World Trade Organization Membership and Intellectual Property Rights
Although China joined the World Trade Organization (WTO) in September 2001 after 16 years of negotiations and in so doing indicated that it was willing to abide by WTO rules to lower tariffs and non-tariff barriers to the import of foreign-made goods and services, the United States contends that China is still engaging in “unfair trade practices” contrary to the WTO’s practices.
What are some of the “unfair” trade practices the United States is accusing China of?
Unfair Subsidies: Doling out subsidies and tax rebates to discourage imports and prop up domestic industries in energy, aerospace, telecommunications and financial services, sectors that typically are not as strong as their foreign competitors.
Quotas: Setting Quotas on products like movies (only 20 Hollywood movies a year can be shown), books, and music.
“Economic Nationalism”: Preferential treatment for and regulations that favor local industries over their foreign competitors, for example by requiring safety inspections for foreign-made medical equipment but not those in China, or requiring that automobiles made in China have local content, thus limiting the import of auto parts.
Intellectual Property Rights Violation: Failure to protect intellectual property rights (IPR) and enforcing copyright and trademark rules, evident in the rampant piracy of everything from computer software and Hollywood films to designer handbags and clothing.
What is the United States’ response to China’s alleged failure to abide by WTO rules?
The U.S. typically first engages in bilateral talks and negotiations (marked by lots of complaints and recriminations on both sides), and failing that, seeking recourse through international channels like the WTO.
-In 2007, the U.S. filed three cases with the WTO, the first citing unfair subsidies across a range of China manufactured products, another challenging aspects of China’s IPR enforcement and the third challenging market access restrictions affecting films, DVDs, music, books and journals.
-In early 2008, the U.S. and European Union filed a case against China’s restraints on financial information providers.
-In early 2008, China received its first defeat at the WTO when the latter ruled in favor of the U.S. and European Union that Beijing was improperly taxing auto parts at the same rate as finished autos when it agreed earlier not to.
China sees itself as a developing socialist-market economy that needs time and some leeway to progress. Despites its accession to the WTO, China maintains that implementation of the rules and opening China up more fully to free trade will take time, and points to all the imports that are already allowed into the country.
When the United States first took China to court at the WTO over the issue of piracy of movies, music and software, the Chinese saw this as a personal insult (in retaliation, they temporarily suspended the import of American movies, although they denied that that was the reason). However, with subsequent disputes, China has shown increasing sophistication and conciliation and has said it is willing to handle issues according to the WTO dispute resolution procedures. In December 2007, just ahead of the fourth Strategic Economic Dialogue between the U.S. and China, China agreed to remove a dozen subsides and tax rebates for its own exports in the areas of steel, wood products, and information technology, but because some of these rebates were for Chinese companies that partly owned by Americans, the effect may not be one that is unanimously positive for America.
How serious is the infringement of Intellectual Property Rights in China?
Protection of Intellectual Property Rights (IPR) in China is one of the more intractable and vexing issues in the U.S.-China relationship. From movies and music to books, medicines, designer accessories and software, one can find counterfeit copies of just about anything a typical consumer uses in daily life. American businesses are crying foul over the billions of dollars lost to counterfeiting in China. To be sure, it is not just foreign IP rights that are infringed upon. There is a high level of infringement of Chinese domestic IP by other Chinese as well. Online piracy is also commonplace: the illegal downloading of movies, software and music constitutes the most prevalent form of online piracy in China. The following numbers illustrate the scope of the problem:
• The Business Software Alliance estimates that in 2005, 86% of all software used in China was pirated, accounting for a $3.9 billion dollar sales loss.
• The U.S. music industry estimates the market for sound recordings in China is almost 90% pirated, resulting in losses of more than $200 million per year.
• Nine out of every 10 DVDs sold in China is an illegal copy, according to the Motion Picture Association.
The Chinese Government’s Response to IPR Protection
A modern IP system has been established in China only since the 1980s. In the last three decades, the government has passed a variety of IP laws, tried to encourage greater public awareness of the issue, and periodically cracked down on piracy by publicly closing down knock-off markets or shops in big coastal cities like Shanghai and Shenzhen. By almost all accounts, however, the government has not been very successful at protecting IPR. Part of this derived from a different view of IP from that of the United States’ and other western countries.
View of IP: Until very recently, rather than seeing intellectual property (IP) as having an intrinsic value, China used to regard high IP costs (which are often more than hardware manufacturing costs) as attempts to contain Chinese manufacturers on the global scene and as a “tax” by less competitive foreign economies to maintain monopoly in their industries. This often led to the Chinese trying to reduce IP costs as a fraction of manufacturing costs by trying to negotiate relief from the high licensing costs of technologies used in things like DVD and MP3 players, while trying to find other locally controlled technologies that would cost next to nothing. Naturally, this approach did not sit well with IP-owning multinational corporations.
