[Senate Hearing 109-587]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-587
 
                    ENSURING PROTECTION OF AMERICAN
                    INTELLECTUAL PROPERTY RIGHTS FOR
                      AMERICAN INDUSTRIES IN CHINA

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 21, 2005

                               __________

               FIELD HEARING IN BEVERLY HILLS, CALIFORNIA

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1

                               WITNESSES
                       Monday, November 21, 2005

Hon. Dan Glickman, Chairman and CEO, Motion Picture Association 
  of America, Inc. (MPAA)........................................    20
Gary Burr, Nashville Songwriter, on behalf of himself and the 
  Recording Industry Association of America (RIAA)...............    24
Jack Sabo, Vice President, Market Data Services, New York Board 
  of Trade (NYBOT)...............................................    26
Loren E. Hillberg, Executive Vice President, General Counsel, on 
  behalf of the Macrovision Corporation..........................    28
Timothy Minor, Vice President of Government Relations, Cummins-
  allison Corporation............................................    30
Ted C. Fishman, Author, ``China, Inc., and How the Rise of the 
  Next Superpower Challenges America and the World''.............    33
Patrick A. Mulloy, Commissioner, U.S.-China Economic and Security 
  Review Commission..............................................    36

                     Alphabetical List of Witnesses

Burr, Gary:
    Testimony....................................................    24
    Prepared statement...........................................    61
Fishman, Ted C.:
    Testimony....................................................    33
    Prepared statement...........................................    93
Glickman, Hon. Dan:
    Testimony....................................................    20
    Prepared statement...........................................    53
Hillberg, Loren E.:
    Testimony....................................................    28
    Prepared statement...........................................    69
Minor, Timothy:
    Testimony....................................................    30
    Prepared statement by William J. Jones with attachments......    80
Mulloy, Commissioner Patrick A.:
    Testimony....................................................    36
    Prepared statement with attachments..........................   100
Sabo, Jack:
    Testimony....................................................    26
    Prepared statement...........................................    67

                                APPENDIX

Article from China Financial Times...............................    89
Article from The Korean Times....................................    92
Article from USA Today...........................................   111
Articles from The Wall Street Journal............................   113


                    ENSURING PROTECTION OF AMERICAN
                    INTELLECTUAL PROPERTY RIGHTS FOR
                      AMERICAN INDUSTRIES IN CHINA

                              ----------                              


                       MONDAY, NOVEMBER 21, 2005

                                       U.S. Senate,
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., at 
the John H. Mitchell Theater, The Museum of Television and 
Radio, 465 North Beverly Drive, Beverly Hills, California, Hon. 
Tom Coburn, Chairman of the Subcommittee, presiding.
    Present: Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The Subcommittee on Federal Financial 
Management, Government Information, and International Security 
will come to order.
    Thank you, each and every one of you, for being here.
    Today's Subcommittee field hearing will focus on the 
massive piracy of American intellectual property that persists 
in China.
    This is an official act of the Subcommittee on Homeland 
Security, and as such, your testimony, both will be made a part 
of the record, as well as it being recorded.
    The important thing is the information--what you have to 
say is gathered and made available to Congress. And so the 
purpose of having this hearing at this time is because how 
large this issue is in terms of how it confronts us both in 
terms of intellectual property, but also in terms of security, 
also in terms of the future of our country, also in terms of 
job loss versus job creation that has come about because of it.
    This is a field hearing as a follow-up to a previous 
hearing held by this Subcommittee this past June where the 
Subcommittee took a snapshot of the direction of the World 
Trade Organization (WTO) where we asked the question about how 
U.S. economic interests were being served and sovereignty 
protected.
    One of the key findings at our hearing was the severity of 
the intellectual property vandalism occurring in China against 
American entrepreneurs, innovators, artists, and consumers.
    That is why we wanted to take the next logical step and 
zoom in on the issues specifically, and what better location 
than here in the great State of California where major 
industries affected by intellectual piracy are located.
    Today we will hear firsthand accounts of companies and 
representatives of various sectors who are experiencing 
intellectual property theft in China.
    One of the reasons why I like to hold hearings outside of 
Washington is that sometimes the hearings are filled with a lot 
of dry government language. When something is as close to the 
pocketbooks of every American as today's topic is, it is 
important that we do not obfuscate that with inside-the-beltway 
jargon, and real language is used.
    Robbery from employers and industries, as represented here 
today, should resonate in the ears of American people because 
ultimately it is their money. Money spent on high prices for 
goods and services, jobs lost to foreign competitors, and lower 
profit margins for employers and everyday investors in these 
companies whose nest eggs do not grow as they should.
    The point cannot be emphasized enough that American jobs 
are at risk once China steals our American intellectual 
properties by copied American goods. The U.S. Congress 
estimates that counterfeit trade in China is worth from $19 
billion to $80 billion a year in terms of loss for us.
    When you apply the general rule of thumb that $1 billion in 
economic activity equals 12,000 to 14,000 jobs, that means we 
are talking anywhere from 240,000 to a million jobs a year that 
are being impacted, opportunities for Americans to earn, 
opportunities for the income and taxes off of that earnings, 
opportunities to create a future.
    The dictionary defines intellectual property as product of 
the intellect that has commercial value, including copyrighted 
product and property such as literary or artistic works, 
ideation of property such as patents, applications, origins, 
business methods, and industrial processes.
    Taking the intellectual property of every American citizen 
is the cornerstone of America's innovation and the success of 
our Nation's economy.
    American citizens must know that when they invest and 
dedicate their energy, resources, and creativity providing the 
product that has the potential to better and benefit our 
quality of life, their intellectual property rights (IPR) will 
be protected by our Nation's laws.
    And as our Nation engages with other nations in trade 
relations, it is the job of those of us in Washington to assure 
that our international commercial partners abide by and protect 
America's wallet on intellectual and property rights.
    The founding fathers rightly identified property rights as 
one of the fundamental rights upon which economic and cultural 
life of a Nation must be based.
    As Madison stated, the rights of persons and the rights of 
properties are the objects for the protection of which the 
government was instituted.
    For some time now the U.S. Government and its citizens have 
engaged with the struggle to stop China from stealing the 
intellectual property of American citizens.
    As the U.S. Chamber of Commerce stated in Congressional 
testimony before the House Judiciary Committee in May of this 
year, intellectual property rights violations in China now 
severely affect virtually all industries, from consumer and 
industrial goods, including medicines, autos, auto parts, food, 
beverages, cosmetics, to copyright works.
    As a result, on April 29, 2005, U.S. Trade Representative 
Nance, said that he had placed China on a special 301 Priority 
Watch List because of its failure to significantly improve 
intellectual property rights protection.
    And last month the Administration took an even stronger 
step forward when U.S. Government filed, through the WTO, an 
official request, Article 63, to have China explain in writing 
what changes it is making in its legal system to fix the 
problem of intellectual property rights theft, and also to 
inform the United States of how many cases of IPR theft have 
been filed by U.S. companies in China.
    China has until January of this next year to provide this 
information which could be helpful to the United States in 
building a case against China and the WTO.
    I have some doubts whether the WTO is strong enough to 
carry out the enforcement mechanism necessary to protect 
American rights.
    Various American companies have recorded over and over the 
struggles they are facing to have the Chinese government to 
take proper legal action to protect their intellectual property 
rights.
    A great example is the manufacturing company Zippo that 
produces lighters. I do not know if you've heard of this, but 
it was reported by Assistant Secretary of Commerce William Lash 
in his press conference on April 14.
    It was discovered during the raid in China that 40,000 
Zippo lighters had been counterfeited; however, because they 
valued these lighters at 0.5, 1.2 remedy or 1, 6 to 15 cents a 
piece, the case fell under the criminal threshold.
    Here's a company that has guaranteed for life its product 
that is made here in the United States. It is a high-quality 
product. They will repair it for the life of the product, and 
all of a sudden they find themselves flooded with products that 
do not work, that do not meet the standards, that have that 
name embossed on the bottom, with the trademark, an absolute 
complete copy, but yet the fine and the value of it fell below 
the threshold, so there is no consequences to copying.
    So, therefore, the Administration is to be commended for 
taking a step forward at WTO on such actions, but we have to do 
more.
    This problem is not going to go away. The U.S. trade 
deficit with China has grown significantly in recent years due 
largely to a surge of U.S. imports to Chinese goods relative to 
U.S. exports of China. That deficit rose from $30 billion in 
1994 to $162 billion in 2004 and estimated to exceed $200 
billion this year.
    As my good friend Ambassador Rob Portman, U.S. trade 
representative, stated in his confirmation testimony, part of 
that deficit is because the Chinese do not play by the rules.
    China is now the sixth largest market for U.S. exports and 
America's third largest retail trading partner overall. The 
U.S. trade deficit with China is now larger than that of any 
other trading partner.
    U.S.T.R. testified before Congress this past May that U.S. 
companies report billions of dollars in lost revenue, 
irreparable harm to the brands of future sales, all of which 
will ultimately affect U.S. workers to design and produce 
legitimate products forced to compete against the Chinese 
fakes.
    In 2002 the value of Chinese counterfeits seized before 
entering the U.S. markets rose from $194 million to $234 
million.
    And U.S. Customs and border protection estimates that 
counterfeit merchandise worldwide is responsible for the loss 
of at least 750,000 American jobs.
    The bottom line is American leaders in Washington need to 
get serious about how to handle this problem and take the 
necessary steps to put an end to it. America's jobs are at 
stake, and America's economy is at stake and is very 
vulnerable. So what do we do?
    We talked about the WTO in terms of China joining it and 
their obligations associated with it. They agreed to fully 
comply with the related aspects of intellectual property 
rights, agreement obligations known as the TRIPS obligations, 
but China has not kept its word in doing that.
    The Administration has filed a request to require 
information back from China on what it is doing to fix the 
problem. It will be incumbent upon the Administration to make 
sure China meets that deadline in 90 days and provide the 
required information in January when it is due.
    There is a great question to ask. It is what do we do if 
China does not meet the deadline? What should be the 
Administration's position?
    The Administration is going to have to make a decision 
based on the information it receives about whether or not to 
let the clock run. And the time has come for the United States 
to file against the Chinese government with the WTO.
    When we debated the decision to grant China permanent most-
favored Nation status, a prestigious designation, it means we 
trust you as a good faith trading partner. Some argued it was 
asking for trouble to get into a financial bed with a communist 
government that does not recognize individual rights. 
Individual rights are what property rights are based on.
    They also, of course, are what human rights are based on. 
And we all know China's deplorable record on that front.
    To my mind, it should come as no surprise that the 
communist Chinese regime has violated Americans' rights given 
that it does not even recognize its own citizens' rights.
    [The prepared statement of Senator Coburn follows:]

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    Senator Coburn. I want to thank our distinguished guests 
and witnesses for being here. I know many of you took time out 
of a busy schedule to do this. This is an important topic that 
the Congress has to face. We serve a function to be both a 
sounding board, but also an accountability board, to the 
Administration in carrying out the laws and treaties of this 
country and making sure we are protecting the future of this 
country.
    I would like to introduce our witnesses and ask them to 
testify. Each of your full written testimony will be made a 
part of the record. And if you could summarize that in 5 to 7 
minutes, and then we will spend some time with questions.
    I would love to have some bantering going back and forth 
between the panelists as well as some questions so that we 
could actually develop this up into what needs to be done, how 
it needs to be done, when it needs to be done, and what the 
consequences are.
    Our first witness is the Hon. Dan Glickman, who serves as 
chairman/CEO of the Motion Picture Association.
    As chairman and chief executive officer of the Motion 
Picture Association of America, Mr. Glickman represents the 
interests of the U.S. film and entertainment industry before 
the U.S. Government, as well as being the U.S. movie industry's 
emissary to foreign capitals and foreign moviemakers.
    MPAA's members are Metro-Goldwyn-Mayer Studios, NBC/
Universal, Paramount, Sony, Walt Disney, Twentieth Century Fox, 
and Warner Entertainment.
    MPAA members all employ hundreds of thousands of U.S. 
workers, entertain millions across the globe, and unique among 
U.S. industries, generate a positive trade balance in virtually 
every country in the world.
    Dan Glickman came to the Motion Picture Association of 
America following a long career of public service. Before 
taking on leadership of MPAA, Congressman Glickman led the 
Institute of Politics at Harvard University's J.F.K. School of 
Government.
    He served with distinguished distinction in President 
Clinton's Cabinet as Secretary of the Department of 
Agriculture. And prior to this, he served 18 years in the U.S. 
House of Representatives.
    Mr. Glickman, we welcome you, and the floor is yours.

