[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
U.S. TRADE WITH CHINA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TRADE
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 15, 2007
__________
Serial No. 110-15
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
40-304 WASHINGTON DC: 2008
---------------------------------------------------------------------
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Brett Loper, Minority Staff Director
______
SUBCOMMITTEE ON TRADE
SANDER M. LEVIN, Michigan, Chairman
JOHN S. TANNER, Tennessee WALLY HERGER, California
JOHN B. LARSON, Connecticut JERRY WELLER, Illinois
EARL BLUMENAUER, Oregon RON LEWIS, Kentucky
BILL PASCRELL JR., New Jersey KEVIN BRADY, Texas
SHELLEY BERKLEY, Nevada THOMAS M. REYNOLDS, New York
JOSEPH CROWLEY, New York KENNY HULSHOF, Missouri
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of February 6, 2007, announcing the hearing............. 2
WITNESSES
Dan Glickman, Chairman and Chief Executive Officer, Motion
Picture Association of America................................. 8
Patricia Schroeder, President and Chief Executive Officer,
Association of American Publishers............................. 15
Geralyn Ritter, Senior Vice President of International Affairs,
Pharmaceutical Research and Manufacturers Association.......... 21
Peter Baranay, Chief Executive Officer, ABRO Industries, Inc.,
South Bend, Indiana............................................ 26
______
John H. Goodish, Executive Vice President and Chief Operations
Officer, United States Steel, Pittsburgh, Pennsylvania......... 43
Franklin J. Vargo, Vice President of International Economic
Affairs, National Association of Manufacturers................. 53
John D. Bassett, III Chairman and Chief Executive Officer,
Vaughan-Bassett Furniture Company, Galax, Virginia............. 62
James C. Tyrone, Senior Vice President of Sales and Marketing,
NewPage Corporation, Dayton, Ohio.............................. 64
Peter Navarro, Ph.D., Professor, University of California,
Irvine, The Paul Merage School of Business, Irvine, California. 67
______
The Honorable Karan K. Bhatia, Deputy U.S. Trade Representative,
Office of the U.S. Trade Representative........................ 81
SUBMISSIONS FOR THE RECORD
Advanced Medical Technology Association, statement............... 98
American Forest and Paper Association, statement................. 101
Americans For Fair Taxation, Conyers, GA, statement.............. 105
Burke, Kevin M., American Apparel and Footwear Association,
letter......................................................... 105
Coalition of Service Industries, statement....................... 108
Haley, Usha C.V., University of New Haven, West Haven, CT,
statement...................................................... 116
National Electrical Manufacturers Association, statement......... 122
Stewart and Stewart, statement................................... 124
Theriault, R. John, Pfizer, New York, NY, statement.............. 138
United States Chamber of Commerce, statement..................... 140
U.S.-China Business Council, statement........................... 146
U.S. TRADE WITH CHINA
----------
THURSDAY, FEBRUARY 15, 2007
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Trade,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:30 a.m., in
room 1100, Longworth House Office Building, Hon. Sander M.
Levin (Chairman of the Subcommittee), presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON TRADE
CONTACT: (202) 226-0158
FOR IMMEDIATE RELEASE
February 06, 2007
TR-1
Trade Subcommittee Chairman Levin
Announces a Hearing on Trade with China
Ways and Means Trade Subcommittee Chairman Sander M. Levin today
announced the Trade Subcommittee will hold the first in a series of
hearings on the U.S.-China trade relationship. The hearing will take
place on Thursday, February 15, in the main Committee hearing room,
1100 Longworth House Office Building, beginning at 10:00 a.m.
Oral testimony at this hearing will be heard from both invited and
public witnesses. Witnesses are expected to include a representative
from the Office of the U.S. Trade Representative. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee or for
inclusion in the printed record of the hearing.
FOCUS OF THE HEARING:
This hearing is the first in a series on U.S.-China economic and
trade relations. The hearings will focus on the impact of U.S.-China
trade on jobs, wages, prices, manufacturing competitiveness, and other
aspects of the U.S. economy; the causes of the U.S. trade deficit with
China; China's compliance with its WTO commitments; and China's role in
the world economy. This hearing will be divided into two panels. The
first panel will focus on the role and effect of subsidies in the
Chinese market and their impact on competition with U.S. products in
China. The other panel will focus on China's enforcement of
intellectual property rights.
BACKGROUND:
Trade flows between the United States and China are substantial and
growing. U.S. exports to China in the first 11 months of 2006 were more
than $50 billion, up from $42 billion in all of 2005, and up from just
$19 billion in 2001, the year China acceded to the World Trade
Organization. Notwithstanding this substantial growth in U.S. exports,
the U.S. goods trade deficit with China in 2006 is expected to approach
one-quarter of a trillion dollars--the largest trade deficit in U.S.
history. China accounts for roughly 12 percent of total U.S. trade and
one-third of the total U.S. goods trade deficit with the world. At the
same time, U.S. imports from other East Asian countries have fallen $10
billion between 2001 and 2005. The United States had a services trade
surplus with China of $2.6 billion in 2005.
It is widely recognized that China has a large number of subsidy
programs that distort the Chinese market and trade with the United
States. In 2006, China submitted a long-overdue subsidies notification
to the World Trade Organization. China identified over 70 subsidy
programs (including some subsidies that appear to be prohibited under
WTO rules), but even that notification was incomplete.
China has a dismal record of enforcing intellectual property
rights. For example, China's market access restrictions and resulting
pirate market growth have been estimated to cost the U.S. copyright
industries about $2.4 billion in 2005. The piracy rates of physical
copyright products remain virtually the highest in the world, at 85-95
percent depending on the industry sector and product format (e.g., 95
percent of DVDs in China are pirate).
DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD:
Requests to be heard at the hearing must be made by telephone to
Cooper Smith at (202) 225-1721 no later than the close of business
Friday, February 9, 2007. The telephone request should be followed by a
formal written request faxed to Janice Mays, Chief of Staff, the
Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515, at (202) 226-
0158. The staff of the Committee will notify by telephone those
scheduled to appear as soon as possible after the filing deadline. Any
questions concerning a scheduled appearance should be directed to the
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In view of the limited time available to hear witnesses, the
Committee may not be able to accommodate all requests to be heard.
Those persons and organizations not scheduled for an oral appearance
are encouraged to submit written statements for the record of the
hearing in lieu of a personal appearance. All persons requesting to be
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Witnesses scheduled to present oral testimony are required to
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noted above.
Chairman LEVIN. Good morning. We have two buttons here. One
is red and the other is green. Mr. Herger and I want to start
on time, knowing that Members who have other Committee
assignments, other work, will have to come in and out. Also, we
have the debate on the floor on Iraq, which overshadows
everything.
This is an important hearing. So, let me, if I might--Mr.
Herger and I discussed briefly the procedure. We thought we
would do it this way. We have two panels, the first on
Intellectual Property Rights (IPR) and the second is on the
subsidy issue. We have four witnesses here on intellectual
property, and then I believe we have five witnesses.
So, we thought we would do this--and then the U.S. Trade
Representative (USTR). We thought we would change the usual
order. Usually, an Administration goes first and then the panel
of witnesses. I thought often that wasn't particularly
productive, that it would be useful to have an experiment where
we would have the panels first and then call on the
representative of USTR. That is agreeable to them, but they
wanted some assurance as to time. So we told them 1:00.
So, if we leave a half an hour for not lunch but a munch,
that would mean an hour and a quarter for each of the panels.
If you take your 5 minutes, and we will try to abide by the
five-minute rule as we ask questions, I think that is workable,
that we can do that.
We will also follow the rule that was established some
years ago, and we will call on Members by the order they came
in. Hopefully, that will work out. Now, for those who will come
later, if they don't get a crack at you, the first panel, they
will have the first crack at the second panel. Okay?
So, now Mr. Herger and I will give our opening remarks. We
have looked forward to this hearing. The first panel, as I
said, will be on IPR and the second will be on subsidies. China
joined in December of 2001. That has been over five years ago.
When China joined, they made commitments regarding
intellectual property. I am going to speak on both subjects,
and then Mr. Herger will, and then we will go on. They made, as
I was saying, these commitments regarding intellectual
property. Unfortunately, they have not maintained or followed
their commitments. We will hear from the panel testimony about
the violations.
We have data that in 2005, between 85 and 93 percent of
music CDs, business software, entertainment software, and
movies in China were pirated, costing billions of dollars. Of
course, the problem affects not only that kind of intellectual
property, but also auto parts, electrical equipment, you name
it, affecting businesses and workers throughout this country.
We in October of last year wrote to the Administration and
urged that there be action taken through our World Trade
Organization (WTO) remedies. That hasn't happened yet. So the
issue becomes, why has there been this period, this half
decade, of inaction by the Administration?
I am reminded of another provision under the China
Permanent Normal Trade Relations (PNTR), of standard pipe under
section 421. The 421 provision is a general surge provision
that we inserted into PNTR so that if there was a major problem
of influx of imports into this country from China, that we
would have a remedy on a number of occasions.
On a number of occasions, a matter was filed. International
Trade Commission (ITC) in four cases recommended action, and
the Administration decided against it. Standard pipe, as I was
mentioning, was one of these. In terms of thousands of net tons
at the time of this attention to this important surge
provision, there were being shipped by China 274,000 net tons.
Just two years later--I am looking at the figures--that has
more than doubled. So the price of inattention has been a very
significant one.
There has been a similar problem regarding their subsidy
regime. When they joined WTO, they promised to give some annual
reports regarding their subsidies. It did not happen year after
year after year. Finally, in 2006, they gave a report that had
been required many years before.
What has happened now is that a case has been brought by
the Administration, and it will testify as to that. It has
brought a case against a small number of the 70-odd subsidies
listed by the Chinese in the report that had been required
years earlier. I think, in a word, what is happening now, after
years of inattention, the Administration has filed a case but
only against a relatively small number of their subsidies
listed by them.
What we are doing now on a bipartisan basis is to work on
legislation that essentially will apply the Countervailing Duty
(CVD) law, the countervailing duty laws, to non-market
economies so that companies that are being hurt by the Chinese
subsidies will be able to file a complaint with Commerce, and
if injury is shown, the Commerce Department will conduct a CVD
investigation.
As I said, this is being worked on on a bipartisan basis. I
hope that the legislation will be introduced within the next
few weeks. I mention this because it is critical that we move
from years of inattention and inaction to true action. Trade
has to be a two-way street. Attention to subsidies is the
opposite of protectionism on our part; it is really action
against the protectionism of other countries.
So, we welcome this panel. The IPR panel will be first. I
think you are going to give us graphic illustration of how
trade hasn't worked when it has been a one-way street, and how
these countries needs to, as it expands trade, as we must, be
sure that it operates both sides, both ways.
