law protecting the copyright of computer software. In the event that the 1988 Trade Act to be put in force in 1989 with its much enhanced Section 301 provisions, China in May 1989 sent a delegation headed by Zhou Xiaochuan128, the then- Assistant to the Minister of Foreign Economic Relations and Trade, to the U.S. for negotiations of issues regarding IPR protections. Following two days of negotiations, the two parties reached an agreement, and a Memorandum of Understanding (MOU) was drafted, but not yet signed. Based on that MOU, China agreed to develop a copyright law extending the protection to computer software. It also agreed to revise its Patent Law so that a patent would be granted to not only the product but also the production method of such a product, and the duration of the patent was to be extended from fifteen years to twenty years. In return, the Office of U.S. Trade Representative did not place China on its priority foreign country list, but did put it on the priority watch list.129 Further high-level negotiations on IPRs were interrupted by the brutal crackdown of students-led pro-democracy protests in and around Tiananmen Square in June 1989. The crackdown was followed by a series of worldwide condemnations and sanctions.

The First Clash: 1989-1992 China’s effort to halt IPR infringement headed nowhere. As it approached to the end of 1980s, piracy and counterfeiting of all kinds became increasingly rampant across streets of Chinese cities. In computer software industry alone, it was estimated that the annual loss to their

127 Jinzhu Ling. “Zhongmei Zhishi Chanquan Guanxi de Fangsheng, Fazhan yu Yingxiang,” (The origin, development and impact of Sino-U.S. IPR relations), Contemporary China History Studies 14, no. 5, 2007: 109. 128 Zhou is now the governor of the People’s Bank of China, China’s central bank. 129 Ibid: 110. 66 revenue each year was between $100 million and $400 million.130 Executives of American computer software companies called for sanctions under the new “Special 301” against China. In April 1989, deputy U.S. Trade Representative for Japan and China, Joseph A. Massey and three other U.S. trade officials paid a four-day visit to China. During their visit, representatives of American businesses informed them that China was considered the world “worst violator of intellectual properties”, and they advised that a special attention targeting China under “Special 301” provisions was needed. However, China managed to avoid being listed on the 1989 “Special 301” priority foreign country list. The Chinese authorities conducted several rounds of high-profile raids against counterfeits in cities along the southeast coast in the months leading up to the release of that year’s Special 301 Report.131 In addition, a Chinese delegation signed a bilateral agreement with then the U.S. Trade Representative Carla A. Hills in May, on which Beijing indicated that it would launch legislative processes for its copyright law and the revision of the patent law. The Chinese also pledged to put in place a regulation to cover computer software.132 However, within the U.S. business world there was still full of dissatisfactions and speculations on China’s resolve to strengthen its IPR system. The U.S. Computer and Business Equipment Manufacturers Association complained, “this agreement with the Chinese as a landmark in U.S.-Chinese intellectual property rights negotiations, but we are keenly aware that progress is still merely in the conceptual stage.”133 As such, even China was not on the Priority Foreign Country List, the USTR still put China on the Priority Watch List. Further bilateral effort to strengthen China’s IPR regime was interrupted because of the June 4th military crackdown of pro-democracy protests in and around the Tiananmen Square in Beijing. Yet Washington did not place China in the Priority Foreign Countries category in 1990, because the United States was in need of China’s support in the United Nations Security Council to at least not veto the resolution authorizing the use of force against Iraq in the first Persian Gulf War.134 But Congress was more assertive to sanction China for the growing trade deficit and

130 Daniel Southerland. “U.S. Businesses Urge Trade Sanctions To Stop Piracy of Software in China,” The Washington Post, April 11, 1989. 131 Gene Linn. “Intellectual Property Rift With China Likely to Grow,” Journal of Commerce, May 15, 1989. 132 “China Moves to Curb Piracy,” Journal of Commerce, June 1, 1980. 133 Ibid. 134 David Hoffman. “Chinese Trade Officials Invited to U.S.: Announcement Made as Administration Lobbies for U.N. Resolution,” The Washington Post, November 27, 1990. 67

China’s human rights record. On October 18, 1990, the House of Representatives passed legislation on a 247-174 vote to strip China’s Most-Favored Nation status.135 Even though the bill was never reached to President George H.W. Bush’s desk, it clearly demonstrated that Congress was prepared to take actions.136 A number of trade problems arose in early 1991. Most prominently, the U.S. trade deficit with China soared from $6.2 billion in 1989 to $10.4 billion in 1990. The Assistant U.S. Trade Representative Joseph Massey traveled to Beijing for two days of talks with Chinese officials on IPR issues in late February. During a press conference, Massey noted that China’s piracy problem was one of the most serious ones around the world.137 Following Massey’s accusation, some Congressmen began urging Carla Hills, the U.S. Trade Representative, to include China on the Priority Foreign Country List, according to Special 301 provisions.138 On April 26, 1991, the U.S. Trade Representative officially designated China, together with Thailand and India as priority foreign countries.139 China was accused that some of its domestic laws, policies, and practices denied adequate and effective protection of intellectual property rights, and therefore denied Americans fair access to the Chinese market. Specifically, the U.S. complained the following: 1) China’s Patent Law was flawed because it did not cover pharmaceuticals and chemicals; 2) China’s copyright law did not provide satisfactory level of protection to American/foreign copyright holders; 3) there was insufficient protection of trade secrets; and 4) enforcement of IPR laws was inadequate. China reacted strongly to these charges as “unacceptable”. China’s Ministry of Foreign Economic Relations and Trade (MOFERT) issued a statement saying that “Neglecting the great effort made by China, the U.S. is pressuring China according to its own trade laws…and [t]his is unacceptable.”140 The statement also warned that there would be serious consequences if the United States went ahead to pursue Section 301 investigation against China.

135 “China Slams U.S. House Vote on Trade Status,” United Press International, October 19, 1990. The Most- Favored Nation status is now called Normal Trade Relations, or NTR. 136 Takashi Oka. “Carrot and Stick Policy with China,” Christian Science Monitor, November 9, 1990. 137 Nicholas D. Kristof. “New Tension of Trade with China,” The New York Times, March 4, 1991. 138 John Maggs. “Senator Urges Actions Against Patent Pirates,” Journal of Commerce, March 20, 1991. 139 John Burgess. “New U.S. Sanctions on Japan; U.S. Moves Toward Trade Sanctions Against Japan,” The Washington Post, April 27,1991. 140 “China Protests U.S. Copyright Charges,” United Press International, April 27, 1991. 68

In the following month, China did make effort in an attempt to ease the tension and hoped that by doing it the U.S. might consider drop Section 301 investigations. For instance, China’s first copyright law was set to be effective on June 1, 1991. The State Council, China’s cabinet ordered more revisions to the draft regulations on computer software piracy.141 However, the U.S. chief negotiator with China, the Assistant U.S. Trade Representative Joseph Massey argued that there were too many loopholes in the new computer software regulation, and therefore it couldn’t effectively protect computer software.142 The USTR’s investigation into China’s IPR practices went ahead anyway. According to Section 301 provisions, China was given a deadline of November 26 to address the piracy issue or face the U.S. retaliation of 100 percent duties levied on Chinese imports. In the meantime, negotiations between the two governments were also underway. The first round of negotiation took place in Beijing in June. However, the negotiations were described as “tough confrontations”, and both sides went home empty-handed.143 Trade officials from the two countries met again in August without major breakthroughs. Specifically, the United States demanded that China must have a specific timetable by the end of September of what actions it would take to control piracy. Beijing only agreed that it would provide more protections to intellectual properties.144 China did submit a proposal, but it was deemed by Carla Hills, the U.S. Trade Representative as insufficient. She said that it did not “measure up to the standards that we expect and insist upon in our trade relations with all of our trading partners.”145 The next round of negotiations took place in Beijing on October 24 between the U.S. delegation led by Joseph Massey and the Chinese team headed by the State Councilor, Song Jian. Talks during this round were focused on copyright of computer software, patents for chemical and pharmaceutical products, and enhanced enforcement of China’s copyright law. This round ended without an agreement, but Massey indicated that the USTR would have until February

141 “State Council Revising Law on Computer Software,” The Associated Press, May 25, 1991. 142 James McGregor. “China’s New Software Protection Rules Are Called Inadequate by U.S. Officials,” The Wall Street Journal, June 17, 1991. 143 Jeffrey K. Parker. “U.S. Envoy Warns Software Makers About China’s Copyright Law,” United Press International, June 15, 1991. 144 “Trade Talks Stall,” The Washington Post, August 25, 1991. 145 Dave Skidmore. “Bush Administration Announces Trade Sanctions on China,” The Associated Press, October 10, 1991. 69

26—the new deadline to determine what retaliatory measures would be if no agreement reached.146 As the IPR dispute became heated, the U.S.-China relations were further complicated by China’s MFN status debate. The President and Congress were at odds with each other on whether or not to renew China’s Most Favored Nation (MFN) status. President George H. W. Bush was in favor of continuing the engagement policy by renewing China’s MFN status. Congress on the other hand, upheld the idea of linking of human rights with trade. The House of Representatives on July 10 voted 223-204 to disapprove the renewal of China’s MFN status citing the U.S. trade deficit with China and China’s violation of human rights. The House also voted 313-112 to impose stringent conditions for future renewal of China’s MFN status.147 Bush was clear that in order for some members of Congress to be on his side, he must get tough on China on the IPR issue. Between November 14 and 17, Secretary of State James Baker was sent to China, marking the first top-ranking U.S. official visit to China since the June 4th Tiananmen crackdown. Although Baker’s visit was not purely for the IPR dispute, China agreed to send a delegation to Washington to discuss IPR issues.148 As a result, the third round of negotiations moved from Beijing to Washington. On November 20, China sent Deputy Minister of MOFERT Madam Wu Yi to Washington for talks with the U.S. Trade Representative Carla Hills, in a hope that a deal could be reached before the November 26 deadline. By November 26, the negotiations failed to make any major breakthrough. Carla Hills announced that the U.S. would impose punitive tariffs on Chinese imports worth up to $1.5 billion. China denounced the U.S. decision and said that the Chinese side had done “its best and made substantial and significant concessions.”149 On December 2, the USTR officially published its retaliatory list covering 106 Chinese products worth of $1.5 billion, and China was given January 16 deadline to meet the U.S. demands.150 A new round of negotiations was soon launched in mid-December in Beijing. Assistant U.S. Trade Representative Massey met with the Minister of MOFERT, Li Lanqing and senior officials in China Patent Bureau and China Copyright Administration. During the negotiations,

146 Sarah Lubman. “U.S.-China Trade Talks Make Little Progress,” United Press International, October 25, 1991. 147 Keith Bradsher. “House Votes Curbs on Chinese Imports,” The New York Times, July 11, 1991. 148 “China and Trade,” Journal of Commerce, November 20, 1991. 149 Jeffrey K. Parker. “China Regrets U.S. Copyright Retaliation,” United Press International, November 27, 1991. 150 Ling, Jinzhu. “Zhongmei Zhishi Chanquan Guanxi de Fangsheng, Fazhan yu Yingxiang,” (The origin, development and impact of Sino-U.S. IPR relations): 111. 70 the Chinese delegates presented a new version of the proposed agreement. But because it left out some of the concessions China made in the previous round, the negotiations went into a stalemate once again. The U.S. insisted that the original version must be on the table.151 Meanwhile, the Uruguay Round of GATT talks on intellectual property achieved a major progress. A draft agreement on Trade-Related Aspects of Intellectual Property was circulated among contracting members. The birth of TRIPS provided a reference to settle the U.S.-China IPR dispute.152 China on January 8 announced its “counter-retaliatory” duties on U.S. products involving aircraft, cotton, corn, steel and chemicals ahead of the final round of negotiations.153 A trade war between two of the world’s largest economies seemed imminent. As the January 16 deadline approached, a Chinese delegation led by Deputy Minister Wu Yi headed to Washington again in the final attempt to conclude the negotiations. This round of negotiations was scheduled to end on January 12. But when the time was up, there was still no agreement. The Chinese offered yet another proposal. The U.S. acknowledged that although this version was better than the one offered in December, it was still worse than the one made in November.154 Negotiations were extended as the deadline was near. An agreement was eventually reached on January 16 just hours before the deadline.155 The United States and China signed the Sino-U.S. Memorandum of Understanding on the Protection of Intellectual Property in the early morning of January 17. This MOU has seven articles ranging from China joining more international conventions to revising China’s IPR laws, though the main focus was how to improve China’s IPR regime, rather than enforcement of IPR laws. Specifically, the Chinese were committed to: 1. Join international conventions— China was to join the Berne Convention governing the protection of literary and artistic works, and the Geneva Convention governing the protection of producers of phonograms. China agreed that these conventions would take precedence over China’s domestic laws should inconsistency exist.

151 David R. Schweisburg. “U.S. China Trade Talks Falter,” United Press International, December 22, 1991. 152 Andrew Mertha, The Politics of Piracy: Intellectual Property in Contemporary China. (Ithaca, NY: Cornell University Press, 2005): 44. For detailed discussions on TRIPS Agreement, please see Chapter 3. 153 Helen Maserati. “China Threatens US with Retaliatory Duties,” Journal of Commerce, January 8, 1992. 154 Keith Bradsher. “U.S. Cool to China Proposal; Dispute on Piracy Continues,” The New York Times, January 11, 1992. 155 Martin Crutsinger. “China, U.S. Agree, Avoiding Trade War,” The Associated Press, January 16, 1992. 71

2. Revise and formulate IPR laws— a) Revision of Patent Law: patent coverage would extend to all chemical inventions, including chemicals and pharmaceuticals; patents would protect both products and methods of production; a twenty-year term; national treatment for foreign patents; compulsory licensing; and administrative protection. b) Revision of Copyright Law: China would amend the Copyright Law according to Berne Convention and Geneva Convention; recognize computer software as literary works; and a fifty-year term protection of computer software. c) Article 4 stipulated that the Chinese government based on Paris Convention would frame a new law punishing unlawful disclosure, procurement, and use of trade secrets.156 In the end, the USTR terminated “Special 301” investigation against China and removed China from its “Priority Foreign Country” list.

The Second Clash: 1993-1995 The focus of the second U.S.-China IPR clash shifted from improving China’s IPR regime to strengthening the enforcement of new IPR laws. In the remainder of 1992 and part of 1993, China was perceived that it implemented most of provisions on the 1992 MOU. For example, China joined the Berne Convention for the Protection of Literary and Artistic Works and Universal Copyright Convention and issued necessary regulations to implement those conventions and relevant laws. In February 1993, amendments to China’s Trademark Law and supplementary provisions to the criminal law adding to penalties for were enacted.157 In April 1993, China also joined the World Copyright Convention and the Convention for Recorded Products. In the meanwhile, China conducted a major anti-piracy campaign in southern provinces—it closed down four production lines of pirated CDs and Laser Discs.158

156 Mertha, supra note 28: 45-56, and “BSA Applauds U.S. Agreement with the People’s Republic of China to Protect Intellectual Property,” Business Wire, January 16, 1992. 157 Ira Shapiro. General Counsel, Office of the U.S. Trade Representative. Prepared Statement before the Subcommittee on International Trade of the Committee on Finance, U.S. Senate, the 103rd Congress, First Session, April 19, 1993. 158 Ibid: 46. 72

However, these efforts were not sufficient to reassure the U.S. intellectual property rights holders that the Chinese authorities were genuine it their commitments to crackdown on IPR infringements. In a testimony before the Senate Finance Committee, International Trade Subcommittee on Special 301 and fight against trade piracy, Jason Berman, the President of Recording Industry Association of America, complained that Chinese laws did not provide criminal punishments for copyright violators. He suggested upgrading China from priority list to priority foreign country list.159 The U.S. Trademark Association also accused China as a major center of illegal trademarked goods.160 In an article published on Computer Law Reporter, Senator Orrin Hatch (Rep.) from Utah criticized the 1992 MOU. He said, “the agreement contains only a vague enforcement clause calling for the Chinese to use ‘effective procedures’ to stop IPR violations.”161 In addition, Hatch pointed out that China’s inefficient dispute settlement system, its cumbersome and lengthy nature had made it very difficult for American firms to protect their intellectual property. By mid-1993, affected industries began again to lobby the USTR to take further actions against China. In another hearing on Special 301 trade remedy took place in June 1993, the Business Software Alliance (BSA) president Robert Holleyman argued that “trade pressure from the U.S. may be the only real means we have to see that the Chinese carry out their commitments to enforcement.”162 BSA complained that 94 percent of packaged software used in China was pirated, which caused losses of $322 million.163 The U.S. investigation indicated that there were 29 production lines in Southern China producing pirated CDs, laser discs, and CD-ROMs. These pirated CDs were not only sold in China, but also exported to , Southeast Asia, Canada, and even back to the United States.164 News reports indicated that even the highest-