TESTIMONY OF THE HON. DAN GLICKMAN,\1\ CHAIRMAN AND CEO, MOTION 
             PICTURE ASSOCIATION OF AMERICA (MPAA)

    Mr. Glickman. Thank you, Senator, very much.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Glickman appears in the Appendix 
on page 53.
---------------------------------------------------------------------------
    This is a very important hearing, I believe, to call 
attention to the Chinese authorities that you consider the 
theft of U.S. intellectual property to be a high priority.
    The President is just coming back from China where I 
believe he raised the issue. Governor Schwarzenegger is just 
coming back where he's raised the issue. I think this hearing 
is extremely important.
    Unless the Chinese government exercises the political will 
to address the rampant theft of U.S. intellectual property 
rights (IPR), all the tools that we have--effective 
enforcement, private sector initiatives, adequate laws--do not 
mean very much. This hearing keeps IPR high on the U.S./China 
agenda, demonstrating in an important forum to the Chinese 
government the priority that you place on this.
    First of all, in some sense the movie industry is the 
poster boy for this problem. You see that almost everybody who 
goes to China holds up that DVD they have bought on the 
streets.
    The problem is shared by all the industries represented 
here and many others, in many respects, we are kind of the 
physical manifestation of this problem.
    The source of the problem is twofold: First, China imposes 
strict limits on the number of foreign films that can be 
exhibited in its theaters on a revenue-sharing basis and 
applies burdensome regulations and confiscatory taxes on 
foreign home video and television content. This creates a 
market vacuum that pirates are only too happy to fill.
    Second, China has not asserted the political will necessary 
to reduce the level of piracy.
    Yes, it has conducted some raids and even put a few pirates 
in jail, but it has not materially reduced the level of piracy 
and the ready availability of pirated products in the shops and 
in the streets.
    Regrettably, to coin a phrase, if you did not see a 
counterfeit DVD, you were not in China. Unfortunately, I fear 
our collective perception of China has become so ingrained with 
the notion that China is overflowing with pirate DVDs, we 
frequently fail to appreciate the magnitude of the problem.
    The problem is ubiquitous--on virtually every street 
corner, packed to the shelves in audiovisual shops in every 
neighborhood. We estimate the piracy rate exceeds 90 percent, 
that is, over 90 percent of the DVDs sold in China are fake. 
More than nine of every ten DVDs in the Chinese market is a 
fake, stolen product.
    Too many see this as an American problem. Well, we do bear 
the disproportionate share of the burden, because of the scale 
and size of the American movie industry. But, movie piracy in 
China affects filmmakers all over the world, and it is 
beginning to affect Chinese filmmakers as well.
    It is clearly more than an American problem, and what we 
have to do is to convince the Chinese filmmakers, as well, that 
they have a stake in this issue.
    As we dig deeper into this problem, particularly the global 
spread of China-sourced pirated material, we are coming to a 
disturbing conclusion: There is a growing link between piracy 
of motion pictures and organized crime.
    Our Asia-Pacific Regional Office just completed a new study 
on these connections.
    With your permission, Mr. Chairman, I have included a copy 
of that study in my statement. I think it will be helpful for 
you as you build the record, but let me cite a couple of 
findings.
    Criminal theft of IPR dwarfs criminal revenues from 
narcotics trade: U.S. Government and international law 
enforcement records peg the illegal narcotics trade at $322 
billion last year; criminal revenues from all IPR theft were 
significantly higher, $512 billion.
    Part of the allure for organized crime to move into DVD 
piracy is the incredible profit margins, much higher than they 
are for drugs. The markup of pirated DVDs made in Asia and sold 
in Europe, for example, averages an astounding 1150 percent, 
three times the markup of heroin that is sourced in Asia and 
sold on the same street corners. And the criminal risk, as you 
pointed out, is far lower.
    The report cites two recent cases linked back to China with 
tentacles around the world, including into the United States.
    In September of this year, a Federal grand jury in New York 
indicted 39 individuals tied to a syndicate based in New York, 
but funneled much of its $1 million per year in earnings back 
to China.
    And an American was arrested in this case for leading this 
particular syndicate. When he was arrested, the Chinese 
authorities seized more than 210,000 DVDs in his possession.
    I think it goes without saying that many of these revenues 
finance other illegal activities in which these criminal 
organizations are involved. This is not just an American 
problem. It is not just a motion picture problem. It is now 
underwriting activities that threaten all walks of life.
    Our industry employs about 1 million American men and women 
directly and indirectly at all job levels. There seems to be a 
view, a myth, that buying a stolen DVD only means that a movie 
star earns a few dollars less on that movie.
    Let me be clear. The notion is just a myth. Every dollar 
the pirate earns is one less dollar going to an American 
worker, a worker employed in an industry that is one of the few 
in this country bringing much more money back to the United 
States in export earnings than it sends overseas.
    Chinese piracy of U.S. pictures also hits some of us 
personally. I was in China last May. I strolled the 
neighborhood across from my hotel and looked in one of the 
audiovisual stores. I admit I was not surprised to see all the 
DVDs that were there. Most of them were pirated. But one caught 
my eye. It was called ``The Hitchhiker's Guide to the Galaxy.''
    At the time the movie was not available on DVD in the 
United States, so I knew it was a fake, taking the money out of 
a U.S. filmmaker's pocket. And that filmmaker is my son. He is 
a producer, and that was his most recent film.
    I relayed the story to him, and he replied: ``And what, 
Dad, Mr. Chairman of the MPAA, are you going to do about this 
as well?''
    MPAA invests millions of dollars each year in fighting 
piracy. As I previously indicated, piracy in China is indeed a 
China problem, but it is also a problem with a global reach. A 
pirated disk made in China can, in a day or two, be on the 
streets in Los Angeles.
    Someone can illegally camcord a movie in Moscow, send the 
file by way of the Internet to someone in Guangzhou, who then 
dubs and subtitles the Russian dialogue and then presses 
thousands of DVDs.
    We fully appreciate the global reach of this problem, and 
we have aggressively pursued a strategy to stop the illegal 
camcording of movies, which is still the largest source of 
pirated product.
    We are very appreciative of the action Congress took to 
make illegal camcording a federal crime, and that the President 
signed the bill earlier this year.
    We seek to track the production of optical disks to make 
sure the plants are not making illegal discs. We are on the 
ground in China. Our representatives survey the market for 
information about the incidence of piracy, and in some cases 
this helps the Chinese authorities formulate raids on these 
sellers and distributors.
    We are also participating in training sessions for Chinese 
authorities and jurists on IPR laws and enforcement, something 
that we hope can produce some benefit as well.
    My statement talks to some of the other things that we have 
done with respect to a memorandum of understanding recently, 
but I wanted to give you some results of that.
    On October 25, we met with Chinese officials to review the 
results of a memorandum of understanding with the MPAA and 
various Chinese departments regarding market piracy.
    For our part we surveyed a small selection of shops in four 
cities: Beijing, Shanghai, Guangzhou, and Shenzhen. The surveys 
were by no means intended to provide a comprehensive assessment 
of any piracy, but what they showed is the following:
    In Shanghai our survey showed that of the films covered 
under the agreement, under the MOU, no pirate versions were 
available at all, at the time the shops were surveyed. A 
positive trend. I do not know how long it will last, but at 
least at the time we surveyed, it was positive.
    In Guangzhou the availability of pirated versions of the 
identified titles was down quite sharply from September, when 
almost all titles were available.
    In Shenzhen, availability of pirated titles fell 50 percent 
from September.
    And in Beijing, in August, with the exception of one shop 
that carried only 50 percent of the protected titles, pirated 
versions of the films still ran from 70 to 90 percent.
    So this MOU is an attempt to try to get the Chinese to 
involve themselves on some enforcement. There have been a 
limited number of successes, but, by and large, we are very 
disappointed with the results.
    Senator Coburn. Can you summarize for us?
    Mr. Glickman. OK. In any event, let me just mention a final 
thing in terms of how you can help.
    Having surveyed the scope of the problem, I would say the 
following:
    First, help make sure our government has the resources it 
needs. Not only do we need tough laws in the United States, 
such as the recent package from the Attorney General, we need 
people to enforce the laws, inspect imports, train foreign 
officials in IPR, and enforce international trade agreements.
    Some of this is going to take money, realizing the problems 
with the Federal budget deficit, but we've got to have 
enforcement authorities overseas.
    Second of all, why do we run a piracy problem at all? One 
of the reasons is because of these burdensome restrictions we 
have on doing business in China.
    We have a positive balance of payment surplus with every 
single country in the world that we sell movies to except one, 
and that one is China.
    The good news is that our movies made in China in 2004 
doubled the amount they made in 2003. The sobering news is that 
the amount was only $10 million. One American movie on an 
opening weekend makes more, as we saw from this last weekend, 
where we had successful operations.
    In recent years, in fact, two Chinese movies, ``Kung Fu 
Hustle'' and ``House of Flying Daggers,'' made more in the 
United States than all the U.S. movies made in China for the 
years they were released, and, ironically, both were 
distributed in the United States by our member companies here 
at MPAA.
    So these market barriers are critically important, and 
they're one of the reasons why we have so much piracy in China.
    At the same time, you can buy any movie in China that you 
want, including movies that were not allowed into the Chinese 
legally.
    So I would just finally say that what we need in this 
country is to continue our efforts to try to get the Chinese to 
enforce; the political will to move ahead if, in fact, they do 
not comply with the agreements; and to keep the pressure on.
    When the Chinese want to stop piracy, they can be 
enormously effective. They do not need 20 more years' 
experience with IPR. They have the resources, they have the 
basic statutes, and they can make the changes needed to improve 
them. They need the political will to protect our goods as 
effectively as they are protecting the Olympic logo.
    Thank you very much, Mr. Chairman.
    Senator Coburn. Thank you.
    Next we will hear from Nashville songwriter Gary Burr, who 
represents the Recording Industry Association of America.
    No stranger to the Nashville scene, Mr. Burr has penned 
numerous hit songs for an impressive roster or country artists, 
including Wynonna, Collin Raye, Doug Stone, Patty Loveless, and 
The Oak Ridge Boys.
    Gary Burr has been awarded ``Songwriter of the Year'' on 
three separate occasions by three separate organizations: 
Billboard, Nashville Songwriters Association International, and 
ASCAP. He has also received over 20 ASCAP recognition awards 
for radio play activity and CDs featuring his songs that have 
sold more than 50 million units worldwide.
    We welcome your statement, Mr. Burr. Please summarize, if 
you would, and your full statement will be made part of the 
record.