I now turn to you, Mr. Herger, for your opening statement.
Mr. HERGER. Thank you, Chairman Levin. I look forward to
our discussion on the importance of trade with China from U.S.
economy-wide perspective.
A recent Wall Street Journal editorial noted that:
``China's economic growth is a dual-edged sword for its trading
partners like the United States, which desires trade on fair
terms but not at the price of jeopardizing entry into one of
the world's fastest-growing markets.''
I think this is a perspective that we must maintain, one of
balance, that views China not only in terms of our trade
deficit, but also its importance to our economy as a whole.
China is our fourth largest export market, accounting for a 4.6
percent overall U.S. exports. Chinese exports of U.S.-
manufactured goods have grown from $9.3 billion in 1994 to
$41.8 billion in goods in 2005.
Our top export categories to China are machinery, aircraft,
medical instruments, and agricultural goods, which provide jobs
to tens of thousands of American workers. Although we run a
deficit in trade of woods with China overall, we currently
maintain trade surpluses in both agricultural goods and
services. Our exports of private commercial services accounted
for $9.1 billion, including professional, technical,
educational, and transportation services, supporting an
estimated 37,000 U.S. jobs.
On the import end, China was the second largest supplier of
goods in 2005, accounting for 14.6 percent of overall U.S.
imports. The primary reason for the recent increase in the
overall U.S. trade deficit in goods is the relative strength of
the U.S. economy.
Strong consumer demand has led to an increase in imports,
while slower growth in much of the industrialized world has
limited U.S. export growth. The value of imports to our economy
cannot be understated, however. They provide U.S. manufacturers
the opportunity to source internationally, allowing them to
maintain competitiveness by keeping final prices down. By
exerting down pressure on prices, imports lead to more choices
for consumers, increasing purchasing power and real income for
American workers and families, and keeping inflation in check.
The size of the U.S. deficit in goods with China is
somewhat misleading because China has become a significant
assembler of other countries' components. In fact, this is
estimated to account for 60 percent of Chinese exports that
were previously completed and shipped from other Asian
countries directly to the United States
Underscoring this point, as our goods deficit with China
has increased, other East Asian imports have dropped by $10
billion. China's economic growth has also kindled new
opportunities for U.S. foreign direct investment, which reached
$16.9 billion in 2005, compared to China Foreign Direct
Investment (FDI) in the United States of $481 million.
Still, as important as China's economic growth is for our
own economy, it is essential that China plays by the rules. We
must see that it complies with the WTO obligations, such as
protecting IPR and ending subsidies that violate its WTO
obligations. To be blunt, I am disappointed at the slow pace of
reform in China on these issues. While we have seen some
improvement on IPR enforcement, it is not enough. I encourage
the USTR to maintain the pressure.
I am pleased at the announcement that the United States is
bringing a case against China's export subsidies and import
substitution. This case is truly about standing up for
America's workers, as has been done before on semiconductors
and auto parts and in achieving positive outcomes in
semiconductors and kraft liner board, by threatening cases.
In our pursuit of balance in this debate, I believe the
United States must continue to press China to open its markets
to our goods and services. Further, we must urge the world's
most populated Nation to adopt stable, pro-growth policies
which will lead to an increasingly large export market for U.S.
producers and investors.
Thank you, Mr. Chairman.
Chairman LEVIN. Thank you very much.
[The prepared statement of Mr. Reynolds follows:]
Opening Statement of The Honorable Thomas M. Reynolds, a Representative
in Congress from the State of New York
Thank you, Mr. Chairman.
Today's hearing gives this subcommittee an opportunity to discuss
an issue I've worked to highlight for several years--China's failure to
protect intellectual property rights, particularly on manufactured
goods.
Two years ago, the Ways and Means Committee heard testimony from
Robert Stevenson, the CEO of Eastman Machines, a small- to mid-sized,
family-owned manufacturer in Buffalo, New York. Mr. Stevenson vividly
highlighted one of the most glaring, unfair trade practices we see from
China--its blatant disregard for intellectual property rights on the
patents of U.S. manufactured products.
In Mr. Stevenson's view, China's contempt for intellectual property
rights is the single biggest disincentive to small- and medium-sized
manufacturers seeking to export their products to that huge and growing
Chinese market. In the case of Eastman Machines, which makes high-
quality cloth cutting machines, the company's Chinese competitors--and
in some cases, even its business partners--are pirating its designs and
producing low-cost knockoffs for sale in the Far East and Pacific Rim.
When China was permitted to join the World Trade Organization in
2001, there was an implicit promise made to American businesses,
workers, and consumers--that we would get a fair deal in our trade
relations with the Chinese. Yet, in so many areas--intellectual
property rights, currency valuation, subsidies, trade barriers, you
name it--we see China failing to uphold its end of the bargain by
ignoring its international trade obligations. But when companies like
Eastman Machine seek relief for their legitimate grievances, they too
often find themselves getting the short end of the stick.
We need to do much more to combat China's unfair trade practices,
and I look forward to working with all of my Ways and Means colleagues
to push for better enforcement of our trade laws, particularly against
countries like China that continually cheat on trade.
Chairman LEVIN. All right. The first panel--and I think
what I will do is to introduce the four of you together, and
then you will proceed. We are not being very chivalrous. We
have Mr. Glickman first, but I guess we will follow that
practice. I am not sure who seated you which way.
I welcome all of you, and especially welcome back Mr.
Glickman and Ms. Schroeder. Both Dan Glickman and Pat Schroeder
served with such distinction in this body. Your contributions
were invaluable, including the sense of humor of both of you,
and we miss that.
Dan Glickman went on to be, of course, a Secretary of
Agriculture, among other distinguished services, and is now
Chairman and CEO of the Motion Picture Association (MPAA). So,
we welcome you, Dan Glickman.
Pat Schroeder, who always had a way with words--sometimes
not always humorous, sometimes very much to the point, as Mr.
Glickman's were--her distinguished service here has been
followed by work in many pursuits, and is now President and
CEO, as we know, of the Association of American Publishers. So,
a special welcome to you, Pat.
Geralyn Ritter is the Vice President for International
Affairs of PhRMA. We know the importance of pharmaceuticals in
this country and this world. So we are especially thankful that
you could come and give us your perspective.
Peter Baranay is CEO of ABRO Industries, and he is going to
give us his perspective from that of a business person.
So, if each of you would take 5 minutes. Your statements
will be in the record. I think the way this is working out, we
will have ample time, if you can adhere to the 5 minutes, for
each of us, or close to that, to have our 5 minutes. So,
proceed.
STATEMENT OF DAN GLICKMAN, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER,
MOTION PICTURE ASSOCIATION OF AMERICA
Mr. GLICKMAN. Thank you very much, Mr. Chairman. It is a
pleasure to be here in this great august room. I served with
both you and Mr. Herger. It is a great honor to be here, and
with the other distinguished Members on this panel. I will make
my comments and then be willing to answer questions afterward,
but let me make the following points.
One, China is the most difficult market in the world for
the U.S. motion picture industry. It is impossible to travel to
one of China's major cities and not encounter street hawkers
pushing pirated versions of the latest movies. I have brought
many of them here with me. More than nine out of every ten DVDs
in the China market is fake. A comprehensive analysis of the
piracy problem estimates that our members lost $244 million to
piracy in China in the year 2005 alone.
While you can see virtually any U.S. film you want in China
in pirated form, the legitimate market to American movies is
one of the most restricted. The pirates have a thriving market,
but our companies, who invest millions and employ hundreds of
thousands of American workers, are throttled because the
Chinese government decides which movies can get in or not.
These problems reinforce each other, making China nearly
too frustrating to deal with. At the same time, as one of the
fastest-growing markets in the world, China is indeed too
potentially lucrative to ignore.
Their government has committed to fight piracy and
strengthen its protection of intellectual property, but it has
neither met its unilaterally announced objectives nor its
international obligations.
In connection with access, we will not be successful
fighting piracy in China unless we have fair access to a fair
China market. That we do not have. The Chinese government needs
to clean the level playingfield and remove the artificial
protectionist barriers that restrict legitimate companies from
supplying Chinese audiences the film entertainment they desire.
Our research indicates that almost half the pirated product
is actually Chinese. We also find stolen copies of Japanese,
Korean, French, and Indian movies in China. The world's film
industry, including the Chinese industry, lost $2.7 billion in
2005 in China. Half of that losses were to the Chinese film
market.
In addition, our analysis of pirated DVDs from around the
world trace their production back to 50 plants in China that,
because of the modern global Internet and the capability of
moving movies around the world, find themselves all over the
world.
Let me give you an example. During my first trip to China
in this role, I visited a shop near the hotel where I stayed.
To my astonishment, I found a copy of one of my son's movies.
My son is a film producer. I met with the Mayor of Beijing the
next day. The next day, the shop was raided and closed.
During my next trip to China, I visited the same shop. It
was full of more pirated disks. We alerted the authorities. It
was raided again and closed.
Last December, our staff met with Ministry of Culture
officials, who touted the closure of the shop and its
conversion to a clothing store. The MPAA staff visited the
store, and from the outside, it did look like a clothing store.
However, inside in a back room, pirated versions of virtually
every current U.S. movie remained available.
So, that is a key problem we face, the will and commitment
of the Chinese authorities to enforce their laws. We have
problems with the adequacy of many of their laws, but as strong
as these laws might be, if the authorities do not enforce them,
we will be no better off than we are right now.
The next problem is access to a fair market. China only
permits 20 foreign films into its market each year on a
revenue-sharing basis, the normal way films are distributed.
Typically, U.S. audiences may have the opportunity to see as
many as 20 new films over a week or two.
Those films must be imported and distributed through a
government-controlled entity which dictates the terms by which
we share box office revenues, and these terms are the most
unbalanced in the entire world. We also must contend with a
censorship process that at times seems to be very much part of
the protectionist movement over there.
In China last year, our U.S. films earned $109 million in
box office. In comparison, over the last weekend the U.S.
domestic box office was $108 million. Notwithstanding these
figures, the 2006 Chinese box office was 30 percent more than
2005. Box office is moving up in China; it is just that our
companies and American motion pictures are not permitted to in
fact participate in that.
We spend a lot of money fighting piracy in China and around
the world. We work with governments to enact and enforce the
laws. We are all on the ground in China. We survey the market
for information. We work with Chinese authorities on
intellectual property and enforcement, and we do have some
cooperation with the Chinese authorities.
The support we have received from China in actually
implementing what they promise to do is indeed lacking. Our
support from the Congress has been tremendous, and frankly, the
work the Administration has done and is doing is invaluable in
this regard.
