[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



                   ISSUES BEFORE THE U.S.-CHINA JOINT
                    COMMISSION ON COMMERCE AND TRADE

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE, 9 2005

                               __________

                           Serial No. 109-73

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia                   Ranking Member
BARBARA CUBIN, Wyoming               MIKE ROSS, Arkansas
GEORGE RADANOVICH, California        EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire       EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania        SHERROD BROWN, Ohio
MARY BONO, California                BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska                  GENE GREEN, Texas
MIKE FERGUSON, New Jersey            TED STRICKLAND, Ohio
MIKE ROGERS, Michigan                DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho          JIM DAVIS, Florida
SUE MYRICK, North Carolina           CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania             TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee          JOHN D. DINGELL, Michigan,
JOE BARTON, Texas,                     (Ex Officio)
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Dudas, Jon W., Undersecretary of Commerce for Intellectual 
      Property, Director, United States Patent and Trademark 
      Office.....................................................     7

              Additional Material Submitted for the Record

    United States Patent and Trademark Office, response to 
      questions from Hon. Barbara Cubin and Hon. Jan Schakowsky..    34

                                 (iii)

  

 
                   ISSUES BEFORE THE U.S.-CHINA JOINT


 
                    COMMISSION ON COMMERCE AND TRADE

                              ----------                              


                         THURSDAY, JUNE 9, 2005

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:22 p.m., in 
room 2123 of the Rayburn House Office Building, Hon. Cliff 
Stearns (chairman) presiding.
    Members present: Representatives Stearns, Blackburn, 
Schakowsky, and Green.
    Staff present: Andy Black, deputy staff director, policy; 
Chris Leahy, policy coordinator; David Cavicke, general 
counsel; Brian McCullough, professional staff; Will Carty, 
professional staff; Billy Harvard, clerk; Terry Lane, deputy 
communications director; Larry Neal, deputy staff director, 
communications; Jonathan Cordone, minority counsel; Turney 
Hall, staff assistant; and David Vogel, staff assistant.
    Mr. Stearns. Good afternoon. The subcommittee will come to 
order. I want, first of all, to start by thanking the 
Department of Commerce for appearing here today to talk about 
the U.S.-China Joint Commission on Commerce and Trade, the 
JCCT. Now, there are many important issues to discuss with 
regard to China. Given the importance of intellectual property 
rights--IPR--to the American economy and its engine of 
innovation, we are particularly glad that Mr. Dudas has come to 
discuss intellectual property rights--IPR. Now, frankly, Mr. 
Dudas, your testimony, I think, is very critical to the 
committee's understanding the complexity of these problems and, 
of course, how we go about solving them.
    My colleagues, U.S.-China trade began to grow shortly after 
diplomatic relations were established in 1979, paving the way 
for a bilateral trade agreement and most-favored nation status 
in 1980. Since 1980, U.S.-China trade has risen from $5 billion 
a year to $231 billion a year in 2004. China joined the World 
Trade Organization, the WTO, in 2001. China is now the third-
largest U.S. trading partner, it is the second largest source 
of imports, and it is fifth largest export market. All of that 
economic activity suggests a thriving economic relationship 
between the United States and China. But for some this rapid 
growth also represents a cause of some concern, especially when 
we consider the $162 billion trade deficit with China last 
year. And while China continues to make significant progress in 
addressing a number of trade issues, the USTR in 2005 placed 
China on a Special 301 Priority Watch List simply because of 
its failure to significantly improve protection of intellectual 
property rights. This is a critical issue for this committee, 
and the health of the United States economy, and for our U.S. 
global leadership in developing intellectual capital, whether 
it is the latest ``Star Wars'' movie, the most advanced and 
safest automobiles, or the next generation of medicines that 
will save millions of lives around the world every year.
    Established in 1983, the JCCT serves as a forum for high-
level discussions on bilateral trade and for promoting 
commercial relations between the United States and China. The 
Intellectual Property Working Group was established in 2004 to 
address the ever-increasing problem of theft of U.S. 
intellectual property through counterfeiting and piracy. And 
while the JCCT has been a very valuable mechanism for 
identifying issues ripe for discussion and setting priorities, 
there is much work to be done and result yet to be seen. 
According to a recent estimate from the International 
Intellectual Property Alliance, U.S. copyright firms lost 
between $2.5 to $3.5 billion in 2004 from lost sales in China. 
It also is estimated that between 15 and 20 percent of all 
products made in China are fakes, either counterfeited or 
pirated. These figures become even more significant when one 
considers that in the year 2002, the U.S. core copyright 
industries' activities accounted for more than 6 percent of the 
United States GDP and achieved foreign sales and exports of 
over $89 billion. These are very large numbers that represent 
very real economic harm to the United States business, 
innovation, and, of course, its jobs.
    The rampant theft of U.S. intellectual property in China 
through illegal counterfeiting and copyright piracy continues 
to challenge the belief that trade and the economic inertia it 
creates will eventually lead to a net benefit for all who are 
involved. In those industries that are fueled by intellectual 
capital--movies, recordings, software, engineering, and so on--
there is increasing concern that the legal IPR fortifications 
protecting this critical and valuable knowledge are being 
breached by lack of enforcement, understanding, and just plain 
respect for a rules-based trading system like the WTO and 
agreements like the Trade-Related Aspects of Intellectual 
Property, the TRIP. The engine of U.S. innovation relies on the 
rule of law to work and create value for both the producer and, 
of course, the consumer. Robust intellectual property rights 
protection and enforcement is equally important for the many 
innovative Chinese companies who are now just embracing IPR as 
a means to protect and grow their own investment in knowledge. 
We, therefore, are very interested to get a status report from 
the under secretary as to the current situation regarding IPR 
in China and the progress--and, of course, by progress I mean 
the results--of the JCCT and the Intellectual Property Working 
Groups to address these concerns.
    It is my hope that our hearing today will identify what the 
JCCT is doing to stem the U.S. losses from fakes and other the 
ways that thieves are stealing U.S. intellectual property and 
indirectly, of course, United States jobs and prosperity. I am 
heartened by the important work the JCCT is doing in the IPR 
area, including the establishment of a working group to consult 
on rule-of-law issues related to a market economy, as well as 
careful review of Chinese progress at instituting structural 
market reforms. Today, the committee would like to review in 
particular the progress being made by the Chinese government to 
combat intellectual property theft, specifically counterfeiting 
and piracy, including Chinese efforts to reduce intellectual 
property rights, infringement levels, increase penalties for 
intellectual property infringement, crack down on these 
violators, and educate the Chinese public about the importance 
of IPR protection. We would also like to know how effective the 
United States has been in simply influencing China to 
accomplish these goals and how the success of these efforts is 
being measured. Today, the committee wants to hear about 
progress--and, of course, by that I think we all want to hear 
some results this afternoon.
    So I would like to welcome you here, Mr. Dudas, and look 
forward to your testimony. With that, the ranking member, Ms. 
Schakowsky.
    [The prepared statement of Hon. Clifford Stearns follows:]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection
    Good Afternoon. I want to start by thanking the Department of 
Commerce for appearing here today to talk about the U.S.-China Joint 
Commission on Commerce and Trade, the JCCT. There are many important 
issues to discuss with regard to trade with China, and given the 
importance of intellectual property rights (IPR) to the American 
economy and its engine of innovation; we are particularly glad Mr. 
Dudas is here to discuss intellectual property rights (IPR). Your 
testimony is critical to the Committee's understanding the complexity 
of these problems and how we are solving them.
    U.S.-China trade began to grow shortly after diplomatic relations 
were established in 1979, paving the way for a bilateral trade 
agreement and most-favored nation (MFN) treatment in 1980. Since 1980, 
U.S.-China trade has risen from $5 billion a year to $231 billion a 
year in 2004. China joined the World Trade Organization (WTO) in 2001. 
China is now the third-largest U.S. trading partner, its second largest 
source of imports, and its fifth largest export market. All of that 
economic activity suggests a thriving economic relationship between the 
United States and China. But for some, this rapid growth also 
represents a cause for concern, especially when we consider the $162 
billion trade deficit with China in 2004. And while China continues to 
make significant progress in addressing a number of trade issues, the 
USTR in 2005 placed China on a Special 301 Priority Watch List because 
of its failure to significantly improve protection of intellectual 
property rights. This is a critical issue for this Committee, the 
health of the U.S. economy, and for our U.S. global leadership in 
developing intellectual capital, whether it's the latest Star Wars 
movie, the most advanced and safest automobiles, or the next generation 
of medicines that will save millions of lives around the world every 
year.
    Established in 1983, the JCCT serves as a forum for high-level 
discussions on bilateral trade and for promoting commercial relations 
between the U.S and China. The Intellectual Property Working Group was 
established in 2004 to address the increasing problem of theft of U.S. 
intellectual property through counterfeiting and piracy. And while the 
JCCT has been a very valuable mechanism for identifying issues ripe for 
discussion and setting priorities, there is much work to be done and 
results yet to be seen. According to a recent estimate from the 
International Intellectual Property Alliance, U.S. copyright firms lost 
between $2.5 and $3.5 billion in 2004 from lost sales in China. It also 
is estimated that between 15 and 20% of all products made in China are 
fakes, either counterfeited or pirated. These figures become even more 
significant when one considers that in 2002, the U.S. core copyright 
industries' activities accounted for more that 6% of U.S. GDP and 
achieved foreign sales and exports of over $89 billion. These are very 
big numbers that represent very real economic harm to U.S. business, 
innovation, and jobs.
    The rampant theft of U.S. intellectual property in China through 
illegal counterfeiting and copyright piracy continues to challenge the 
belief that trade and the economic inertia it creates will eventually 
lead to a net benefit for all involved. In those industries that are 
fueled by intellectual capital--movies, recordings, software, 
engineering, and so on--there is increasing concern that the legal IPR 
fortifications protecting this critical and valuable knowledge are 
being breached by lack of enforcement, understanding, and just plain 
respect for a rules-based trading system like the WTO and agreements 
like Trade Related Aspects of Intellectual Property (TRIPs). The engine 
of U.S. innovation relies on the rule of law to work and create value 
for both the producer and consumer. Robust intellectual property rights 
protection AND enforcement is equally important for the many innovative 
Chinese companies who are just now embracing IPR as a means to protect 
and grow their own investment in knowledge. We therefore, are very 
interested to get a status report from Undersecretary Dudas as to the 
current situation regarding IPR in China and the progress--and by 
progress I mean results--of the JCCT and the Intellectual Property 
Working Group to address these concerns.
    It is my hope that our hearing today will identify what the JCCT is 
doing to stem the U.S. losses from fakes and other the ways thieves are 
stealing U.S. intellectual property, and indirectly, U.S. jobs and 
prosperity. I am heartened by the important work the JCCT is doing in 
the IPR area, including the establishment of a working group to consult 
on rule of law issues related to a market economy as wells as careful 
review of Chinese progress at instituting structural market reforms. 
Today, the Committee would like to review, in particular, the progress 
being made by the Chinese government to combat intellectual property 
theft, specifically counterfeiting and piracy, including Chinese 
efforts to reduce intellectual property rights infringement levels, 
increase penalties for intellectual property infringement, crack down 
on violators, and educate the Chinese public about the importance of 
IPR protection. Also, we would like to know how effective the United 
States has been in influencing China to accomplish these goals and how 
the success of these efforts is measured. Today, the Committee wants to 
hear about progress--and by that, we mean results.
    Again, I would like to welcome Undersecretary Dudas here today. We 
look forward to your important testimony. Thank you.

