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





 INTELLECTUAL PROPERTY PROTECTION AS ECONOMIC POLICY: WILL CHINA EVER 
                          ENFORCE ITS IP LAWS?

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

                               ROUNDTABLE

                               before the

              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 16, 2005

                               __________

 Printed for the use of the Congressional-Executive Commission on China


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              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    LEGISLATIVE BRANCH COMMISSIONERS


Senate                               House

CHUCK HAGEL, Nebraska, Chairman      JAMES A. LEACH, Iowa, C-Chairman
SAM BROWNBACK, Kansas                DAVID DREIER, California
GORDON SMITH, Oregon                 FRANK R. WOLF, Virginia
JIM DeMINT, South Carolina           JOSEPH R. PITTS, Pennsylvania
MEL MARTINEZ, Florida                ROBERT B. ADERHOLT, Alabama
MAX BAUCUS, Montana                  
CARL LEVIN, Michigan                 
DIANNE FEINSTEIN, California         
BYRON DORGAN, North Dakota           
                                     

                     EXECUTIVE BRANCH COMMISSIONERS

                  STEPHEN J. LAW, Department of Labor
                 PAULA DOBRIANSKY, Department of State

                David Dorman, Staff Director (Chairman)

               John Foarde, Staff Director (Co-Chairman)

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

                               STATEMENTS

Chow, Daniel, C.K., Robert J. Nordstrom Designated Professor of 
  Law, Ohio State University, Michael E. Mortiz College of Law, 
  Columbus, OH...................................................     2
Smith, Eric H., president, International Intellectual Property 
  Alliance, Washington, DC.......................................     6
Zimmerman, James M., partner and chief representative, Beijing 
  office, Squire, Sanders & Dempsey, LLP, Beijing, China.........     9

                                APPENDIX
                          Prepared Statements

Chow, Daniel C.K.................................................    31
Smith, Eric H....................................................    35
Zimmerman, James M...............................................    72

 
 INTELLECTUAL PROPERTY PROTECTION AS ECONOMIC POLICY: WILL CHINA EVER 
                          ENFORCE ITS IP LAWS?

                              ----------                              


                          MONDAY, MAY 16, 2005

                            Congressional-Executive
                                       Commission on China,
                                                    Washington, DC.
    The Roundtable was convened, pursuant to notice, at 2 p.m., 
in room 192, Dirksen Senate Office Building, John Foarde (staff 
director) presiding.
    Also present: Demetrios Marantis, Office of Senator Max 
Baucus; Susan Roosevelt Weld, general counsel; Keith Hand, 
senior counsel; Adam Bobrow, counsel, commercial rule of law; 
and William A. Farris, senior specialist on Internet and 
commercial rule of law.
    Mr. Foarde. Good afternoon, everyone. Let us get started. 
We have developed a reputation, whether deserved or undeserved, 
for both starting on time and ending on time, so we are going 
to try to keep up our three and a half years of good record 
this afternoon.
    I would like to welcome everyone on behalf of Chairman 
Chuck Hagel and Co-Chairman Jim Leach of the Congressional-
Executive Commission on China, and also on behalf of the 
legislative and executive branch members of the Commission who 
have been named so far.
    This afternoon, our inquiry is about intellectual property 
and its protection, or lack thereof, in the People's Republic 
of China. All of our members have been interested in our trade 
relationship for many years, and all of them share an interest 
in the protection of intellectual property [IP]. They 
recognize, as I am sure everyone here recognizes, that 
America's intellectual property industries, which rely on IP 
protection for their revenues, significantly contribute to the 
U.S. economy and represent a growing proportion of our gross 
domestic product [GDP]. This sector includes not only the 
copyright industries, such as motion pictures, musical 
recordings, and book publishing, but also industries that rely 
on the value of their trademarked brands. It also includes 
patent industries, such as the pharmaceutical industry and many 
manufacturing businesses.
    The health of U.S. IP industries, as well as the 
development of IP industries in China, may depend on whether 
China continues its role as the largest producer of pirated 
products in the world or joins the ranks of nations that 
protect IP.
    So this afternoon we want to examine the current crisis 
resulting from the lack of IP enforcement in China, and looking 
beyond the simple question of how much piracy and 
counterfeiting occurs, we hope to examine the policies that 
have created the current problems and assess whether they are 
likely to continue in the future.
    Our panelists this afternoon will explain the scope of the 
problem, analyze its source, and assess which strategies can 
advance IP protection in China. We are delighted to have three 
extremely distinguished and knowledgeable panelists this 
afternoon. I will introduce them in detail before they speak.
    Our procedure is as we have operated for the last three and 
a half years at these Issues Roundtables. Each panelist will 
get 10 minutes for an opening presentation. After about eight 
minutes, I will tell you that you have a couple of minutes 
left, and then that is your signal to wrap things up. 
Inevitably, you will not cover everything that you want to say 
in your initial presentation, but we will be able, we hope--and 
that has certainly been our experience--to pick up anything 
that has been left unsaid during the question and answer 
session, which will follow the opening presentations.
    Each of the members of the staff panel here will get the 
opportunity to ask a question and hear the answer for about 
five minutes each, and then we will just continue to do rounds 
until 3:30 arrives, or we run out of steam or exhaust the 
subject, whichever comes first. On a subject this interesting 
and complex, I doubt we will get to the exhaustion-of-topic 
problem this afternoon.
    So let me then recognize, with great pleasure, Mr. Daniel 
C.K. Chow, Robert J. Nordstrom Designated Professor of Law at 
Ohio State University's Michael E. Mortiz College of Law. Mr. 
Chow 
specializes in international trade law, international business 
transactions, international intellectual property, and legal 
issues concerning China. He has authored numerous books and 
articles, 
including two well-known case books, but he is probably most 
well-known as the author of this wonderful tome, ``The Nutshell 
Series: The Legal System of the People's Republic of China,'' 
and we have all benefited from it. Mr. Chow is fluent in 
Mandarin Chinese and reads and writes Chinese at a high level. 
He obtained his bachelor's degree from Yale College and his 
J.D. from Yale Law School.
    Welcome, Dan. Thank you for coming this afternoon.

 STATEMENT OF DANIEL C.K. CHOW, ROBERT J. NORDSTROM DESIGNATED 
  PROFESSOR OF LAW, OHIO STATE UNIVERSITY, MICHAEL E. MORTIZ 
                  COLLEGE OF LAW, COLUMBUS, OH

    Mr. Chow. Thank you, Mr. Foarde. Does the staff panel have 
a copy of the PowerPoint printout? Let me begin on page one.
    My topic today is trademark counterfeiting, so I am going 
to focus on the counterfeiting of trademarks, products, and 
brands. I am not going to focus on patent infringement or on 
copyright piracy, but I am going to focus specifically on 
product counterfeiting. Let me begin, nonetheless, by saying 
that the counterfeiting problem in China is recognized by many 
as the most serious counterfeiting problem in world history. 
The PRC Government itself estimates that the counterfeit trade 
in China is between $19 and $24 billion per year, and about 8 
percent of its gross national product.
    U.S. industries that do business in China estimate their 
losses to be in the billions to tens of billions of dollars per 
year. In China, 15 to 20 percent of well-known brands of 
consumer products are counterfeit. You can find them in every 
large city, in every street market in China.
    One thing about this that I want to emphasize is that no 
problem of this size and scope could exist without the direct 
or indirect involvement of the government, and I want to detail 
how that occurs in my talk. I also want to highlight an ominous 
development, which is that exports from China of counterfeit 
products, which are already serious and which make this into a 
global problem, are about, in my opinion, to increase 
significantly as a result of China's entry into the World Trade 
Organization [WTO]. I will discuss that in detail.
    If we could go to the second page, please.
    What are the origins of such a problem? Well, first, let me 
say that China is the world's largest recipient of foreign 
direct investment. It surpassed the United States as a 
recipient of foreign direct investment--I mean foreign 
capital--in the year 2002. But along with capital, foreign 
direct investment is the best source of technology transfer in 
the world today. In fact, when you look at a company such as 
Coca-Cola, the value to Coca-Cola of its trademark in China is 
worth much more to that company than the millions, tens of 
millions, or hundreds of millions of dollars of capital 
investment that Coca-Cola has put into China.
    So, too, with trademarks of companies like Procter & 
Gamble, Johnson & Johnson, Unilever. All of these marks, all of 
these intellectual property rights [IPRs], are actually far 
more valuable to the company than the value of the capital that 
the company might put into China. So because it is the world's 
largest recipient of foreign direct investment, China now has 
unprecedented access to the world's most valuable intellectual 
property.
    The second cause of this problem, I think, is that although 
China is the world's largest recipient of foreign direct 
investment, China's legal system still has many gaps, it is 
still weak, and it is still developing. That, in combination 
with the value of the product or intellectual property that has 
gone into China, has led to one of the world's most serious 
counterfeiting problems.
    I will also talk about issues of political and legal 
reform, but let us go on now and I want to discuss the issue in 
detail, if we can turn to the third page. I am going to talk 
now about the economics of counterfeiting in China. If you look 
at the map here, you can divide counterfeiting really into two 
distinct segments. First, there is the manufacturing end of it, 
and second, there is the distribution end.
    With respect to the manufacturing end, if you look at the 
map, the shaded area of the map shows the southeast region of 
China, Guangdong Province and Fujian Province, which were two 
of the areas first open to foreign direct investment, and which 
is where most of the manufacturing occurs. The manufacturing 
occurs in the south, but let me emphasize here the role of 
criminal organizations in counterfeiting, organized crime in 
Hong Kong and in Taiwan. Most of the people in Hong Kong have 
their ancestral home in Guangdong Province; most of the people 
in Taiwan have their ancestral home in Fujian Province. But 
criminal organizations involved in smuggling, prostitution, and 
narcotics have now moved into the counterfeit trade because it 
is so lucrative. They supply the capital and they supply the 
know-how by investing in factories in Guangdong and in Fujian 
Province, and they use the international borders of Taiwan and 
Hong Kong to elude law enforcement and detection.
    The second part of the counterfeiting industry that I want 
to point out is the distribution end. Of course, as everyone 
knows, it is no good just to have a counterfeit product, you 
must be able to deliver it to the end-use consumer. So, 
distribution plays a vital role in the counterfeit trade.
    Here on the map are highlighted five different wholesale 
markets throughout the central and northern region of China. 
Each of these wholesale markets is located near a strategic 
urban location, large and densely populated urban areas such as 
Shanghai in the east, Beijing and Tianjin in the north, 
Guangzhou and Shenzhen in the south. These wholesale markets, 
many of them open-air or partly enclosed, serve the vital role 
of delivering the counterfeit product to the end-use consumer, 
as retailers who will come to these wholesale markets will be 
able to buy counterfeit goods and then take them back to street 
kiosks, street stalls, and small retail stores for their 
purchase by consumers.
    I want to focus for a moment on Yiwu, which is in Zhejiang 
Province, that you see on the map on the east here. If I had a 
screen, I would point to it, but unfortunately I do not. If you 
see it, it is on the east coast of China. This city is well-
known as the counterfeiting capital of China.
    The thing to understand about these distribution centers is 
that many of these wholesale markets are established by local 
governments. Local governments, specifically the local 
Administrations of Industry and Commerce [AIC], invest in and 
protect these local markets.
    In Yiwu, there are 100,000 different products, 200,000 
visitors per day who purchase 2,000 tons of goods. Between 80 
and 90 percent of these goods are counterfeit and infringing 
goods. I know this for a fact because I spent many weeks in 
Yiwu when I was working in China and saw personally the scope 
of this problem.
    In 1997, the China Small Commodities Market, the largest 
wholesale market in Yiwu, grossed $2.4 billion in total revenue 
in China. That is larger than Procter & Gamble, Nike, Unilever, 
and Johnson & Johnson combined. That is larger than their total 
yearly revenues.
    The role of counterfeiting in Yiwu, it is no exaggeration 
to say, supports the entire local economy and legitimate 
businesses, such as restaurants, nightclubs, warehouses, 
transportation companies, and hotels. All of them have grown up 
and they support the trade in counterfeit goods. If you shut 
down the trade in counterfeit goods in Yiwu, you will probably 
shut down the local economy. Because the government has 
invested in these wholesale markets, they are heavily defended 
at the local level.
    If you skip the chart on the next page, I know I am running 
out of time already. I would like, now, to move to the chart on 
the State Administration of Industry and Commerce [SAIC] on 
trademark enforcement activity.
    I just want to highlight for you the nature of the 
enforcement issue. I am just going to talk about this briefly 
and skip over most of this subject, but it is detailed in my 
written statement.
    In the year 2000, there were 22,000 enforcement cases which 
were brought by the State Administration of Industry and 
Commerce. The average fine in those cases was $794. We are 
talking about a multi-billion dollar industry, and the fine was 
$794. Perhaps even more startling, if you look at criminal 
prosecutions, there were 45, total. That is 45 cases out of 
22,000 enforcement actions that were then transferred over to 
the authorities for criminal prosecution. The level of 
enforcement, I think, in China, does not create deterrence.
    Now, if we can go to the next page on exports. As I know my 
time is running very low, I am going to now emphasize the most 
significant point on this page, which is that in my opinion 
there is going to be a significant increase of counterfeit 
products from China, which already accounts for probably 80 
percent of all of the counterfeit items that are exported in 
the world today. There is going to be a significant increase 
because, in 2004, China, in accordance with its WTO 
commitments, has eliminated the export monopoly that had been 
enjoyed by state trading companies. Prior to 2004, a 
counterfeiter had to get the cooperation and compliance of a 
state trading company, which had a monopoly on export rights, 
before they could export counterfeit product. Now, in 2004, 
that monopoly has been eliminated. It means that any 
counterfeiter now can export counterfeit product. As there are, 
in my view, no criminal penalties specifically directed at the 
exporter of counterfeit goods, I think we are going to see a 
significant increase. In fact, mid-year 2004 figures show a 
sharp jump in the amount of counterfeit product that is being 
seized by U.S. Customs.
    Finally, if we can go to the last page, let me just talk 
now about future trends. The issue, as I see it, in China is 
that, really, counterfeiting occurs at the local level. It 
supports local economies. Shutting down counterfeiting will 
mean, in many instances, shutting down entire towns and 
municipalities which will cause problems of unemployment, 
dislocation, and social chaos, which is something that the 
Chinese Government fears more than anything else.
    On the one hand, you have the tremendous cost of the 
shutdown and crackdown on counterfeiting. On the other hand, 
you have multinational companies in China which are very afraid 
of offending the Chinese Government and they do not want to do 
anything that might jeopardize their business interests.
    So I think right now there is no political will on the part 
of the Chinese Government to crack down, because right now 
counterfeiting is not causing the Chinese Government pain. 
Until it does, I do not think there is going to be a 
significant change in the situation.
    Thank you very much.
    Mr. Foarde. Thank you very much, Dan, for a sobering and 
very quick overview. We will come back to some of the issues 
that you have raised in the question and answer session. I take 
it they did not give you the key to the city for all the time 
you spent in Yiwu, right?
    Mr. Chow. No. We stayed in the best hotel, though, I must 
say. It was run by the counterfeiters.
    [The prepared statement of Mr. Chow appears in the 
appendix.]
    Mr. Foarde. I would like, now, to recognize Eric Smith, who 
is president of the International Intellectual Property 
Alliance [IIPA]. IIPA is a private sector coalition of six U.S. 
trade associations which represents over 1,300 companies 
producing and distributing materials protected by copyright 
laws throughout the world.
    Mr. Smith serves as chairman of the ITAC-15, the executive 
branch's Trade Advisory Committee on Intellectual Property 
Rights, and regularly advises the U.S. Government on 
negotiating strategy in the trade and intellectual property 
rights arena. He was formerly chairman of IFAC-3, the 
predecessor to ITAC-15, as well as a member of IFAC-4, which 
formally advised the U.S. Government on e-commerce issues. He 
is a former trustee of the Copyright Society of the United 
States, and former chairman of the D.C. Bar's Committee on 
Copyright. He has written numerous articles on communications 
and international copyright, and has lectured worldwide on many 
subjects related to both domestic and international copyright 
law, U.S. trade policy, and intellectual property and new 
technologies.
    Eric hails from California, and holds a J.D. from the 
University of California at Berkeley--Boalt Hall, 1967--and 
obtained his bachelors degree with honors from Stanford.
    Welcome, Eric Smith. Thank you for sharing your expertise 
with us this afternoon.