The market is not open. The piracy rates are incredible. As
you can see from all these DVDs that I brought you from a
variety of movies that are not out legitimately in DVDs in the
United States, all the way from ``The Pursuit of Happyness,''
``Night at the Museum,'' ``Babel,'' ``Blood Diamond,'' ``Flags
of Our Fathers''--and by the way, those movies are not
permitted to even be shown in China. There are only two movies
on DVDs that are being permitted to be shown in China, ``Casino
Royale'' and ``Happy Feet,'' but again, they are not out in DVD
legitimately in the United States as well.
So, I say to you that this is a problem that needs
addressing. In many cases, we are the poster boy for this
particular problem. There are some folks in the Chinese
authorities who want to help us, but for the most part, we need
your help and we need it as quickly as possible. Thank you very
much, Mr. Chairman.
[The prepared statement of Mr. Glickman follows:]
Statement of Dan Glickman, Chairman and Chief Executive Officer,
Motion Picture Association of America
Mr. Chairman: ``China is too frustrating to deal with, too
lucrative to ignore.'' That quotation, attributed to a film industry
executive, appeared in a story Variety carried this past Monday
describing the problems the U.S. motion picture industry faces in the
China market. It captures the situation perfectly, almost. For the
reasons I will cite, the numbers show that China has been far from
lucrative, though still a market with enormous potential.
China is the most difficult market in the world for the U.S. motion
picture industry. It is impossible to travel to one of China's major
cities and not encounter street hawkers pushing pirated versions of the
latest U.S. movies. More than 9 of every 10 DVDs in the China market is
fake. A comprehensive analysis of the piracy problem estimated that our
members lost $244 million to piracy in China in 2005 alone.
While you can see virtually any U.S. film you want in China, in
pirated form, the legitimate market is one of the world's most
restricted. The pirates have a thriving market, but our companies--who
invest millions and employ hundreds of thousands American workers--are
throttled. The Chinese government decides which U.S. films Chinese
audiences will see, when they will see them, and dictates the terms of
getting those films into China.
These problems reinforce each other; they make China nearly ``too
frustrating to deal with.'' At the same time, as one of the fastest
growing markets in the world populated with audiences who genuinely
like and flock to U.S. films, China is indeed ``too [potentially]
lucrative to ignore.''
Let me frame the three key points in the U.S.-China trade agenda
from our perspective:
One, the U.S. motion picture cannot continue to absorb losses of
the magnitude it suffers in China. The Chinese government has committed
to fight piracy and strengthen its protection of intellectual property,
for the motion picture industry as well as other U.S. copyright
industries. It has met neither its unilaterally announced objectives
nor its international obligations.
Two, the U.S. motion picture industry will not be successful
fighting piracy in China until it has fair access to a fair China
market. We are not seeking preferential treatment, we are seeking fair
treatment. Movie pirates invest nothing in creating the content they
peddle, yet they enjoy virtually unfettered access to Chinese
audiences.
The Chinese government needs to clean then level the playing field,
remove the artificial, protectionist barriers that restrict legitimate
companies from supplying Chinese audiences the filmed entertainment
they clearly desire.
Three, success in achieving these goals will depend, in part, on
the continued support of our agenda from the Congress and the
Administration.
Movie Piracy in China
Regrettably, to coin a phrase, if you did not see a counterfeit
DVD, you were not in China. Too many, especially some around the world
who should be allies in the fight against piracy in China, view this as
an American problem, or a Hollywood problem. While we certainly bear
the disproportionate brunt of the burden of this problem, movie piracy
in China affects film makers all around the world.
Our research indicates that almost half the pirated product is
actually Chinese. We also find stolen copies of Japanese, Korean,
French, and Indian movies in China. The world's film industry,
including the Chinese industry, lost $2.7 billion in 2005, according to
the research we commissioned.
I recall a conversation with a young Chinese film producer who
recently visited my office. When asked to define his number one
problem, he did not mention financing, distribution, or any of the
other obstacles film producers must overcome: He said piracy is his
biggest problem--the theft of his movies, in China.
Movie piracy is a problem afflicting film makers no matter where
they live and make movies, in more than one way. Not only are the
pirates sapping legitimate movie makers in the China market, they are
encroaching on legitimate markets all around the world. Our analysis of
pirated DVDs seized from around the world traced their production back
to over 50 plants in China.
Piracy in China it is also a problem with global reach. A pirated
disc made in China can, in a day or two, be on the streets of Los
Angeles. Someone can illegally camcord a movie in Montreal, send the
file by way of the internet to someone in Guangzhou who then dubs and
subtitles the dialogue, and then illegal presses thousands of DVDs.
In June of last year, the first research conducted in China
examining the effect of piracy on the country's motion picture industry
from the perspective of industry participants revealed that Chinese
film producers, exhibitors, and distributors are suffering badly from
widespread film piracy, and that few are optimistic that the situation
will improve any time soon.
Asked about the future of movie piracy in China over the short
term, 61 percent of industry respondents surveyed in this study said
they believe movie piracy will continue to increase, while 39 percent
said they believe piracy levels will hold steady. No one interviewed
believes that the market for pirated films will shrink.
The researchers concluded that meeting consumer demand--through
increased variety and availability of legitimate movie titles as well
as improved legitimate distribution networks--is to some extent a
precursor of the eradication of piracy.
Over the last several months, senior Chinese officials have stepped
up their rhetoric about intellectual property rights enforcement. We
have seen several pronouncements of enforcement campaigns, the most
recent being the so-called 100 Day Campaign launched last summer,
extending through the fall of 2006.
We undertook our own survey of the effects of the campaign on the
availability of pirated product. In general, we found that in some
cities, in some shops, at some times, the availability declined;
however, pirated discs were still available at virtually the same
level. In some instances, we were asked to come back later in the day,
or were squirreled to back rooms.
Let me give you an example: During my first trip to China in this
role, I visited a shop near the hotel. To my astonishment, I found a
copy of one my son's movies. I met with the mayor of Beijing later that
day. The next day, the shop was raided and closed. During my next trip
to China, I visited the same shop. It was full of more pirated discs.
We alerted the authorities; it was raided, again, and closed. Last
December, our staff met with Ministry of Culture officials, who touted
the closure of the shop and its conversion to a clothing store. They
visited the store, and from the outside, it did appear to be a clothing
store. However, inside, in a backroom, virtually pirate versions of
every current U.S. movie remained available.
Therein lies a key problem we face: The will and commitment of the
Chinese authorities to enforce their laws. We have problems with the
adequacy of many of the provisions of their laws. But as strong as the
laws might be, if the authorities do not enforce them, we will be no
better off than where we are right now.
Fair Access to a Fair Market
Unfortunately, there are several territories around the world where
the rate of piracy of U.S. motion picture rivals the rates we endure in
China. However, China stands unequalled in the barriers it places on
the U.S. industry's ability to enter the market. Let me cite six of the
most visible, and frustrating, barriers we face.
First, China only permits 20 foreign films into its market each
year on a revenue sharing basis. Typically, U.S. audiences may have the
opportunity to see as many as 20 new films over a week or two; China
only allows 20 foreign films into its cinemas a year.
Second, those films must be imported and distributed through a
government-controlled entity. We have an extremely limited role in the
normal commercial activities of distributing and promoting our own
films.
Third, China's state-controlled film importer and distributor
dictates the terms by which we share box office revenues with Chinese
theaters; these terms are the most unbalanced in the world and return
to the U.S. industry rates far below normal commercial terms.
Fourth, we must contend with a censorship process that at times, we
believe, can be arbitrary and motivated more by political or
protectionist concerns than by making judgments about the suitability
of the film.
Fifth, when we do get our films in the market, around and over
these obstacles, we frequently find ourselves subjected to blackout
periods, as we term them. They are periods when the Chinese authorities
reserve local cinemas for Chinese films, only. To make our exclusion
from cinemas even worse, blackout periods usually occur during periods,
when audiences are most likely to be on holiday from work or school,
such as the upcoming new year holiday.
Sixth, we also face restrictions on our ability to invest and
control film production, distribution, and exhibitions businesses in
China. Like other businesses, we are subject to arbitrary decisions
affecting our businesses, a lack of transparency about the way those
policies are set, and policies that favor local companies at our
expense.
Consequently, in China last year U.S. films earned $109 million in
box office. In comparison, over the last weekend, the domestic box
office was $108 million. Notwithstanding these figures, the 2006
Chinese box office was 30% more than 2005. A recent industry analysis
projected that box office revenue will double within the next 4 years.
Over the last few years, the U.S. motion picture industry has
stepped up its investment in the Chinese industry. We have invested in
cinemas as well as film and television production facilities. We are
interested in continuing that investment; however, as we have told the
Chinese authorities, we must be assured of the ability to return a
sufficiently attractive return on that investment to justify it.
Some of our members have also adjusted their marketing practices to
compete with the pirates. But no matter how aggressively we price our
products, we cannot compete with pirates who have no investment in the
content of the product and we cannot compete against the pirates who
have the market to themselves, not hindered by the government
regulations and restrictions we encounter.
The MPAA China Agenda
MPAA invests millions every year in fighting piracy, in China, and
around the world. We go after the pirates, we work with governments to
enact and then enforce adequate laws. We work to educate the public
about the consequences of piracy, and the legal alternatives, and we
are constantly seeking new ways to address the problem through
technology, education, and changing business practices.
We are also on the ground in China. Our representatives survey the
market for information about the incidence of piracy and pass on this
information to the Chinese authorities. In many cases, this information
helps Chinese authorities formulate cases for raids on sellers and
distributors, and often, those authorities invite our representatives
to accompany them on such raids.
We operate and participate in training sessions for Chinese
authorities and jurists on IPR laws and enforcement, in the U.S. and in
China.
We have executed a memorandum of understanding with the Chinese
Ministry of Culture, National Copyright Administration, and State
Administration of Radio, Film, and Television to improve protection of
home entertainment products. We just recently executed, with other U.S.
copyright trade associations, another agreement with the National
Copyright Administration of China to enhance our collective efforts to
combat internet piracy.
The support we have received from the Congress is tremendous. The
work the Administration has done and is doing is invaluable.
I want to note the work, in particular, of Secretary Gutierrez and
Ambassador Schwab. The Secretary has been one of our most powerful and
articulate advocates; his team, here and in Beijing, are top-rate.
Ambassador Schwab approaches our China agenda with a clear and forceful
strategy for success, and she has deployed some of the best and most
effective officials in the executive branch to our cause. We are deeply
appreciative of these efforts.