  TESTIMONY OF GARY BURR,\1\ NASHVILLE SONGWRITER, RECORDING 
             INDUSTRY ASSOCIATION OF AMERICA (RIAA)

    Mr. Burr. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Burr appears in the Appendix on 
page 61.
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    The last several years have been tough ones for my 
industry. The piracy of our music, physical, amd online--has 
been the major reason for this.
    In rough terms, the combination of growing global physical 
piracy, easy Internet piracy, illegal CD-burning--it has made 
us go down by 20 percent. There has been a 20 percent decline 
in our industry sales since 1999.
    The impact of the revenue crash has been profound in human 
and creative terms. There are hundreds of large and small 
record companies in the United States which contribute to 
America's culture, cultural diversity, and our Nation's 
economic welfare that have been severely affected.
    Successive rounds of job losses have occurred in the 
American record companies--the small and large ones. There have 
been additional losses with closing of thousands of retail 
stores.
    Yet the creative cost is even more troubling. Artist 
rosters have been slashed dramatically. Piracy robs the 
industry of the capital it needs to invest, and the result is 
fewer artists finding the financial support they need to put 
food on their table.
    American recordings are sold all over the world because--
I'm biased, but American music is the best.
    And the sales of this benefit everyone in the industry, and 
they add significantly to our Nation's trade balance and to our 
national welfare. And our Nation's welfare is reduced and our 
composers, artists, and all the employees of record companies, 
small and large, suffer when foreign governments permit our 
recordings to be pirated in their countries.
    When it comes to ripping off American sound recordings, 
China is one of the worst. The magnitude of record piracy there 
eclipses any other country. This has been a point of conflict 
between our countries for years.
    I understand that China has taken steps to improve its laws 
against copyright piracy. But China runs a few raids and it 
seizes lots of products, yet the problem remains as bad as 
ever.
    Mass quantities of pirated Chinese CDs are found all over 
China, and all over the world, in large part because realistic, 
meaningful penalties are never imposed by the Chinese 
government on the pirate producers.
    The challenge for us as Americans is to get China to impose 
penalties on large-scale pirating and to truly discourage such 
piracy. Unless and until they do, not much is likely to change.
    Our own government is pressing China hard on this--that 
isn't the problem--But China isn't responding. I think we need 
to use all the tools available to get this problem solved.
    I have no idea--I'm a songwriter. I have no idea what those 
tools are, but if the tools are out there, we really need to 
use them.
    I also want to say a word about Russia, which is fast 
becoming the next China when it comes to the blatant piracy of 
our products.
    Sound recording pirates in Russia are producing far more 
sound recordings than are needed for legitimate demand and 
exploiting them all over the world, ruining our industry's 
market inside and outside Russia. In addition, Russia is 
tolerating one of the world's worst online music pirates, an 
entity named ``allofmp3.com.'' Nice name.
    But we have a unique opportunity with Russia. They hope to 
join the World Trade Organization. And the U.S. Government 
should not agree to this until Russia effectively addresses 
these problems. I urge Congress to insist on this.
    The U.S. Government must press China and Russia harder to 
strengthen their antipiracy enforcement regimes. The current 
systems in these countries do not work. Unless the United 
States uses each and every option available to it, we will 
continue to face the same situation we do today for the 
foreseeable future: Overwhelmingly pirate markets and lost 
opportunities for legitimate U.S. companies.
    Thank you, Mr. Chairman.
    Senator Coburn. Thank you, Mr. Burr.
    Next I would like to introduce Jack Sabo. He serves as vice 
president of Market Data at the New York Board of Trade. As 
vice president of Market Data Services, he is responsible for 
Market Data revenue at the New York Board of Trade. The 
function entails technology, finance, education, antipiracy, 
and marketing.
    The New York Board of Trade is New York's original futures 
exchange where the world trades futures in coffee, sugar, 
cocoa, orange juice, cotton, and certain financial products.
    He currently serves on the board of the Software and 
Information Industry Association, is on the executive council 
of that board, the Financial Information Services Division, 
where he's cochairman of the Governance Advisory Committee and 
Chairman of the Redistribution Advisory Committee.
    We welcome your statement, Mr. Sabo.

  TESTIMONY OF JACK SABO,\1\ VICE PRESIDENT, MARKET DATA, NEW 
                      YORK BOARD OF TRADE

    Mr. Sabo. Thank you, Chairman Coburn. Good morning, 
everybody.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sabo appears in the Appendix on 
page 67.
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    Chairman Coburn, I appreciate the opportunity to appear 
before you today to discuss the challenges faced by the U.S. 
financial community and, in particular, the New York Board of 
Trade. This problem is due to piracy of realtime market data in 
China.
    While the issue of piracy in China is often dominated by 
high-profile industries, such as motion pictures, recording, 
and software and publishing, Chinese piracy also affects the 
financial industry by robbing exchanges of fees from the sales 
of market data and by robbing customers from licensed market 
data vendors, such as Bloomberg, e-Signal, Reuters, and others.
    Revenue from market data can be as much as 25 percent of 
total exchange revenues. This market data that is provided by 
our derivative exchanges is vital information used by the 
global financial industry.
    It includes brokerage houses, banks, fund managers, 
farmers, brokers of cotton, coffee, sugar, cattle, corn, orange 
juice, and many more.
    As Senator Coburn mentioned, New York Board of Trade, 
commonly referred to as NYBOT, is an old part of the financial 
community.
    In its pits on the trading floor, traders scream, yell, 
wave their hands, and jostle one another all for one reason: To 
get the best possible price for their customers.
    Like many businesses, NYBOT has gone through some tough 
times. On September 11 its facility at 4 World Trade Center was 
destroyed and some of our people were killed.
    At the time it appeared that our entire business, our 
entire franchise was destroyed, but, fortunately, we are in the 
risk management business, and as a result of the 1993 bombing 
of the World Trade Center, we had built a backup trading 
facility.
    No one could have anticipated how much we would need it. We 
worked out of that limited facility for 2 years.
    Now we have returned to lower Manhattan in an expanded 
state-of-the-art facility with 13,000 square feet packed with 
screaming traders.
    I do not know if any of you have ever visited NYBOT's 
trading floor, but if you have not, please call me sometime and 
come visit. It is a unique experience, and you will love it.
    More than 2 years ago, we discovered a Chinese firm very 
well known in Beijing that was offering realtime market data of 
the world's derivative exchanges on their Web site. To test it, 
we subscribed. The subscription for all those exchanges should 
have cost somewhere around $10,000 per month. We paid $600 for 
an entire year.
    This firm is not a licensed vendor and, to my knowledge, 
does not remit any revenue to exchanges, certainly none to 
NYBOT.
    If something like this were to happen in the United States 
or even in Europe, we would know how to stop it immediately. 
However, we had no clue how to proceed in China.
    Now, we are members of the Software & Information Industry 
Association called SIIA, so we gave them a call and asked them 
to help. On our behalf, SIIA tried to contact the chairman of 
the offending firm and asked that the company cease and desist 
from their infringing activities. To date, there has been no 
response from the firm, and still any individual from anywhere 
in the world can today still subscribe at well below market 
rates.
    Even as we have pursued and continue to pursue our own 
efforts to stop this piracy, we have appreciated the 
willingness of the U.S. Government to hear our concerns and 
work with us to put this on their agenda.
    NYBOT is especially appreciative that Commissioner Sharon 
Brown-Hruska of the Commodity Futures Trading Commission has 
helped her government colleagues to understand the importance 
of the market data industry to our economy and explain some of 
the technical issues surrounding our operations.
    With SIIA we have had constructive meetings with the Office 
of the U.S. Trade Representative who understands the issues and 
is working with us to raise them with their Chinese 
counterparts.
    Right now the Web site is only in Chinese, but the 
company's chairman and CEO, ironically, got his graduate degree 
here in the United States, and we are very concerned that the 
Web site will soon be translated into English. If that happens 
I believe it will cause us to lose even more revenue.
    Chairman Coburn, as you and your colleagues in the U.S. 
Government work to improve the environment for conducting 
business in China, we ask that the challenges facing the market 
data industry remain an important part of the agenda.
    It is our hope that with your help, sometime in the near 
future the Chinese government will take concrete steps to 
prevent entities from illegally obtaining and selling U.S. 
exchanges' proprietary Market Data.
    I greatly appreciate this opportunity to appear before you 
today and would be glad to answer any questions you might have 
later.
    Senator Coburn. Thank you very much, Mr. Sabo.
    Next we will hear from Loren Hillberg, who serves as 
general counsel for the software company Macrovision. Mr. 
Hillberg handles all corporate legal matters for Macrovision.
    Prior to joining this company, Mr. Hillberg served as vice 
president and general counsel of Macromedia. And prior to that, 
Mr. Hillberg served as vice president and general counsel for 
Micro Focus Group U.K., a U.K.-based provider of enterprise 
software tools.
    Mr. Hillberg, thank you very much. Your entire statement 
has been made a part of the record, and if you would summarize 
that in 5 minutes, I appreciate that.