     STATEMENT OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 
         INTELLECTUAL PROPERTY ALLIANCE, WASHINGTON, DC

    Mr. Smith. Thank you, Mr. Foarde. I appreciate it. This is 
a terrific forum to highlight both the counterfeiting and 
piracy problems in China, and I really appreciate the 
opportunity to talk to all of you about it. Mr. Chow introduced 
the topic quite well. I am going to speak about copyright 
piracy.
    Our organization represents, as you mentioned, six trade 
associations, 1,300 companies that account for about 6 percent 
of the U.S. GDP and about 4 percent of U.S. employment, and 
that has been growing every year since we started doing the 
first study in 1990.
    These industries employ workers at about three times the 
rate of the economy as a whole. The situation globally for the 
copyright industries is very difficult because of the ease of 
copying, but China is a particular problem for us because the 
levels of piracy are the highest in the world. For example, in 
each of our industries, piracy runs about 90 percent of the 
market. That means 9 out of 10 copies available in China are 
pirated. Given the global demand and the demand in China for 
our products, for movies, for music, for software, these 
companies should be generating literally billions of dollars of 
revenue in the Chinese market. When you think about it, how do 
you make money in a market where you are competing for 10 
percent of the market?
    But it should not be forgotten that an additional problem 
in China is the lack of market access for each of these 
sectors. The copyright sector is probably the most closed to 
doing effective business in China than any other U.S. business 
sector, partly because of the sensitivity of many of these 
industries; the Chinese Government always viewed film as a 
major propaganda tool. But the combination of high levels of 
piracy and the inability to get legitimate product into the 
market combines to create, in our case, a very conservative 
estimate of $2.5 billion in losses a year. Now that is just 
measuring what the market is today. If you were to look at what 
the market should be with market access and the ability to form 
anti-piracy organizations like we have in every other country 
in the world, and if piracy stayed at 90 percent, the losses 
would be many times that.
    I wanted to leave you with some key thoughts. I have given 
in my written testimony, and I have handed you our rather 
comprehensive February 301 submission that we give to the 
Office of the U.S. Trade Representative [USTR] every year, that 
goes into detail about the problems in China from a copyright 
piracy standpoint.
    The Chinese enforcement system relies almost entirely on 
thousands of people who run administrative raids against 
pirates and counterfeiters. As Mr. Chow said, the fines are the 
cost of doing business, basically. We did a survey in Beijing a 
little while ago with respect to actions taken at the request 
of one of our industries, the motion picture industry, and 
looked at the fines that were assessed in those cases. These 
were administrative cases brought by the Beijing Copyright 
Bureau, in conjunction with the Ministry of Culture and other 
agencies that worked together. We discovered that the fines 
tended to average a little bit above the cost of buying a blank 
tape. With this kind of penalty structure, as Mr. Chow 
mentioned, there is simply no disincentive to continue in this 
business.
    In the trademark area, we understand there have been some 
criminal cases. I think Mr. Chow mentioned 40. In our area, we 
have been able to count, over the last 10 years, maybe, to our 
knowledge, 10 criminal cases. We know of only one criminal case 
that involved foreign copyrighted works. This really gets to 
the nubbin of the issue, I think. In every other country in 
which our companies do business, and that is 100 countries, all 
use their criminal law as a way of dealing with piracy.
    The profits are so high in this business that if you are a 
CD factory owner--and there are now 83 factories in China, many 
of which churn out pirated product on a regular basis--the 
money is so high that, without criminal enforcement and the 
potential of jail terms, there is going to be no possibility of 
ever getting a handle on this problem. We have been, and the 
U.S. Government has been, asking now for 15 years, really, for 
the Chinese to undertake an enforcement program that has 
deterrent penalties, and we have yet to really see it.
    In the Joint Commission on Commerce and Trade [JCCT], which 
convened last April when Vice Premier Wu Yi was here, the U.S. 
Government and the Chinese delegation met, and the Chinese 
delegation committed--Wu Yi committed--to significantly 
reducing 
piracy rates. A year later, during the USTR out-of-cycle review 
process, the formal legal process that they use to evaluate 
what China has been doing, there has only been a negligible 
change in the piracy levels in China.
    I think in the recording industry, piracy rates went down 
approximately 5 percent, from 90 percent to 85 percent. 
However, on the other side of the equation, Internet piracy 
skyrocketed. We do not have any way of really measuring 
Internet piracy yet, but China is going online, and it is a 
very serious problem and the legal infrastructure is not there 
yet.
    So we have a situation where piracy rates have not been 
significantly reduced, and during the course of that one-year 
period, we know of one copyright piracy case that involved the 
two Americans who were arrested in Shanghai.
    Let me just spend a couple of minutes on that case. That 
case was initially prosecuted under Article 225 of the criminal 
law of China. That is the part of the criminal law that says it 
is illegal to engage in a business operation without the 
license allowing you to do it. It is not a piracy offense, it 
is illegal business operations. At the end of the day, when 
that case was finally decided, the prosecutor broke that down 
to an Article 217 case, which is, in fact, the crime of piracy. 
There has not been much news about that. We were happy that 
that happened, because it is the first time that that has 
happened. The problem with criminal prosecutions under Article 
225, is it just sends the wrong message to Chinese society.
    I would just leave you with this one fundamental point. 
Unless China is willing to use its criminal law procedures to 
deal with 
piracy, they are not going to be able to substantially change 
the situation. Now, China cannot continue to operate in the 
atmosphere in which they are operating now. They have to move 
up the value chain. They cannot continue to be a low-wage 
manufacturing country.
    We have the examples of Korea, Taiwan, and other countries 
in the Asian region that have driven down piracy rates from, in 
the mid-1980s, 100 percent piracy in Taiwan and Korea, to--
believe me--piracy rates at the latter part of the 1990s that 
were down to 15 percent. How did they do it? Very simple. They 
put pirates in jail. If it was not a jailable offense, they 
fined them at levels that were deterrent. Until China makes the 
political commitment to do that, it is not going to be able to 
deal with this problem.
    In 1995-1996--and this goes to the point that Mr. Chow made 
at the end of his presentation, and this is a point about 
incentives--the Chinese Government was facing $2 billion worth 
of retaliation if they did not close their CD factories. The 
Minister of Propaganda finally ordered the closure of those 
factories. They were in the provinces.
    Mr. Chow is absolutely right, it is a local issue, too. But 
until the Politburo and the central political leadership of 
China makes that kind of a decision to say ``enough'' and 
announces it into the society, nothing is going to change in 
China. We are working now with USTR, looking at the possibility 
of a WTO case. We are strongly supportive of the JCCT 
commitment on both the market access and the piracy side, and 
there is an IPR working group.
    Madam Ma is going to be in town next week. So this hearing, 
in particular, is very timely and we hope that the Chinese 
delegation gets the kinds of messages from the U.S. Congress 
that they need to get in order to solve this problem. Thank you 
very much.
    [The prepared statement of Mr. Smith appears in the 
appendix.]
    Mr. Foarde. Thank you very much, Eric Smith, for another 
rich presentation. We will pick up some of those issues as well 
in the question and answer session.
    I would like to go on now and recognize an old friend, Jim 
Zimmerman, partner and chief representative of the Beijing 
office of Squire, Sanders & Dempsey, LLP. Jim concentrates his 
practice on foreign investment matters in China and represents 
multinational clients in a broad range of industries with 
respect to their joint venture investments, manufacturing 
investments, liquidation and dissolution of investments, 
mergers and acquisitions, regulatory compliance, customs and 
trade matters, and dispute resolution. Jim is the author of 
several books, chapters, and articles concerning Chinese law, 
customs regulations, and trade policy related issues, including 
``The China Law Deskbook,'' which is a publication of the 
American Bar Association. He is a governor and vice chair of 
the Board of Governors of the American Chamber of Commerce in 
China [AmCham], and chair of the Legal Committee for that 
Chamber. He is also chair emeritus of the China Law Committee 
of the ABA's International Law Section. He is on the panel of 
mediators for the U.S.-China Business Mediation Center, jointly 
operated by the CPR Institute of Dispute Resolution and the 
China Council for the Promotion of International Trade. Jim is 
also on the panel of arbitrators for the International Court of 
Arbitration of the International Chamber of Commerce [ICC] and 
has served as an arbitrator in ICC cases.
    Welcome, Jim Zimmerman. It is great to have you here in 
Washington.

      STATEMENT OF JAMES M. ZIMMERMAN, PARTNER AND CHIEF 
REPRESENTATIVE, BEIJING OFFICE, SQUIRE, SANDERS & DEMPSEY, LLP, 
                         BEIJING, CHINA

    Mr. Zimmerman. Thank you, Mr. Foarde. It is a pleasure to 
be here.
    My comments will be on behalf of not just myself and my 
firm, but also on behalf of the American Chamber of Commerce in 
China. We are here in town this week as part of the Chamber's 
annual Washington Doorknock Program. I have prepared a written 
statement and I will send that by e-mail to you later today. If 
anyone would like a copy of that, they can ask me or send me an 