    Ms. Schakowsky. Thank you, Mr. Chairman, for holding this 
hearing on the Administration's progress in addressing the 
serious trade issues that we have with China. I understand that 
the Commerce Department was reluctant to provide us with a 
witness today, and I welcome Mr. Dudas. I am glad that you are 
here. I can really understand the hesitation. I would demure as 
well, frankly, if I had to defend the record of this 
Administration.
    Failure by the Administration to address such U.S.-China 
trade issues such as forced labor production practices, massive 
counterfeiting of American products, and the refusal to allow 
the Yuan to float freely may be good for the Walton family 
dividend checks from Wal-Mart, but it has been a disaster for 
the American economy as a whole and America's working families 
in particular.
    Furthermore, this failure to achieve meaningful resolution 
of the unfair trade practices employed by China is having more 
and more serious consequences. As our trade deficit grows and 
these dollars are used to purchase evermore of the debt 
instruments created by this Administration, China becomes less 
and less vulnerable to retaliatory measures available to the 
U.S. Government. By the time either this Administration wakes 
up or is replaced by one more in-tune with economic reality, we 
may find ourselves with no choice but to accept the terms of 
trade dictated by the Chinese because they will have the power 
to harm our economy with a computer stroke.
    Despite promises made as a condition of U.S. acceptance of 
the admission of China to the World Trade Organization, despite 
international treaties signed by the Beijing government, and in 
the face of public aggravation worldwide, China continues to 
rely upon slave-like labor conditions for its export advantages 
from its only unions, whose sole function is to transmit 
government messages to the workforce, exploits its workers with 
subsistence wages, treacherous working conditions and little or 
no benefits. Women in the workforce face the worst 
exploitation. What has the Administration done about the import 
of goods made under these competitive conditions?
    China has become the pirate capital of the world. Goods 
that we have a notable comparative advantage in--namely movies 
and recorded music and computer software--generate little 
income to their American owners as pirates dominate sales in 
China. Current estimates are that 15 to 20 percent of China's 
manufactured goods are counterfeit, encompassing 8 percent of 
its GNP. The counterfeiting problem has grown even more, 
threatening our economic well-being. Apparently, designs for 
such large-scale items as GM cars and SYSCO operating systems 
are being knocked off. If all of our technology continues to be 
appropriated at will by Chinese entrepreneurs, then our 
economic demise is a long-term certainty.
    China is also playing Russian roulette with the world 
economy by refusing its currency to float freely. Our record 
trade deficit with China, $162 billion in 2004 alone, and the 
related growth in foreign currency reserves, reportedly $608 
billion, more than triple the reserves of 2000, cannot be 
sustained. Inflationary pressures are bound to eventually reach 
the boiling point in China, and another international financial 
crisis will result.
    Finally, I acknowledge that China, as a superpower, is a 
special case. It is understandable that this Administration 
would treat their economic imperialism lightly if such kid-
glove treatment resulted in political advances that made the 
region and the world more stable. But what has the 
Administration gotten for its forbearance? The answer is 
nothing. For all its kid-gloves approaches to China's economic 
aggression, this Administration has not advanced the cause of 
peace and democracy in China and in the region as a whole.
    My question to the Administration is simple. When do the 
gloves come off? When are we going to get serious about the 
threat to our economy posed by China's unfair trade practices? 
Thank you, Mr. Chairman.
    Mr. Stearns. I thank my colleague. The gentleman from 
Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I would like to thank 
you and our ranking member for holding this important hearing 
on U.S.-China Joint Commission on Commerce and Trade. I am 
pleased the subcommittee is exerting our trade jurisdiction 
which extends to non-tariff trade barriers. In my opinion, most 
of this country's trade problems with China fall squarely 
within that jurisdiction.
    China's currency manipulation and state subsidies give it 
an unfair competitive advantage when it comes to trade with the 
United States. But those are government-sponsored activities. 
It has become all too clear that a growing problem is with 
China's counterfeiting and intellectual property violations 
that are taking place underground.
    According to the U.S. trade representatives, Chinese goods 
account for 66 percent of all goods seized at U.S. ports that 
infringe on intellectual property rights. Figures from the 
software industry suggest that at least 90 percent of all 
software installed in Chinese computers is pirated. Whether it 
is piracy of movies, software, or the counterfeiting of auto 
parts and pharmaceutical, these IPR infringements by the 
Chinese have cost our country billions of dollars, and without 
a doubt, this illegal activity has contributed to the loss of 
jobs in our own country.
    As many of us mourn the decline of the U.S. manufacturing 
sector, we are told to be encouraged because the United States 
is a country of ideas, and these ideas will keep us on track 
for economic growth. But infringing on U.S. intellectual 
property rights, the Chinese essentially are stealing these 
ideas. For our economic security we must demand that China 
abide by international laws protecting our ideas and our 
intellectual property.
    Over the last 25 years, the copyright industry's share of 
U.S. GDP grew twice as fast as the rest of the U.S. economy. It 
is clear that the continued growth in IPR infringement will 
have an increasingly devastating impact on our economy. And I 
have no doubt that this was one of the most important topics 
discussed at the U.S.-China Joint Commission on Commerce and 
Trade meeting. And I have every confidence that the U.S. will 
take a hard line with the Chinese, but it is imperative that we 
hold their feet to the fire on this issue and demand that the 
Chinese comply with international law.
    I look forward to hearing from our witness about the best 
way to accomplish that goal. And again I thank you for 
appearing today, and again thank you, Mr. Chairman and ranking 
member, for holding the hearing.
    Mr. Stearns. I thank my colleague. Now, without further 
ado, there appears to be no more opening statements.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce
    Thank You, Chairman Stearns, for holding this important hearing 
today. This Committee has jurisdiction over non-tariff trade issues and 
this hearing continues the work we did in the last Congress to examine 
the issues within our jurisdiction. And I expect the Committee to 
continue work on these trade-related issues.
    Trade is a vital component to our economic growth and prosperity. 
Trade facilitates jobs in the U.S. for both imports and exports. Trade 
also provides our trading partners and us a higher standard of living. 
But trade can also create growing pains as resources--and jobs--are re-
allocated to our most competitive sectors. We all enjoy cheaper goods 
that leave more income for other needs, but at the same time nobody 
wants to lose US jobs. We expect that when we open our markets to 
foreign trade that benefits our consumers, likewise our partners will 
open their markets to the goods and services we export and in the same 
manner.
    No other bi-lateral trade partner has received as much attention in 
recent years as China, and with good reason. With its accession to the 
WTO in December of 2001, it has become a force in global trade. China 
is now our third largest trading partner with over $231 billion in 
trade in 2004. It has moved ahead of Germany as our fifth largest 
export market and is our second largest source of imports. Our trade 
deficit with China could reach $211 billion this year.
    Although there are a number of reasons for the trade imbalance, 
many concerns regarding China's trade practices involve their 
commitment to fulfilling their obligations as a member of the WTO. I am 
generally a ``free trader'', but I voted against giving China permanent 
status as a ``most favored nation''. I opposed China becoming a member 
of the World Trade Organization (WTO). I did not believe we could count 
on the Chinese government to live it up to its promises. This hearing 
provides yet another example of why we should be skeptical about 
promises made by China.
    A number of recent trade concerns have been addressed successfully 
through the Joint Commission on Commerce and Trade (JCCT). 
Unfortunately, some concerns require additional work.
    One specific area that needs continued improvement is the 
protection of Intellectual property rights. One of our most valuable 
exports is our intellectual property, whether in the form of computer 
software, entertainment DVDs, or other copyright and trademark 
products. Yet more than 90% of the market for these products in China 
is lost to counterfeits and piracy.
    Last year, the JCCT addressed many of these issues. Through their 
work, progress has been made and China instituted reforms last year. 
Yet concerns remain that despite this progress, the market for our IP 
exports has changed very little in China and piracy is still rampant. 
This is not fair trade. It is important that our most valuable assets 
receive the same protections abroad as the protections we provide to 
foreign producers who send their goods here. Our relationship with 
China depends on a mutual respect that is necessary for bi-lateral 
trade.
    I am pleased we have the Under Secretary of Commerce for 
Intellectual Property Dudas here to answer questions on this important 
topic. He is Co-chair of the JCCT Intellectual Property Working Group 
and knows how important it is that we achieve further improvement from 
China on IP protection.
    I thank the Chairman and yield back the balance of my time.

    Mr. Stearns. We welcome Mr. Jon W. Dudas, Under Secretary 
of Commerce for Intellectual Property Rights; Director, United 
States Patent and Trade Office, to our hearing. And I think you 
have worked on the Hill before, so it is probably nice to say 
welcome back to the Hill and we appreciate your opening 
statement this morning.

   STATEMENT OF JON W. DUDAS, UNDERSECRETARY OF COMMERCE FOR 
   INTELLECTUAL PROPERTY, DIRECTOR, UNITED STATES PATENT AND 
                        TRADEMARK OFFICE

    Mr. Dudas. Thank you very much, Mr. Chairman, and thank 
you, Ranking Member Schakowsky and----
    Mr. Stearns. You might pull the mike just a little----
    Mr. Dudas. Oh, yes.
    Mr. Stearns. [continuing] closer to you. That is good.
    Mr. Dudas. Thank you, yes. You are correct, I did work on 
the Hill. I worked for the Judiciary Committee, and I think it 
is always important that I acknowledge mistakes I made as a 
staffer. I remember sitting behind the dais and passing notes 
to the chairman or the ranking member to ask mean questions of 
the witness, and I just want to admit openly to the committee I 
was wrong to do that. So I can recognize that. I think it 
shouldn't be done.
    I sincerely appreciate the opportunity to discuss the U.S.-
China Joint Commission on Commerce and Trade and related 
intellectual property issues with China. Mr. Chairman, I am 
sure you won't remember, but I had the opportunity 5 years ago 
to staff you on a delegation to the European Union where you 
helped lead, with Congressman Goodlatte, discussions on the 
importance of intellectual property and the importance of trade 
and technology. Much has changed since then, but as today's 
hearing demonstrates your strong commitment to resolving 
critical international economic issues relating to intellectual 
property and trade and technology has not changed.
    As the Under Secretary for Intellectual Property and 
Director of the Patent and Trademark Office, I lead the only 
government agency solely devoted to intellectual property. But 
that leaves for me my only regret today, that my knowledge and 
expertise are limited to intellectual property matters. I am 
certain we can fill more than a day with these critical issues, 
and any matter that I cannot address I can assure you I will 
bring back to the appropriate agency within the department or 
at the Administration.
    Secretary of Commerce Carlos Gutierrez is keenly aware of 
the significance of intellectual property protection for 
American businesses and has made combating piracy and 
counterfeiting a top priority for the Department of Commerce. 
As Under Secretary of Commerce for Intellectual Property, I am 
dedicated to reducing the toll that IP theft takes on 
Americans. As you know, I co-chair the Joint Commission on 
Commerce and Trade Intellectual Property Rights Working Group 
along with Ambassador Josette Shiner, who is the Deputy U.S. 
Trade Representative.
    Through the JCCT and other avenues, we are working closely 
with China to improve the situation for U.S. IP rights holders. 
JCCT functions range from technical consultations to meetings 
with high-level U.S. and Chinese officials literally from the 
offices and agencies up through the Premier of China.
    Today, I will update you on the progress of this group as 
it relates to intellectual property rights. And I can tell you, 
China has taken some important steps in the right direction to 
improve intellectual property protection. Unfortunately, 
however, we have not yet seen a significant reduction in IPR 
infringements throughout China, the critical test. The Chinese 
have reported significant increases in the last several months 
in criminal prosecutions as a result of some of the measures of 
JCCT, but we still have not yet seen the effect on the sales of 
legitimate products in China, again, the real test, the real 
results. So we continue to impress on the Chinese that action 
plans and commitments are important, but they must translate 
into actual reductions of IP theft.
    During last year's session of the JCCT, China committed to, 
first and foremost, significantly reduce IPR infringement 
levels across the county, to subject a greater range of 
violations to criminal penalties, and to apply criminal 
sanctions to the import, export, storage, and distribution of 
pirated and counterfeited goods, as well as online piracy. They 
committed to crack down on IPR violators through nationwide 
enforcement actions and increase customs enforcement actions 
making it easier for rights holders to secure effective border 
enforcement. They committed to improve protection of electronic 
works by ratifying and implementing the WIPO Internet Treaties 
and by extending the ban on the use of pirated software to 
local governments. They also committed to launch a national IPR 
education campaign and to establish an Intellectual Property 
Rights Working Group to consult and cooperate with the U.S. on 
the full range of IPR issues.
    In December the Chinese Supreme People Court issued a new 
judicial interpretation intended to increase criminal 
prosecution of IPR infringements in China. We have seen some 
results; we have also seen some disappointments. The most 
recent IPR Working Group meeting was just 2 weeks ago right 
here in Washington where I met with my Chinese counterpart, 
Madame Ma. We discussed our expectations about intellectual 
property rights related commitments made by the Chinese in the 
2004 JCCT. We advanced cooperation between the U.S. and Chinese 
agency in combating large-scale IPR counterfeiting and piracy 
syndicates, and in this process, many issues were clarified, 
understanding was advanced, and progress was made.
    China agreed to anti-counterfeiting campaigns begun in 
Beijing and Shanghai to other large cities. The Beijing and 
Shanghai campaigns allow rights holders to register their 
trademarks with the authorities, and those authorities then 
sweep illegal street stalls and kiosks and seize all infringing 
goods.
    And as part of our continuing staff-level consultations 
with the Chinese, we have developed a mechanism to refer 
appropriate cases to China's Ministry of Commerce with a formal 
request for review and appropriate response, specific cases 
seeking specific responses. Under this mechanism, U.S. 
companies may report infringing activity to the Department of 
Commerce and provide all relevant information about the 
infringement and efforts to resolve it.
    Secretary Gutierrez returned just this week from his first 
official trip to China where he was promoting the 
Administration's Fair Trade Agenda and discussing issues of 
ongoing concern. His central message on intellectual property 
was that China must deter widespread infringements of IPR 
through strict enforcement. He made his message clear and he 
made his message simple. And I will quote what he said the 
first day in China. ``Intellectual property rights violations 
are a crime, and we don't believe we should be negotiating 
crimes with our trading partners.'' Next, Secretary Gutierrez 
will chair the 2005 JCCT meeting scheduled in July in Beijing 
along with the U.S. Trade Representative Portman and Vice 
Premier Wu Yi from China.
    As we work toward China taking drastic improvements in its 
IPR system, we absolutely must not underestimate the steps that 
our businesses can take to reduce the tolls in IP thefts. We 
are encouraging our industries to work with us and other U.S. 
agencies to improve China's IP protection and enforcement 
environment, and we are asking entities to do specific things: 
one, they themselves urge the fair and transparent 
implementation of China's IPR system; that they fully exploit 
the system within China; that they provide us with detailed 
information on each deficiency they see; and that they support 
our bilateral and multilateral efforts.
    So in closing, Mr. Chairman, members of the subcommittee, 
the JCCT process continues to be a high-level government-to-
government forum to examine and address important trade and 
commerce issues with China. By continuing to work with you, 
other Members of Congress, other agencies and private 
industries in likeminded countries importantly, we will 
continue to do more to help American businesses protect their 
intellectual property. Thank you all for your leadership on 
this issue, and I look forward to continuing to work with you 
in this hearing and beyond.
    [The prepared statement of Jon W. Dudas follows:]
 Prepared Statement of Hon. Jon W. Dudas, Under Secretary of Commerce 
for Intellectual Property and Director of the United States Patent and 
                            Trademark Office

