[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
    INTERNATIONAL PIRACY: THE CHALLENGES OF PROTECTING INTELLECTUAL 
                      PROPERTY IN THE 21ST CENTURY

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 18, 2007

                               __________

                           Serial No. 110-67

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                 HOWARD L. BERMAN, California, Chairman

JOHN CONYERS, Jr., Michigan          HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia               TOM FEENEY, Florida
ROBERT WEXLER, Florida               LAMAR SMITH, Texas
MELVIN L. WATT, North Carolina       F. JAMES SENSENBRENNER, Jr., 
SHEILA JACKSON LEE, Texas            Wisconsin
STEVE COHEN, Tennessee               ELTON GALLEGLY, California
HANK JOHNSON, Georgia                BOB GOODLATTE, Virginia
BRAD SHERMAN, California             STEVE CHABOT, Ohio
ANTHONY D. WEINER, New York          CHRIS CANNON, Utah
ADAM B. SCHIFF, California           RIC KELLER, Florida
ZOE LOFGREN, California              DARRELL ISSA, California
BETTY SUTTON, Ohio                   MIKE PENCE, Indiana


                     Shanna Winters, Chief Counsel

                    Blaine Merritt, Minority Counsel


                            C O N T E N T S

                              ----------                              

                            OCTOBER 18, 2007

                                                                   Page

                           OPENING STATEMENTS

The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Chairman, Subcommittee on Courts, 
  the Internet, and Intellectual Property........................     1
The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     3
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Member, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................    11

                               WITNESSES

Ms. Victoria A. Espinel, Assistant U.S. Representative for 
  Intellectual Property and Innovation, Office of the U.S. Trade 
  Representative, Washington, DC
  Oral Testimony.................................................    24
  Prepared Statement.............................................    26
Mr. Eric H. Smith, President, International Intellectual Property 
  Alliance (IIPA), Washington, DC
  Oral Testimony.................................................    31
  Prepared Statement.............................................    34
Mr. Loren Yager, Director of International Affairs and Trade, 
  U.S. General Accountability Office (GAO), Washington, DC
  Oral Testimony.................................................    50
  Prepared Statement.............................................    52
Mr. Mark MacCarthy, Senior Vice President for Global Public 
  Policy, Visa Incorporated, Washington, DC
  Oral Testimony.................................................    71
  Prepared Statement.............................................    73

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Howard Coble, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................     5
Prepared Statement of the Honorable Lamar Smith, a Representative 
  in Congress from the State of Texas, and Member, Subcommittee 
  on Courts, the Internet, and Intellectual Property.............    13
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Courts, the Internet, and Intellectual Property.............    20

                                APPENDIX

Material Submitted for the Hearing Record........................   112


    INTERNATIONAL PIRACY: THE CHALLENGES OF PROTECTING INTELLECTUAL 
                      PROPERTY IN THE 21ST CENTURY

                              ----------                              


                       THURSDAY, OCTOBER 18, 2007

              House of Representatives,    
      Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
Room 2237, Rayburn House Office Building, the Honorable Howard 
Berman (Chairman of the Subcommittee) presiding.
    Present: Representatives Berman, Watt, Jackson Lee, 
Sherman, Schiff, Lofgren, Sutton, Coble, Sensenbrenner, Smith, 
and Goodlatte.
    Mr. Berman. The hearing of the Subcommittee on Courts, the 
Internet, and Intellectual Property will come to order.
    I would like to begin by welcoming everyone to this 
hearing, International Piracy: The Challenges of Protecting 
Intellectual Property in the 21st Century.
    I will recognize myself for an opening statement.
    Almost a year ago, in connection with bilateral 
negotiations on the Russian Federation's accession to the World 
Trade Organization, the Russian government and the U.S. reached 
an agreement regarding actions to improve the protection and 
enforcement of intellectual property rights in Russia.
    Just last week, the U.S. requested the WTO establish a 
dispute settlement panel to challenge China's restrictions on 
the importation and distribution of products of copyright-
intensive industries such as theatrical films, DVDs, music, 
books, and journals.
    This hearing will update us on the status of our efforts in 
these two specific countries, which many have identified as the 
primary culprits in allowing piracy and counterfeiting to 
flourish.
    We also will look at the piracy problem in other countries 
and the challenges America faces when trying to alter the legal 
landscape and enforcement mechanisms available.
    This is an effort to ensure that other countries do not 
thrive on the backs of American creativity.
    Today's witnesses will speak to the importance of IP to the 
global economy. I would like to use my time to move beyond that 
particular aspect of the issue to identify causes for the lack 
of adequate protection for IP in some places, and to talk about 
solutions and incentives to address the problem.
    Hopefully these will dovetail with the IP enforcement bill 
that I hope to be introducing shortly with the Chairman of the 
full Committee, Mr. Conyers, as the lead author, along with the 
Ranking Member of the full Judiciary Committee, Mr. Smith, and 
Ranking Member of this Subcommittee, Mr. Coble.
    The Organization for Economic Cooperation and Development 
recently released their report on the Economic Impact of 
Counterfeiting and Piracy together with suggestions to enact 
stronger criminal penalties and increase enforcement of 
national laws, strengthen cooperation between government and 
industry, and educate consumers.
    These are the cornerstones of effective IP protection. Each 
of the participants--governments, industries and the consuming 
public--must have the will to do it, the will to respect 
intellectual property rights.
    Sometimes that will comes naturally, as when the 
participants understand that IP enforcement is in their own 
interest. That occurred, at least for a brief moment in China 
when they saw counterfeit 2008 Olympic T-shirts appearing on 
street corners.
    But sometimes outside inducement is helpful. Some nations, 
such as Russia, do not yet meet international standards in 
their IP laws. Others, such as China, may have good laws on the 
books but often fail to enforce them.
    How do we get Russia, China and other emerging market 
economies to, as Mark MacCarthy of Visa states, ``do the right 
thing?''
    We have the tools of persuasion and trade benefits at our 
disposal and, of course, international law in accession to the 
WTO. Sometimes it takes a little nudge for a country to see the 
light.
    Industry, not only those who own the rights, but those who 
benefit from use of those rights, must also have the will to 
protect intellectual property.
    Whether it be Internet service providers, or financial 
services such as banks and credit card companies, such 
intermediaries often facilitate piracy through their servicing 
of illegal transactions.
    While there may be legal ambiguity as to whether their 
conduct meets the legal definition of contributory 
infringement, industry clearly has a responsibility. Their 
refusal to use the technical tools at their disposal now to 
stop piracy exacerbates the problem.
    They should understand that effective IP enforcement 
improves economies and ultimately, therefore, their own bottom 
line.
    Take, for instance, Baidu, the Chinese counterpart to 
Google. It is responsible for much of the Internet piracy in 
China. Their continued activities have dissuaded any legitimate 
down-stream services from entering that market.
    I am more than a little surprised that a company can be 
traded on the New York Stock Exchange and still maintain 
practices that are so destructive of the ability of the Chinese 
digital market to develop in a legitimate manner.
    And I don't mean just to pick on Russia and China. Although 
they have garnered the lion's share of the headlines, trading 
partners such as Chile, India, Turkey, Venezuela and others 
have been cited for their inadequate commitments to IP 
protection.
    Even, I am sad to say, our neighbor to the north needs to 
improve. To date, they have still not updated their laws to 
comply with the 1996 WIPO Copyright Treaty.
    On Tuesday night, the Governor General of Canada presented 
the new government's agenda to Parliament: Our government will 
improve the protection of cultural and intellectual property 
rights in Canada, including copyright reform.
    While formal commitments are necessary, they aren't 
sufficient. They must be backed by results.
    Now, I recognize the Ranking Member of the Subcommittee for 
his opening statement, Mr. Smith, if he has one, and then Mr. 
Conyers, chairing, actually, another hearing at this time of 
this task force----
    Howard?
    Mr. Coble. Thank you, Mr. Chairman. I want to join you in 
welcoming all to our hearing this morning.
    I want to commend you, Mr. Chairman, and Ranking Member 
Smith. I believe you all convened at least three hearings on 
this very significant subject in 2005.
    The investment in time, capital and effort needed to obtain 
a valid patent, trademark, or copyright is enormous, as you all 
know.
    The reward for that investment is supposed to be the 
exclusive right for a limited time to manufacture, market or 
license an invention, product or work.
    But that reward is of little incentive or value if 
individuals and governments are unable or, in the latter 
instance, sometimes unwilling to provide meaningful protection 
and enforcement to the owners of intellectual property rights.
    A number of developments in recent years have overwhelmed 
the methods that countries traditionally employ to prevent 
legitimate producers from being exposed to unfair competition 
and to protect consumers from health and safety risks 
associated with unsafe goods.
    The expansion of transnational trade and the development of 
the Internet as a commercial tool and the ability of producers 
anywhere in the world to cheaply and rapidly produce, 
distribute and transport goods to virtually any other point of 
the globe have revolutionized not merely the relationships 
between producers and consumers but also the relationships 
between and among nations and their citizens.
    To protect the legitimate interest of nations and inventors 
with respect to promotion of intellectual property rights, Mr. 
Chairman, it seems the United States is party to numerous 
international multilateral and bilateral agreements.
    Our ability to ensure these agreements and understandings 
are properly carried out, not merely here at home, but also in 
the markets overseas that demand the creative products 
Americans are so skilled at producing, is fundamental to the 
continued vitality of our economy.
    When you consider that our copyright industry typically 
receives about half of its revenue from outside the United 
States, industries that rely on IP protection account for over 
half of all U.S. exports, and these industries together 
represent about 40 percent of the U.S. economic growth, it is 
obvious why it is so important that we ensure that foreign 
governments respect the rights of our producers.
    One of the principal methods that our government uses to 
promote these interests is the Section 301 review process, 
which was established pursuant to the Trade Act of 1974.
    Among other things, Section 301, as you know, requires the 
U.S. trade rep to publish an annual report that details foreign 
government policies or practices that violate a bilateral or 
multilateral trade agreement or are unreasonable, 
unjustifiable, are discriminatory and are unnecessarily 
burdensome to the United States commerce.
    For many years, the Section 301 Report has documented 
various violations by the governments of China and Russia, as 
you just pointed out in your statement, Mr. Chairman, with 
respect to the protection and enforcement of U.S. intellectual 
property rights.
    Indeed, the failure of China in particular to reduce its 
levels of counterfeiting and piracy, which in many copyright 
sectors routinely approaches 90 percent, has led to the United 
States filing two IP-related complaints at the WTO.
    Rather than stealing the thunder of our witnesses, who can 
describe in great detail the status of our concern with China 
and Russia and other countries of priority to U.S. IP owners, I 
want to first acknowledge the progress the Administration, 
Congress and private industry have made in recent years in 
improving the exchange of information and developing strategies 
to improve the situation for IP owners.
    There are no quick fixes in this area as complex as this. 
Real progress require most sustained attention and a bipartisan 
commitment.
    Mr. Chairman, I spoke a little longer than I usually do, 
but I don't know of any subject that impacts our economy any 
more significant than what we are discussing today.
    President Reagan once summed up the U.S. policy of 
negotiating arms control agreements as ``trust, but verify.'' 
In my view, meaningful progress in the promotion of 
intellectual property rights requires a similar transparency. 
In other words, we need a little less trust and a lot more 
verification.
    I thank you, Mr. Chairman, and I yield back my time.
    [The prepared statement of Mr. Coble follows:]

 Prepared Statement of the Honorable Howard Coble, a Representative in 
    Congress from the State of North Carolina, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property













    Mr. Berman. Well, thank you very much, Mr. Coble, and your 
comments reminded me that, in fact, we have had a number of 
hearings on this subject building up to this point.
    Our colleague from Texas, Mr. Smith, as Chairman of the 
Subcommittee over the last few years, and now as Ranking Member 
of the full Committee--I recognize him for his opening 
statement.
    Mr. Smith of Texas. Thank you, Mr. Chairman. You mentioned 
Mr. Conyers a while ago.
    Like Mr. Conyers, I am a Member of the Antitrust Task 
Force, which also happens to be meeting right now, so I suspect 
that he and I will be shuttling back and forth and maybe even 
substituting for each other as the morning goes on.
    But I do want to thank you, Mr. Chairman and Ranking Member 
Coble, for convening this very important oversight hearing.
    As has already been mentioned, we have had three 
Subcommittee hearings on this subject already, which is clearly 
an indication of how important this Subcommittee thinks this 
subject is, and it is nice to have this as a bipartisan subject 
of interest as well.
    At the outset of the first hearing, I noted one of our 
purposes is to begin an examination of the role of intellectual 
property rights in promoting international respect for the rule 
of law. In whatever form it takes, the theft of intellectual 
property inflicts substantial economic harm on our country, our 
entrepreneurs, our innovators and ultimately on American 
consumers.
    I don't quote myself very often, but I thought that was a 
particularly good statement from a couple of years ago. 
[Laughter.]
    The potential harm to consumers that results from the 
rampant production and distribution of illegal goods is, of 
course, not limited to purely economic harm.
    Recently, Chinese-manufactured toothpaste was recalled 
because it contained a chemical used in antifreeze. And Connor 
O'Keefe, a 7-year-old British boy, tragically died after 
reportedly being electrocuted by a counterfeit Nintendo Gameboy 
charger.
    These cases illustrate the danger posed by the failure to 
stop the manufacture and distribution of unsafe and counterfeit 
goods.
    The enormous scope of today's counterfeiting activity and 
the unprecedented ability of pirates to distribute their 
illegal wares quickly and on a global scale pose new challenges 
to policy makers around the world.
    When government officials and countries who profit from 
illegal commerce actually facilitate it, these challenges are 
tougher.
    When the U.S. trade representative released her annual 
Special 301 Report earlier this year, China and Russia were 
once again included on the priority watch list. It came as no 
surprise.
    That designation reflects a judgment that these countries 
fail to provide an adequate level of intellectual property 
rights protection or appropriate market access to intellectual 
property owners.
    China is posed to become the second-largest trading nation 
in the world, and Russia is seeking to join the World Trade 
Organization.
    The U.S. and other countries that support the international 
rules-based trading regime must take steps to ensure that these 
and other countries which enjoy the benefits of free trade also 
exercise the responsibilities that that free trade requires.
    Since our hearings in 2005, the U.S. government has stepped 
up its dialogue with Congress and industry stakeholders and has 
sought to monitor and improve international respect for IPR.
    While today's hearing topic is broader than the subject of 
Chinese and Russian IP theft, I do hope our witnesses will 
address several specific topics.
    These include offering their views on Russia's 
implementation of their bilateral IPR agreement which was 
signed with the U.S. on November 19th, 2006, and the current 
situation with respect to the two complaints the U.S. filed 
against China at the World Trade Organization for IP 
violations.
    Before concluding, Mr. Chairman, I would like to take a 
moment to recognize the service of Victoria Espinel, to our 
left, the assistant U.S. trade representative for intellectual 
property and innovation, who is one of our four witnesses.
    I understand that she will be leaving government service 
soon. In May 2005, she served as the only common witness at our 
two back-to-back hearings on IP theft.
    She has brought an unparalleled dedication and commitment 
to her duties at USTR, and in doing so she has brought credit 
and credibility to our international efforts to improve respect 
for intellectual property rights.
    And we thank you for your efforts and appreciate your being 
here, perhaps to testify for the last time.
    Mr. Chairman, with that, I will yield back.
    [The prepared statement of Mr. Smith follows:]

 Prepared Statement of the Honorable Lamar Smith, a Representative in 
 Congress from the State of Texas, and Member, Subcommittee on Courts, 
                the Internet, and Intellectual Property













    Mr. Berman. Thank you, Mr. Smith. And in the interest of 
proceeding to our witnesses and--you know, we have a vote on, 
so I would ask other Members to submit their statements for the 
record.
    I would ask the Members to submit any opening statements by 
the close of business Wednesday. And without objection, all 
opening statements will be placed into the record.
    [The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
   Judiciary, and Member, Subcommittee on Courts, the Internet, and 
                         Intellectual Property









    Mr. Berman. Without objection, the Chair will be authorized 
to declare a recess of the hearing at any point. And maybe we 
could have Ms. Espinel testify.
    So let me quickly introduce our witnesses and join with 
you, Mr. Smith, in acknowledging the fine work of our first 
witness. That will be Victoria Espinel. She is the Assistant 
USTR for Intellectual Property and Innovation.
    She is the Chief Policy Advisor to the United States Trade 
Representative and the administration on Intellectual Property 
and Innovation, and trade issues and the chief U.S. trade 
negotiator for intellectual property issues.
    She seems like the right person to have here for this 
subject. She oversees enforcement of the intellectual property 
protection required under International Trade rules, authors 
the annual Special 301 Report of international Protection of 
Intellectual Property Rights, and was involved in creating the 
President's multi-agency initiative to combat global 
counterfeiting and piracy, otherwise known as the STOP 
initiative.
    Welcome, and I will have you perhaps give your testimony, 
and then I will introduce the rest of the panel afterwards but 
still hope you could stick around. It is your last shot--and 
for questions after this. Thank you.