In the 5 years since China joined the World Trade Organization,
since taking on the obligations and responsibilities that organization
demands of its members, we have, regretfully, seen little meaningful
progress from China towards protecting U.S. motion pictures as the WTO
requires. The market continues to be tightly controlled, in violation
in some aspects of the letter of the WTO and certainly in spirit.
We will continue our work inside China, with the officials there,
with the industry, and our members will likely do so, too. However, our
patience and our pocketbooks are not limitless.
We have walked a long way down the China road, looking and hoping
for improvement. We may be nearing the end of that course and deciding
on whether to take another, another which calls China into account for
its WTO obligations and responsibilities, and, we believe, its failure
to abide by them.
Olympic Leverage
Before coming to my current position, I spent a fair amount of time
in China and working on matters affecting China while I was in Congress
and as Secretary of Agriculture. In particular, with respect to the
latter, I was deeply involved with President Clinton in fighting,
successfully, for PNTR for China.
When I traveled first to China under the MPAA mantle, I was greeted
as a friend of China for that work. I was able to secure meetings at
the most senior levels and enjoyed candid and productive conversations
with those officials. Since then, I have worked hard to maintain good
relations with the Chinese government and industry.
In addressing our problems with the Chinese officials, I told them
that I am struck by the fact that when, and if, they want to protect
intellectual property, they can be remarkably successful. While fake
DVDs litter Beijing, fake Olympic-logo materials are impossible to
find. The government has made it abundantly clear that it will not
tolerate Olympic rip-offs, and it has enforced that edict, effectively.
In sum, when the Chinese authorities want to protect intellectual
property, they can.
As the world's eyes begin to turn to Beijing in the run-up to the
2008 Olympics, I have asked the authorities if they want the world to
see a China of which they can be proud, or do they want the world to
see a China of fake DVDs--a China which pays no heed to intellectual
property, a China which countenances theft, theft of ideas, creativity,
and of the livelihoods of the working men and women who make those
movies.
My views on how we can use the pressure of the Olympics to further
our agenda are explained more fully in the attachment to this
statement. In your discussions with Chinese officials, I urge you to
make the same points. I believe we must step up enforcement, open the
market, possibly take legal action at the WTO, and we must also shine
the powerful light of world public opinion on the Chinese.
Mr. Chairman, I appreciate the fact that you have decided to call
attention to our China problems as one of the first matters on your
agenda this Congress. I look forward to your questions and to working
with you and your colleagues in advancing our agenda in China.
Thank you.
______
Is China ready for its close-up?
As the world focuses on the Beijing Olympics, will the government drop
the curtain on entertainment pirates?
By Dan Glickman
From: The Los Angeles Times
AS BEIJING begins preparing for the 2008 Olympic Games, we will see
more and more of the Olympic logo, one of the most widely recognized
pieces of intellectual property--and one of the best protected.
To be sure, fake depictions of the five rings and the logos of
individual Games have plagued the International Olympic Committee and
host country Olympic committees. But the integrity of the logo will be
tested like never before when the torch enters Beijing.
China is arguably the world's largest marketplace for pirated
goods--from copied luxury items and medicines to bootleg versions of
the latest films. Will knockoffs of Beijing's running-man logo for the
2008 Games become as commonplace?
A recent news story cited a Chinese manufacturer who observed that
his government was implementing strict control over the production and
distribution of Olympics materials ``to protect the value of the
logo''--and it's working. Will China translate its apparent will to
protect the integrity of its Olympic logo to movies, music,
publications, television, entertainment and business software,
pharmaceuticals and other industries that are built and dependent on
effective protection of their intellectual property?
In a little less than two years from now, hundreds of thousands of
people will travel to China for the Games that billions of people will
watch on television. I know the kind of China I want them to see: a
responsible great power, a leading player in the world's affairs
abiding by the rules of the community of nations. I also want to see
China as welcoming of movies and other entertainment from around the
world as the government will be of fans and athletes from around the
world.
Indeed, China has actively sought such recognition, most pronounced
in its successful bid to join the World Trade Organization. Along with
recognition, that membership carries responsibility, a duty that China
has failed to meet in opening its market to legitimate entertainment
industries and protecting intellectual property and the value of
creativity. This deficiency is not just an intolerable burden to the
U.S. motion picture industry; it afflicts filmmakers worldwide,
including those in China. An independent Chinese film producer recently
told me that his single biggest problem is the piracy of his work by
his fellow countrymen.
During my last trip to China, I heard from Chinese officials--all
too frequently--that the rest of the world must be patient, that we
must give China more time to develop a sophisticated, comprehensive and
effective system of protections for intellectual property rights. The
authorities said that modern China has a mere 20 years experience--a
small fraction of that of the United States.
I reject this explanation. My first trip to China was more than 20
years ago. The transformation of the nation and its economy since then
has been astonishing, made possible by a commitment to purpose and a
purposeful will--both of which have been lacking in its approach to
intellectual property rights. Although China has opened itself to the
world in many remarkable ways, the U.S. motion picture industry still
faces a bewildering array of restrictions, hobbling its fair access to
China's market. At the same time that China effectively permits pirates
unfettered access to Chinese movie consumers--93% of the film market is
pirated goods, according to Motion Picture Assn. of America research--
it severely restricts the ability of legitimate moviemakers who have
invested enormous capital in producing the filmed entertainment that
the pirates steal. This gives the pirates a monopoly.
I challenge Beijing to use the 2008 Games to showcase a new
commitment to movie rights. Beijing has enlisted the help of some of
the greatest American film directors to create projects to showcase
China and the Olympics. Yet these same directors have repeatedly had
their films rejected for exhibition in China. But make no mistake,
their films are widely known and viewed in China, thanks to the sales
of millions of pirated DVDs.
In 2008, the world could see China as a nation of fake goods, a
nation running roughshod over respect for intellectual property. Or it
could be seen as a respected member of the international community that
welcomes a diversity of entertainment products while protecting and
valuing the integrity of intellectual property.
China is a great power. Will it act like one?
FOOTNOTE
---------------------------------------------------------------------------
The Motion Picture Association of America (MPAA) represents the
major U.S. producers and distributors of motion picture and television
programs; its members are NBC Universal City Studios, Paramount
Pictures Corporation, Sony Pictures Entertainment, The Walt Disney
Company, Twentieth Century Fox Film Corporation, and Warner Bros.
Entertainment
---------------------------------------------------------------------------
Chairman LEVIN. Thank you very much.
Pat Schroeder. Welcome.
STATEMENT OF PATRICIA SCHROEDER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ASSOCIATION OF AMERICAN PUBLISHERS
Ms. SCHROEDER. Thank you. It is so wonderful to see
Chairman Levin and Chairman Herger--or Ranking Member Herger up
there. Both of you got great promotions. It is great to see all
of my friends up there. Those of us who weren't on Ways and
Means are always in awe when we are in this room. So, I will
try not to be too awestruck.
Thank you for----
Chairman LEVIN. It may not last long.
Ms. SCHROEDER. Yes. Yes.
Mr. CROWLEY. Mr. Chairman, can I also say that so are we.
Ms. SCHROEDER. That is great. Well, I want to say for the
book industry--we know. You earned it.
Chairman LEVIN. All right. We won't take that away from
your 5 minutes.
Ms. SCHROEDER. Terrific. Well, I just want to say for the
book industry, we really thank you for including us. America's
book industry is about a $25 billion industry. It is very, very
large. We have all the same problems of the movie people.
Obviously, our publishers desperately want to get into the
Chinese market and have not been able to. That's not just
talk--people say, of course you want to get in, but last
January 30th, or this January 30th, Danny and I and some other
copyright folks were over here on the Hill releasing the 2005
statistics on the copyright industries in America.
I just want to remind people, we are over 11 percent of the
gross national product of this country. We are one of the major
exports of this country. What we also showed is that the wages
of the average person in copyright was 40 percent over the
average worker in America. These are the middle class wages
Americans want, and we really think that intellectual property
is where America's future jobs are in this global economy. So,
we really need to work together to protect them.
Obviously, we can't get into the Chinese market as long as
they keep cratering that market with this rampant piracy that
our book industry is up against. We have no idea what the true
value is. We estimate just for higher ed, it is conservatively
$52 million.
We are also getting hit very hard by digital piracy, the
downloading of entire books. Digital piracy is growing by leaps
and bounds. We have no estimate for how broad-based that is,
nor do we know how deep it is for all of the general pirated
books that we have out there, just the regular market books.
Let me say what we are working on first in China is the
schools. Universities are reproducing entire books. They do it
at the university. They often put their stamp on it. Sometimes
they put hard covers on it. Obviously, the Chinese government
has to know about this. This is very shocking to us. That is
where we really can get some figures as to what piracy looks
like. So, American publishers are trying to educate the
Chinese, but we are not getting paid for any of our textbooks
being used everywhere. It is really kind of strange.
Then obviously, just as Danny had, all of our book
publishers find their books over there, and that is very
frustrating. We have no idea the value of overall piracy of
books in China. Kite Runner, Bill Clinton, they are all out.
You can buy illegal copies on any corner.
Then they do trademark piracy, too. Harvard University has
got so many books over there with the Harvard symbol on it, and
other universities are the same. All the books are frauds. They
are all total frauds. One of our favorites even had a
recommendation from Einstein. It is pretty hard to give a
recommendation from the grave, but nevertheless, that is what
is happening.
So, we have been very frustrated by this problem. We work
with the local Chinese publishing association. They are equally
as frustrated by it. We had a gigantic conference on piracy at
the international Beijing book fair in 2005. Interestingly
enough, right out on the street in front they were selling
pirated books, so clearly, the pirates aren't worried about any
kind of enforcement at all if you can do it right outside the
book international show.
So, finally, we have gotten the Chinese to pay a little bit
of attention. They raided some universities. They raided six of
them. Many of them they raided when universities were closed
down, so obviously, they didn't find much. Secondly, if they
did find much, the fines were so de minimis it didn't mean a
lot, but at least it was an attempt. It is kind of the
frustration that you talk about. They have put out some memos
saying, thou shalt not do this. Well, will they follow up? Will
they really pursue that? We don't know.
We have been working with our Government. Our Government
desperately needs to help. As I say, we work with the local
industry. We talk to the Chinese officials. We keep pushing,
but we don't seem to get very far.
Finally, book publishers can't even get into the Chinese
market. Under the WTO Agreement, they were supposed to be
allowed in, but we are not allowed to import our own books in
the legitimate market at all. No Amercican publisher are
allowed unless they align themselves with a local government
official or a sanctioned publishing house. Our publishers are
not allowed to set up and publish internally. Nor can our
publushers distribute. We can't bring them in. We are shut out
of the market. We want to be in the market. We see our stuff
being sold and pirated all over the market. So, that is it.
Thank you very much, Mr. Chairman.