                              INTRODUCTION
    Chairman Stearns, Ranking Member Schakowsky, and Members of the 
Subcommittee: Thank you for this opportunity to appear before you to 
discuss the U.S.-China Joint Commission on Commerce and Trade (JCCT), 
as well as the broader set of international intellectual property (IP) 
issues relating to China. As you are surely aware, the U.S. Department 
of Commerce has a prominent role in protecting IP abroad. Secretary of 
Commerce Carlos Gutierrez is keenly aware of the increasing 
significance of IP protection for American businesses and innovators 
and has made combating piracy and counterfeiting a top priority for the 
entire Department. As Under Secretary of Commerce for Intellectual 
Property and Director of the United States Patent and Trademark Office 
(USPTO), I am dedicated to marshalling U.S. government efforts to 
reduce the toll that IP theft takes on American IP owners. I also co-
chair the JCCT IPR Working Group along with Ambassador Josette Shiner, 
Deputy U.S. Trade Representative. We are very appreciative of the 
Subcommittee's interest in IP protection and the JCCT process and thus 
commend you for holding today's hearing.
    Through the JCCT and other avenues, the U.S. hopes to continue to 
work closely with China to improve the situation for U.S. right 
holders. The process aims to produce concrete, discrete results. During 
the last year's session of the JCCT, China presented an action plan 
designed to address the piracy and counterfeiting problems faced by 
U.S. companies. Under the plan, China committed to: (1) significantly 
reduce IPR infringement levels; (2) issue a judicial interpretation by 
the end of 2004 and apply it to increase criminal enforcement of IPR 
violations; (3) conduct nation-wide education and enforcement campaigns 
and increase customs enforcement; (4) ratify and implement the WIPO 
Internet Treaties as soon as possible and extend to the local level the 
ban on the use of pirated software in central and provincial government 
offices, and (5) establish an IPR working group under the JCCT. In line 
with the JCCT mandate, the working group seeks to ensure that China 
significantly reduces IPR infringement levels.
    While we recognize that China has expended significant effort to 
improve the protection of intellectual property, much work remains to 
be done. We have not seen any significant reduction in IPR 
infringements throughout China. We continue to impress upon the Chinese 
that action plans and commitments must translate into actual reductions 
in infringing activity. As former Secretary Evans said earlier this 
year: ``Process isn't progress. Results are progress.''

               HISTORY AND BACKGROUND OF THE JCCT PROCESS
    It may be useful to provide a brief background and some history of 
the JCCT, before I detail the broader set of issues and initiatives 
being implemented by the Administration to address the problems of the 
piracy and counterfeiting of IP. There are several functions of the 
JCCT that range from technical consultations to meetings by high level 
U.S. and Chinese officials that have resulted in measurable concrete 
results that have benefited U.S. intellectual property owners.
    The JCCT was established in 1983 to serve as a government-to-
government consultative mechanism that provides a forum to resolve 
trade concerns and promote bilateral commercial opportunities. Issues 
addressed by the JCCT over the years have included industrial policies, 
services and agriculture. In recognition of the critical role 
intellectual property plays in our economy and the serious effects of 
piracy and counterfeiting, an intellectual property rights (IPR) 
Working Group was established at the 15th annual meeting of the JCCT in 
April 2004. That meeting of the JCCT was chaired by former Commerce 
Secretary Donald Evans, former USTR Robert Zoellick and Chinese Vice 
Premier Wu Yi.
    The most recent meeting of the IPR Working Group was just a few 
weeks ago here in Washington when I, along with Ambassador Shiner, met 
with our Chinese counterpart, Vice Minister Ma Xiuhong. We discussed 
the past progress made and expectations regarding various IPR-related 
commitments made by the Chinese at the 2004 JCCT to address piracy and 
counterfeiting of American ideas and innovations.
    The process is working and we are beginning to see results. For 
example, one recent positive development has been the issuance of a new 
judicial interpretation by the Chinese Supreme People's Court intended 
to increase the incidence of criminal prosecution of IPR infringements 
in China. The issuance of the interpretation last December is 
consistent with the commitments made by Chinese officials at the 2004 
JCCT. The interpretation serves as a guideline to lower courts on case 
acceptance and minimum thresholds necessary for conviction of a 
criminal IP offense. According to statistics provided by the Chinese at 
our latest meeting, criminal IPR case filings are up almost 19% (18.9%) 
since the issuance of the new judicial interpretation. While the 
interpretation appears to significantly reduce the criminal thresholds 
for trademark and patent counterfeiting and copyright piracy, we have 
identified a number of potential concerns with the judicial 
interpretation, including the methodology for determining the value of 
infringing goods, the criminalization of exports and certain copyright 
offenses, and the treatment of repeat offenders. We continue to study 
the interpretation and will monitor its implementation by the Chinese 
courts.
    During JCCT IPR Working Group meetings on May 26 and May 27, 2005, 
a full complement of technical experts from both sides discussed ways 
to work better together to combat IP theft in China. In particular, 
U.S. and Chinese law enforcement agencies exchanged views on increasing 
information and expertise sharing, and cooperation in individual cases, 
including with respect to investigation techniques. The USPTO and the 
U.S. Copyright Office conferred with their counterparts on a number of 
topics, including ways to enhance IPR monitoring of trade fairs in 
China and the expansion of crackdown campaigns that closed down the 
infamous ``Silk Alley'' Market in Beijing and a number of illegal 
street stalls and kiosks in Shanghai that sell counterfeit and pirated 
name brand and luxury goods. I hope and expect that this meeting of the 
JCCT IPR Working Group is only the beginning of continuing and 
substantive technical dialogue.
    Secretary Evans' successor, Secretary of Commerce Carlos Gutierrez, 
earlier this month completed his first trip to China to promote the 
Administration's fair trade agenda and discuss issues of ongoing 
concern. His central message on IP was that China must deter widespread 
infringements of intellectual property rights through strict 
enforcement. Secretary Gutierrez will co-chair the 2005 JCCT scheduled 
in July in Beijing, along with U.S. Trade Representative Portman and 
Vice-Premier Wu Yi.
    As part of our continuing staff-level consultations with the 
Chinese, we--have developed--a mechanism to refer appropriate cases to 
China's Ministry of Commerce with a formal request for review and 
appropriate response. Under this mechanism, U.S. companies--may report 
infringing activity to the Department of Commerce and provide all 
relevant information regarding the nature of the infringement and all 
efforts taken to resolve the matter. If a company has attempted to 
obtain or enforce intellectual property rights via the foreign 
country's legal system and its efforts have been unsuccessful, due to 
either systemic flaw or unfair application of the laws,--the Commerce 
Department may be able to engage the foreign government on the issues 
raised by the company.

          SCOPE OF GLOBAL IP PIRACY AND COUNTERFEITING PROBLEM
    The background for the need for these efforts is well-known, as you 
increasingly hear about IP piracy and counterfeiting issues from your 
constituents and on the nightly news. Increasingly, both the United 
States and our trading partners are relying on IP to drive economic 
growth. This is because competitive success in a market economy depends 
more and more on the IP assets held by an institution--from the skills 
of its employees to the results of its latest research. IP-based 
businesses, such as the software and entertainment industries, now 
represent the largest single sector of the U.S. economy.
    According to the International Intellectual Property Alliance, U.S. 
copyright industries continue to lead the U.S. economy in their 
contributions to job growth, gross domestic product (GDP), and foreign 
sales/exports. Between 1977 and 2001, the U.S. copyright industries' 
share of the GDP grew at an annual rate more than twice as fast as the 
rest of the U.S. economy. In 2002, the U.S. ``core'' copyright 
industries' activities accounted for approximately 6 percent of the 
U.S. GDP ($626.6 billion).1 In 2002, the U.S. copyright 
industries achieved estimated foreign sales and exports of $89 billion, 
leading all major industry sectors, including motor vehicles (equipment 
and parts), aircraft and aircraft parts, and the agricultural 
sector.2
---------------------------------------------------------------------------
    \1\ ``Copyright Industries in the U.S. Economy: The 2004 Report,'' 
Stephen E. Siwek, Economists Inc., prepared for the International 
Intellectual Property Alliance. ``Core'' industries include: 
newspapers, publishing, recording, music, motion pictures, radio, 
television broadcasting and computer software.
    \2\ Id.
---------------------------------------------------------------------------
    Unfortunately, the economic benefits of capitalizing on 
intellectual property rights (IPR) have captured the attention of 
pirates, organized crime, and terrorists. The global criminal nature of 
IP piracy has effects in other areas as well. As former U.S. Attorney 
General John Ashcroft reported: ``In addition to threatening our 
economic and personal well being, intellectual property crime is a 
lucrative venture for organized criminal enterprises. And as law 
enforcement has moved to cut off the traditional means of fund-raising 
by terrorists, the immense profit margins from intellectual property 
crimes risk becoming a potential source for terrorist financing.''

                USPTO AND DOC EFFORTS TO COMBAT PROBLEM
    Given these threats to U.S. economic interests and our national 
security, the USPTO and our colleagues in the Department of Commerce 
are working hard to curb IP crime and strengthen IP enforcement in 
every corner of the globe. Indeed, former Secretary Evans heavily 
emphasized this issue, and Secretary Gutierrez has indicated it is a 
top priority for the entire Department. Because American IP owners 
compete in a global marketplace, we must expand our efforts to promote 
IP protection internationally. We must make sure that American IP 
owners have sufficient knowledge and legal tools to fight piracy and 
counterfeiting. We also must provide foreign countries technical 
assistance on drafting and implementing effective IP laws and promoting 
the effective enforcement of IP rights.
The Role of the USPTO in IP Policy
    The passage of the American Inventors Protection Act of 1999 (AIPA) 
(P.L. 106-113) set the stage for the USPTO to advise the President, 
through the Secretary of Commerce, and all Federal agencies, on 
national and international IP policy issues, including IP protection in 
other countries. USPTO is also authorized by the AIPA to provide 
guidance, conduct programs and studies, and otherwise interact with 
foreign IP offices and international intergovernmental organizations on 
matters involving the protection of intellectual property.
    Our established Offices of International Relations and Enforcement 
carry out the functions authorized by the AIPA. These include (1) 
working with Congress to implement international IP treaties; (2) 
providing technical assistance to foreign governments that are looking 
to develop or improve their IP laws and systems; (3) training foreign 
IP officials on IP enforcement; (4) advising the Department of State 
and the Office of the U.S. Trade Representative (USTR) on drafting/
reviewing of IP sections in bilateral investment treaties and trade 
agreements; (5) advising USTR on intellectual property issues in the 
World Trade Organization (WTO); and (6) working with USTR and industry 
on the annual review of IP protection and enforcement under the Special 
301 provisions of the Trade Act of 1974. The USPTO also represents the 
United States in United Nations bodies, such as the World Intellectual 
Property Organization (WIPO), to help set the international standards 
for IP protection and enforcement.