e-mail.
    Basically, my perspective is a little different. I come 
from the perspective of being on the ground in China and 
spending a lot of time meeting with government officials, 
meeting with court officials, and to get their insights on IP 
enforcement.
    But let me start by saying this. In January of this year 
the U.S. Ambassador to China held an IPR roundtable and I 
provided the comments on behalf of the U.S. industry. I made 
the following comment: ``Since its accession to the World Trade 
Organization in 
December 2001, China has made significant improvements to its 
written laws governing intellectual property rights. However, 
there has been minimal progress in establishing a system of 
effective enforcement.'' My comments were picked up by the 
press in the United States and by the press in China. The press 
in China, in the China Daily, focused on the comment that 
``significant improvements have been made.'' The press in the 
United States focused on the comment of ``minimal progress in 
establishing a system of effective enforcement.''
    Therein lies the problem, which is a perception issue. Some 
people in the United States believe China has done nothing, and 
I do not believe that is true, as I will go into some detail 
later. At the same time, China believes that it has made 
significant improvements, not just to their written laws, but 
with respect to enforcement. That is not true, either. Much, 
much, much more work needs to be done in a lot of different 
areas, and China does need to be strongly encouraged to make 
some progress, and progress this year.
    The progress that they have made is that they have spent a 
great deal of time re-writing their laws and amending 
regulations, adopting rules and standards. They have improved 
the court systems. They have gone from a situation where they 
were without a legal system 25 years ago, to one where they 
have an environment, at least to some degree, in which the rule 
of law is followed.
    The IP court, specifically in Beijing and Shanghai, at 
least, has highly trained judges. They have retired most of the 
military officials, most of the Party officials, and have put 
in place qualified judges, for the most part.
    Now, the situation in the courts right now is that there is 
a significant amount of litigation, but that has been filed 
mostly by domestic companies. At least 90 percent of the 
litigation in the courts is between domestic parties, and less 
than 10 percent may involve a foreign party. Somebody is taking 
advantage of the court system in China. It is not the 
foreigners, but the domestic companies because the issue of IPR 
enforcement strongly affects domestic companies. I agree 100 
percent with Dan and Eric on their observations, but a big 
impact is on the domestic companies as well and their ability 
to get the benefit of their IP rights.
    But progress needs to be made. Leadership needs to be shown 
in a number of areas. I do agree with what Eric is saying and 
Dan is saying about criminal prosecution. The PRC Government 
needs to demonstrate the political will to put people in jail 
and to enforce the laws.
    In a meeting with the Supreme People's Court in February, 
the AmCham leadership discussed the judicial interpretation on 
IPR criminal penalties that came out in January 2004. On its 
face, the judicial interpretation lacks specificity. It is not 
detailed enough. There is much that needs to be clarified, 
specifically with respect to the liability of organizational 
end users with software, with respect to the liability of 
exporters, and also with respect to infringement that may be a 
health and safety issue.
    One question we posed to the Supreme People's Court was, 
``Well, what if you are below the threshold? '' Hence, you have 
a situation where you do not reach that threshold for criminal 
liability, but someone dies as a result of a tainted drug? The 
Supreme People's Court did say that a crime would be committed 
in that instance, but not under the judicial interpretation, 
but some other law. The Supreme People's Court, in no uncertain 
terms, told us that they will use their leadership to strongly 
enforce the judicial interpretation. So, it is left for 
observation what they will actually do. At the end of the day, 
what really needs to take place is that they need to bring 
prosecutions. That is something that we are encouraging them to 
do.
    Second, what needs to take place is that China must 
dedicate more resources to IP-related issues. As an example, 
the Trademark Office is significantly understaffed. In this 
regard, I have seen situations where we have applied or 
petitioned on behalf of clients to invalidate infringing 
trademarks and we have been told by the Trademark Office staff 
that they have over 20,000 cases, and they are still dealing 
with cases that were filed in 1999. This is the Trademark 
Office telling us that they are understaffed. It is unheard of 
that a Chinese Government official would make that kind of 
statement, but it is true. They are under-staffed. It is almost 
like a cry for help, that they need more resources. Now, one of 
the things that we are stressing--the American Chamber of 
Commerce--is that the government needs to add resources to get 
that backlog of cases taken care of.
    Bear in mind that the 20,000 case backlog also involves 
domestic companies. The case that we are waiting for 
specifically is a U.S. company versus a Singapore company, 
foreigner versus foreigner. There is no political risk here. 
There is no political issue. The Trademark Office will not be 
protecting some domestic enterprise. It is a case, from our 
view, that should be quickly decided, but they are backlogged. 
So, the dedication of additional resources must be encouraged. 
It is very important. In addition, the Chinese Government 
agencies responsible for trademark and patent registration are 
behind because they do not have the resources.
    Third, they need better agency coordination. One of the 
things that we have been pressing for is better communication 
and coordination of cases between IPR-related agencies. In 
China, it is common for China Customs to be doing one thing, 
and the SAIC doing another thing, and they do not coordinate 
with one another. They do not even pass files to one another. 
That is a real practical and logistical problem. There is also 
no agency coordination between province to province, from city 
to city.
    How do you get the message to them on these issues? I do 
believe that one forum is the JCCT, which will be meeting this 
summer. Now, we do not want to be in the same position we were 
last year where we came up with a list of bullet points and 
then they do not make progress. We do need to get the message 
to the Chinese that they must make progress on these issues.
    So on the criminal side, at the end of the day they have 
got to throw violators in jail. They have got to enforce their 
laws. We need to see statistics on that. We need transparency. 
We need to see that people are being prosecuted. They need 
better inter-agency coordination, and then they also need to 
dedicate more resources. Another issue is--and this is a role 
that the American Chamber and other organizations can play--is 
to encourage China to believe that if they protect intellectual 
property and do away with the companies that are making 
billions on counterfeit goods, there is a tremendous potential 
tax revenue that they are losing out on.
    The IPR Roundtable raised that issue to the Chinese 
Government. Can you imagine the PRC Government's tax revenue if 
all companies were making legitimate products and they put the 
counterfeiters out of business? Because the counterfeiters are 
out of the system, they are likely not paying taxes. They are 
not in the system, they are out of the system. As Dan 
mentioned, a lot of the counterfeiters are criminal 
organizations. They are not paying taxes in China. Those people 
should be paying taxes. The same thing is true with legitimate 
foreign companies that want to sell their goods in China and 
demand market access. If they are legitimately selling their 
goods, that potentially is tax revenue that the PRC Government 
can tap into.
    So, those are things that the Chinese Government needs to 
be told, and not just, ``you are going to be subject to a 
Section 301 investigation,'' but to be told some of the 
positive side on this.
    Those are my comments for now. I would be happy to answer 
any questions that you might have on this issue.
    [The prepared statement of Mr. Zimmerman appears in the 
appendix.]
    Mr. Foarde. Jim, thank you very much also for some useful 
and timely information.
    I would like to let our panelists rest their voices for a 
moment while I make an announcement or two. I would like 
everyone to also attend next week's Issues Roundtable, which 
will be on unofficial religions in China. We will be looking at 
the religious groups that are not so-called ``patriotic'' 
religious groups. That roundtable will be on Monday, May 23, at 
2 p.m. in room 2255 of the Rayburn House Office Building, so we 
hope to see you on the other side of the Capitol next week.
    Also, the statements, and eventually the transcript, of 
today's roundtable, will be up on our Web site at www.cecc.gov. 
You will also find the transcripts and statements from all of 
our earlier hearings and roundtables. If you are not already 
signed up for our master mailing list, you can do that on the 
Web site and then you will get all of the announcements about 
hearings, roundtables, and other activities.
    So, now let us go on to the question and answer session. As 
I said before, we will let each of the staff panel up here 
question either one individual panelist, or all of you, for 
about five minutes each. If the question is directed at just 
one panelist but the other two have comments, by all means, we 
would like to hear those responses, because the whole purpose 
of the exercise, from our point of view, is to hear your ideas 
and get those on the record.
    I am particularly pleased this afternoon to exercise the 
prerogative of the chair and waive my own first set of 
questions to recognize my colleague, Demetrios Marantis, who 
has just joined 
Senator Max Baucus' trade staff. Senator Baucus was our first 
chairman and Demetrios is now working for him. Max Baucus 
spends a lot of time thinking about our issues and is in touch 
with us frequently. So, Demetrios, over to you, and welcome.
    Mr. Marantis. Thank you very much for that kind 
introduction. I would like to thank the panelists. That was 
extremely useful. Given the recent release of USTR's Special 
301 report, this roundtable is rather timely. I have one 
question that I would like to address to Eric, but I would be 
curious as well as to what the rest of the panelists think. The 
issue that has been of concern to Senator Baucus, as well as to 
the whole Finance Committee, relates to IPR enforcement in 
China.
    As you probably know, all 20 Senators of the Finance 
Committee sent a letter on April 30, urging the Administration 
to step up its enforcement of the Trade-Related Aspects of 
Intellectual Propety Rights [TRIPS] commitments in China, with 
a view to a potential WTO dispute settlement case. My boss, 
Senator Baucus, was a bit disappointed that USTR's out-of-cycle 
review did not include the initiation of a WTO dispute 
settlement case against China, given that we have been hearing 
from the Administration that piracy in China is at ``epidemic'' 
levels and the losses, Eric, that you mentioned that the 
copyright industries are facing on a yearly basis, are pretty 
staggering.
    So I just would like to get your thoughts as to what you 
all think the utility of WTO dispute settlement against China 
is, particularly on the copyright and trademark side of things, 
and why we are where we are in terms of not being in a place 
where we can initiate a dispute settlement case against China, 
and whether or not WTO dispute settlement is the way to go to 
address some of these issues, or if you have other thoughts as 
to what would be a more effective use of the Administration's 
resources. Thank you.
    Mr. Smith. Thank you, Demetrios. As you may know, the 
enforcement text of the TRIPS agreement is a part of the 
agreement that is not a bastion of clarity. To bring a case 
under Articles 41 and 61 against a country that has piracy at 
the levels of China, the first thing you would say is, how, 
possibly, could a country such as China be in compliance with 
any kind of enforcement obligation when you are running a 90 
percent piracy rate? But in the WTO, you have to prove your 
case absolutely. And you are quite right. We asked for the 
commencement of WTO consultations. USTR decided not to do that. 
They decided to move forward with a process of using Article 63 
of the TRIPS agreement to get more statistics from the Chinese 
Government about the exact nature of what is going on there, 
because as you know, China's system is wholly non-transparent. 
It is very, very difficult to find out what is going on, 
particularly when you are talking about cases brought and 
results obtained in cases.
    We are working very closely with USTR right now in moving 
along that line. We understand what USTR did. It would not have 
been our first choice, but they made the decision to move 
forward in a deliberate way. They have invited us to go along 
with them. We are in the process of preparing what is going to 
be, or what will possibly be, a very large and extremely 
important case.
    We wish that the language in those two sections of the 
TRIPS agreement were clearer and that we could use them with 
less risk of losing a case. We think we can win the case, but 
we have a ways to go to develop the evidence to get there.
    Mr. Foarde. Do either of the other panelists want to 
address that? You can have a minute or two, if you would like.
    Mr. Zimmerman. A quick comment on that. I agree with Eric. 
The language in the TRIPS agreement on enforcement is 
uncertain. To bring an action would be time-consuming. I think 
that the choice of remedies that the USTR has taken will 
probably move China faster. If they do not make progress, then 
there is the option of pursuing a formal enforcement action 
under TRIPS. I think, right now, the strategy is a smart 
strategy. With the various organizations pressuring, or working 
with USTR to pressure, China, we are hopeful that action will 
be taken this year. I do believe China knows that this year, 
2005, the United States is very serious and wants action, and 
wants to see accomplishments this year.
    Mr. Chow. Let me just say, from the trademark perspective, 
I think many companies with trademarks in China are very 
reluctant to confront China. The whole idea of bringing a WTO 
dispute settlement action, or worse, much worse, a Special 301, 
is something that many of the companies on the ground are very 
reluctant to do because they do not want to do anything that is 
going to offend the Chinese Government. That is part of the 
issue here, that the multinational companies that are in China 
now have to decide how far they are willing to go. Many of them 
scream all the time at the U.S. Government, but they do not 
want to do anything to offend the Chinese Government. That 
includes Special 301, that includes WTO dispute settlement. So 
I think industry, on the trademark side, big companies, part of 
the Quality Brands Protection Committee that is the 
multinational companies in China that are lobbying the Chinese 
industry, they are very conflicted on this issue. They are not 
sending clear signals to the U.S. Government. USTR, of course, 
is going to listen to its constituency. There is a lot of 
reluctance to confront China.
    Mr. Foarde. Thanks, all three of you, for that response.
    Let me recognize Susan Roosevelt Weld, who is the general 
counsel of the Commission. Susan.
    Ms. Weld. Thank you very much, John. Thank you for all of 
your remarks. I am interested in whether you three think that 
bilateral cooperative efforts by the United States can do 
anything to help cure this problem. I guess I will start with 
you, Mr. Smith.
    Mr. Smith. This is a very frustrating topic. Some of my 
colleagues who I work with right now used to be in the U.S. 
Government, and they were engaged bilaterally with China. I 
have been engaged, the U.S. Government has been engaged, for 15 
years now. With respect to this topic, enforcement, there 
really has been very little progress. Over the last year, 
following Wu Yi's commitment about substantially reducing IPR 
infringements, that has not happened. Is it going to happen in 
the next year? With Jim Zimmerman, we really hope so. But 
absent that progress and without the incentives that Mr. Chow 
is talking about, one begins to question whether or not the 
Chinese have the incentive to do this.
    Over the long term, they must. They cannot continue to live 
as a counterfeit culture. The question is when? In the case of 
the copyright companies, unlike the trademark companies--I 
should not draw this distinction too harshly--our companies do 
not really even have market access. Many of the companies in 
the trademark area are doing business in China and making 
money. They are getting hurt by counterfeiting. Many of our 
companies are not making anything in China. So we have a 
slightly different perspective on this question, as we did in 
1995 and 1996 when the trademark community did not join in the 
301 action, which was basically a copyright industry driven 
action.
    But now we are in a WTO world. A 301 bilateral world is 
much more difficult now. So, we really have to look, first, at 
multilateral remedies. That is where you come up against 
Articles 41, 61, and the TRIPS agreement.
    Mr. Foarde. Does anyone else want to address that? Please, 
Jim. If you have a comment, go ahead.
    Mr. Zimmerman. I was going to add that this is the first 
step. The bilateral negotiation is the first step, and I do 
think it is a helpful step. We will just have to see how it 
plays out.
    I am optimistic. We have to remain optimistic. Part of that 
optimism is based on some of the assurances that we received 
from Chinese Government officials, how they are serious about 
it, and they do want to improve. They want the relationship 
with the United States to improve, so they have an incentive to 
really make progress.
    And when I say 2005 is the year, it is because we also 
understand that the U.S. Congress is under pressure from a lot 
of different quarters from people who are not happy, but at the 
same time, I think that China realizes that and understands 
that they are going to have to listen this time. It is just 
like in 1995, when they had the Section 301 hanging over their 
heads. Right now, they have got these negotiations that are 
hanging over their heads.
    Mr. Chow. Well, just going back to this whole issue of 
bilateral negotiations, I think that the United States is going 
to take its lead from industry. I can tell you that when I 
worked in China for a multinational company, we met with the 
U.S. Government. What we said to the U.S. Government was, 
``well, we would like you to talk to the Chinese Government, 
but please do not use our name and please do not make them 
angry.'' That is what we said, because that was essentially the 
attitude of the companies. So I think that the companies 
themselves have to make a decision: how far are they willing to 
push this, or is this really a situation that is more or less 
the status quo?
    Mr. Foarde. Thank you, all, very much.
    Putting on these Issues Roundtables, although they may seem 
quite seamless, requires a great deal of organization and hard 
work. So we give the privilege of asking questions at each 
roundtable to the one staff member who has done the most heavy 
lifting to organize it. In this case, it is our friend and 
colleague, Adam Bobrow, our senior counsel for commercial rule 
of law. Adam, over to you for some questions.
    Mr. Bobrow. Thank you, John. And thank you very much to the 
panelists. This has been very informative and we have heard a 
lot of very good testimony so far.
    I would like to switch gears a little bit. We think of this 
sometimes as a simple situation in which you have people who 
want to see DVD movies or want to buy trademark products and 
other things, and some sort of a culture of willingness to let 
this stuff get made under the table without enforcement. The 
Chinese Government believes nobody is getting hurt, so what is 
the big deal, and that it is that simple.
    But I would like to look a little bit behind that and see 
whether or not the panelists have any feeling about whether or 
not some of the policy decisions that the Chinese Government 
makes in other areas have led to this situation where there is 
no real incentive for enforcement against infringers.
    Let me give a particular example. It is probably a bit 
outside your specific expertise, so you do not necessarily have 
to address the specific example. But in the case of China's 3-G 
standard that they are developing domestically, it is known as 
TD-SCMA. CDMA is a U.S.-company owned, IP-protected, patent-
protected standard for cell phone communications. TD-SCMA 
obviously is going to be built--you can tell from the name--on 
top of that.
    The Chinese Government has recently issued draft 
regulations that would seem to indicate that, in the situation 
under which there would be patents or other IP-protecting and 
underlying technology that is announced in the standard, they 
would issue a compulsory license for that technology without 
using the term. This is where I think the rubber hits the road.
    Regarding IP domestically, the Chinese Government has 
decided who, what, where, when, and how it will generate a 
Chinese-owned IP system that will move their manufacturing 
economy up the value chain.
    At the same time, enforcement of IP rights owned by 
innovators, whether they be foreign or domestic, have never 
really received the same sort of policy attention by the 
policymakers in the central government. Therefore, as Dan 
outlined, with the local enforcement authorities, and because 
those authorities unfortunately are tied up in a web with the 
illegal counterfeiters, there is perhaps too little incentive 
to get actual enforcement on the ground.
    The first part of my question is, I guess, to what extent 
do you think that I am making this much too complicated? The 
second part of the question is how do you actually generate 
that will at the political or policy level in the central 
government to get the enforcement to occur at the local level? 
I will open it up to any of the panelists who would like to 
answer that.
    Mr. Smith. Maybe I could start. I think it is wrong to say 
that local Chinese rights owners are not being damaged by what 
is going on China. I think, in the trademark area, we have 
heard about whole cities being devoted to counterfeiting. But 
just the examples in our area, if you are a Chinese filmmaker, 
or you are a Chinese performer, or you are a music composer, or 
you are a software developer, you are in big trouble. You 
cannot make a return on your investment. Now, we know that 
these people complain all the time in the only way that they 
can, politically, to the Chinese Government about this problem, 
and they are not getting any recompense and it is very sad.
    If you look at what has happened with other governments, 
governments have started to listen and realize that they are 
hurting themselves worse than they are hurting U.S. companies. 
So, maybe that is more specific to the copyright area than it 
is to other areas.
    On the other hand, I think your general observation is 
probably close to correct. I think there are a lot of 
policymakers in China that have looked at this as, ``how do we 
build into our system a 10 percent growth rate, because that is 
what we need to stay even, and rule of the law be damned. The 
fact that we have laws on the books and we are not enforcing 
them, we are letting them just go, we think that is what we 
need to grow.''
    I think Jim made the point that the growth rate from legal 
businesses is going to be, in our judgment, and we think the 
economic literature supports this point, the growth rate from 
encouraging legal businesses is greater than encouraging 
businesses based on naked copying. China is going to have to 
realize that very soon. We hope Jim is right, that they realize 
it in 2005, because we are dying and we cannot wait too much 
longer.
    Mr. Zimmerman. A couple of comments. On the standards 
issue, there is a big debate going on in China as to whether or 
not the inclusion of patents and standards should be a 
voluntary process or a compulsory process. There were some 
draft regulations from the Standard Administrations of China 
released for public comment last September, and then there was 
a big uproar about that because it was basically a compulsory 
process. The Chinese Government backed off. Two things to 
China's credit on that: one, they did allow for public comment; 
second, it was a relatively transparent process.
    Now the issue has not been resolved, but I can tell you 
this: there are some elements in China that believe the 
inclusion of 
foreign patents and standards could be characterized as foreign 
domination, given the history of foreign domination and foreign 
intervention in China. So there are a lot of people that do not 
like that idea. They do not like foreign standards being 
imposed on China, they want to create their own.
    Unfortunately, that does not encourage innovation. The 
debate, I think, is a healthy debate going on in China right 
now, because they are trying to break away from being viewed as 
the low-valued knock-off economy. They want to move toward 
something where their homegrown IP has value, because as we 
have mentioned, that is where the true economic development 
lies--in China getting away from being a knock-off culture to 
one based on innovation, and we have to encourage China to move 
in that direction.
    Many foreign companies are encouraging innovation because 
they are setting up R&D operations and hiring local engineers, 
hiring creative people in China, and showing them how to 
develop new technology that will be homegrown. China needs to 
protect that homegrown technology and to protect the foreign 
technology as well, give them equal status. But if they move in 
a direction where they are going to have a lack of incentives 
and force patent holders to be part of standards without any 
compensation, that will only perpetuate the problem.
    The other question as to whether there is a government 
policy in general of supporting infringement? I do not think 
so. I think you give China too much credit when you suggest 
that they are developing a policy which encourages 
infringement. I think it is more a lack of resources, lack of 
coordination of agencies, lack of political will, and those are 
things that they need to correct.
    Mr. Chow. Just turning to the patent issue and the 
compulsory license issue, as far as I can see, this is really a 
different type of dispute. As far as I can see, I think this is 