159 Jason Berman, president of Record Industry Association of America. Prepared Statement before the Subcommittee on International Trade of the Committee on Finance, U.S. Senate, the 103rd Congress, First Session, April 19, 1993. 160 John Cummings, president of U.S. Trademark Association. Prepared Statement before the Subcommittee on International Trade of the Committee on Finance, U.S. Senate, the 103rd Congress, First Session, April 19, 1993. 161 Orrin G. Hatch. “Protecting Intellectual Property Rights in China,” Computer Law Reporter, Vol. 16, No. 3, 1993. 162 Testimony of Robert W. Holleyman II, president of the Business Software Alliance, Hearing on Special 301 Trade Remedy Before the International Trade Committee on Finance, United States Senate, Washington, DC, June 24, 1994. 163 Ibid. 164 Meiyi Guo. Rushihou Zhongguo Qiye Bibei Guoji Fagui yu Xianjing Fangfan. (Basic international laws and regulations, and precautious measures for Chinese companies since the WTO accession). (Beijing: Zhongguo Fazhan Chubanshe, 2001: 128). 73 ranking Chinese officials were involved in these illegal CD production plants.165 Although China did take some actions in order to demonstrate it was indeed enforcing its IPR laws, such as high- profile crackdowns of illegal CD production and sales lines, fining a research institute at Shenzhen University $260 for counterfeiting Microsoft’s trademark, and a state-run market $1,712 for illegally using trademark of a Sino-French joint venture bakery’s brand, these actions were largely considered too little, too late. The USTR elevated China from the “Watch List” to “Priority Watch List” in November 1993, and eventually “Priority Foreign Country” list in June 1994. China was given December 31 deadline to meet the U.S. requirements or facing sanctions. In response, China made some positive steps in order to avoid U.S. sanctions. Immediately after it was designated as a priority foreign country, China conducted several highly publicized raids against illegal CDs, audiotapes, videodiscs, and computer CD-ROMs. China’s National People’s Congress, China’s legislature passed legislation in July, which made criminal punishment available for copyright violators with a maximum of seven-year imprisonment.166 The State Council also urged all legislative and administrative agencies to cooperate to protect intellectual property rights. It also requested local government to establish intellectual property courts for trying IPR cases.167 In addition, China’s central government in August established a company to evaluate copyright and other “invisible” assets as part of efforts to reduce further losses to U.S. copyright holders.168 During the initial contacts between officials from the two countries, the United States requested that China must shut down 26 CD production factories in southern China, capable of producing the country’s entire output of 75 million CDs each year.169 Despite the denunciation by Beijing that the U.S. call to close these factories as “interfering” of its domestic affairs, China promptly shut down four of the 26 factories.170 Several rounds of negotiations were conducted but failed to bring about a new agreement. The two sides were at odds on whether China had done enough to protect intellectual properties based on the 1992 agreement, and whether it was

165 John Maggs. “Business Groups Demand Actions on Chinese Piracy,” Journal of Commerce, February 22, 1994. 166 “China Approves Tougher Penalties for Copyright Violators,” The Associated Press, July 5, 1994. 167 “China Boosts Copyright Protection,” United Press International, July 22, 1994. 168 Rajiv Chandra. “China-Trade: Copyright Guarantees Before GATT Membership,” IPS-Inter Press Service, August 24, 1994 169 The U.S. later on corrected the number of these factories to be 29. 170 P.T. Bangsburg. “Despite Protest at U.S. Pressure, China Shuts 4 Pirate CD Plants,” Journal of Commerce, July 29. 1994. 74 appropriate for the United States to negotiate the issues of market access, China’s accession to GATT/WTO along with better IPR protections. China blamed the U.S. for taking China’s bid for GATT/WTO membership hostage by linking it with the ongoing IPR negotiations.171 A notable development was that U.S. chief negotiator Lee Sands walked out of negotiations with his Chinese counterpart on December 13 announcing the talks were “fruitless”, which more or less infuriated the Chinese and prompted Beijing’s demand to replace him as the chief negotiator.172 The U.S. came to the conclusion that although China significantly improved its IPR regime, it never intended to faithfully enforce its newly devised IPR laws and regulations. A notable example was the person who ran one of the CD production factories had close ties with the top Chinese leadership.173 As such, the focus of the second U.S.-China IPR dispute shifted from building a modern IPR regime to effective enforcement of the existing laws and regulations so that the Chinese market could be open for American IP-intensive products. Specifically, the United States requested that China’s legal system responsible for IP infringement must undergo a complete overhaul. China, however argued that the U.S. demands were too much and too fast.174 It defended that as a large country, it was impossible for the central government to conduct examinations of pirating activities at any moment.175 In addition, China suggested that counterfeiting is a “social phenomenon” among Chinese communities and therefore it was impossible for the Chinese government to eradicate it in a very short time.176 In other aspects, as it was becoming one of the top destinations for foreign direct investment, China miscalculated that the United States would make concessions during the IPR talks in order to get better access to the Chinese market. For instance, throughout the second IPR crisis the United States continued its negotiations with the Chinese in many other areas. China purchased two thirds of Boeing’s 79 new 737 aircrafts, and was in talk with Boeing for moving portions of tail wings manufacture of

171 Renee Schoof. “China: Living up to Agreement on Intellectual Property,” The Associated Press, October 25, 1994. “China Presses GATT Re-entry,” United Press International, November 27, 1994. 172 “U.S. Head of China Talks Replaced,” United Press International, February 19, 1995. 173 John Maggs. “US, Angry at Chinese Piracy, Prepares Import Retaliation List,” Journal of Commerce, December 21, 1994. 174 “China Blasts U.S. over Copyright Talks,” United Press International, January 6, 1995 175 Peter Behr. “In China, a Great Wall of Trade Rules; Restrictions Against Imports from U.S. Creating Impasse,” The Washington Post, December 21, 1994. 176 Shujin Yang. “Zhongmei Zhishi Chanquan Zhengudan he Xin Maoyi Xieding Yingxiang,” (Sino-U.S. IPR disputes, and the impact of new trade agreement) Dangdai Zhongguo Yanjiu. 1995: 3. 75

Boeing 737s to China.177 China also insisted that bilateral negotiations must return to the framework established by the 1992 MOU rather than provisions in Special 301. On December 31, 1994, the U.S. Trade Representative Mickey Kantor announced a preliminary list of retaliation on Chinese exports including electronic products, toys, shoes, power generators, bicycles, and watches, with a total value of $2.8 billion, and asked the U.S. industries to comment on this list. On the same day, China’s Ministry of Foreign Trade and Economic Cooperation (MOFTEC) responded by declaring its own retaliatory measures. These measures were: 1) suspending the U.S. auto makers from investing in China’s auto industry; 2) imposing punitive tariffs on U.S. exports of cassettes, discs, cigarettes, and other consumer products; 3) suspending trade relations with International Intellectual Property Alliance (IIPA) and BSA; 4) suspending considerations of American chemical and pharmaceutical producers with regard to their applications of patents; 5) suspending from taking applications of the Chinese subsidiaries of U.S. sound recording and film companies for importing audio and visual equipments. On top of these, China claimed that it considered canceling the purchase of Boeing airplanes worth of billions of dollars.178 Three days later, Assistant U.S. Trade Representative Charlene Barshefsky said that negotiations with China were set to resume on January 16, and the USTR would have February 4 deadline to decide whether or not to take retaliatory actions. Several prominent industry representatives also joined the U.S. negotiating team. Among them was Jack Valenti, president of the Motion Picture Export Association of America, Jay Berman, president of the Recording Industry Association of America, and Robert Holleyman, president of the Business Software Alliance.179 On January 18, two days later than scheduled, negotiations reopened in Beijing in a last- ditch effort to avert a trade war. But before the negotiation was taking place, a U.S. official said that China must take concrete actions including shutting down at least one more illegal CD production factory, destroying infringing products seized by the Chinese customs, and allowing American music, movies, publications, and computer software to access freely to the Chinese

177 Chandra, supra note 44. 178 P.T. Bangsberg. “Beijing Blasts US Warning of Retaliation for Piracy,” Journal of Commerce, January 4, 1995. 179 John Leicester. “U.S. Says Differences Narrowing with China on Piracy,” The Associated Press, January 16, 1995. 76 market before any agreement could be possibly reached.180 By January 26, many signs indicated that the two sides were approaching to an agreement. Shen Guofang, the spokesman for MOFTEC said in a press conference, “So long as the two sides can settle this issue with calmness and sobermindedness, I believe an agreement can be reached.”181 However, everything was turned upside down on January 28. The U.S. Trade Representative Mickey Kantor said that although preliminary agreement was reached with regard to some important grounds, yet “overall the Chinese have not committed to address major areas of concern to United States industries that are so important to our economy, including protection of computer software.182 Kantor also set February 4 deadline to impose sanctions. In the meanwhile, he invited the Chinese negotiators to Washington for further negotiations to catch the February 4 deadline. The Chinese side insisted that China had stepped up IPR protections, and also complained that the U.S. negotiators in the last minute brought about many new issues, which were irrelevant to IPRs.183 However, China did not respond to the U.S. call for the last-ditch negotiations ahead of the February 4 deadline. Like what happened during the previous IPR clash, both sides failed to reach a deal by February 4. The United Sates subsequently declared that 100 percent of retaliatory tariffs worth $1.08 billion would be imposed on selected Chinese imports effective on February 26 if the two sides could not reach an agreement. China swiftly announced its own counter-retaliatory list. However, the two sides agreed that the last round of negotiations would be resumed in Beijing on February 15. As the negotiations got underway, China did raid several of the 29 CD plants in the southern Chinese provinces of Guangdong and Jiangsu.184 Although some progress in the final round of IPR negotiations was reported, China threatened that major U.S. businesses particularly Boeing’s $2 billion in orders for aircrafts, might in jeopardy if the dispute could not be settled.185 In the final days toward the February 26 deadline, the level of negotiations was elevated from working groups to negotiating representatives, headed by Deputy U.S. Trade

180 Ibid. 181 “China and U.S. Work to Solve Trade Row,” United Press International, January 26, 1995. 182 “USTR Kantor: No Trade Pact with China,” United Press International, January 28, 1995. 183 Martin Crutsinger. “U.S., China on Brink of Trade War over Bootleg Music, Movies, Software,” The Associated Press, January 28, 1995. 184 Steven Mulfson. “China Says Crackdown on CD Pirates Widens; Talks with U.S. Resumes as Trade War Looms,” The Washington Post, February 16, 1995. 185 Mufson. “China Links Jet Sales to U.S. Talks on Piracy; Newspaper Reports Threat to Bar Boeing,” The Washington Post, February 17, 1995. 77

Representative Charlene Barshefsky on the U.S. side and Vice Minister of MOFTEC Sun Zhenyu on the Chinese side.186 Negotiations were again dragged to the last minute. In the morning of February 26, the two countries finally reached an agreement after all-night talks and raids of two more CD factories by the Chinese authorities.187 This version of U.S.-China IPR agreement was in the form of “Exchange of letters and Action Plan” with an overwhelming focus on copyright and enforcement of IPR laws. In this agreement, China promised to enforce the “Action Plan” in the following three aspects: 1. Carry out a nationwide anti-piracy campaign instantly: 1) in a “special enforcement period”, Chinese authorities to close down massive production and circulation lines of piracy and counterfeiting movements; 2) in the long-term take measures to prevent the massive production of counterfeiting products; and 3) establish government agencies to prevent the export of counterfeits. 2. Take long-term measures to guarantee the enforcement of IPR laws: 1) the government agencies would use licensed computer software; 2) institutionalize the formation of Intellectual Property Rights Working Conference at national and provincial levels and IPR task forces to improve enforcement of IPR laws; and 3) expand the role of China’s customs in IPR protections. 3. Increase opportunities of American IPR holders to access Chinese market: 1) cancel quotas from the import of U.S. audiovisual products; 2) conditionally allow U.S. sound recording companies to sell their full lines of products; and 3) allow American companies to produce, publish, reprint, and make sale of their products in China when joint-venturing with Chinese partners.188 Another notable provision was that China and the United States were to exchange information on IPR enforcement on a quarterly basis beginning from June 1, 1995. In return, the United States agreed to 1) immediately revoke China’s “Priority Foreign Country” designation; and 2) provide technical support to China with regard to IPR protections.

186 “China, U.S. Say Progress Made in Talks to Prevent Trade War,” The Associated Press, February 19, 1995. 187 Mufson. “Trade War Averted by U.S., China; Beijing Would Protect Intellectual Property In Tentative Accord,” The Washington Post, February 26, 1995. 188 Guohua Yang. “Zhongmei Baohu Zhishi Chanquan Xieyi Gaishu,” (An overview of the Agreement of Sino-U.S. IPR Protections). Intellectual Property Protection in China, www.ipr.gov.cn/cn/zhuanti/meiIPzhuanlan/zhmIPxieyigaishu.doc (accessed February 2, 2008). 78

The Third Clash: 1995-1996 Since the signing of the 1995 Agreement, China did make some real efforts to reduce counterfeiting and piracy The Chinese authorities conducted more than 4000 investigations, and demolished 2 million copies of pirated CDs, hundreds of thousands pirated books and music cassettes. However the piracy issue quickly reemerged within six months since the February agreement was signed. U.S. businesses complained that despite a fierce campaign against the sale of bootleg music, movies, and computer, specific measures targeting manufactures of infringing products were rarely seen.189 The IIPA estimated that losses to American IP-intensive businesses due to piracy in China reached to $2.3 billion in 1995.190 The United States also complained that China failed to fulfill its commitment to shut down all the production lines involving pirating activities. Moreover, some of these manufacturers had shifted from producing music CDs to more value-added CD-ROMs, which incurred even more losses to U.S. computer software industry. On top of that, 13 additional underground CD factories were discovered,191 which infuriated American IP holders and producers. The U.S. also maintained that the Chinese IPR laws could not effectively deter piracy and counterfeiting because the threshold incurring criminal punishment was set too high. In a testimony before Senate Subcommittee on East Asian and Pacific Affairs, Charlene Barshefsky, deputy U.S. Trade Representative, said that “China’s overall implementation of the agreement [fell] far short of the requirements of the agreement.”192 On May 1, 1996, a little over a year since the 1995 IPR Agreement was signed, the United States for the third time had China as the sole country on that year’s Special 301 “Priority Foreign Country” list. The Clinton administration also considered imposing punitive tariffs on Chinese imports worth of $2 billion.193 Because China was under Section 306 of monitoring and supervision, no new Section 301 investigation was necessary. The 1996 “Priority Foreign Country” designation was aimed at pushing China for more effective enforcement of existing

189 James Cox. “U.S. Firms: Piracy Thrives in China,” USA Today, August 23, 1995. 190 Crutsinger. “U.S., China Appears on Collision Course over Copyright Piracy,” The Associated Press, May 8, 1996. 191 David E. Sanger. “Software Pirates Growing in Number in China, U.S. Says,” The New York Times, May 8, 1996. 192 Paul Blustein. “U.S. Warns China to Step Up Efforts Against ‘Piracy’,” The Washington Post, November 30, 1995. 193 Richard W. Stevenson. “U.S. Cites China for Failing to Curb Piracy in Trade,” The New York Times, May 1, 1996. 79 agreement. However, if the USTR could determine that no satisfactory progress was made by China, it could initiate trade sanctions at any time. The development of the third U.S.-China IPR crisis was very much similar to those during the first and second IPR clashes. On May 13 and 14, Assistant U.S. Trade Representative Lee Sands met with the Chinese representatives in Beijing demanding that China must 1) strengthen IP enforcement; 2) improve its IPR regime by reforming the legal system; and 3) further open the market for American IP-intensive products.194 The negotiations failed to produce any result. The next day, the USTR announced that it would levy 100 percent punitive tariffs worth $3 billion on Chinese exports of textiles, garments, and electronic products based on Section 306 provisions for failing to implement the 1995 IPR agreement.195 On the same day, China’s MOFTEC protested the U.S. decision and published its own counter-retaliation list. After public hearings were conducted on June 6 and 7, the USTR reduced the value of retaliation to $2 billion and gave China June 17 deadline to bring the 1995 Action Plan into full implementation.196 Nevertheless, negotiations resumed as expected. On June 17, a new agreement was reached. The 1996 agreement was called “Exchange of Letters and Report on Chinese Enforcement Actions” under the 1995 IPR Agreement. In this new agreement, China agreed the following: 1. Shut down the production lines of illegal CDs, CD-ROMs, laser discs, and Video-CDs; 2. Control and monitor existing CD factories and suspend the application of licenses for new CD factories; 3. Prevent the export of pirated CDs, CD-ROMs, laser discs, and Video-CDs; and 4. Close wholesale markets of pirated CDs.197 The United States, on the other hand, withdrew China’s “Priority Foreign Country” designation and ordered the U.S. customs to stop restrictions on Chinese textiles and garments. It also announced that it would continue monitoring China’s enforcement of the 1995 IPR Agreement under Section 306.