TESTIMONY OF VICTORIA A. ESPINEL, ASSISTANT U.S. REPRESENTATIVE 
 FOR INTELLECTUAL PROPERTY AND INNOVATION, OFFICE OF THE U.S. 
              TRADE REPRESENTATIVE, WASHINGTON, DC

    Ms. Espinel. Thank you for inviting me to speak today about 
some of the work the U.S. government is doing to strengthen 
protections and enforcement of intellectual property rights 
around the world, including in China and Russia.
    It is a great privilege that I have had the opportunity to 
work with the leadership displayed in this Committee in 
protecting one of America's greatest comparative advantages, 
our creative class.
    I would also like to commend your skilled and dedicated 
staff members for all of their efforts as well. As Mr. Smith 
mentioned, this was, in fact, the first Subcommittee that I 
testified in front of on this issue, and it will likely be the 
last, at least in my capacity as assistant USTR.
    So, I want to say what a true pleasure it has been to work 
with the Members of this Subcommittee and to work with your 
excellent staff.
    There are a number of challenges that we face in protecting 
American rights overseas, including weak laws, a lack of 
political will by some of our trading partners, and the 
increasing scope and sophistication of counterfeiters and 
pirates.
    We use and devote considerable resources to addressing 
these problems. The free trade agreements that we negotiate 
contain comprehensive chapters on intellectual property 
outlining our model for protecting intellectual property, a 
model that is the world's gold standard.
    Our FTAs get results. We have consistently seen stronger 
laws and better enforcement of those laws from the FTAs that we 
conclude.
    Another tool is Special 301, which has been mentioned by 
the Chairman, the Ranking Member and Mr. Smith. This report has 
been successful in encouraging countries to institute reforms 
or to increase enforcement in order to avoid elevation on the 
list or to improve their standing on the list.
    Another serious challenge that we face comes from advancing 
technology and from the increasing scope and sophistication of 
counterfeiters, including dissemination over the Internet and 
highly organized distribution networks, some with links to 
organized crime.
    USTR is keenly aware that counterfeiting and piracy is a 
threat to the health and safety of our consumers and to our 
economy. In order to address this, we need to ensure that our 
own system is as strong as possible.
    We need a new international consensus on stronger rules for 
civil, criminal and border enforcement. And we need to increase 
global cooperation with our trading partners.
    With that broad overview of USTR's approach to IP issues as 
a background, I would like to comment briefly on recent 
activities in China and in Russia.
    China is a top intellectual property enforcement concern 
for us. There is no question that China must do more to protect 
intellectual property rights. China is making some genuine 
efforts, but IP infringement remains at unacceptable levels.
    This year's Special 301 Report described the United States' 
plan to maintain China on the priority watch list and to 
continue Section 306 monitoring.
    In addition, we conducted an unprecedented special 
provincial review of IP enforcement in several key provinces 
and independent municipalities of China.
    Many of these provinces and municipalities are huge 
economies in their own right, and they attract significant U.S. 
investment. They are also on the front lines of the IP problems 
of many of our right holders.
    We reported the results of that review in this year's 301 
report, spotlighting weaknesses at the local level but also 
highlighting some positive efforts.
    In past years, we have used the Joint Commission on 
Commerce and Trade to make progress on IP issues such as China 
joining the WIPO Internet Treaties, which are critical to 
ensuring IP protection in the digital age, and new rules 
requiring that all computers be pre-installed with legal 
operating system software.
    Finally, in appropriate cases where bilateral dialogue has 
not resolved our concerns, we have taken the further step of 
filing cases at the WTO, using the WTO's dispute settlement 
procedure.
    So far we have initiated two cases that relate to our 
intellectual property concerns. The first case involves 
deficiencies in China's system for protecting and enforcing 
intellectual property.
    The second case challenges China's rules which make it 
difficult for movies, publications and music, products of our 
copyright industry, to be imported and distributed inside of 
China.
    It is clear from these examples that we do not hesitate to 
file WTO cases when circumstances warrant that action. That 
said, we believe these cases are evidence of need for more 
bilateral cooperation with China, not less.
    The United States believes that continued dialogue and 
cooperation with China is essential to making further progress 
on intellectual property issues.
    With respect to Russia, the Administration has made it 
clear to Russia's officials at the very highest levels that 
protection of intellectual property is a singular U.S. 
priority.
    In November 2006 we negotiated a bilateral intellectual 
property agreement between the United States and Russia, which 
includes important and specific commitments to strengthen IP 
protection and enforcement in Russia.
    This agreement sets the stage for further progress on IP 
issues in the ongoing multilateral negotiations at the WTO 
concerning Russia's bid to enter the WTO.
    We are also conducting an out-of-cycle review of Russia 
under the Special 301. Russia has made progress in some areas--
for example, taking steps to remove pirate optical disc plants 
off of government and military sites and cracking down on 
unlicensed optical disc plants.
    These were all specific commitments in our bilateral 
agreement with Russia. However, more remains to be done under 
our bilateral agreement. We will continue to press Russia to 
shut down and prosecute the operators of illegal Web sites 
operating in Russia, including the successors to the infamous 
AllOfMP3.com.
    Russia needs to pass legislation now pending in the Duma to 
strengthen customs authority. Russia needs to complete 
implementation of the WIPO Internet Treaties. And Russia needs 
to amend Part 4 of the civil code to bring it into compliance 
with the TRIPS agreement and other IP agreements.
    In closing, Mr. Chairman, I want to assure you in the 
strongest possible terms that the Administration shares the 
view, frequently and well-articulated by the Members of this 
Committee, that protection of U.S. intellectual property 
overseas is critical to America's economic future.
    With that in mind, we look forward to continuing to work 
with you and your colleagues to improve protection and 
enforcement of intellectual property around the world.
    [The prepared statement of Ms. Espinel follows:]

               Prepared Statement of Victoria A. Espinel

    Mr. Chairman, my name is Victoria A. Espinel, and I am the 
Assistant U.S. Trade Representative for Intellectual Property and 
Innovation. It is my pleasure to have this opportunity to speak to you 
today about some of the U.S. Government's work to strengthen protection 
and enforcement of intellectual property rights (IPR) around the world, 
including in China and Russia.
    In order to better use our trade policy tools, the Office of the 
U.S. Trade Representative (USTR) created a new Intellectual Property 
and Innovation office in 2006. I head that office. The office also 
includes a new Chief Negotiator for Intellectual Property Enforcement, 
Stanford McCoy, and five other IPR specialists. My office is tasked 
with using the full range of trade policy tools around the world to 
better protect American industry from piracy and counterfeiting around 
the world, and to ensure that protection remains effective as 
technology continues to develop and intellectual property (IP) 
infringers become more sophisticated.
    USTR uses a variety of tools to protect US intellectual property 
overseas, working in cooperation with other U.S. Government agencies, 
with our foreign trading partners, and with U.S. right holders. These 
tools include our free trade agreements, negotiations of Trade and 
Investment Framework Agreements (TIFAs), WTO accession negotiations, 
bilateral discussions of IP issues, the Special 301 process, U.S. 
preference programs, and dispute settlement.
    There are a variety of reasons that U.S. IP rights are violated 
overseas, including that: some governments have weak laws--that is, 
laws that are inadequate to deter piracy and counterfeiting, and some 
governments do not place a high priority on protection of IP. In 
addition, the scale and scope of piracy and counterfeiting has changed 
in the last decade, as we have seen the use of new means to produce and 
distribute infringing goods, such as the Internet, and the increasing 
sophistication and organization of pirates and counterfeiters on a 
global scale.

                               WEAK LAWS

    Many countries' laws are inadequate to deter counterfeiting and 
piracy. The WTO Agreement on Trade-Related Aspects of Intellectual 
Property Rights (TRIPS) sets out certain minimum standards. However, 
even those countries that have implemented TRIPS may not make 
consistent use of those laws to deter IP theft.
    USTR devotes considerable resources to working with countries to 
strengthen their laws. One way we do this is through negotiations of 
free trade agreements (FTAs). Each of the FTAs we negotiate contains a 
comprehensive chapter on intellectual property. Our IP chapters provide 
the international standard for rules to protect copyright, trademarks 
and patents and other forms of intellectual property, in line with U.S. 
law. Our IP chapters also contain high standards for enforcement, 
including civil enforcement, criminal enforcement and border 
enforcement. After we negotiate an FTA, USTR works closely with our 
trading partners to ensure that the agreement is faithfully 
implemented.
    For example, as a result of the United States-Australia FTA, 
Australia has strengthened its laws to combat internet piracy and 
signal piracy. As a result of the United States-Singapore FTA, 
Singapore passed a law to criminalize end user piracy of software and 
then used that law to criminally prosecute software pirates for the 
first time. If the United-States Korea FTA is approved and goes into 
effect, Korea will be obligated to change its laws to provide greater 
authority to its police and customs authorities, to outlaw movie 
camcording, and to increase its focus on fighting book piracy.
    We also work with countries on IP issues through our Trade and 
Investment Framework Agreement (TIFA) discussions. While a TIFA does 
not have as detailed IPR provisions as an FTA, we have found the TIFA 
discussions to be a productive forum to discuss intellectual property 
issues. For instance, our TIFA dialogue helped persuade Taiwan to pass 
legislation to make peer-to-peer file sharing services illegal. Through 
our TIFA dialogue, we also encouraged Taiwan to clamp down on 
counterfeit pharmaceuticals, leading to police shutting down 40 drug 
counterfeiting operations; pass legislation to create specialized IP 
courts; and create a task force to combat copyright infringement on 
university campuses.
    WTO accession negotiations are another tool we have to strengthen 
laws. One outcome of the negotiations on Vietnam's accession to the WTO 
is that Vietnam will provide protections against criminal copyright and 
trademark violations where no such protections previously existed. 
Furthermore, the government has committed to address the problem of 
government use of illegal software and to increase enforcement against 
signal piracy. We have also used WTO accession negotiations to address 
IP concerns in Russia, which I will discuss in more detail later.

                            LACK OF PRIORITY

    Another challenge that we face is that some governments do not 
place a high enough priority on protecting intellectual property. To 
address this problem, we use the Special 301 process to encourage 
specific trading partners to place a higher priority on addressing 
identified IP problems. Each April, USTR issues a Special 301 Report 
cataloguing specific IPR problems in dozens of countries worldwide. A 
trading partner's ranking in the report sends a message to the world, 
including potential investors, about its commitment to IPR protection. 
Special 301 also affords an opportunity to give credit where it is due, 
as in our decision to improve countries' standing when there are 
significant improvements in IPR protection and enforcement.
    The Special 301 Report has been successful in encouraging countries 
to institute reforms or increase enforcement to avoid elevation on the 
list or to improve standing on the list. For example, Indonesia had 
been listed as a Priority Watch List country for a number of years and 
was interested in improving its standing. Our concerns about illegal OD 
factories in Indonesia helped persuade Indonesia to significantly 
increase enforcement actions, in particular against manufacturers and 
retailers of illegal optical discs. These continued and sustained 
actions, which demonstrated there was political will to do more on 
protecting IPR, caused Indonesia's standing to be improved to Watch 
List. We are continuing to work with Indonesia to further improve IP 
protection on the basis of an Action Plan developed when we improved 
its standing on the Watch List.
    Last year we started a new program called the Special 301 
Initiative intended to make the Special 301 process even more 
effective. Under the Special 301 Initiative we have focused attention 
on a group of countries where we believe there is a good possibility of 
progress through increased engagement. This has proved a success; we 
have in fact seen concrete results over the past year in terms of 
stronger legislation and better enforcement as result of the Special 
301 Initiative.

       TECHNOLOGICAL CHANGES AND SOPHISTICATION OF COUNTERFEITERS

    Another of our challenges comes from advancing technology and from 
the increasing scope and sophistication of the activities of pirates 
and counterfeiters. Counterfeit and pirated products are manufactured 
and then exported around the world using increasingly sophisticated and 
highly organized distribution networks, some with links to organized 
crime. The Internet, for example, is creating great economic 
opportunities and facilitating wide dissemination of information, but 
it is also a means to distribute vast quantities of pirated material 
around the world quickly and at very low cost. To give another example, 
product counterfeiting spans a remarkable array of products, not only 
luxury goods and apparel, but also pharmaceuticals, electronics, baby 
formula and auto parts, among many others.
    USTR is keenly aware that counterfeiting and piracy is an 
increasing threat to the health and safety of our consumers and to our 
economy. We need a strong international regime for IP protection; we 
need an international consensus of strong rules for civil, criminal and 
border enforcement; and we need to continue to increase global 
cooperation with our trading partners.
    Along with challenges, we have some new opportunities. One such 
opportunity is that other countries are increasingly aware of the harm 
that counterfeiting is causing to their domestic economies and 
consumers and are increasingly concerned that lack of IP protection 
will inhibit their ability to innovate. As governments like Brazil, 
China, and India pursue policies to become more innovative, they have a 
greater stake in the international IP system. A second opportunity is 
that other countries are becoming more interested in cooperating with 
the United States on protecting IP. There is a growing international 
realization that we need strong cooperation in order to stop the 
manufacture and trade in counterfeit and pirate goods. USTR has worked 
to capitalize on these opportunities to strengthen the international IP 
regime and to increase cooperation with our trading partners.
    With that broad overview of USTR's approach to IPR issues as 
background, I would now like to comment briefly on recent activities in 
China and Russia, two countries that have been the topics of hearings 
before this subcommittee.