a legitimate trade issue. I am not even convinced that what 
China is trying to do here is wrong.
    I think every country wants to acquire advanced technology 
and that they want to implement policies that will allow them 
to do so. That is very different from counterfeiting, which is 
organized criminal activity. These are illegal factories that 
are not registered. These are not state-owned enterprises that 
are registered, and that have a fixed permanent location, that 
have a legal identity, that have a business license. We are 
talking about illegal, underground factories financed by 
criminal organizations. There is no dispute about that, but 
that is completely wrong. Nobody in China argues that that 
should be in any way supported.
    The other thing I want to mention also is I agree with Jim 
that I do not think there is a policy supporting infringement 
in China. I do not think that there is any coordinated view in 
the central government or any attempt, conscious or 
unconscious. I think that this process has begun because, very 
simply, counterfeiting and piracy are extremely lucrative 
economic crimes. There is so much money to be made, that 
criminal elements and other loose elements of society are just 
naturally drawn to it.
    Mr. Foarde. Let me now recognize Keith Hand, who is senior 
counsel with the Commission staff. Keith.
    Mr. Hand. Thanks, John. Thank you for the presentations. 
They have been very interesting.
    I would be interested in talking a bit more about the 
domestic pressures for enforcement. We have been touching on 
that issue here and there through the course of our discussion, 
and I was very interested in Jim's point that 80 percent of the 
infringement cases are brought by domestic entities for 
domestic infringement.
    Are there domestic trade associations analogous to yours 
that are bringing pressure for greater enforcement or is 
advocacy in China more dispersed, an individual company with 
influence raising this issue with the Chinese Government?
    On the issue of the infringement cases, is there a 
significant difference in plaintiff success rates and 
enforcement rates in domestic versus domestic cases as opposed 
foreign versus domestic cases?
    Mr. Zimmerman. First, the question on whether or not there 
is support by domestic associations. I do know with respect to 
DVD manufacturers, the Chinese organization that was 
responsible for managing that issue was leading the 
negotiations for the various Chinese DVD manufacturers to 
encourage them to negotiate with what was called the 3-C and 6-
C group of patent holders--which are the foreign companies that 
hold the IP rights to the DVD technology. That association--and 
I cannot remember the name off the top of my head--encouraged 
its member companies to negotiate royalty-related agreements 
with the various foreign technology holders. They had mixed 
success. They were able to negotiate arrangements on behalf of 
several companies, but there was still room for improvement in 
terms of the negotiations. But the point is that there are some 
associations that are taking the lead. Now, I am not aware of 
what the film or the music industry is doing, but there are 
more and more domestic companies and more and more domestic 
organizations that realize the value of IP and realize that 
their members are losing out. So I think that if you were to 
look at some of the organizations that have been behind those 
issues, I think you'll find that they are keen to push the 
question, but I do not have the answer right now on that.
    In terms of the success in litigation, it is a mixed bag 
for both domestic and foreign companies. I think that foreign 
companies are more successful in the courts in the major 
cities--and that is not just IP, that is with regard to any 
kind of dispute. If you bring an action in a local court or 
provincial court there is a risk that the foreign litigant may 
experience local protectionism or that the local Party might be 
politically influential and impact the case. So, the foreigners 
will do much better in the larger cities. The courts are 
treating cases in Beijing and Shanghai professionally. But I do 
not have statistics in terms of the success rate, because 
sometimes success is measured in various ways; hence, even 
though a company might lose, the result might be fair. We find, 
in terms of arbitration cases before, like the China 
International Economic & Trade Arbitration Commission [CIETAC], 
CIETAC claims that in 75 percent of their cases involving 
foreigners, the foreign party prevails. My statement to CIETAC 
was to give themselves some credit because even though a 
foreign party may lose, the result may be fair. I have actually 
had cases where we have lost but the results were very fair. 
For example, I had a matter where the amount at issue was $20 
million, but we lost and the amount that was actually awarded 
was $50,000. So, given the results, we actually won. Thus, it 
does not matter if you win or lose, it is whether or not the 
result is fair and whether or not the court or the arbitrators 
followed the law and parties' contracts.
    Mr. Smith. If I might respond to that question. I agree 
with Jim. The civil court system, and the IPR courts, and the 
intermediate courts in China have improved significantly. 
Unfortunately, civil litigation is not a way to get at criminal 
enterprises engaged in counterfeiting and piracy. It just is 
not deterrent. Certainly from our industry's standpoint, it is 
not the way to go for us. No one is making money, and you would 
make even less if you spent it on lawyers engaged in civil 
litigation because it would not really be deterrent.
    That being said, the recording industry brought, over the 
last three or four years, maybe well over 100 civil cases 
against licensed CD and DVD factories. These were not 
underground plants, because you cannot bring a civil case 
against an underground plant if you do not know where it is. 
You can only bring a criminal case with the help of the 
government, and we are not getting criminal cases. Those cases 
were mostly settled for damages that had an impact, but it is 
simply not the way ultimately that you are going to deal with 
the problem of piracy, though it is very important to China to 
work on the rule of law and make their civil courts work. It 
just is not relevant in our area.
    The second thing you asked is about trade associations. 
Yes, there are trade associations: China Audio-Video 
Association and Computer Software Association of China. First 
of all, many of these trade associations comprise primarily 
state-owned enterprises. How aggressive is that trade 
association going to be against its own government? You hear 
lots of talk in the background, but they are not going to be 
out there screaming like a private sector trade association in 
the United States might scream.
    An exception to that is probably the Computer Software 
Association, which has a number of private company members. But 
even there, the politics within China--look, the Chinese are 
masters of divide and conquer, and that is what they are doing 
with us. Everybody is scared to death of saying anything 
negative about China for fear of retaliation. There is no 
question about that.
    The last point I wanted to make, in response to you, Adam, 
is the Chinese invented the pirate format in Asia, the VCD. 
They invented it. About a year ago, or a year and a half ago, 
we heard news that they were going to ``invent'' or innovate a 
new DVD format, but this format would not have any protection 
on it. It would be a completely in-the-clear format. Of course, 
the motion picture industry was absolutely apoplectic about 
this possibility, and it has not happened.
    Third, the Chinese Government has just recently announced--
and there was a hearing in the House Government Reform 
Committee yesterday on this subject--a procurement regulation 
that, according to the Business Software Resellers Alliance 
[BSRA] member, would probably kill any ability of a foreign 
software company to sell software in China, because that 
procurement regulation would require state-owned enterprises, 
et cetera, to purchase only Chinese software.
    So I do not subscribe to the view, and I do not think our 
members subscribe to the view, that there is any sort of great 
conspiracy here behind the scenes. I think there is just a 
combination of a lot of different things going on, a lot of 
lack of cooperation, and some agencies that have specific 
missions that are probably very anti-foreign. The combination 
of all of those elements gives you what we have today, which is 
a horrendous situation for IP owners.
    Mr. Chow. Civil litigation is for legitimate business 
disputes when you have a plaintiff and a defendant who are 
willing to show up in court. That is all right, and the local 
companies that are bringing these cases they have legitimate 
business disputes. But civil litigation does not preserve the 
element of surprise. When you deal with counterfeiters, you 
have to surprise them, because they are not there if you do not 
surprise them. So what most people in China do is they bring an 
administrative action, an enforcement action that is an ex 
parte action, where you show up and 15 minutes later the AIC or 
the PSB go with you and you raid the factory and then you seize 
all the goods. Then what happens is that there are penalties 
that do not create a deterrent. So, I think civil litigation 
certainly is important for China's long-term progress, but it 
is not the answer for counterfeiting.
    Mr. Foarde. Thank you all again for those answers.
    I would like now to recognize my friend and colleague, 
William Farris, who is our senior specialist for the Internet, 
and has also taken over duties as our press director. William.
    Mr. Farris. Thank you. One of the areas I look at is 
censorship in China. It seems like we were talking earlier 
about issues of political will and capacity. It seems like when 
it comes to censorship, China has a great deal of political 
will and a great deal of capacity. Mr. Smith, I believe you 
mentioned, perhaps indirectly, that China's method of handling 
cultural imports is affecting the ability of copyright holders 
to make money in China. You also mentioned that the two 
foreigners arrested in Shanghai were initially charged under 
Article 225, which, as I understand it, is the law on which the 
Supreme People's Court also has issued an interpretation that 
says that illegal publications would be prosecuted under that 
law.
    I am wondering if you, or perhaps the rest of the 
panelists, might be able to further comment specifically on why 
they were arrested under Article 225, and why the charge was 
eventually changed to a charge under Article 217 of the 
criminal law, and also any issues relating to how China's 
censorship regime affects the ability of U.S. copyright or 
other intellectual property holders to make money in China. 
Thank you.
    Mr. Smith. Well, I think our industries face censorship in 
almost every developing country in the world, so we are used to 
having our movies and our music censored. You build around 
that. You can adjust to it. One of the difficulties in China, 
is that pirates do not go through censorship and, in the case 
of the music industry, for example, local music companies do 
not go through censorship. So, that is sort of a national 
treatment violation, right there.
    The Internet is another example. I will just give you an 
example. I think I mentioned it in my testimony. There are 
something like 200,000 Internet cafes in China, with 100 to 300 
seats each. Most of them are devoted to game playing. These 
Internet cafes are intensely regulated, but there is no 
regulation that says they cannot pirate, and in fact, they all 
do. They download off the Internet, they get pirated games. It 
is just a real big problem.
    So the control that the Chinese Government has over its own 
society to prevent social misbehavior, to prevent pornography, 
many of these 225 actions that have been commenced over the 
last 10 years were really actions against pornographers. Now, 
there was pirated product seized in the raid, but the real 
gravamen, we think, of a lot of these criminal actions was to 
get at the pornographers, because that they view as a really 
serious problem that they need to stop, and we just would like 
to see them to make the judgment that piracy is like that.
    Mr. Foarde. Would any other panelist want to make a 
comment? Please, go ahead. Go ahead.
    Mr. Zimmerman. One of the concerns with Chinese law in 
general, and including the IPR judicial interpretation, is that 
it is very vague, very generally worded. It gives the 
government as much wiggle room as possible, and, unfortunately, 
much enforcement is in the hands of those who are interpreting 
the law.
    Subjective enforcement is a concern because, without 
specificity, we have to guess how they are going to interpret 
or implement the law and regulations. That wiggle room creates 
problems because there is too much discretion in the hands of 
the PRC agencies. Such discretion is why some enforcement 
activities are politically motivated and the politics have to 
be played to encourage somebody to prosecute or to seize goods.
    That is a problem with Chinese law, in general. It is very 
general, the way it is worded, and leaves a tremendous amount 
of discretion on the part of the agencies or the court with 
respect to the judicial interpretation. Unfortunately, we have 
to anticipate how the law is going to be applied and we have to 
have some faith that they will, because of outside pressure, 
move forward with criminal prosecution. That is the key thing 
here, is that at the end of the day, at the end of the year, we 
are going to count the success of achieving benchmarks, and we 
are going to find out if they put people in jail. It is not 
just the guy on the street that is selling the DVDs that has no 
political power, no political strength, but it is the factory 
owners and the government officials protecting them. Those are 
the people that have to go to jail, and that is what we are 
looking for.
    Mr. Chow. We have talked a lot about the difficulty in 
obtaining enforcement, and we have not gone into a great deal 
of detail, but it is just really incredible how many obstacles 
there are to effective enforcement. I will just give you a very 
simple example. When I was working in China, we went to the 
Public Security Bureau [PSB], and we said, ``Well, we know of a 
counterfeiter, and what we want you to do is to arrest them.'' 
What the PSB said to us was, ``Well, will you give us a reward? 
'' I said, ``What do you mean? '' ``Well, we want 50,000 RMB 
per arrest.'' That is not that much. That is about $6,000 U.S. 
dollars. But the U.S. corporation has to worry about the 
Foreign Corrupt Practices Act, and of course we said no. But 
they would not do it unless you paid them a case fee, 50,000 
RMB per head. So, that is just to give you an idea.
    There are so many others, and I can go into detail about 
evidentiary issues and what counts as evidence and what does 
not. There are just so many issues and so many obstacles, it is 
very difficult to get that type of enforcement.
    Mr. Zimmerman. It is not a user-friendly system.
    Mr. Foarde. Let the record show that the comment was that 
it is not a user-friendly system. Let me pick up on the 
questions now. One for Dan Chow. I was struck by your comment 
on trading rights eventually or suddenly being able to be 
acquired by counterfeiting companies, domestic counterfeiting 
companies in China, which I take it was not the case before. 
How much relationship, if any, does this have with the trading 
rights commitments that the Chinese Government made in the WTO 
accession process?
    Mr. Chow. When China joined the WTO, China committed to 
further liberalize its economy and its legal system so that it 
could foster legitimate trade. Part of the same liberalizations 
which help legitimate trade also help the illegal trade in 
counterfeit goods. Specifically, what I mentioned was that, 
under China's pre-WTO system, only state trading companies had 
the privilege of exporting products from China. This is an 
example of the lifting of a restriction that is going to help 
both legitimate and illegitimate trade. So, for example, the 
reason why China has to eliminate the export monopoly that 
state trading companies have is to facilitate legitimate 
businesses who do not then have to go through the process of 
hiring a state trading company to export their products.
    Well, if you eliminate the monopoly rights that state 
trading companies have on exports, that means anybody, 
including counterfeiters, can export without the help of a 
state trading company.
    What has happened today is that counterfeiters find a 
cooperative state trading company that is willing to export 
counterfeit goods, but that involves work, that involves 
payments, and that is something of a barrier. But by lifting 
that export monopoly and by giving a general right to every 
company, except with respect to certain types of goods, such as 
cotton, which are restricted, now any company can export.
    Now, if you are a counterfeiter and you can export to 
Eastern Europe where there is no legitimate product, so they 
cannot tell, and where it appears that there is no specific 
criminal law directed at exports, what is going to happen is 
you are going to see an explosion in the amount of exported 
products from China. I believe, in the first half of 2004, 
there has been a sharp increase in the number of seizures by 
U.S. Customs. So the same measures that will liberalize trade 
in China and help legitimate trade will also, in the short 
term, I think, lead to an increase in commercial piracy.
    Mr. Foarde. I would be happy to have either one of you 
address that.
    Mr. Zimmerman. Just for clarification on that, there is a 
distinction between the trading rights and the distribution 
rights. To China's credit, last summer they did provide for 
wholly foreign-owned enterprises to have trading rights, and 
that was in the amended foreign trade law. That was six months 
before their WTO obligation kicked in. But on distribution 
rights, it is still something that we are waiting for. The new 
notice that came out two weeks ago, is still unclear on the 
process of obtaining distribution rights.
    Now, the impact of all of that on IP issues is that because 
things are relaxing, I think you are going to find more and 
more counterfeits in the export market. So, with meeting the 
WTO obligations on trading rights, distribution, or whatever, 
it is going to make it worse because now they are exporting 
everywhere.
    Mr. Smith. We are actually a little bit more concerned on 
the import side, again, as part of the market access problem, 
getting legitimate product into China. Basically, the export of 
CD product, after the 1996 closures, went down to a trickle. 
Now it is back up. It is an interesting comment, because most 
of the exporting was not done before, and it was smuggled out. 
So, that has not made much difference.
    But what we were really hoping for was to be able to import 
directly to the Chinese consumer without going through China 
Film or the China monopoly importer for the record industry, or 
the CMPIEC for book publishing. For those industries, all that 
is still in place right now. We still have to go through those 
monopoly organizations, in part because the trading rights did 
not apply in the film industry. In the publishing industry, we 
are trying to figure out now why publishers are importing 
through the monopoly. They should have full trading rights. 
They should be able to go directly to the consumer. So, these 
are things that need to be worked on and resolved.
    I just want to say that what they did in the judicial 
interpretations is that they did kind of a back-handed thing. 
For somebody who exports or imports, it is not a direct 
offense. You are an accomplice to some other offense. I do not 
know quite how that is going to work. But they just did not go 
the whole way. To give you another example of this, there was 
an internal Supreme Court research study done before the 
judicial interpretations were issued, and that study 
recommended, I believe, that the threshold be measured by the 
of the value of the legitimate product, not of the pirated 
product. You can imagine, if you are selling a DVD for 60 
cents, you have to have a heck of a lot of DVDs before you 
meet, for a major crime, the $54,000 threshold at 60 cents. 
That is a lot of product. It was recommended that they get rid 
of that. In the political processes, they worked through the 
JIs, or the judicial interpretations, and that did not happen. 
In part, it was to maintain this kind of discretion that Jim 
was talking about. They did not want to have a hard-and-fast 
rule that said this is going to be a crime, this is not going 
to be a crime. They wanted to be able to make sure that they 
could play with it.
    Mr. Foarde. Our shadows are getting long this afternoon, 
but I think I would like to take the privilege to ask the last 
question for the afternoon and just pick up on a theme that I 
think both Jim touched on, and Eric as well, in your opening 
presentations, on how China compares with the sort of 
counterfeiting history of Taiwan, Hong Kong, and South Korea. 
If you could help us a little bit to understand your views 
about where China is on that continuum and get into that a 
little bit more deeply in the couple of minutes we have 
remaining, I think it will be very useful for us.
    Mr. Smith. I can say that it is a little difficult to talk 
about Taiwan in this context, because what happened was, from 
1989 through 1998, they had an enforcement campaign that drove 
audio and video piracy rates, as I say, down to like 12 and 15 
percent. We crowed about Taiwan as our success story. Then what 
happened, is the Taiwan government let the OD factories, the 
optical disk factories, go. They kind of relaxed and the 
pressure went off. All of a sudden, there were 60 factories. 
Organized crime took over and they were investing on the 
mainland, they were investing in Hong Kong, they were investing 
in Thailand and Malaysia, and it went out of control and piracy 
went back up to 50 percent. So, it is now back down. It is 
going back down again. I would say you could cite Taiwan as an 
example of a country very much like the mainland, but much 
smaller, where the political will was there.
    Korea is another example. Within a period of maybe five 
years, they went from 90 percent piracy rates down to 15 
percent piracy rates. So, again, a smaller country, a country 
that at the time had a government that was not as 
democratically oriented as it is now, and the piracy situation 
in Korea is not quite as good. It is a whole new thing. The 
Internet is in Korea now. It is the most wired country in the 
world and piracy is out of control. But back in the days before 
the Internet, piracy was under control.
    So, our message is, China could do this. This is not 
impossible. You do not have to take every person on the street 
and make them a cop to stop piracy. It is called smart 
enforcement, deterrent enforcement, not just throwing bodies at 
it. The SAICs have 100,000 employees and they are doing 
trademark enforcement. I do not work much with the SAICs, but 
there are a lot of people. It does not necessarily take a lot 
of people. It takes smart enforcement, not bodies.
    Mr. Foarde. If either of you would like to comment on that 
in the minute or so we have remaining, please.
    Mr. Zimmerman. I think there is a pattern between Taiwan, 
South Korea, and China here, and also, with Mexico and Latin 
America, where you have countries that have underdeveloped 
legal systems and where their focus is on low-cost 
manufacturing. They are going to find a way to make money and 
make money off counterfeiting. I remember in the early 1970s in 
Mexico, there were knock-off eight-track tapes and cassettes 
that were readily available on the streets. I am not sure if 
you will find those today. I think Mexico has made progress on 
IPR issues. But there is a pattern. China is, of course, a 
bigger country.
    I do agree with what Eric is saying. What is required is 
smart enforcement. It is coordination of resources, dedicating 
more resources, and then having the political will to go after 
those criminal organizations and to shut them down. But we have 
also got to keep reminding China that there is a tremendous 
benefit for their own industry, for their own tax revenues to 
make this a priority. We cannot keep saying to them, ``Hey, 
this is to protect foreign companies,'' or ``this is to protect 
foreign IP holders.'' That is part of the equation.
    The other part of the equation is that you have to protect 
your own industry, and, most importantly, to protect themselves 
and their reputation internationally. China has a lot to gain 
by being an international player. They have a lot to lose by 
being labeled as a hub for knock-off manufacturing. That 
reputation is not something that China wants or needs.
    Mr. Chow. I know that many people draw comparisons between 
Taiwan, South Korea, and China. But Taiwan and South Korea felt 
the pain of counterfeiting, and that has not happened to China. 
I am not sure if it is going to happen to China.
    The other thing is that there is this basic assumption that 
we have that no nation can achieve a high level of industrial 
and economic development without respect for IP laws. But I am 
not sure that that historical lesson is going to apply to 
China. I mean, I think we may be seeing the emergence of a new 
type of economy, one in which piracy rates remain permanently 
higher than anything we have ever seen before, and the economy 
continues to grow. That is what is going on. The economy 
continues to grow at rates which are the envy of the world. 
China continues to be the largest recipient of foreign direct 
investment in the world, consumer wealth and spending continue 
to increase, all this against a background of a commercial 
piracy problem that has no parallels in world history. So, I do 
not know that the historical lesson is going to apply to China, 
and I think that China may test that. We may be seeing 
something new.
    Mr. Foarde. I take it from what we have heard before, 
particularly from Eric, that there is not universal agreement 
on that point, but I am glad that we heard a diverse set of 
views on this question.
    Our time for this afternoon is up, unfortunately, so we are 
going to have to leave it there. I would like to thank, on 
behalf of Senator Chuck Hagel, our Chairman, and Congressman 
Jim Leach, our Co-Chairman, our three panelists, Eric Smith, 
Jim Zimmerman, Daniel Chow, and also all of you who came to 
listen this afternoon.
    We hope you will join us again next week on Monday 
afternoon at 2 p.m. over in 2255 Rayburn for a roundtable on 
unofficial religions in China.
    So we will call this one closed for today. Thank you all.
    [Whereupon, at 3:34 p.m. the roundtable was concluded.]