194 Joe McDonald. “U.S., China Push Anti-Piracy Talks to Brink of Sanctions,” The Associated Press, June 16, 1996. 195 Crutsinger. “U.S., China Trade Sanctions Threats in Bitter Trade Fight,” The Associated Press, May 15, 1996. 196 “China, U.S. Agree to Resume Talks on Copyright Piracy,” The Associated Press, June 7, 1996. 197 McDonald. “U.S., China Reach Anti-Piracy Agreement; Sanctions Cancelled ,” The Associated Press, June 17, 1996. 80

After 1996, the U.S.-China IPR dispute became less confrontational. Regular IPR consultations were held at least twice a year. These consultations in 1997 and 1998 were mainly about the status of China’s enforcement of the 1995 and 1996 agreements. Later IPR talks between the United States and China were even more relaxed and they were more like exchanges of information.198

U.S.-CHINA IPR DISPUTE GOES TO THE WTO Since three major IPR clashes between the United States and China, the issue of IP infringement became less prominent in U.S.-China trade relations. However, this by no means stands for the IP protection in China was getting any better. Rather, it was because negotiations of China’s World Trade Organization (WTO) accession was on top of the list, which involves a whole host of trade issues ranging from tariffs and quotas to trade in services and market access. Nevertheless, even after China joined the WTO in December 2001, the U.S. surprisingly did not rush into using the WTO’s dispute settlement mechanism to pursue IP infringement by the Chinese in spite of the fact that violation of intellectual property rights continues to be one of the most serious problems in U.S.-China economic relations today. This section reviews the ongoing IPR dispute between the United States and China.

The Origins The U.S.-China IPR dispute in the new era is largely the continuation of their dispute in the 1990s. The 2002 edition of the Special 301 Report noted that the piracy level of optical media in China was still extremely high. More importantly, the 2002 Special Report pointed out that although cooperation between administrative enforcement agencies and industries was improved, penalties associated with administrative enforcement was too small to effectively deter infringing activities. Specifically, infringers and distributors of pirated and counterfeit products, if caught, only got “affordable” fines with their infringing products confiscated. The report says, “Criminal investigations and sanctions are rare, and very few cases are referred to criminal prosecution.”199 In particular, the threshold for initiating a criminal case for violations of intellectual property rights remained unreasonably high. The threshold issue persisted in the following years leading to U.S.-China IPR dispute at the WTO.

198 Mertha. supra note 28: 52. 199 The Office of the United States Trade Representative (USTR), 2002 Special 301 Report, (Washington, DC: 2002: 17). 81

In 2004, U.S. business representatives reported that the violation of intellectual property rights in China had worsened.200 A consensus among U.S. industries and government agencies was reached that although China had made steady statuary improvement to bring its legal framework in line with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), enforcement of IPR laws and regulations lagged far behind. Particularly, criminal enforcement had been very little. The 2004 Special 301 Report again complained that the monetary thresholds to trigger criminal investigations were too high.201 Second, even the threshold was met, prosecutors in some cases require extraneous proof-of-sale. Third, the criminal prosecutions were rarely applied to import/export, transport, storage, and distribution of infringing products.202 During several meetings between higher-ranking officials of the U.S. and China, the Chinese were committed to take actions in these areas. In response, the USTR decided that it would conduct an out-of-cycle review in early 2005 to evaluate the status of China’s fulfillment of its commitments.203 The Out-of-Cycle Review report was released as promised. In this report, the U.S. blamed China for not fulfilling its promise. The report says, “there has not been a significant reduction in IPR infringements throughout China as it committed.”204 The report also points out that the WTO accession did not result in the reduction of IPR infringements in China. In some instances, the levels of piracy and counterfeiting rather increased. The core problem was still the lack or ineffective IP enforcement. The Out-of-Cycle Report also notes that lack of transparency on IP infringement levels and enforcement activities was also a serious concern of the U.S. With these unsatisfactory results, the United States decided the following. First, the U.S. made it clear that it intended to use the WTO dispute settlement mechanism whenever it deemed appropriate to address China’s IPR problems. As far as transparency was concerned, the U.S. would invoke provisions of TRIPS Agreement on transparency to request documentation on certain aspects of IPR enforcement by Chinese authorities. Second, based on findings from the Out-of-Cycle Review, the USTR elevated China to the Priority Watch List. Finally, the U.S.

200 USTR, 2004 Report to Congress on China’s WTO Compliance, (Washington, DC: 2004: 63). 201 In order to bring a criminal action against an infringer, there must be proof-of-sales totaling $24,100 for companies, and $6,030 for individuals. USTR, 2004 Report to Congress on China’s WTO Compliance, (Washington, DC: 2004: 66). 202 USTR, 2004 Special 301 Report, (Washington, DC: 12). 203 Ibid.: 13. 204 USTR, Results of Out-of-Cycle Review on China, (Washington, DC: 2005). 82 would use the Joint Commission on Commerce and Trade (JCCT) and IPR Working Group as the platform to keep pressuring the Chinese leadership for more significant IP protection and enforcement.205 The problem stayed unchanged in much of 2006. While noting China did achieve some improvements, the USTR once again claimed that the inadequacy of the enforcement of IPR laws and regulations is one of the greatest problems regarding to China’s compliance to its WTO accession commitments. In a report to Congress on China’s WTO compliance, the USTR identified China’s reluctance to utilize its more deterrent criminal remedies was among the factors that contributed to the lack of IP enforcement. Instead of launching criminal investigations, China insisted using what the USTR called “toothless administrative enforcement”. In the report, the USTR implied that what China had done concerning criminal prosecution against infringers might not be in consistence with Article 61 of the TRIPS Agreement. On another account, the U.S. argued that China’s restrictions on import and distribution of certain types of legitimate foreign products helped pirated books, music CDs, and movies to dominate the Chinese market.206 The United States warned that a WTO dispute against China on IP infringement could be imminent if no actions were taken by China.207

The Dispute On April 10, 2007, the United States filed its dispute against China concerning the protection and enforcement of intellectual property rights with the WTO’s dispute settlement mechanism.208 The dispute focused on four areas. The first is the quantitative thresholds required by China’s criminal law, which must be met in order to pursue criminal prosecutions of either copyright piracy or trademark counterfeiting. The U.S. considers that such thresholds have created “a substantial safe harbor for those who manufacture, distribute, or sell pirated and counterfeit products in China”.209 In particular, the U.S. complained that the Chinese legal system including the People’s Courts and the People’s Procuratorates at various levels uses the price of the infringing goods as opposed to the price of the corresponding legitimate goods to

205 Ibid. 206 USTR, 2006 Report to Congress on China’s WTO Compliance, (Washington, DC: 2006: 70-78). 207 USTR, 2006 Special 301 Report, (Washington, DC: 2006). 208 The United States filed another dispute against China on the same day concerning China’s measures restricting foreign companies the right to import and distribute certain publications and audiovisual entertainment products (WT/DS363). 209 USTR, 2007 Special 301 Report, (Washington, DC: 2007). 83 determine “illegal business volume”. Such a measure gives infringers significant leeway to sell and distribute pirated CDs and counterfeits without reaching the thresholds defined by reference to “illegal business volume” for criminal punishment. The second concerns the disposal of infringing goods confiscated by Chinese customs authorities. The United States blamed that China after seizing infringing products, allows such products to reenter the commerce channels when infringing features were removed. The third deals with the denial of copyright and related rights protection and enforcement to works that have not been approved for publication and distribution by Chinese censorship. For instance, works that undergo censorship review are not protected before the review is completed. In addition, the U.S. claimed that China offers differential treatments between domestic works and those of foreign nationals during pre- authorization and pre-distribution review processes, which ultimately gives earlier or more favorable protection of copyright or related rights to Chinese rights holders. Finally, the U.S. contested that Chinese laws provide no criminal procedures or penalties for those who engages in either illegal reproduction or distribution of copyrighted works. In other words, criminal procedures against infringements are only available when the infringers are both producers and distributors of unauthorized works. In response to these charges, China insisted that its IPR laws are consistent with the TRIPR Agreement.210 Specifically, China rejected the U.S. allegations by citing Article 1 of the TRIPS Agreement,211 which provides that “[m]embers shall be free to determine the appropriate method of implementing the provisions of [the TRIPS] Agreement within their own legal system and practice.”212 As the consultations required by the Dispute Settlement Understanding (DSU) failed to reach a deal the United States requested the establishment of a WTO panel on August 13, 2007. Although China rejected the U.S. call to establish a panel, the panel was automatically established when the United States asked to do so for the second time on September 25, 2007.

210 “Wo shangwubu dui meiguo jiu zhishichanquan wenti suzhu WTO biaoshi yihan,” (Ministry of Commerce regrets the United States filed a dispute with the WTO on the issue of intellectual property rights) Xinhua News Agency, August 16, 2007 (http://news.xinhuanet.com/newscenter/2007-08/16/content_6544019.htm, accessed April 14, 2009). 211 “Wo dui mei zaici yaoqiu shimaozuzhi she zhishichanquan wenti zhuanjiazu biaoshi yihan,” (China regrets the U.S. second call for the establishment of a WTO panel on the issue of intellectual property rights) Embassy of the People’s Republic of China in the United States, September 25, 2007 (http://www.china- embassy.org/chn//xw/t366569.htm, accessed April 14, 2009). 212 TRIPS Agreement, Article 1. 84

The Director-General subsequently appointed panelists on December 13, 2007. The release of the final report was delayed until January 2009, and the final Panel report was adopted on the Dispute Settlement Body (DSB) meeting on March 20, 2009.

The Rulings The lengthy 135-page final Panel Report, by itself suggests the complex nature of this dispute.

On China’s Copyright Law This section of the Panel Report focuses on whether part of China’s Copyright Law was inconsistent with China’s obligations under Article 9.1 of the TRIPS Agreement. In particular, whether the copyrighted works poised to enter the Chinese market but awaiting China’s “content review” clearance should be subject to copyright protection under the Copyright Law. The issue at stake was the first sentence of the Article 4(1) of China’s Copyright Law. Article 4 provides that “[w]orks, the publication and/or dissemination of which are prohibited by law shall not be protected by this Law.” The United States claimed that this provision denies the protection of copyright and related rights to certain categories of works.213 The Panel upholds the U.S. claim. It notes that China failed to provide explanations that how authors would be able to enjoy copyright protections if their works were denied entry into the Chinese market.214 China counter-argued that while works failed the “content review” are not protected by the Copyright Law, protections were indeed available to the legal portion of the works. However, the Panel indicates that based on information available, it is not clear how China could handle such situations.215 The Panel also notes that works never submitted for content review or awaiting the results of content review could potentially be denied of copyright protections.216 Therefore the Panel rules that China’s Copyright Law, specifically Article 4(1) is inconsistent with Article 9.1 of the TRIPS Agreement. Related to Article 9.1, the Panel also rules that China’s measure denying the enforcement of copyright and criminal procedures for works never submitted to content review or awaiting content review approval is inconsistent with Articles 41.1 and 61 of the TRIPS Agreement.

213 WTO, WT/DS362/R, 7.16. 214 WTO, WT/DS362/R, 7.67. 215 WTO, WT/DS362/R, 7.87. 216 WTO, WT/DS362/R, 7.118, and 7.138. 85

On China’s Disposal of Confiscated Infringing Products In this part, the Panel Report analyzes and determines whether China’s measures for the disposal of infringing goods seized by China’s customs authorities have violated relevant provisions of the TRIPS Agreement. The United States claimed that Article 27 of China’s Customs Law, as well as Article 30 of The Measures for the Implementation of the Customs IPR Regulations have created a “compulsory scheme” so that the Chinese customs cannot have such authorities as to order destruction of infringing products in their discretion. Instead, China’s customs authorities must give priority to disposal options that would allow infringing goods to reenter the channels of commerce or otherwise cause harm to right holders. Specifically, the U.S. argued that handing infringing goods over to social welfare bodies could be harmful to right holders, and no measure is available to prevent such bodies from selling the infringing goods; sale infringing goods back to the right holder also harms the right holder in the amount the right holder pays for the infringing goods; and auction off the infringing goods when the infringing features are eradicated without the right holder’s consent, allows the infringing goods to reenter the channels of commerce, may harm the right holder. Also, when these three options are available, the customs authorities cannot order destruction of infringing goods. Taken these together, the United States argued that China’s measures with regard to the disposal of infringing goods seized by its customs authorities are inconsistent with its obligations under Article 59 of the TRIPS Agreement.217 The Panel then determines that the Article 46 of the TRIPS Agreement sets out principles for the Article 59. Thus, the Panel concludes the following: 1) Authorities shall have the authority to order disposal or destruction without compensation of any sort; and 2) authorities shall have the authority to order disposal outside the channels of commerce in such a manner as to avoid harm caused to the right holder; or 3) authorities shall have the authority to order destruction unless this would be contrary to existing constitutional requirements; and 4) with regard to counterfeit trademarked goods, the simple removal of the trademark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce.218

217 WTO, WT/DS362/R, 7.197. 218 WTO, WT/DS362/R, 7.266, 7.267. 86

Based on the above mentioned, the Panel concludes that disposal of infringing goods outside of the channels of commerce may cause confusion but depending upon specific circumstances. In the meantime, the Panel does rule that the disposal of goods outside the channels of commerce is a legitimate alternative to the destruction of infringing goods if such goods are disposed of in such a manner as to avoid any harm caused to the right holder. Therefore, the Panel indicates that donating the infringing products by the customs authorities to charities does not violate the TRIPS Agreement. However, the Panel notes that it cannot support the U.S. claim that the social welfare shall not sell infringing goods. Regarding the claim that sales of infringing products back to the right holder may cause harms to the right holder, the Panel notes that because such sales are voluntary and it is not the only option available, it cannot support the U.S. claim.219 On the issue of the order to destruct infringing goods, the Panel indicates that the destruction of infringing goods is conditioned on whether it is possible for the infringing features to be removed, which does not necessarily mean the Chinese customs authorities lack the needed authority to order the destruction of infringing goods.220 The Panel further argues that the inability to eradicate infringing features precludes the auction method, but the ability to eradicate infringing features does not preclude other disposal methods, because the auction method is optional, not mandatory.221 Also, the very low rate of infringing products that were actually went for auction suggests auction is not a mandatory disposal method, and the Chinese customs authorities indeed maintain the kind of authority to choose appropriate disposal method in their discretion.222 This section finally deals with the U.S. claim that the simple removal of the trademark unlawfully affixed shall not be sufficient to permit the release of infringing goods back into channels of commerce. The Panel first clarifies that “infringing features” cover more than trademarks, but also copyright and patents. It also clarifies that the release of infringing goods into the channels of commerce is permitted, but more than simple removal of trademark must be carried out. 223 Yet the Panel confirms that the only action to eliminate infringing features taken

219 WTO, WT/DS362/R, 7.235, 7.236. 220 WTO, WT/DS362/R. 7.333. 221 WTO, WT/DS362/R. 7.334. 222 WTO, WT/DS362/R. 7.340-352. 223 WTO, WT.DS362/R, 7.366, 7.367. 87 by the Chinese authorities before releasing the goods to the channels of commerce is the removal of the infringing trademark.224 It therefore rules that China’s customs measure of simple removal of infringing trademarks is inconsistent with Article 59 of the TRIPS Agreement.