                                 CHINA

    China is a top IPR enforcement concern for us.
    There is no question that China must do more to protect 
intellectual property rights. China is making some genuine efforts, but 
IPR infringements remain at unacceptable levels.
    Let me start with some of the recent efforts China has taken to 
improve IPR protection and enforcement. In July, as a result of the 
ongoing work of experts in the U.S.-China Joint Liaison Group for Law 
Enforcement, Chinese and FBI law enforcement successfully worked 
together in their largest joint IP investigation to date, Operation 
Summer Solstice. Among other things, this operation dismantled a major 
international criminal network engaged in optical disc piracy; seized 
half-a-billion dollars in pirated U.S. software and over $7 million in 
assets; arrested 25 suspects in China; and dismantled 6 manufacturing 
and retail facilities. China also agreed in May to cooperate with U.S. 
Customs and Border Protection (CBP) to fight exports of counterfeit and 
pirated goods.
    That said, we see evidence of unacceptable levels of IPR 
infringement most vividly in the numbers of infringing goods seized at 
U.S. borders. CBP mid-year statistics for 2007 showed that China was 
the source of 81 percent of infringing goods seized at U.S. borders. 
China's high share of seized goods is not particular to the current 
year.
    USTR and the Administration as a whole continue to respond to this 
critical concern by making innovative use of our full range of trade 
policy tools. First, USTR has augmented our focus on the unique 
challenges of China with the appointment last year of a Chief Counsel 
for China Trade Enforcement, Claire Reade, who leads our China 
Enforcement Task Force.
    Second, this year's Special 301 Report described the United States' 
plan to maintain China on the Priority Watch List and to continue 
Section 306 monitoring. In addition, we conducted an unprecedented 
special provincial review of progress on IPR issues in several key 
provinces and independent municipalities of China. Many of these 
provinces and municipalities are huge economies in their own right, and 
they attract significant U.S. investment. They are also on the front 
lines of IPR problems for some U.S. right holders. We reported the 
results of that review at the end of the 2007 Special 301 report, 
spotlighting weaknesses at local levels, but also highlighting positive 
efforts, innovative initiatives for fighting Internet piracy in 
Beijing, pilot programs on enforcement in Shanghai, and deeper 
engagement with international right holders in Jiangsu province.
    In past years, we have used the Joint Commission on Commerce and 
Trade (JCCT), which Ambassador Schwab jointly chairs with Secretary 
Gutierrez, to get results on IPR. For example, as a result of past JCCT 
commitments:

          China introduced rules that require computers to be 
        pre-installed with licensed operating system software;

          China agreed to step up work to combat counterfeit 
        goods at trade fairs and consumer markets; and

          China joined the WIPO Internet Treaties, which are 
        critical to ensuring IP protection in the digital age.

    As I mentioned earlier, we have also used our Special 301 process--
USTR's annual report card on international IP protection--to highlight 
China as a top IPR enforcement priority. Our analysis of China is the 
most in-depth and detailed of any country covered in the Special 301 
Report.
    Finally, in appropriate cases, where bilateral dialogue has not 
resolved our concerns, we have taken the further step of filing World 
Trade Organization (WTO) dispute settlement cases. So far we have 
initiated two cases that relate to our IPR concerns.
    The first of these cases involves deficiencies in China's legal 
regime for protecting and enforcing copyrights and trademarks on a wide 
range of products. Specifically, our panel request focused on three 
main issues: quantitative thresholds in China's law that must be met in 
order to start criminal prosecutions of copyright piracy and trademark 
counterfeiting and that appear to create a substantial safe harbor for 
those who manufacture, distribute, or sell pirated and counterfeit 
products in China; rules for disposal of IPR infringing goods seized by 
China's customs authorities; and the apparent denial of copyright 
protection to works poised to enter the Chinese market but awaiting 
censorship approval from China's authorities. The WTO panel in this 
case was formally established at a meeting of the WTO Dispute 
Settlement Body on September 25.
    Our second WTO case challenges China's barriers to trade in books, 
music, videos and movies. Our panel request focuses on a legal 
structure in China that denies foreign companies the right to import 
publications, movies, music, and videos, as well as on China's rules 
that severely impede the efficient and effective distribution of 
publications and videos within China. In addition, this panel request 
addresses market access barriers affecting the distribution of movies, 
as well as the distribution of sound recordings over the internet and 
the mobile phone network.
    It is clear from these examples that we do not hesitate to file WTO 
cases when circumstances warrant that action. At the same time, these 
cases are evidence of the need for more, not less, bilateral engagement 
with China. The United States believes that continued bilateral 
dialogue and cooperation can lead to further progress in these and 
other areas. The United States will continue to put serious efforts 
into its joint work with China on innovation policy, intellectual 
property protection strategies, and the range of other important 
matters in our bilateral economic relationship through the U.S.--China 
Strategic Economic Dialogue and the JCCT.
    Moving ahead with that work will of course require a willingness to 
cooperate on the Chinese side. We have seen that in some areas, such as 
the recent law enforcement actions I mentioned earlier, and we hope to 
see it in other areas as well.

                                 RUSSIA

    With respect to Russia, the Administration has made it clear to 
Russia's officials at the highest levels that the protection of IPR in 
Russia is a U.S. priority. As we have moved into the multilateral phase 
of the negotiations on Russia's accession to the WTO, we have continued 
to reinforce the importance that both the Administration and Congress 
place on full implementation of all the commitments in our November 
2006 Bilateral IPR Agreement.
    The 2007 Special 301 Report describes the Bilateral IPR Agreement 
between the United States and Russia, concluded in November 2006, which 
includes important commitments to strengthen IPR protection and 
enforcement in Russia. Under the terms of the agreement, Russia 
committed to take action to address piracy and counterfeiting and 
further improve its laws on IPR protection and enforcement. The 
agreement sets the stage for further progress on IPR issues in ongoing 
multilateral negotiations concerning Russia's bid to enter the WTO. 
This year's Special 301 Report continued heightened scrutiny of Russia 
by maintaining Russia on the Priority Watch List and announcing plans 
for an Out-of-Cycle Review.
    In August, we received comments from the public, including from 
U.S. industry and the Russian Federation, as part of the Out-of-Cycle 
Review of Russia's protection of intellectual property. A major purpose 
of that review is to scrutinize Russia's implementation of the 
Bilateral IPR Agreement. That review is ongoing.
    In the meantime, we continue to work intensively with our Russian 
counterparts to achieve progress on the outstanding bilateral and 
multilateral issues related to Russia's WTO accession, including 
implementation of TRIPS.
    Russia has made clear progress in some areas. For example, they are 
taking steps to move optical disc plants off of restricted military-
industrial sites, cracking down on unlicensed optical disc 
manufacturers, passing laws to curb abuses by rogue copyright 
collecting societies, and issuing helpful new guidance for the 
prosecution of criminal IPR cases. These were all specific commitments 
in our bilateral agreement.
    However, more remains to be done pursuant to our bilateral 
agreement. For example, we will continue to press Russia to shut down 
and prosecute the operators of illegal websites operating in Russia, 
including the successors to the infamous allofmp3.com. Russia needs to 
strengthen its supervision of licensed optical disc plants, including 
better laws and regulations and more enforcement. Russia still needs to 
make legislative changes to implement its TRIPS requirements to protect 
pharmaceutical test data. It must pass legislation now pending in the 
Duma to strengthen Customs' authority to take actions ex officio with 
respect to suspected exports and imports of pirated or counterfeit 
goods. Russia needs to complete implementation of the WIPO Internet 
Treaties, and it must amend Part IV of its Civil Code to ensure full 
compliance with TRIPS and other IPR agreements. Some of these actions 
are overdue--a concern that we raised with our Russian colleagues at 
our bilateral Intellectual Property working Group in Moscow on 
September 24 and 25 and during other recent meetings with the Russian 
Federation in Geneva and Washington. We have been assured that the 
process of compliance is moving ahead.
                                 ______
                                 
    In closing, Mr. Chairman, I want to assure you in the strongest 
possible terms that the Administration shares the view, so frequently 
and well articulated by the distinguished members of this subcommittee, 
that protection of U.S. intellectual property overseas is critical to 
America's economic future. With that in mind, we look forward to 
continuing to work with you and your colleagues to improve protection 
and enforcement of IPR around the world.

    Mr. Berman. Well, thank you very much, Ms. Espinel.
    And I think at this point I will recess the hearing. I 
believe it is one vote, so we will be right back and introduce 
the rest of the witnesses, hear their testimony and then 
questions.
    Thank you.
    [Recess.]
    Mr. Berman. Let me introduce the rest of the panel and 
reconvene the meeting. The next witness will be Eric Smith, who 
represents the International Intellectual Property Alliance.
    The IIPA is a private-sector coalition of seven copyright-
based trade associations which represent over 1,900 companies 
in the movie, music, business software, and video game 
publishing industries.
    Since co-founding the IIPA in 1984, Mr. Smith has 
represented the IIPA before U.S. and foreign governments with 
the primary objective of opening foreign markets to U.S. 
copyrighted products and reducing piracy levels through 
improved legal protection and effective enforcement.
    He was the principal representative of the copyright 
industries in the WTO's TRIPS and NAFTA intellectual property 
negotiations, and served on the U.S. delegation at the 
diplomatic conference leading to the adoption of the WIPO 
Copyright Treaty and Performances and Phonograms Treaty in 
1996.
    I would just add that I had the pleasure of spending a 
couple of days with him at a conference on these subjects this 
past summer, and both enjoyed it and found him incredibly 
knowledgeable on this whole subject.
    Dr. Loren Yager is Director of International Affairs and 
Trade of the U.S. Government Accountability Office.
    Dr. Yager has managed GAO efforts to document U.S. efforts 
to enforce intellectual property rights at home and abroad, the 
Federal approach and strategy for improving intellectual 
property rights enforcement, and small business efforts to 
obtain patent protection.
    Additionally, Dr. Yager has completed reports and provided 
congressional testimony on a wide range of topics, including 
China import remedies, customs and border protection's in-bond 
system, off-shoring of U.S. services, terrorist financing, 
global corporate responsibility, illegal textile transshipment 
and the World Trade Organization, China's WTO compliance, the 
maquiladora industry, container security, and a variety of 
other subjects.
    Lastly, Mark MacCarthy is Senior Vice President of Global 
Public Policy at Visa. He represents Visa before international 
public policy makers around the world and in the United States 
before the Congress, the Administration, the Federal Trade 
Commission, the banking regulators and other regulatory 
agencies.
    Mr. MacCarthy is responsible for Visa's global public 
policy initiatives and strategies in the area of data security 
and privacy, electronic commerce issues such as Internet 
gambling and Internet pharmacies, and product innovation such 
as Visa's contactless payment platform and prepaid cards.
    If I recall correctly, he also worked in this place for a 
good period of time.
    Gentlemen, all your written statements will be part of the 
record in its entirety. I would ask you to summarize your 
testimony in 5 minutes or less.
    There is a timing light at your table that supposedly works 
now, and when 1 minute remains, the light will switch from 
green to yellow, and then to red when the 5 minutes are up.
    I am tempted to let Mr. Coble add his admonition about what 
that light means, but I'm not doing that. Mr. Smith, why don't 
you begin?

     TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 
     INTELLECTUAL PROPERTY ALLIANCE (IIPA), WASHINGTON, DC

    Mr. Smith. Chairman Berman, Ranking Member Coble, Members 
of the Subcommittee, it is an honor and pleasure to appear 
before the Subcommittee for the third time on this topic, twice 
in 2005, to again provide an update on global copyright piracy.
    Piracy continues to rage around the world and is a threat 
to U.S. growth and U.S. jobs. While the situation is slowly 
improving each year on the physical piracy front, with some 
individual country exceptions, Internet piracy is now truly a 
global problem with U.S. content fueling that piracy in most 
countries.
    Increasingly, we all must focus on online piracy as a 
threat to e-commerce and to U.S. leadership in producing and 
globally distributing high-value content.
    The U.S. maintains a huge comparative advantage, as was 
said by Mr. Coble, in the production and distribution of 
creative works, filmed entertainment, music and recordings, 
business and entertainment software, and books and journals 
that make up the IIPA family.
    And for most of these industries, 50 percent of their 
revenues derive from outside the U.S.
    This comparative advantage has meant that these creative 
industries now account for an ever-increasing portion of the 
GDP, about $819 billion in 2005, or close to 7 percent of the 
U.S. GDP; over five million jobs, which is about 4 percent of 
total employment; and $110 billion in foreign trade revenues, 
making it one of the largest contributors to trade in our 
economy.
    Perhaps most important is that these industries accounted 
for over 13 percent of the growth in the economy in 2006. 
Global piracy threatens that growth path. We have been 
wiretapping what Internet piracy has done to our recording 
industry and threatens to do to others as well.
    A study came out this month that for the first time was 
able to quantify the impact of global piracy on the U.S. 
economy, $58 billion in losses, lost jobs, lost tax revenues, 
lost waves.
    The study concluded that all these numbers were 
conservative. In my written statement, I detailed IIPA members' 
initiatives and challenges in dealing with this problem, and I 
won't repeat them here.
    But Mr. Coble was quite right. On the enforcement side 
there just aren't any quick fixes.
    Suffice it to say that the copyright industries depend 
critically on good laws and enforcement and that governments 
are central to making that happen.
    Our government has led the way and without the help of USTR 
and other agencies and from Congress for providing the trade 
tools to assist in awakening our trading partners to the need 
to protect our intellectual property, including for the benefit 
of their own citizens and creators, we would be in truly dire 
straits.
    We have witnesses many successes in the last 20 years, 
driven in part by good work from our government.
    I do want to report on the two countries that have provided 
the greatest challenges for us, China and Russia. The situation 
in China since we last reported to you at the end of 2005 is 
mixed.
    IIPA members, with the exception of the business software 
industry, have not seen much progress at all, mostly at the 
margins. Losses continue at very high levels, hovering between 
80 percent and 90 percent of the market, making it almost 
impossible to do business there.
    The biggest problem, again, as before, is China's stubborn 
reliance on a flawed administrative enforcement system that 
simply lacks any incentive for pirates to leave this lucrative 
business, and China's almost total failure, really, to employ 
criminal remedies, which has been the only way we have been 
able to reduce piracy levels in the rest of the world.
    The business software industry, through China's meeting 
some key JCCT commitments with respect to legalizing software 
use in the industry's biggest customer, the Chinese government, 
has seen a 10 percent decrease in piracy rates and a resulting 
88 percent increase in sales since our last report to you in 
2005.
    And I can guarantee you the rest of my members would love 
to see that kind of progress, too.
    Internet piracy is our most urgent concern. The biggest ISP 
search service in China, Baidu, which was mentioned, is 
reportedly responsible for 50 percent of illegal downloads.
    We think the Chinese government is also very concerned 
about Internet piracy, has passed good regulations dealing with 
the protection of content online, but, again, enforcement is 
weak and criminal enforcement is spotty at best.
    Overall, we have only counted six concluded criminal cases 
involving U.S. works since 2001, when China joined the WTO, a 
record that must change if China is ever to reduce its high 
piracy levels and make a real market for copyrighted material.
    And China is a closed market in terms of market access for 
our cultural industries, another problem that prevents them 
from selling in the Chinese market.
    The pirates, of course, enjoy complete market access for 
our products, and through this theft enjoy the economic 
benefits that should come to our own citizens.
    Russia remains a continuing frustration. The November 2006 
IPR agreement, Russia's pathway to WTO accession, we hope and 
continue to hope will be complied with. And if so, we will see 
a much better market there.
    Russia has made some progress, as Victoria has outlined, 
but even here we await the true fruits of that progress. For 
example, while Russia promised to cancel leases for the pirate 
O.D. factories housed on protected government reservations, 
that process is still in process.
    No direct results yet. No plant owner has been convicted, 
and very few criminal cases with deterrent penalties can be 
counted.
    We await real progress, and meanwhile IIPA's year 2000 GSP 
petition remains in limbo with Russia still receiving over $500 
million in unilateral benefits in 2006, with our industries, in 
turn, suffering close to $2 billion in losses.
    Mr. Chairman, it is there in our testimony, in our written 
testimony, it is there for all to evaluate how serious Russia 
is in working to solve its massive piracy problems.
    If I might, Mr. Chairman, one word about Canada.
    Mr. Berman. One sentence.
    Mr. Smith. The situation there is not good. The law is 
antiquated and unequipped to deal with online piracy, which is 
growing. Enforcement is not a high priority there. We 
definitely need improvements in Canada. Thank you.
    [The prepared statement of Mr. Smith follows:]

                  Prepared Statement of Eric H. Smith

































    Mr. Berman. Thank you very much.
    Dr. Yager?