                            A P P E N D I X

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


                          Prepared Statements

                              ----------                              


                 Prepared Statement of Daniel C.K. Chow

                              may 16, 2005

                        Counterfeiting in China

                            I. INTRODUCTION

    In terms of size, scope, and magnitude, counterfeiting in China is 
considered by many to the most serious counterfeiting problem in world 
history. (As used here, counterfeiting refers to the unauthorized use 
of trademarks owned by another on identical or similar goods.) A recent 
study by the PRC State Council Research and Development Center reported 
that in 2001 the PRC economy was flooded with between $19-$24 billion 
worth of counterfeit goods. Brand owners in China estimate that 15 to 
20 percent of all well-known brands in China are counterfeit and 
estimate their losses to be in the tens of billions of dollars. 
Counterfeiting is estimated to now account for approximately 8 percent 
of China's gross domestic product.
    China is also a leading exporter of counterfeit products to other 
countries in Asia, Europe, and the United States. In 2003, China 
accounted for 66 percent or over $62 million of the $94 million of all 
counterfeit and infringing goods seized by the U.S. Customs Service at 
ports of entry into the United States. Mid-year figures in 2004 
indicate that seizures are sharply higher with $64 million seized in 
the first half of 2004 alone. An ominous development is that beginning 
in 2004, exports of counterfeits from China to the United States and 
other parts of the world may begin to increase significantly for the 
foreseeable future.

                II. ORIGINS AND CAUSES OF COUNTERFEITING

    There are several explanations for the unprecedented size and scope 
of counterfeiting in China:

    (1) Foreign Direct Investment and Advanced Technology. China's 
economic growth through the decade of the 1990s has been fueled in 
large part by foreign direct investment (FDI) from multi-national 
enterprises (MNEs). In the 1990s, China emerged as the world's second 
largest recipient of foreign direct investment behind only the United 
States and in 2002, China surpassed the United States to become the 
world's largest recipient of foreign direct investment with $50 billion 
of foreign capital inflows. FDI is the best means in the world today 
for the transfer of advanced technology, intellectual property, and 
other forms of valuable information. In many cases today the 
intellectual property component of a FDI in the form of patents, 
copyrights, and trademarks is the most important component of the 
foreign investment. For example, the value of the Coca-Cola trademark 
in China is worth more many more times to that company than the 
millions of dollars in capital that it has invested in China. The same 
is true for the patents and copyrights owned by pharmaceutical 
companies and software companies doing business in China today. 
However, while MNEs are creating a transfer of technology through FDI 
that is being absorbed into China's legitimate economy through joint 
ventures and wholly foreign owned enterprises some of this intellectual 
property is also being diverted into China's illegitimate economy as 
pirates steal this technology to engage in counterfeiting and other 
forms of commercial piracy. It is no coincidence that China, the 
world's largest recipient of FDI, advanced technology, and intellectual 
property also has the world's most serious commercial piracy problem.
    (2) State Support of Counterfeiting and Local Protectionism. No 
problem of this size and scope could exist without the direct or 
indirect involvement of the state. In China, the national government in 
Beijing appears to be sincere in its recognition of the importance of 
protecting intellectual property rights, but national level authorities 
are policy and law-making bodies whereas enforcement occurs on the 
ground at the local level. At this level, local governments are either 
directly or indirectly involved in supporting the trade in counterfeit 
goods and are often reluctant to punish counterfeiters.
    (3) Ineffective Legal Enforcement and Lack of Deterrence. China has 
a developing legal system that is weak in many respects by comparison 
to legal systems in advanced industrialized countries such as the 
United States. While China's intellectual property laws are now 
considered by most observers to be in compliance with the standards set 
by TRIPS, enforcement of these laws remains inadequate and fails to 
create sufficient deterrence of counterfeiting.

    The combination of these factors--the world's largest influx of 
foreign direct investment and widespread access to advanced technology, 
direct or indirect government involvement and support of the 
counterfeit trade, and a weak legal system that does not create 
sufficient deterrence for counterfeiters in a very lucrative trade--has 
resulted in a counterfeiting and commercial piracy problem that is 
unprecedented in world history.

                III. OVERVIEW OF COUNTERFEITING IN CHINA

    The illegal trade in counterfeit goods in China can be divided into 
two components: manufacture and distribution:

    (1) Manufacture: The manufacture of counterfeit products tends to 
be concentrated in China's southeast region in coastal areas near 
Taiwan and Hong Kong. Criminal organizations in Hong Kong and Taiwan 
involved in smuggling, prostitution, and narcotics have now branched 
out into counterfeiting because of its lucrative nature. These criminal 
organizations supply the capital and startup costs and use the borders 
between China and their headquarters in Taiwan and Hong Kong to 
frustrate and elude law enforcement.
    (2) Distribution: Distribution of counterfeit products occurs 
through a series of large open air or partially enclosed wholesale 
markets. These wholesale markets are found in strategic locations 
around the country and are positioned to serve large densely populated 
urban areas. These wholesale markets are established and regulated by 
the local Administration of Industry and Commerce (AIC), a branch of 
the local government responsible for promoting, regulating, and 
policing commercial activity. Based on the experience of the author, 
every wholesale market in China traffics in counterfeit goods. As AICs 
are also one of the primary government entities in China charged with 
enforcement against counterfeiting, AICs are faced with a conflict of 
interest as they are charged with policing and enforcing the very 
markets in which AICs and the local government have a substantial 
investment and financial interest. Shutting down these wholesale 
markets would not only result in a direct loss of revenue to the AIC 
but would also have many repercussions as many retail businesses, 
hotels, restaurants, and nightclubs are all supported by the trade in 
counterfeit goods.