On China’s Criminal Thresholds This section deals with the claim whether China’s system of criminal thresholds provides insufficient criminal procedures to punish and deter infringing activities in copyright piracy and trademark counterfeits. This is the centerpiece of the entire dispute, the ruling on which determines whether the U.S. can prevail. The Panel notes that the U.S. claim is based on two alleged fundamental problems referred to as two “limbs”. The first limb concerns the level and the method of calculation of the thresholds. The U.S. alleged that the calculation method that the Chinese has been using effectively eliminate whole classes of counterfeiting and piracy from risk of criminal prosecutions and penalties. The second limb concerns the limited numerical tests in the thresholds. The U.S. alleged that the numerical tests allow law enforcement officers to ignore other indicia of counterfeiting and piracy. The Panel finds that Article 61, which constitutes the entire Section 5 of Part III of the TRIPS Agreement, is applicable to address issues in this part of the dispute. The first sentence of Article 61 requires that Members MUST make criminal procedures and penalties available to at least cases of willful trademark counterfeiting or copyright piracy on a commercial scale. In contrast, the fourth sentence of Article 61 provides that Members MAY apply criminal procedures and penalties to other cases of IP infringement, particularly if they are committed willfully and on a commercial scale. Based on these, the Panel concludes that Article 61 makes it clear that Members an obligated to make criminal procedures and penalties available to “willful trademark counterfeiting or copyright piracy on a commercial scale.”225 The Panel then decides whether copyright and trademark infringement falls below the thresholds constitutes willful trademark counterfeiting or copyright piracy on a commercial scale. The Panel determines that three preconditions must be met in order to trigger criminal procedures. The first is that infringing activities must be counterfeiting or piracy, but not all forms of IP infringements. The second is that counterfeiting and piracy must be willful. Finally,

224 WTO, WT/DS 362/R, 7.371. 225 WTO, WT/DS 362/R, 7.515, 7.516. 88 such activities must be on a commercial scale. Since trademark counterfeiting and copyright piracy are well explained by the TRIPS Agreement and the word “willful” is well understood, the Panel now shifts to the precise interpretation of the phrase “commercial scale”. The Panel considers that “counterfeiting or piracy ‘on a commercial scale’ refers to counterfeiting or piracy carried out at the magnitude or extent of typical or usual commercial activity with respect to a given product in a given market.” In this sense, the Panel defines that “what constitutes a commercial scale for counterfeiting or piracy of a particular product in a particular market will depend on the magnitude or extent that is typical or usual with respect to such a product in such a market, which may be small or large.”226 Concerning Article 41.5 of the TRIPS Agreement, which provides that Members are not obligated to put in place a judicial system for the enforcement of intellectual property rights that is distinctive to the enforcement of law in general, the Panel confirms China’s assertion that if Members are not required to punish low-level crimes, they shall not be required to punish low- level IPR infringements either. Given Article 1.1 of the TRIPS Agreement, which provides that “Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice”, the Panel notes that as long as criminal procedures and penalties are indeed available for willful counterfeiting and piracy on a commercial scale, a Member is in compliance with this obligation under the TRIPS Agreement.227 The key to this part of the dispute now relies on whether willful counterfeiting and piracy on a commercial scale are exposed to China’s criminal procedures and penalties. Despite repeated claims from the U.S. that China’s thresholds have effectively prevented criminal prosecution and penalties to certain commercial counterfeiting and piracy activities in certain market situations, the Panel determines that the United States has failed to provide convincing data regarding goods and markets “that would demonstrate what constituted ‘a commercial scale’ in the specific situation of China’s marketplace.”228 Therefore, with respect to the first limb of the claim under the first sentence of Article 61, the Panel rules that the U.S. did not make a prima facie case. 229 With regard to the second limb of the claim, which argues that China’s criminal thresholds are tied to numerical tests and require law enforcement officials to

226 WTO, WT/DS 362/R, 7.577. 227 WTO, WT/DS 362/R, 7.597, 7.601. 228 WTO, WT/DS 362/R, 7.614. 229 WTO, WT/DS 362/R, 7.617, 7.628, 7.629, and 7.632. 89 ignore other indicia of counterfeiting and piracy, the Panel rejects the U.S. claim by saying the evidence it submitted is insufficient. For these reasons, the United States has been unsuccessful to challenge China’s measures with respect to the criminal thresholds which allegedly have created a safe harbor for those who engage in trademark counterfeiting and copyright piracy.

Results and Summary The Panel Report was first circulated on January 26, 2009, and it was adopted by the DSB on March 20. Because neither country submitted the request for appeal within the allowed period of time, the rulings from the Panel Report are considered final. The Panel has ruled as follows. 1. The Chinese rules and measures in which the first sentence of Article 4 of China’s Copyright Law denies the protection to copyrighted works that have failed, or otherwise not been approved by the Chinese censorship are inconsistent with its obligations under the TRIPS Agreement. 2. The Chinese rules and measures in which they allows the counterfeiting goods seized by the Chinese customs authorities to reenter the channels of commerce through simple removal of counterfeiting features are inconsistent with its obligations under the TRIPS Agreement. However, the Panel does not support the U.S. claims that infringing goods after seized by customs authorities are donating to charities; and sales of infringing goods back to the right holder have caused harms to the right holder. The Panel also rejects the U.S. claim that the Chinese customs authorities lack the authority to order destructions of infringing goods. 3. The United States has not provided sufficient evidence to substantiate its claim that China’s criminal thresholds have made criminal procedures and penalties unavailable for certain trade counterfeits and copyright piracy. For the United States, the results of its first WTO case against China on IP enforcement were mixed. Although the U.S. was able to win most of its claims, it fell short to prevail on the most important one – the high thresholds to trigger criminal procedures against counterfeiting and piracy. The Panel has ruled that existing evidence are not sufficient to demonstrate that high thresholds help reduce the availability of criminal procedures against copyright pirates and counterfeiters, and distributors of infringing products. This is particularly disappointing, because the U.S. businesses and officials have repeatedly indicated that the high thresholds are the main

90 contributing factor to China’s deficiency of IP enforcement.230 To some extent, the unsuccessful challenge to the high thresholds is a major setback for the U.S., which it had high hopes that the TRIPS Agreement and the dispute settlement mechanism could bring in a breakthrough in its long struggle with IP infringement in China. In this sense, the ruling is a major setback for the United States in appealing for more IPR protection from China. The next chapter will discuss in- detail findings from research of primary sources of information about the effectiveness of the U.S. WTO-based strategy against IP infringement in China.

CHAPTER SUMMARY The United States has a long-term problem with China on the issue of intellectual property rights infringement. The problem started almost as soon as the two countries initiate their trade relations. The development of the U.S.-China IPR dispute can be divided into three stages. The first stage is between late 1980s and mid-1990s, featuring three clashes, during which there were intense moments, and each time the two countries were appeared to be at the brink of a total trade war. However, in each of the clash, the two countries were able to avert going into a trade war in the last minute by reaching an agreement after tough negotiations. During these clashes, the United States gradually came to realize that the most essential problem with regard to rampant IP infringement in China was the lack of enforcement. The U.S. also find out that in order for China to more effectively carry out IP enforcement, it must force China to open up its criminal procedures against counterfeiters and pirates by lowering the high criminal thresholds. The second stage begins from the late 1990s until the first years after China became a WTO member in late 2001. This period witnesses much less confrontations but more talks and collaborations. The two sides met regularly to discuss issues and report development and progress on measures related to protection and enforcement of intellectual property rights. The main reason is that the focus of U.S.-China trade relations shifted from individual issues such as IPRs, market access and trade in services to much broader issue of China’s accession to the WTO. In this period, the American businesses and government officials worked with their Chinese counterparts to improve China’s IPR regime and bring it into full compliance with the TRIPS Agreement. Another reason is that after September 11 terrorist attack, the United States was deeply entangled in its global war on terror, particularly the invasion of Afghanistan and

230 See USTR Special 301 Report, various issues. 91

Iraq, it was unwilling and to a less extent, unable to wage a trade dispute on IPRs with China. The year 2005 marks the beginning of a new stage when the United States started to utilize the WTO’s dispute settlement system to address its chronic pain with respect to China’s IPR infringement. The WTO’s dispute settlement mechanism has provided a new framework, which presents both opportunities and challenges. In April 2007, the United States formally filed its first case against China for lack of protection and enforcement of intellectual properties. It takes almost two years for the Panel to finally reach the conclusion. Although the United States was able to win most of claims, it failed to challenge the most important one—the high thresholds that effectively prevent criminal procedures and penalties from punishing copyright pirates and trademark counterfeiters.

Table 7: List of Major Events in U.S.-China IPR Disputes, 1989-2009

Date Event April, 1989 The U.S. had China on its Special 301 “Watch List”. 1990 The U.S. elevated China from “Watch List” to “Priority Watch List”. April 26, 1991 The USTR designated China as Special 301 “Priority Foreign Country”, and initiated Special 301 investigation against China. December 2, The USTR announced a retaliatory list worth of $1.5 billion. 1991 December 3, China announced its anti-retaliation list worth of $1.2 billion. 1991 January 17, 1992 The U.S. and China signed the Sino-U.S. memorandum of Understanding on the Protection of Intellectual Property, which marks the end of the first U.S.-China IPR clash. June 30, 1994 The U.S. for the second time had China on its “Priority Foreign Country” list, and investigation against China was initiated. December 31, The USTR announced a preliminary list of retaliation against China worth 1994 of $2.8 billion. December 31, China’s anti-retaliation list was announced. 1994 February 26, The U.S. and China signed the Sino-U.S. Agreement of IPR Protection, 1995 which marks the end of the second U.S.-China IPR clash. May 1, 1996 The USTR for the third time had China on its “Priority Foreign Country” list. May 15, 1996 The USTR announced a retaliation list worth of $3 billion. May 15, 1996 China’s MOFTEC protested and announced its anti-retaliation list. June 17, 1996 An agreement in the form of Report on Chinese Enforcement Actions under the 1995 IPR Agreement was reached between the U.S. and China. It marks the end of the third U.S.-China IPR clash. March 12, 1999 The U.S. and China signed the Sino-U.S. IPR Agreement. 92

April 29, 2005 The USTR put China in its “Priority Watch Country” list. October, 2005 The U.S. invoked Article 63.3 of the TRIPS Agreement to formally request “clarifications regarding specific cases of IPR enforcement that China has identified for the years 2001 through 2004, and other relevant cases.” April, 10, 2007 The U.S. formally filed a dispute against China concerning the protection and enforcement of intellectual property rights with the WTO’s dispute settlement mechanism. January 26, 2009 The final Panel Report was released. March 20, 2009 The Panel Report was adopted by the DSB. The U.S. has failed to challenge China’s criminal thresholds that must be met in order to initiate criminal procedures and penalties against infringers of trademark counterfeits and/or copyright piracy.

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Chapter 5 Interview Results and Findings

INTORDUCTION As China became a member of the World Trade Organization, the United States could no longer take actions against China unilaterally. Doing so would be a violation of WTO principles and further complicates the matter. The consequence for China’s WTO accession is that the Special 301 becomes effectively irrelevant when the target is China. In other words, when it comes to trade related intellectual property issues, the U.S. simply cannot impose sanctions or even threat to impose sanctions by citing its Special 301 provisions as it did before 2001. Instead, it must now bring the case to the WTO’s Dispute Settlement Body (DSB), and ask the DSB to authorize sanctions if possible. The question for now is how the U.S. trade and other government officials, and private industries feel about the WTO’s dispute settlement mechanism (DSM) as a weapon to counter rampant IP infringement by the Chinese. Has the WTO’s DSM been facilitating the U.S. interest in garnering more protection of IP by the Chinese, or, the DSM has failed to promote U.S. goals and even weakened the U.S. capabilities that it now possesses limited resources to potentially take more aggressive actions? These are the questions to be addressed in this chapter. Chapter 4 has shown that it appears that before China joined the WTO, Special 301 was fairly effective in securing Chinese concessions. In comparison, the first U.S.-China WTO case yields only mixed results. The U.S. didn’t win the key battle to challenge China’s criminal thresholds, which the U.S. has repeatedly said that it was one of the most critical factors leading to China’s ineffective IPR enforcement. In this chapter, I examine data drawn from primary sources to evaluate the U.S. perceptions of the effectiveness of the WTO’s dispute settlement mechanism in protecting and promoting U.S. interests in intellectual property rights with regard to China. Data were collected from two types of sources: primary documents issued by key government agencies and industry groups; and results of several interviews I conducted with U.S. government officials and of private industries. The rest of the chapter is organized as follows. The next section discusses findings from reviewing primary documents issued by a U.S. government agency and one industry group. It is followed by report of interview results. A chapter summary is provided at the end to conclude this chapter.

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FINDINGS FROM REVIEWING PRIMARY DOCUMENTS

Government Agency and Industry Group Researched Two entities were selected as sources of primary documents for this research. They are the United States Trade Representative, and the International Intellectual Property Alliance. I shall detail the reasons why these two entities were picked next. United States Trade Representative As far as the scope of this study is concerned, the United States Trade Representative provides the most important source of information. The USTR is a key player in trade policymaking as well as executing U.S. trade policy towards U.S. goals. The federal agency is particularly important in protecting intellectual property rights for U.S. industries operating overseas. The so-called “Special 301” from the 1988 Omnibus Trade and Competitiveness Act asks the USTR to identify each year countries that deny adequate protection, or market access, for intellectual property rights, and initiate section 301 investigations against such countries. According to provisions of Special 301, the USTR is required to submit the National Trade Estimate (NTE) report each year to the President and Congress. The NTE lists major trade barriers existed in foreign countries, the impact of those trade barriers to U.S. commerce, and measure the U.S. has taken to eliminate these barriers. One of the most important sections in the NTE is about violations of U.S. IPRs by foreign countries and problems in market access pertaining to IPR violations. According to Special 301 provisions, within 30 days of the release of NTE, the USTR must identify “priority foreign countries”, as well as priority watch countries, and watch countries. In addition to the NTE report, the annual Special 301 Report prepared by the USTR provides another important source of information. This report discloses actions taken by the USTR during the previous year, and the lists of Priority Foreign Countries, Priority Watch Countries, and Watch Countries. Under the Special 301 provisions as amended by the Omnibus Trade and Competitiveness Act of 1988, the USTR must also conduct surveys on an annual basis to foreign countries’ laws and policies governing intellectual property. According to the Uruguay Round Agreements Act of 1994, this Special 301 report also includes actions taken by the USTR related to the TRIPS Agreement. This chapter uses both NTE reports and Special 301 reports as important primary sources of information.

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International Intellectual Property Alliance The International Intellectual Property Alliance (IIPA) is a private sector coalition of seven trade associations representing U.S. copyright based industries with the goal of strengthening international copyright protection and enforcement through working with U.S. and foreign governments. The other goal of the IIPA is to open up foreign markets closed by piracy and other market access barriers through bilateral and multilateral efforts. The IIPA’s seven member associations are the Association of American Publishers (AAP), the Business Software Alliance (BSA), the Entertainment Software Association (ESA), the Independent Film & Television Alliance (IFTA), the Motion Picture Association of America (MPAA), the National Music Publishers’ Association (NMPA) and the Recording Industry Association of America (RIAA). These member associations altogether represent more than 1,900 U.S. companies, whose business depends heavily on adequate and effective protection of copyrights, for example, books and publications, computer software, and entertainment such as music and movies. The IIPA works with the U.S. government as well as foreign governments and local rights holders to improve copyright laws and enforcement regime in over 80 countries. The Alliance has submitted its annual Special 301 Report on Copyright Protection and Enforcement for over 20 years. The report provides reviews on whether practices or policies of a foreign country deny adequate and effective protection of intellectual property rights or fair market access for U.S. businesses relying on intellectual property protection. This chapter uses this document as an important primary source as well.

Findings from Reviewing Primary Documents The review of primary documents touches upon four aspects of the U.S. perceptions of how China’s IPR issues were handled. These aspects are: 1) perception about the current status of China’s IPR infringement problem; 2) perception about China’s efforts in controlling IPR infringement; 3) perception about the efficacy of the past U.S. negotiations with the Chinese government in resolving the IPR disputes; and 4) views and experience with the WTO’s dispute settlement mechanism.

Perception of the Current Status of China’s IPR Problem a) Overall Situation

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Despite some positive improvements, both the USTR’s annual Special 301 Report and annual National Trade Estimate Report indicate that the situation of counterfeiting and piracy in China remain severe. The USTR announced in its 2011 Special 301 Report, “China remains on the Priority Watch List and subject to Section 306 monitoring.”231 It notes, “[p]ersisten inadequacies in the protection and enforcement of IPR [in China] represent barriers to U.S. exports and investment.”232 Therefore, China’s IPR enforcement and implementation of its WTO obligations are still America’s top priorities. Traditional types of counterfeiting and piracy are still pervasive. China is involved in “all phases of the production and global distribution of counterfeit goods,”233 says the 2011 Special 301 Report. Counterfeited goods originated from China are ranged from apparel and footwear, pharmaceuticals and medial equipment, and agricultural chemicals to consumer electronics, mobile phones, computers and networking equipment, and automotive parts. In addition to traditional counterfeit markets, such as the Silk Market in Beijing, and wholesale markets in Yiwu City, the sale and distribution of counterfeit goods are increasingly relying on online sales platforms and global express delivery services. In the meanwhile, piracy over the Internet quickly becomes a source of concern. The widespread availability of broadband Internet connections has made the Internet an extremely convenient vehicle for disseminating infringing products. China’s estimated 457 million Internet users is the world’s largest. However, industry reports show that IP industries suffer tremendous loss in revenue due to piracy. The International Intellectual Property Alliance (IIPA) claimed that the total value of legitimate digital sales in China in 2009 was $94 billion, and total revenue for physical and digital combined was only $124 million. This was even lower than $142 million of revenue in Thailand, not to mention $7.9 billion in the U.S., and $285 million in South Korea. The IIPA’s 2011 annual Special 301 Report says, “If Chinese sales were equivalent to Thailand’s on a per capita basis, present music sales would be US$2.8 billion, and even that would represent under-performance and reflect significant losses due to piracy.”234

231 USTR, “2011 Special 301 Report,” available at http://www.ustr.gov/about-us/press-office/reports-and- publications/2011/2011-special-301-report (April, 2011), 19. 232 USTR, “2011 National Trade Estimate Report on Foreign Trade Barriers,” (hereinafter NTE Report) available at http://www.ustr.gov/about-us/press-office/reports-and-publications/2011-0 (March, 2011), 71. 233 USTR, “2011 Special 301 Report,” 21. 234 IIPA, “IIPA’s 2011 Special 301 Report on Copyright Protection and Enforcement,” (hereinafter, IIPA’s 2011 Special 301 Report), 61. 97