TESTIMONY OF LOREN YAGER, DIRECTOR OF INTERNATIONAL AFFAIRS AND 
TRADE, U.S. GENERAL ACCOUNTABILITY OFFICE (GAO), WASHINGTON, DC

    Mr. Yager. Good morning, Mr. Chairman, Members of the 
Subcommittee. I am pleased to be here today to report on our 
work on intellectual property protection before the 
Subcommittee of the U.S. Congress that has identified this 
topic as one of its primary areas of focus.
    Prior hearings of this Subcommittee have focused on the 
patent reform act, trying to create the right formula for 
stimulating creative and inventive activity in the United 
States.
    Ultimately, once the patents or other protections have been 
granted, it will only be meaningful if there is protection of 
IP in the United States as well as in other countries.
    Today I will discuss the increasing challenges to IP 
protection as advances in technology and changes in global 
manufacturing make counterfeiting and piracy an ever greater 
threat.
    As requested, I will summarize the work the GAO has 
performed on two subjects, first the nature of the risk that 
U.S. corporations face in protecting IP, and second, U.S. 
methods for implementing and coordinating United States' 
intellectual property enforcement activities.
    My remarks are based on a variety of assignments the GAO 
has conducted for the Congress related to IP protection over 
the past 5 years.
    The first major subject I would like to cover in this 
statement is that the risk to IP is increasing for U.S. firms, 
for a number of reasons.
    For example, as the technological and manufacturing 
capability in Asia increases in industries such as the 
semiconductor industry, more complex parts of the production 
process are being carried out in countries like China, which 
puts more U.S. technology at risk.
    A second reason is that high profits and technological 
advances have also raised the risk of IP infringements by 
encouraging and facilitating counterfeiting and piracy.
    Economic incentives for counterfeiting and piracy include 
low barriers to entry and high profits, given that there is no 
repayment of the research and development or other reward for 
the inventive activity.
    In addition, technology has allowed high-quality, 
inexpensive and accessible reproduction and distribution, 
particularly in the digital industries.
    At the same time, the level of deterrence has not kept pace 
with the level of profitability. For example, there has been 
weak enforcement in some countries, and China is a country 
where the combination of production capability as well as 
export capacity is unique.
    However, there are many other countries where enforcement 
challenges have persisted despite U.S. efforts.
    The second subject I want to cover is the U.S. domestic 
efforts to protect intellectual property can also be improved.
    The United States faces significant obstacles to 
coordinating domestic efforts and ensuring that strong 
intellectual property protection remains a priority.
    One of the biggest obstacles is the crosscutting nature of 
the issue and the necessity for coordination between the large 
number of agencies involved in IP protection.
    In my written statement, I have included a figure showing 
the different agencies and sub-agencies involved in IP 
protection, and the figure includes policy agencies such as 
USTR, enforcement agencies such as the FBI, as well as 
technical offices such as the copyright office.
    We took a close look at the IP coordination structure in 
the United States and found that it lacks permanence as well as 
some other features that are central to the success of this 
type of effort.
    We also reported on the efforts of customs and border 
protection to interdict counterfeit goods at the U.S. border 
and found that the bulk of customs enforcement outcomes in 
recent years have been accomplished within certain modes of 
transport, product types, and have been restricted to a very 
limited number of ports.
    For example, only 10 of the 300-plus ports are responsible 
for three-fourths of the seizure value, but yet these were not 
necessarily the largest ports in terms of import volume.
    We made a series of recommendations to customs that we 
believe will help them better focus their IP inspection 
activities.
    In conclusion, Mr. Chairman, having the right formulas for 
creating intellectual property is of limited value unless there 
is sufficient protection for the works that are created, and 
this hearing directly addresses that issue.
    There is little disagreement, at least domestically, with 
the need to strengthen protection, but the difficulty is in how 
to best achieve that goal in the face of the strong economic 
incentives for counterfeiting and the limited resources 
available to protect it.
    While there are many elements of a successful national 
strategy, continuity is central to success, whether that is in 
the efforts to encourage trading partners such as China, the 
domestic efforts of U.S. agencies, or in the oversight by 
Congress.
    We appreciate the opportunity to discuss some of our 
findings before this Subcommittee and would be happy to help 
consult further to help achieve the long-term goals.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions.
    [The prepared statement of Mr. Yager follows:]

                   Prepared Statement of Loren Yager







































    Mr. Berman. Thank you, Dr. Yager.
    And, Mr. MacCarthy?

 TESTIMONY OF MARK MacCARTHY, SENIOR VICE PRESIDENT FOR GLOBAL 
        PUBLIC POLICY, VISA INCORPORATED, WASHINGTON, DC

    Mr. MacCarthy. Thank you, Mr. Chairman, and Ranking Member 
Coble and Members of the Subcommittee. Thank you for the 
opportunity to testify before you today. Visa operates a global 
electronic payments network in more than 170 countries around 
the world.
    We do not issues Visa cards and we do not arrange for 
acceptance of Visa cards by merchants. These relationships are 
handled by our network of 16,000 financial institutions 
throughout the world.
    To protect the Visa brand, to promote electronic commerce 
and because it is the right thing to do--and thank you, Mr. 
Chairman, for that quotation there--Visa goes beyond any legal 
requirements to prevent the use of our payment system for 
illegal electronic commerce transactions.
    Our policy is clear and unambiguous. Our systems should not 
be used for illegal transactions.
    We work cooperatively with law enforcement around the 
world, and we take special steps in cases of criminal activity 
and activity that threatens health and safety.
    For example, we search the Internet for merchants selling 
child pornography or illegally distributing controlled 
substances, and we expel them from our system as soon as they 
are discovered.
    The subject of today's hearing is different. It relates to 
complaints by third-party business entities that Internet 
merchants are violating their intellectual property rights.
    Now, Visa can't be the law enforcement agency for 
violations of intellectual property rights on the Internet. 
Still, we have policies and procedures in place to handle these 
third-party complaints.
    Our global policy is this: If a transaction would be 
illegal in either the jurisdiction of the merchant or the 
jurisdiction of the cardholder, we don't want that transaction.
    The AllOfMP3.com and allTunes.com case illustrates how this 
policy works. In that case, Visa officials received a 
documented complaint from IFPI, which represents copyright 
owners internationally.
    They asserted that AllOfMP3.com, a music download site 
located in Russia, was infringing on the copyrights of their 
members. We conducted a legal assessment, including a review by 
outside counsel, and concluded that under Russian law and under 
the law of the vast majority of the customers of AllOfMP3.com, 
the merchant's transactions were illegal.
    After appropriate notice, the Russian bank working with the 
site stopped processing its Visa transactions. This was in 
September of 2006. At the end of September 2006, the bank also 
stopped processing transactions from an affiliated download 
music site called allTunes.
    And then the owner of allTunes sued the bank in a Russian 
court. Visa was a party to that litigation on the side of the 
bank. And in June 2007, the owner won a judgment that the bank 
had violated its contract with the merchant, and the bank would 
be required to provide processing services.
    In response to the bank's claim that the merchant was 
acting illegally, the court determined that there were no 
rulings in Russia establishing that allTunes was making illegal 
use of exclusive rights belonging to some rights holder.
    Later on, in August of 2007, in a different case, a Russian 
court issued a ruling relating to a criminal copyright 
infringement case initiated by IFPI against the owner of 
AllOfMP3.com. This ruling stated that there and not been 
sufficient confirmation of any illegal activity by the site's 
owner.
    The court implied that this and similar sites would be in 
compliance with Russian law to the extent that they paid for 
rights from a Russian collective rights society.
    These court cases created a challenge for us. To preserve 
our cross-border policy, we decided to allow the local bank to 
provide only domestic service to the site involved in the court 
case, but transactions from customers in other countries would 
not be allowed.
    Now, what lessons can we learn from this case? First, Visa 
has policies and procedures in place to handle these kind of 
issues. Second, private-sector enforcement in this area is 
limited. Visa can only make decisions where the underlying law 
is reasonably clear.
    In this circumstance, the local law appeared reasonably 
clear to us, to our local bank and to the record companies. But 
a local court thought otherwise.
    As a result, Visa's client bank was exposed to legal 
liability for withdrawing service to a merchant that was found 
to be operating legally under local law.
    We are simply not in a position to clarify local law, to 
override it, or to resolve conflicts between different legal 
systems.
    There are clearly system limitations on our ability to 
block illegal transactions when the laws of many countries 
conflict. Potentially we would have to deal with conflicting 
regimes in the 170 countries around the world where we operate.
    And this leads to my third and final point. When local laws 
are not clear, governments and aggrieved businesses cannot put 
private-sector intermediaries like Visa in the position of 
resolving the issues.
    Ultimately, this will require government-to-government 
discussions that harmonize local legal structures.
    Thank you again for the opportunity to testify today, and I 
am happy to answer any questions you might have.
    [The prepared statement of Mr. MacCarthy follows:]