[The prepared statement of Ms. Schroeder follows:]
Statement of Patricia Schroeder, President and Chief Executive Officer,
Association of American Publishers, Inc.
The Association of American Publishers (AAP) thanks Chairman Levin
and the Ways and Means Trade Subcommittee for the opportunity to
participate in today's public hearing on the matters related to the
protection of intellectual property rights in China. The pervasive
problems of copyright piracy and trademark counterfeiting in China,
exacerbated further by severe restrictions on market access for several
industries including publishing, are some of the most important issues
facing China and the U.S. today.
About AAP
The Association of American Publishers is the national trade
association of the U.S. book and journal publishing industry--an
industry with 2006 sales exceeding $25 billion. AAP's more than 300
members include most of the major commercial book publishers in the
United States, as well as smaller and non-profit publishers, university
presses and scholarly societies. AAP members publish books in every
field, educational materials for the elementary, secondary,
postsecondary, and professional markets, scholarly journals, computer
software, and electronic products and services. The protection of
intellectual property rights in all media, the defense of the freedom
to read and the freedom to publish at home and abroad, and the
promotion of reading and literacy are among the Association's highest
priorities.
Introduction to Book and Journal Piracy in China
In 2006, AAP estimated losses to U.S. publishers in China at $52
million, not including losses due to piracy on the internet. Visits to
China and discussions with our member publishers reveal a staggering
amount of book piracy plaguing this most promising of markets.
Book piracy manifests itself in a number of different forms in
China. Illegal commercial scale photocopying of academic materials is
the industry's most immediate concern. Print piracy (unauthorized
reprints approximating the quality and appearance of the original) and
illegal translations have profound effects on the market as well.
Internet piracy in the form of sites offering illegally scanned books
for download, peer-to-peer trading and unauthorized access to
electronic journals and other database compilations, is growing by
leaps and bounds. Furthermore, trademark counterfeiting, especially
with regard to books produced by university presses, misleads Chinese
consumers. All of this is exacerbated by market access barriers that
deny foreign publishers the ability to freely import into the Chinese
market, distribute their own materials, obtain local Chinese book
publication numbers or print for the local market.
Commercial photocopying
One of the most destructive forms of book and journal piracy is
commercial-scale illegal photocopying of academic materials, an
activity that takes place on and near school and university campuses
all over the world. The mechanisms differ slightly from place to place.
In some cases, most of the photocopying takes place at small copyshops
lining the campuses. These shops often appear to be minute, independent
operations, but in reality are frequently linked in ownership and
highly organized. Campus facilities are often used to make illegal
copies as well, including library books, copiers in libraries, student
centers and academic buildings and commercial operations leasing space
on the premises of the institutions.
In China, this is taken one step further. Almost every Chinese
university has at least one ``textbook center'' on campus, in most
cases run by the university itself and charged with distributing
textbooks to students at the start of each term. In some cases, these
textbook centers are distributing legitimate texts, legally printed or
imported for the use of the students. In the vast majority of cases,
however, these centers are distributing photocopied or illegally
printed texts in large quantities. These illegal copies are generally
made on the campus--at or near the textbook center, presumably at the
request of the university authorities or the lecturers adopting the
books. It is often a highly organized practice, complete with stock
lists, storage warehouse, bar codes and colorful covers bearing the
name of the department or the university crest.
It is important to note two things when discussing these textbook
center practices. First, being mindful of the notion of ``fair use'' or
``fair dealing'' in academic materials--legal provisions stipulating
that a certain amount of copying is permissible for purposes of private
study or research--I must emphasize that the copying taking place at
these textbook centers far exceeds the possible bounds of fair dealing.
Routinely, books are copied in their entirety. Large portions of books
or journals included in ``compilations'' go well beyond ``fair use'' as
well. AAP respects the balance reflected in the fair use provisions
contained in international agreements. These practices, however,
disrespect that balance greatly. Second, it is important to recognize
that these textbook centers hurt Chinese publishers just as much as
foreign publishers. Many of the illegally copied books found in
textbook centers are Chinese language, Chinese published books. This
results in massive losses to a local industry that is trying to
establish itself in an international marketplace.
The practices of these textbook centers, undertaken with either the
tacit or active consent of the universities themselves, are destroying
the market for English and Chinese-produced textbooks alike. AAP and
the Publishers Association (PA), its sister association in the U.K.,
have been working with authorities in the General Administration of
Press and Publication (GAPP), the National Copyright Administration of
China (NCAC), regional copyright authorities and the Ministry of
Education (MOE) to bring light to these issues.
Print piracy and translations
Print piracy and unauthorized translations have a profound effect
on the market as well. Bestsellers such as the Harry Potter'
series, Dan Brown's novels and political autobiographies are pirated in
English and Chinese within days of their home country releases. These
books--of varying quality--are readily available in retail markets and
street stalls, apparently without fear by the vendors of any government
action. AAP representatives have routinely seen pirate books sold by
street vendors outside the Beijing International Book Fair venue!
Clearly, the boldness of the pirates suggests that enforcement measures
to date have not been effective.
Until a few years ago, print piracy of all books was the prevalent
form of piracy in China. This was due, in part, to the high cost of
photocopy paper and implements--it was more profitable to undertake an
entire print run of a bestselling commercial or professional book.
While photocopying has caught up and perhaps surpassed this problem in
prevalence, the issue of print piracy remains significant. Print
piracy's effects are especially severely felt among publishers of high-
end technical books, reference books and English language teaching
books, as well as commercial fiction.
Print piracy exists primarily in two forms. The first involves
print overruns by an otherwise legitimate Chinese printer. This
licensing issue is exacerbated by the market access restrictions in
place (see below) that prevent U.S. publishers from engaging in direct
contracts for printing for the Chinese market. Instead, U.S. publishers
must partner with a Chinese publisher, who handles all contracts for
book production. This lack of control over the contractual relationship
makes it difficult for U.S. publishers to control licensees who violate
the contract terms by printing more copies than licensed and selling
the ``rogue'' copies for an extra profit. They then return the unsold
legitimate copies to the publisher, who bears the full risk of
estimating market demand under the industry's ``remainder'' system.
Foreign publishers will remain vulnerable to this practice until market
access barriers as to printing are removed.
The second form is outright piracy by an entity that has no license
to print the book at all. In some cases, book pirates target an English
language book that they are able to replicate almost exactly, thus
being able to print a book that is virtually indistinguishable from the
original. In other cases, books are clearly pirated--the quality varies
greatly. Most translation piracy involves print piracy of this type--
often, poor quality translations, bound at a printing press. This hurts
not only the original foreign publisher, but also the Chinese publisher
who was granted the legitimate translation rights.
Recent studies suggest that underground dealing of pirated
bestsellers, especially at places such as the Beijing Book Market in
Tianshuiyuan, is flourishing. AAP suspects that Tianshuiyuan is the
primary source for pirated books sold in the street vendor network in
Beijing.
Internet piracy
The industry's fastest growing problem--a problem we share with
many of our fellow copyright industries--is internet piracy. Just in
the last six months, complaints from publishers about scanned books
being traded online have increased significantly. Clearly, this is a
practice that threatens to do more harm to our industry than all other
problems combined.
Web sites offering free book downloads are thriving. These books in
most cases do not originate in electronic form, but are scanned
versions of hard cover books. Sites offering pay or free downloads join
traditional peer to peer trading sites as serious threats to the book
market. Too often, takedown notices are ignored and government action
against these operations is slow.
Internet piracy is affecting publishers of academic and
professional journals in a different way. These journals, which unlike
most of the books originate in electronic form, are usually made
available by publishers to institutional subscribers through use of
passwords or similar ``gateway'' mechanisms. Increasingly, journals
publishers are seeing evidence of these electronic ``gateways'' being
left open or accessed by unauthorized users. Publishers have also
reported evidence of abuse of ``trial'' samples of electronic goods
sent to libraries through extensive unauthorized sharing of these
samples among institutions. All of this activity--in violation of both
copyright laws and subscriber agreements, opens the doors for pirate
operations to access these materials, reproduce them and sell them in
competition with the legitimate vendors.
Electronic piracy is in some cases replacing photocopying as well.
Reports indicate that often, scanned versions of academic titles are
reprinted and bound for distribution by second hand bookstores, with
the label ``e-book.'' Indeed, this is an increasingly frequent
phenomenon throughout the world, as more and more enforcement actions
against traditional copyshops are yielding computers full of ``e-
files'' ready to print at customer demand.
Trademark counterfeiting
While most book publishers are primarily focused on copyright
piracy, trademark counterfeiting affects the industry as well.
Counterfeiting is often incidental to copyright piracy, as pirates use
the famous imprints of American publishers to get attention from
readers. This is taken to a new level when well-known publishers' names
are used on books that bear no content produced by that publisher at
all! These books, available at mainstream bookstores in China, mislead
consumers as to the origin of their content.
In addition, book publishers suffer from a sort of ``passing off,''
by which books bearing titles and fictional authors' names similar to
bestsellers are marketed at the expense of the legitimate authors and
publishers. By one example, former President Bill Clinton's book was
marketed, before release in China. One version contained long excerpts
of Senator Hillary Clinton's book in place of President Clinton's
writings.
Market access
One will never effectively tackle a piracy problem without ensuring
that legitimate product is available for the market in question. We
cannot divorce the concept of market access from the question of
piracy. In no case is this more apparent than in China. Activities
essential in the publishing chain of events are off-limits to foreign
publishers. Many of the restrictions in place violate the commitments
China made in acceding to the World Trade Organization (WTO). For
instance, foreign publishers cannot import, hold stock and distribute
their own materials in the Chinese market, resulting in delays in
delivery and increased costs. Some of these activities are restricted
to State-owned enterprises; others are limited in such ways as to keep
them effectively entirely closed. Foreign owned enterprises are also
prohibited from making final decisions about content to be published in
the market, or obtaining the necessary Chinese book number that is a
prerequisite for publishing in China. Foreign publishers cannot print
for the Chinese market, but only for export. AAP believes
wholeheartedly that, in order for publishers to be able to tailor a
product to the market--in substance and in price--foreign publishers
must have greater access to the market than they do today.
Publishers understand the needs of a local government to exercise
some degree of content control, and remain willing to abide by China's
censorship process. Yet, the censorship process should not be coupled
with such severe restrictions on activities in the market.
Market access issues affect the ever-growing market for online
content as well as hard goods. High fees charged for access to foreign
material on the China Education and Research Network (CERNET) result in
high costs to publishers of electronic materials (such as academic and
professional journals) in making their products available in China, and
fewer, lower quality options available to Chinese scholars and
students.