NATIONAL INTELLECTUAL PROPERTY LAW ENFORCEMENT COORDINATION COUNCIL 
        (NIPLECC)
    The USPTO serves as the co-chair of the National Intellectual 
Property Law Enforcement Coordination Council (NIPLECC), which is 
tasked with coordinating domestic and international intellectual 
property law enforcement. NIPLECC was launched in 1999 to ensure the 
effective and efficient enforcement of intellectual property in the 
United States and worldwide. NIPLECC's coordination activities ensure 
that government enforcement efforts are consensus-based and non-
duplicative. NIPLECC has developed a comprehensive database that 
includes all recent IP law enforcement training provided by the U.S. 
government and many associations to developing and least developed 
nations. It is also developing legislative suggestions to improve 
domestic IP laws related to enforcement. We look forward to continuing 
our efforts in NIPLECC.
Enforcement Training and Technical Assistance
    The USPTO provides a variety of IP enforcement training and 
technical assistance activities. These programs are designed to foster 
respect for IP, encourage governmental and right holders' efforts to 
combat infringement, and promote best practices in the enforcement of 
IPR. Our technical assistance and capacity building initiatives grew 
out of a desire to promote IP protection and assist developing 
countries in meeting their obligations under the WTO's Trade-Related 
Aspects of Intellectual Property Rights (TRIPs) Agreement. In addition, 
we have responded to an increasing number of requests by foreign 
governments for such training and technical assistance activities. Our 
efforts have had positive results in some countries, measured by 
decreasing levels of IP piracy and counterfeiting, and the 
implementation of stronger legal protections in many of the countries 
in which we have provided such training. Still, much work remains, 
including in China, where IP theft has not decreased.
    Today, our efforts are aimed at: (1) assisting developing and least 
developed countries to meet international standards in the protection 
and enforcement of IP; and (2) assisting administrative, judicial, and 
law enforcement officials in addressing their enforcement issues.
Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPs)
    At the conclusion of the Uruguay Round in 1994, the resulting TRIPs 
Agreement presented WTO members with new obligations and challenges. 
The TRIPs Agreement sets minimum standards of protection for the 
various forms of IP and requires WTO members to provide for 
``enforcement procedures . . . that permit effective action against any 
act of infringement of intellectual property rights.'' The TRIPs 
Agreement includes detailed provisions on civil, criminal and border 
enforcement measures designed to provide the owners of IP with the 
tools to protect and enforce their rights. Today, Developing Countries 
obligations' under the TRIPs Agreement have fully entered into force. 
Least Developed Countries have until 2006 to comply with the bulk of 
the provisions, including the enforcement obligations.
    Over the last several years, the USPTO has assisted countries 
around the world in establishing adequate enforcement mechanisms to 
meet their obligations under the TRIPs Agreement. In bilateral 
negotiations, we work closely with USTR to seek assurances from our 
trading partners of even higher levels of IP enforcement. We provide 
technical advice through the annual Special 301 process, the GSP 
review, the TRIPs Council review of implementing enforcement 
legislation, and in the negotiation of free trade agreements (FTAs).
    Our approach to the on-going FTA negotiations has been to build 
upon the TRIPs Agreement. In other words, our negotiating position is 
that these trade agreements should follow a ``TRIPs Plus'' format by, 
among other things, expanding the minimum standards set out in the 
TRIPs Agreement. For example, by incorporating provisions of the WIPO 
Copyright Treaty and WIPO Performances and Phonograms Treaty, the FTA 
updates copyright protections and enforcement for the digital 
environment. In our advisory capacity, we will continue to work with 
the Department of State and USTR to conclude FTAs that provide strong 
enforcement and reflect a standard of protection similar to that found 
in United States law.

        INTELLECTUAL PROPERTY ISSUES AND USPTO APPROACH IN CHINA
    Due to the rapid increases in piracy and counterfeiting in China, 
we recognize that U.S. companies face enormous IPR protection and 
enforcement challenges and that their losses there are mounting daily. 
At the same time, the pressures of the competitive global marketplace, 
criminal elements, and protectionist and non-tariff barriers, make 
these challenges increasingly more sophisticated. That is why the 
USPTO's team of experts has developed comprehensive work-plans to 
address the rising IP problems facing these countries. While the USPTO 
does not have the lead on trade policy issues, which is the mandate of 
USTR, we have devoted significant resources to making progress in 
improving China's IPR regimes for our industries, right holders and 
this Administration.
    The Bush Administration understands that IP is a vital component of 
our nation's economy and that this Administration's focus on combating 
global piracy and counterfeiting has produced a solid track record of 
real results. The STOP Initiative, which I will discuss in more detail 
later, is a continuation of these efforts by providing additional tools 
to protect American workers from counterfeiters and pirates who are 
robbing billions of dollars from the U.S. economy.