                  Prepared Statement of Mark MacCarthy





















    Mr. Berman. Well, thank you all.
    And I am going to wait till the end of Member questioning 
to ask my questions and will recognize now, for 5 minutes, the 
Ranking Member of the Subcommittee, Mr. Coble.
    Mr. Coble. Mr. Chairman, I thank you for that.
    For the information of the witnesses, some weeks ago in my 
district a church had a fundraiser, and the high bidders, Mr. 
Chairman, were assured that they would be my guests for lunch.
    So if I don't appear in the Members' room on or about 
11:30, they are not going to be happy with me. I have got to 
pick up the tab. Thank you, Mr. Chairman.
    Ms. Espinel, given that China is the fourth-largest economy 
in the world, and----
    Mr. Berman. Is this an online program?
    Mr. Coble. No. No. [Laughter.]
    He always disarms me, but with a smile on his face.
    Given that China is the fourth-largest economy in the world 
and poised to become the second-largest training nation in the 
world, why should it be considered a developing nation?
    And let me ask you this, Ms. Espinel. Are there any 
economic or trade benefits that extend to China based on this 
designation?
    Ms. Espinel. Well, certainly, with respect to the area that 
I cover, intellectual property, we do not believe that China's 
status as a developing country--and I am not conceding that 
China is a developing country or has any particular status.
    But if China asserts that it is, we don't believe that that 
should serve as any excuse for China not to strengthen its 
intellectual property system and adequately protect American 
interests consistent with the obligations and commitments that 
it has under the WTO.
    Mr. Coble. And I wanted to ask Mr. Smith a question, but I 
want to put one more question to Ms. Espinel.
    Your statement referred generally to some of the 
commitments contained in the bilateral IPR agreement, but it 
did not make clear which, if any, of the specific actions that 
the Russian government was obligated to complete by June 1st of 
this year have been satisfactorily performed.
    If you will, Ms. Espinel, can you identify which 
commitments were required to be performed by 1 June and the 
USTR's current assessment of Russia's performance on each?
    Ms. Espinel. I would be happy to. There are two categories 
of commitments. Some were required to be in place by June 1st.
    Some, particularly as related to enforcement, are 
commitments that Russia signed up to start acting on 
immediately and commitments that we think should continue after 
their WTO membership is complete, should we come to that point.
    Two that I want to highlight in particular--one of the 
commitments that Russia made in the bilateral agreement was to 
shut down or to terminate the leases of illegal optical disc 
plants that are operating on government sites, what are 
referred to as restricted access sites.
    And Russia has made progress in this are. I believe there 
are 17 such plants. Russia has terminated the leases--or by the 
end of this year, Russia should have terminated the leases on 
16 of those 17 plants.
    And I can assure you we won't forget about the one that is 
remaining. But that is significant progress on an issue that 
has been a point of contention between the U.S. and Russia for 
some time.
    Russia has also stepped up enforcement against illegal, 
unlicensed optical disc plants. They have conducted seven raids 
of unlicensed plants this year. They have conducted 17 raids of 
warehouses where illegal product is stashed. So that is 
progress.
    However, there are a number of areas where Russia still 
needs to make considerable progress, and we will continue to 
push them on that.
    And a few of those areas are--for example, there is customs 
legislation that they committed to pass that has not yet gone 
into force. It is now pending in the Duma.
    But Russia needs to pass that customs legislation to give 
their customs authorities more authority to take action at the 
border.
    Russia needs to take action against illegal pirate Web 
sites--the successors to the AllOfMP3, which have been 
mentioned by some of my fellow panelists.
    Russia needs to make amendments to its civil code to bring 
it into compliance with the TRIPS agreement. Russia needs to 
complete its accession to the WIPO Internet Treaties to protect 
copyright in the digital age.
    So again, while Russia has made some progress in some 
areas, there are still a number of areas where Russia needs to 
make further progress in order to be in compliance with the 
agreement that we have negotiated.
    Mr. Coble. I thank you.
    Mr. Smith, for some time the IIPA members call upon the 
United States government to utilize the WTO dispute settlement 
mechanism to press our concerns regarding China.
    Now that we have done so, what do you consider to be the 
next most important steps that the USG can take to improve 
conditions for IP owners in China?
    Mr. Smith. Well, I think that case has to proceed apace. It 
is an important case, and I think Ms. Espinel can probably give 
you the details. IIPA is not directly involved in that case. It 
is a subgroup of our group called the China Copyright Alliance.
    But I think that case has to proceed, and I think the 
people who are involved in that case feel very certain that 
that case will go well.
    And I think the key is going to be, if that is true, the 
implementation phase of that case when it is completed to try 
to leverage additional improvements beyond those--the actual 
panel decision on the narrow facts of the particular claims 
that are being brought.
    Mr. Coble. I thank you for that.
    Mr. Chairman, I know my red light is on, but if I may make 
one more statement, Mr. Chairman.
    The international trading system, lady and gentlemen, is 
rules-based. And respect for those rules demands that there be 
serious consequences for countries which have voluntarily 
agreed to abide by the rules of the road but yet choose to 
consistently and continually fail to honor their commitments.
    And I think that is one of the impediments, Mr. Chairman, 
that we must encounter successfully.
    Thank you.
    And thank you, Mr. Chairman.
    Mr. Berman. Thank you, Mr. Coble. I couldn't agree with you 
more. Of course, one of the questions I plan to ask later to 
Ms. Espinel is what about the situation where we don't comply 
with this rules-based system, but we will save that for later.
    The gentleman from North Carolina, Mr. Watt, is recognized 
for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    I want to first applaud the Chair for convening this 
important hearing. I am new to this Subcommittee.
    There probably hadn't been a more consistent theme for a 
set of involvements that I have had in international travel 
since I have been in Congress than this one issue.
    I don't think I have ever been to a foreign country on a 
congressional delegation trip, on an informal trip, on 
anybody's dime where there hadn't been an aggressive discussion 
of how we attack the piracy and theft of intellectual property 
and its products.
    And I guess if I had made an opening statement, it would 
have paralleled Ms. Espinel's that we started off thinking that 
in most countries it was primarily a question of weak laws or 
no laws.
    We progressed beyond that to a recognition that having a 
set of laws on the books, without some effective enforcement 
mechanism and policing and sanctioning process, wasn't very 
helpful.
    And the third point she made was that despite all of those 
efforts, after 15 years in Congress, the explosion of 
international trade and the opportunities for people to engage 
in piracy and intellectual property theft have gotten bigger, 
and bigger, and bigger and bigger.
    So one walks away from a hearing of this kind with a sense 
of frustration, a much, much better understanding of a 
description of the problem, which all of the witnesses were 
very well equipped to describe.
    What seems always lacking at the end of these kinds of 
hearings is not a lack of understanding about what the problem 
is but what can we do more aggressively to try to solve the 
problem.
    And so let me start with Mr. Yager and Mr. MacCarthy. First 
of all, maybe I will start with Mr. MacCarthy, just to see 
whether other facilitators of the economic transactions--credit 
card issuers, banks that facilitate the transfer of money and 
facilitate commerce in the regular course of events--aside from 
the off market itself.
    I am not much on using the term black market for reasons 
that some people might understand better than others.
    But what is the general attitude of facilitators of 
financial transactions? Are they consistent with the ones that 
you have expressed here? Are they being aggressively engaged? 
And what more can they do to help us with this problem?
    Mr. MacCarthy. I can't speak in detail for all of the 
financial service providers in this area, but in general they 
have policies and procedures that are similar to the ones that 
I described, which is they have in place a process for 
evaluating complaints that come to them, investigating them and 
then taking appropriate action.
    Even if the systems--the traditional systems that are 
involved in electronic commerce could stamp out these kind of 
transactions within their systems--and for reasons I mentioned 
in my testimony, it seems unlikely that they will be successful 
in doing that completely.
    But even if they could, there are alternative payment 
mechanisms out there that are ready to move into the gap and to 
provide payment services when the traditional payment providers 
are successful in driving the illegal activity out of their 
circumstance.
    We have seen that already in the context of child 
pornography, where there is a coalition against child 
pornography that the financial institutions have organized, and 
we are working cooperatively together with the National Center 
for Missing and Exploited Children.
    And what we found is that the success that we have had in 
driving those kind of transactions out of our system has been 
mirrored by the use of alternative payment mechanisms for those 
transactions. Various kinds of e-cash or digital cash are 
stepping in to be the transaction processor of choice.
    Similar things are happening in Internet gambling. As we 
are using our coding and blocking mechanism to reduce the use 
of regular payment cards for Internet gambling transactions, 
those merchants are turning to the automated clearinghouse and 
using that as the mechanism for completing the transactions.
    And that mechanism is not, you know, a kind of underground 
operation. That is the same mechanism that many people use to 
get their payment from employment. It is the same mechanism 
that people use for many recurrent payments, for their 
mortgages or utilities or their rental payments.
    But it is a harder system to control. There is less ability 
to know exactly who is doing what on that system. And it is the 
kind of system that can be used as an alternative mechanism 
when the traditional payment mechanisms have done what they can 
to drive the illegal transactions out of them.
    Mr. Watt. You may be depressing everybody in the room if I 
allow you to go further.
    My time has expired.
    Mr. Yager, and you don't have to answer this now, if the 
GAO has done some specific set of recommendations about how we 
may approach solutions--I mean, I understand the problem. There 
is a great description of the problem that you have outlined in 
your testimony.
    But if there are a set of solutions that you all--came up 
in the process of doing the GAO study, I would welcome----
    Mr. Yager. Let me just answer that very briefly. We have 
done a lot of work. Obviously, Ms. Espinel has covered what 
happens abroad.
    Some of the work that we have done has to do with what can 
be done in the United States to raise the level of deterrent, 
because that is really what we are talking about, trying to 
create a bigger deterrent for the operations.
    So a couple of the very specific studies we did had to do 
with the customs and border protection that operates at our 
borders when the goods are coming across.
    One of the keys there is that there has to be a greater 
extent and a greater level of seizure activity, because we 
found in looking at their seizure efforts that they were highly 
concentrated in certain specific ports, and some of the major 
ports are not getting much seizure activity.
    And there isn't awareness by the management of this problem 
to try to learn how it is that some ports are doing so much 
better than others. What can they learn internally to make sure 
that that kind of skill exists at all ports?
    The second recommendation and the second issue that we 
brought up in our report is that in some cases there are 
penalties assessed against seized goods, but one of the things 
that we found is less than 1 percent of those penalties are 
currently being collected.
    Penalties without payment are not an effective deterrent, 
so there has to be greater attention to not just levying the 
fines but collecting the fines from those that are abusing the 
laws.
    So I think that also means at some point a greater threat 
of prosecution in the United States. So I think that the 
deterrent level needs to be raised.
    Certainly, a lot can be done abroad, but there are also 
things that can be done domestically, and we have some very 
specific suggestions as to how that could be done.
    Mr. Watt. And I know my time is over, but it seems to me 
that there is a parallel effort going on here to intercept the 
prospect of terrorism before it gets to the borders that you 
are talking about.
    Mr. Yager. That is right.
    Mr. Watt. Is anybody looking at the--I mean, we tend to 
look at this stuff in silos.
    I would like the benefit, at some point--not right now--of 
knowing whether anybody is even talking to each other across 
those silos to try to figure out some common steps that we 
could be making on the intellectual property front while we are 
making steps on the terrorism, counterterrorism front.
    Mr. Chairman, I am way over my time, and I will yield back.
    Mr. Berman. Perhaps a hearing on whether we should take the 
military option off the table--well, never--no. [Laughter.]
    Just based on order of appearance, I am going to recognize 
our newest Member of the Subcommittee, from Ohio, Ms. Sutton.
    Ms. Sutton. Thank you, Mr. Chairman. And Mr. Coble is gone, 
but I want to thank you both for not only, of course, Mr. 
Chairman, for holding the hearing but also for the remarks and 
the questions that Mr. Coble asked while he was present.
    This is an extraordinarily important issue, and I see it 
as--in reflecting upon Mr. Coble's words, as part of a bigger 
problem that our international trading system is broken. And I 
have a number of questions, but I would just like to sort of 
draw some things together.
    And I was struck, Ms. Espinel, when you were talking about 
the privilege to protect our creative class.
    And I absolutely concur that this is an enormous issue, and 
I am sympathetic and looking forward to finding ways to make 
this work so that our businesses and our workers are not left 
at a disadvantage in this country.
    But I was struck by the use of the words that you chose, 
protect and protect and protect against sort of these illegal 
tactics being employed by others.
    When I use that language to talk about other sectors of our 
economy, like the traditional manufacturing sector, just 
talking about stopping unfair trading practices that are being 
employed and sometimes subsidized by other countries, I am 
called a protectionist.
    Do you ever get--are you ever called a protectionist, or do 
you fashion yourself one?
    Ms. Espinel. No. In the sense that that word is used, 
protectionist in terms of--obviously, my office, USTR as a 
whole, are strong proponents of free trade.
    We see our free trade agreements--we see our free trade 
agenda--as being a way not just to increase market access for 
U.S. products but also for a way to build the world economy and 
a way to help other countries build their own economy.
    In terms of intellectual property protection, yes, the 
mission of my office is to protect American industry, but we 
also strongly believe that other countries have a role, a true 
stake, in the international IP system.
    We have talked a lot today about challenges. One of the 
opportunities we have is that there are many countries around 
the world that want to become innovators, that I think see 
their future as being part of the knowledge economy.
    And I think as that continues, they will then see that they 
have a greater stake in the international IP system. Amd I 
think there is also a growing realization among our trading 
partners that while the U.S. does a tremendous amount to 
protect the right holders, we cannot do it alone.
    This problem that we are discussing of global trade and 
counterfeit and pirate goods is an area where we need increased 
cooperation with our trading partners.
    I think more and more of some of the trading partners that 
share the U.S. concerns are aware of that. And USTR has been 
working very actively to try to capitalize on that and to try 
to come up with some new and creative ideas to increase that 
cooperation with our trading partners, because without that 
cooperation, it is difficult for us to truly be effective.
    Ms. Sutton. I appreciate your response, and I concur with 
the promise of trade as a tool that can lift up people 
worldwide and can benefit beyond our borders and that it should 
be that kind of a tool, and I am a proponent of making it that 
kind of tool.
    I again go back to my belief--and I think it is, frankly, 
also supported by the testimony that we have heard here today--
that there are problems, however, with the gap between the 
promise of trade and what is actually playing out out there.
    And we are trying to find ways not only with intellectual 
property, obviously, but with other veins. It is a multifaceted 
problem. And it has to be approached in a multifaceted way.
    But I was just curious--and I understand--and I don't 
believe that that is protectionistic, what you said.
    But I think it is an interesting dichotomy, where we hear 
the protection against illegal subsidies by foreign countries 
in one vein being called--if somebody who rails against that 
says that with respect to illegal dumping of steel, for 
example, they are a protectionist, if you want to do something 
to fix that.
    And I also just simply--I am not going to have a lot of 
time here, but I also just simply reject the idea that there 
aren't things internally that we need to be focusing our 
attention on also.
    We heard testimony by others on the panel about the actions 
that the United States can and should properly take to deal 
with this issue.
    And of course, again, I believe there are actions that we 
can take in the rest of the facets of this huge, huge issue of 
international trade.
    I guess my time is up. I just wanted to know, to the 
extent--you know, we see these illegal subsidies from other 
countries.
    Are countries in any way complicit in the pirating of 
intellectual property, to your know, other than the United 
States, outside of the United States?
    Ms. Espinel. That is an excellent question, and a 
complicated one. And I know we are short on time here, so I am 
going to speak concisely but then would be happy to follow up 
in more detail.
    Going back to your first point on protectionism, that term 
is generally used for countries that are trying to protect 
their local industry from competition. And we talking about 
protecting intellectual property--it is exactly the opposite.
    We are not trying to protect our right holders----
    Ms. Sutton. With all due respect, I understand the theory 
of what protectionism is. That is not how that word is often 
used.
    It is also used to try to shut down people who want to 
fight against unfair similar, in a different vein, kinds of 
illegal subsidies, to just remove the unfair advantage, to have 
rules enforced.
    Sometimes it is used for that purpose of shutting down that 
debate because, unfortunately, there are some who are 
benefitting from those unfair tactics. I understand the 
difference between--there is a gap here between what the word 
really means and how it is used. That is my point, and I 
appreciate that.
    Ms. Espinel. Exactly.
    Ms. Sutton. Thank you.
    Ms. Espinel. And in protecting intellectual property, we 
are trying to increase market access. We are trying to make 
sure that there is a market for our legitimate products 
overseas so that we can compete on a level playing field.
    Ms. Sutton. Exactly, exactly. And I support that 