China's lack of transparency with regard to the laws and
regulations governing market access further exacerbate an already
frustrating situation. This must be improved. AAP calls on China to
increase its transparency with regard to all provisions pertaining to
implementation of its obligations under international agreements.
Industry Efforts and Activities
AAP, along with the Publishers Association of the U.K. (PA), has
been working hard to engage the relevant Chinese authorities on the
various issues facing the industry. The association has worked
extensively with the National Copyright Administration of China (NCAC),
the General Administration of Press and Publication (GAPP), the
Ministry of Education (MOE), the Ministry of Information Industry (MII)
and regional copyright authorities to address the problems of illegal
reproduction at university textbook centers and internet piracy.
Between June and October 2006, NCAC and GAPP, together with
regional authorities, investigated and took action against textbook
copying at six universities, including some of Chinese most prestigious
institutions. These organizations and the Ministry of Education also
issued a series of notices to be disseminated to universities mandating
that the infringing activities be halted. AAP and PA are working with
authorities to verify the effects of these notices and actions. Since
copying of academic materials in particular is cyclical in nature, it
is especially important that the authorities monitor campus activities
at the beginning of the academic terms. The starting points of classes
this year--in March and September--therefore present excellent
opportunities for the Chinese government to show that it is serious
about stopping this form of piracy.
In addition, AAP and the PA are working with NCAC, MII and regional
authorities to ensure that sites infringing our materials receive
adequate attention. The associations have had at least one early
success but progress has been slow on a second complaint.
These enforcement efforts have been complemented by a number of
educational programs and dialogues that have allowed foreign and local
publishers to join voices in the fight against piracy. On May 19, 2006,
AAP and PA partnered with the Publishers Association of China (PAC) to
bring a dialogue on these efforts to BookExpo America, the largest book
publishing trade show in the United States. The program featured
speakers from the GAPP, the Chinese Institute of Publishing Science,
the U.S. Patent and Trademark Office, the Office of the U.S. Trade
Representative and many industry bodies from China, the U.S. and the
U.K. AAP was pleased to see the recognition that piracy is a common
problem affecting many economies and a host of book-related industries.
The May 19 program followed a groundbreaking event held at the
Beijing International Book Fair in September 2005. Also cosponsored by
the Chinese, British and U.S. publishing associations, the program was
entitled ``Intellectual Property in the Global Economy: China's Place
in the World Publishing Community'' and featured speakers from the U.S.
Embassy Beijing, the NCAC, the GAPP, the Beijing Municipal Copyright
Bureau, Renmin University, the Chinese Academy of Social Sciences and
several publishing associations and companies. Again, all came away
with the clear conviction that there was a common goal to pursue.
Conclusions and Industry Suggestions
The industry is working hard to inform itself, speak to the
authorities and make a dent in this landscape of piracy. AAP and its
members firmly feel, however, that government-to-government dialogue is
essential in bringing about meaningful change in the Chinese market
place. We encourage the Administration and Congress to keep engaging
the Chinese government in a variety of venues, consistently emphasizing
the need for strong intellectual property rights protection for China's
local industry as well as foreign industry, and the need for greater
market opening in this sector so important to Chinese culture and
scholarship. China is a country that boasts millions upon millions of
eager potential readers and scholars, and these readers are largely
being supplied with illegal goods.
AAP asks that government-to-government discussion of book piracy--
including in the Joint Commission on Commerce and Trade (JCCT) talks,
the Strategic Economic Dialogue (SED), and other appropriate venues be
stepped up. AAP also joins its fellow copyright industries in asking
that the U.S. government continue to pursue strong laws and regulations
governing internet infringement, in hopes of saving the market from
utter destruction by file-sharing and downloading sites. Third, AAP
emphasizes the need for more effective enforcement against hard goods
pirates, through the administrative, civil and criminal systems.
Finally, AAP stresses that market access for foreign companies is
imperative in the fight against spreading piracy, that transparency of
laws and regulations affecting both market access and intellectual
property protection must be increased and that China must bring its
laws and regulations into compliance with the commitments it made upon
acceding to the WTO. AAP looks forward to working with all relevant
parties to ensure that the market becomes increasingly viable for
legitimate businesses.
Chairman LEVIN. Thank you so much, Ms. Schroeder.
Your turn. Thanks.
STATEMENT OF GERALYN RITTER, SENIOR VICE PRESIDENT OF
INTERNATIONAL AFFAIRS, PHARMACEUTICAL RESEARCHERS AND
MANUFACTURERS OF AMERICA
Ms. RITTER. On behalf of PhRMA, I would like to thank you
very much, Mr. Chairman and other Members of the Subcommittee,
for organizing today's hearing and giving us a chance to speak
about this very important issue.
IPR drive innovation in the biopharmaceutical industry, and
that is what makes possible the development of new medicines
for patients around the world. Nowhere, I think, is that more
important and more under threat than in China.
My testimony today is going to focus on two of our top
issues. That is pharmaceutical counterfeiting, and also the
absence of reliable clinical test data protection in China.
Pharmaceutical counterfeiting is an intellectual property
(IP) enforcement concern, of course, but first and foremost, it
is a safety concern. Counterfeit medicines take several forms,
but in every form they are dangerous. Some of the most
insidious counterfeits actually do contain chemical compounds
that are the same as the legitimate product, but in quantities
that are far too high or often far too low, both of which can
cause serious effects.
Oftentimes the counterfeits are just sugar pills. They are
placebos, with no active ingredients at all. Of course, the
worst kinds of counterfeits are pure poison, and even one of
those, I think we can all agree, is too many.
The Chinese government has undertaken a series of actions
to try to deal with this problem. Raids and seizures are up in
2006, but still, China remains the number one global source of
counterfeit medicines in the world.
They have got two real, serious weaknesses in their
regulatory scheme that cause us a lot of problems and hamper
enforcement in China. The first is that even though the laws
prohibit fake medicines, criminal liability is generally
conditioned on showing some sort of actual harm to a patient.
So, if you become aware of a shipment of counterfeit drugs and
stop it before it actually reaches the patient and hurts
someone, then you have just made it far harder to get a
criminal conviction.
A much better way to deal with drug counterfeiting in China
would be for the Chinese government to amend its drug laws to
make it a crime to manufacture or distribute any medicine that
is deliberately mislabeled. It shouldn't matter how much, and
it shouldn't matter whether or not someone has actually been
hurt yet. If you make a drug and you call it something that it
is not, that should be a crime, full stop.
China also needs to improve coordination among their
various government agencies that have oversight and enforcement
responsibilities in this area. They need to make sure that
those agencies have sufficient authority and resources to
prosecute every link in the counterfeiting supply chain.
Which brings me to my second point on counterfeiting. There
is a missing link in enforcement against counterfeits in China,
and the missing link is the very first one, the most upstream
producers. Chemical manufacturers in China are freely selling
and shipping the active pharmaceutical ingredients, the bulk
chemicals that make a medicine work, within China and around
the world with no oversight by that country's food and drug
authority.
This is important because these are the chemicals that are
sold to the downstream counterfeiters that may process them
into pills or tablets for worldwide distribution, but at
present, although the authorities can go after pharmacies and
other distributors, and even the manufacturers of the finished
product, it is far more difficult and they don't really have
good legal authority to go after the chemical companies that
are supplying those counterfeiters. So, China's law needs to be
amended so that those chemical companies that produce the
unregulated active ingredients are subject to far more
stringent regulation.
The second major IP problem that we are facing in China
relates to clinical test data protection. When China joined the
WTO in 2001, they promised to do this. They revised their laws
and indicated that they would be enforcing Trade-Related
Aspects of Intellectual Property Rights to protect the client
test data that is submitted when a drug application is filed.
Unfortunately, the way they have implemented those laws has
made that protection meaningless and works to provide an unfair
advantage to local Chinese companies.
What is supposed to happen is that when an innovator files
an application for a new drug at the Chinese Food and Drug
Administration, the test data that takes years and millions of
dollars to develop to prove that the drug is safe and effective
is supposed to be protected for a period of time so that no
other company can rely on that data until the protection
expires.
What happens in reality is that an innovator files its data
for a new drug, often in the United States first, and almost
instantly multiple Chinese companies are filing for approval in
China based on a reference to the U.S. data. The result?
Multiple Chinese companies entering the market at the same time
as the innovator with the same product based on the same data
and no period of protection at all.
So, let me sum up here and say that PhRMA Members are
committed to the Chinese market. We are committed to Chinese
patients. We want to work and we do work with the Chinese
government to address these problems, and we have appreciated
the support we have received from the U.S. Government, but the
problems are very serious and they remain. We look forward to
working with you to try to provide a better business
environment for U.S. companies in China. Thank you.
[The prepared statement of Ms. Ritter follows:]
Statement of Geralyn Ritter, Vice President of International Affairs,
Pharmaceutical Research and Manufacturers Association
On behalf of the Pharmaceutical Research and Manufacturers of
America (PhRMA), I thank Chairman Levin and the Subcommittee members
for organizing today's hearing on intellectual property rights
enforcement in China. Intellectual property rights drive innovation in
the bio-pharmaceutical industry and enable the development of new and
improved medicines for patients. PhRMA strives to uphold and defend
these rights around the world. China is no exception.
My testimony will focus on the top three IP concerns for our
industry in China: Specifically, pharmaceutical counterfeiting,
protection of clinical data and patent reform. We estimate that the
economic damage resulting from poor IP enforcement costs the industry
approximately 3.4 billion dollars in lost sales annually. This is, in
fact, a conservative estimate because it only captures quantifiable
losses due to the lack of patent protection and data exclusivity for
many products. It is impossible to know what percentage of the
legitimate pharmaceutical market in China is supplied by counterfeits.
Pharmaceutical Counterfeiting
While the Chinese Government has undertaken a series of actions to
combat drug counterfeiting, the prevalence of counterfeit drugs within
and originating from China nevertheless remains a substantial concern.
Indeed, China is believed to be the world's leading exporter of
counterfeit drugs and bulk chemicals.
Although pharmaceutical counterfeiting is subject to criminal,
administrative and civil remedies under China's trademark laws, the
effectiveness of such remedies is undermined by burdensome evidentiary
requirements and weak enforcement. Anti-counterfeiting efforts are
hindered by the general reluctance of administrative authorities to
impose deterrent penalties and transfer cases to criminal authorities.
Moreover, border enforcement is undermined by excessive bond
requirements, a lack of transparency and short filing deadlines.