The U.S. also renews its complaint that “weaknesses in China’s enforcement system – criminal, civil, and administrative – contribute to China’s poor IPR enforcement record.”235 Specifically, the U.S. argues that high legal thresholds must be met before criminal prosecutions can be initiated. U.S. IP-intensive industries also complain that “administrative fines are too low, and imposed too infrequent, to be a deterrent.”236 On policy level, the U.S. has expressed concerns to China regarding its innovation- related policies. Specifically, the U.S. contends that Chinese innovation-related and other industrial policies discriminate against U.S. exports or disadvantage U.S. businesses and their investments in China. It says, “Chinese regulations, rules and other regulatory documents frequently call for technology transfer, and in certain cases, condition, or propose to condition, eligibility for government benefits or preferences on intellectual property being owned or developed in China, or being licensed…to a Chinese party.”237 The U.S. argues that compulsory transfer of intellectual property ownership, registration or licensing is inconsistent with international practices, and may raise concerns that such practices have violated WTO principles. The United States is also concerned about China’s maintenance of market access barriers for import and distribution of legitimate copyright-intensive products, such as theatrical films, DVDs, music, and publications. The U.S. believes that such restrictions have played a key role in China’s poor IPR protection. Specifically, the restrictions impose burdens on legitimate products and delay their introduction into the Chinese markets. The USTR contends that such “burdens and delays faced by legitimate products create advantages for infringing products and help to ensure that those infringing products continue to dominate markets within China.”238 b) China’s Weak IP Enforcement The United States has consistently complained that the lack of effective IP enforcement is one of the most important factors that have led to high level of IP infringement in China. Among others, the most notorious obstacles to effective IP enforcement is the high value and volume thresholds that must be met before the criminal procedures can kick in.239 The U.S. has long opposed any of such thresholds. However, instead of lowering these thresholds, China’s prosecution guidelines of May 2010 tripled the threshold for investigating and prosecuting trade

235 USTR, “2011 NTE Report,” 71. 236 Ibid. 237 USTR, “2011 Special 301 Report,” 23. 238 USTR, “2011 NTE Report,” 71. 239 USTR, “2010 Special 301 Report.” 98 in counterfeit products. The USTR in its 2011 annual Special 301 Report argues that raising the thresholds adds problems to “an already difficult enforcement environment in which administrative fines lack deterrent effect and are viewed merely as a cost of doing business.”240 The International Intellectual Property Alliance has voiced the similar concerns with regard to high level of thresholds for criminal procedures. In particular, the IIPA argues that the methodology used by Chinese authorities to calculate values of infringing goods is flawed. It says, “the methodology used by the Price Evaluation Bureau (PEB) fails to adequately account for the economic impact caused by pirated software and circumvention devices, and as a result, raids that result in the seizure of major quantities of pirated games or circumvention devices are rarely referred to the PSB unless counterfeit hardware is also involved.”241 Enforcement is also undermined by other factors. For example, there are inconsistencies with respect to matters such as the valuation methodologies for calculating damages, fines, and penalties used by different government agencies. At local level, IP enforcement is hampered by “poor coordination among Chinese government ministries and agencies, local protectionism and corruption, and inadequate and non-transparent processes.”242 In late 2010, China announced that it launched the “Program for Special Campaign on Combating IPR Infringement and Manufacture and Sales of Counterfeiting and Shoddy Commodities”. The Campaign was originally scheduled to end in March 2011, but later extended three moths. Some progress on crackdown of IP infringement was reported. However, some companies and trade associations were skeptical about how long the positive impact of the Campaign could stay. For instance, the software industry reported that the Campaign resulted no substantial increase in legitimate software sales. The industry also reported that the Campaign resulted in no significant changes in software-related enforcement activity.243 c) Market Access Barriers Market access is another area that the United States is confronted with China’s IPR problem. Barriers to market access are considered the second most important factor leading to high rate of piracy. According to the IIPA, there is a “direct relationship between the fight against infringement and the need for liberalized market access to supply legitimate product

240 USTR, “2011 Special 301 Report,” 21-22. 241 IIPA, “IIPA’s 2011 Special 301 Report,” 68. 242 USTR, “2010 Special 301 Report,” 23. 243 Ibid, 20. 99

(both foreign and local) to Chinese consumers.”244 These barriers, such as import restrictions and restrictions on wholesale and retail distribution, have created additional incentives for the production of infringing movies, music, and video games. An example of such market access barriers in China is that a circular released by Chinese Ministry of Culture in September 2009 regarding digital music download bars providers of imported digital music from distributing their content online, unless they have obtained content approval, and met strict requirements, such as entering into mandatory exclusive licensing arrangement with a wholly Chinese-owned company.245 Because of such restrictions, the demand for illegal products is tremendous. China runs one of the most strict censorship systems in the world, which delays or prevents copyright owners from offering legitimate products to customers in a timely fashion. All foreign movies, theatrical films, sound recordings, video games, and books must go through lengthy censorship process before they can be legally released to the Chinese market. In the absence of legitimate products, it is the pirates in China that enjoy the full market access for copyright.246 For example, in motion picture industry, China each year allows only 20 theatrical films into the country on the revenue sharing basis with a domestic (usually a state- owned) company. The state enforced monopoly import structure is in addition to the already burdensome censorship system. Foreign film makers and distributors cannot independently distribute revenue-sharing films. The Chinese authorities have on various occasions declared “blackout periods” during which no new revenue sharing blockbuster foreign films can be released to support domestic produced films. Such measures have further exacerbated piracy, “as pirates meet immediate consumer demand for major foreign titles by offering illegal downloads through the Internet, optical discs, and pirate video-on-demand channels.”247 For example, video game companies complain that “lengthy delays in the censorship approval process, wiping out the very short viable window for legitimate distribution of entertainment software products.”248 d) Problems in Trademarks and Patent

244 IIPA’s 2011 Special 301 Report, 72. 245 IIPA, “IIPA’s 2011 Special 301 Report on Copyright Protection and Enforcement,” (hereinafter, IIPA’s 2010 Special 301 Report). 246 Ibid. 247 Ibid. 248 IIPA’s 2011 Special 301 Report, 74. 100

In addition to copyright piracy, other types of infringing activities include “squatting” of foreign company names, designs, and trademarks; registration of other companies’ trademarks as design patents; false indications of geographic origins of products; and the use of falsified or misleading license documents to create the appearance of legitimacy in counterfeiting operations.249 In the patent sector, China’s latest edition of its Patent Law enacted in 2008 requires the disclosure of the origins of genetic resources, which has led to concerns regarding whether validity of a patent can be denied or undermined if the disclosure requirements are not met. Concerns have also been raised regarding the inadequacy of a two year limitation for filing a patent infringement case. In addition, the limited scope of patentable subject matter makes it extremely difficult to obtain patents for transgenic plants and animals and methods of treatment or diagnosis. The U.S. pharmaceuticals industry continues to complain that the Chinese authorities do not provide sufficient protection against unfair commercial use of undisclosed test and other data submitted by foreign pharmaceutical companies seeking marketing approval for their products. In addition, the build-in delays in China’s marketing approval system for pharmaceuticals and the inadequate regulatory oversight of the production of active pharmaceutical ingredients by China’s domestic producers continue to create incentives for counterfeiting.250

Perceptions about China’s Efforts in Controlling IPR Infringement By and large, the United States is skeptical about the Chinese commitment to fight against counterfeiting and piracy. A good indicator is that during the 2008 Summer Olympics in Beijing, the Chinese government took “unprecedented” measures to mobilize its resources and launched a finely coordinated crackdown on the unauthorized retransmission of the sporting event as well as online broadcastings related to the Olympics. Similar crackdowns were also conducted against unauthorized sales and counterfeits of Olympic related products, such as souvenirs bearing Beijing Olympic symbols. These efforts turned out to be one of the most successful campaigns that the Chinese authorities have ever engaged against online piracy as

249 USTR, 2009 Special 301 Report. 250 USTR, 2009 NTE Report. 101 well as hard goods counterfeiting. It demonstrated that “when the Chinese Government chooses to exercise its political will to deal with an IPR problem, it can yield results.”251 However, as the Olympics became a history, and the global financial crisis loomed, the Chinese officials reportedly were allowing more lenient enforcement of IPR laws.252 Until recently, the USTR again claimed, “China’s IPR enforcement regime remains largely ineffective and non-deterrent.”253 The USTR also noted the concerns raised by U.S. industries that Chinese laws and policies in a variety of fields might be used to unfairly favor domestic IP holders over foreign ones.254

Things China Has Done to Contain IP Infringement (since accession to the WTO) a) Legislative and Policy Aspect: In the months leading to China’s WTO accession, China amended its IPR laws to bring them into compliance with the TRIPS Agreement. For example, upon joining the WTO, China issued regulations and started to implement rules for the Trademark Law and the Copyright Law. China also issued rules and regulations for specific target areas, such as “integrated circuits, computer software, and pharmaceuticals.” In 2003, China issued new IPR measures periodically.255 In 2004, China’s Supreme People’s Court for the first time issued Judicial Interpretations to lower the high “thresholds” for criminal liability under Articles 217 and 218 of China’s Criminal Law.256 In the 2004 and 2005 U.S.-China Joint Committee on Commerce and Trade (JCCT) talks, China agreed to “completely legalize the computer software that all government agencies used.”257 An Action Plan issued in 2006 followed that commitment. In the 2006 JCCT, China was also committed to prohibit sale of personal computers both manufactured in China and imported without legal operating systems.258 China took an important step in May 2006, when the State Council, China’s Cabinet adopted China’s first Internet regulations, the Regulations on the Protection of Copyright Over

251 USTR, 2009 Special 301 Report. 252 Ibid. 253 USTR, 2010 Special 301 Report, 19. 254 USTR, 2009 Special 301 Report, 20. 255 USTR 2009 NTE Report, 23. 256 IIPA’s 2009 Special 301 Report. 257 Ibid, 64. 258 Ibid. 102

Information Networks, which went into effect in July 2006. China also entered into force of the WIPO Internet Treaties for effective protection of content on the Internet in 2007.259 The latest major campaign against counterfeiting and piracy launched in October 2010 also produced some regulatory and judicial changes. The State Council issued the “Notice on Further Strengthening the Management of the Software Assets of Central Administrative Entities and Public Institutions” in November 2010. The document for the fist time in China obligates “central government budge allocations for legitimate software purchases. [It also requires that] government asset management include software, and only legitimate software be used in central government networks.”260 China is also committed to legalize software installed in all government computers, including computers of state owned enterprises (SOEs). At the December 2010 JCCT and in the joint statement from the summit between Chinese President Hu Jintao and President Obama in January 2011, China promised that it would “allocate current and future government budgets for legal software purchase and upgrades; conduct audits to ensure that government agencies at all levels use legal software and publish the results.”261 Following these commitments, the Chinese government issued several directives to implement processes for software legalization in government agencies and SOEs. Another major development is that the promulgation of “Opinions on Certain Issues Concerning the Application of Laws for Handling Criminal Cases of Infringement of Intellectual Property Rights” by Supreme People’s Court, Supreme People’s Procuratorate and the Ministry of Public Security in January 2011. According to IIPA’s annual Special 301 Report, “These Opinions set out some important elements for Internet and related criminal cases and may help clarify and address other ongoing issues related to criminal liability in China.”262 For example, Article 10 of the Opinions provides that in addition to sale, “for the purpose of making profit” shall include directly or indirectly charging fees for transmitting non-free third parties’ works or advertisements. The Opinions also provide “specificity on the thresholds for criminal liability in

259 IIPA’s 2009 Special 301 Report. 260 USTR, 2011 Special 301 Report, 20. 261 IIPA, “IIPA’s 2011 Special 301 Report,” 66. 262 Ibid, 69. 103 the online environment,”263 such as illegal operation costs amount to $7,585, disseminating over 500 copies of third parties’ works, and so forth. b) Enforcement Although China conducts administrative enforcement periodically, criminal enforcement has been very limited, even the number of criminal cases brought about by relevant authorities was seen on the rise. The lack of systematic and orderly criminal enforcement has been a long- term threat to U.S. corporations doing business in China. However, there were some flashpoints that are worth of mentioning. China collaborated with the U.S. law enforcement agencies, such as FBI and U.S. Customs and Border Protection, as part of the Intellectual Property Criminal Enforcement Working Group of the U.S.-China Joint Liaison Group for Law Enforcement Cooperation. The joint operations achieved some most successful enforcement campaigns. For instance, “Operation Summer Solstice” in July 2007 resulted in the largest ever U.S.-China joint investigation and prosecution. The operation seized more than 290,000 copies of counterfeit software discs worth more than $500 million. The operation also resulted in arrests of 25 Chinese nationals, and many illicit OD plants shut down.264 In 2008, various raids and seizures at the wholesale and distribution level resulted 76.85 million “illegal publications” seized, which included 69.71 million “pirated audiovisual products,” 12 million pirated books and 2.58 million copies of pirated software and “electronic publications.” Eight OD production lines were closed. The Chinese authorities also reported that 117 criminal cases were tried, and 373 offenders were convicted.265 In October 2010, China conducted yet another major campaign against a broad range of intellectual property violations, including “IPR infringement over the Internet, such as through illegal downloads of music and movies; sale of pirated CDs and DVDs; infringing software; and trademark infringement, particularly related to counterfeit mobile phones, auto parts, bulk commodity exports, and pharmaceuticals.”266 The Campaign was under the direct leadership and supervision of Chinese Vice Premier Wang Qishan. As the result of the Campaign, some companies and trade associations reported moderate increase in investigative and enforcement

263 Ibid, 70. 264 USTR 2009 NTE. 265 IIPA 2009 Special 301. 266 USTR, “2011 Special 301 Report,” 19. 104 activity. In particular, Chinese media reported some 200 website closures and suspensions of online business licenses. Chinese authorities claimed that there were 1,372 raids conducted “involving more than 700,000 law enforcement personnel, logging 5,000 trademark violations in 16,000 cases valued at over $15 million.”267 U.S. industries also acknowledged that some of these special campaigns against IP infringement indeed resulted in an increase of arrests and seizures of infringing materials. For example, the IIPA noted that such campaigns “resulted in some progress by the Chinese Government against Internet piracy in 2010, both in terms of administrative measures and seeking criminal prosecutions against infringing sites and services supporting and benefiting from infringement.”268 U.S. industries also reported some increase of criminal enforcement activities, such as a 6-month jail term sentencing of the operator of an infringing website (7t7t.com) in Jiangsu Province, and the sentencing of three operators of another infringing website (Qishi.com) from 3 years and 3 months to 5 years jail terms in Anhui Province in January 2011.269

Perceptions about the Efficacy of Using Bilateral Negotiations The U.S. government seems to be pleased at least at the moment with a strategy centered on bilateral negotiations and diplomacy. They believe that dialogues and consultations on a regular and institutionalized basis such as the annual JCCT meeting and the U.S.-China Strategic and Economic Dialogue (S&ED) are useful in dealing with China’s IPR issues. The USTR in its 2009 annual Special 301 report said, “[t]he United States believes that bilateral dialogue and cooperation can lead to further progress in [IPR] and other areas…, and will continue to put serious efforts into its joint work with China on IPR enforcement and…the range of other important IPR-related matters…through the JCCT and other fora.”270 The USTR also noted that the JCCT has been a very important forum to secure Chinese commitment to engage in cooperative discussions. For example, China agreed to sign two memoranda of understanding on strategic cooperation to improve the effectiveness of copyright and trademark protection and enforcement in October 2008. In 2004-2005 JCCT meetings, China agreed that

267 Ibid, 20. 268 IIPA, “IIPA’s 2011 Special 301 Report,” 63. 269 Ibid, 64. 270 USTR 2009 Special 301. 105 computers sold in China must be pre-loaded with legal operating systems.271 During the 2010 JCCT meetings, China again promised that it was going to implement the legalization of computer software in all government computers. The U.S. businesses appear to hold a slightly different view. Although they are not against using bilateral negotiations as the primary means to deal with IP theft in China, they are somewhat concerned that relying too much on bilateral negotiations may be viewed as being “too soft” on China. U.S. industries have been consistently pushing for more aggressive use of WTO dispute settlement mechanism and Special 301 provisions to pursue wrongdoings by the Chinese, including the violation of TRIPS Agreement and other international IP protocols, and at the same time actively monitor actions taken by the Chinese authorities in improving IP enforcement. The IIPA complained that after almost a decade of numerous rounds of negotiations with China after it joined the WTO, the progress China had made in reducing overwhelming IPR infringement, improving enforcement and eliminating market access barriers was at best modest.272 The IIPA also argued that the U.S. could have done more within the WTO framework, for instance, bringing more cases against China to the WTO’s Dispute Settle Body.273

Views and Experience with the WTO’s Dispute Settlement The United States filed two cases against China in April 2007, one on protection and enforcement of IP, and the other on market access barriers.274 Both cases were concluded with the market access cases going through the appealing process. The United States claimed that it achieved a major victory in the market access case, and partial victory in the IP enforcement case. With respect to the first case over deficiencies in China’s intellectual property rights laws, the United States prevailed in most of its claims, but unfortunately it failed to challenge the criminal thresholds exist in China’s criminal law, an area considered crucially important to IP enforcement. The USTR released a statement indicating its overall satisfaction with the ruling. Then Acting U.S. Trade Representative Peter Allgeier announced in the statement that the WTO panel findings were “an important victory,” because the Panel not only supported two of the three claims the United States initiated, it also clarified China’s obligation to make criminal procedures and penalties available to willful engagement in counterfeiting and piracy on a