proposition, and I also support it in other venues.
    Ms. Espinel. With respect to your second question, 
governments' complicity--and again, we would be happy to follow 
up in more detail--there are some instances where we feel that 
governments themselves not only are not enforcing their laws 
but may be complicit.
    And one of the things that we have talked about are the 
illegal optical discs that have been operating on Russian 
military sites. That has been an enormous focus and enormous 
concern.
    And that is one of the key commitments in the bilateral 
agreement with Russia, to stop that. So again, happy to follow 
up with you in more detail. There are some instances of that, 
and it is something that we obviously go after quite 
aggressively.
    Ms. Sutton. I appreciate the time.
    Mr. Berman. I mean, it is a very interesting question. And 
for example, one example is good--I think--I don't know if we 
can do it right at this second, but a more comprehensive sense 
of countries that are not merely enforcing their laws, but that 
are actually actively facilitating the theft--is one that the 
Subcommittee generally would be very interested in getting some 
more specifics on.
    Ms. Espinel. Well, we would be happy to follow up.
    Ms. Sutton. Thank you, Mr. Chairman.
    Mr. Berman. Yes. Just one more diversion based on Ms. 
Sutton's question. We did in the late 1990's, as a response to 
Chinese activities in counterfeiting, propose a series of 
countervailing tariffs that by virtue of their impact--by the 
way, their impact was on some U.S. importers as well as on 
Chinese companies and the Chinese government.
    But as a result of those countervailing tactics, they 
actually took some steps they had not been willing to take to 
avoid those countervailing duties from actually coming into 
place.
    Ms. Espinel. Right.
    Mr. Berman. I think that is a little bit where Ms. Sutton 
is focusing, a thing that on its own might be protectionist in 
that situation was simply a tool to deal with the blocking of 
violations of trading rules.
    Ms. Lofgren? I am sorry.
    Ms. Lofgren. Thank you, Mr. Chairman.
    I do appreciate this hearing, and I think that we perhaps 
have the potential of accomplishing something, and I give you 
credit for that.
    Often times, those of us who follow these issues tend to 
focus on actually the relatively small area where there is 
disagreement, in the DMCA where we are arguing about the 
technology mandate and freedom and First Amendment issue, 
instead of focusing on the issue where there is no 
disagreement, where you have vast piracy and we should have an 
effective enforcement regime.
    And so I was actually wanting to follow up, Dr. Yager, on 
your report on the 1 percent penalty collection, because, you 
know, we are not doing a very good job, actually, of 
inspecting. That is something that most people don't realize.
    And the gentleman from North Carolina is correct. I mean, 
it not only has IP issues. There are national security issues 
involved with that.
    But even for the small amount we inspect, to assess the 
penalties and then not collect them, I mean, is really 
counterproductive.
    What recommendations do you have? I mean, this is not a new 
thing. I mean, your prior reports identified a similar issue.
    Mr. Yager. Well, I think one of the things that we noticed, 
and this also gets back to Mr. Watt's question, is that the 
Department of Homeland Security--its primary mission, 
obviously, is protecting the homeland and trying to ensure that 
no weapons of mass destruction get through the U.S. ports.
    But one of the things that we have observed is that they 
have some very important--what are now called legacy functions, 
and that is collecting trade revenue, for example, where these 
are tariffs or countervailing duties.
    It is protecting against drugs entering the United States, 
protecting against intellectual property that comes into the 
United States.
    In the series of reports that we have done, whether it is 
on IP or whether it is on customs revenue or another one called 
an in-bond system, we are finding that DHS has not found a good 
balance between their new function and their existing legacy 
functions.
    Some of those functions are not getting the kind of 
attention that is necessary, and not only these weaknesses and 
problems in the IP area, but also--in fact, it also has a 
relationship to even performing the security function, because 
we found that one program allows goods to come into the United 
States and not officially enter until they get to a domestic 
port somewhere in the interior.
    We found that that program actually makes it more difficult 
for CBP to screen even for weapons of mass destruction. So I 
think Mr. Watt's point and your question are on target in that 
DHS needs to find the ability to not just perform their primary 
function but to also spend the time and make sure they are 
performing these legacy functions, because the legacy functions 
are quite important.
    Ms. Lofgren. Well, I wouldn't refer to them as legacy 
functions, because I actually voted against the creation of the 
Department of Homeland Security, a vote that looks better and 
better in that respect.
    But the department was passed with not just a security 
measure, but taking over the entire function of the customs 
bureau and the like.
    Now, wouldn't it be true that with this level of 
performance by the Department of Homeland Security our ability 
even to adequate impose countervailing tariffs would be in 
doubt?
    Mr. Yager. We are currently performing work on the issue of 
their ability to collect countervailing duties. One of the 
problems that we have is that the duties are finally assessed 
sometimes years after the goods have entered.
    In some cases, the deposits that have been made are not 
sufficient, and therefore you can't collect the full amount of 
the duties.
    So there certainly are a number of issues at Customs and 
Border Protection where they can be doing a better job of 
enforcing U.S. trade laws.
    Again, finding that balance between their primary mission 
and these other missions is something that we have commented on 
in a number of reports, and we think they can do better on 
these issues.
    Ms. Lofgren. Have you done a look at the impact that this 
failure has had on the value of patents in the United States?
    Mr. Yager. We haven't looked at that specifically.
    One thing I think where we do have industry-specific 
information--we look at the kinds of seizures that they have 
made over the past 5 years or so, and I think there has been a 
lot in the area of the garment, and footwear and clothing 
industries. I mean, the dominant category are those kinds of 
products.
    Ms. Lofgren. So it is trademark infringement?
    Mr. Yager. Yes. In many cases, though, where you would 
expect to see a much higher level of seizures--for example, 
with pharmaceutical products and things of that nature, where 
there are really health and safety issues, the percent of 
overall seizures in those areas is quite low, about 1 percent 
or 2 percent.
    So I think there certainly are opportunities to take a hard 
look, as we have recommended for CBP. They have made that a 
priority area, but ultimately we haven't seen the results of 
demonstrating or indicating that that priority actually affects 
what people do at the border.
    Ms. Lofgren. Mr. Chairman, I think that this is--I hope 
that we can follow up on this aspect. I serve on the Homeland 
Security Committee and unfortunately have the opportunity on a 
regular basis to find dysfunction in virtually every element of 
the department.
    But this is one that, you know, actually is within our 
jurisdiction here, and maybe we could--you know, the customs 
inspectors, I think, and the whole customs function has really 
been treated shabbily in the whole department.
    And I think the morale among the employees is low as a 
consequence. And it is perhaps something that we could pursue 
further. And I think it is an area where we would have broad 
agreement here on the Committee, if we could get some changes.
    Mr. Yager. If I could just make one quick answer, we 
certainly found a lot of people in customs--when we visited 
ports, we visited ports all over the United States. There are 
many people who are very dedicated to this mission.
    It is a very tough mission, because the movement on ports 
is relentless. The amount of goods coming by train, truck, and 
ship is staggering. They have a very hard job. They do need 
support, and some of them don't feel like they are getting that 
support.
    Ms. Lofgren. Well, I am glad you mentioned that, because I 
certainly would not want my criticisms to be directed at the 
people who are trying, under trying circumstances--but the 
problem has been in the department a lack of leadership, a lack 
of organization and structure that dedicated people can 
actually successfully implement. And this is still another 
example of that.
    My time is up, I know, Mr. Chairman. I thank you for this 
hearing and this opportunity.
    Mr. Berman. I thank the gentlelady.
    And I recognize the gentleman from California, Mr. Schiff.
    Mr. Schiff. Well, thank you, Mr. Chairman, and also thank 
you, Mr. Chairman, for letting me go out of order. I have to 
run in 5 minutes, so I know I won't take more than that amount 
of time.
    But I did have one question, Ms. Espinel. Two years ago, we 
had a hearing before this Subcommittee focused on IPR issues 
and Russia and China. At the time, your office was continuing 
its review of Russia's IPR regime as part of the WTO extension 
negotiations.
    Back in 2005, I asked you to identify clear metrics or the 
specific criteria you presented to Russia so that they would 
know precisely what we expected of them and so that we could 
hold your office accountable, and together we could hold the 
Russians accountable if those metrics were not reached.
    You responded at the time that in terms of benchmarks there 
were two key items the U.S. had made quite clear that Russia 
needed to address.
    First you noted that Russia had a massive optical disc 
piracy problem, and you indicated they must close the optical 
disc plants and also show us the equipment seized and destroy 
the plants so they are unable to reopen.
    Now, in your 2007 report, and I will quote from it, you 
provide that the U.S. copyright industries estimates they lose 
in excess of $2.1 billion in 2006 due to copyright piracy in 
Russia.
    The U.S. copyright industries also reported in 2006 
Russia's optical disc production capacity continued to be far 
in excess of domestic demand, with pirated products apparently 
intended not only for domestic consumption but also for export.
    Second, you indicated at that hearing a couple years ago 
that tackling the Internet piracy problem in Russia must be 
addressed and indicated that there are raids and prosecutions, 
but that we needed to see people actually put in jail.
    But again, reading from your 2007 report, you state poor 
enforcement of IPR in Russia is a pervasive problem. The U.S. 
notes that prosecution and adjudication of IP cases remains 
sporadic and inadequate in Russia. There is a lack of 
transparency and a failure to impose deterrent penalties.
    We all know about AllOfMP3.com, et cetera. Long and short 
of it, it has been nearly 2 years. You shared benchmarks with 
us. I don't see any progress.
    Why did we conclude bilateral negotiations when none of 
these benchmarks were satisfied? Isn't it clear that Russia's 
IPR regime is nowhere near ready for admission to the WTO?
    Ms. Espinel. Since the hearing in 2005, we have actually 
expanded the benchmarks that we have given to Russia, and we 
have done that in a very concrete way.
    In November of 2006, we negotiated in the context of 
Russia's bilateral accession agreement with the United States.
    We negotiated a very specific agreement with Russia that 
lays out a blueprint of very specific commitments and actions 
that they need to take in order to come into the WTO on 
intellectual property protection and enforcement.
    And that agreement between us, I think, serves as an 
excellent series of benchmarks that Russia will need to 
complete if they are, in fact, going to enter the WTO.
    That agreement includes some of the issues that we 
discussed at that time, including taking action against optical 
disc plants and taking action against illegal pirate Web sites.
    It, in fact, actually added a series of other commitments 
that Russia also needs to comply with--for example, 
strengthening customs authority, amending the civil code so 
that it is in compliance with the TRIPS agreement and other IP 
agreements.
    Russia has made some progress on some of those commitments, 
but they are certainly not in compliance with the agreement 
that we negotiated with them.
    And until they are in compliance with that agreement, we 
have made very clear to Russia that compliance with that 
agreement is essential to Russia being able to enter the WTO.
    Mr. Schiff. Well, I mean, you know, right away, it sounds 
like the Russian benchmarks aren't being met any more than the 
Iraqi benchmarks.
    And you know, we--I asked the question for a reason 2 years 
ago, because we wanted something to measure progress by, 
because, you know, the rhetoric we hear usually is the same, 
``They are making progress. You know, this is--we are turning 
the corner. They are really going to be serious now.''
    And so we ask, you know, what can we measure this by so 
that when we meet 2 years from now--and I am concerned that we 
meet 2 years from today, and either we will have new benchmarks 
because the old ones weren't met, or we will have Russia that 
is part of the WTO that is doing what China has done as part of 
the WTO, which is very little, as far as I can see, in terms of 
enforcement.
    Ms. Espinel. Well, then, to be more specific in terms of 
the benchmark that we have laid out in this agreement and the 
commitments, one of them, as you mentioned, was optical disc 
plants.
    Russia has 16 optical disc plants that have been operating 
on military sites. That has been an enormous concern for the 
United States. One of the commitments in this agreement was 
that they had to terminate the leases on those optical disc 
plants.
    That is an area where Russia has made progress that we can 
measure, and they have terminated 15 of those 16 leases, and 
those plants should be removed by the end of the year. That is 
one very concrete measure we can look at in terms of Russia 
making progress.
    But I completely agree with you, there are many areas where 
Russia has not yet met the benchmarks that we have set for 
them, and until Russia does that, the United States will not 
allow them into the WTO.
    And I think that accession negotiation that we have with 
the WTO is one of the most powerful tools that we have to push 
Russia to make progress on these issues, and we will continue 
to use it to the full.
    Mr. Berman. Mr. Sherman?
    Mr. Sherman. Thank you.
    Mr. Berman. Recognized for 5 minutes.
    Mr. Sherman. Mr. Yager, what percentage of the incoming 
cargo do we inspect? And who pays for the inspections?
    Mr. Yager. At the present time, Mr. Sherman, 100 percent of 
the cargo is inspected at least in terms of the paperwork. It 
is not, obviously, opened. So the first thing is for security 
purposes----
    Mr. Sherman. Okay. Let me ask the question this way. What 
percentage of the cargo do we actually open up the container, 
look what is inside, and make sure we don't have counterfeit 
disks inside?
    Mr. Yager. In terms of intellectual property protection, it 
is much less than 1 percent.
    Mr. Sherman. Much less than one--now who pays for the 
inspection?
    Mr. Yager. In general, the inspections are performed by CBP 
officers either at the port or in warehouse locations near the 
port. But the costs and the delay are borne by the shippers and 
ultimately the----
    Mr. Sherman. The costs--so if my container is opened and 
looked at, I pay for that as an extra fee?
    Mr. Yager. There is not an extra fee. There is a delay. And 
obviously, any time that cargo----
    Mr. Sherman. Okay. I am talking not about the delay. I am 
talking about--you know, there is a guy. He is looking.
    Mr. Yager. Right.
    Mr. Sherman. So he is getting a salary. Who is paying for 
that?
    Mr. Yager. This is the U.S. Customs Service. The U.S. 
Customs Officials are the ones who are----
    Mr. Sherman. And so that is out of general tax revenue?
    Mr. Yager. Correct.
    Mr. Sherman. Okay.
    I am going to mispronounce your last name, Ms. Espinel. 
Would it be a violation of WTO for us to say that the owner of 
the container--that we impose a fee on each container coming 
in, we use those fees exclusively to look inside every 
container?
    Ms. Espinel. That is an excellent question, and I would 
want to make sure that my answer is as accurate as possible, so 
if I may, I would like to get back to you on that so we can 
give you a precise and accurate answer.
    It is not obvious to me that there is any WTO issue----
    Mr. Sherman. Okay, so----
    Ms. Espinel [continuing]. That would arise from that, but I 
wouldn't want----
    Mr. Sherman [continuing]. We have a situation, then, where 
the importers of this country and ultimately all of those who 
consume imported products, which means all of us, are imposing 
a host of risks and costs on America--the risks of weapons of 
mass destruction, the risk of pirated products, toys with lead 
in them.
    And we are not doing anything to open the boxes. We just 
bring them in. We look at less than 1 percent. And there we may 
just, you know, pass a Geiger counter over it to make sure that 
if there is a nuclear weapon inside at least they have been 
smart enough to shield it with lead.
    So if we wanted to prevent people from importing pirated 
disks and fraudulent brake pads and all the other illegal 
products, not to mention drugs, coming into this country, we 
would actually have to open the packages--open the containers.
    That would cost money, and that cost would be borne by our 
importers, which, I might add, would help us on the balance of 
payments situation, where right now all of the costs, societal 
costs, of piracy, et cetera, are not borne by the importers 
but, rather, borne by the society at large.
    Have we ever threatened China with loss of access to U.S. 
markets if they do not--I don't care what agreements they sign, 
because that is absolutely meaningless.
    But if they actually don't create a circumstance where 
everybody I talk to visits Beijing and says, as they are 
walking around, they are tripping over stands selling pirated 
movies, pirated music, et cetera, what does China have to lose?
    And why are they laughing at us so hard when we fail to do 
anything?
    Ms. Espinel. I think China is one of the most important 
trading relationships that we have, and----
    Mr. Sherman. Well, excuse me, aren't our exports to China 
about the size of our exports to Belgium?
    Ms. Espinel. Yes, but the Chinese economy--the Chinese 
imports--not just our export economy----
    Mr. Sherman. Okay. If you think that you get rich by 
importing, then the Chinese trade relationship is critically 
important. If you think you get rich by--society gets rich by 
high corporate profits, then China is important.
    But if you think in terms of U.S. jobs, better focus on 
Belgium. That is to say, exports are what creates jobs. So in 
any case, it is an important trading relationship, at least in 
one direction.
    What have we threatened the Chinese with?
    Ms. Espinel. And I understand the frustration that you are 
expressing. I think before taking action to shut down Chinese 
market access to the United States, we have to look very 
carefully at the consequences that would have on U.S. 
consumers, on the U.S. public as a whole.
    But your comment that China----
    Mr. Sherman. Yes, somebody might actually get a job in the 
textile industry. It could happen.
    Ms. Espinel. Your comment that China is laughing at us I 
would respectfully disagree with. I would agree that China----
    Mr. Sherman. Have you had your----
    Ms. Espinel [continuing]. Needs to do more.
    Mr. Sherman [continuing]. Hearing checked?
    Ms. Espinel. But China has made progress. China is not in 
the same situation--and I think that is in part because of U.S. 
pressure, but I think that is also because the Chinese 
government has recognized that its reputation as a 
manufacturing source around the world, the primary 
manufacturing source, of counterfeit and pirated goods, is not 
a benefit to it.
    That is not at all----
    Mr. Sherman. Are you saying that any American diplomat just 
walking around the streets of Beijing will not, without even 
looking for it, run into pirated goods for sale?