 TESTIMONY OF LOREN HILLBERG,\1\ GENERAL COUNSEL, MACROVISION 
                          CORPORATION

    Mr. Hillberg. Thank you, Chairman, Mr. Coburn.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hillberg appears in the Appendix 
on page 69.
---------------------------------------------------------------------------
    I appreciate the opportunity to testify before you today on 
very significant piracy problems affecting the U.S. software 
and information technologies companies in China.
    Macrovision is the world's leading supplier of digital 
distribution commerce and consumption solutions for software 
and entertainment content. Our media software and network-based 
solutions deliver protection and enablement capabilities to the 
home video, PC games, music, cable satellite, consumer 
software, and enterprise software industries.
    Macrovision has delivered, installed, and managed software 
on over 500 million desktops. It serves all 1,000 of the 
Fortune 1000 companies and has enabled over 10 billion units of 
packaged media, 5 billion DVDs, a half billion CDs, and 300 
million online games.
    Macrovision is also a member of the Software & Information 
Industry Association.
    Macrovision holds a total of 220 issued or pending United 
States patents and 1,200 issued or pending international 
patents and continues to increase its patent portfolio with new 
and innovative technologies in related fields.
    In addition, and perhaps more relevant to this hearing, in 
China, Macrovision has 35 issued patents and another 25 
applications pending. We also have registered or pending 
registrations for 10 trademarks and numerous copyrights.
    As a company, we have been active in our efforts to 
preserve our intellectual property rights in China. 
Unfortunately, while the Chinese government has established 
portions of an infrastructure for intellectual property 
protection, they have not so far provided a critical element of 
that infrastructure: A clear and reliable enforcement process.
    In order for the software industry to effectively protect 
and invest in China, this notable failure must be rectified.
    The proliferation of computers, internal computer networks, 
and the Internet has made illegal reproduction and distribution 
of protected material much easier to accomplish and more 
difficult for software companies to police.
    Macrovision, as a software provider that protects the 
copyrights of media companies, is uniquely negatively impacted 
by the lack of the Chinese enforcement efforts. Our ability to 
provide effective solutions to our customers depends both on 
our technology and the ability to police the misuse of our 
technology in the marketplace.
    The Chinese government is to be applauded for its efforts 
to join the world community respecting intellectual property 
over the past 10 years. Unfortunately, they have fallen down 
with respect to the most important aspect of such protection, 
and that is enforcement.
    There have been initial efforts to address the piracy of 
intellectual property. Unfortunately, the appropriation of 
intellectual property in China has occurred on such a massive 
scale that these small initial steps are simply not sufficient 
to address the impacted international businesses.
    Core technologies across the array of the information and 
communications industries have been copied in China without 
impunity.
    Further, notwithstanding the commitment of China's leaders 
to require all governmental branches and agencies to use 
legally licensed software, the lack of compliance even within 
the government sector continues to be significant.
    Closely related to these troubling intellectual property 
policies is the regulatory framework emerging around the 
development of tactical standards requiring the use of 
intellectual property in China standards and competition 
policies. These are commercial terms under which U.S. companies 
are unwilling to play.
    What needs to be done?
    The framework for success has a foundation. The outcomes of 
the Joint Commission on Commerce and Trade announced in July 
2005 offer real opportunities for improvement, but only if the 
Chinese government plays the important role that it must.
    A few of the important commitments intended to address U.S. 
concerns with respect to intellectual property include 
increasing criminal prosecution, reducing the exports of 
infringing goods, improving national police coordination, 
enhancing coordination across all law enforcement authorities, 
ensuring the use of legal software in the state-owned sector, 
and fighting software and end-user piracy.
    What further steps are required?
    The first and most important is a significant increase in 
enforcement resources. This year the Ministry of Public 
Security in China has increased somewhat its enforcement, but 
much more needs to be done to move intellectual property into 
the realm of law enforcement rather than leaving it solely 
within the purview of administrative agencies.
    Legal authorities are now better armed with guidance that 
enables them to prosecute more cases of intellectual property 
infringement. Now the cases need to be pursued. In a country 
where in a single year more than 150 million pirated DVDs are 
confiscated, 52,000 trademark violations are prosecuted, an 
average of less than 600 arrests is simply inadequate.
    Another area of importance is anti-circumvention 
legislation. A critical element enabling the U.S. content 
profession are the circumvention provisions of the DMCA, the 
Digital Millennium Copyright Act.
    Through the TRIPS process, China has agreed to implement 
similar legislation in this area. Until these laws are fully in 
place and provide a meaningful enforcement avenue for rights 
holders, piracy will remain a rampant problem.
    In summary, China has made great strides over many years. 
Nonetheless, for an effective intellectual property protection 
system to exist, the most important aspects of the system are 
the need to allow the enablement to actually enforce the rights 
that are protected by the system. China needs to do much more 
to meet these obligations.
    Thank you, Senator.
    Senator Coburn. Thank you.
    Next we will hear from Timothy Minor, who serves as vice 
president of government relations for Cummins-Allison 
Corporation.
    Mr. Minor was gracious enough to fill in for the chief 
executive officer at Cummins-Allison, Bill Jones, who at the 
last minute had to cancel his plans here.
    Cummins-Allison Corporation is an office equipment and 
security products manufacturer and currency protector founded 
in Chicago in 1887. The founding families were prominent 
families from Iowa and Indiana respectively at the turn of the 
century.
    B.F. Cummins, the first president of Cummins-Allison, grew 
up in the State of Iowa. B.F. Cummins' eldest brother, Albert 
Baird Cummins, served as governor of Iowa from 1902 to 1908, 
elected to the U.S. Senate, and served as Senator from 1908 to 
1926.
    Senator Cummins served as president pro tem of the Senate 
during the 66th through the 69th Congress. Albert B. Cummins 
was a member of the progressive wing of the Republican Party 
and thus was closely aligned with Theodore Roosevelt regarding 
the legislation reform of the railroads and other powerful 
trusts and business interests.
    Mr. Minor, welcome. Thank you for filling in for Mr. Jones. 
And your entire statement--his entire statement has been made a 
part of the record.
    And if you would summarize.

  TESTIMONY OF TIMOTHY MINOR,\1\ VICE PRESIDENT OF GOVERNMENT 
             RELATIONS, CUMMINS-ALLISON CORPORATION

    Mr. Minor. Thank you, Mr. Chairman. Good morning, fellow 
members of the panel, other attendees here today. My name is 
Tim Minor. I'm vice president of government relations for the 
Cummins-Allison Corporation, which is a privately held 
manufacturing company headquartered in the Chicago area.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Jones submitted by Mr. Minor with 
attachments appears in the Appendix on page 80.
---------------------------------------------------------------------------
    Originally William Jones, chairman and my boss at Cummins-
Allison, was invited and was scheduled to participate in this 
hearing. It is quite ironic that a patent infringement suit 
against one of our Japanese competitors is finally coming to 
trial and forced him to remain in Chicago today.
    Mr. Chairman, Mr. Jones asked that I extend his apologies 
to you. He very much wanted to be here and participate in the 
hearing, commends you for addressing these critical issues 
associated with the theft of intellectual property.
    We thank you for the invitation to participate in this 
important hearing on the protection of intellectual property of 
American industries. Your work is crucial to the identification 
and implementation of meaningful--and I highlight 
``meaningful''--solutions to the expensive and debilitating 
problems associated with intellectual property theft by foreign 
governments and businesses.
    Cummins-Allison was founded in 1887 by the Cummins and 
Allison families. Today Cummins-Allison is the last American-
owned manufacturer of currency-processing equipment.
    Our products scan, sort, denominate, and authenticate U.S. 
currency as well as many foreign currencies.
    Cummins' currency-processing products are utilized by 
banks, retailers, governments, armored carriers, and casinos. 
The high-speed processing and counterfeit detection 
capabilities of our products help to protect the integrity of 
the dollar as a world reserve currency. This is critical to our 
Nation's economy and security.
    The theft and utilization of America's intellectual 
property by foreign manufacturers and nations is only one 
component of an ineffective American trade policy. The U.S. 
trade deficit with China will likely top $200 billion this 
year, a clear indication that our policies are not working.
    Beijing manipulates its currency to gain commercial value 
without consequence. Its manufacturers dump products into the 
United States without retribution.
    The export of industrial and innovative capabilities to 
China, along with the theft of intellectual property, has done 
grievous damage to the U.S. economy.
    When U.S. companies lose business to Chinese rivals or need 
to cut costs to the bone as their margins shrink, jobs are 
displaced, wages fall, taxable income vanishes, vital public 
revenue streams decline, and resources for new investment in 
research and development diminishes.
    As far as Cummins is concerned, unlike our foreign 
counterparts, our American Government provides us with no 
industry support or protection. The Chinese government, on the 
other hand, has declared that currency and currency processing 
are matters of national security.
    Therefore, even after their entry into the WTO, tariffs of 
38 percent to 40 percent continue to be assessed by the Chinese 
government on Cummins-Allison products exported to China.
    Compounding the problem, Cummins has no practical or 
effective means to protect our patents or intellectual property 
rights in China. As a result, China's currency-processing 
industry can and does copy Cummins technology with impunity.
    Another trade barrier and threat to our intellectual 
property is a suit called the CCC safety certification, which 
was recently implemented by the Chinese government. China 
requires foreign manufacturers to apply for and secure CCC 
certification for every imported electronic component or 
product.
    In order to receive a CCC certification, Cummins would have 
to agree to let the Chinese government officials annually tour 
and inspect our facilities here in the United States and pay 
for all of their travel expenses.
    In addition, they want full access to the engineering 
drawings and the design schematics for our products. They also 
require that we ship the finished product, intellectual 
property and all, to China for their evaluation.
    Clearly, it is not in the best interest of our national 
security to provide Chinese government officials with access to 
Cummins product design and production especially when these 
technologies protect the integrity of U.S. currency and help to 
identify sophisticated counterfeit money.
    As a result of trade barriers and potential loss of 
intellectual property, Cummins has chosen to withdraw from the 
Chinese market. Given the high tariffs, the government 
intervention, and the new so-called safety requirements, we 
have decided it is not practical or profitable for Cummins to 
export to China and risk compromising or losing our 
intellectual property.
    Of course, fewer Cummins product sales resulting from the 
abandoned Chinese market translates into fewer research and 
development resources and jobs here in the United States.
    Senator Coburn. Can you summarize for us?
    Mr. Minor. Sure.
    For some time we have seen excellent counterfeits of 
American currency coming out of North Korea circulating around 
China and into South America and the Middle East. One of these 
pieces of currency that you're looking at, Mr. Chairman, is 
counterfeit; one is not.
    Senator Coburn. I can't tell the difference.
      r. Minor. It is indeed a national security issue for the 
United States when foreign governments collaborate to produce 
and circulate excellent counterfeit U.S. currency. America, in 
fact, has a serious problem, as was confirmed in the recent 
story of ``The Korea Times.''\1\
---------------------------------------------------------------------------
    \1\ The article from the Korean Times appears in the Appendix on 
page 92.
---------------------------------------------------------------------------
    Currency counterfeiting also creates potential security 
risk through the illicit financing of terrorist activities. As 
terrorist-funding resources have been eradicated, there is 
increased likelihood that terrorists will turn to 
counterfeiting as a means to purchase technologies and attain 
future objectives.
    In short, counterfeiting and theft of intellectual property 
are very serious problems which threaten our economy, quality 
of life, and national security.
    As a last remaining American-owned manufacturer of 
currency-processing equipment, Cummins-Allison believes that 
the United States lacks a complete, coordinated currency 
protection policy, which should be an important component of 
our national security.
    We encourage Congress and the Executive Branch to develop 
and coordinate a substantive U.S. currency protection program 
which, in part, recognizes the importance of protecting 
America's intellectual property in the currency-processing 
industry.
    Thank you, Mr. Chairman.
    Senator Coburn. Thank you.
    I can't tell the difference.
    Our next witness is Dr. Ted Fishman. Ted C. Fishman's best-
selling book ``China, Inc., and How the Rise of the Next 
Superpower Challenges America and the World,'' has helped 
describe for the world the effects of China's momentous change 
on the lives and businesses of people everywhere.
    In addition to its success in America, the book, translated 
and published in 21 languages, is an international bestseller. 
In 2006 it will appear in Chinese editions in both The People's 
Republic and Taiwan.
    Mr. Fishman has testified before Congressional committees 
and commissions, and consults on China with a wide range of 
government officials, including some of the Nation's most 
influential officeholders.
    His essays and reports appear in many of the world's most 
prominent journals, including The New York Times Magazine, 
Harper's, Esquire, U.S.A. Today, GQ, The Times of London, and 
others.
    Mr. Fishman, welcome. I have read both of your books. I 
appreciate you being here. And please try to keep your comments 
to 5 minutes.