                                 CHINA
    Unfortunately, problems persist and our concerns about IP 
enforcement in China continue to grow. Despite China's membership in 
the WTO and its obligation to comply with the TRIPs Agreement, as well 
as a series of bilateral commitments made over the past 10 or more 
years, the lack of effective IP enforcement in China is a major problem 
for U.S. business interests, costing billions of dollars in lost 
revenue and perhaps tens of thousands of U.S. jobs. While China has 
done a generally good job of creating laws to comply with its WTO 
commitments, IP enforcement problems remain pervasive. These problems 
run the gamut from rampant piracy of movies and business software to 
counterfeiting of consumer goods, electrical equipment, automotive 
parts, and pharmaceuticals.
    I am very pleased Secretary Gutierrez has cited IP protection as a 
key issue in U.S. trade ties with China. During his first trip to China 
as Secretary of Commerce, Secretary Gutierrez urged China to deter 
widespread infringements of intellectual property rights through strict 
enforcement. Secretary Gutierrez told business officials on the first 
day of his visit to China ``Intellectual property rights violations are 
a crime and we don't believe we should be negotiating crimes with our 
trading partners.''
IP Problem in China
    Estimates from the computer software and automotive parts 
industries are illustrative of the scope of the problem. The software 
industry estimates that more than 90 percent of all software installed 
on computers in China in 2003 was pirated.3 The automotive 
parts industries estimate that counterfeit automotive parts production 
costs the industry billions of dollars in lost sales. One industry 
group estimates that legitimate automotive companies could hire 210,000 
more employees if the counterfeit auto parts trade is 
eradicated.4 China is a leader in counterfeit goods in this 
industry.
---------------------------------------------------------------------------
    \3\ Ibid. Key Findings: BSA and IDC Global Software Piracy Study.
    \4\ Motor and Equipment Manufacturers Association, September 2003.
---------------------------------------------------------------------------
    In the automotive arena, most counterfeiting involves parts that 
need to be replaced frequently, such as oil filters, headlamps, 
batteries, brake pads, fan belts, windshields, and spark plugs. For 
example, DaimlerChrysler, BMW, Audi, Volvo, Mitsubishi, and Toyota 
report that even though a factory in Guangdong Province has been raided 
three times in a two-and-a-half-year period, it has been allowed to 
continue making windshields stamped with their brand names for sale in 
the world market.
    According to the World Health Organization (WHO), 10 percent of the 
medicines in the world are counterfeit, with China being one of the 
main centers of counterfeit production. Rudolph Giuliani offered the 
following testimony before a Senate Committee in June of last year:
          ``An August 30, 2002, Washington Post story cites the 
        Shenzhen Evening News in reporting that an estimated 192,000 
        people died in China in 2001 because of counterfeit drugs. 
        Another news story reported that as much as 50 percent of 
        China's drug supply is counterfeit (Investor's Business Daily 
        dated October 20, 2003).'' 5
---------------------------------------------------------------------------
    \5\ See Statement of Rudolph W. Giuliani before the Senate 
Government Affairs Committee, Permanent Investigations Subcommittee, 
Oversight Hearing on Safety of Internet Drugs (July 16, 2003).
---------------------------------------------------------------------------
    While no definitive statistics exist on total U.S. job losses 
attributable to IP piracy and counterfeiting in China, there is no 
doubt piracy and counterfeiting deprive the government of billions of 
dollars of much needed tax revenue, cost thousands of jobs, and injure 
the domestic software industries.
China's Enforcement Issues
    The Chinese IPR enforcement environment today is complicated by a 
variety of different Chinese and foreign interests, including Chinese 
industrial policies, trade policies, the interests of foreign 
investors, and the interests of Chinese domestic enterprises. In this 
environment, our right holders increasingly look to adequate 
enforcement of criminal IPR laws in implementation of China's WTO 
commitments as a key to reducing counterfeiting and piracy rates in 
China. China, it should be noted, does not lack for quantitative 
enforcement. Each year, tens of thousands of enforcement actions are 
undertaken. However, these actions are typically pursued by 
administrative agencies, which impose non-deterrent penalties.
    This Administration has been pressing China to impose prison 
sentences and/or stiffer fines on violators of IPR since fines and 
other penalties imposed are too modest and provide little or no 
deterrence. In December 2004, two branches of China's government--the 
Supreme People's Court and Supreme People's Procuratorate (prosecutor) 
issued a new ``Judicial Interpretation'' for criminal IPR 
infringements. The new Interpretation expanded the scope of violations 
punishable by prison sentences by lowering the value threshold 
necessary to initiate a prosecution, but on the enforcement side took a 
significant step backwards with respect to violations committed by 
repeat offenders. The new Interpretation was also deficient in many 
other areas of concern to industry and foreign governments, including, 
for example, coordination among China's civil and administrative 
systems as well as the relationship with other IP laws. Furthermore, 
the new Interpretation complicated matters by allowing infringing goods 
to be valued based on their street value, not their legitimate value, 
thus sanctioning declarations by the infringer as a measure for 
determining whether or not Chinese valuation thresholds were met 
dictating prosecution. Equally disconcerting was that unfinished or 
offsite products were exempt in assessing that value.
    Many of the challenges that China encounters are at least partially 
due to deficiencies in its own system, including extensive corruption, 
local protectionism, and lack of interagency coordination. Some of the 
issues we have raised with Chinese colleagues include: the use of 
mandatory sentencing guidelines for IPR crimes; support for specialized 
IPR courts which have greater independence from local financing and 
control; establishing appropriate procedures for investigation, 
prosecution, and conviction of IPR criminals; and effectively 
addressing trans-border IPR crime, as well as IP crime committed over 
the Internet.
    It is important to recognize that there is a Chinese domestic 
constituency also seeking enhanced IPR protection and enforcement. As 
the economy grows, domestic interest in IP, particularly in the more 
developed cities on China's seaboard, is increasing dramatically. 
China's deficient IP protection and enforcement hinders Chinese 
software engineers, inventors, and movie producers who have to struggle 
with a severely deficient domestic market as their principal source of 
income. Chinese IP owners have become increasingly vocal proponents of 
stronger IP protection. One indication that IPR is attaining increased 
domestic importance is the number of trademark applications received by 
the Chinese Trademark Office (CTO). For the past two years, the CTO 
received more trademark applications than any country in the world. The 
State Intellectual Property Office is also growing rapidly and receives 
some of the highest number of filings for patent applications 
worldwide.
    Growing domestic interest in IP protection and enforcement may be 
of small comfort to U.S. industry when the impact of piracy and 
counterfeiting on U.S. industry appears to be growing. U.S. Government 
statistics show a worsening situation. For example, USTR's 2005 Special 
301 Report states that during 2004, 67 percent of all of the IPR-
infringing goods seized at the U.S. border came from China.6 
Many industries also increasingly suspect that the Chinese government, 
by restricting market access, is providing free rein for 
counterfeiters, pirates, and criminals to exploit the void created by 
the lack of legitimate products. Many U.S. companies also complain of 
industrial policies that help create conditions for production of 
infringing products. Counterfeit Viagra, for example, dominates the 
Chinese market, while the legitimate product has been hampered by 
market access restrictions. Pirated movies appear in the Chinese market 
long before censors have approved the legitimate product. Other high-
tech companies complain of standards setting, such as in wireless 
networking technology, which limits introduction of legitimate products 
or mandates technology transfer.
---------------------------------------------------------------------------
    \6\ http://www.ustr.gov/assets/Document_Library/
Reports_Publications/2005/2005_Special_301/
asset_upload_file195_7636.pdf
---------------------------------------------------------------------------
USPTO's Efforts in China
    Under the direction of this Administration, the USPTO has been 
working extensively to reduce piracy and counterfeiting activity in 
China. First, we provide technical support to all agencies of the U.S. 
Government that are addressing these issues, including USTR, the 
Department of Commerce/International Trade Administration (ITA), the 
U.S. Department of Justice, the Department of Homeland Security, and 
the State Department.
    The USPTO has an established team of experts on Chinese IP matters, 
which includes IP attorneys with detailed knowledge and background on 
patents, trademarks, copyrights, enforcement issues, and WTO/WIPO 
issues. Our cooperation with other U.S. government agencies extends 
beyond the trade agenda to providing support on strategies and to 
addressing transnational crime and transnational trade in counterfeit 
goods, as well as other issues.
    TRIPS review. For example, we take an active role in the annual 
review of China's TRIPs commitments at the WTO, including primary 
responsibility for drafting many of the TRIPs-related questions. Three 
USPTO officials attended China's WTO review last year. We also actively 
participate in the APEC Intellectual Property Experts Group, which 
plays a constructive role in developing regional standards for IP, 
including cooperation on enforcement matters. Further IP initiatives in 
China supported by the USPTO are described below.
    IP attorney at U.S. embassy. For two summers, with the active 
support of U.S. Ambassador Clark T. Randt, we stationed one of our IP 
enforcement attorneys, who is fluent in Mandarin, in our embassy in 
Beijing to help with IP enforcement issues in the region. Last fall, 
the USPTO was proud to continue this support by detailing this 
individual as attache to the U.S. Embassy in Beijing for a three-year 
appointment to continue our Government's efforts to combat piracy and 
counterfeiting. This is the first time the USPTO has sent an official 
abroad for an extended period of time to assist in improving IP 
protection in a specific country, which highlights the seriousness of 
IP violations in China. Having an attache stationed in China has 
enhanced the USPTO's ability to work with Chinese government officials 
to improve IP laws and enforcement procedures in addition to assisting 
U.S. businesses to better understand the challenges of protecting and 
enforcing their IPR in China.
    Meetings with Enforcement Officials and Other Influences. One of 
the greatest challenges in China is ensuring that localities fully 
enforce national laws. To that end, the USPTO has held meetings with 
numerous local copyright, trademark, judicial, police, and 
prosecutorial enforcement officials throughout China to ensure that 
local officials fully understand their international obligations. We 
have hosted numerous delegations at the USPTO, with the objective of 
addressing this challenge. We have also worked with U.S. non-
governmental organizations in support of rule of law efforts and 
training programs, including a Temple University program and Franklin 
Pierce Law School's annual summer program on intellectual property law 
in Beijing for American and Chinese law students.
    Training. Recent efforts in China that we have supported include: 
training on criminal IPR with the support of the British Government and 
China's Ministry of Public Security; training on patent data protection 
and patent linkage with the State Intellectual Property Office and 
State Food and Drug Administration; training on ``business methods 
patents'' with the State Banking Regulatory Commission, State Council 
Legislative Affairs Office and the Development Bank of China; training 
with the World Customs Organization on border measures and criminal 
IPR; participation in Chinese sponsored programs on IP protection in 
Shanghai and on IPR strategies for multinational companies in Beijing; 
and a joint U.S. Semiconductor Industry Association and Chinese 
Semiconductor Industry Association training program on IPR in high tech 
industries, to name but a few.
    Bilateral meetings with trade groups. We have also participated in 
a range of bilateral meetings and consultations with visiting U.S. 
trade associations such as the Intellectual Property Owners, U.S. 
Information Technology Office, Research and Development Pharmaceutical 
Association of China, Quality Brands Protection Committee, American Bar 
Association, International Federation of Phonographic Industries, 
Motion Pictures Association, Entertainment Software Association, 
Business Software Association, Association of American Publishers, U.S. 
Chamber of Commerce, to name just a few. We have also worked with some 
of these organizations to host enforcement conferences in such major 
cities as Beijing, Shanghai, Guangzhou, Wuhan, Nanjing, and Chengdu.
    Both domestically and in Beijing, we have provided briefings for 
visiting congressional and judicial delegations, and we have provided 
training for State Department and Commerce Department officials at our 
various consulates, including participation at a regional training 
program in Hong Kong sponsored by the Economic Bureau of the State 
Department. Working with the Department of Commerce's Technology 
Administration and the International Intellectual Property Institute, 
we have provided technical assistance on copyright protection in Dalian 
and Shenzhen.
    Public relations efforts. The USPTO continues to work through our 
own office of public affairs and the public diplomacy offices of the 
Embassy and consulates on providing an informed perspective on IP 
matters to the Chinese public and Chinese decision makers. 
Additionally, we are supporting State Department efforts to provide 
informational materials on U.S. IP practices to the Chinese public. We 
have also had several meetings at Chinese Universities. For example, I 
delivered a talk at Qinghua University, one of China's leading law and 
engineering institutions, on IP protection. In addition, my staff has 
delivered presentations at Sichuan Normal University Law Faculty, 
Qinghua Law Faculty, People's University and other institutions, as 
well as appearing on several television shows and being featured in 
newspaper articles.
Supporting Businesses and Working with Law Enforcement in China
    Apart from these advocacy and training efforts, we are involved in 
developing practical strategies to support our businesses in handling 
problems in China. We have worked extensively with the Commerce 
Department on improving methods for handling business complaints 
involving unfair IP practices in China and have become involved with 
the STOP Initiative whereby we handle complaints involving IP, many of 
which involve China. We have worked on two leading programs associated 
with the U.S. Embassy involving IP: a ``toolkit'' on IP matters for 
U.S. businesses on the Embassy's website, and the ``IPR Roundtable'' 
that the Ambassador hosts each year.
    Meetings in China. We have held meetings at the Canton Trade Fair 
to discuss IPR enforcement and complaints filed. We continue working 
with ITA, the American Bar Association, and many other organizations to 
provide better assistance to U.S. small and medium businesses. USPTO 
attorneys have been meeting with other foreign missions and trade 
associations to exchange ideas on innovative ways to promote better 
protection of IPR in China.
    Training programs for American businesses. We have participated in 
training programs for our business people in the United States, to 
better enable them to forcefully address the IPR challenges they 
experience in China and, when necessary, bring well-founded complaints 
to our attention. Typically in conjunction with the Department of 
Commerce, members of our China team have participated in programs in 
such cities as: Cincinnati, Ohio; Grand Rapids and Pontiac, Michigan; 
Charlotte, North Carolina; Miami, Florida; Minneapolis, Minnesota; 
Wichita, Kansas; St. Louis, Missouri; New York City and Long Island, 
New York; Waterbury, Connecticut; Boston, Massachusetts; Providence, 
Rhode Island; Portsmouth, New Hampshire; Fresno, San Jose and San 
Francisco, California; Salt Lake City, Utah; and Washington, D.C. A 
major focus of these efforts has been to address problems of small and 
medium enterprises, although larger enterprises have also benefited 
from participation in many of these programs as well.
    Workshops about China. In addition to our work with the Department 
of Commerce, our China team is planning to roll out a series of 
intensive China workshops and seminars in several cities throughout the 
United States in 2005-2006. The first of these seminars is planned for 
Detroit, Michigan, in June. The program will provide companies with 
information about several useful topics, ranging from an overview of 
the IP protection and enforcement environment in China, specific 
information on how to file patent and trademark applications in China, 
how to use China's administrative and judicial systems to enforce IPR, 
and useful tips about how to locate and hire a local company to 
investigate IP infringement in China.
    Another activity, as part of our ongoing efforts to assist U.S. 
businesses and IP owners in protecting their rights overseas, includes 
a seminar on the Chinese criminal justice system for IP offenses that 
we held in February of this year. The seminar introduced the Chinese 
criminal justice system to U.S. industry, government agencies, IP 
owners, and legal practitioners and included information on the 
recently amended Judicial Interpretation so they may better understand 
the system and use this information to their full advantage to combat 
counterfeiting and piracy. We sponsored a follow up program in April of 
this year.
    Our China team has supported a number of programs to advise our 
companies on how to file a criminal IPR case in China. These programs 
have already been held in Guangzhou, Beijing, and Hong Kong with an 
additional program planned for Shanghai. In addition, we provide 
support to our own law enforcement authorities where possible on IP 
criminal matters. For example, we have supported the Joint Liaison 
Group on criminal justice cooperation in its efforts to facilitate 
better criminal IPR cooperation, and joined in training programs run by 
a number of different government agencies on criminal IPR matters. Our 
China team works closely with the Customs Attache and Legal Attache at 
the U.S. embassy as well as the Bureau of International Narcotics and 
Law Enforcement at the State Department on these matters.
    More United States Government Efforts in China. Like Secretary 
Gutierrez, former Secretary of Commerce Evans believed in the strong 
enforcement of our trade laws and took innovative and proactive 
measures to strengthen the enforcement and compliance of our trade 
agreements. During his tenure, he tasked Commerce agencies, such as 
USPTO and the new Investigations and Compliance Unit within ITA's 
Market Access and Compliance Group, to coordinate their efforts to 
vigorously pursue allegations of IPR violations wherever they occur, 
especially in China.
    Delegations to China. In 2003, then-Commerce Secretary Evans led a 
mission to China and highlighted China's lack of IPR enforcement. The 
Secretary met with high-ranking Chinese officials and reiterated a 
continuing concern--that effective IPR protection requires that 
criminal penalties for IP theft and fines are large enough to be a 
deterrent, rather than a business expense.
    As a follow-up to the October 2003 trip, I led two delegations in 
2004 for consultations with senior officials at China's patent, 
trademark, copyright, and other IP agencies. Our delegation also met 
with U.S. companies facing IP issues in China. The primary focus of 
these trips was to further the Administration's goals of improving the 
IP environment for U.S. companies doing business in China, and 
specifically of addressing widespread counterfeiting and piracy. We 
discussed several issues, including the need for improved criminal, 
civil, and administrative enforcement, the need for protecting 
copyrights over the Internet and China's accession to the WIPO Internet 
Treaties.
    In January 2005, I traveled to Beijing as part of a second Evans-
led delegation. We were fortunate to be able to meet with Chinese 
Premier Wen Jiabao and Vice Premier Wu Yi to discuss concerns over 
China's enforcement of IPR of American businesses. Ambassador Randt 
also hosted the third roundtable on Intellectual Property Rights, which 
was attended more than 250 government officials and business and 
industry representatives from the USPTO, the European Union, Japan, and 
China's IP agencies. In addition to providing the luncheon keynote 
address during the January roundtable, I announced the USPTO's new 
plans for IP technical assistance for Chinese IP-related agencies. 
Ambassador Randt was pleased that the USPTO's offers of cooperative 
assistance were well received, and we are in the process of 
implementing these as well.
Challenges and Recommendations concerning China
    While our trips to China have been well received, and we are 
pleased to note a continuing and increasing awareness among Chinese 
officials of the importance of IP protection and enforcement, we have 
not yet seen significant progress on most of the key issues. These 
issues include enhanced criminal enforcement, a deterrent 
administrative enforcement system, protecting copyrights over the 
Internet, and stopping the export of counterfeit goods. We are also 
interested in other developments, such as China's efforts to develop an 
IPR Strategic Plan for development of its IP assets, other industrial 
policy goals, legislative efforts to draft a Civil Code that may 
include IPR, and general rule of law efforts that could significantly 
affect the protection of IPR over the long run.
    While we fully recognize that China needs to make drastic 
improvements in its IPR system to ensure that our right holders are 
fairly protected, we should not underestimate the steps that our 
businesses and government can take to reduce the risks of piracy and 
counterfeiting. The USPTO will continue working with small and medium-
sized companies on how best to protect their valuable IP rights in 
China. One particular example is for companies to register all their 
trademarks promptly in China and especially, their Chinese language 
trademarks. Given the fast pace of China's economic development and the 
huge volume of trademark applications in China, companies should file 
for their marks early in their marketing cycle.
    Globalization means that competitors can retrieve information about 
products not yet introduced in their country from a U.S. company's web 
site. Counterfeiting and piracy also originates from employees, agents, 
or distributors who have taken confidential information to engage in a 
competing operation. China's practice regarding protection of trade 
secrets by former employees who have signed non-compete agreements is 
different from the United States. We will continue to educate companies 
on how best to protect their intellectual property rights.
    It is especially important we encourage our industries to work with 
us and the other U.S. agencies involved in improving China's IP 
protection and enforcement environment by: urging the fair and 
transparent implementation of China's IPR system; fully exploiting this 
system; providing us with detailed information on its deficiencies in 
order to reduce future risks of such activities; and supporting our 
bilateral and multilateral efforts to reduce the impact of these 
problems.

   THE GLOBAL STRATEGIC TARGETING ORGANIZED PIRACY (STOP) INITIATIVE
    We are pleased to discuss with you the STOP! Initiative, the most 
comprehensive intergovernmental agency initiative ever advanced to 
smash the criminal networks that traffic in fakes, stop trade in 
pirated and counterfeit goods at America's borders, block bogus goods 
around the world, and help small businesses secure and enforce their 
rights in overseas markets. There are several important features of the 
STOP! Initiative that I'll mention:
Hotline and Website
    First, the USPTO participates heavily in this initiative by 
managing a hotline, 1-866-999-HALT, established by the Department of 
Commerce to help businesses protect their IPR at home and overseas. The 
goal of the hotline is to empower U.S. business to secure and enforce 
their IPR by providing them the information they need to secure their 
patents, copyright and trademarks, and to enforce these rights here in 
the U.S. and abroad.
    Callers receive information from IP attorneys with regional 
expertise on how to secure patents, trademarks, and copyrights, and on 
the enforcement of these rights. Businesses and innovators now have 
access to a place to learn more about the risks of global piracy and 
counterfeiting and how to protect their IP rights in both individual 
countries and in multiple countries through international treaties. In 
addition, we have established a link from our USPTO website to 
www.stopfakes.gov on the Department of Commerce's website, which 
provides in depth detail of the STOP! Initiative.
No Trade in Fakes Program
    The Department of Commerce is in charge of another important 
component of the STOP! Initiative, the no-trade-in-fakes program that 
is being developed in cooperation with the private sector. This is a 
voluntary, industry-driven set of guidelines and a corporate compliance 
program that participating companies will use to ensure their supply 
chains and retail networks are free of counterfeit or pirated goods.
Increasing and Communicating Enforcement
    The STOP! Initiative will raise the stakes for international IP 
thieves by more aggressively pursuing perpetrators of IP crimes and 
dismantling criminal enterprises. STOP! also seeks to increase global 
awareness of the risks and consequences of IP crimes through public 
awareness campaigns, and creating and operating a website publicizing 
information about international criminal IP enforcement actions.
Building Coalitions
    The ultimate success of the STOP! Initiative involves building 
coalitions with many of our like-minded trading partners, such as 
Japan, the United Kingdom, and France, who have all recently launched 
similar initiatives. We are seeking to continue working with our 
partners in the G-8, Organization for Economic Cooperation and 
Development (OECD) and the Asia-Pacific Economic Cooperation (APEC) 
forum. Cooperation on new initiatives to improve the global 
intellectual property environment is essential to disrupting the 
operations of pirates and counterfeiters.
International Outreach
    A delegation of U.S. officials from seven federal agencies, 
including Deputy Secretary of Commerce for Intellectual Property Steve 
Pinkos, recently kicked-off our international outreach effort to 
promote STOP! internationally. In April, our officials visited various 
capitals in Asia generating much interest and fruitful discussions. 
Just this week, our USPTO representative and officials from the other 
STOP! agencies are meeting with their counterparts and representatives 
from the private sector in five capitals throughout Europe. This week's 
second global outreach tour is an important opportunity to continue 
developing enforcement mechanisms to raise the stakes for pirates and 
counterfeiters and share proposals on how to make it easier for 
businesses to protect their innovation at home and abroad.
    During these international visits, U.S. officials share information 
on our efforts to combat the theft of inventions, brands and ideas. Our 
efforts abroad are advancing our commitment by enlisting our trading 
partners in an aggressive, unified fight against intellectual property 
theft. Finally, we have tentatively planned that countries receptive to 
cooperation on STOP! will be invited to attend a meeting in Washington, 
D.C. (likely in the fall of 2005) designed to--formalize their 
participation and finalize--a work plan.
Future STOP! Activities
    The USPTO has several future planned activities supporting our 
initiatives under STOP! The first involves our public outreach efforts. 
In addition to our China-related workshops and seminars for 2005-2006, 
my staff will also be embarking on an educational road show to various 
cities in the United States to educate small- and medium-sized 
businesses on what IPR are, why they are important, and how to protect 
and enforce these rights domestically and internationally. The first of 
these workshops took place in Salt Lake City on May 23 and 24, and 
already, we have found an enormous amount of interest in the program. 
We will replicate this program in other cities throughout several 
regions of the U.S. in the coming months.
    We continue to work in WIPO to seek to simplify, streamline, and 
improve the cost efficiency of the trademark application process across 
borders to provide more efficient and less burdensome systems for right 
holders. We will continue to work closely with the IP community, STOP! 
team, and you to promote a legislative agenda that is designed to meet 
the huge challenge of combating piracy and counterfeiting. Tougher 
enforcement of our international trade laws is necessary for the growth 
of our economy and the creation of new jobs. In order to fully 
implement the STOP! Initiative, it may be necessary to reassess current 
legislation.