271 USTR 2009 NET Report. 272 IIPA 2010 Submission. 273 This was implied from IIPA 2010 Special 301 Report. 274 For a detailed account and analysis of the two cases the U.S. brought to the WTO DSB, please refer to Chapter 4. 106 commercial scale. The Panel didn’t make rulings on the third and also the most important claim on China’s criminal threshold, but indicated it will need more evidence from the U.S. The USTR expressed its disappointment but still said, “While this conclusion is disappointing, the United States is encouraged that the Panel, facing a case of first impression, set forth a market-based analytical approach that should help WTO Members and panels avoid or resolve future disputes concerning obstacles to criminal enforcement against counterfeiting and piracy.”275 The second case was not about protection of intellectual property itself, yet it was still considered an important step leading to better protection and enforcement of IP in China. In this case, the United States sought to challenge three market access barriers in China to U.S. DVDs, music, books, and films for theatrical release. These market access barriers are: 1) China prohibits foreign entities and individuals from importing such products; 2) China prohibits foreign companies from distributing certain reading materials and music online; and 3) some imported products are confronted with more burdensome requirements than their domestic counterparts before they can be distributed in China. The new U.S. Trade Representative Ron Kirk appointed by President Obama noted that the case “is also an important part of our efforts to combat intellectual property piracy.”276 The Panel made its rulings and the Panel Report was circulated to Members in August 2009. The Panel supported most of U.S. claims, and recommended China to bring its measure in compliance with its WTO obligations. China notified its decision to appeal to the Appellate Body in September. The AB Report was circulated to Members of the WTO in December. The AB upheld the Panel findings and rejected China’s appeal that its restrictions to U.S. reading materials, films, DVDs, music, and other audiovisual products are for the protection of public morale. It is apparent that the Office of U.S. Trade Representative was satisfied with the WTO ruling. Ambassador Kirk claimed that “America got a big win,” and the United States was very pleased with the result that the WTO had found China’s import and distribution restrictions on U.S. movies, music, DVDs and publications were inconsistent with its WTO obligations.277 He

275 USTR Press Release, “United States Wins WTO Dispute Over Deficiencies in China’s Intellectual Property Rights Laws,” (January 26, 2009), available at http://www.ustr.gov/about-us/press-office/press- releases/2009/january/united-states-wins-wto-dispute-over-deficiencies-c. 276 USTR Press Release, “WTO Appellate Body Confirms Finding Against China’s Treatment Of Certain Copyright-Intensive Products,” (December 21, 2009), available at http://www.ustr.gov/about-us/press-office/press- releases/2009/december/wto-appellate-body-confirms-finding-against-china. 277 Ibid. 107 also noted that the Panel and AB rulings would grant U.S. products fair access to Chinese market so that they could reach Chinese customers and beat out pirates. The U.S. business community’s reactions to the two WTO cases were positive as well. With respect to the U.S. challenge to China’s criminal thresholds, the IIPA noted that the Panel for the first time provided a detailed interpretation of terms “copyright piracy and trademark counterfeiting on a commercial scale” that acts of infringement must be criminalized under Article 61 of the TRIPS Agreement. Although the IIPA seemed disappointed that the Panel did not rule to support the U.S. on this claim, in which the high thresholds to incur criminal procedures could potentially prevent any commercial scale counterfeiting and piracy from being categorized as criminal, it did believe that “the market-based test set out by the Panel, if properly applied by China, would…require it to lower its thresholds to criminalize ‘all’ commercial scale piracy.”278 One of the IIPA’s member organizations, the Motion Picture Association of America (MPAA) also cheered that the WTO’s DSB ruled in favor of almost all U.S. claims in the second case with respect to market access for U.S. DVDs, music, books, and films for theatrical release. The President of MPAA called the victory a major victory over its long battle for opening China’s film market. He said, “This ruling will complement our strategy to fight movie piracy in China…[It] represents a positive step in promoting the growth of legitimate U.S. movies in a market that is growing rapidly, and with great potential.”279 The documents research didn’t show that China would openly go against the DSB recommendations and rulings. In the case regarding deficiencies in China’s legal regime for protecting and enforcing IPRs, China notified the Dispute Settlement Body that it planned to implement DSB recommendations and rulings on April 15, 2009, but it would require one year as a reasonable period of time to do so. Until March 20, 2010, China had completed all necessary domestic legislative procedures as required by DSB recommendations and rulings. On March 19, 2010, China reported that the Standing Committee of its 11th National People’s Congress had approved the amendments of Chinese Copyright Law and on March 17, 2010 China’s State Council adopted the revision of the Regulations for Customs Protection of Intellectual Property Rights.

278 IIPA 2009 Submission. 279 MPAA Press Release, (August 12, 2009). 108

China did the same thing for the second case concerning market access barriers. This case went through the entire dispute settlement procedures including the appealing process. The Appellate Body did not support China’s claims, which means China used up its legal options within the WTO’s dispute settlement mechanism to reverse the Panel decisions. The AB report and the modified Panel report as were adopted on the DSB meeting on January 19, 2010. As a result, China had no choice but to fully implement the AB recommendations and rulings, or it could face the U.S. retaliation.280 On July 12, 2010, China and the U.S. informed the DSB that they had agreed the reasonable period of time for China to implement DSB recommendations and rulings shall be 14 months. The reasonable period of time already expired on March 19, 2011. However, according to the 2011 Special 301 Report, China did not bring all of its measures into compliance with the DSB recommendations by the March 19 deadline.281 The 2011 Special 301 Report said that the U.S. would continue work with China to resolve all the outstanding issues.282

INTERVIEW RESULTS So far, I have discussed findings from reviewing documents issued by relevant U.S. government agencies and private industries. In this section, I continue to discuss how American government and businesses view the effectiveness of the WTO’s dispute settlement system in protecting and promoting U.S. interest in intellectual property rights in China, and the effectiveness of the current U.S. strategy in dealing with rampant IP infringement in China. The data and analysis were obtained from three interviews I conducted in the summer of 2009, and the spring of 2010. A follow-up interview with the retired USTR official was made in the fall of 2010 to keep this research updated with the most current development. The purpose of doing these interviews is to offer additional but also important perspectives which were not available from reviewing the documents. Three individuals including one incumbent U.S. government official (U.S. Government Accountability Office), one retired U.S. government official (Office of the U.S. Trade Representative), and one U.S. IP industry group leader (Business Software Alliance) participated

280 The U.S. is allowed to ask the DSB for retaliation if China fails to fully implement Panel and AB recommendations and rulings. 281 USTR 2011 Special 301 Report. 282 For detailed account and analysis of these two cases field by the U.S. against China 109 in this research.283 The United States Government Accountability Office (GAO) is a Congressional watchdog located in the legislative branch of the U.S. government responsible for conducting audit and investigations of the performance of the federal government. The works that the GAO does are usually at the request of congressional committees or subcommittees.284 Two of the GAO goals are: 1) “reporting on how well government programs and policies are meeting their objectives…, and performing policy analyses and outlining options for congressional consideration;” and 2) “advises Congress and heads of executive agencies about ways to make government more efficient, effective.”285 The GAO’s division on international affairs and trade has been conducting constant reviews on the performance of U.S. policies against intellectual property infringement in overseas. The incumbent U.S. government official, by the time of the interview was conducted, was from the division on international affairs and trade. The retired U.S. government official was a high ranking official within the Office of China Affairs, of the Office of United States Trade Representative (USTR). His office was responsible for managing USTR’s formulation and implementation of U.S. trade policy for China, Taiwan, Hong Kong, Macao, and Mongolia. The goal of the Office of China Affairs is to increase access of U.S. goods and services to these markets, and to ensure that the WTO and other trade commitments are enforced. The individual from the Business Software Alliance (BSA) was a senior level official. BSA is the largest business group representing world companies in computer software industry. One of its main goals is to stop copyright infringement of software produced by its members. BSA is committed to expand legal software markets, particularly the world’s top emerging markets, through pushing for more stringent enforcement of IPR laws; fighting Internet-based piracy; and education.286

283 The Office of U.S. Trade Representative and U.S. International Trade Commission (USITC) were contacted for interviews. The USTR didn’t respond to my interview request, and the USITC said that there wouldn’t be anybody available for interviews. The Screen Actors Guild (SAG) was also contacted for interview. The purpose was to include a labor union’s view on the U.S.-China IPR dispute. However, the SAG responded that they are not directly involved in this process. 284 U.S. Government Accountability Office. “About GAO”, available at http://www.gao.gov/about/index.html (accessed September 12, 2009). 285 Ibid. 286 BSA. “About BSA,” available at http://www.bsa.org/country/BSA%20and%20Members.aspx (accessed October 5, 2009) 110

All interviews were made through telephone, and each interview lasted from 20 to 60 minutes. It is worth pointing out that because this dissertation deals exclusively with how the United States feels about the efficacy of its current policy on China’s IP infringement with a special focus on the role of WTO’s dispute settlement, views from the Chinese side were not intended to be included. Interviewees, because of the positions they held and the kind of duties they performed, were considered possessing adequate knowledge and information about the issues discussed in this dissertation. Their views reflected official views and positions. The questionnaire that was used to organize the interviews can be found in Appendix A to this dissertation. Survey questions touched upon five aspects of the U.S. perception of the IPR issue with respect to China. These aspects are: 1) perception about China’s efforts in controlling IPR infringement; 3) perception about the efficacy of the past U.S negotiations with the Chinese government in resolving the IPR dispute; 4) perception about the current U.S. measures against IP infringement in China; and 5) views and experience with the WTO’s Dispute Settlement. For the purpose of confidentiality (as required by the Institutional Review Board for Human Subjects Research at Miami University, Oxford, Ohio), and to encourage maximum participation and candidness, the names and titles of the individuals who were interviewed are not disclosed. Instead, interviewees in this dissertation are identified by the names of the agencies they worked for. In the following pages of this section, I shall first present a detailed account of the interview results. A summary and analysis of the interview results is followed.

Summary of Interview Results

Perceptions about China’s Efforts in Controlling IPR Infringement While acknowledging that China’s central government did seem to be genuine in its commitment to bring down the country’s piracy level, both the retired USTR official and the GAO official asserted during the interviews that China’s intention was rather to boost the competitiveness of China’s indigenous industries that rely on effective IP protection, such as computer software and entertainment, and the goal of the Chinese government might not necessarily to offer across-the-board enhanced protections of intellectual property. Both the retired USTR official and the BSA official claimed that the increased crackdowns on IP

111 infringement particularly piracy of computer software, DVDs and music CDs were in part because the Chinese companies have been complaining more aggressively, and it is much more in China’s interest and benefit to protect and nurture indigenous innovation by showing the Chinese government are serious about piracy issues and they are working to protect their own companies. The retired USTR official noted that there is marked difference in terms of treatment between Chinese products and foreign ones, and clearly the priority is almost always given to domestic companies. She provided anecdotal examples saying that Chinese courts are generally more efficient when the plaintiff is a Chinese IP right holder. She also said that Chinese policies encourage or in some cases require foreign companies to transfer their IPR to their Chinese partners. The retired USTR official also noted that the Chinese authorities engage in special campaigns on combating IPR infringement and manufacture and sales of infringing products from time to time during the year. When such campaigns are ongoing, they do intend to bring down the piracy levels. However, the results produced by these raids won’t sustain. When the campaigns are over, piracy levels usually resurge to the pre-campaign levels. Another problem, as the retired USTR official pointed out, is that China does not typically confiscate and destroy equipment used to produce counterfeit goods. This practice makes it almost certain that counterfeiting activities will resume as soon as the law enforcement officers leave. The most serious concern about counterfeiting and piracy comes from high thresholds for initiating criminal actions, which were considered by U.S. officials and business leader as the most effective deterrence to manufacture and distribution of infringing products. All my interviewees noted that nothing is more important than lowering criminal thresholds address the IPR infringement issue in China. However, the USTR official said that rather than further lowering criminal thresholds, China had recently increased the thresholds to incur criminal procedures, making it even more difficult to deter infringers. For example, the recent prosecution guidelines released by the Chinese authorities in May 2010 tripled the threshold for criminal investigation and prosecution of trade in counterfeit goods. The retired USTR official also complained about China’s indigenous innovation policies. She said that China’s innovation-related policies and other industrial policies discriminate or in

112 other instances place U.S. businesses in disadvantageous positions, because relevant Chinese rules and regulations usually call for technology transfer to a Chinese partner, and in some cases, they condition eligibility for government benefits or preferences on intellectual property developed or owned by Chinese entities. For example, three Chinese government agencies – the Ministry of Science and Technology, the Ministry of Finance, and National Development and Reform Commission in late 2009 issued a National Indigenous Production Accreditation System that links the innovation policies to the provision of government procurement preferences. She said that such practice is inconsistent with international norms, and may raise concerns about China’s WTO obligations. Although China had agreed at the 2010 JCCT that it would not make the location of the development and the ownership of the intellectual property a condition for eligibility for government procurement preferences, it remains to be seen how China actually implements such commitment. There were also complaints about IPR enforcement. While acknowledging that China has made marked progress in improving its IPR legal framework, the U.S. government and industry have consistently criticized China for not doing enough on enforcement. The BSA official blamed China that its IP enforcement lagged way behind the commitment it had made in various occasion, and it essentially failed to comply with its WTO obligations. He argued that the lack of transparency in China’s legal and administrative bureaucracies made it nearly impossible to verify whether China had honored its commitments. The BSA official noted that the Chinese government might have only partially fulfilled its commitment to install licensed software to all government agency computers, the commitment China made during the 2005 annual JCCT meeting. The GAO official pointed out that the central-local dynamism exists in Chinese politics, such as local protectionism, resistance to the policies made by the central government, employment concerns, and corruptions have further undermined China’s enforcement capability.

Perceptions about the Efficacy of Bilateral Negotiations All my interviewees agreed that bilateral negotiation is an essential and important component of the overall U.S. strategy to deal with China’s IP infringement issues. They wouldn’t comment how effective bilateral negotiations were, but they seemed to agree that bilateral negotiation played different roles in different circumstances. When asked whether the coercive negotiating strategy the U.S. used during the 1990s under the “Special 301” framework was failed to achieve the desired results, no respondent said

113 that those actions were a failure. Instead, they all indicated that it was largely because the U.S. aggressive actions of using Special 301 and threatening of sanctions led to the rebuilding of China’s IPR regime. However, there is a caveat. The respondents believed that although the external pressure is an important factor, it must be combined with a good timing. The aggressive negotiating strategy looked more effective in the 1990s when the United States had more bargaining power. At that time, China was not a member of WTO, and its Most- Favored-Nation status was tied to many other issues including human rights, and was subject to annual review of Congress. China had no choice but to give in to U.S. pressure. Domestically, it was in China’s interest to build a modern IPR regime to attract foreign investment and latest technologies. However, since China was granted permanent normal trade relations status under the Clinton administration, the United States has been gradually losing the upper hand in its trade conflicts with China. The United States now must use bilateral or multilateral approach to resolve all its trade issues with China. But according to my interviews, the U.S. government appeared that they had no problem with a strategy centered on bilateral negotiations and diplomacy. Both the retired USTR official and GAO official believed that dialogues and consultations on a regular and institutionalized basis such as the annual JCCT meeting and the U.S.-China Strategic and Economic Dialogue (S&ED) have their merits and sometimes are more useful. The retired USTR official said the good thing about negotiating with China is that it keeps the door open for the Chinese to take actions, and it won’t antagonize China for retaliation, compared with taking the case directly to the WTO, for example. She mentioned that some U.S. diplomats also recognized that negotiations are more likely to lead to an amicable resolution, as they lead to decreased rather than increase tensions. The retired USTR official confessed that like it or not, bilateral negotiation has become a major approach to deal with China’s IP problem. She argued that with China’s growing economic power, the United States could no longer achieve most of its major goals without Chinese cooperation. Recent experience had clearly demonstrated that when China feels it is being offended, the communist leadership will suspend cooperation and may even offer retaliation. For example, China suspended almost every bilateral negotiation with the U.S. after two WTO cases were filed against it in 2007.

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The U.S. businesses generally agreed that bilateral negotiations are important, yet they called for more aggressive actions by the U.S. government. The biggest complaint from the business community was that negotiations usually yield only limited effect. The Chinese may take some actions when it is getting closer to or immediately after major bilateral negotiations, but rarely there are actions in-between major negotiations. The BSA official claimed that the U.S. should step up its pressure against China’s IP issues on all fronts. He suggested that diplomacy must go hand-in-hand with some hardline measures to push China for more actions. For example, the U.S. could more actively use the WTO’s dispute settlement mechanism, such as bringing more cases to the Dispute Settlement Body for consultation and adjudication. He was particularly critical of the Bush administration for not enforcing intellectual property protection commitments obtained in trade agreements. He quoted Dan Glickman, former Chairman and CEO of the Motion Picture Association of America as saying, “trade agreements do no good if we cannot enforce them.”