TESTIMONY OF TED FISHMAN,\1\ ARTHOR, ``CHINA, INC., AND HOW THE 
RISE OF THE NEXT SUPERPOWER CHALLENGES AMERICA AND THE WORLD,''

    Mr. Fishman. Thank you very much. I'm glad to be here. I'm 
so frightened from Mr. Minor's remarks, I do not know if I can 
speak. It was really chilling.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Fishman appears in the Appendix 
on page 93.
---------------------------------------------------------------------------
    I'm going to speak off of my testimony. You have my 
testimony for the record, but I'm just going to speak based on 
what I've heard and some notes I made from reading a news 
article last night and today.
    As you know, Mr. Chairman, I have a strong conviction that 
this is the most important issue facing our trade with China. 
And it is one of the most important issues facing the vitality 
of the American economy, not only because we lose sales, but 
because we lose vitality out of our economy.
    And it affects everything up and down the architecture and 
contours of our economy, every decision from where a company 
invests to how a university student plans his future, whether 
he wants to be an engineer and produce world-leading knowledge 
products, or whether that kind of enterprise is threatened by 
China's theft of our intellectual property.
    And it strikes me that California is a particularly 
important place for this hearing, not only because it is the 
home of the entertainment industry, but it is also the home of 
high-tech industries, biotech, software that serves the service 
industries, and also the home of the greatest entrepreneurial 
boom, one of the greatest entrepreneurial booms in American 
history.
    As you know, entrepreneurs begin their businesses because 
they have a new idea, and they aren't just mom-and-pop ideas. 
Sometimes they're world-class ideas. When those ideas are 
threatened, entrepreneurship, which is an engine of our 
economy, is also threatened.
    We have made a bargain in this country which is that we are 
willing to shed low-cost manufacturing to other countries, cut 
and sews, simple assembly manufacturings, if we can move up the 
economic feeding chain into higher-value knowledge goods, but 
when those knowledge goods are threatened and when the world's 
fastest-growing economy provides no market for those goods 
because those goods are--simply migrate there at no cost, then 
this bargain that we have made with our own people is not 
working.
    Instead, we just lose the low-end jobs, and we threaten the 
high-end jobs.
    It is one thing to talk about the consumer in China as the 
beneficiary of a regime that does not police intellectual 
piracy--intellectual property, the piracy of intellectual 
property.
    But I would encourage us all to think about what Mr. Minor 
said and maybe even broaden it to the shop floor in the United 
States and how China's intellectual property regime threatens 
the shop floor of the United States.
    If you look at consumer software, consumer entertainment, 
they end up in the hands of an end user, but if you look at the 
means of production that are pirated inside China, they end up 
on shop floors and in factories. And one of the highest costs 
for American companies competing in the world market is the 
technology cost.
    Often we can compete with low-cost labor around the world, 
like automating our factories. And we do this by making better 
and better investments in better and better technology. And a 
technology cost for an American company is often among its 
highest cost that it pays, but for a Chinese company, it is 
among the lowest cost that it pays because it does not pay 
them.
    So when you go to an American factory, particularly the 
kinds of factories I'm familiar with and Mr. Minor must be 
familiar with in the Midwest, you go into a bread and butter 
manufacturing company, whether they are forging or injection-
molding or creating any kind of product that goes into the 80 
percent of American industry which provides parts for American 
industry, you are likely to see a row of CAD/CAM machines, all 
other kinds of sophisticated software, other machines on the 
shop floor. What you won't see is a lot of people on the shop 
floor.
    But these machines, these CAD/CAM machines, can cost 
$60,000 to $100,000 a year in license fees. It can cost 
millions of dollars for a company that is not that big, and yet 
these companies must compete with Chinese competitors who pay 
nothing for that. We can compete against the low-cost labor, 
but we can't compete away the technology costs because American 
companies pay full bore for that.
    Another issue I wanted to stress in listening to the other 
panelists was how are Americans partnered in the piracy that 
goes on in China? And why our role as partner in the piracy 
also puts us in a unique role as a problem-solver for Chinese 
piracy.
    One thing we shouldn't overlook is we benefit from the low 
cost of Chinese goods. I think it would be very hard to find a 
Chinese factory which was not running on pirated software, 
reverse-engineered machinery.
    Chinese research institutes exist, in essence, to reverse-
engineer the world's leading technology, and yet about one in 
six dollars of the Chinese GDP cycles through the United 
States. That is the size of our trade deficit with China.
    And we benefit from the low cost that comes out of these 
factories that use this pirated and reverse-engineered 
technology, and yet we do not police the factories.
    Often the legitimate goods that arrive on our shores look 
legitimate when they get here, but the environment they come 
out of is wholly illegitimate.
    There is an interesting case that is been covered by the 
papers lately about a Chinese-born American businessman who 
owes half a billion dollars to a Chinese television company 
presumably for not paying the license fees for DVD players.
    Well, those DVD players came at steeply cut prices into 
America's big-box retailers for Thanksgiving specials, for 
Christmas specials. Nobody asked at those retailers, how are 
you selling DVD players for $30 when a license fee on a DVD 
chip costs about $14?
    In a way there is a wink and a nudge that comes from the 
American buyer into the Chinese marketplace who bring those 
products here, and we have to think about that.
    And with due respect to Mr. Glickman, while we complain 
about pirated DVDs, we might also raise a flag on the DVD 
player market also, which is part of the issue.
    It is interesting to look at when the United States 
tolerates and does not tolerate piracy. All poor countries are 
forced to pirate in some degree. They simply can't afford the 
drugs, the entertainment, and the means of production that they 
need to bootstrap themselves up. And we have benefited from the 
growth of China's economy. But now we are at an inflexion point 
where we have to think anew about it and say, how are we 
creating these massive competitors?
    And one thing I would propose is that we think deeply about 
creating an economic incentive about how--why China should stop 
piracy rather than a police incentive. And we might think about 
how American companies can reach back into the Chinese 
workplace, look to see whether the workplace itself is 
legitimate, and if it is not, do not allow those goods inside 
the country.
    Create the kind of certification regime that exists against 
child labor, that exists against rain forest lumber, that 
exists against environmental degradation. These are effective 
enforcement regimes that exist around the world, and it is 
something that we can benefit from.
    Thank you, Mr. Chairman.
    Senator Coburn. Thank you.
    Our next witness is Commissioner Patrick Mulloy. He was 
reappointed to the U.S.-China Economic and Security Review 
Commission on March 25, 2003, by Senate Democratic Leader Tom 
Daschle, to a 2-year term expiring on December 31, 2006.
    Commissioner Mulloy previously served as a member from 
April 1, 2001, to January 7, 2003.
    United States-China Economic and Security Review Commission 
is a bipartisan commission established by Congress in the year 
2000 to investigate, analyze, and provide recommendations to 
Congress on the economic and national security implications of 
the U.S.-China relationship.
    And recently, just 2 weeks ago, it released its 2005 Annual 
Report to Congress.
    Prior to assuming his current responsibilities, 
Commissioner Mulloy was nominated by President Clinton and 
confirmed by the U.S. Senate as Assistant Secretary for Market 
Access and Compliance in the Department of Commerce's 
International Trade Administration where he served from 1998 to 
2001.
    In that position he directed a trade policy unit for over 
200 international trade specialists which focused worldwide on 
removing foreign barriers to U.S. exports and on ensuring that 
foreign countries comply with trade agreements negotiated with 
the United States.
    Commissioner Mulloy, welcome. And if you would, limit your 
comments to 5 minutes. Your complete testimony will be made a 
part of the record.