                               CONCLUSION
    Mr. Chairman, the JCCT process continues to provide a high-level 
government-to-government forum to examine and address the trade and 
commerce issues with China that are important to us all. While there is 
a lot of discussion about the problems regarding piracy and 
counterfeiting in China, it is my hope that the Subcommittee now has an 
increased understanding of how the process is working toward concrete, 
discrete solutions that benefit U.S. small businesses and owners of 
intellectual property.
    As we look to the future, let me conclude on a positive note. The 
Administration is working on several fronts to combat the theft of U.S. 
IP through efforts, such as the STOP! Initiative. Although by all 
accounts counterfeiting and piracy appear to be growth ``industries,'' 
there have been some recent successes in attacking the problem. Between 
2001 and 2002, the software industry estimates that software piracy in 
Indonesia decreased from 89 percent to 68 percent. In South Africa, it 
fell from 63 percent to 36 percent. The motion picture industry has 
reported a decrease in piracy levels in Qatar from 30 percent in 2001 
to 15 percent in 2002. In Bahrain, there have been dramatic and 
systemic improvements in IP protection and enforcement over the past 
few years. These include the signing of numerous international IP 
conventions and the virtual elimination of copyright piracy and 
counterfeiting in retail establishments.
    There is some reason for optimism. I remain hopeful that with the 
continued support and partnership of the Subcommittee, we will be able 
to do even more to provide American businesses and entrepreneurs with 
the IP knowledge and protection they need. Clearly, in terms of the 
economy and national security, much is at stake. That is why our 
dedicated team of experts will continue to work tirelessly to protect 
American intellectual property all around the globe.
    Thank you very much.