New IP Strategy: Recently, however, the Chinese government appears to have realized the value of IP in generating innovation and promoting the use of new technologies in China’s industries for the long-term economic development of the country. To that end, it unveiled a new IP strategy in June 2008 that would among other things:
• Strengthen existing laws such as the Patent Law, Trademark Law, and Copyright Law
• Legislate protection for Genetic Resources, Traditional Knowledge, and Folklore
• Promote IP creation
• Crack down on infringement of IPR
• Make a concerted effort to raise public awareness about the significance and value of IPR for China’s future
• Set up around 40 centers around the country for IPR protection that would provide consultation and financial assistance to those who cannot afford to pursue legal redress
• Strengthen the Chinese People’s Courts to better enforce IP laws. More than 100,000 cases a year of IPR violation are filed (about 90% by domestic firms) in Chinese courts and other administrative bodies, but huge barriers have remained to eradicating piracy.
Challenges To Protecting IPR And Eradicating Piracy
Counterfeiting Creates Economic Growth: Counterfeit production hubs abound in cities like Taizhou (auto parts), Chaozhou (cosmetics), and Wengang (pens) where people’s livelihoods and the cities’ economic prosperity are often dependent on some amount of counterfeiting.
Weak Enforcement: The collusion of local authorities, driven by the desire to profit economically from counterfeit products, leads to weak to non-existent IPR enforcement. Despite periodic crackdowns, counterfeiting activities are merely driven underground, not eradicated.
People Want Cheap Goods: Continuing demand by consumers and tourists for cheaper versions of expensive/luxury goods
Lax Penalties: Court fines and sentences are usually not stringent enough to be a deterrent. Some judgement awards are too small to be able to pay for investigative and legal costs.
IPR – Looking Ahead
The success of China’s new IP strategy will depend largely on the enforcement of existing and new laws, and on how China balances its long-term goal of innovation and growth, with the short-term economic benefits that some sectors may derive from counterfeiting.
With its latest IP strategy, China recognizes that it still has a long way to go before it can catch up with the U.S. in IP use, generation, and protection, but it has wisely acknowledged this and asked the U.S for assistance, possibly thereby defusing the sensitivity of the issue. Yet, because strengthening legal systems and raising public awareness take time, IPR will likely continue to be a challenging issue in the U.S.-China relationship, and those fighting for IPR in China will continue to face an uphill battle in the near term.
The United States will likely continue to apply pressure on China to enforce IPR using every available means although experts have advocated using the Dispute Settlement Mechanism of the WTO rather than bilateral confrontation, which often yields only nationalistic responses and recriminations on both sides. Bilateral confrontation is likely to continue, however, as the stakes for American businesses are too high, so expect a continuous cycle of mutual threats of protectionism and other punitive measures, though likely everyone’s bark will be worse than their bite.
More Litigation: On the ground in China, court cases will continue to be filed and many of them may be successful, though foreign companies might have to temper their expectations of receiving a western form of redress from the Chinese courts.
Value of IPR: It remains to be seen whether the Chinese government has truly embraced the value of IP. Ultimately, until both sides have the same understanding of and apply the same value to IPR, it will continue to be a source of tension between the two countries.
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2 Frances Williams, “WTO rules against China over tariffs,” Financial Times, July 19, 2008, http://www.ft.com/cms/s/0/f20fd9ee-551f-11dd-ae9c-000077b07658.html (accessed 7/22/08).
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6 Kenneth J. DeWoskin, “China: Key Issues for Business,” China Into the Future: Making Sense of the World’s Most Dynamic Economy, ed. W. John Hoffmann and Michael J. Enright. (Singapore: John Wiley & Sons (Asia) Pte. Ltd.), 80.
7 DeWoskin, 81.
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10 Jamil Anderlini, “The realities of tackling corporate brand theft in China,” Financial Times, January 22, 2008, http://www.ft.com/cms/s/0/476ecf8c-c88d-11dc-94a6-0000779fd2ac.html (accesed 1/22/08).
11 Don Lee, “Fake Pens Write Their Own Ticket,” Los Angeles Times, December 17, 2007, http://www.latimes.com/business/la-fi-fakepens17dec17,0,6138708,full.story?coll-la-home-business (accessed 7/21/08).
12 Wang Qishan, “No More Chinese Knock-Offs,” The Wall Street Journal Online, June 17, 2008, http://online.wsj.com/article/SB121366822005079739.html (accessed 6/17/08).