    Ms. Espinel. I am not disagreeing at all that there is a 
massive problem in China and that you will find counterfeit and 
pirated goods quite easily in China.
    The Chinese authorities have taken some actions against 
those, but clearly they have not done enough and----
    Mr. Sherman. These actions they have taken that you have 
bought off on, for the most part, and apologize for here, are 
so ineffective that it is easier to buy pirated goods in China 
than it is to buy chewing gum here in the United States.
    Ms. Espinel. I also want to take this opportunity to point 
out that we have been encouraging the Chinese to do a better 
job here, one of the most effective tools that we have at 
USTR--and of course--is WTO dispute settlement.
    And we have recently filed cases against China at the WTO. 
That is something the Chinese government is obviously quite 
displeased with our doing so.
    Mr. Sherman. They are quite displeased because they tell 
you--they put on an act in front of you, and you buy it.
    They are quite displeased because they can walk into a 
room, point to the most recent highly ineffectual action you 
have taken, pound the table, cry--if they are really good 
actors--and convince you that way that your ineffectual actions 
are somehow having some effect, and then leave and then laugh, 
but only behind your back.
    Ms. Espinel. Well, I would say that it is certainly our 
hope that the cases we have brought at the WTO will not be as 
ineffectual as you seem to think that they will be.
    We have rights at the WTO. We chose to exercise those 
rights when it became clear that we were not going to be able 
to resolve some of our differences with China.
    And it is my personal belief that these cases, while 
certainly not addressing the entire IP issue in China, will be 
effective at increasing enforcement in China.
    Mr. Sherman. I yield back. My time has expired.
    Mr. Berman. If extra time would bring a consensus---- 
[Laughter.]
    Mr. Sherman. If I could have just 30 seconds, I would like 
to commend to the Chair the bill that has been introduced in 
the Senate, and three of us introduced it in the House, and 
that is the Intellectual Property Rights Enforcement Act.
    And I hope that we either pass that separately or, better 
yet, include it in the larger package. And I think that we will 
have strong support in the Senate for that approach.
    Mr. Berman. And just on that subject, I mentioned it in my 
opening statement, but some of the issues here that have been 
raised in the reports and by all of you in one way or another, 
are going to be addressed in a larger enforcement bill that 
Chairman Conyers and I will be introducing 3 weeks ago--I mean, 
no, coming up soon. [Laughter.]
    I recognize myself now.
    Just initially, Ms. Espinel--and by the way, I am sorry you 
have to spend your birthday testifying here. But by and large, 
there could be worse places to testify than here. And happy 
birthday.
    Mr. Sherman. Happy birthday. [Laughter.]
    Mr. Berman. We will skip the karaoke singing.
    But just on the issue of Russia accession, what is the 
trade representative--the Administration--thinking about in the 
context of timing? The U.S.-Russia bilateral agreement that was 
a precondition, is that complete and signed off on?
    You have talked about the intellectual property part of 
that agreement, but is the overall agreement done?
    Ms. Espinel. We have concluded the bilateral phase. We are 
now in the process of conducting what we call the multilateral 
phase of the negotiations. So that is the part of the process 
where all of the WTO trading partners together negotiate the 
terms of Russia's final accession into the WTO.
    Mr. Berman. Does that mean that all the bilaterals Russia 
has entered into are concluded or are there other countries 
that are still negotiating their bilateral agreements with 
Russia?
    Ms. Espinel. The last I knew, there were two that were 
open, but those may have concluded recently, so I should double 
check----
    Mr. Berman. So we are in the multilateral----
    Ms. Espinel. It is a very small number.
    Mr. Berman. We are in the multilateral phase now.
    Ms. Espinel. Yes.
    Mr. Berman. And it is not until it is concluded that you 
will come to Congress with an effort to repeal the Jackson-
Vanik provisions which are a precondition to----
    Ms. Espinel. The multilateral phase has to be completed 
before Russia can come into the WTO. And obviously, part of 
that, as well, will involve the Jackson-Vanik----
    Mr. Berman. And my guess is this is not a 2007 issue for 
Congress. I mean, you would like it to have been a 2005 issue, 
but the other things you are doing means that at this point 
Jackson-Vanik isn't the main thing that stands in the way of 
Russian accession and----
    Ms. Espinel. At this point what stands between Russia and 
its desire to join the WTO is making progress on a number of 
areas, but including making progress on IP, to come into 
compliance with the bilateral agreement that we negotiated with 
them.
    The pace and process of the multilateral process will 
depend on Russia. There is very intense engagement going on 
with the Russian Federation in Geneva.
    But there are a number of areas where Russia needs to make 
progress, not just intellectual property. And again, 
ultimately, the pace of that negotiation will depend on how 
quickly Russia is able to make progress sufficient for the 
United States to be comfortable for it to come into the WTO.
    Mr. Berman. At one point you testified about a gold 
standard. The U.S., on intellectual property enforcement, is 
the gold standard. But we are not quite pure as driven snow 
yet.
    What are our obligations in terms of compliance with 
international trade rules? Where do we fall short?
    Ms. Espinel. Well, overall, the United States system--the 
United States laws are very strong.
    Mr. Berman. I am talking in the intellectual property area; 
I am not getting off into a discussion about agriculture 
subsidies or anything else.
    Ms. Espinel. Thank you.
    In the intellectual property area, we have a very strong 
system. I think our system is and should be a model for the 
world. But there are two aspects of our system that have been 
challenged at the WTO and have been found to be inconsistent 
with the WTO.
    And those two aspects--one of them is with respect to our 
copyright law, certain exceptions under our copyright law, and 
one of those is with respect to certain aspects of trademark 
enforcement.
    I don't want to suggest that our inconsistency with the WTO 
is anything comparable to the scale of the problem that we 
have, for example, in China or in Russia.
    Mr. Berman. Nor would I.
    Ms. Espinel. But it is a blemish on our record, and it is a 
problem for us bilaterally and at the WTO.
    As the U.S. pushes very hard for other countries to fully 
implement their WTO commitments, these cases do have the effect 
of hurting our credibility. And we believe it would be a 
benefit to us if these issues were resolved.
    Mr. Watt. Will the gentleman yield?
    What was the second issue? One was copyright and the second 
one was----
    Ms. Espinel. And the second one is with respect to certain 
aspects of trademark enforcement related to assets that have 
been seized by the Cuban government.
    Mr. Berman. This is an issue that revolves around Section 
211 that was stuck into an Omnibus Appropriations bill, I 
believe in the dark of night, in the days when that was still 
done.
    Mr. Watt. You mean last year. [Laughter.]
    Mr. Berman. Well, not in the last days that it was still 
done, about 5 years, 6 years, 7 years ago, dealing with a 
trademark held by a French company, and that was challenged at 
the WTO, and the WTO found that our action violated our 
obligations under TRIPS.
    Is that a fair summary?
    Ms. Espinel. That is correct.
    Mr. Berman. And just on that subject, to close that 
subject, would USTR support an effort to repeal one or both of 
those provisions?
    Ms. Espinel. Yes. USTR would support an effort to amend our 
laws on both of those provisions, and we feel like that would 
be a benefit to us in trying to push other countries to come 
into full compliance with their WTO obligations.
    Mr. Berman. Mark MacCarthy told an interesting story of 
Visa's efforts to do the right thing in the context of the 
AllOfMP3.com site and this other site, allTunes, and what 
happened in Russian courts.
    Is the trade representative's office trying to create 
clarity of what Russian laws are? To do what I think he 
logically said their company cannot do, which is to get an 
understanding about what the law is, and what constitutes 
illegal actions in Russia in terms of intellectual property 
protection?
    Ms. Espinel. Yes. Mr. MacCarthy made the point that it is 
difficult for Visa to try to clarify local laws, but that is 
one of the things the USTR can try to do.
    My understanding of the case is that Media Services, the 
company that operated allTunes, was able to successfully argue 
in Russian court that it was not acting illegally because it 
was paying royalties to collecting societies, collecting 
societies that were not authorized by the rights holders.
    That is one of the issues, one of the very specific issues, 
that we addressed in the bilateral agreement that we negotiated 
with Russia.
    One of the commitments that they have made is to change 
their law so that it is clear that collecting societies can 
only, in the Internet context, can only collect on behalf of 
right holders that have authorized them to do so, and that 
should resolve this particular issue.
    That change is one that has actually already been made in 
Russia's civil code, and it should go into effect in January of 
2008. And it should resolve or clarify that particular problem 
in the Russian legal system.
    Mr. Berman. Do you disagree with that? Is that news to you, 
or is that----
    Mr. MacCarthy. No, that is roughly our understanding of the 
legal situation in the Russian Federation right now.
    I should mention that the complication of local Russian law 
means only, from our point of view, that for the time being, at 
least, these sites that we have received complaints about have 
to be permitted to operate within the Russian Federation 
itself.
    Insofar as international transactions are concerned, our 
policy is to make sure that they are not processed using Visa 
cards.
    So for example, someone sitting here in the United States 
or in London who wants to go to one of these sites to use their 
card to make a purchase would not be able to do it under our 
cross border policy.
    Mr. Berman. I just have to say that I think this is a case 
where the company you represent has shown real leadership, and 
it has done the right thing, and I hope other financial service 
providers that facilitate online transactions will follow the 
example that you have showed here.
    Mr. Watt? I mean, I have got more, but I could go for 20 
minutes.
    Mr. Watt. Let me just follow up on what Mr. McCarthy said. 
It is, I assume, true that somebody could still sit in Russia, 
under what Ms. Espinel has said--internal to Russia, the law 
would still be----
    Mr. MacCarthy. Our interpretation of Russian law right now 
is that we don't have the legal standing to say to the Russian 
banks that operate within Russia, ``You have to stop processing 
transactions for domestic transactions.''
    Mr. Watt. So what do you say about that, Ms. Espinel?
    Ms. Espinel. The change that Russia has made to the civil 
code, which is one of the commitments that they agreed to do in 
their bilateral agreement with the United States--this change 
that they have enacted should fix that problem in the context 
of sites like AllOfMP3 on the Internet, and that change should 
go into effect in Russia in January of 2008.
    Mr. Berman. Because they use the royalty collection 
society, which was sort of a phony deal--it never was 
authorized by the people to whom the royalties were owed--they 
claim that is what made what they were doing legal.
    They were making payments to this society and now----
    Mr. MacCarthy. Exactly, and that they prevailed in court. 
And if that changes in January of 2008, we would then be able 
to move forward in the context of addressing the local 
distribution of this music.
    By the way, just in terms of the successor sites to 
AllOfMP3 and allTunes, our understanding is that allTunes is in 
business these days, but they are not taking Visa cards at all. 
And another site called MP3Sparks is also in business, but they 
are not taking Visa cards at all.
    Mr. Watt. Mr. Smith seems not quite as satisfied with what 
you all are saying.
    Mr. Smith. No, I think everything that was said here is 
completely accurate.
    We in industry and, I think, lawyers that are familiar with 
the Russian law when it was passed in the early 1990's have 
always concluded that this case, this particular case, was 
decided wrongly, that, in fact, existing Russian law made these 
acts, including collecting societies representing--purporting 
to represent record companies that they don't represent, was a 
violation of Russian law.
    And it is true that the 2008 amendments will fix that 
specifically. But I think every lawyer who has looked at this, 
including, I think, Visa's lawyers--we all scratched our heads 
and said, ``Wait a minute. This is already a violation of 
Russian law, and this should have been solved years ago.''
    Mr. Watt. I have no further questions.
    Mr. Berman. The gentleman from Virginia, Mr. Goodlatte?
    Mr. Goodlatte. Thank you, Mr. Chairman.
    And I want to thank all the panelists. I am sorry I have 
not been able to be present earlier, but two other hearings, 
one in this Committee and one in the Agriculture Committee, 
have kept me elsewhere.
    But I am very pleased that you have taken up this subject, 
Mr. Chairman. It is one that is very important to me. I serve 
as one of the co-chairs of the International Antipiracy Caucus 
and welcome the exposure that you have afforded this issue.
    One of the things that I raise with other countries when I 
have the opportunity to do so, whether representatives come 
here, whether I am meeting with them in other places, is to 
point out that it is in their interest to support intellectual 
property law and the build-out of the infrastructure necessary 
to both have the law and enforce it.
    Because if they hope to transition into an innovation-based 
economy--many countries that are developing have many creative 
scientists and researchers and people involved in the 
technology community and other areas where the advancement of 
intellectual property is worth protecting--entertainment, 
artists, and so on.
    And that we are not asking them to enforce those laws just 
out of our interest in protecting what we export to those 
countries, but that it is in their interest to do that for the 
development and growth of their own intellectual property 
community.
    We have been hearing reports that China is beginning 
efforts to transition from a manufacturing-based economy to an 
innovation-based economy. And it seems like this could present 
a unique opportunity to make headway with the Chinese on the 
importance of intellectual property.
    So I would direct this to Ms. Espinel and to Mr. Smith. But 
in light of this apparent desire on the part of the Chinese, 
are there additional opportunities we should be pursuing to 
leverage this critical time to encourage China to take its own 
intellectual property laws more seriously as well as its 
obligations to honor the intellectual property of other 
nations' inventors and authors?
    Ms. Espinel. I would say that I agree with you. I think 
China's desire to become a leader in innovation does present an 
opportunity.
    I think there are actually several other countries as well, 
major trading partners, that see themselves as wanting to enter 
into the future and build a knowledge economy. And I think all 
of those do present a real opportunity for us.
    We have a number of tools that we use to push China and 
other countries to further strengthen intellectual property. 
But I think what you have just raised is--in terms of what we 
can do more--I think that is an opportunity for the United 
States to try to cooperate further on China.
    So USTR is best known, in many ways, for the stick 
approach, for the Special 301 Report, for WTO dispute 
settlement, and we will continue to use all of those tools as 
aggressively as we feel is warranted in order to make progress.
    But I think countries--where there is an opportunity for a 
country to recognize that it is in their own domestic interest 
to be protecting intellectual property, I think the United 
States, USTR and the other government agencies can build on 
that desire through cooperation, through using, for example, 
our system as a model, and having dialogues with China, for 
example, on how to build a system that is closer to the U.S. 
system and is modeled on the U.S. system in some of the ways 
that we have encouraged innovation, so for example----
    Mr. Goodlatte. I know that in some countries--Russia, for 
example--at least a few years ago we were making pretty serious 
efforts to help translate U.S. intellectual property law, 
decisions and documents related to it, into Russian, that we 
were trying to help them with the court system and how they 
would handle disputes in this area and so on.
    Do we have any initiative like that with the Chinese? Have 
they shown any interest in working with us in terms of looking 
at laws that respect property rights?
    Ms. Espinel. I think the Chinese do pay close attention to 
the laws. One specific example I could cite that pertains to 
China and, actually, India as well is our Bayh-Dole 
legislation.
    Bayh-Dole in the United States is extremely effective in 
terms of increasing research of industry and building 
partnerships between universities and industry, thereby 
increasing the number of products that were brought to market.
    China is looking at our Bayh-Dole system--India is looking 
at our Bayh-Dole system--because it has proved to be 
successful.
    And while Bayh-Dole is not an intellectual property rule 
per se, having China and India and other countries become 
innovators, begin to build their system or base their system on 
aspects of the U.S. system that have been successful, I think 
will, long term, be very effective in helping us improve IP 
enforcement as they see that they have a greater stake 
themselves domestically in protecting intellectual property and 
as they see themselves having a greater stake in the 
international system for protecting intellectual property.
    Mr. Goodlatte. Thank you.
    If I might, Mr. Chairman--I notice my light has already 
gone on, but I had a lot of competition----
    Mr. Berman. Well, you would be the only person to have 
actually observed it. [Laughter.]
    Mr. Goodlatte. Well, if you would give me that preference, 
I would like to ask one more question.
    Mr. Berman. It wouldn't be preference. It would be 
nondiscrimination.
    Mr. Goodlatte. I thank the Chairman for his indulgence.
    And I will ask this to all the panel members. But it 
follows along with what we have just been talking about. The 
Internet provides the means for massive copyright infringement 
in a single instant.
    While the U.S. has strong laws against online piracy, it 
seems that most of the discussion about international IP theft 
centers around the production of pirated products in physical 
form.
    How bad is online piracy in Russia and China? And do these 
countries' IP laws address online piracy sufficiently? And do 
you see any evidence that these countries are inclined to make 
any decent attempt to combat it?
    Start with Mr. MacCarthy.
    Ms. Espinel. Start with Mr. Smith.
    Mr. Smith. I think the one area----
    Mr. Goodlatte. You are welcome to address my first 
question, too, Mr. MacCarthy.
    Mr. Smith. I will. Actually, I think China is very 
interested in pursuing the digital environment in an aggressive 
way, and I think we see it with the software industry in China 
that has seen more gains than any of our other industries.
    So I think there is a place there where we can intervene 
and gain some things. Unfortunately, that interest does not 
extend to the cultural industries where China is immensely 
protectionist.
    But with respect to the Internet--and I think you see it in 
the Internet environment--in 2006 they passed Internet 
regulations with respect to protecting content, and it was a 
very transparent process, quite surprisingly for China.
    We made three sets of comments. The regulations came out 
actually quite good and not that far from U.S. law. And I think 
China is interested in protecting on the Internet.
    What they haven't done yet, and hopefully they will do, is 