    Mr. Stearns. I thank you, Mr. Under Secretary. I will start 
with the first questions. This is going to be fun to ask you 
because I just want a yes or a no. And since you have been 
behind me here advising Henry Hyde to see if you can get a yes 
or no, I am going to ask you this question. So just a yes or no 
now.
    You are a business and a businessman comes to you and says, 
you know, I had this property, this business that deals 
totally, exclusively, core assets are intellectual property, 
and I have got an opportunity to set up a shop in China and to 
work with the Chinese to develop this business and to do 
business with China in China with intellectual property rights 
associated with some of the Motion Picture Association back 
here. Do you think I should do it? Just yes or no.
    Mr. Dudas. No.
    Mr. Stearns. No, okay. So now, with that in mind tell me 
why ``no'' because that is the question that I was hoping you 
would answer because if you said yes, based upon your 
statistics in your opening statement and everything, I 
wouldn't, as a businessman, go into China to develop something 
dealing with intellectual property rights. I would be very wary 
because not even going into business they are going to get my 
product if they come over here; there are many ways to get it. 
So answer the question ``no'', why ``no''?
    Mr. Dudas. And, again, you asked me to answer the question 
as my person opinion as a businessperson who a 100 percent of 
my assets are intellectual property, I think I can compare that 
to industries that are there right now. And I believe the 
industries have answered that in the affirmative, not as a 
``no.'' But I look at the Motion Picture Association, the 
business software, others who 100 percent of their business is 
in intellectual property, the concern is that there is rampant 
theft of intellectual property. That is the very problem. It is 
the challenge that we face right now.
    I think each of you had an opening statement that talked 
about that our country's future to some degree depends on our 
ideas and the protection of our ideas. So while I answered in 
the negative myself--I am looking at myself--if all I had was 
one asset and it was intellectual property and I had no level 
of protection, I would be wary, certainly, of investing that.
    Again, I will say that there are--the industries that are 
out there find that the market is attractive enough that they 
have found ways to invest; they have found ways to go forward. 
So I think the fact that many in the industry have still found 
it to be worthwhile because it is such a large market, such an 
important market.
    And perhaps I might conclude that part of the theft is a 
part of just doing business; that is their overhead that they 
are going to lose because the market is so big. It is possible 
that industries make that calculation and view it almost as a 
business decision, but I think that is the very threat that 
businesses are facing is in terms of if you have a 99-percent 
piracy rate or a 92-percent piracy rate, the question is how 
much do you have to gain and how much do you have to lose. 
Again, evidence shows that they are willing to invest because--
if I take moment, I know I am beyond yes or no--I believe that 
most industries see, and I certainly see, that the situation is 
getting better. The question is is it getting better quickly 
enough? Is it getting better as rapidly as we want to see it? 
And are we seeing it at the level we need to see? I think----
    Mr. Stearns. Yes.
    Mr. Dudas. [continuing] businesses who actually invest the 
money feel that it is and it will.
    Mr. Stearns. And as I understand it we have a trade surplus 
in intellectual property, so that is one of the few areas where 
we have a surplus, and so we want to protect it.
    Your testimony shows there is a plant in China that 
produces windshields illegally, and they are stamped with major 
auto manufacturers name on them, so they are replicating theses 
windshields. This plant was raided three times over a period of 
2.5 years, yet it continues to operate. So if that is an 
example of China's effort to stop just the windshields being 
replicated based upon American auto parts, you realize that 
either, one, the enforcement mechanism is not strong enough; 
two, they are incorrigible to people because they have realized 
the penalties are so weak.
    So my question is can you influence--and maybe you can 
start in telling me--are there civil and criminal penalties and 
are they severe enough and can you have any influence to make 
them enforced? And is China committed to doing this? I mean 
that is the feeling we have that this is sort of a misdemeanor 
crime that China doesn't even care about. In many countries you 
can go into and you go down a street, you just find vendor 
after vendor selling--for example, in Singapore. Well, we sat 
down with Singapore and we worked it out. And when I was in 
Singapore, you could go down these streets; you couldn't find 
it, which was good. It is good for American consumers and it is 
good for intellectual property rights.
    But now I was recently in Barcelona, Spain and there was 
people with all kinds of movies, DVDs, right there on rugs just 
tens and tens of these movies. So my question basically, you 
know, how do you get the Chinese government to put in place the 
enforcement mechanism and the penalties, whether civil or 
criminal, to make this thing real?
    Mr. Dudas. You get to the very heart of the problem. Is 
there a deterrent, an effective system of enforcement within 
China? And certainly, within the United States I think we lead 
by example. Where there have been problems with intellectual 
property theft, often there is a bill that comes to Congress; 
it passes, it is implements, and it is publicly displayed, what 
enforcement has occurred. And that is what we are working with 
the Chinese on as well. Is the system that they have in place 
creating a deterrent for piracy and counterfeiting, or is it 
considered a cost of doing business?
    And your question about what kind of system do they have, 
they have an administrative system and a civil system and a 
criminal system. Their administrative system is unlike what we 
have here in the United States. We have pushed very hard in 
China.
    Mr. Stearns. It is unlike the one we have?
    Mr. Dudas. The administrative system is unlike what we have 
in the United States. And it is a different area of the law 
that they have there. What we have pressed for through the JCCT 
was we want to see stronger criminal prosecutions; we want to 
see lower thresholds. And what we have seen in December of last 
year as a result of the JCCT was a new judicial interpretation. 
They came out and gave guidance to court systems, to 
prosecutors, to the procurator in China that basically directed 
how criminal IPR violations should be handled.
    The Chinese came and reported to us that in the last 
several months they have had about a 19-percent increase in 
criminal violations. That is a promising statistic. But what is 
most important--and I think what you are getting at in your 
opening statement and what we are getting at with the JCCT--is 
we must see an absolute result that we can understand in terms 
of metrics, and that result will be more legitimate goods being 
sold in China. And that is where we are working toward with the 
Chinese. So we see progress. The difference between delegations 
I led to China about 2 years ago versus last year, I met with 
agency heads with the Food and Drug Administration, with the 
intellectual property offices in China after the JCCT in going 
with the Secretary of Commerce then Evans, we met with the 
premier, the vice-premier Wu Yi; you could see that there were 
differences. Well-known marks, certain marks that had never 
been protected, U.S. names, trademarks that had no protection 
in China were now being protected. We established many more 
cooperative efforts where we give technical assistance to the 
Chinese patent office or we give it to the Chinese trademark 
office.
    At the end of the day, the question comes down to, however, 
Congressman Green had pointed to the fact that our seizures at 
our borders, two-thirds of those seizures of counterfeited and 
pirated goods came from mainland China. That must come down. We 
must see more legitimate goods being sold there. There is a 
commitment from what I have seen and heard from the premier to 
the vice-premier, but that commitment needs to be shown in 
actions and results.
    Mr. Stearns. My time has expired. The ranking member.
    Ms. Schakowsky. There is somewhat of a credibility gap, 
though, Mr. Dudas, because Beijing has the ability to find and 
jail a trade union organizer or sympathizer at will. Do you 
really believe that if a government of China decided to, that 
it couldn't stop counterfeiting tomorrow if it really put an 
emphasis on that?
    Mr. Dudas. I don't know that I am an expert enough on the 
Chinese government to know whether or not, but that is 
certainly one of the issues we have, is the political will 
there to get that done? Are we seeing any results? I can tell 
you again that we have seen dramatic differences within the 
last 2 years. I think your question goes to the heart again. 
Are those differences enough? Is the political well-being shown 
to the level that we think is necessary and sufficient?
    Ms. Schakowsky. I wanted to ask you some questions about 
workers' rights and labor, the unfair, illegal advantage that 
China gains by suppressing workers' rights and artificially 
keeping wages low. I am going to ask them all at once 
basically. A little over a year ago the Administration convened 
four Cabinet secretaries to announce the decision to reject the 
AFL-CIO Section 301 Petition, alleging that China's egregious 
repression of workers' rights constituted an unfair trade 
practice. And at the time, the four Cabinet secretaries 
conceded that there were workers' rights problems in China, but 
they would address these through dialog and engagement. So you 
have had over a year now to dialog with the Chinese government 
over those very serious issues. Can you tell me what concrete 
improvements in Chinese workers' rights have been made in the 
last year? In particular, has there been any progress in 
reforming China's labor laws, which prohibit the formation of 
independent unions and the right to bargain collectively? Have 
any Chinese workers actually formed an independent union, a 
real independent union? And aside from Labor Secretary Chao's 
visit to China last summer and a couple of non-binding letters 
of understanding that were signed at the time, what other 
actions has the Administration taken to ensure progress on 
workers' rights, human rights, and democracy found in China? 
And finally, I want to just ask given the slow progress in the 
last year, would you consider, would the department consider 
accepting the AFL-CIO 301 Petition if it were re-filed? Do you 
think this issue needs to be addressed with more urgency and a 
higher priority, or are you satisfied with the progress that 
has been made so far?
    Mr. Dudas. I will open by thanking you for your questions, 
and I have to tell you, in your opening statement you mentioned 
that there might have been some reluctance to testify. I can 
assure the committee there was no reluctance to testify. I had 
a person concerned that there are areas of expertise I do not 
have. I am certain I will disappoint you with my answer that I 
have really no knowledge on that front. My expertise is limited 
to intellectual property. I am happy to bring those questions 
to the appropriate folks within the Administration.
    Ms. Schakowsky. You know, I just want to tell you, I think 
that in some ways that this is indicative of the various levels 
that intellectual property rights, as opposed to workers' 
rights, environmental rights are placed. This is not a 
criticism of you, but rather it would have been a good thing, I 
think, since it is not unknown that many of us are concerned 
about these issues of labor rights. You know, when you have got 
a situation that it has been reported that many child workers 
aged 12 to 15 migrate to the southern coast of China and end up 
working in these special economic zones using false identify 
papers, according to Hong Kong news reports, instead of 
acknowledging the lack of adequate information, officials at 
the Labor Ministry ``claim that no government figures are 
available because child labor is not a problem in China.'' Now, 
you probably know enough--well, let me ask you is child labor a 
problem in China?
    Mr. Dudas. I don't have the expertise to answer that 
question.
    Ms. Schakowsky. In 2000 worker rights advocates affiliated 
with the Hong Kong Christian Industrial Committee reported that 
McDonald's Happy Meals toys were being produced by a supplier 
that employed child labor from mainland China. Children as 
young as 14 were earning $3 for 16 hours of work each day. So 
what has your agency done to investigate this allegation and to 
prevent similar incidents from occurring in the future?
    Mr. Dudas. I don't know what our agency has done and only, 
again, because I am solely committed to intellectual property. 
But I would welcome the opportunity to supply you with answers 
to these questions.
    Ms. Schakowsky. Well, I have a number of questions that, 
you know----
    Mr. Stearns. We are going to go to a second.
    Ms. Schakowsky. Well, he is not going to know in a second 
round the answers to my questions either. And, you know, I just 
think that in our zest here for low-cost goods for developing 
and increasing this relationship with China that we should not 
only be concerned with what I do agree is the future 
comparative edge for the United States of America, and that is 
our brain power, our technological advantage, our intellectual 
property, but that we have to put as much emphasis, I believe, 
on looking--because otherwise, we then become supportive of a 
real race to the bottom, which ends up affecting our workers at 
home. And the interests of business and multinational 
corporations and protecting the rights of intellectual property 
or any kinds of property, while they are important, human 
capital is very important too. So I can submit these to the 
department for answers.
    Mr. Stearns. I thank the gentlelady. The gentlelady from 
Tennessee, Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman, and I thank you for 
working on this issue. And, Mr. Dudas, I thank you for being 
with us today. I certainly appreciate it. I represent a little 
bit of Nashville, a little bit of Memphis, so I am a little bit 
country and a little bit rock and roll and real concerned about 
intellectual property. And so I thank you for being here with 
us today. As a matter of fact, I am doing a hearing or a 
listening session, if you will, over on Music Row in Nashville 
on Sunday with some of our folks over there. We are looking at 
the impact on the small business entertainment community, the 
impact that intellectual property has on our economy and the 
impact that is coming from China and how we fill that. And, you 
know, our State of Tennessee, when you look at State revenues, 
$26 billion budget, about $14 billion of it comes from the 
State. About $1 billion is a direct result of entertainment 
products. So when they steal, we squeal. And it hurts.
    So let us talk about this for a second in terms of 
percentages. I understand that 85 percent of the music that is 
sold in China is pirated. I understand that 95 percent of films 
is pirated. And these are troubling, troubling numbers. And, 
you know, we accept and we understand it is a cultural 
difference. You know, when something is printed here it is 
copyrighted and you own it. When something is printed there it 
is public. And there is a different level of respect for that 
creative energy, but I really am protective of this creative 
community that we have here. I think that it is worth 
protecting. And they are great people, and by and large they 
are small business people.
    So does the Administration--do you all have plans to raise 
these percentages and raise this issue with them and bring it 
to pursue it before the WTO? Because it is such an egregious 
violation. What is the plan there?
    Mr. Dudas. Commenting generally on what you said, you are 
absolutely right that the United States has--it is in our 
Constitution--how fundamental the protection of intellectual 
property rights is. It went without a vote; it went with out 
debate. It was clearly understood from the Framers of the 
Constitution through today what patents and copyrights and 
trademarks and IP does for our country.
    The answer to the statistics that you have spoken of, yes, 
those are industry-reported statistics. Some you even hear 
higher from industries. Some industries have said in the 
business software that they see 92 up to 99 percent. That is 
something that must be addressed, and I can assure you it is 
being addressed within the JCCT where we are very specific 
talking just specific points that we are making with specific 
actions that we expect the Chinese to take in order to reduce 
these levels. We have also gotten overall promises they will 
reduce these levels. As I mentioned earlier, what is important 
at the end of the day will not be more promises or more 
discussions of crackdowns or anything else other than having 
more legitimate product sold in China, the absolute result.
    On your question about a WTO action, the United States has 
kept all options open vis-`-vis China. That is a decision that 
it has ultimately made out of the office of the President's 
United States Trade Representative. But I can tell you that 
China last year was put on this special priority watch list. 
There is a plan to invoke the transparency provisions of the 
TRIP agreement, which basically says we want to see from you, 
China, what kinds of piracy levels you see. We will have 
requests for information to find specifically what is in there. 
There is working going on right now with the industries you 
have mentioned to find out, to gather evidence and gather 
information in case a WTO procedure is taken. So those options 
all remain open.
    On another front, the Joint Commission on Commerce and 
Trade has a very cooperative relationship at the highest levels 
of the U.S. Government and Chinese government. But we have laid 
out very specific line-item actions that we believe they should 
take to reduce the level of piracy and counterfeiting. And our 
point is we believe this will make a difference; this has 
worked in the United States and in other countries. But at the 
end of the day what is important is that you reduce your levels 
of IPR infringement----
    Ms. Blackburn. But we----
    Mr. Dudas. [continuing] that would be the test.
    Ms. Blackburn. Yes, we would just like to see you all a 
little quicker on the uptake on following up with some of this. 
Let us go back. You said that China has a--I think my time is 
about to expire and I do have another group of questions I 
think I will start while they are--okay. You said 19-percent 
increase in their criminal prosecutions, and I am familiar with 
their saying they have done 40,000 raids in the past few 
months, and I think we are all familiar with ``Silk Alley,'' 
that closing that took place in January. So what are we seeing 
as far as prosecutions, convictions, and penalties? Is there an 
increase that you all can substantiate, not just what they say? 
But can you all substantiate this and point to some things 
other than the Golden Sciences Technology's decision that we 
got out of Hong Kong last year, which was a 5-year process to 
get something done? So where are you on that? Give something 
more specific if you will, please.
    Mr. Dudas. Well, on that front on the specifics on criminal 
prosecutions we are relying--just 2 weeks ago--I am relying on 
the documents they gave us to show that there was a 19-percent 
increase in criminal prosecution----
    Ms. Blackburn. Are they listing them----
    Mr. Dudas. [continuing] due to----
    Ms. Blackburn. [continuing] and----
    Mr. Dudas. [continuing] they are not listed, and that is 
part of what is important to do if you consider a WTO procedure 
to be looking at the transparency provisions where you say to 
the government we need to see all of the information that we 
need. Again, that is a process that does not come out of my 
office. It comes out of the United States Trade Representative. 
But in the out-of-cycle review, it was noted that that is 
something that the United States will be looking at is getting 
that information.
    Ms. Blackburn. Okay, and the issue is raised----
    Mr. Dudas. An issue has been----
    Ms. Blackburn. [continuing] is what you are saying. You 
have raised that. I think that is part of the frustration. When 
we look at an industry that is so important to our community 
and your friends and your neighbors and the people you see and 
you work with and you cross paths with every single day. And 
they are getting ripped off. They make an independent film, and 
then when they go to sell those video rights, they can't sell 
them in Southeast Asia, and the reason is the pirated copy has 
made it to the streets. So then their rights are worth nothing. 
You have authors--we have a big publishing industry in Middle, 
Tennessee, a lot folks writing a lot of books, different 
genres, and they can't sell the rights on those books.
    So, you know, understanding that it is a different culture 
and accepting that, I hope that you will take to heart our 