    TESTIMONY OF COMMISSIONER PATRICK MULLOY,\1\ U.S.-CHINA 
            ECONOMIC AND SECURITY REVIEW COMMISSION

    Mr. Mulloy. Thank you, Mr. Chairman, for having this 
hearing on this most important issue.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Mulloy with attachments appears 
in the Appendix on page 100.
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    I want to just use my time to briefly highlight a few key 
points about China's continued violations of the obligations it 
assumed when it joined the WTO.
    China is enjoying enormous economic benefits from being in 
the WTO. The United States permanently gives most-favored 
nations tariffs to China. If you do not have most-favored 
nations tariffs, goods coming from China would face about a 40 
percent tariff coming into our market.
    Because they have M.F.N., which we have now locked in place 
through their WTO entry, their average tariff coming into the 
United States is about 2.5 percent. This does not mean that 
U.S. goods going to China have a 2.5 percent tariff. We 
bargained too. I think their average tariff on our goods going 
to China is about 10.5 percent. So there is a discrepancy. But 
that is the agreement that was made when they joined the WTO 
and we are living up to it.
    But what we did, we wanted them to sign on to the WTO TRIPS 
agreement, the Trade Related Intellectual Property Rights 
Protection. That was one of the reasons we wanted them in the 
WTO.
    Prior to them coming into the WTO, we could have used 
Section 301 of our trade laws to limit their exports of goods 
into our market if they continued to violate their copyrights 
and patents of our companies in China.
    We gave away that leverage when we got them in the WTO. We 
can no longer unilaterally use Section 301 to force them to 
live up to their obligations.
    Our only option now is to take them into WTO dispute 
settlement if we want to stay within the system that we have 
signed up to.
    So that is an enormous gift that we gave to the Chinese.
    Mr. Chairman, you talked about the enormous trade deficit 
that we have with China. Let us just look at this.
    Last year, 2004, our total trade with China was $231 
billion, $197 billion of that was imports coming from China 
into this country. We had about $35 billion going off to China. 
That is an enormous discrepancy, and this year it is going to 
be much larger. Our trade deficit with China is going to be 
over $200 billion.
    Now, it is not just T-shirts and it is not just tennis 
shoes. We are running an increasingly large trade deficit in 
advanced technology products as defined by our own Commerce 
Department. Last year, 2004, our trade deficit with China in 
advanced technology products was $36 billion. This year it will 
be over $40 billion, I assure you.
    From 1990 to the end of 2005, our total trade deficit with 
China is over a trillion dollars. The Chinese now have about 
$700 billion of U.S. dollar assets which they can now directly 
invest in our Treasury bills as part of their scheme to keep 
their currency undervalued, but it also gives them enormous 
leverage over American interest rates.
    So that is something. If we do not turn this situation 
around, we will, as the old Tennessee Ernie Ford song goes, be 
another day older and deeper in debt.
    Now, what can we do?
    Oh, there are two things that you have to think about.
    We want to try and get them to enforce intellectual 
property protection for our companies doing business in China. 
We can't enforce our laws in China. The TRIPS agreement 
requires them to put the laws on the books and to enforce them, 
including criminal penalties. That is what the TRIPS calls for.
    But what we can do, we can police our own borders and our 
own market and stop those counterfeit goods from coming into 
our market.
    Two-thirds of the counterfeit products in the world market 
are of Chinese origin.
    That means we will have counterfeit medicines coming into 
this country, counterfeit parts for automobiles, maybe even, 
God forbid, counterfeit parts for airlines. This is an enormous 
health and safety hazard to the American people, and this is an 
area that we really should beef up tremendously.
    Now, you heard the different industries, the entertainment 
industry, the software industry. It is not just them, though. 
It is our manufacturing firms whose patents is being ripped off 
as well.
    Now, can the Chinese really enforce these laws? Let me put 
into the record, Mr. Chairman, an article that appeared in The 
Washington Post on November 4.\1\ The Chinese have this Olympic 
logo that they make money from. They enforce those laws. There 
is not a lot of pirating of their Olympic logo.
---------------------------------------------------------------------------
    \1\ The article from The Wall Street Journal appears in the 
Appendix on page 112.
---------------------------------------------------------------------------
    They can do it if they want to do it, but they do not want 
to do it. Why? Because there is no economic incentive.
    We should give them an economic incentive by, one, keeping 
those goods out of our market and, two, bringing a WTO case and 
getting the right to put tariffs on selected products from 
China. If we win a case, we would then show how much damage 
their violations caused, and then we would have a right to put 
tariffs on that amount of goods coming from China into our 
market.
    And we would select which goods we could put the tariff on 
to get the most leverage on them. I think it is a no-brainer 
that we have to go ahead and bring a WTO case against them.
    Now, let me tell you one of the problems with that. USTR 
and others, they love this WTO so much that they're afraid that 
if they bring a case and do not win it, it will show that the 
WTO does not work.
    Well, for me, my view is bring the case. If it does not 
work, then we have to do something else because we cannot let 
this situation continue.
    I would just note that today there was a report on 
President Bush's and Secretary Rice's visit to China. We have 
been after this issue for 15 years negotiating with the Chinese 
on WIPR violations. Here's what the U.S.A. Today quotes:
    ``Secretary Rice, Mr. Hu promised to do more to end piracy 
of U.S. movies, music, and other products. Secretary Rice said 
the discussion on intellectual property rights was, `much more 
detailed, much more specific than previous talks.' ''
    I guarantee you, if we do not bring a case and we do not 
get some leverage on these guys, people will go over there 
another year from now and they will have the same discussion.
    Finally, Mr. Chairman, when Mr. Portman, your former 
colleague, finally began to use the WTO mechanism and filed 
that Article 63 request for information about what their 
enforcement activities are, here is the way The Wall Street 
Journal reported that, and this is what really makes you 
wonder.
    ``In a move expected to ratchet up tensions with China . . 
.''
    Why should that ratchet up tensions with China? We are 
asking China to live up to agreements that it assumed as part 
of its WTO commitment. This is an organization that gives them 
enormous benefits, as we just went through, in terms of their 
access to our market. We should not let our media and people 
who want to keep this situation--many of our companies are 
making enormous amounts of money--beginning to make money in 
China by making things in China and shipping them back here.
    But we can not let them run our policy toward China. 
Because if you look at the size of these deficits, you know 
what it is doing to our overall economy. Ted Fishman went 
through that, what that does, and some of these other folks as 
well.
    So we have to get very tough and focused on this issue, Mr. 
Chairman. And it is not just IPR. It is exchange rates. It is 
subsidies. We tried to go into this, Mr. Chairman, in the 
report that we recently sent up to the Congress.
    I appreciate very much the opportunity to be here with you, 
Mr. Chairman. As I said in the report, in my additional views, 
we have to rely on the elected representatives of our people to 
be more active in our China policy.
    In my view, for too long we have subcontracted our China 
policy to corporate interest. And they are not necessarily 
working in the national interest. They will work for the 
interest of that corporation. They are not charged to look out 
for the national interest. They are charged to make money for 
their shareholders. It is the elected representatives of the 
people who have to get into this.
    And I worked in an administration, and I know what goes on 
in these meetings in the Executive Branch.
    You need to have the Congress very active and pushing on 
these issues or nothing will get done. Thank you.
    Senator Coburn. That is why you are here, Commissioner 
Mulloy.
    Mr. Mulloy. Thank you.
    Senator Coburn. Thanks to each of you.
    A couple of thoughts. The situation with intellectual 
property is pretty grim. And I heard Mr. Fishman say that--I 
think his comment was that the Chinese are forced to pirate.
    I take a little bit of issue with that in terms of nobody 
is forced to steal. Nobody--that is not the only option that 
they have.
    As a matter of fact, by their own signatories through the 
WTO, they say that they will not steal. And so I do not want to 
give them that out. They are not forced to pirate. They can be 
good actors.
    What I am concerned about more than anything is a couple of 
things Mr. Glickman said, is that organized crime seems to be 
getting into the intellectual property duplication.
    And if anybody has any comments on that, I would love to 
hear that, because that portends a much greater problem and a 
much more difficult solution if, in fact, that is the driving 
force behind it, other than economic advance for a country is 
that individual economic advance in terms of organized crime.
    The other thing that I am concerned about and I would love 
to have the input is what is the response to the Chinese 
government, when you all have interacted with them in terms of 
you say, well, you are going to do this and you are going to do 
this and then you go around the streets and they are better and 
then you send somebody a month later and they are right back 
where they were. What's the answer to that? And what is the 
response?
    Are we dealing with somebody that we can deal with, or are 
we dealing with somebody that is not--we can not deal with?
    The decision for the Congress to make, is if you lie to me 
once, that is my problem. If you lie to me twice, then it is 
our country's problem, and we can not trust you anymore.
    And the TRIPS agreement, the WTO, the most-favored nation 
status, we are down that road, but we went down that road on 
the basis of knowing that there is a participation by everybody 
on both sides of this agreement. And what we have heard today 
would seem that there is much less of a participation on the 
part of China and others in Asia than there is this country.
    And the real concern is the long term. As Commissioner 
Mulloy said--if the WTO does not work and as we lose over the 
next 10 years our ability to compete worldwide, as we lose our 
manufacturing base, and as our intellectual property is 
whittled away because we can not protect it, then the creation 
of intellectual property is going to go where it can be most 
cheaply created.
    And all you have to do is look at several U.S. businesses 
today--3M is one and many others--where they are moving their 
intellectual property development there so that you can develop 
it there. And so you start from that basis.
    So we undermine our economy both not at the workplace and 
small-piece job, but we also undermine our economy 
intellectually.
    And then the other thing that is concerning me is the 
short-term philosophy of many American businesses and our 
government, which means we make hay in the short term, but in 
the long-term our country is depleted and undermined, and our 
ability to protect ourselves, which is really the only true 
function of government, is to protect our national security. 
The ultimate No. 1 is undermined because we do not have a 
manufacturing base with which to defend ourselves.
    So anybody that wants to comment, I am going to let you go 
back and forth a little bit and just comment as you would, and 
then we will get into some specific questions.
    Mr. Fishman. If you do not mind, I would like to start with 
a thought. I do not want to overstate the forced to steal. Of 
course, no one is forced to steal. It is just the how--what 
makes you go to rationalize the theft.
    Governments are charged with certain functions. They have 
to provide for the health of their people, the economic well-
being of their people, the entertainment of their people, and 
the education of their people.
    If you are the leader of 1.3 to 1.6 billion people, most of 
whom are desperately poor, and you could save millions of lives 
by having them spend pennies on the dollar for drugs, you could 
give them a presence in the global economy by having them spend 
pennies on the dollars for software, you can make your students 
smarter by taking textbooks for pennies on the dollar and 
expect to pay no consequence for that behavior, all of us might 
make the same decision.
    Senator Coburn. That is the question, whether or not there 
is a consequence, and that is what this hearing is all about.
    Can China continue to ignore the TRIPS agreement? Can China 
continue to ignore the world norm in terms of intellectual 
property? Can China continue to ignore the fact that you do not 
have free trade when you do not have a free-forming currency? 
Can we allow China to continue to do that as the U.S. Congress? 
And, therefore, if we do, then, I would say, yes, we can 
rationalize that it is OK for them to steal that because we 
have not said there is a consequence.
    Mr. Fishman. Yes. Here, here. I agree. All that more 
important that the solution come from us.
    When Mr. Glickman was in China--I think you should just 
live in China, because when you were there, there were no 
pirated DVDs on the street, and it was very hard to find even 
the shops. But they used that little brief time to make their 
shops that much nicer so when you left, they all looked like 
Blockbuster.
    Mr. Glickman. I have no desire to live there, but I do 
appreciate the suggestion. Maybe I can go there more often.
    Mr. Fishman. You seem to be somebody capable of keeping 
them in line.
    But that is why I think the enforcement we should expect 
should not necessarily be from Chinese police, but we have to 
create a culture of compliance.
    So if you want to sell $200 billion worth of goods to the 
United States, you have to do it out of a factory that is I.P.-
compliant. And then those factories, those tens of thousands, 
hundreds of thousands of factories will not want to compete in 
an economy where their competitors are stealing I.P.
    And you would get pressure internally inside of China to 
comply. And we have to have a strategy that creates that. And 
one way to do that is to put conditions on the goods that we 
buy from China, which is a huge amount of their GDP.
    Mr. Glickman. Can I just comment on that?
    Senator Coburn. Sure.
    Mr. Glickman. I used to be chairman of the Fair Labor 
