U.S. Trade Representative Susan C. Schwab announced today that the United States will make two requests tomorrow for World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China: one over deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products, and the other over China’s barriers to trade in books, music, videos and movies.

"Piracy and counterfeiting levels in China remain unacceptably high,” Ambassador Schwab said. “Inadequate protection of intellectual property rights in China costs U.S. firms and workers billions of dollars each year, and in the case of many products, it also poses a serious risk of harm to consumers in China, the United States and around the world. We acknowledge that China’s leadership has made the protection of intellectual property rights a priority and has taken active steps to improve IPR protection and enforcement. However, while the United States and China have been able to work cooperatively and pragmatically on a range of IPR issues, and China has taken numerous steps to improve its protection and enforcement of intellectual property rights, we have not been able to agree on several important changes to China’s legal regime that we believe are required by China’s WTO commitments. Because bilateral dialogue has not resolved our concerns, we are taking the next step by requesting WTO consultations. We will continue to welcome dialogue with China in an effort to resolve these issues. We also look forward to continuing fruitful bilateral discussions with China on other important IPR matters we have been working on together, since achieving comprehensive IPR protection requires concerted efforts on many fronts. Ultimately, it is in the best interest of all nations, including China, to protect intellectual property rights.”

“In the same vein, we have discussed with China in detail the harm to U.S. industries, authors and artists who produce books, journals, movies, videos, and music caused by limiting the importation of these products to Chinese state-owned entities, and the problems caused by Chinese laws that hobble the distribution of foreign home entertainment products and publications within China. These products are favorite targets for IPR pirates, and the legal obstacles standing between these legitimate products and the consumers in China give IPR pirates the upper hand in the Chinese market.”

“As we continue to have an open dialogue with China in an effort to resolve these particular issues with the help of the WTO dispute resolution mechanisms, we will of course also continue to put serious efforts into our joint work with China on innovation policy, intellectual property protection strategies, and the range of other important matters in our bilateral economic relationship through the U.S. – China Strategic Economic Dialogue and the Joint Commission on Commerce and Trade.”

IPR Consultations

The United States’ consultation request on IPR protection and enforcement seeks to eliminate significant structural barriers that give pirates and counterfeiters in China a safe harbor to avoid criminal liability, to reduce the volume of counterfeit goods crossing the border into China, and to give copyright owners more tools to prevent unauthorized copies in China.

The U.S. IPR consultation request focuses on provisions of Chinese law that create a substantial “safe harbor” for wholesalers and retailers who distribute or sell pirated and counterfeit products in China. China has established quantitative thresholds that must be met in order to start criminal prosecutions of copyright piracy and trademark counterfeiting. China appears to have lowered some of these thresholds recently, which is an important recognition of the problems thresholds create. However, wholesalers and distributors still will be able to operate below high thresholds without fear of criminal liability. These thresholds appear to effectively permit large-scale piracy and counterfeiting.

The U.S. IPR enforcement consultation request also focuses on the rules for disposal of IPR infringing goods seized by Chinese customs authorities. Those rules appear to permit goods to be released into commerce following the removal of fake labels or other infringing features, when WTO rules dictate that these goods normally should be kept out of the marketplace altogether.

The third IPR enforcement issue concerns the Chinese copyright law’s apparent denial of copyright protection for works poised to enter the market but awaiting Chinese censorship approval. It appears that Chinese copyright law provides the copyright holder with no right to complain about copyright infringement (including illegal/infringing copies and unauthorized translations) before censorship approval is granted. Immediate availability of copyright protection is critical for new products entering a market, and it appears that copyright protection is available immediately to Chinese works.

Beyond these three problems, an additional IPR enforcement issue may exist, concerning the scope of China’s criminal law with respect to copyright piracy. In particular, the law appears to provide that someone who reproduces a copyrighted work without the owner’s permission is not subject to criminal liability unless he also distributes the pirated work. Thus, persons who copy large quantities of copyrighted goods may face no possibility of criminal punishment. However, late last week, China issued a judicial interpretation that appears designed to address this problem. The United States welcomes this potential development and looks forward to discussing it with China during WTO consultations.

The measures at issue in the U.S. IPR enforcement consultation request appear to be inconsistent with China’s obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), to discriminate against U.S. rights holders, to cause significant harm to IPR owners, and to impede trade between China and other WTO Members.

Market Access Consultations

The U.S. market access related WTO consultation request seeks to eliminate Chinese import and internal distribution barriers that significantly hamper the ability of U.S. publishers and producers of audio-visual products to get their legitimate products into the Chinese marketplace under normal market conditions.

The U.S. market access consultation request focuses on a Chinese legal structure that denies U.S. companies the right to import books, journals, movies, music, and videos, and instead requires all imports to be channeled through specially authorized state-approved or state-run companies. Such trading rights are a key element of market access, allowing U.S. companies to control when, where and how their products enter China.

The U.S. market access consultation request also focuses on Chinese rules that severely impede the efficient and effective distribution of publications and home entertainment video products within China. These rules appear to prohibit some distribution activities outright, and in other areas, they seem to apply discriminatory rules to U.S. and other foreign companies involved in the activities that are allowed. These barriers slow down the flow of genuine products within China and give opportunities for IPR piracy and counterfeiting to flourish instead.

The measures at issue in the U.S. market access consultation request appear to be inconsistent with China’s obligations under its WTO Accession Protocol and under the WTO General Agreement on Trade in Services (GATS Agreement), to discriminate against U.S. companies, to cause significant harm to the publication and audio-visual industries, and to worsen the problems of IPR piracy and counterfeiting in China.

Background

WTO Procedures

A request for consultations is the first step in a WTO dispute. Under WTO rules, if the parties do not resolve a matter within a 60-day consultation period, then the complaining party may refer the matter to a WTO dispute settlement panel.

Key United States – China Dialogues

The U.S.-China Joint Commission on Commerce and Trade (JCCT), in conjunction with the high-level U.S.-China Strategic Economic Dialogue established in September 2006, are the main vehicles through which USTR, together with the Department of Commerce, cooperate with China on IPR issues. USTR and the U.S. Patent and Trademark Office co-chair the JCCT’s Intellectual Property Rights Working Group (IPRWG) with China’s Ministry of Commerce. U.S. and Chinese agencies responsible for IPR protection and enforcement meet regularly in the IPRWG to discuss IPR issues. The initiation of the Strategic Economic Dialogue (SED) provides a broader strategic framework for issues related to innovation and IPR, and strategic input to the JCCT process.

To date, the JCCT and the IPRWG have supported and facilitated China’s decisions to take a number of important steps to amend or adopt a range of laws, regulations and other measures in the IPR area, including:

• Regulations to enhance protection for copyrighted works on
the Internet, in preparation for China’s recent accession to the
WIPO Internet Treaties;

• Measures to protect intellectual property rights at trade fairs;

• New patent examination guidelines;

• New standards for the review of trademarks;

• New requirement that legal operating system software be
installed on all computers manufactured in or imported into
China, and requirement that government agencies at all levels
purchase only such computers;

• Adoption of plan to encourage use of legal software by
enterprises; steps to ensure government agencies use only
legal software.