      IV. BARRIERS TO EFFECTIVE ENFORCEMENT AGAINST COUNTERFEITING

    (1) Local Protectionism: While it appears that central level 
leaders understand the importance of protecting intellectual property 
for promoting China's long-term economic development, central level 
authorities are legislative and policymaking bodies. Actual 
implementation and enforcement of the law occurs at the local level 
where there continue to be questionable commitments to suppressing 
counterfeiting, copyright piracy, and other forms of economic crimes. 
Local areas benefit directly and indirectly from counterfeiting. In 
some areas, counterfeiting provides jobs and generates revenue that are 
essential to support the local economy. In some cases, counterfeiters 
voluntarily pay substantial taxes to local authorities. In other cases, 
legitimate businesses such as hotels, restaurants, nightclubs, storage 
and transportation companies have been created to support the trade in 
counterfeit goods. The payment of taxes and the creation of lawful 
supporting businesses has integrated counterfeiting into the legitimate 
local economy. It is no exaggeration to say that some local areas in 
China are entirely supported by the trade in counterfeit goods and that 
local residents are ready to use any means necessary to protect their 
illegal trade. A crackdown on counterfeiting would result in shutdown 
of the local economy with all of the attendant costs of unemployment, 
dislocation, social turmoil, and chaos. Because the costs of a 
crackdown at the local level can be so severe, counterfeiting is 
heavily defended at local levels.
    (2) Inadequate Punishment: Local protectionism and a weak legal 
system contribute to the lack of adequate enforcement against 
counterfeiting. The result is that the Chinese enforcement system does 
not create deterrence. To be sure there is no lack of enforcement 
activity. To the contrary, it is relatively easy to obtain an 
administrative action in the form of a raid and seizure action against 
suspected counterfeiters. The problem is that once the enforcement 
action is completed the level of fines and criminal prosecutions are so 
low that whatever sanctions are meted out do not create deterrence. For 
example, the average fine imposed on the counterfeiter or infringer in 
2000 was $794, a figure that is so low as to be considered a cost of 
doing business in a very lucrative trade. The amount of compensation 
awarded to brand owners in 2000 stands at $19, a negligible amount. 
Damages awarded by AICs seek to award the brand owner the profits 
earned by the counterfeiter after deducting all expenses (as 
represented by the counterfeiter) and are not based upon economic 
losses suffered. As for criminal prosecutions, in 2000 only about 1 in 
500 cases were referred to judicial authorities for criminal 
prosecutions. Enforcement in China does not create fear in 
counterfeiters or deterrence.

                         V. EXPORTS FROM CHINA

    Recent changes indicate an ominous development: exports from China 
are likely to increase dramatically beginning in 2004.

    (1) Exports to the United States: In 2003, U.S. Customs seized a 
total of $94 million of counterfeit and infringing goods in ports of 
entry at the United States. Of this total, products originating in 
China accounted for 66 percent of the total and $62 million of the 
total. The 2003 figures for China represent a significant increase over 
comparable 2002 figures when China account for 49 percent of all 
counterfeiting and infringing products and $48 million of the total $98 
million of illegal product seized by U.S. Customs. Counterfeits from 
China and Hong Kong (through which many counterfeits produced in China 
are transshipped) accounted for $80 million or 75 percent of the total. 
No other country accounted for more than 3 percent of counterfeit 
products. As many counterfeit products, such as auto parts, that 
originate in China are transshipped through other countries, such as 
those in South America and through Canada, before ultimately entering 
the United States, China likely accounts for a significantly higher 
percentage than the 66 percent set forth the 2003 U.S. Customs 
statistics. It is possible that China accounts for as much as 80 
percent or more of the counterfeits goods that enter the United States. 
Note that the $94 million figure represents only the value of the 
products that are seized by U.S. Customs in 2003, which can only be a 
tiny fraction of what enters the U.S. market. If the total value of the 
products seized represents 1 percent of the counterfeiting and 
infringing product that enters the U.S. market then the total value of 
counterfeits that entered the U.S. market in 2003 is approximately $10 
billion with China accounting for between $6 and $8 billion of that 
total. It is possible that the actual figures are much higher.
    (2) WTO Commitments: There is likely to be a significant increase 
in the amount of counterfeit products exported from China to the United 
States beginning in 2004 and for the foreseeable future for several 
reasons. In accordance with its WTO obligations, China has amended its 
foreign trade laws in December 2003 to eliminate the monopoly on export 
rights that had been limited to state trading companies. Under prior 
law, only certain designated state trading companies were permitted to 
lawfully export products from China to other countries. This 
restriction meant that counterfeiters had to find a compliant state 
trading company that was willing to work together with the 
counterfeiter in exporting the illegal goods overseas. To be sure, 
there was no shortage of export companies willing to work with 
counterfeiters in exporting counterfeit and infringing products, but 
this requirement nevertheless created an additional obstacle and costs 
that have now been removed. The effect of the elimination of the 
monopoly on exports rights means that anyone can now lawfully export 
products from China. As counterfeiters are likely to take full 
advantage of the elimination of this restriction, exports of 
counterfeits from China to the United States are likely to surge for 
the foreseeable future. U.S. Customs mid-year seizure figures for 2004 
indicate that there is a sharp increase in seizure activity: $64 
million in counterfeit goods were seized by mid-year 2004 compared to 
$38 million by mid-year 2003.
    (3) Lack of Criminal Laws: China does not appear to have any 
current criminal laws that specifically apply to the export of 
counterfeit products. As the earlier discussion indicated, China has 
criminal laws against commercial scale counterfeiting within China, 
although the effective enforcement of these laws is impeded by various 
obstacles. In the area of exports, however, it is arguable that there 
are no applicable criminal laws at all, and that counterfeiters can 
export with impunity from both civil and criminal liability. As 
pressure mounts on China to obtain better enforcement results within 
China, it is likely that counterfeiters will turn increasingly to 
exports as a source of revenue.



                   Prepared Statement of Eric H. Smith

                              may 16, 2005

    Mr. Chairman, Members of the Commission and Commission Staff, IIPA 
and its members thank you for the opportunity to appear today to review 
China's record on enforcement of its copyright law against widespread 
piracy and China's compliance with its WTO-TRIPS obligations. IIPA 
represents the U.S. copyright industries. Its six member trade 
associations consist of over 1,300 U.S. companies, 
accounting for millions of U.S. jobs. The copyright industries, in 
2002, contributed over $625 billion to the GDP, or 6 percent of the 
U.S. economy and almost 5.5 million jobs or 4 percent of U.S. 
employment. These companies and the individual creators that work with 
them are critically dependent on having strong copyright laws in place 
around the world and having those laws effectively enforced. On 
average, the copyright industries generate over 50 percent of their 
revenue from outside the United States, contributing over $89 billion 
in exports and foreign sales to the U.S. economy. Given the 
overwhelming global demand for the products of America's creative 
industries, all these numbers would be significantly higher if those 
trading partners, including China, that continue to allow piracy to 
flourish in their own economies were to significantly reduce piracy 
rates by enforcing their copyright law vigorously.
    Before turning to the important topic of this Roundtable, I want to 
provide you with a brief update to IIPA's comprehensive February 2005 
Special 301 submission on China to the U.S. Trade Representative. In 
that submission we called for entering into a new, multilateral 
dialogue in the WTO with the Chinese government as a way to persuade it 
to take aggressive action--as promised in the Joint Commission on 
Commerce and Trade Meetings over one year ago--to significantly reduce 
the rate of piracy in all IPR sectors including the copyright sector. 
We then provided a summary review of what had happened in China over 
the last year to redeem that commitment. Our conclusion: China has 
failed to comply with its commitment made over one year ago in the JCCT 
to significantly reduce piracy rates. While some modest reductions have 
occurred in some sectors, by no measure have piracy rates been 
significantly reduced. In fact little has changed in the marketplace 
for our members and their companies, despite reports of increased 
raiding activity and seizures of many pirate products. For the record, 
I am submitting a copy of that Special 301 submission which tells the 
story of the failure of an enforcement system to deter rampant piracy 
in the potentially largest market in the world.
    On April 29, 2005, USTR issued its decision resulting from the out-
of-cycle review of China's enforcement practices announced on May 3, 
2004. USTR reflected in this decision its deep concern over China's 
lack of progress in the enforcement area by elevating China to the 
Priority Watch List. It also announced a number of other initiatives, 
one of which was to work closely with our industries with an eye on 
utilizing WTO procedures to bring China into compliance with its WTO 
obligations. Since that time we have met with USTR to begin this 
process and will work intensively with USTR toward the mutual goal of 
bringing China into compliance with its WTO TRIPS obligations, its 
bilateral obligations to the United States in the 1995 and 1996 IPR 
agreement and action plan, and its commitments made to our government 
in the JCCT process.
    This process has now commenced in earnest. USTR will also be 
seeking information from the Chinese government under the transparency 
provisions of the TRIPS agreement, and is committed to using the JCCT 
process to encourage the Chinese government to implement key reforms on 
both the enforcement and the all-important market access front.
    Mr. Chairman, our industries are deeply frustrated by the lack of 
real progress by China in taking effective action to deter piracy and 
to open up its market to legitimate cultural and high technology 
copyright products. China remains one of the most closed markets in the 
world for the U.S. copyright industries. Onerous market access 
restrictions affect all our industries. Notwithstanding Premier Wen's 
pledge to address the $162 billion trade imbalance between the United 
States and China by increasing China's imports from the United States, 
China is retaining--and, in some sectors, augmenting--market access 
restrictions for creative and high-tech products that represent 
America's comparative advantage.
    Copyright piracy represents perhaps the largest barrier to 
effective market access in China. An average (and truly staggering) 90 
percent piracy rate has persisted for years despite repeated ``strike 
hard'' enforcement campaigns, steamroller campaigns, and public 
statements from many high level government officials supporting 
stronger enforcement. While our Special 301 submission highlights the 
current situation in China, I wanted to give you a brief flavor of what 
copyright companies confront in trying to do business in China in face 
of these trade barriers and these inexcusably high piracy levels.
     Taking the business software industry first--one of our nation's 
most productive and important creative sectors: The software industry 
faces piracy rates in China of 90 percent, one of the highest in the 
world for that industry. China leads the world in the production and 
export of counterfeit software--software packages that are purposely 
designed to replicate the original legitimate product. Losses to U.S. 
software publishers were estimated by the Business Software Alliance 
(BSA) at $1.47 billion in 2004. China was the 6th largest market in the 
world for personal computers and ranked 26th in legitimate software 
sales. This increasing disparity not only damages the U.S. industry but 
hurts Chinese software developers as well.
    China has failed to criminalize the most damaging type of piracy to 
the business software industry--the unauthorized use of software within 
businesses and government institutions. This is a violation of the 
TRIPS Agreement. Combined with the total absence of a criminal remedy 
is the absence of all but a few administrative actions against this 
type of piracy with woefully low and non-deterrent fines. As a 
consequence, piracy rates continue to remain at staggering levels.
    To make matters worse, China is on the verge of shutting down 
access for U.S. and other foreign companies to the largest purchaser of 
software in China: the Chinese government. It would accomplish this by 
adopting draft government procurement regulations that would expressly 
favor Chinese software only. In short, the 
situation for this critical copyright sector is truly dire in China 
with no significant improvement in sight.
    The U.S. motion picture industry is facing a 95 percent piracy rate 
in China (the highest in the Asia Pacific region, and among the highest 
in the world) which represents a worsening of the situation from the 
previous year. Losses to just the motion picture industry, from 1998 
through 2004, are estimated at over $1 billion (not including losses 
from Internet piracy, which are growing alarmingly). While raids and 
seizures have increased somewhat following Vice Premier Wu Yi's 2004 
enforcement campaign, administrative fines remain far too low to deter 
pirate activity and, as I will describe later, criminal cases have been 
extremely rare despite Chinese promises to use this TRIPS-required 
remedy. According to a recent newspaper report, the legitimate home 
video market in China represents about 5 percent of the estimated total 
market of $1.3 billion (which is itself a very conservative estimate). 
Of the 83 optical disc factories licensed by the government (and an 
unknown number of ``underground'' unlicensed plants), many continue to 
churn out pirate DVDs. The export of pirated home video product, which 
had slowed to a trickle after the U.S. Section 301 action (and 
threatened retaliation) in 1995-96, has resumed and is growing. The 
total optical disk plant production capacity, a significant amount of 
which is devoted to producing pirate product, is now close to 2.7 
billion units annually. Optical disks sourced in China and containing 
pirated films have been seized in over 25 countries around the world. 
The massive quantity of pirated movie product available in China is 
evidenced by the fact that pirate prices start around $0.60 per unit 
the lowest price in Asia. As with the other copyright industries, any 
enforcement that occurs is conducted by administrative agencies, with 
overlapping jurisdiction and often little coordination, and fines 
imposed are a mere ``cost of doing business.'' A recent anecdotal 
study, conducted by IIPA member, the Motion Picture Association (MPA), 
revealed that the average fine imposed per pirate home video product 
(DVD, VCD) seized in raids resulting from MPA complaints is only 
slightly higher than the cost of purchasing a blank disk--clearly of no 
deterrent value. The lack of deterrent administrative penalties is a 
key reason, in addition to the almost complete lack of criminal 
enforcement that piracy rates persist at 90 percent of the market and 
above.
    Accompanying and reinforcing this piracy situation are onerous 
market access restrictions, including a Government-owned, monopoly 
importer, very limited competition in distribution, and a quota of 20 
theatrical films allowed into China annually on commercial terms. The 
pirates capture 100 percent of the market for films not permitted 
legally in China. Even those films permitted theatrical release suffer 
piracy rates of 70-75 percent, because of the long delays before most 
American films are given screen time. Another consequence of the lack 
of competition in importation and distribution is the non-competitive 
pricing in the Chinese market. Cumbersome licensing requirements 
burdens the retail sale of legal home entertainment product, holding 
down revenue potential and helping keep the market in the hands of the 
pirates. These barriers and those to all our industries must be removed 
in the JCCT process.
    The entertainment software industry, one of the fastest growing 
copyright-based industries, faces similar high piracy rates and 
estimates the value of pirated video games in the market at $510 
million in 2004. Demand for entertainment software products is growing 
rapidly but is being soaked up primarily by the pirates. This demand is 
exemplified by the exploding popularity of ``massively multiplayer 
online roleplaying games'' (MMORPGs) where literally thousands of 
players can compete against one another simultaneously. Demand for 
MMORPGs in China grew at 40-45 percent over expectations in 2004. This 
increasing demand has fueled, in part, the growth of Internet cafes in 
China. (It is estimated that there are close to 200,000 Internet cafes 
in the country, with a seating capacity of between 100-300 seats, of 
which 60 percent are involved in game play.) While U.S. game 
publishers, represented by IIPA member, the Entertainment Software 
Association (ESA), have engaged in some licensing of the cafes, the 
vast majority of the product used is pirated, either available at the 
cafe or downloadable from the Internet. This dire situation has been 
all the more exasperating since the Chinese government extensively 
regulates the activities of these Internet cafes and often and 
vigorously revokes licenses for actions the government deems 
inappropriate. However, as far as we know, the government has never 
sought to include in this extensive regulatory scheme prohibitions 
against the widespread and blatant piracy at these cafes in its 
business licenses (which are otherwise very thorough). Moreover, no 
copyright enforcement of any kind has occurred. The legal 
infrastructure governing the Internet still is not helpful to copyright 
enforcement. Takedown of pirate sites is negligible; penalties non-
existent.
    Cartridge-based handheld games are also hard hit by the pirates 
with manufacturing and assembly operations throughout China with 
exports throughout Asia, Latin America, the Middle East and Europe. 
Enforcement attempts have been relatively successful in terms of raids 
and seizures but, like with other industries, 
administrative fines are non-deterrent and criminal enforcement action 
very rarely undertaken, even against factories generating millions of 
dollars in illicit profits. Entertainment software products are also 
subject to a protracted content review process, by two separate 
agencies contributing to market entry delays. Given the immediate 
nature of the demand and lifecycle of best selling games, this leaves 
the pirates virtually uncontested in the market prior to the official 
release of a new title. There are also Internet and investment 
restrictions that must be significantly eased or abolished.
    The U.S. book publishing industry, represented by IIPA member, the 
Association of American Publishers (AAP), faces both significant offset 
printing of pirated books, primarily in translated editions, and 
massive commercial photocopying of textbooks and reference books on and 
near University campuses. There are 580 licensed state-owned publishers 
in China, 50 of which are considered major. There are only a few 
privately owned publishers but they must buy publishing rights from the 
state-owned publishers. U.S. publishers issued 4500 translation 
licenses in 2004, a significant number but far below China's potential. 
All the best selling books are then 
virtually immediately pirated by outlaw ``printers'' and made available 
through independent bookstores, stalls and street vendors. To give an 
example, the famous self-help bestseller ``Who Moved My Cheese'' sold 
over 3 million copies in China. It is estimated, however, that the 
pirates sold another 6 million copies. The Harry Potter books, and 
other best sellers like Hilary and Bill Clinton's books ``Living 
History'' and ``My Life,'' John Grisham's books and others all face a 
similar fate from the pirates. Former General Electric President, Jack 
Welch's biography, ``Winning,'' has sold over 800,000 copies but with 
an equal number of pirate copies available in the market. English 
language textbooks are also heavily photocopied in their entirety and 
there are six known websites which make available entire copies of 
textbooks that are downloaded and then photocopied. Enforcement against 
this vast piracy is spotty and all done administratively through the 
local and national copyright bureaus. Any resulting administrative 
fines are non-deterrent. We know of no criminal enforcement. The book 
publishing industry also faces market access barriers--U.S. publishers 
are not permitted to publish, sign authors, or print their books in 
China.
    The recording industry, represented by IIPA member, the Recording 
Industry Association of America (RIAA) did experience a minor reduction 
in the piracy rate for sound recordings, from 90 percent in 2003 to 85 
percent in 2004 in ``hard goods'' piracy, but with significant 
increases in Internet piracy. Losses remain in excess of $200 million 
per year from continued optical disk manufacture and distribution 
within the Chinese market and significant levels of audiocassette 
piracy (still an important format in China). The recording industry 
faces many of the same problems with optical disk piracy confronting 
the motion picture industry. Millions of pirated music CDs are readily 
available throughout China. Some of these pirate products have found 
their way into the export market. China continues to rely on its failed 
administrative enforcement system, which relies on numerous 
inspections, product seizures and, when the pirate doesn't flee, the 
imposition of small, non-deterrent fines.
    Internet piracy in China, as in other countries in the world, has 
become a huge problem for the recording industry. Thousands of active 
websites such as www.9sky.com and www.chinaMP3.com are giving away, or 
offering links to, thousands of pirated songs. (These not-for-profit 
acts of piracy are not criminalized in China, as they are, for example, 
in the United States.) International criminal syndicates are apparently 
using Chinese servers to hide their illicit activity (www.boxup.com) 
and many Asian pirate sites are doing a thriving business in China, 
such as www.kuro.com from Taiwan.
    Market access restrictions are severe, contributing to piracy and 
market losses. U.S. record companies cannot ``publish'' or release a 
recording without permission of a state owned company and cannot 
manufacture, distribute or engage in retailing of its products, which 
artificially segments the market and makes it extraordinarily difficult 
for this world class industry to participate in the Chinese market. Its 
products are subject to censorship while domestic (as well as pirate) 
recordings are not--a national treatment violation.
    All in all, the copyright industries estimate their total losses in 
excess of $2.5 billion in 2004 due to piracy in China. The simple fact 
remains that these losses and the 90 percent piracy rates will NOT be 
significantly reduced without subjecting major piracy to criminal 
enforcement accompanied by deterrent penalties and substantially 
increasing the administrative fines specified in the copyright law and 
imposing them in practice. To date, even after the JCCT commitments, 
this has NOT happened and there is a real question whether the Chinese 
government as a whole (Vice Premier Wu Yi has been a staunch defender 
of better enforcement) can muster the political will to take these 
absolutely necessary actions--actions that have been key to significant 
reductions in piracy levels in other countries in which our companies 
operate. China cannot exempt itself from the rules--that enforcement 
against piracy requires deterrence and criminal remedies. The global 
community recognized this when it fashioned the Article 61 criminal 
obligation in TRIPS and it has proven to be the case in practice.
    The Commission has asked the key question that has trouble everyone 
associated with China's IPR regime: ``Will China ever enforce its IPR 
laws.'' The article in the Far Eastern Economic Review,\1\ provided to 
us by the staff, sets out the interesting thesis that this failure has 
nothing to do with ``stages of development'' or ``cultural attitudes.'' 
We completely agree. These shibboleths have regularly been argued to 
excuse China (and other countries) from meeting their freely bargained-
for WTO obligations. In fact, other countries have similar ``cultural 
attitudes'' and are at or near China's development level and they have 
done a far better job bringing deterrence to their copyright 
enforcement system thereby reducing piracy rates. Piracy is an economic 
crime and responds to economic disincentives placed in the pirates' way 
by an effective, deterrent enforcement system. If the risk is too high, 
the conduct will cease or be substantially reduced. The authors also 
set out the view that Chinese government control over its economy and 
the ``command'' nature of the government's involvement contains built 
in incentives to continue to permit infringements as a way of 
protecting tottering state-owned enterprises. We have no expert view on 
this but observe that China has sought to preserve the import and 
distribution monopolies that are pervasive in the copyright sector. The 
thesis seems to apply more, however, to the patent and trademark areas 
of IP protection, rather than to copyright, where it is becoming 
clearer to us at least that the harm from copyright piracy is falling 
increasingly on Chinese creators and Chinese companies (some rather 
large too). These companies, because they are either state-owned (and 
find it difficult to confront their own government for its failures), 
or are private (and the government, like many governments in developing 
economies, are not yet responsive to the entreaties of their private 
sector) face a governmental response that derives primarily from 
internal bureaucratic needs, first and foremost. An illustration might 
be the apparent unwillingness of the Chinese authorities to lower the 
thresholds for initiating a criminal prosecution so that they become 
workable in practice (a result not accomplished in our opinion in the 
new Judicial Interpretations issued in December 2004) and to follow 
with criminal prosecutions and deterrent penalties. The reason given is 
that bringing more criminal cases would risk overwhelming the 
enforcement bureaucracy. However, many other governments face this same 
potential argument and have nevertheless determined that criminal 
enforcement is a necessary condition to reducing piracy (as well as 
being a WTO obligation). Furthermore, we should not underestimate the 
problem that the central government faces in controlling what happens 
at the provincial level. We believe, however, that, through the 
Politburo and the Party structure, this impediment can be overcome, if 
the political will is there. It may be that such political will CAN be 
generated if the proper ``incentives'' are there. An example of this 
would be when the Chinese government (at the highest ``political'' 
level), in 1996-97, closed many of the CD factories that were exporting 
pirate optical disk product globally under threat of U.S. trade 
retaliation.
---------------------------------------------------------------------------
    \1\ Anne Stevenson -Yang and Ken DeWoskin, China Destroys the IP 
Paradigm, Far Eastern Economic Review (March 2005).
---------------------------------------------------------------------------
    Regardless of the reasons why the Chinese government has not, at 
least yet, decided to take deterrent criminal actions against major 
acts of piracy (as required by TRIPS), to make necessary amendments to 
its criminal law (as required by TRIPS), to further amend its Judicial 
Interpretations to reduce the hurdles to effective criminal 
prosecutions, and to increase administrative penalties and impose them 
at deterrent levels, they are nevertheless under an international 
obligation (in the WTO), and a bilateral obligation (under the 1995-
1996 bilateral agreement settling the Section 301 case) to do so. 
Moreover, it is not in China's own interest to undermine its own 
domestic creative industry and to continue to foster trade friction 
with its key trading partners. Other governments in the Asian region 
have made the political determination that effective enforcement is in 
that country's own interest. China must do the same and do so NOW. 
Thank you very much for the opportunity to participate in this 
Roundtable.