Association, and one of the things we did was to--we were--it 
was a private sector group composed of apparel companies. And 
what they would do is they would certify companies and 
investigate their human rights violations to determine if 
mostly apparel that was coming in met those specifications.
    I think that is what you are talking about here, is some 
sort of internal certification process. And that is an 
interesting idea.
    And the other thing I think you mentioned, which I think is 
important, is the whole issue of consumer electronics coming in 
in this country and maybe we are taking advantage of those.
    There is this big annual consumer electronics show in 
January. I do not know to what extent antipiracy--we raise it 
there, but I do not know to what extent it is embedded in the 
entire subject of billions and billions of dollars in consumer 
electronics that are sold in this country. I think that is an 
interesting point.
    I also think this issue of the Beijing Olympics logo--and I 
would be interested to know what Mr. Fishman might think about 
the Olympics as being----
    Senator Coburn. A leverage.
    Mr. Glickman [continuing]. A leverage point to maybe work 
the Chinese, if you think there is any realistic possibility 
there.
    Mr. Fishman. Yes. It reminds me of a story of a book author 
in the audience of one of my talks, and he says my book has 
been pirated into China. What do I do about it?
    And I said, you should insert references to Tibetan 
independence. Because the Chinese do clamp down when they see a 
political need to, and they have the ability to do it.
    And I think as you get closer to the Olympics, they will be 
embarrassed by cameras going everywhere finding these pirated 
DVD shops, and they will disappear from Beijing.
    Now, what happens in the west of China, I have no idea, 
because it seems like it is only the glare of the cameras in 
any given place that makes it stop temporarily.
    But we can hope that the Olympics will be kind of a coming-
out party for more responsibility.
    Senator Coburn. But the point is, is that the Chinese 
government does have the ability, should they so desire, to 
enforce intellectual property in China.
    Would the panel agree with that?
    Mr. Minor. I am not sure they have the legal 
infrastructure.
    Senator Coburn. Well, where they want to enforce it, they 
can. So they obviously have the legal infrastructure when they 
selectively enforce if it goes against either what they do not 
want in terms of political, like Guangdong and several of the 
others.
    Mr. Hillberg. I think the key is that the government can 
enforce certain intellectual property rights. I think the 
regime does not necessarily permit companies or other 
participants in the marketplace to be successful.
    Senator Coburn. The government does have the power to do 
it. It may not run as smooth as it does here, but they--if they 
choose to do it, they could do it.
    Would anybody disagree with that?
    Mr. Fishman. I would disagree with that on this, that there 
is a lot of jurisdiction shopping in China. And there is a lot 
of different kinds of enforcement from jurisdiction to 
jurisdiction. Andrew Mertha at Washington University in St. 
Louis has written at length about it.
    When you clamp down in one area, activities move to 
another. There is also the difficulty of driving an economic 
wedge between conflicts of interest. In pharmaceuticals, for 
example, the government is the No. 1 producer of drugs and the 
No. 1 buyer of drugs.
    As a buyer, it has the huge incentive to get the lowest 
price possible. As a producer it has incentive to take drug 
technology as its own and sell it for pennies on the dollar. 
And it is very hard to drive a wedge in between those conflicts 
of interest.
    Mr. Mulloy. Mr. Chairman, in my view, you need to give them 
the economic incentive to enforce their laws. If you are able 
to bring some WTO cases and win them and then you target key 
exports and put quite high tariffs, as you will be permitted to 
do, then you have economic leverage on them, and they will then 
pay more attention and begin to find ways to enforce those 
laws.
    Remember how much talk there was that the Internet was 
really going to free up that society?
    They are putting an enormous amount of money into 
controlling the Internet in that country. They have an interest 
in controlling the Internet, and they do it. If they had an 
interest in getting after this issue, they will do it. But they 
are not going to do it if we continue to talk rather than see 
if this mechanism in the WTO will work.
    We strongly recommended that we work with both the E.U. and 
Japan to bring these WTO cases because then there will even be 
more leverage.
    It is very interesting on that request filed by Mr. 
Portman, the Japanese joined us, the Swiss joined us, but the 
E.U. did not. I think we need to work on the E.U. and get them 
into this ball game a little bit more. And that is what we 
strongly recommended.
    Senator Coburn. This also does not just play in terms of 
trade. One of the great proprietors of Iran's progression in 
terms of the uranium enrichment happens to be the Chinese.
    And so if we do not take a stand on our economic 
intellectual property, then we are perceived as weak in every 
other area of our foreign policy as well. And so it is 
important that we take that stand so that we hold them 
accountable.
    Mr. Mulloy. I would think that they must wonder that we 
have the President of the United States over there saying, 
pretty please, do this for us, and this has been going on for 
15 years with no results. I mean, they must not take us 
seriously about these things.
    Senator Coburn. So it is not a Republican or Democratic 
thing? It is this policy stinks in terms of enforcement of the 
things we do?
    Mr. Mulloy. Absolutely. There was a requirement in the law 
that the Banking Committee wrote in 1988 requiring Treasury to 
identify currency manipulators. Early on the Bush 
Administration, Bush 1, actually identified Korea, Taiwan, and 
China as currency manipulators.
    Beginning in 1992 that passed under both Clinton and now 
Bush 2. Nobody's identified China as a currency manipulator, 
although everybody knows they are a currency manipulator.
    When Tim Adams, our undersecretary of the Treasury, 
complained to the IMF and said, why aren't you working to stop 
China's currency manipulation, the IMF came back and said, you 
have not even named them a currency manipulator in your reports 
to Congress.
    Because we have not been truthful, then we get bitten. We 
have to be truthful, and then you can deal with the reality or 
you find policies that deal with the reality. If you pretend it 
is not happening and you put your head in the sand, it is just 
going to get worse.
    And one last thing, on Ted Fishman, he talked about the 
big-box retailers. They are bringing in this stuff--maybe some 
of it is pirated or counterfeit goods. We ought to have a law 
that says if American companies are going to be part of this 
process and they know or have reason to know that the goods 
they are bringing in are counterfeit goods and can be 
threatening to our people, that they should be faced with 
punishment for doing that.
    That is what we did on bribery. When our companies were out 
bribing people, we put a law on the books and forbade them to 
do so. Now, they may find ways around it, but at least it is 
out there and I think it is a real deterrent on that behavior 
and we could do the same thing here.
    Senator Coburn. Mr. Sabo.
    Mr. Sabo. Senator, all I can say, based on everything I 
have heard today, is that this is something we better address 
right now because if it continues like this for 5 more years 
without addressing it and addressing it strongly, our economy 
is really going to be hit hard.
    Mr. Minor. It is not only our economy; it is our national 
security that is at risk. As we transfer technologies to China, 
as we transfer the ability to manufacture key military 
mechanisms to protect ourselves, we become weaker and weaker 
each day.
    So far the policy with the Chinese has been to ask politely 
and hope for the best and that just can not continue.
    I was wondering if we could share those pieces of currency, 
Michelle, with the other members of the panel.
    Senator Coburn. I thought I was going to get to keep them.
    Mr. Minor. Well, one of those you do not want to keep, 
Senator.
    We have known as a company for some time through our 
customers of our products that the very good counterfeits are 
coming out of North Korea and likely manufactured by the North 
Korean government. Only recently a major Chinese bank was 
charged in the United States for funneling and laundering these 
counterfeits.
    But we are finding them all over the world: Central 
America, South America. And if our currency and our military 
are compromised through intellectual property theft, there is 
no turning around. Five years might be too long.
    Mr. Fishman. Here is a scenario you might think of, which 
is imagine we do get some sort of redress on intellectual 
property, possibly through this compliance regime that I have 
talked about.
    You get a double advantage. One, you chip away at China's 
low-cost manufacturing advantage because factories have to buy 
technology. Two, is you inject some vitality into our tech 
sector because you create a market for technology where a 
market didn't exist before. And it is not just any market; it 
is the fastest growing market in the economic history of the 
world. And right now we do not sell into it.
    Senator Coburn. And three, is if we had a free-floating 
currency, the price of our technology would go down to the 
Chinese, and the price of their products would come up.
    Mr. Fishman. Absolutely. Exactly.
    Mr. Glickman. One thing that is interesting. My whole life 
being involved in agriculture, we often had disputes with 
Chinese on certain sanitary issues. But by and large--this is 
one area that the Chinese, need us to feed their population, 
particularly to increase as their standard of living goes up, 
their protein consumption goes up, and, therefore, they've got 
to have feed and meal to feed those animals over there. It is 
an interesting dichotomy here.
    Because where they need us, they will take advantage of 
what we have to give them. I do not know if anybody's ever 
really explored the relationship between agriculture and the 
peasants on the revolution side of the picture with the 
manufacturing-industrial side of the picture that we have here, 
and I think we should.
    The other point I would make is it goes back to something 
Mr. Fishman said. I went to the Fortune Conference in Beijing 
in the spring, and it is a tricky situation because everybody 
wants to be polite when they are there.
    But what I saw, by and large, is not a very confrontational 
atmosphere between the American private sector and the Chinese 
authorities.
    Now, I was not looking for people to pick a gratuitous 
fight with them, but it is an interesting juxtaposition when 
you look at globalization in this world. The 
internationalization of a lot of American companies have made 
them a lot, I think, less likely to want to pick a fight.
    And I do not think the government can do this by itself. I 
think you have got to have the people who are employed 
Americans involved in this fight as well.
    Mr. Mulloy. Can I speak on that?
    Senator Coburn. Yes. Let me just put something in. One of 
the real disappointments for me was that you do not see a 
Microsoft here today, the leader who has lost more in China 
than all the other software firms combined. And I am set to 
presume that they do not want to offend the Chinese because it 
might hurt their short-term business interest.
    That is where we are in terms of the government. How do you 
not offend the Chinese, but yet hold them accountable?
    And if the short-term price of your stock is more important 
than the long-term future and security of our country, then 
that is a terrible scenario for American business.
    And I can tell you it does not just apply there. It applies 
in asbestos litigation and in all these other things that we 
are trying to solve.
    What we are seeing is a change in perspective by American 
business, that they have chosen to go the short run instead of 
the long run. And they have chosen to make profits in the short 
term instead of secure the future of their firm and their 
country and their employees by doing what is in the best long-
term interest of their firm.
    And so it is very concerning to me that people want to duck 
this discussion because it might have a negative reverberation 
in China on their business.
    And if it does, then what it says is, who are we dealing 
with? And what is the long-term quality prospects for fair 
trade with China if, in fact, you can not be critical of 
somebody who is supposed to be doing something who is not and 
because you happen to be critical it hurts your business? You 
are not dealing with somebody that you really want to deal with 
or--unless you are going to hold their feet to the fire, you 
never win on that.
    And so it is concerning to me that we have seen that 
philosophy take over in terms of our international business 
company--the companies that do international business, that the 
short term is more important than the long term.
    Mr. Mulloy. Senator, the American companies can try and use 
the Chinese legal system like GM went after Chaney. I saw in 
the Los Angeles Times today that they settled that case.
    It was a big article about how Chinese automobile 
production has expanded. They are going to be the third largest 
auto producers in the world next year. So they are coming on 
pretty fast in autos, and we expect them here.
    But the thing we have to understand is we can go after them 
to live up to their international agreements both on IMF 
currency, WTO, IPR, or other issues. Our companies are in a 
system where they have to make profits, and they are going to 
make profits if they want to survive.
    The Chinese have figured out how to incentivize our 
companies and other foreign companies to build their industrial 
base.
    Sixty percent of China's exports are from foreign-invested 
companies. We were over there in August. We went through these 
scientific and industrial parks. It is amazing. You had it 
exactly, that the R and D is beginning to flow over there now 
as well.
    So they figured out how to incentivize them. We have to do 
some going back to understanding our own system. How do we 
incentivize our guys to serve our interests rather than the 
Chinese interests?
    I heard on NPR, somebody talking the other night. It was 
not Ted--you were on NPR, but another show coming from China, 
was saying that the American corporations in China are almost 
like spokesmen for the Chinese government. They are like an 
echo chamber. You will hear the government say things, and then 
before long the American companies were saying the same things.
    Mr. Fishman. That was me.
    Mr. Mulloy. That was you? OK.
    I found the same thing when I am over there traveling 
around, meeting with these people.
    Mr. Burr. Mr. Chairman.
    Senator Coburn. Yes, Mr. Burr.
    Mr. Burr. A few years ago when music lovers started to 