Significant weaknesses in China's drug safety regime contribute to
the proliferation of counterfeit pharmaceuticals in China and the
global export of inherently dangerous products. Pharmaceutical
counterfeiting is first and foremost a drug safety violation. Thus, the
adequacy of China's response to pharmaceutical counterfeiting must be
measured against the framework of laws that regulate the various links
in the drug manufacturing and supply chain. In that regard, China has
yet to enact laws that address all aspects of drug counterfeiting
activity or to provide the kind of enforcement resources and commitment
necessary to combat this growing problem. For example, although China's
drug laws prohibit ``fake'' medicines, criminal liability is
conditioned upon proof of harm, a statutory requirement that, in
practice, requires evidence of a serious defect in quality. This
burdensome and excessive evidentiary requirement all but precludes
criminal prosecution against counterfeiters under China's drug laws.
Another significant deficiency is the fact that China's drug
regulatory authorities lack sufficient investigative powers and
resources to take effective action against upstream manufacturers and
suppliers. As a result, regulators are forced to rely upon criminal
authorities to target counterfeiters; as noted above, however, criminal
authorities are hamstrung by excessive evidentiary requirements. The
net effect is a system of drug safety laws that provide no meaningful
deterrence against the manufacture and distribution of counterfeit
pharmaceuticals. Moreover, once counterfeit drugs reach the border,
there are virtually no checks in place to prevent their export to other
markets.
To rectify these problems, it is imperative that China amend its
drug laws to prohibit and criminalize the manufacture, distribution,
import or export of any pharmaceutical that is deliberately mislabeled
as to source or identity (consistent with the WHO definition of a
counterfeit medicine), without the need to prove harmful effects or
deficient quality. In addition, China should create an interagency,
pharmaceutical task force of law enforcers, regulatory authorities and
customs agents to ensure adequate coordination among the various
authorities with relevant oversight and enforcement responsibilities.
Each of these officials must be given the investigative powers and
mandate to prosecute all links in the counterfeit drug chain, including
manufacturers, wholesale and retail distributors and exporters of
counterfeit medicines and related packaging and raw materials.
An important factor contributing to the pervasiveness of drug
counterfeiting is that Chinese chemical manufacturers are producing
bulk active pharmaceutical ingredients (API) which are being used in
the manufacture of counterfeit drugs.
China has thousands of chemical companies, and there is evidence
that some are producing and selling API in bulk form to downstream
counterfeiters, often via the internet. The downstream manufacturers
further process the chemicals into counterfeit pills and tablets sold
within and outside of China, including the United States.
Unfortunately, under current Chinese law, the chemical suppliers who
are conducting such activities are not operating illegally under
Chinese law.
According to Chinese Drug Administration Law, a chemical company is
subject to government oversight by the SFDA when it ``chooses'' to
register a specific API product with SFDA. It is only when the chemical
company declares that it is making an API to be used in a finished
pharmaceutical good and after the SFDA grants a product registration
number that the company is legally permitted to supply API for
inclusion in a finished pharmaceutical product. Under the current
regulatory framework, if a chemical company manufactures an API, but
elects not to declare that the API will be used in a finished
pharmaceutical good, there is no government agency that possesses
authority to preclude this activity from occurring.
The SFDA recognizes the importance of patient health and safety by
regulating chemicals that will be used in finished pharmaceuticals.
However, clear evidence exists that chemical companies are ignoring
SFDA requirements by advertising their API products on commercial
websites in the bulk form under the category of ``(for) medicinal use''
while not adhering to SFDA GMP regulations. Chemical manufacturers are
freely selling and shipping API products to locations within China and
abroad with either no regard for the intended use of the API or
flagrantly choosing not to comply with existing Chinese regulations
that would bring them under the oversight of the SFDA. These
unregulated and unethical practices by chemical companies contribute
significantly to, and, in some cases, aid and abet the counterfeit drug
trade.\1\ More troubling is that the unregulated distribution of API
exposes patients to serious and significant health risks as well as
degrades consumer confidence in the global medicinal supply chain.
---------------------------------------------------------------------------
\1\ Under U.S. law, a supplier of active ingredient for a drug that
will be marketed in violation of the Federal Food, Drug, and Cosmetic
Act (FDCA) may, if the supplier is knowingly involved in the illegal
activity, be charged with a conspiracy to commit that offense, 18
U.S.C. 371. In addition, the supplier who knowingly helps its customers
in violating the counterfeit prohibition could be charged for aiding
and abetting a violation of a U.S. federal statute, 18 U.S.C. 2.
---------------------------------------------------------------------------
Addressing the Most Prevalently Counterfeited Medicines
PhRMA recommends that the SFDA impose special requirements on the
API substances of the 10 most commonly counterfeited pharmaceutical
products in China (the ``Listed API Product(s)'') according to the data
compiled and updated jointly by SFDA and the Ministry of Public
Security on an annual basis. SFDA could require all chemical companies
manufacturing one or more of the Listed API Products to comply with all
SFDA Good Manufacturing Practices (GMP) requirements, as if it were to
be used in a legitimate finished pharmaceutical good.\2\ Additionally,
SFDA could require that the chemical companies certify that they will
maintain detailed records of the recipients of each shipment, the
quantity, the intended use of the Listed API Product being shipped and
the Business License showing the business scope of the recipient. These
records could be made available to SFDA officials should they ask to
review the records. If the chemical company fails to maintain
appropriate GMP, provides a false certification and/or fails to keep
accurate records, the SFDA should have the authority to impose
deterrent penalties, including a fine and a notice of its violation to
the local Administration of Industry and Commerce (AIC) to whom the
chemical company is registered and the possible revocation of the
company's operating license should multiple violations occur.
---------------------------------------------------------------------------
\2\ Active Pharmaceutical Ingredient (API), for this purpose,
should include those components and intermediates of the product that
may undergo chemical change during the manufacture of the drug product
and be present in the drug product in a modified form intended to
furnish the specified activity or effect.
---------------------------------------------------------------------------
PhRMA supports the formation of a working group between industry,
SFDA, the Ministry of Commerce and the Ministry of Public Security to
address the problem of counterfeit API and to discuss the proposal
outlined above.
Clinical Data Protection
Following accession to the World Trade Organization in 2001, China
revised its laws to incorporate concepts from Article 39.3 of the WTO
Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS). Article 39.3 provides that a country must protect data
submitted in the context of a drug registration application from unfair
commercial use. Loopholes in China's current regulatory environment
allow for unfair commercial use of safety and efficacy data generated
by PhRMA member companies.
One such loophole exists because China defines ``new drug'' as any
drug not previously marketed in China. Chinese domestic companies can
file a ``new drug application'' for approval of a compound if that
compound was previously approved by a regulatory agency in another
country. Although the SFDA requires some limited clinical data on local
populations for drug marketing approval, it relies heavily on published
material generated by originator companies in the country of first
launch. The published data, however, is insufficient by itself to prove
the safety and efficacy of the product. But for the full clinical
dossier that was submitted to the FDA in the U.S. or EMEA in Europe,
China would not grant marketing approval on the basis of the limited
clinical data required for regulatory approval. This is evident from
the fact that China distinguishes products that have never received
marketing approval anywhere in the world from those that are simply
``new to China.'' Products that have never been approved anywhere in
the world require considerably more safety and efficacy data than
products that have received prior marketing approval.
PhRMA views China's deference to published material and regulatory
decisions by agencies outside of China as reliance on clinical data
developed by originator companies. The published data alone are usually
insufficient to prove the safety and efficacy of a product. The
published data merely summarize the data included in the original
filing. The original data were necessary to demonstrate the safety and
efficacy of the product. Reliance on summary data or approvals in
countries outside of China conveys an unfair commercial advantage to
non-originator companies because non-originator companies do not incur
the cost of generating their own clinical data.
In practice, the SFDA receives numerous applications for marketing
approval of a compound once it is approved in the United States or
Europe. The originator's application may or may not be the first
application SFDA receives. SFDA has interpreted the data protection
provision of the Drug Registration Regulation to apply after marketing
authorization is granted in China. Marketing authorization can take up
to four years. During this period additional applications from Chinese
companies can be submitted to the SFDA. Any company that receives
authorization to begin limited, local clinical trials before marketing
approval is granted to the first company is permitted to complete the
regulatory process. This can result in multiple companies entering the
market with the same product--and no effective data exclusivity for the
originator.
In the United States, any non-originator company can seek
regulatory approval during the data protection period if it submits a
full data package consistent with requirements of a New Drug
Application (NDA). China, however, grants marketing approval for
products based on incomplete data filings. Applications in the United
States during the data exclusivity period must include all elements of
the NDA. An abbreviated application is not accepted during the data
exclusivity period.
For the above mentioned reasons, we encourage China to revise its
regulations to close the loopholes that permit the unfair commercial
use of clinical data generated at considerable cost and risk by U.S.
companies.
Patent Reform
We encourage China to ``link'' its patent system and the regulatory
approval system. Such linkage would ensure that the SFDA does not grant
marketing approval to third parties without authorization of the patent
owner if the products are still covered by a patent. Linking the patent
system and the regulatory approval system will not only facilitate
effective enforcement of pharmaceutical patents, but will avoid the
need for infringement actions in these types of cases.
Conclusion
In conclusion let me stress that we are committed to the China
market and to Chinese patients. We want to work with the Chinese
Government to resolve problems in a collaborative fashion and welcome
the U.S. Government's support of these initiatives. I have limited my
remarks today to the industry's IP concerns in China. I have not
touched on the very substantial market access barriers the industry
faces. China is a dynamic and complex market that warrants the
attention of this Committee and the Administration. We look forward to
working with you to foster a better business environment for American
companies operating in China. The U.S. pharmaceutical industry houses
some of the best scientific minds in the world and is the global leader
in biomedical innovation. With respect to innovation, the goals of this
industry are consistent with the goals of this Congress: To quote House
Speaker Nancy Pelosi, we share ``a steadfast commitment to being the
most competitive and innovative nation in the world.'' China seeks to
become a world leader in many innovative industries. Allowing them to
steal the intellectual property of U.S. companies only encourages the
shift of high paying, high skilled jobs in the pharmaceutical industry
from the U.S. to China. We seek your support in upholding intellectual
property protection around the globe and here at home to sustain the
innovative nature of our industry--and to ensure that new and improved
medicines are available in the future.
Chairman LEVIN. Thank you very much.
Mr. Baranay.
STATEMENT OF PETER BARANAY, CHIEF EXECUTIVE OFFICER, ABRO
INDUSTRIES, INC., SOUTH BEND, INDIANA
Ms. BARANAY. Good morning, Mr. Chairman and Members of the
House Committee on Ways and Means on Trade. Thank you for
giving me an opportunity today to testify regarding China's
enforcement of IPR. My name is Peter Baranay, and I am
President of ABRO Industries of South Bend, Indiana.