                Prepared Statement of James M. Zimmerman

                              may 16, 2005

         AmCham-China's Views on China's IPR Enforcement Record

    Thank you Mr. Chairman and staff members for this opportunity to 
present the views of the American Chamber of Commerce, People's 
Republic of China.
    My name is James M. Zimmerman. I am the Vice Chairman of the Board 
of Governors of AmCham-China and Co-Chair of AmCham's Legal Committee. 
I am a partner and Chief Representative of the Beijing office of the 
international law firm of Squire, Sanders & Dempsey L.L.P.
    AmCham-China, which is based in Beijing, is an organization that 
represents the interests of the American business community in China. 
Along with its sister organization in Shanghai, AmCham-China represents 
over 2000 companies and individuals from virtually every state in the 
union, including small to medium sized businesses and U.S. exporters 
without a formal presence in China. We do not represent the interests 
of Chinese companies or the PRC government. AmCham-China and its member 
companies are in the field every day fighting for market access for 
U.S. products and services.
    One of our core tasks is to meet with the Chinese government on a 
broad range of issues such as for greater market access of U.S. goods/
services, timely implementation of China's WTO obligations, increased 
enforcement of intellectual property, and continued improvement of 
China's legal system and business environment.
    AmCham-China and its member companies--given our on-the-ground 
presence and years of in-country first-hand experience--are committed 
to assisting this Commission and Members of Congress in obtaining 
information and data to assist it with respect to its investigation 
concerning the issues addressed in this forum today.
    I am here today to share our concerns and efforts with respect to 
IPR protection and enforcement in China.
    Since its accession to the World Trade Organization (WTO) in 
December 2001, China has made significant improvements to its laws 
governing intellectual property rights (IPR). However, there has been 
minimal progress in establishing a system of effective enforcement.
    Indeed, counterfeiting and piracy problems in China are worsening 
and affecting both Chinese domestic and foreign brands. More 
sophisticated infringement schemes, combined with an increasing number 
of exporters, mean more counterfeits are showing up in foreign markets. 
Piracy not only amounts in a tremendous loss of revenue to IPR holders, 
but is also a consumer health and safety issue since counterfeit 
product rarely meets stringent quality standards.
    The violation of intellectual property rights impacts almost all 
industry sectors including consumer and industrial goods. Among a few 
examples, computer software, films, music recordings, clothing, 
cosmetics, auto parts, pharmaceuticals, and food and beverages have all 
felt the sting of piracy.
    In the media sector, it is common for a newly released film in the 
United States to surface within days of its American release as a 
pirated copy in China. Pirated DVDs in high quality packaging are now 
widely available in DVD stores throughout Beijing, despite the Chinese 
government's repeated commitments to crack down on piracy.
    Piracy is a deeply frustrating problem for our members. More than 
three-quarters of respondents to the 2004 AmCham-China & AmCham-
Shanghai membership questionnaire are negatively impacted by China's 
poor IPR protection. Ninety percent of our members believe China's IPR 
protection is ineffective.
    AmCham-China believes that the answer to the problem will only be 
tackled with stronger national leadership to address IPR enforcement 
issues.\1\ Large department stores and markets openly selling 
counterfeit and pirated goods are widespread throughout China, 
including in Beijing itself. Chinese agencies report that they 
periodically raid these markets, sometimes imposing modest 
administrative fines on vendors. However, the fact that these markets 
continue to operate in the public eye, with seemingly no fear of 
meaningful legal penalty, creates the impression that China's national 
leadership lacks the will to stop counterfeiting and piracy.
---------------------------------------------------------------------------
    \1\ We are pleased with Vice Premier Wu Yi's commitment, made on 
behalf of the Chinese government at the April 2004 Joint Commission on 
Commerce and Trade (JCCT) meetings, to make specific improvements in 
IPR laws and regulations; strengthening IPR education and enforcement; 
ratifying the WIPO digital treaties; establishing a joint U.S.-China 
IPR interagency working group to tackle enforcement issues; and 
promulgating the judicial interpretations on criminal liabilities 
standards covering prosecution, conviction, and sentences. However, the 
2004 commitments have not bee fulfilled and more work needs to be 
accomplished.
---------------------------------------------------------------------------
    Among other things, we believe that strong IPR protection is not 
just to protect the interests of foreign multinational corporations but 
also to guard the rights and interests of domestic intellectual 
property rights holders and to protect the health and safety of 
consumers worldwide that may purchase pirated goods.
    With these general comments in mind, AmCham-China supports the USTR 
in placing China on a Priority Watch List and initiating WTO 
consultations with China under the TRIPS agreement. We believe that 
China needs to be put on notice in the strongest and most direct terms 
possible, that the IPR problem must be effectively contained or the USG 
will be forced to either take WTO action (with all the uncertainty that 
entails given the untested nature of the WTO TRIPS Agreement).
    AmCham is in favor of exploring ways to taking action against 
specific regions, cities, or provinces in the PRC that are areas of 
flagrant IPR abuse, or specific Chinese companies which engage in 
repeated and gross violations of IPR.
    While enforcement efforts have been lax, we believe the Chinese are 
growing more aware of their poor performance on IPR there is nowhere 
near the required effective and deterrent enforcement measures as 
required by WTO. As we have stressed to the PRC leadership, the key to 
enforcement is credible criminal sanctions that deters commercial-scale 
IPR counterfeiters and pirates.
    For its part, AmCham-China has developed an exchange and education 
program of its own to encourage more effective enforcement in China and 
this program in general includes, among other things, the following 
components:

   IPR Index of Enforcement: AmCham-Beijing has created an IPR 
        Index which measures whether China's IPR enforcement is 
        improving or not. We are currently conducting the baseline 
        survey and plan to publish the results three times a year. This 
        information will be available to the public, including the PRC 
        and U.S. governments. We recognize that we in the private 
        sector--here and in China--need to provide much more data on 
        specific examples of inadequate Chinese enforcement. Our IPR 
        Index will aid this effort and we are also taking steps to 
        advise and inform our members of the importance of collecting 
        and sharing such information directly with the USG.
   Legal Exchange and Education Efforts: AmCham is pressing 
        various PRC government agencies and judiciary to take certain 
        key steps during the next year.\2\ In short, we have stressed 
        to the PRC government that several laws must be amended/adopted 
        to provide stronger protection, enhanced penalties, and further 
        clarification of standards. As part of its efforts, AmCham-
        China and AmCham-Shanghai jointly publish an English/Chinese 
        language issues White Paper on an annual basis for purposes of 
        educating the Chinese government on areas of concern for U.S. 
        business, and included in the White Paper is a detailed 
        analysis of U.S. industries' concerns with IPR enforcement. At 
        the end of this Statement is a draft of excerpts from our White 
        Paper and reflects some of the issues we continue to emphasize 
        to the PRC leadership.
---------------------------------------------------------------------------
    \2\ On January 19 2005, an AmCham delegation met with key members 
of the PRC Supreme Peoples Court (the ``SPC'') to exchange views on the 
Interpretation by the SPC and the Supreme People's Procuratorate (the 
``SPP'') on Several Issues Concerning Application of Laws in Handling 
Criminal Cases Involving the Infringement of Intellectual Property (the 
``Judicial Interpretation'') that was effective in December 2004. While 
the language of the Judicial Interpretation left much to be desired, 
Justice Huang Songyou, Vice President of the SPC, assured us that the 
Chinese government was serious about fulfilling its WTO commitments and 
gave priority to IPR protection. As stressed to the SPC, the key to 
enforcement is credible criminal sanctions that deter commercial-scale 
IPR counterfeiters and pirates. We believe that the SPC (the highest 
court in China) understands that effective action must be taken.
---------------------------------------------------------------------------
   Benchmarks and Performance Criteria: This will be indicative 
        of its commitment to IPR (we developed this list independently 
        but it bears many similarities to the list of tangible results 
        expected of China in USTR's April 30 Special 301 Report):

                --Impose criminal sanctions against a significant 
                number of large-scale Chinese counterfeit operations. 
                This crackdown should be widely publicized in the 
                media.
                --There should be a significant decline in seizures of 
                counterfeit goods at US and EU ports as a result of 
                Chinese customs interception actions.
                --Chinese patent authorities should avoid retroactive 
                rulemaking which undermines the perceived value of 
                Chinese patents and creates unpredictability for 
                foreign investors. An example of this behavior is the 
                invalidation of Pfizer's Viagra patent.
                --China should substantially increase its budget 
                dedicated to enforcement of IPR and give national 
                police the authority to operate across jurisdictions 
                within China.
                --China should substantially increase the budget for 
                the Trademark Office to resolve the backlog of 
                invalidation cases pending (i.e., 20,000 cases and some 
                pending since 1999).