Perceptions about the Current U.S. Strategy against IP Infringement in China Questions in this section asked how respondents felt about the overall U.S. strategy to address the IP infringement issues in China. Generally, the interviewees were satisfied with the current U.S. strategy, which is centered on bilateral negotiations, but also focuses on using the WTO’s dispute settlement mechanism as an important complementary component. The BSA official expressed appreciations that the USTR finally decided to get tough on China, when it brought two IP related cases – one on enforcement of TRIPS Agreement, and the other on market access barriers to the WTO Dispute Settlement Body. He said that it also demonstrated that after five years since China joined the WTO, the United States had eventually found a viable strategy to address China’s pervasive infringement of U.S. intellectual property. All three interviewees said that they did not believe that the U.S. is constrained in any ways by the WTO in its fighting against China’s IP infringement as the result of China’s WTO accession. The BSA official noted that the WTO has actually advanced the U.S. goals. This is because as a WTO member, China must agree to join a whole host of IP-related treaties and agreements, including the WTO’s TRIPS Agreement. These treaties and agreements would theoretically elevate China’s IP protection and enforcement to a much more acceptable level. The reason is that China is supposedly under the international pressure to bring its measures in line with the TRIPS and other international agreements. China needs to behave itself to show that

115 it is a responsible member of the international community, and it is making steady effort to create a business-friendly environment for tech industries. Such pressure did not exist before China joined the WTO. In the meanwhile, the BSA official argued that the WTO’s dispute settlement system is an internationally recognized, multilateral-based mechanism whose rulings are accepted and honored by all members of the WTO. In this regard, the impact of Section 301 and its derivatives such as Special 301 and Super 301 is not nearly as good as that of the WTO.

Views and Experience with the WTO’s Dispute Settlement The United States filed two cases against China in April 2007, one on protection and enforcement of intellectual property, and the other on market access. Both cases have concluded with the market access case went through the appealing process. The United States claimed that it achieved a major victory on the market access case, and partial victory on the IP enforcement case. All interviewees held positive views of the U.S. experience with the WTO’s dispute settlement mechanism. They didn’t seem care too much that the U.S. was not successful in challenging China’s criminal thresholds. They claimed, regardless of results, by filing the complaint, the United States had demonstrated to China that it is determined to pursue WTO actions against China for IP violations. The retired USTR official said that it was disappointing that the DSB report on this issue was not in favor of the U.S., however the panelists simply said that they need more evidence. She hinted that it is very likely that the U.S. will challenge China’s high thresholds for criminally investigating IP infringement in the future should the U.S. possess enough evidence. The BSA official also indicated that both cases could be viewed as intermediary steps the United States had taken to push China for improved IP enforcement. All interviewees agreed that the WTO’s dispute settlement mechanism is indeed one of the best choices available to address China’s IPR infringement issues so far, if not the best choice. They said that the dispute settlement mechanism bears the highest authority and legitimacy in settling trade disputes. China as a member of the WTO is obligated to comply with WTO rules, as well as panel recommendations and Appellate Body rulings. However, the interviewees also emphasized the value of institutionalized bilateral negotiations, such as annual JCCT and S&ED, citing that China considers filing a formal case at the WTO against it as unfriendly and sometimes humiliating. For instance, China withdrew from the annual JCCT

116 meetings and slowed down its measures against counterfeiting and piracy immediately after the U.S. filed the two WTO disputes. Even the WTO’s dispute settlement mechanism is a preferred approach to deal with rampant IPR infringement in China, it is not without problem. The retired USTR official said that preparing a WTO case takes enormous time, and consumes remarkable monetary and human resources. She noted that it was as early as 2003 that the Office of U.S. Trade Representative began to prepare a WTO case against China on the infringement of American intellectual property. But it took the agency almost four years to finally bring the case to the DSB. One reason was that in order to present a winnable case to the DSB, the United States, as the complaint must collect enough evidence, a crucial but also difficult step. This is because the WTO dispute settlement mechanism requires the burden of proof to be borne on the plaintiff. The interviewees were well aware of that winning a WTO case does not translate into immediate effect. In fact, they did not expect that the situation of IP infringement in China could change overnight. All interviewees acknowledged that winning the battle against Chinese counterfeiting and piracy is a long and tenacious process, requiring not just a single shot, but multiple measures combined, including diplomacy, negotiations, and use of WTO dispute settlement. The BSA official agreed that what the U.S. did perfectly fits into this strategy— pursuing its ultimate goal incrementally. He also predicted that the United States is likely to file another dispute against China with the DSB for issues related to the protection and enforcement of intellectual property. However, the GAO official cautioned that the U.S. might not file a new case before the cost and effectiveness of the current two cases were fully evaluated. A notable concern associated with using the WTO’s dispute settlement system, particularly from the business community is that by filing a formal IPR complaint, China might retaliate American IP-intensive companies doing business in China. The BSA official noted that the Chinese authorities had already provided favorable treatment to domestic companies in awarding government procurement contracts, product registrations, government oversight and reviews, and legal suits. He complained that China’s recent indigenous innovation policies unfairly offer local enterprises many advantages to their foreign counterparts, such as tax return incentives, cheap state-owned bank loans, and mandatory technology transfers. The retired USTR official also noted that China had been actively exploring opportunities to file WTO

117 complaints against the U.S. in agricultural subsidies, financial sectors, and other areas to retaliate possible future WTO cases on intellectual property rights. Looking into the future, some worried that China’s WTO membership could be an obstacle for implementing TRIPS-plus measures. The TRIPS-plus is a set of more rigorous IP protection and enforcement standards that the U.S. has been seeking to replace the current TRIPS Agreement, which as pointed out by the BSA official, provides only minimum accepted standards. The BSA official claimed that China, as a member of the WTO might be well positioned to align with other major developing countries such as Brazil and India to resist the United States and other industrialized countries for promoting higher standards for trade-related measures of intellectual property rights. The interviewees did not expect that China would openly defy WTO rulings. China did make necessary changes in its domestic legislative procedures as required by DSB recommendations and rulings. However, both the retired USTR official and the BSA official warned that the implementation of DSB rulings doesn’t stop when the defendant completed the required revisions of its laws and regulations. For countries like China, which doesn’t have a good record of implementing even its own laws, the bulk of the work relies on monitoring how well/bad China enforces its newly revised IP laws and regulations. The retired USTR official said that the U.S. could file another case against China for not fully implementing DSB recommendations and rulings.

CONCLUSION AND CHAPTER SUMMARY This chapter, so far has detailed a series of interviews conducted with former and current U.S. government officials and a representative from private industries, as well as research of documents issued by a key government agency and a union of industry associations about their views and opinions on U.S. managing of China’s IP infringement issue with and without the WTO’s dispute settlement mechanism. The chapter has also presented the American government officials and private industries’ positions on the overall U.S. strategy of battling counterfeiting and piracy in China. The interview results and documents research show that China did make some progress in protection and enforcement of intellectual property since joining the WTO. However, most noticeable effort was centered around improving China’s legal and regulatory frameworks on IP

118 protection and enforcement. For example, China revised both its Patent Law and Copyright Law. China also joined the WIPO Internet Treaties for effective protection of content on the Internet in 2007. However, China’s effort in bringing up its measures against IP infringement lagged far behind in the most crucial area, which is enforcement, particularly the criminal enforcement. The U.S. industries are still complaining that the IP enforcement in China is too weak. One of the reasons is that both China’s criminal and civil laws lack the kind of power to deter infringing activities. For instance, the Chinese IP infringers even thought that paying fines for producing and/or distributing counterfeits was part of their operation cost. While acknowledging that the Chinese authorities are indeed taking substantial measures against IP infringement, the U.S. business and government are also convinced that differential treatments do exist where domestic IP holders are favored in Chinese courts and other areas over their foreign counterparts. Interview results and document research demonstrate that U.S. industries and government agencies do believe that bilateral negotiations, including the institutionalized fora, such as the annual JCCT meeting and SE&D are important and constructive means to contain IP infringement in China, if they are used strategically. That means the U.S. should maintain its current dual-track strategy, where it keeps the door for talks open, and in the meanwhile, pushes China to live up to its commitments through active use of the WTO’s dispute settlement mechanism. The interviewees also noted that the previous negotiations during the 1990s were also important, as they functioned as external pressure that eventually pushed China onto the track of revamping its IPR regime. Interviewees and documents research also show that U.S. government and private industries are generally satisfied with the WTO’s dispute settlement system, despite the WTO Panel did not support one of the most important U.S. claims concerning China’s criminal thresholds. In fact, the USTR has proclaimed that the United States prevailed in both cases. The interviewees noted that one of the most important benefits of using the WTO’s dispute settlement system is that the DSB enjoys the highest authority and legitimacy in resolving international trade disputes. Therefore, China is expected to bring its measures in compliance with the Panel or Appellate Body rulings. Based on the current experience and the overall satisfaction, one interviewee is predicting that it is very likely the United States may file another dispute against China on IP-related issues in the future.

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Chapter 6 Conclusion For more than two decades, intellectual property rights infringement has been one of the most important issues and source of frictions in U.S.-China trade relations. It was highly anticipated that China’s accession to the World Trade Organization could significantly reduce that country’s rampant counterfeiting and piracy. Many hoped that with the Trade-Related Aspects of Intellectual Property Rights, China would have to fulfill its international obligations to seriously protect intellectual property rights. China did adopt and implement strong IPR laws as required by the TRIPS Agreement. However, despite the changes in legislation, enforcement of these laws lagged far behind. After years of fruitless negotiations, the United States finally brought two formal complaints against China to the WTO in 2007, one on IP enforcement and the other on market access of some U.S. copyrighted products. Going to the WTO marks a new era in the U.S.-China IPR dispute. It shows that the United States would more actively pursue WTO actions to push China for better IPR enforcement. It also demonstrates that the U.S. is shifting to a new strategy to fight IP infringement in China. In its 2006 Top to Bottom Review of U.S.-China Trade Relations, the USTR identified three phases in the development of U.S.-China trade relations.287 The current phase from 2006 onward expects a “more equitable and durable” bilateral trading relationship with one of the objectives being to “monitor China’s adherence to international and bilateral trade obligations and secure full implementation and compliance.”288 This dissertation makes an attempt to examine the new U.S. strategy on reducing China’s infringement of U.S. intellectual property rights. Specifically, this dissertation has reviewed the role of the WTO’s dispute settlement mechanism in solving U.S.-China IPR dispute from the lenses of American government and private industry. The rest of this chapter proceeds as follows. The next section presents summary of this research. It is followed by a brief discussion of theoretical implications of this research. Next, I discuss the underlying reasons for the lack of IPR enforcement in China. Finally, I attempt to provide some policy recommendations to fight IP infringement in China.

287 USTR, “U.S.-China Trade Relations: Entering a News Phase of Greater Accountability and Enforcement,” (February, 2006). Available at http://www.ustr.gov/sites/default/files/Top-to-Bottom%20Review%20FINAL.pdf. 288 Ibid, 11. 120

U.S.-CHINA IPR DISPUTE IN RETROSPECTIVE This study began by reviewing the evolution of U.S. domestic laws governing protection of U.S. intellectual property rights overseas. The United States has a long history of active protection of intellectual property rights. This was mainly because industries depending on effective protection of IPRs, such as computer software, pharmaceuticals, entertainment, and consumer electronics represent an important driver of economic growth. These are also the industries that the U.S. enjoys both competitive and comparative advantages in international competition. In response to the growing number of IP theft overseas, particularly in emerging economies, U.S. IP-intensive industries began to lobby Congress for passing more stringent legislation to punish most notorious countries for IPR infringement. As a result, Congress passed a series of legislations to strengthen the power of U.S. Trade Representative through “Section 301”, so that the USTR could unilaterally initiate investigations, conduct negotiations with foreign governments, and even impose sanctions against unfair foreign trade practices, including IPR infringement. Ultimately, the Omnibus Trade and Competiveness Act of 1988 created “Special 301”, in which the USTR is required by law to identify priority foreign countries for IP infringement each year and automatically enter into negotiations with the governments of priority foreign countries. If the negotiations fail to achieve the desired results, the USTR is authorized to unilaterally impose trade sanctions for retaliation. Between late 1980s and mid-1990s, the United States clashed with China three times over the IP infringement dispute. Each time, the U.S. followed its Special 301 procedures by placing China on that year’s Priority Foreign Country List and entered intense negotiations with Chinese officials. Each time, the two countries were able to reach an agreement at the last minute, and narrowly averted a trade war. Through these negotiations, the U.S. secured Chinese commitments to better protect intellectual properties. As a result, China joined more international treaties governing IP protections, revamped parts of its IPR regime, and conducted a number of high-profile raids against manufacturers and distributors of infringing products. Despite such victories, U.S. businesses and gradually realized that the key to China’s IPR infringement is not to force China to sign more new agreements, but to enforce those already existed. Following the conclusion of the third IPR in 1996, the U.S.-China IPR dynamics entered into a decade of less confrontational period of time. During this period, the U.S. focused more on

121 monitoring China’s implementation of previously reached agreements. Since December 2001, when China formally joined the World Trade Organization, the TRIPS Agreement and the Dispute Settlement Mechanism of the WTO became available to the United States as a new weapon to target rampant counterfeiting and piracy in China. The WTO offers a new mechanism for settling trade disputes, including consultations, negotiations, dispute settlement, and arbitration. In the meanwhile, the TRIPS Agreement covers almost every aspect of IPRs, and sets the minimum acceptable standards for IPR protection. The significance of the WTO-based IPR system is that with the dispute settlement mechanism, protection and enforcement of IP are effectively tied with receiving trade benefits in other areas. For instance, a member aggrieved by the failure of another to fulfill its obligations under the TRIPS Agreement can potentially be authorized to suspend obligations under a different agreement. With respect to the TRIPS Agreement, the Agreement is one of the most important and celebrated achievements from the Uruguay Round of multilateral trade negotiations. The Agreement was built upon existing treaties and conventions administered by the World Intellectual Property Organization. It sets up the minimum acceptable standards for IP protections by WTO members. TRIPS also allows members to bring disputes on violations of the TRIPS Agreement to the WTO’s Dispute Settlement Body for adjudication. Regarding the dispute settlement mechanism, the new trade dispute resolution system maintains the highest authority in resolving trade disputes among WTO members. The DSM has established a tow-tiered structure of litigation, which means the losing party can ask their case to be heard by the upper level body for appeal, and the Appellate Body makes the final judgment. The system has also streamlined the dispute settlement process so that it helps minimize the role that power plays, which is common in international conflict resolution. That means a smaller or less developed country can potentially present a winnable case against a larger or more developed country. Last, the DSM only considers disputes with issues that are already covered by existing WTO agreements. If the issue in question is not clearly defined, the panel or the AB panel will make judgment and attempt to settle the dispute by interpreting specific provisions of a WTO agreement related to the issue. However, the U.S. was not in a hurry to file a formal dispute against China at the WTO. Rather, it provided China with several years of so-called “buffer time” to adjust its IPR laws and

122 other relevant laws and administrative regulations to meet the WTO standards. In April 2007, after intense from private industries and mounting pressure from Congress, the U.S. finally lodged a formal complaint against China at the WTO’s Dispute Settlement Body. The dispute focused on four areas. The first is the quantitative thresholds required by China’s criminal law, which must be met in order to pursue criminal prosecutions of either copyright piracy or trademark counterfeiting. The second concerns the disposal of infringing goods confiscated by Chinese customs authorities. The third deals with the denial of copyright and related rights protection and enforcement to works that have not been approved for publication and distribution by Chinese censorship. Finally, the U.S. contested that Chinese laws provide no criminal procedures or penalties for those who engages in either illegal reproduction or distribution of copyrighted works. The rulings of the case were adopted in March 2009 by the Dispute Settlement Body, in which the Panel supported most of U.S. claims. However, the U.S. fell short to prevail on the most important one – the high thresholds to trigger criminal procedures against counterfeiting and piracy. The Panel has ruled that existing evidence are not sufficient to demonstrate that high thresholds help reduce the availability of criminal procedures against copyright pirates and counterfeiters, and distributors of infringing products. This is particularly disappointing, because the U.S. businesses and officials have repeatedly indicated that the high thresholds are the main contributing factor to China’s ineffective IP enforcement. The U.S. filed another dispute in 2007 on China’s measures that restrict the distribution of U.S. audiovisual products in the Chinese market. Although the case was not about protection of intellectual property itself, it was still considered an important step leading to better protection and enforcement of IP in China. In this case, the U.S. sought to challenge three Chinese market access barriers to U.S. DVDs, music, books, and films for theatrical release. These barriers are: 1) China prohibits foreign entities and individuals from importing such products; 2) China prohibits foreign companies from distributing certain reading materials and music online; and 3) some imported products are confronted with more burdensome requirements than their domestic counterparts before they can be distributed in China. This case went through the entire dispute settlement procedures, including appealing process. The U.S. claims a total victory, but it remains to be seen how the victory can be translated into specific actions and improved IPR enforcement.

