PAPER POLICIES: CHINA STILL STRUGGLES WITH IPR PROTECTION

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PAPER POLICIES:

CHINA STILL STRUGGLES WITH IPR PROTECTION

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Michelle A. Sparkman Elliott School of International Affairs, The George Washington University Economics 283 – Spring 2001 Sparkman@gwu.edu April 12, 2001

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Paper Policies: China still struggles with IPR protection

Advocates of China’s entry into the WTO assert that China has made sufficient improvements in their protection and enforcement of intellectual property rights.

However, evidence of actual improvement has not been realized and new problems are erupting. In addition, until China properly faces the ideological and cultural aspects of copyright infringement, any attempts at change will prove futile.

The issue of intellectual property rights (IPR) in China is no small matter, rarely anything is in a country of 1.3 billion people. Shen Rengan, the vice director of the China State Copyright Bureau (CNCB) estimated that the total value of China’s domestic copyright sector constitutes 5% of the national GDP.¹ This figure compares to that of the United States, whose copyright sector was 6.53% of GDP in 1997.² These numbers give reason for the Chinese government’s new eagerness to embrace international firms and increase business in relevant sectors (such as books, newspapers, magazines, audio and video publications, and e-publications). While the Chinese would like to see continued growth in these sectors, necessary changes must be made to protect foreign investors from the piracy that has prevented real profits and even kept many firms from entering the risky market.

The Chinese government should make changes not only in the formation of more stringent laws, but tough enforcement measures as well. The United States has

exchanged dialogue and memorandums of understanding (MOUs) with China regarding the topic of IPR protection since 1992. With the U.S. at the lead, changes in China’s IPR

1 China Online News article: “Copyright material nears 5% of GDP.” (March 30, 2001) Chinaonline.com [Retrieved online 4-1-01].

2 Ibid.

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record are a sticking point in the negotiations for their entry in the World Trade Organization (WTO), a process that began in 1986.

This paper will explore the changes China has made to address IPR protection both before and after negotiating the U.S. bilateral agreement toward WTO accession.

One would expect to find evidence that China has made significant improvements in regard to the protection of IPR since the United States (in March 2000) expressed support for China’s accession.³ This paper argues that despite the change in U.S. policy,

evidence indicating Chinese improvement is mixed. In conclusion, the state of intellectual property right protection in China should not be hastily determined.

The foundation for any sort of real IPR protection must come from legal reform.

China is currently improving its legislation to allow for copyright and trademark laws more closely resembling TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights).⁴ They revised their patent law in August 2000 to make it both easier to undergo patent examination and receive protection.⁵ This change is quite significant;

however, much of the motivation for these efforts is the growing importance of

intellectual property in the Chinese economy itself. Domestic software firms have now identified piracy as their largest obstacle to development. Regrettably, meeting both new domestic and long-time foreign calls for better IPR protection has been hindered by government corruption, lack of trained staff, diverging laws in different jurisdictions, and inherent difficulties in stopping underground movements.

3 Letter from John Pepper, Chairman of the President’s Advisory Committee for Trade Policy and Negotiations (ACTPN). April 3, 2000. [Retrieved online at: www.ustr.gov, 3-30-01] The U.S.-China bilateral agreement.

4 Trade Summary for People’s Republic of China 2001. U.S. Trade Representative, p55. [Retrieved online at www.ustr.gov, 3-30-01].

5 Trade Summary 2001, p55.

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The disconnect between national laws and provincial and local government laws presents a serious problem. Often, laws do not agree to the same terms and difficulties arise when many offenders, lawyers, and even judges seek to meet their local self- interests rather than follow regional or national procedures on IPR protection. This demonstrates the widespread depth of corruption and lack of faith in the national system.

The matter is unfortunately worse for foreign firms than domestic ones. Foreign

copyright owners are required to deal with the National Copyright Administration, which presents time delays and service that is potentially not as stringent and protective as what some local laws provide for. Chinese officials have agreed to eliminate this procedure for foreign firms when they become a member of WTO.⁶ Despite these changes, placing foreign firms on par with domestic firms hardly solves the problem when forces such as those mentioned in the local and regional atmospheres will continue to plague copyright sensitive industries.

The Chinese declared in 1996 that they would focus on IPR protection under a

“Special Enforcement period.” Making good on their promise, China conducted a recent sting operation that was its largest anti-piracy operation to ever take place. The operation resulted in the destruction of seven illegal optical disk production lines and 23 suspects arrested who will face charges under China’s Criminal Law. The government adapted to the problem of self- interest seeking by giving individuals that helped in the uncovering of the underground operations cash rewards.

While the sting operation was extremely successful, U.S. film industry fears were confirmed when DVD production lines were discovered in the factories.⁷ This finding

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reveals the fact that copyright violators in China are using more sophisticated

technologies and expanding their illegal production to new areas that the government has yet to address. In addition, there is no noticeable improvement in the protection of books and journals, a deficiency verified by an industry representative who estimated that copyright infringement in these areas led to the loss of $130 million in 2000.⁸

This inability to protect company trademark rights has expanded to new IPR issues, including Internet domain name piracy.⁹ Problems focused on e-publishing, e- commerce, and domain names will only worsen as Internet usage grows in China, where over 22 million had access to the World Wide Web in 2000.