they haven't taken those regulations and then enforced them. 
What we are facing in the Internet environment is just simply 
what we are facing in the physical environment--bad 
enforcement, no criminal enforcement and very weak 
administrative enforcement.
    And lots of confusion in the ISP community has been 
recently generated by some nonbinding regulations the 
government has put out which have caused more burdensome notice 
requirements, if you are familiar with those.
    It is just a situation that hopefully China will, as 
distinct from maybe some other areas, find to be really in 
their interest.
    And of course, they want to control the Internet. We all 
know that. So the content issues sort of play into that 
political necessity that they have.
    Mr. Goodlatte. Thank you.
    Mr. MacCarthy, do you want to add anything to that?
    Mr. MacCarthy. I could just repeat some of the main points 
that I made in my testimony, which is when we were involved 
with two of the Web sites in Russia, we got caught up in 
complications from local Russian law.
    One of the court cases ruled against our local bank, that 
they had violated their contract by cutting off service to that 
merchant, and seemed to want a ruling from a competent court 
within Russia before they would allow us to withdraw service.
    And the second case was a case not brought by us and not 
involving us directly, IFPI, where the owner of one of these 
sites was absolved of taking any illegal action whatsoever 
under Russian law.
    As I talked about before, this situation may be improved in 
January of this year when a revision to their law on collective 
rights society goes into effect.
    In the meantime, what we have done is we have tried to take 
account of the differences in local jurisdictions by making 
sure that international transactions from the Russian sites are 
not processed within the Visa system.
    Mr. Goodlatte. Thank you.
    Mr. Yager?
    Mr. Yager. Yes, Mr. Goodlatte, just a couple of quick 
answers. With regard to the issue of the trading on the 
Internet in the near future, certainly, as the other countries' 
bandwidth increases and a greater share of the populations 
there are able to secure these songs, movies online, that will 
become a greater issue.
    I think there is a certain amount of time, depending on the 
countries, before that happens on a wide-scale basis.
    But if I could also address the other point that you made 
about linking with like-minded countries, or at least 
expressing their own interest, even in cases where the country 
as a whole may not feel that it is in their interest to give 
full protection. There may be industries within the country 
that can be useful for education purposes or others.
    And I give the example of Brazil. They have some very 
important recording artists, and a significant share of the 
music sold in Brazil is from domestic artists. And these folks 
have been quite successful in putting out the message that it 
is stealing, which is a long-term process in trying to get that 
message across.
    So I think even in countries where there have been larger 
challenges, there are domestic industries that the United 
States can link up with.
    On the other side of that coin, there are also countries--
for example, in South America, again--Paraguay is not a country 
that has a lot of content. An entire city exists in order to 
just take advantage of the illegal trade across the border.
    Ciudad de Este is a city that exists between the two giants 
of Argentina and Brazil, and it seems like everything that 
happens in that city is to take advantage of those trade 
opportunities. And many of those, obviously, are illegal.
    So I think that can work in places like China over the 
longer term as well as other countries, but in some countries 
that don't have a lot of content production, it is going to be 
a tougher sell.
    Mr. Goodlatte. Thanks.
    Ms. Espinel?
    Ms. Espinel. With respect to China, China has joined the 
WIPO Internet Treaties to protect digital projects over the 
Internet, which is progress.
    And we have noticed, and we note in our Special 301 
provincial review report this year, that there have been some 
increased efforts, particularly in Beijing--have some 
innovative programs for fighting Internet piracy.
    With Russia, they have reported that they have opened 30 
investigations this year against illegal Web sites. Now, 
clearly, this is a significant problem in Russia still, but 
that is a significant increase over last year.
    My last point I wanted to make is one of the challenges I 
think we face in fighting Internet piracy around the world is 
that the--there is no clear international regime for fighting 
Internet piracy the way there is for some other aspects of 
intellectual property.
    And one of the things that USTR would like to see is to see 
a stronger--a consensus on stronger rules for enforcement, 
including a consensus on new rules for fighting Internet 
piracy.
    Mr. Goodlatte. Thank you.
    Thank you, Mr. Chairman.
    Mr. Berman. Well, thank you.
    I am going to ask one question to Mr. Smith, and then I 
will recognize the gentlelady from Texas.
    You may have touched on this, but do you think the Special 
301 review is an effective tool? We list countries year after 
year. Is there something beyond that we should be doing, either 
in lieu of or instead of this Special 301 review?
    Mr. Smith. I think Special 301 continues to be effective. I 
think there is debate about that.
    Because most of our trading partners are now in the WTO, we 
can't use Special 301 as we did in the case you mentioned in 
1995 and 1996 against China, where we were able to unilaterally 
retaliate.
    Mr. Berman. Say that one more time. What aren't we able to 
do?
    Mr. Smith. Because the United States is, and all our 
trading partners are, now in the WTO, unilateral retaliation, 
with an exception I will mention in a minute, is no longer 
possible.
    Like with China, our dispute has been taken through the WTO 
dispute settlement system, which would result, if we win that 
case, in the possibility of retaliation.
    Mr. Berman. What were the tariffs on the steel dumping? 
That was after WTO.
    Mr. Smith. Oh. Well, that is a different part--I mean, you 
can unilaterally add tariffs on----
    Mr. Berman. Steel gets it but IP doesn't?
    Mr. Smith. I can't answer that question whether or not it 
would be WTO-legal to do something in the IP area.
    Mr. Berman. Well, actually, I think WTO found there wasn't.
    Mr. Smith. But what I am talking about is the ability to 
stop at our border goods coming from China because of--without 
going through the WTO dispute settlement process.
    We do have other tools, though. We have all our unilateral 
trade preference tools--GSP, CBERA--where if countries don't--
and in Russia, which gets $500 million in GSP benefits. Those 
benefits are removable, suspendable, for failure to effectively 
protect intellectual property.
    So that is another tool, and that is part of Special 301. 
But countries still don't want to be on those lists, and we 
feel that that process continues to work to persuade and make 
countries aware of the need to improve their intellectual 
property protection.
    So we are strongly supportive of the Special 301 process. 
Could it be improved? I think it can be improved. And I think 
there are things that USTR is doing--for example, looking at 
enforcement agreements.
    There are things like that that can be done, and a more 
aggressive use of the 301 process I think is possible than is 
now being done. But basically, I think our industries believe 
that the process has been pretty successful.
    Mr. Berman. All right. Well, I think our last questions 
will come from the gentlelady from Texas, Ms. Jackson Lee.
    Ms. Jackson Lee. Mr. Chairman, thank you very much for 
holding this hearing.
    And I apologize to the witnesses for being delayed in an 
overlapping hearing. I will narrow my inquiry to a comment and 
then a question. Frankly, I think that we are severely 
disadvantaged.
    And I thank the Chairman for continuing his oversight on 
some of these many issues involving intellectual property--but 
severely impacted and damaged by the fact that trade, 
intellectual property, is all wrapped up in foreign policy.
    And many times, we are more concerned about not offending 
our perceived ally as opposed to protecting the intellectual 
property of Americans and the ability for our economy to churn.
    I frankly believe that the trade imbalance, for example, is 
a stark example, particularly with China, of how skewed our 
foreign policy and trade policy has gotten.
    So with respect to the protection of intellectual property, 
sometimes we yield, even with the 301 review, to not offending.
    I would like to ask each of you to express your level of 
anguish or anger at the present state of intellectual property 
thievery.
    And also, as I heard Ms. Espinel mention stronger piracy 
laws, if each of you would--and if this has been asked and 
answered, forgive me, but each of you give me again what kind 
of legislative fix, the strongest legislative fix, we could get 
to impact in particular both Russia and China, but others, in 
terms of intellectual property--strengthening 301?
    I have heard it mentioned that it is a fair process and you 
are happy. But any other legislative fixes that would be 
helpful in what is still an ongoing problem with the thievery 
of our intellectual property.
    And I will start with Mr. MacCarthy.
    Mr. MacCarthy. In terms of the bigger picture, our access 
to information about the problem comes largely from 
intellectual property owners who come to us with complaints.
    And in that regard, we have a process in place for dealing 
with those kind of complaints. We think that process resolves 
the responsibilities that we have in that area.
    We think it is a balanced and legitimate use of our 
complaint process to come to us when there are these kind of 
difficulties. It is a business problem for many, many copyright 
owners, and we are pleased to step forward to process the 
complaints when they come to us in an appropriate fashion.
    In terms of legislation, we don't have a general 
recommendations.
    Ms. Jackson Lee. What do you do? What is the relief that 
you give to the Internet----
    Mr. MacCarthy. If an aggrieved copyright owner comes to us 
with a documented complaint, and if they identify the Internet 
site that is involved in the alleged infringement, they give us 
evidence that, indeed, this is illegal activity, and they 
provide us documentation that Visa cards are used, we will 
conduct an assessment of the legal situation.
    And if we find that indeed these transactions are illegal 
either under the laws of the country where the merchant is 
located or where the cardholder is located, in either 
jurisdiction, we will pass that information on to the banks 
that work within our system directly with the merchant and ask 
them to take corrective action.
    Ms. Jackson Lee. Now, you do a civilian relief. You are 
obviously processed to move that client's problem through and 
try to resolve it in that way.
    All right, let me ask, you were getting ready to say 
legislatively you had a suggestion.
    Mr. MacCarthy. We don't have an affirmative suggestion for 
legislation on the broader issues. We don't have any expertise 
or competence in there.
    We do think it would be unnecessary to have legislation 
that imposed liability on financial services intermediaries in 
this area. We think we have stepped forward with the kind of 
responsible private-sector enforcement action that should help 
to resolve the problem.
    We talked about the limits of private sector action in that 
area. We can't help to resolve local laws or conflicts between 
local laws.
    And if there are many, many conflicts among the laws in 
many different countries, the system I described won't work as 
effectively as it did in the cases that we have applied it to 
already.
    So we don't think the legislation that would give us legal 
responsibilities would improve the situation, and we are 
already taking the steps we think are necessary to resolve the 
problem through private-sector action.
    Ms. Jackson Lee. Thank you.
    Mr. Yager?
    Mr. Yager. Yes. We have made one recommendation to the 
Congress. It has to do with the coordinating group that is now 
bringing together the U.S. agencies to combat IP--our 
recommendation is to capture the energy that is currently 
housed within the presidential initiative called STOP and try 
to capture that to make that a more permanent structure.
    Right now, STOP, as a presidential initiative, could go 
away at the end of this Administration. Obviously, intellectual 
property protection won't be solved by them. We think there 
needs to be a permanent structure to maintain that, and we made 
a recommendation in that direction.
    We also made a number of recommendations to the U.S. 
agencies in terms of their attention to intellectual property 
and trying to find the right balance between this particular 
function, which is often called a legacy function, for example, 
in the Department of Homeland Security--trying to use the 
existing resources better to focus their efforts on the kinds 
of things that can generate intellectual property seizures.
    Because even with the existing resources, we believe that 
seizures and penalties and prosecution afterwards can be a more 
effective deterrent to that crime than they are right now, and 
we have a number of specific recommendations in those areas.
    Ms. Jackson Lee. Is that in your statement?
    Mr. Yager. Yes, and we also cite a number of reports that 
we have done within the last year that have those 
recommendations.
    Ms. Jackson Lee. Seizures and penalties.
    Mr. Yager. That is correct.
    Ms. Jackson Lee. Thank you.
    Mr. Smith. I think our position is that with respect to 
foreign piracy, as opposed to customs and what happens here, 
there are ways to more effectively use the existing trade 
mechanisms that are in our current law.
    And I wanted to mention that and then mention something 
about legislation.
    Ms. Jackson Lee. Do you want to just briefly instruct us 
how to be more effective in using----
    Mr. Smith. Yes. I mean, I think there are programs and 
unilateral trade programs that can be removed from countries 
that do not adequately protect our intellectual property.
    That authority has tended in the last years not to be used 
and I think lacks credibility now with our trading partners.
    Ms. Jackson Lee. So we need to do due diligence and act 
upon that.
    Mr. Smith. Yes.
    Ms. Jackson Lee. If you are violating those laws, they need 
to suffer through what we already have in place, or partly what 
we have in place, which is to stop the relationship.
    Mr. Smith. That is right.
    Ms. Jackson Lee. Stop the ability.
    Mr. Smith. Also, in addition, there are trade agreements 
with countries that aren't WTO members that could be used 
effectively.
    There are dispute settlement processes in the free trade 
agreements which are available to be used as leverage to get 
countries--now, we haven't needed to do that yet, but at some 
point we will need to do that. Those are tools that we have 
that will leverage improvements.
    But I also think that there are things that can be done in 
the legislative area that may increase the credibility of this 
process and leverage improvements both--in the Special 301 
area, I think, for example, we would like to see more and 
stronger representation of the IP industries in the White 
House.
    We would like to see perhaps changes in Special 301 that 
tighten up the timetables, tighten up the way USTR does that 
business. We have some ideas there. But all of these things 
ultimately end up with the--there are no quick fixes, which 
Ranking Member Coble mentioned at the beginning of this 
hearing.
    There are no quick fixes. This is a long slog and a 
continuing push to make countries aware that it is in their 
interest to protect our intellectual property. All these tools 
help get you to that place, and that is where you need to get.
    Ms. Jackson Lee. And that is probably where we have not 
acted, particularly in Russia and China.
    But, Ms. Espinel, I will allow you to refute what I have 
just said by, in addition to your answer that--I hope you will 
repeat also this intellectual privacy strengthening that you 
would like.
    What is the record of the trade office and the White House 
on denying access to the United States based on bad actors in 
terms of intellectual property violations? What is your record?
    What is the last five that you have denied that access?
    Ms. Espinel. In terms of denying market access, one of the 
things that we have been discussing today is that, for example, 
using the Special 301 process to impose unilateral sanctions--
our ability to do that is now somewhat restricted by the fact 
that most of our trading partners, including China, are members 
of the WTO.
    And so we are not in a position where we can, for example, 
impose unilateral sanctions to block access consistent with our 
WTO obligations.
    Ms. Jackson Lee. Have you gone to the WTO? What is your 
current status in the WTO in terms of challenging those who 
have violated our agreements?
    What are the countries?
    Ms. Espinel. That said, we do have rights at the WTO. So 
while the WTO membership may have restricted in some ways our 
abilities under Special 301, membership in the WTO has also 
given us certain rights against countries, including China.
    And we have exercised those rights at the WTO. We have 
recently filed two different cases against China at the WTO.
    Ms. Jackson Lee. Are they broad cases, meaning something--
--
    Ms. Espinel. Yes. They impact IP enforcement and 
protection. That is the first case. And then there is a second 
case which goes after certain market access restrictions that 
China places on copyright products.
    While that is not an intellectual property case per se, the 
restrictions that China has do have the impact of restricting 
our copyright industries' ability to access the Chinese market 
and, as an ancillary effect to that, they create an enormous 
vacuum for legitimate product and, therefore, an incentive to 
pirate.
    So we believe that China needs to get rid of those market 
access restrictions both so that our products can enter the 
Chinese market but also to remove an enormous incentive to 
pirate, and we think that will be helpful in improving the 
enforcement situation in China.
    I also want to comment on Special 301. We do feel that it 
is a very effective process. Countries do pay attention to 
their standing on the list. It has been successful in getting 
countries to institute reforms.
    But we are always looking at ways that we can improve the 
tools that we have. And in fact, last year USTR logged 
something that we call the Special 301 Initiative, where we 
were looking to see how we could better focus our resources.
    And we selected a group of countries where we felt 
increased engagement under Special 301 will lead to progress, 
and that has, in fact, been successful. We have seen some 
concrete results come out of that, and we are planning to 
continue that initiative this year.
    In terms of legislative fixes, I think we would look more 
at the international side of things. And where we see a gap in 
international rules to protect intellectual property is in 
areas where we are facing new challenges that have arisen in 
the last 10 years.
    And two I would point to in particular are Internet piracy 
and the fact that counterfeiting and pirating has become a much 
more sophisticated, global criminal enterprise than it was 10 
years ago.
    Ms. Jackson Lee. The first one was Internet piracy, and 
what----
    Ms. Espinel. Internet piracy.
    Ms. Jackson Lee [continuing]. Was the second?
    Ms. Espinel. The sophistication of counterfeiters, the fact 
that counterfeiters are not at this point just servicing a 
domestic market but are manufacturing and then distributing 
their products all across the world in very sophisticated ways.
    We feel that we need a new set of international rules, a 
new consensus on how to fight those rules, if we are going to 
be able to effectively address that. USTR has some ideas in 
that regard, and that is something that we are working on 
actively with our trading partners.
    Ms. Jackson Lee. Thank you, Mr. Chairman.
    Mr. Berman. Okay.
    Unless people object really strenuously, I think we will 
adjourn this hearing. Thank all of you very much. You have 
really provided, I think, very helpful testimony and useful 
suggestions.
    And happy birthday, Ms. Espinel.
    [Whereupon, at 12:41 p.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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