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THE IMPACT OF WTO ON U.S. HANDLING OF IPR INFRINGEMENT IN CHINA Through a series of interviews conducted with U.S. government officials and a representative from private industries, and research of primary documents issued by a major U.S. government agency in trade policymaking and a union of industry associations, this research has shown that China did make progress in some aspects of IPR protections since it joined the WTO, and particularly after the U.S. submitted its first IPR infringement complaint at the WTO. For instance, China has periodically issued new IPR measures since 2003. The U.S. government and U.S. right holders have reviewed these measures through the bilateral negotiations and TRIPS Council reviews. In 2008, China issued a policy document – National Intellectual Property Strategy – intended to promote and facilitate creation, development and management of IP in China. The document stresses the need to strengthen IPR protection, prevent abuses, and foster an IPR culture in China. China also acceded to the WIPO Internet treaties in 2007 for protection of intellectual property on the Internet. There are also some positive developments on the enforcement front. China issued new rules during months before the 2006 JCCT meeting to implement a previous commitment, which require all Chinese government computers to install legal operating system software, and to purchase new computers pre-installed with licensed operating system software. The U.S. software industry reported a 10-percentage-point drop of software piracy rate in China between 2003 and 2007, although the compliance rate fell from 65% in 2006 to 50% in 2008. Chinese courts have also been in action. A highly publicized case involving Microsoft and Fanqie Huayuan (literally Tomato Garden), a brand of a Chinese company long engaged in pirating and distributing Microsoft’s Windows operating system software. In August 2009, a Chinese court in Suzhou sentenced two founders of Fanqie Huayuan and two others to prison and levied $1.6 million in fine for charges on software copyright infringement. The Washington-based industry association, Business Software Alliance issued a statement cheering the verdict as “the first successful criminal case to crack down on such large-scale online piracy in China.”289 By one account, it is reported that the recent win rate for multinational corporations in lawsuits

289 Loretta Chao. “Chinese Court Issues Prison Terms for Software Piracy,” The Wall Street Journal, August 24, 2009. 124 concerning IP in China has reached to more than 50%, and in some places, this rate is over 90%.290 These positive developments indicate that the WTO is taking effect. Despite the fact that the U.S. didn’t win one of the most important claims concerning China’s criminal thresholds in its WTO dispute with China, this research shows that both U.S. government agencies and IP- intensive industries are generally pleased with the performance of the WTO’s dispute settlement mechanism in adjudicating the IPR protection and enforcement dispute between the United States and China. Interviewees noted that the rule-based system enjoys the highest authority and legitimacy in international trade conflict resolution, and China is under tremendous pressure to bring its measures in compliance with the WTO agreements. Filing a formal WTO complaint can also demonstrate to China that the U.S. is determined to take on counterfeiting and piracy in China. However, the WTO is not without problem. First, preparing a WTO case takes enormous time, and winning a case usually do not translate into an immediate effect. For example, the first U.S.-China WTO dispute over the infringement of intellectual property rights took almost two years since the United States submitted the request for consultations. It took another year for China to complete all necessary domestic legislative procedures for implementing DSB recommendations and rulings. Again, two years following China claimed that it had fully implemented DSB recommendations and rulings, the levels of counterfeiting and piracy in China remain unacceptably high. Second, some feared pursuing a formal WTO complaint could incur Chinese retaliations. More commonly, China would suspend high profile exchanges with U.S. government agencies or private sector interests if China deems that U.S. measures disgrace its image. According to one of the interviews for this research, China was actively exploring opportunities to file WTO complaints against the U.S. in agricultural subsidies, financial sectors, and other areas to retaliate possible future WTO cases on intellectual property rights. Finally, the WTO’s dispute settlement mechanism only covers issues already existed in the TRIPS Agreement or other WTO agreements. The WTO can do little to bring fundamental changes to China’s judicial system, because the WTO doesn’t require member countries to implement provisions of the TRIPS Agreement in a specific manner. Article 1.1 of the TRIPS Agreement

290 Benjamin Bai. “Yes, China Does Protect Intellectual Property,” The Wall Street Journal, February 17, 2010. Statistic numbers are based on anecdotal evidence. 125 stipulates that members shall have the authority to decide how to implement TRIPS Agreement provisions within their own legal system and practice. It is for these reasons that the U.S. cannot and will not rely solely on the WTO to address the issue of IPR infringement in China. As a result, the U.S. has adopted a cooperation-oriented strategy that is centered on bilateral negotiations and consultations on a regular and institutionalized basis, with the use of the WTO’s dispute settlement mechanism as the last resort. This research demonstrates that both U.S. government and private industries are generally satisfied with the current negotiations- centered approach to handle IPR infringement in China, and that this approach might be indeed working.291. Interview results and document research show that U.S. government agencies and private industries recognize the merits of bilateral negotiations, including the institutionalized fora, such as the annual JCCT meeting and S&ED as important and constructive means to contain IPR infringement in China. This research concludes that the U.S. is likely to maintain its current dual-track strategy, where it keeps the door for talks open, and in the meanwhile, pushes China to live up to its commitments through active use of the WTO’s dispute settlement mechanism.

THEORETICAL IMPLICATIONS This research also has broader theoretical implications to the studies of international political economy that it reconfirms one of liberal international relations theory’s core propositions that interest groups and supranational organizations are among others, fundamental actors in international political economy. This research has clearly illustrated that U.S. IP- intensive industries were the driving force in both the creation of Special 301 provisions and negotiations of the TRIPS Agreement to enhance worldwide protection and enforcement of intellectual property rights. They also play a crucial role in the ongoing U.S.-China IPR dispute. For instance, the International Intellectual Property Alliance publishes its own Special 301 Report each year, in which it reports problems and development of IPR infringement in China and dozens of other important economies, and it makes recommendations to the Office of U.S. Trade Representative for taking necessary measures, for example, WTO proceedings, or Special 301-related measures. The USTR indeed needs the information furnished by private industry groups to get informed, formulate or adjust strategies, and take appropriate actions.

291 A detailed discussion of the U.S. achievement on IPR in China since 2001 can be found in Chapter 5. 126

This research has also evidently demonstrated that supranational bureaucracies, in this case, the World Trade Organization, have an important role in international political economy. It shows that the United States as the world most powerful country is counting on the WTO to rein rampant IPR infringement in China. Interviews results indicate both U.S. government officials and IP-intensive industries are satisfied with the WTO’s involvement in its IPR dispute with China. They acknowledge that without the WTO, the U.S. could face more difficulties and hurdles to address piracy and counterfeiting issues in China. As this research pointed out in the previous chapter, all interviewees agree that the WTO’s dispute settlement mechanism enjoys the highest authority and legitimacy in settling trade disputes, and China as a member of the WTO has both legal and moral obligations to comply with WTO agreements and all dispute settlement rulings and recommendations.

WHY IS THERE A LACK OF IP ENFORCEMENT IN CHINA? Before I provide specific policy recommendations, we need to first understand the underlying reasons why the Chinese authorities are reluctant or unwilling to enforce intellectual property rights. William Alford in his book To Steal A Book Is An Elegant Offense: Intellectual Property Law in Chinese Civilization argues that the lack of intellectual property enforcement in China stems from the Chinese Communist culture and its cultural roots in Confucianism, where individual interests are subordinated to group interests. This is remarkably different from Western Capitalist culture. He contends, “current attempts to establish intellectual property law, particularly on the Chinese mainland, have been deeply flawed in their failure to address the difficulties of reconciling legal values, institutions, and forms generated in the West with the legacy of China’s past and the constraints imposed by its present circumstances.”292 In China, protection of copyrights or patents was a rare idea until late early 1980s when the Communist leadership began to engage in economic reforms. Therefore, it has been painfully difficult to promote intellectual property rights protection among Chinese officials, as well as among its huge population. In practice, perhaps the primary reason for China’s lack of IPR enforcement is that provincial and local enforcement is distressingly weak. Local officials are not genuine in their

292 William P. Alford, To Steal A Book Is An Elegant Offense: Intellectual Property Law in Chinese Civilization. (Stanford, CA: Stanford University Press, 1995), 2. 127 efforts to crackdown on counterfeiting and piracy because doing so would adversely affect local GDP growth and job creations, which have been the core performance criteria to assess local officials. For example, China’s thriving small commodities markets in many cities and towns across the country usually can bring in considerable tax revenues to local governments. However, most of these markets are also notorious distributors of counterfeits. Daniel C.K. Chow and Edward Lee in their studies of China’s IPR infringement point out that local governments are either directly or indirectly involved in supporting trade in counterfeit goods. They argue, “[c]ounterfeits has become so important that this illegal trade now supports entire local economies and a crackdown on counterfeiting would result in a shut-down of the local economy with all of the attendant costs of unemployment, dislocation, social turmoil, and chaos.”293 This explains why IPR enforcement at local levels is weak and ineffective. Long and D’Amato suggest that lack of enforcement doesn’t result from a single factor. They note, “absence of the rule of law, corruption, lack of efficient judicial enforcement mechanisms, fiscal concerns, and local culture and prejudices all contributed toward a global pirating problem that at times seemed insurmountable.”294 The above discussion demonstrates that China’s chronic and widespread IPR infringement has its deep roots, eradicating of which needs enormous efforts but also patience. The next section discusses policy recommendations to IPR infringement in China.

POLICY RECOMMENDATIONS If China’s IP infringement is so pervasive and persistent, then what the United States could do? Based on the findings from this research that the U.S. officials and private industries are so far satisfied with its current strategy on protecting U.S. intellectual properties in China, the United States is expected to follow its current path. This strategy emphasizes cooperation rather than confrontation. It is built upon bilateral negotiations and consultations, with resorting to WTO’s dispute settlement mechanism as an addition. Such a cooperative strategy is preferred because it is more conducive to draw positive responses from the Chinese. As the former U.S. Treasury Secretary Henry Paulson puts it, “The dialogue is an on-going process. To get results, we must build relationships, and take smaller, deliberate steps forward together to create

293 Daniel C.K. Chow and Edward Lee, International Intellectual Property: Problems, Cases, and Materials. (New York, NY: Thomson/West, 2006), 744. 294 Doris E. Long, and Anthony D’Amato, A Coursebook in International intellectual Property. (Columbia, MO: West Group, 2000), 578. 128 momentum for greater change. Through candid discussions, we will ease, rather than increase, tensions and get to solutions and action.”295 However, there are still several areas that the U.S. might want to do to perfect this strategy. The first thing that the U.S. might consider to do is to convince Chinese consumers, businesses and officials that stronger intellectual property rights protection is in their best interests. The U.S. government and business communities need to do more to increase the awareness among Chinese public about the benefits of purchasing legal or authorized products, whether they are DVDs or computer software. Peggy Chaudhry and Stephen Stumpf conducted a survey of consumers in five largest markets – Brazil, Russia, India, China and the U.S. – what factors would make them pick authentic out of pirated ones or counterfeits.296 The survey asks consumers of the five mentioned countries which factors they consider as more important than others during the decision-making process of whether to buy legal or fake. These factors are 1) quality and performance; 2) cost; 3) sentiment; 4) ethics; and 5) ease. With respect to the Chinese market, the survey results indicate that quality and performance, and cost are the two most important factors that the Chinese consumers consider when it comes to them whether to buy legitimate or fake. As such, U.S. companies may want to campaign Chinese consumers that the bootlegs are terrible substitutes, and in many cases, they even pose health hazards. Another thing the U.S. companies may consider to strengthen is to educate consumers that using fakes is an equivalent of steal. In the meanwhile, by purchasing the bootlegs they are helping the pirates to make huge profits, and hurt creators and/or IP holders, and drive them out of business. The U.S. government shall provide support in any kinds to its businesses operating in China to conduct such campaigns. Additionally, companies may want to offer other incentives or benefits to consumers who purchased legitimate products, for example, opportunities to enter sweepstakes, contests, or prizes. American businesses should also campaign to inform the Chinese consumers that their products of quality are the fruits of human creativity, wisdom, knowledge, hard work, which involve countless experiments and failures. In such campaigns, they may want to give consumers

295 Henry M. Paulson, Jr., former U.S. Secretary of Treasury, Remark at the Heritage Foundation, China and the Strategic Economic Dialogue (June 5, 2007). 296 Peggy E. Chaudhry, and Stephen A. Stumpf. “Getting Real About Fakes,” The Wall Street Journal, August 17, 2009. 129 solid reasons why the prices of their products are high. It is also important to let the Chinese consumers, as well as the Chinese government to be aware of that buying/purchasing fakes is not only illegal, but also unethical. Chaudhry and Stumpf suggest that “the best approach may be to appeal people’s basic sense of right and wrong.”297 My own recommendation is that U.S. companies need to make it very clear to the Chinese consumers that engaging in illicit consumption is illegal, and will face civil and even criminal penalties. On the other hand, the U.S. companies shall understand that it is equally important for them to better understand Chinese laws and how the Chinese judicial system functions. A recent study by a Western scholar even claims that the IPR is one of the very few sectors in China that bears the sign of emerging rule of law, given the country’s overall picture of rule by the state.298 That the U.S. companies are capable of maneuvering through the intricacies of law and politics in China is essential for them to prevail in IP litigations and enforcing IP rights. This is particularly the case for less well-known companies. As such, for small and mid-size companies, they might find it is useful to form local partnership with Chinese partners through establishment of joint-ventures. Part of the reason is that Chinese companies are better at dealing with local authorities and red tape. Another reason is that the Chinese authorities, as reported by U.S. business associations and government agencies, are more willing to enforce IPRs owned by locals.

297 Ibid. 298 For detailed analysis, see Martin Dimitrov, Piracy and the State: The Politics of Intellectual Property in China, (Cambridge, UK: Cambridge University Press, 2009). 130

Appendix: Interview Questions

I. The interviewee’s perception about the severity and the current status of China’s IPR infringement problem: 1. In your opinion, why is the protection of intellectual property so important to your industry, or to the United States? Could you provide the most up-to-date data? 2. What is the overall situation of IPR protection in developing and least-developed countries? 3. If the IPR protection is in general weak in developing countries, what factors make China more problematic? 4. What is the current situation of IPR infringement in China? 5. What has China done recently (since its accession to the WTO) to improve IPR protection, and what are the positive developments? 6. How has poor enforcement of IPR laws and regulations adversely affected your industry, your organization, or the U.S. economy? Could you provide specific evidence? 7. In your opinion, what are the most acute problems within China’s IPR regime, and what are the most damaging aspects of China’s IPR infringement? II. The interviewee’s perception about China’s efforts in controlling IPR infringement: 1. Do you think the Chinese government has a good faith in combating piracy? 2. Do you think the Chinese government has recently made substantial efforts to contain IPR infringement, if yes, in which aspects; if no, could you explain? 3. In your opinion, what are the most important elements causing China’s lax enforcement of IPR laws? III. The interviewee’s perception about the efficacy of the past U.S. negotiations with the Chinese government in resolving the IPR problem: 1. In the past, the United States used its domestic laws, i.e. Section 301, Special 301 and other unilateral measures such as threats of suspending China’s MFN status to push China for better protection of intellectual property. Between late 1980s and mid- 1990s, the United States conducted three major negotiations with the Chinese, pressuring China to step up its measures against piracy, counterfeiting and other forms of intellectual property infringement. In your opinion, why did those negotiations eventually fail to correct the problem? What are the problems with this much aggressive approach? 2. What are the positive developments/achievements associated with those negotiations? 3. Bilateral negotiations or diplomacy has been a major approach used by the United States since China’s accession to the WTO in 2001. Has this milder approach been effective? What are the pros and cons? 4. In your opinion, should the United States continue using diplomatic oriented approach in dealing with China’s IPR problem? If yes, why? If not, what are the possible alternatives? IV. From an affected industry’s perspective, the interviewee’s perception about the current U.S. measures against piracy in China: 1. In your opinion, has the U.S. government done enough to improve the situation of IPR protection in China? 2. Have the relevant U.S. government agencies been receptive to your complaints?

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3. Do you think that the U.S. is constrained by its obligations under the WTO and other international institutions in its fight against counterfeiting and piracy in China? If yes, what are your solutions? 4. Would your organization be willing to lobby Congress in the future to pass news legislations or take additional measures with regard to China’s IPR problem? V. The interviewee’s views and experience with the WTO Dispute Settlement System, and whether this mechanism is an answer to the U.S. IPR problem with China: 1. The United States filed a formal dispute against China in 2007 at the WTO on protection and enforcement of intellectual property rights. The Panel Report was adopted on March 2009. In your opinion, are you satisfied with the WTO rulings? What are your complaints about the rulings? 2. What are the major difficulties for the U.S. to prevail? 3. What are the positive aspects with regard to using WTO dispute settlement system? 4. Based on the rulings, do you think that the WTO’s dispute settlement system is the best choice available to handle China’s IPR problem? 5. What are the most significant problems with the WTO, including the TRIPS Agreement and the dispute settlement system? 6. In which aspect(s), do you seek improvement in the WTO with respect to China’s IPR case? 7. Do you think that compliance with the WTO rulings is an issue? 8. Based on the experience with the WTO’s dispute settlement system so far, do you think the United States will file another dispute against China on the enforcement of intellectual property rights? If yes, what would the U.S. do?

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