Problems in pharmaceutical and brand name counterfeit are also worsening. An unnamed American executive complained that more fake products in the first five months of 2000 had been confiscated than in the previous two years combined. The Chinese State Council Development and Research Center published a report in June 2000 that blamed slack law enforcement, inadequate punishment, and lack of respect for the law for the continuing problems of IPR piracy. The fact that the report was not swept under the rug and received wide media coverage indicates an improved attitude for the Chinese government.¹⁰ In addition, a revision of the product quality law took place that same month and resulted in tougher punishment for the making and selling of fake and

substandard goods. Enforcement agencies were given the right to order inspections, view business transaction documents, and confiscate counterfeit products. Regrettably, these improvements are only examples of what is widely needed among several industries before real change in IPR can occur in China.

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In October 2000 China launched a national campaign against counterfeit products whose target was foreign- investment enterprises. While this demonstrates another surface- level improvement in Chinese protection policies, implementation of the

campaign and such efforts continues to be a problem. A shortage of agents authorized to handle trademark applications from foreign companies, enforcement problems, and lack of stringent criminal and civil penalties seek to undermine many of the protection efforts.

Despite the difficulties China is having in IPR protection it is not the worst offender, surprisingly Japan and Germany rank above in violations.¹¹ What is worrisome though is China’s rate of IPR violations – where in 1996 it was estimated that China was surpassed only by Vietnam and Indonesia.¹²

The economic concerns of IPR protection are very much connected to the unique culture of China. Mark Cohen asserted that IPR is a “bellwether of China’s adjustment to the West.” Cohen also wrote that China’s cultural tradition itself (both communist and pre-communist) seemed to be at odds with providing protection to IPR.¹³ Pamela Yatsko provided a deeper perspective when she pointed out in an article for Fortune magazine that cultural differences in China make the concept of copyright infringement and intellectual property protection somewhat incomprehensible. According to Yatsko,

“copying enjoys a long tradition in China and does not carry a stigma. Copying a masterpiece was historically considered an art form in its own right, while Chinese students have been taught for centuries to copy their teachers as accurately as possible

11 Marshall, Patrick. “Guarding the Wealth of the Nations.” The Wilson Quarterly, January 1, 1997 p 64.

12 Lampton, David M. “China.” Foreign Policy, April 1998, page 13.

13 Cohen, Mark A. “Protecting the Intangible: Intellectual Property Issues in Sino-Foreign Ventures.”

1997. Retrieved online at www.chinaipr.com/lprwp5.htm.

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before attempting to create.”¹⁴ These cultural differences are probably the largest obstacle for China to overcome in IPR protection efforts.

Considering everything discussed above, one might ask why the US approved the 1999 bilateral accession agreement that will lead China closer to WTO accession despite these problems?’ The answer is unclear, especially when China does not even rank among the top ten nations (or territories) in terms of U.S. Capitol Hill lobbying efforts!¹⁵ It is clear that China’s attitude and attempt at IPR protection and enforcement have improved. For instance, the Chinese government pledged that all public entities would only use legitimate software. The Chinese have established many new offices and agencies to monitor and enforce IPR issues; the State Intellectual Property Office (SIPO) is an example of a completely new entity created in 1998.¹⁶

Although actual progress has not been something as easily and clearly

demonstrated, business in intellectual property is expanding in China - evidence of this is the recent announcement by Oracle Corp., (the world’s second largest software

enterprise) planning to set up its Asia-Pacific commercial headquarters in Shanghai.¹⁷ In addition, US exports to China have grown faster than sales to any other country in the last decade and exceeded $16 billion last year.¹⁸ The United States has become the third largest investor in China. For these reasons, the U.S. has committed itself to helping

14 Yatsko, Pamela. “Knocking out the Knockoffs.” Fortune Magazine, 10-02-2000, p 213. [Retrieved online through Dow Jones International Search Engine, 3-22-01.]

15 Lampton, David. p13.

17 Minister of Foreign Trade and Economic Cooperation, PRC Website. News Release: “Overseas Investors Eye Shanghai Market after China’s WTO Entry.” 3-23-2001.

18 Alden, Edward and McGregor, Richard. “Saving private enterprise.” The Financial Times. April 7 -8, 2001, page 6.

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China in IPR protection by providing assistance from the U.S. Customs Service, the Department of Justice, and the Patent and Trademark Office.¹⁹

While it has made legislative and enforcement improvements on its own and with the help of the United States, China desperately needs reform to achieve significant IPR protection. More importantly, as trade increases it is important for China to address the cultural aspects of IPR protection for real results to be achieved.

19 Trade Compliance Center (www.mac.doc.gov). PRC Intellectual Property Rights Memorandum of Understanding- 1995 Action Plan.