    AmCham further believes that the U.S. Government should dedicate 
additional resources to counter the effect of PRC-based counterfeiting 
and to support China's efforts to develop an effective enforcement 
system, including the following:

   Significant increase of U.S. Customs personnel dedicated to 
        interception of Chinese counterfeit goods.
   Increase in U.S. Customs' cooperation in cross-border 
        criminal investigations with China and EU.
   U.S. government, particularly USPTO, to engage in more 
        cooperative technical assistance programs to assist China in 
        raising the level of IP practice so that U.S. companies can 
        benefit. An improved patent/trademark examination system may 
        expedite the grant of IP rights to U.S. companies.

    In summary, the AmCham-China and AmCham-Shanghai believe that China 
has made progress in the past three years with respect to its IPR laws, 
but much focused and aggressive work remains in order to elevate 
China's system to international standards and to give worldwide IPR 
holders a comfort level that their 
intellectual property interests will be respected and protected in 
China, and that infringing parties will be punished. China's IPR 
standards and regulatory system--as a work in progress--requires strong 
national leadership and the dedication of capital and resources to be 
more effective and respected.
    Thank you for this opportunity.

 Excerpts of AmCham-China and AmCham-Shanghai's Draft 2005 White Paper 
             Concerning Intellectual Property Rights Issues

    Central Government Resources: The Chinese leadership needs to 
devote more of its political capital and bureaucratic resources to 
shaping a national IPR strategy and putting into place an effective IPR 
enforcement regime. There is a need for revised laws, regulations, and 
policies. The most glaring deficiency in China's IPR regime at this 
time is in the need to revise the one key law that was not revised when 
China joined the WTO--its criminal code, which should be revised to 
provide stronger protection, enhanced penalties, and further 
clarification of standards. More attention is needed on the ``big 
impact items to improve local enforcement, raise public awareness and 
strengthen intellectual property customs protection, and enhance 
interagency coordination.
    Interagency Coordination: The lack of coordination among the many 
Chinese government agencies responsible IPR enforcement prevents 
effective enforcement. The Administrations for Industry and Commerce 
Trademark Divisions (AIC), AIC Economic Supervision Divisions, 
Technical Supervision Bureaus (TSB), Copyright Administration offices, 
Customs, Public Security Bureaus (PSB) Social Order Divisions, and PSB 
Economic Crimes Investigation Divisions (ECID), to name a few, have 
overlapping jurisdiction and authority. Jurisdictional issues need to 
be resolved and a program adopted to improve coordination.
    Customs Enforcement: Since its WTO accession, China has liberalized 
its foreign trade regime. This is a welcome development. An unintended 
consequence, however, is that exports of counterfeit and pirated goods 
from China have increased sharply in the past two years and are now a 
global problem. Further liberalization contemplated by the revised 
Foreign Trade Law may well accelerate this trend. Although verbal 
assurance from the Supreme People's Court provides otherwise, there is 
nothing in the written laws that indicates that it is illegal to export 
counterfeit goods from China. This should be rectified and enforcement 
resources provided.
    The PRC Intellectual Property Customs Protection Regulations, in 
effect from March 1, 2004, and the related implementing rules, promise 
to improve IPR customs enforcement. We are hopeful that Chinese customs 
will invest in the organizational and equipment upgrades necessary to 
make these regulations fully effective. This includes the purchase of a 
centralized computer system to enable customs officials to track the 
activities of counterfeiters and copyright pirates.
    The regulations themselves, however, contain several weaknesses. 
There are no provisions to transfer suspected cases of criminal 
liability to the public security organs. AmCham-China and AmCham-
Shanghai are also concerned about the removal of administrative 
penalties from the customs regulations and hope that such penalties 
will be reinstated. Presently, however, there appear to be no 
punishments for willful trade in infringing goods.
    Chinese regulations require IPR owners to carry a heavy burden for 
protecting their intellectual property. For example, companies must 
provide customs officials with precise information as to which port(s) 
counterfeit goods will be going through, even though such information 
is very difficult to obtain. IPR owners also are required to post bonds 
to cover the risk of counterclaims in the event that a court finds the 
detained goods are not counterfeit. The procedures and amounts are 
unreasonably burdensome, especially because the courts require a 
separate bond in the event that a seizure leads to litigation. We 
believe IPR owners should be allowed to post a single bond at the China 
Customs in Beijing covering the risk of counterclaims for all customs 
branches.
    *Criminal Enforcement: The AmCham welcomes the release of the 
Judicial Interpretation on Issues Concerning Application of Laws in 
Handling Criminal Cases Involving the Infringement of Intellectual 
Property, effective in December 2004. While the Judicial Interpretation 
significantly reduces the numerical thresholds to trigger criminal IPR 
prosecutions, we are disappointed that the Judicial Interpretation 
fails to include language concerning, among other things, the criminal 
liability for exporters of counterfeits and organizational end-users 
(and specifically with respect to the misuse of software products); 
methods for calculating value of semi-finished infringing products; 
enhanced penalties for repeated offenders, violations of health and 
safety, and other aggravating circumstances; and a clear definition of 
``illegal business income'' which appears to allow the use of the 
infringing party's prices and not the actual loss by the genuine owner 
of the IPR. Moreover, the distinction between individual and corporate 
infringing activity (with the threshold for unit or corporate activity 
being significantly higher than for individual activity) is unfortunate 
since it will simply encourage criminals to incorporate to avoid 
criminal liability. In the end, the true test of effectiveness of the 
Judicial Interpretation--and the resulting work of the courts and 
prosecutors--will be whether it is effective in deterring the rampant 
infringement of IPR in China and in bringing more criminal prosecutions 
and convictions in IP cases.
    Administrative Enforcement: The existing system for administrative 
enforcement of regulations against piracy and counterfeiting needs to 
be improved. The AIC and the TSBs are key agencies providing support to 
intellectual property rights holders, but their effectiveness is 
limited by policy and legal problems. For example, there are no minimum 
standards for administrative fines; only a maximum standard. 
Consequently, our members report the amount and scope of administrative 
fines is dropping. We encourage the government to unify standards at 
the local level, combat local protectionism, and enhance interagency 
coordination.
    Administrative Fines for Trademark Infringement: The State Council 
issued implementing regulations for the PRC Trademark Law, which 
entered into effect on September 15, 2002. These regulations provide, 
inter alia, for a dramatic increase in the maximum administrative fines 
that may be imposed on counterfeiters, from the prior 50 percent of 
turnover to the current 300 percent. Unfortunately, these increases in 
maximum potential fines have yet to result in a significant increase in 
actual penalties imposed. This is mainly due to the lack of guidelines 
from the State Council and the Trademark Office of the SAIC as to how 
fines should be calculated.
    Administrative Enforcement of Software Copyright: Copyright 
authorities at the local level are crippled by inadequate manpower, 
training, and resources. Appropriate steps should be taken to ensure 
that the National Copyright Administration (NCA) and their local 
offices responsible for enforcing copyrights are adequately supported, 
such that rights holders can have reliable access to administrative and 
civil remedies provided under relevant laws against end-user and other 
copyright pirates. Effective coordination needs to be established with 
the SAIC to increase the enforcement capability of the local Copyright 
Administration offices. There must be reliable administrative 
enforcement coupled with deterrent penalties to prove that corporate 
end-user piracy bears administrative liability. We look forward to the 
prompt enactment of administrative rules by the NCA and the Ministry of 
Information Industry (MII) to deal with Internet piracy, takedown 
notice procedure and ISP liability.
    The following issues related to the Computer Software Protection 
Regulations (issued by the State Council on June 4, 1991 and amended on 
December 20, 2001) should be addressed: (1) the regulations should be 
modified to clarify that temporary copies of software are protected; 
(2) the exception under Article 17--which allows for the unlimited use 
of any software for the purposes of learning and studying the design--
should be amended since it goes well beyond what is permitted under the 
Berne Convention and the TRIPS Agreement; (3) the exception under 
Article 30 of the Regulations--which creates a significant loophole in 
the liability of corporate end-user pirates by allowing an exception to 
liability in cases where a party is deemed to have acted without 
knowledge--should also be amended as inconsistent with international 
standards; and (4) the requirement under Article 30 that allows for a 
compulsory license in situations if destruction of the illegally used 
software would bring great loss to the infringer--should be deleted or 
amended as it is vague and goes beyond the exceptions and limitations 
permitted by the TRIPS Agreement.
    Local Standards and Local Protectionism: There is significant 
variation among 
localities for interpreting liability thresholds. Currently, the 
provinces and municipalities have very different thresholds for 
determining copyright infringement. For example, the Shanghai PSB has 
issued its own IPR crime arrest and investigation guidelines, but we 
are not aware of any current efforts to provide nationwide standards. 
In many cases, local protectionism renders administrative enforcement 
ineffective. After raiding counterfeiters, trademark owners too often 
encounter local AICs that are reluctant (delays are often more than six 
months, and sometimes more than a year) to release the official 
administrative penalty decision letters. This has seriously hindered 
trademark owners' efforts to recover damages from counterfeiters in 
court. We welcome steps to bring cases against administrative 
authorities for abuse of their authority in rendering insignificant 
fines. We also believe that administrative authorities should be 
encouraged to make their decisions publicly available to ensure the 
system is fully transparent and in accordance with the law.
    Patent and Trademark Registration and Protection: Improving the 
trademark registration process would help deter counterfeiters who 
preemptively register well-known trademarks, trademark imitations, and 
even blatant copies of the trade dress of others. Unfortunately, the 
China Trademark Review and Adjudication Board (TRAB) and Chinese courts 
do not take bad faith into consideration in cases of preemptive 
trademark registration, trademark imitation, and trade dress 
infringement. There is also considerable delays with respect to 
trademark invalidation petitions before the Trademark Office, which 
reportedly has 20,000 undecided cases pending with some disputes filed 
in 1999 remain undecided.
    Similarly, the China Patent Reexamination Board (PRB) and the 
Chinese courts rarely take bad faith into consideration when reviewing 
preemptive patent filing at either the invalidation process with the 
PRB or infringement suits in court. Currently, a legitimate rights 
owner has little recourse against counterfeiters that file utility and 
design patents, knowing that such filings lack novelty.
    Delays in receiving patents or being granted market access are 
another problem. SIPO is understaffed to handle the large volume of 
applications. With the resulting backlog of patent applications, it can 
take up to five years to receive a patent.
    The thin legal grounds underlying the State Patent Office's 
decision to invalidate the use-patent for Viagra represent a step 
backwards. In its decision to invalidate the patent, SIPO relied on new 
guidelines issued after the patent had been granted, and then did not 
allow the patentee the opportunity to meet the revised data provision 
standard of the new guidelines. The SIPO decision has been appealed to 
the courts and at this writing is still in litigation. Although we are 
most concerned with SIPO's rationale and procedure in invalidating this 
patent, which set an unfortunate precedent, we also note that the 
patent did not protect that legal producer. Domestic pharmaceutical 
companies widely copied the product and sold it through a variety of 
legal and illegal channels.
    Patents and Standards: The intellectual property policies of the 
standards working groups in China do not conform to international 
practices. International standards organizations have an intellectual 
property policy that defines how intellectual property is contributed 
and made available for implementation of standards. Generally, Chinese 
standards groups in high tech areas (Advanced Visual Standard (AVS), 
Radio Frequency Identification (RFID), Linux, Intelligent Grouping and 
Resource Sharing (IGRS), etc.) either have no such policy, or an 
unreasonable policy requiring mandatory patent pool participation, 
unreasonable disclosure, and compulsory licensing.
    The common practice is to require members of standards working 
groups to place all related patents in the patent pool and to entrust 
only the standards group to license the technology. In addition to 
creating monopolistic control, mandatory patent pool participation 
devalues patents in subsequent negotiations, cross licensing, and 
defense of intellectual property. Patent disclosure obligations in 
working groups typically apply to the entire company rather than the 
individual representing the company, and cover not only patents 
necessary to the standard in question, but all related patents, 
including third party patents and patent applications. Such disclosure 
standards are overly broad and impractical. This is compounded by rules 
in some working groups that non-disclosed patents must be licensed 
royalty free or not asserted.
    The AVS Working Group is making an effort to cooperate with 
international standards experts to develop an appropriate IPR policy 
and related legal documentation. We recommend that relevant agencies 
and other Chinese standards organizations study this example.
    Patent Protection for Computer Software: Patent examination 
guidelines and practices only allow patenting software-related 
inventions in the form of the computer that executes software 
(apparatus claims) or methods for operating computers using software 
(process claims). Protection is not allowed for computer readable media 
claims or programs that cause a computer to implement an innovative 
process (program product claims). As a result, the only one likely to 
be a direct infringer is the end-user who actually uses the software. 
This limits the use of software-related patents to protect the 
intellectual property of the industry. Many governments, such as the 
United States, Germany, Japan, and Korea have already recognized 
program product claims. China's failure to do so is not only 
discouraging to foreign companies, but also denies protection to 
Chinese software enterprises at home and leaves them facing an 
unfamiliar environment in international markets full of competitors 
seasoned in patent protection of program products. We recommend 
revision of the patent examination guidelines to accept program 
products claims.