frustration on behalf of our constituents who comprise a 
wonderful creative community. We don't want to lose them. And 
it is encouraging to us to see your aggressiveness. We need to 
see more aggressiveness, and not just in writing, but in some 
actions, something that is quantifiable so when I step before 
this music industry on Sunday afternoon to do a listening 
session--and I have got several small business/entertainment 
industry folks in front of me, I can say let me tell you what 
the U.S. Government and this Administration is specifically 
doing to protect your right to exercise your giftedness and 
your talents in order to earn a living. And that is what I 
don't have chapter and verse, and that is what I want to see, 
chapter and verse. And I appreciate so much that you would take 
your time and come here and visit with us on this issue today 
because it is an economic issue. It is a jobs issue. It is 
preservation of an industry issue for me and for my 
constituents. Thank you, Mr. Chairman. I yield back.
    Mr. Stearns. I thank the gentlelady. The ranking member is 
recognized in unanimous consent.
    Ms. Schakowsky. I could have unanimous consent to insert 
into the record a report called ``The Struggle for Workers' 
Rights in China.''
    Mr. Stearns. By unanimous consent, so ordered.
    [The report is available at http://
www.solidaritycenter.org/publications/jfa_china.cfm]
    Mr. Stearns. I told my colleagues we are going to go around 
for a second round. With Mr. Dudas here, we might as well just 
camp out here for a while if we have got him here. And he has 
been kind enough to stay, so I will start with another round.
    Mr. Dudas, we just had a vote on the WTO whether we should 
leave the WTO. And, as you know, every 5 years we have this 
vote, and the vote overwhelmingly lost. But there were, I 
think, about 33----
    Ms. Schakowsky. 85.
    Mr. Stearns. 85 people who voted ``yes.'' And I have been 
on both sides of this issue. Dealing with intellectual property 
rights, is there any response to the WTO to handle this? Can a 
WTO do anything to China? I mean, I know your boss is going for 
another round of negotiations out to China in July, I guess it 
is? Is that correct? Secretary Gutierrez will co-chair the 2005 
JCCT schedule in July in Beijing along with U.S. Trade 
Representative Portman and the Chinese Vice-Premier. And you 
are talking to the Chinese, but why isn't there a two-prong 
approach going through the WTO?
    Mr. Dudas. Well, WTO procedures are one potential avenue. 
As I mentioned, the Administration is keeping all avenues open. 
The----
    Mr. Stearns. That is just so weak that you don't think it 
works?
    Mr. Dudas. I will go to another instance of whether WTO 
actions have worked. There is something called geographical 
indications----
    Mr. Stearns. Yes, that is good. If you can give me an 
example of what WTO works, I would like to hear that, dealing 
with China.
    Mr. Dudas. That is outside my expertise, I apologize, but 
in the semiconductor industry I believe a WTO action was 
taken----
    Mr. Stearns. But does it work with intellectual property 
rights?
    Mr. Dudas. Well, I can give you an example where it has 
worked with the European Union----
    Mr. Stearns. Okay.
    Mr. Dudas. [continuing] on an issue of geographical 
indications. The United States took a case against the European 
Union on something called geographical indications. 
Essentially, you want to be able to protect Idaho potatoes and 
say that Idaho potatoes come from Idaho. Certainly, a number of 
European nations want to protect certain kinds of cheeses, and 
the United States has a system that does protect certain kinds 
of cheeses. Parmigiano-Reggiano comes from a certain region in 
Italy. That is a geographical indication that is protected in 
the United States. However, Idaho potatoes and Florida oranges 
were not protected in the European Union. The USPTO working 
together with the United States trade representative, USTR took 
a case on that through the WTO and that came out very favorably 
for the U.S. interests saying they were insufficient----
    Mr. Stearns. Why don't we have a case going to WTO or do we 
have a case going to WTO on intellectual property rights asking 
for them to assess China or to put tariffs on them for this 
theft of our property rights?
    Mr. Dudas. I think that is under consideration when I say 
all options are open, whether or not to take a case to China. 
There are a number of issues--before you would ever take a case 
you want to make sure you have your evidence lined up perfectly 
in a row----
    Mr. Stearns. You don't think there is enough evidence?
    Mr. Dudas. Well, I think the United States trade 
representative is gathering evidence right now, working with--
--
    Mr. Stearns. Would you personally--your office think there 
is enough evidence now to make the case that we could go to the 
WTO?
    Mr. Dudas. I don't know that I have--I would have to look 
at the very specific evidence----
    Mr. Stearns. Well, let me just remind you now, your title 
as the expert here is Under Secretary of Commerce for 
Intellectual Property. So if I have to go to anybody, I assume 
I would go to you to find out if there is enough evidence--and 
you have just advised me if you had a company on intellectual 
property rights you would not go to China to do business. So 
obviously, there is enough evidence in your mind, so I just 
can't understand why we don't have a two-prong approach: 
negotiate but at the same time move forward with a case against 
China in the WTO. That is what the WTO is for.
    Mr. Dudas. Well, and I think those are--there are certainly 
negotiations going on and the discussions and decisionmaking 
process about whether or not to invoke WTO procedures. Again, I 
can tell you it is--the United States trade representative has 
said we are looking at evidence. We are also looking at the 
transparency provisions. These are----
    Mr. Stearns. I think you make a weak case when you say we 
are looking at the evidence. I mean, I think the evidence is 
clear. The question is do you want to act?
    Mr. Dudas. Well, let me be clear----
    Mr. Stearns. Unless you are saying that the evidence now is 
dubious that they are stealing our intellectual property 
rights.
    Mr. Dudas. Well, I think what I am saying is there is 
discussions that need to occur, pulling together, working with 
industry to get very specific information. There are certain 
areas that you would go into, invoking the transparency 
provisions where you are telling the government there are 
certain areas of evidence that we would like to have, evidence 
that we would like to look at. Those are underway right now. 
The decision on whether or not to actually take a case, I am 
not the expert. I am not the person who ultimately gets to make 
that decision and----
    Mr. Stearns. Oh, I appreciate that you are not the lawyer 
that would take it to the WTO, but I think you should be the 
person to say yes, there is enough evidence and yes, it is 
powerful enough that the United States should take it to the 
WTO, because you could make that decision.
    Mr. Dudas. Actually, I am not the person that gets to make 
the decision on whether or not to take a case to the WTO----
    Mr. Stearns. No, I know----
    Mr. Dudas. [continuing] but----
    Mr. Stearns. [continuing] but you could recommend it to 
Secretary Gutierrez and say----
    Mr. Dudas. Well, certainly, we have discussions within 
trying to make these determinations, but I ultimately, 
certainly, defer to the United States trade representative.
    Mr. Stearns. So let me ask you pointblank yes or no. Do you 
think there is enough evidence to go to the WTO to complain 
about China stealing our intellectual property rights? Yes or 
no?
    Mr. Dudas. I can't give you a yes or no answer to that 
question because I am not the person that makes that decision.
    Mr. Stearns. You don't think there is enough evidence of 
them stealing our intellectual property rights?
    Mr. Dudas. I don't feel that there is a lack of evidence. 
What I am telling you is that is a decision that is being 
reviewed through a variety of agencies throughout the U.S. 
Government and one that--I know that if the U.S. ever takes a 
case, I know that that day that yes, there is enough evidence 
to take that case.
    Mr. Stearns. In the judicial interpretation that was issued 
in December your testimony states, ``it took a step backwards 
regarding the enforcement against repeat offenders.'' Could you 
explain what that means and what should the penalties be?
    Mr. Dudas. Yes, sir, in those judicial interpretations 
there were a number of steps that we thought were forward 
steps. There were a few steps that we thought were backward 
steps, including eradicating the provision that allows for 
repeat offenders to have certain penalties. We are now working 
very closely with the Chinese on making certain that we 
understand fully what is in their judicial interpretation, and 
we are seeking clarifications.
    Another area where there was express disappointment on 
behalf of my office in the U.S. Government, it looked as though 
sound recordings had been excluded from the judicial 
interpretation for criminal penalties. In discussions with the 
Chinese just 2 weeks ago it was made clear to us that that was 
not intention, that actually there is a way that they have been 
included. We are working very closely with them to make certain 
that if that is the case, we get a clarification.
    The successes of the JCCT are along those lines where we 
are finding out we can have very express conversation where we 
discuss where we think there are deficiencies, where we think 
things need to be improved, and we are working closely with the 
agencies to make sure we get that clarification with them and 
in through the highest level of the government.
    Mr. Stearns. My last question is I think you stated that 
the Chinese government is giving free rein to counterfeiters by 
restricting market access to foreign companies. What 
restrictions do they impose and how are we working to open 
those markets if, indeed, that is occurring and it is giving 
free rein to these counterfeiters? Does that make sense? Do you 
know what I mean?
    Mr. Dudas. Yes. I think the philosophical argument, and it 
makes perfect sense and it is correct, that if a company does 
not have access to the markets, if an industry does not have 
access to markets in any country there is----
    Mr. Stearns. Underground market.
    Mr. Dudas. Right, they don't have--well, I mean, just the 
fact that if a legitimate company cannot get into the market 
because of other restrictions----
    Mr. Stearns. By the Chinese government.
    Mr. Dudas. [continuing] by the Chinese government in this 
case, then how will you ever be able to compete with 
counterfeiters? So an example, case in point--and I think 
Congresswoman Blackburn referred to it--in the motion picture 
situation, there are certain limits on how many motion pictures 
can be shown, foreign films can be shown in China. That was an 
agreed-to discussion under WTO negotiations. That number is 20. 
We believe that that number 20 is absolutely a floor not a 
ceiling. The Chinese have treated it as a ceiling. It is very 
difficult for a company to be able to--if they can't sell their 
product--if it takes 2 months to get their product out on the 
street, an illegitimate, a copy, a pirated version will be 
sold. The market is gone within a month. So if you can 
compete--I guess many industries are saying we will even try to 
compete with counterfeiters, but you have to give us the 
opportunity to compete with counterfeiters.
    The business software folks that have issues in China are 
very concerned that there might be government procurement 
regulations that would favor the Chinese government that would 
somehow not allow foreign companies to come into those markets. 
If you put in barriers to markets in areas where 90 percent of 
the production is occurring in the United States, we are 
obviously most at risk.
    Mr. Stearns. I am just curious; you say that the Chinese 
government only allows 20 showings of a film? Is that what you 
said?
    Mr. Dudas. No, the rule is that there are only 20 foreign 
films that are allowed in----
    Mr. Stearns. Oh.
    Mr. Dudas. [continuing] to be shown in their movie 
theaters.
    Mr. Stearns. Okay, so 1.3 billion people, only 20 specific 
foreign films are allowed in----
    Mr. Dudas. For the movie----
    Mr. Stearns. [continuing] for the movie industry?
    Mr. Dudas. Yes.
    Mr. Stearns. And is there a floor on American films? That 
includes the American films I guess----
    Mr. Dudas. Oh, no----
    Mr. Stearns. [continuing] because we are foreign.
    Mr. Dudas. [continuing] it includes American films, yes.
    Mr. Stearns. So out of that that means you have got France 
and you have got India, you have got Italy, so you have got the 
entire European Union and not to mention the----
    Mr. Dudas. Right.
    Mr. Stearns. --Pacific Rim, so all these countries, only 20 
films are allowed a year?
    Mr. Dudas. Get approximately 15 from the United States.
    Mr. Stearns. So 15. And I am just curious, how do they make 
that selection of those 15? Is it based upon politics?
    Mr. Dudas. There are certain censorship decisions, other 
decisions that they are making in China that go into that 
decision, yes.
    Mr. Stearns. Because you can see that there is a dearth of 
these movies, and so the people say by golly, I am going to 
find another way to counteract that. And, you know, that goes 
to the heart of what we are trying to do if we are trying to 
get China to be a free society and an open society and then you 
wouldn't have this huge restriction and the counterfeiters are 
actually making a lot better money because the Chinese 
government is restricting films. So my time has expired. The 
gentlelady from Tennessee.
    Ms. Blackburn. Thank you, Mr. Chairman. You might wish you 
had never come over this afternoon when we finish with all of 
our questions, but, you know, it is a pretty important issue. 
And so let us go back to this prosecutions question. You know, 
we talked percentages; we talked about the 40,000 raids they 
say that they have conducted. Do you have a number? Can you say 
this is the total number? If you can't recite chapter and verse 
and where and what the offense was, are they giving you a total 
number rather than just saying we have had an increase?
    Mr. Dudas. An increase in prosecutions or in----
    Ms. Blackburn. Correct----
    Mr. Dudas. [continuing] raids or----
    Ms. Blackburn. [continuing] prosecutions.
    Mr. Dudas. The answer is yes, they will give us--they gave 
us a total number. I don't know what that total number was----
    Ms. Blackburn. Would you get that to me----
    Mr. Dudas. I will----
    Ms. Blackburn. [continuing] please?
    Mr. Dudas. [continuing] get you what they----
    Ms. Blackburn. Okay.
    Mr. Dudas. [continuing] give us. If you wouldn't mind, I 
would say that it is not important in many ways what the total 
number is because it almost can't be enough--it can't be enough 
if we are not seeing legitimate products being sold in China. 
In other words, it can be anecdotal if you say I did 10,000 
prosecutions or I did 20,000 prosecutions or 30,000 
prosecutions, it won't be enough if there has still been a rise 
in----
    Ms. Blackburn. I realize that and I agree with you on that.
    Mr. Dudas. Yes.
    Ms. Blackburn. However, when you have had zero and you have 
got something, at least there is some tangible action----
    Mr. Dudas. Yes.
    Ms. Blackburn. [continuing] that you can point to. Now, 
part of the problem with this entire situation is they have to 
come to the point that they value the product created from 
intellectual property, that they see that as something that is 
a revenue stream in their county. When you go into China, many 
times government is your partner on something. So they have to 
have a value for that. And you have talked about process, you 
have talked progress, you have talked about gathering evidence 
and being able to move forward, so let us talk about what you 
are tangibly doing. Are you all working with NGO's or other 
groups in addition to the WTO? Or who are you working with on 
education? Are there NGO's that are out there helping us with 
not only China, but other of the Asian nations, other of the 
Central American nations to get laws on the books so that we 
have something that we can negotiate to, so that we have 
something that we can demand enforcement of?
    Mr. Dudas. Absolutely. Thank you for that question. First, 
let me say on the value of intellectual property within China, 
I can give you some good news. They have the largest trademark 
office in the entire world. The United States used to have the 
largest trademark office in the world----
    Ms. Blackburn. Size means nothing----
    Mr. Dudas. But they----
    Ms. Blackburn. [continuing] I mean we want to see----
    Mr. Dudas. Right.
    Ms. Blackburn. [continuing] action.
    Mr. Dudas. But what you see is in the patent office, they 
have one of the largest patent offices in the world. Last year 
was the first year where there was more intellectual property 
produced in China than by foreign nations, which is very 
important for them to understand and need.
    In answer to your question of what are we doing, the 
Administration has raised to the highest levels. President Bush 
asked last year to get Secretaries together of Commerce, the 
United States Trade Representative, Department of Homeland 
Security, and Department of Justice and go forward on this STOP 
Initiative, which is the strategy for targeting organized 
piracy. As part of that, there have been what are called world 
tours. There is one going on right now in the EU. There was one 
a few months ago where our deputy under secretary, Steve 
Pinkos, attended on behalf of the PTO going into different 
Asian nations, working with them, explaining to them what we 
are doing to crack down, what we are doing in customs, et 
cetera. My office has an enforcement division where literally 
hundreds of training programs go on a year. We will travel to 
China; we will travel to Russia; we have an institute where we 
are working with people here. We have trained Supreme Court 
Justices in India and other Asian nations. We have trained the 
prosecutors; we have trained judges; we have trained IP 
officials. We work very closely with IP officials--wherever we 
can get people who are likeminded within any nation on the 
value of intellectual property and getting that education 
throughout their country, we will work with them.
    Ms. Blackburn. Let me ask you one more thing. You know, not 
only does this affect our entertainment folks in Tennessee, but 
we have a lot of pharmaceutical distributors, some 
manufacturing and biotech. Tool and die is a big industry, and 
tool and die has been hit tremendously. I have one constituent 
who lost $500,000 worth of business this year because of China. 
And that always brings up the problems with liability. So, you 
know, I know that there are some products, you know, when you 
are talking about products with safety elements and the 
liability issue enters into that, whether it is a grommet or 
some small piece used in a car. And then you get that pirated 
in China, sold, counterfeit labeled, sold back into the 
American market. Should consumers be concerned? Have you all 
raised this as a safety issue? And what action are you taking 
there?
    Mr. Dudas. Certainly, it is something that we are very 
concerned about as well. The issue of counterfeiting and piracy 
is not just an issue of money and economics; it is an issue of 
safety. If you have drugs that are being counterfeited, if you 
have products that are otherwise for safety, the UL listing has 
been counterfeited so that what you think you are getting is a 
safe--electrical cord that explodes. We definitely have been 
raising that. We do have a very strong customs department in 
the United States. So we are very good at our borders and 
protecting our borders in what comes in, but worldwide, the 
World Health Organization has estimated that up to 10 percent 
of pharmaceuticals are counterfeited. Of those, 67 percent of 
the wrong amounts in them, wrong amounts of----
    Ms. Blackburn. Now, with all due respect, you know, if we 
have got two-thirds of the counterfeit product in this 
country--the counterfeit product that is being sold in this 
county coming from China, we have got a leak somewhere. 
Something is not exactly working. So I would just respectfully 
request that there be a review and a reconsideration of that 
process. Mr. Chairman, I yield back.
    Mr. Stearns. I thank the gentlelady. And I think we have 
completed our questions for you, Mr. Dudas. And I want to thank 
you very much for coming. I would conclude by advising you that 
you should tell your boss, Mr. Gutierrez, that when he goes to 
Beijing, if he wants to see the theft of intellectual property 
rights, all he has to do is go behind the American Embassy and 
there is a shopping venue where he doesn't get just 15 American 
films; he can get any American film he wants. So before he sits 
down to meet with the Chinese, just walk behind the American 
Embassy to the shopping venue. You can give him that tip, and 
that will give him a good idea of how to start his 
negotiations. With that, the subcommittee is adjourned.
    [Whereupon, at 2:26 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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