discover that they could use the Internet and basically just 
take songs off it for free and not have to pay for them, that 
was the beginning of a huge decline of our industry and 
everyone was really scared about it and it started this--retail 
stores and the mom-and-pop record stores were all closing. And 
we all had a very doomsday scenario in our heads.
    And the organization--the RIAA and NARIS and organizations 
like that, they all got together and they started suing 14-
year-old kids. And it got ugly, but it worked.
    Everyone said, Oh, how can they do this? It is just these 
kids. But I tell you what, you throw a lawsuit where the father 
has to pull out $20,000 to settle a lawsuit for the 15-year-old 
stealing Oasis songs, pretty soon that kid finds his computer 
unplugged.
    And I think that we are going to have to--with China, I 
think we are going to have to sometimes maybe treat them like a 
14-year-old and it is going to get ugly and we can not be 
afraid to have it get ugly for a while. Because on the other 
side after it gets ugly, they will get the message.
    Senator Coburn. I think that is good input. Anybody else?
    Mr. Fishman. Yes.
    I would say something to that point, which is it is 
essential on this issue to get a public consensus on it. And it 
is very hard to get the public consensus around it on the 
consumer issues because consumers also steal when they can.
    But if we talk about it more and more in terms of the shop 
floor, in terms of the jobs lost--I know Mr. Minor brought an 
article from the Chicago Tribune which talked about the $6,000 
drop in the average paycheck in Illinois because of the loss of 
manufacturing. Michigan actually lost more. And there have been 
3 million manufacturing jobs lost from the United States since 
2000.
    This is even a higher cost to pay than what you pay for 
your 14-year-old.
    Senator Coburn. Sure.
    Mr. Fishman. And this is one place where I think we can get 
national consensus on it by really stressing that the workplace 
is in danger, not just the home theater.
    Senator Coburn. Right. Middle income America is at risk.
    I thought it was interesting to note that we have talked 
about movies, recording, financial, software, core 
technologies, patents, manufacturing, currencies, 
macroeconomic, and advanced technology. Every aspect of our 
economy is under attack----
    Mr. Fishman. Agriculture.
    Senator Coburn [continuing]. In terms of intellectual 
property rights being ignored. It is not just recording a 
movie. It is every aspect of our economy.
    The same thing is happening--we see it more visible because 
it is easier to see the results of it in terms of the recording 
industry or the movie industry because it is out there and it 
is also shipped back here.
    But the subtleties of the other is there is not an area of 
our economy that is not under attack.
    Mr. Fishman. Well, there is a kind of war in industry in 
this country, and it is between large corporations and this 80 
percent of American industry, which is medium and small 
businesses.
    Large corporations have the resources to go into China to 
fight their intellectual property battles. Small industry, 
which sees the rug being pulled out from under them as their 
large clients move to China and find suppliers in China and 
benefit from pirated technology in the Chinese workplace are 
really at risk here, and they do not have the resources to 
fight their own battles inside China.
    It is impossible as a company that is 50 million and under 
to have played a Chinese legal system for years.
    Senator Coburn. Let me put the question out to you. So let 
us say we are going to do the TRIPS, we are going to enforce, 
we are going to file through the WTO. What happens when we 
lose? What happens if we lose, knowing the truth, knowing the 
facts? What happens when we lose?
    I do not have a lot of confidence in some of the WTO 
rulings, as we have seen from the past. What happens when we 
lose? What do we do?
    Mr. Minor. Hopefully we would reassess our membership in 
the WTO.
    Senator Coburn. But what do we do?
    Mr. Sabo. Is not that our only choice?
    Mr. Mulloy. Secretary Glickman.
    Mr. Glickman. Well, you have to fight the battles. We 
fought them for years on the agriculture front, and we 
certainly have not won every battle there. And we fought them 
on consumer issues and international financial issues.
    We also have to have a good case too. It does not mean we 
do not file the case, but we have to have the data there. We 
have to have the facts there. That is what the Administration 
has finally done. Now we have to keep pushing them to make sure 
that they follow through on that kind of thing.
    China has wanted for years to get in the WTO. They are now 
in this organization. It means a lot to them. And, I do not 
think that they want to ignore the WTO. They kind of do that at 
their peril if they really become--if they want to play roles 
around the world.
    That is one of the reasons I thought that when Mr. Burr 
talked about Russia was so important.
    Russia is not in the WTO, and the Russians are actually in 
a much more lawless situation even than the Chinese are. So we 
have an opportunity with Russia maybe to advance the situation.
    But, I am not going to presuppose whether we should file 
the case or not, but my belief is we are probably not going to 
get the attention of China without filing the case. And we just 
have to have the best case we can possibly do.
    Senator Coburn. Is there a function that the Congress can 
do outside of the WTO in terms of carrying forward--both 
sending signals to China, but also in terms of setting meaty 
legislation that will have an impact on them, and what is that?
    Mr. Minor. The currency bill would send a message, I think.
    Senator Coburn. You mean in terms of floating of the 
currency?
    Mr. Minor. Right.
    Mr. Mulloy. Revaluing--upward revaluation of their currency 
is enormously important.
    We can put laws on our books to control what comes into our 
country in terms of counterfeit goods.
    Senator Coburn. Yes.
    Mr. Mulloy. There is no right to bring counterfeit goods 
into this country, and we can pass good, tough legislation so 
that does not happen.
    Then the next step is only the government. USTR is the only 
place that can authorize bringing a case to the WTO. Private 
companies can not do it. It has to be the government. So we 
have to go ahead and see if it works. It will take 2 years to 
bring one of these WTO cases before you are even in a position 
to put the tariffs even if you win it. So get started.
    Now, what Senators Schumer and Graham, in their currency 
bill, have done--do you remember how they said, we will put 
immediate tariffs on you if you do not stop manipulating the 
currency? They went to Article 21 of the WTO agreement, which 
provides that you can protect your national security as an 
exemption to everything else that is going on.
    So your obligation--you always have the national security 
out. Sweeney at one time used Article 21 to protect its 
footwear industry. In the GATT it was always held self-judging, 
a country can make its own judgment as to its national 
security.
    Now, that is an enormous step to go. I would prefer to get 
the case in the WTO to find out what happens first.
    Senator Coburn. Let me question you on that for a minute. 
Going to be a quarter of a billion dollars--quarter of a 
trillion dollars that flow out of this country this year in 
China. We are going to lose another 200,000 or 300,000 
manufacturing jobs because of intellectual property that is not 
protected in terms of small businesses. We are going to lose 
the ability to fund and grow our own economy and fund our own 
intellectual property for the future, and development of R and 
D.
    Why is that not a national security and national emergency 
issue for us right now? Not 2 years from now, right now.
    Mr. Mulloy. Do you want me to comment?
    Senator Coburn. Sure. I want anybody to comment on that.
    Mr. Mulloy. Well, I think it is, and that is why I was very 
happy with--we endorsed the concept of the Schumer-Graham bill 
on currency because we think it is a national security issue.
    One more thing I want to tell you, Senator.
    In our report we do not blame everything on China. There is 
much that we have to do here at home with our emphasis on 
science and technology, getting our economic house in order. 
That also has to be a part of this.
    Just getting our economic house in order is not going to do 
this because we can not get it in order unless we deal with 
this other issue. The two have to be done at the same time.
    So our commission endorsed using Article 21 on the currency 
issue.
    Senator Coburn. Anyone else?
    Mr. Fishman. I have a comment. One is--what can you do at 
home? One is to shed daylight on some of the practices that 
keep China's regime going. China's had this enormous benefit 
from the way it has done business.
    Senator Coburn. That is what we are having this hearing 
for.
    Mr. Fishman. And one thing that the Subcommittee can do 
is--and I do not know the legal structure of the Subcommittee. 
But if you have subpoena power, you can go into some agreements 
and look at what is the dynamic.
    There is this great case where Huawei, which is a Chinese 
telecom firm, basically built itself into a multi-billion-
dollar company by copying virtually everything in the Cisco 
catalog, including the catalog.
    And then it entered the United States market and Cisco sued 
it, filed suit. Well, that suit was settled. We do not know the 
terms of the settlement. And, it will be very interesting to 
know whether part of the terms of that settlement was access to 
the Chinese market by Cisco, but there was no redress on the 
piracy itself.
    Instead, Whawei, which is now a global player in telecom, 
competing against our best companies, went out and bought the 
Qualcomm patent portfolio, which gives it 30,000 legitimate 
patents.
    So these intellectual piracy regimes in a way become like 
the Mafia buying the liquor store. They can legitimate 
themselves once they grow to scale. That is quite a threat. So 
if you have the investigative power to look at that, I would 
encourage it.
    Also, it would be interesting to look at the pricing 
demands that big-box retailers put on their suppliers.
    Factories that supply big-box retailers are asked every 
year to cut their prices sometimes 15 percent a year. Do you 
think with those demands for the price cuts there is also a 
demand that you pay full bore for technology? You are forcing 
your suppliers to cut your costs somewhere. It would be 
interesting to know what is the chain of events that leads to 
that piracy.
    Mr. Mulloy. Well, we did a hearing on that, Senator, in New 
York to look at the role of the big-box retailers. There is 
tremendous pressure on the smaller manufacturers if they want 
to stay in the supply chain of the larger manufacturers who are 
in China. In order to meet the China price to stay in, they are 
forced also.
    So there is a tremendous incentive from the big guys and 
Wal-Marts and others, those big-box guys, to force the smaller 
guys who want to stay in their supply chains to move their 
operations to China. That is the situation we are now in.
    Mr. Glickman. I think this whole idea--I do not know what 
the criminal laws are, but knowingly importing counterfeit 
material, in the same way that--knowingly importing material 
that is done with human rights violations or improper labor 
violations, it is, I think, something the Subcommittee could 
explore looking at the laws.
    I would like to mention, however, part of the issue is they 
do not buy anything that we--or very little we produce. It is 
the reverse. I want to go back to the situation because here we 
are in Los Angeles, the entertainment business.
    The WTO provided that the Chinese would allow into their 
market--we saw it as a minimum of 20 foreign movies a year for 
domestic distribution. They saw it as a maximum.
    Out of that 20 movies, the United States gets in roughly 
about 14 movies a year, and they--the Chinese determine, based 
on a lot of different formulas, what those 14 movies a year 
are.
    On the streets of Beijing, Shanghai, Guangzhou, and all the 
other cities, on the average there are probably 2,000 to 3,000 
of titles a year on the streets. So all these movies we are 
trying to get in, legally we can not, and there they are.
    Senator Coburn. Now they are creating the demand.
    Mr. Glickman. They create the demand for this kind of 
stuff.
    So in addition to them selling us stuff that may be 
counterfeit--there is a tremendous need for market opening 
stuff on our part as well.
    Senator Coburn. All right.
    Senator Carper could not be here. He had made a commitment. 
And we work in a bipartisan fashion. He's a partner--he's the 
Ranking Member, Senator Carper from Delaware, and he will look 
at this material as well.
    Any other final closing comments?
    Mr. Mulloy. I just want to let you know, Senator, that we 
are a Commission created by the Congress, bipartisan. And our 
last report came out 11 to 1. All six Republicans and six 
Democrats were on that report.
    We are here to be of assistance to you and your staff in 
any way we can in dealing with this larger phenomenon of how we 
are going to deal with the U.S.-China economic relationship.
    Because when you transfer the amount of resources we are 
transferring to China now, it enables them to have a much 
stronger power projection militarily as well.
    Senator Coburn. Right.
    Mr. Mulloy. You can not decouple these things. And I am not 
saying that we want to demonize those people, but we better 
start getting our act together and enforce what we bargained 
for.
    Mr. Fishman. If I could add one more thing, it is about the 
culture of compliance at home.
    We have Fortune 50 companies in the United States that have 
paid hundreds of millions of dollars to settle patent and 
copyright infringement cases because these drag through our 
courts just as long as any cases drag through the Chinese 
courts.
    If we could take this more seriously at home, then we would 
certainly be taken more seriously abroad.
    Senator Coburn. I agree.
    Mr. Minor. Congressman Glickman suggested that China needed 
to develop political will to address some of these issues, and 
I would add to that, that both within the Executive Branch and 
the Legislative Branch we need to develop the political will to 
get tough on trade and fix these problems.
    Large multinationals, Fortune 50, Fortune 500, 750 
companies have the resources to fight patents and litigate. 
When you are a smaller manufacturer, medium-size manufacturer, 
you do not have the resources, and you certainly do not have 
the time. We need the help from our government.
    Senator Coburn. All right. Thank you all very much.
    Mr. Mulloy. Mr. Commissioner, can I ask permission to put 
the three articles that I referred to in my testimony to be 
made a part of the record?
    Senator Coburn. They will be made part of the record if you 
will submit it.
    Mr. Mulloy. Thank you, Mr. Chairman.
    Senator Coburn. And the hearing is adjourned.
    (Whereupon, at 11:50 a.m., the Subcommittee was adjourned.)


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