United States International Trade Commission China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy Investigation No. 332-519 USITC Publication 4226 May 2011 U.S. International Trade Commission COMMISSIONERS Deanna Tanner Okun, Chairman Irving A. Williamson, Vice Chairman Charlotte R. Lane Daniel R. Pearson Shara L. Aranoff Dean A. Pinkert Robert B. Koopman Acting Director of Operations Nannette Christ Karen Laney Acting Director of Economics Director, Office of Industries Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 U.S. International Trade Commission Washington, DC 20436 www.usitc.gov China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy Investigation No. 332-519 USITC Publication 4226 May 2011 Project Leaders Alexander Hammer Katherine Linton [email protected] [email protected] Deputy Project Leader Jeremy Wise [email protected] Office of Economics Eric Cardenas, Caitlyn Carrico, Dylan Carlson, Robert Feinberg, Michael Ferrantino, Tani Fukui, Nick Grossman, Joanne Guth, Kyle Hutzler, Kyle Johnson, Seidu Dauda, Nathanael Snow, James Stamps, Danielle Trachtenberg, Samantha Warrington, and Edward Wilson Office of Industries Lisa Ferens Alejandro, Peder Andersen, Tamar Asadurian, Renee Berry, Laura Bloodgood, David Coffin, Cathy Jabara, Jeanette Leary, Kathryn Lundquist, David Lundy, Elizabeth Nesbitt, Samira Salem, and Donald Sussman Special Assistance with the Questionnaire John Benedetto, Rebecca Brofft, Gail Burns, Cindy Cohen, Vincent DeSapio, Rebecca Esmaili, William Greene, Erland Herfindahl, Aaron Honsowetz, Jackie Jones, John Kitzmiller, Eric Land, Aimee Larsen, Lara Lowenstein, Dennis Luther, Erick Oh, Mary Messer, Angela Newell, Samantha Pham, Stefania Pozzi Porter, Amelia Preece, Mathew Reisman, Laura Rodriguez, George Serletis, Amy Sherman, Philip Stone, Karen Taylor, Stephen Wanser, Falan Yinug, and Charles Yost Questionnaire Administrative Support Janice Allen, Phyllis Boone, Judy Bryant, Brenda Carroll, Patricia Cooper, Sharon Greenfield, Lita David-Harris, Carolyn Holmes, Cynthia Payne, Monica Reed, Lemuel Shields, Darlene Smith, and Wanda Tolson Office of the General Counsel Sidney Rosenzweig Content Reviewers Walker Pollard and John Fry Editorial Review Peg Hausman Administrative Support Tabitha Scallan Under the Direction of Arona Butcher, Chief Country and Regional Analysis Division ABSTRACT China’s rapid economic transformation over the past three decades has presented both opportunities and challenges to many U.S. businesses. Despite broad success in the China market, many U.S. companies have reported that two major factors—the infringement of their intellectual property rights (IPR) in China and China’s indigenous innovation policies—have undermined their competitive positions. In response to a U.S. International Trade Commission (Commission) survey, many U.S. firms reported losses associated with IPR infringement in China, including losses in sales, profits, and license and royalty fees, as well as damage to brand names and product reputation. U.S. firms have reported losses associated with China’s indigenous innovation policies as well, but have been mostly concerned about the future implications of these evolving policies in such areas as technical standards and preferential support to Chinese firms. In this second of two interconnected reports requested by the U.S. Senate Committee on Finance, the Commission was asked to estimate the effect of reported IPR infringement in China and China’s indigenous innovation policies on the U.S. economy and employment, to the extent feasible. This report provides such estimates, on both an economy-wide and sectoral basis, using a combination of analytic tools and qualitative information. i CONTENTS Page Abstract ................................................................................................................................ i Acronyms........................................................................................................................... ix Executive Summary ............................................................................................... xiii Chapter 1: Introduction .................................................................................. 1-1 Objective ................................................................................................................................. 1-2 Approach ................................................................................................................................. 1-4 Using the Questionnaire.................................................................................................... 1-4 Using Statistical and Simulation Analysis........................................................................ 1-4 Using Case Study Analysis............................................................................................... 1-5 Scope ....................................................................................................................................... 1-5 Information Sources................................................................................................................ 1-6 Organization ............................................................................................................................ 1-7 Definitions............................................................................................................................... 1-9 Chapter 2: Trends and Characteristics of Chinese IPR Infringement and Indigenous Innovation Policies: External Sources ................................................................................................. 2-1 IPR Seizure Statistics .............................................................................................................. 2-1 U.S. Seizures of Counterfeit Goods from China............................................................... 2-1 China’s Role in Counterfeit Goods Trade.................................................................. 2-2 Types of Counterfeits Seized in the United States ..................................................... 2-4 Other Countries’ Seizures of Counterfeits from China..................................................... 2-4 Factors Facilitating Counterfeiting ................................................................................... 2-6 Limitations of Seizure Data .............................................................................................. 2-8 IPR Infringement in China and the Role of the Internet.......................................................... 2-9 Counterfeiting and Piracy on the Internet......................................................................... 2-10 Online Marketplaces for Counterfeits ........................................................................ 2-10 Digital Piracy Mechanisms ........................................................................................ 2-12 IPR Infringement and the Internet: Information Gaps ...................................................... 2-13 Approaches to Measuring IPR Infringement and Indigenous Innovation............................... 2-16 The Costs of IPR Infringement......................................................................................... 2-16 Global Effects of Global Infringement....................................................................... 2-16 Effects on U.S. Economy of Global Infringement ..................................................... 2-17 Sector-Specific Studies of IPR Infringement ............................................................. 2-17 Studies on Other Countries......................................................................................... 2-18 Statistical Studies of Infringement’s Impact on U.S. Firms....................................... 2-18 The Effect of IPR Infringement on Employment ............................................................. 2-20 Patent Protection and Employment Effects................................................................ 2-21 Indigenous Innovation...................................................................................................... 2-21 iii CONTENTS—Continued Page Chapter 3: Reported Effects from IPR Infringement in China on U.S. Economy (Survey Results)............................... 3-1 Key Findings........................................................................................................................... 3-1 Survey Overview: Questionnaire and Methodology ............................................................... 3-2 Sector Selection................................................................................................................ 3-2 Firms that Experienced IPR Infringement in China.......................................................... 3-4 Organization of this Chapter............................................................................................. 3-7 Survey Results: IPR Infringement-Related Losses and Expenses........................................... 3-8 Estimated Losses Due to Chinese IPR infringement ........................................................ 3-9 IPR Infringement Expenses and Impact of Improved IPR Protection and Enforcement.. 3-12 IPR Infringement Expenses.......................................................................................