I am here representing the Motor & Equipment Manufacturers
Association, known as MEMA, and the Brand Protection Council of
MEMA, whose purpose is ``to provide a forum for manufacturers
to discuss counterfeiting, IPR, grey market or diversion, share
best practices, recommend solutions, formulate future seminars,
and promote networking.''
This group was started about three years ago and has over
50 members. Most of the names you will recognize--Ford, General
Motors, Dana, Delphi, Tenneco, to name a few. You may be
wondering why I am here today instead of one of those big name
companies. The answer is simple. Many companies do not want to
talk publicly about their counterfeiting problems, and
specifically with respect to China and its booming automotive
industry. These companies are concerned the publicity will have
a negative impact on their customers.
As a member of the President's Advisory Committee on Trade
Policy and Negotiation, I know this failure to disclose
counterfeit issues facing American companies was a problem when
the USTR office tried to build an out-of-cycle WTO complaint
against China.
I am pleased to be here with you today to share with you
some details of the types of counterfeit problems and issues
ABRO and other members of MEMA are facing.
ABRO traces its corporate roots back to 1939, when our
founder started as a translation service. By 1944, he had
incorporated and was working with manufacturers in the United
States selling their products in the international marketplace.
By the mid-seventies, the ABRO brand was developed as part of a
long-term strategy to continue to sell U.S.-manufactured
products overseas.
ABRO is perhaps unique in that 100 percent of our business
activity is conducted overseas. Although we do business in over
165 countries, not one dollar of ABRO products is sold in the
United States. We began to trademark the ABRO name beginning in
the United States, followed by Singapore, in 1980. Twenty-seven
years later, the ABRO trademark is registered in 167 countries,
and we own nearly 1100 registrations in numerous international
classifications.
ABRO considers intellectual property protection of
paramount importance. Although we can point to many examples of
counterfeiters throughout the world, the one company who was
the most egregious and a dangerous economic terrorist with
respect to intellectual property is Hunan Magic of China.
Beginning as early as 2001, on the heels of the WTO, Hunan
Magic not only began to counterfeit ABRO products, but began to
represent themselves as ABRO Industries itself, a brazen
example of corporate identity theft.
Hunan Magic manufactures in China and exports throughout
the world, markets that ABRO Industries developed. This story
was the subject of a page 1 article in the Wall Street Journal
in November 2004.
The last 5 years have been enormously frustrating in that
in spite of ABRO holding numerous valid Chinese registrations
and Hunan Magic holding none, they have operated with relative
impunity in their local community and have shipped tens of
millions of dollars of counterfeit ABRO products around the
world and have destroyed many American jobs.
Fortunately, with aggressive legal action and the support
of the USTR office and the U.S. Patent & Trademark Office, ABRO
has initiated numerous legal actions and we have prevailed
against Hunan Magic on a number of fronts. We have succeeded in
stopping Hunan Magic from registering the ABRO mark, although
Hunan Magic continues to claim their application as a legal
basis for continuing to counterfeit. Hunan Magic has gone so
far as to claim that they independently created the ABRO mark
and our packaging, a claim that is rather far-fetched as the
photograph on one of our often-counterfeited products is the
wife of our corporate vice president. She has become rather
famous throughout the world.
ABRO has received fair hearings in China at the Trademark
Office, and on the Federal level we are prevailing in China. We
have conducted a series of raids against Hunan Magic's
manufacturing operations, during which ABRO's counterfeit
products were seized. We aggressively pursued Hunan Magic
within China's legal system, and the case was ultimately
decided in our favor in December of 2006 with damages of
$64,000 awarded to ABRO, a small fraction, of course, but a
start.
Again, at the Federal level, ABRO registered the ABRO mark
with Chinese customs, and a significant number of export
containers from Hunan Magic and others have been seized, with
the goods ultimately destroyed and fines levied against the
exporters and Hunan Magic. We have been extremely satisfied
with the cooperation we received from Chinese customs.
Regrettably, business is ultimately local in nature, and
Hunan Magic operates openly within Hunan Province as they
employ individuals and pay taxes.
Many American companies have found themselves victimized in
China and other than countries because they failed to
adequately protect their intellectual property. Other
companies, such as ABRO Industries, have been proactive but
still find ourselves the victims of counterfeiters, some of
whom are just as audacious and tenacious as Hunan Magic.
I believe that senior members of the Chinese government
fully recognize the need to be compliant with respect to
intellectual property, but in many respects actions have not
followed their words.
Thank you for giving me the opportunity to testify today,
and I look forward to any questions you may have.
[The prepared statement of Mr. Baranay follows:]
Statement of Peter Baranay, Chief Executive Officer,
ABRO Industries, Inc., South Bend, Indiana
Good morning Chairman Levin and members of the House Ways and Means
Subcommittee on Trade.
Thank you for giving me an opportunity to testify today regarding
China's enforcement of Intellectual Property Rights.
My name is Peter F. Baranay and I am President of ABRO Industries,
Inc. in South Bend, Indiana. I am here representing the Motor Equipment
Manufacturer's Association known as MEMA and the Brand Protection
Council of MEMA whose purpose is to ``provide a forum for manufacturers
to discuss counterfeiting, intellectual property rights, gray market or
diversion, share best practices, recommend solutions, formulate future
seminars and promote networking.''
This group was started nearly three years ago and has over 50
members. Most of the names you will recognize: Ford, General Motors,
Dana, Delphi, and Tenneco to name a few.
You may be wondering why I am here instead of one big name company.
The answer is simple. Many companies do not want to talk publicly about
their counterfeiting problem and specifically with respect to China and
its booming automotive industry. These companies are concerned the
publicity will have a negative impact on their customers. As a member
of the President's Advisory Committee on Trade Policy and Negotiation
(ACTPN), I know this failure to disclose counterfeit issues facing
American companies was a problem when the U.S. Trade Representative's
Office tried to build an out-of cycle WTO complaint against China.
I am pleased to be here today to share with you some details of the
types of counterfeit problems and issues ABRO and other members of MEMA
are facing.
ABRO Industries traces its corporate roots back to 1939 when our
founder started a translation service. In 1944 he had incorporated and
was working with manufacturers in the United States selling their
products in the international market place. In the mid 1970's, the
``ABRO'' brand was developed as part of a long term strategy to
continue to sell U.S. manufactured products into the International
market place.
ABRO is perhaps unique in that 100% of our business activity is
conducted overseas. Although we do business in over 165 countries, not
one dollar of ABRO products are sold in the United States. We began to
trademark the ABRO name beginning in the U.S. followed by Singapore in
1980. 27 years later the ABRO trademark is registered in 167 countries
and we own 1,085 registrations in numerous international
classifications. ABRO considers Intellectual Property Protection of
paramount importance. Although we can point to many examples of
counterfeiters, the one specific company who is the most egregious and
a dangerous economic terrorist with respect to Intellectual Property is
Hunan Magic of China. Beginning as early as 2001, Hunan Magic Power
Inc. Company Ltd. not only began to counterfeit ABRO products, but
began to represent themselves as ABRO itself. A brazen example of
Corporate identify theft.
This story was the subject of a Page One article in the Wall Street
Journal in November 2004.
Intellectual Property Piracy in China
The last five years have been enormously frustrating in spite of
ABRO holding numerous valid Chinese registrations and Hunan Magic
holding none. They have operated with relative impunity in their local
community and have shipped tens of millions of dollars of counterfeit
ABRO goods around the world.
Fortunately, with aggressive legal action and the support of the
U.S. Trade Representative's office and the U.S. Patent and Trademark
Office, ABRO has legal action on a number of succeeded fronts against
Hunan Magic. We have succeeded in stopping Hunan Magic from registering
the ABRO mark, although Hunan Magic continues to claim their
application as legal basis for continuing to counterfeit. Hunan Magic
has gone so far as to claim that they independently created the ABRO
mark and our packaging. A claim that is rather far fetched as the
photograph on one of our often counterfeited products is the wife of
our corporate Vice President.
ABRO has received fair hearings by the Chinese Trademark Office,
and on the Federal level we are prevailing in China. We have conducted
a series of raids against Hunan Magic's manufacturing operations during
which counterfeit ABRO products were seized. We aggressively pursued
Hunan Magic within the China legal system, and the case was ultimately
decided in our favor in December 2006 with damages of $64,000 awarded
to ABRO Industries, Inc. Again at the Federal level, ABRO registered
the ABRO mark with Chinese customs and a significant number of export
containers from Hunan Magic and others have been seized with the goods
ultimately destroyed and fines levied against the exporter, and Hunan
Magic.
We have been extremely satisfied with the cooperation we received
from China customs.
Regrettably, business is ultimately local in nature and Hunan Magic
operates openly within Hunan Province as they employ individuals and
pay taxes.
Many American companies have found themselves victimized in China
and other countries because they failed to adequately protect their
intellectual property. Other companies such as ABRO Industries, Inc.
have been pro-active, but still find themselves the victims of
counterfeit some of whom are just as audacious and tenacious as Hunan
Magic.
I believe that senior members of the Chinese Government fully
recognize the need to be compliant with respect to Intellectual
Property, but in many respects actions have not followed their words.
Thank you for giving me the opportunity to testify today and I look
forward to any questions you may have.
Chairman LEVIN. Thank you very much.
The Olympics are in Beijing in 2008. I would hope that we
would set as a goal some major compliance by China by the year
of the Olympics. That is going to be a test not only for China,
but also for the United States. It is going to be a challenge
and a test whether those who are supposed to be enforcing our
laws take the steps necessary that there be a dramatic change
in China by next year.
If that doesn't happen, people who go to the Olympics will
find the same as in my last trip to China. I left the hotel to
just walk around, and I met somebody with a DVD, one dollar. He
felt really chagrined that I did not buy the good for one
dollar. It was a total counterfeit, of course. So, I do hope
that we will set this as an objective.
Mr. Herger.
Mr. HERGER. Thank you very much, Mr. Chairman. Again, I
want to thank you for this very important hearing on an
incredibly important hearing.
Mr. Glickman, it is good to see you. As you mentioned, both
of us knew each other in our youth in a different life on the
House Agriculture Committee.
Mr. GLICKMAN, but you still have your hair, Mr. Herger. I
don't.
Mr. HERGER. Anyway, it is good to have you in your new
capacity appearing before us. At this point, I would like to
direct my question to you, if I could.
At this point, I believe that everyone on this Committee
certainly acknowledges that China is not abiding by its WTO
obligations on IPR protections, but it would appear that there
have been some simplistic criticisms of the USTR for not
instantly filing such a case.
Could you tell us, Mr. Glickman, have you supported USTR'S
efforts to handle this matter initially through negotiation
with the Chinese officials, although those efforts may not bear
fruit ultimately? Or was USTR mistaken to negotiate with the
Chinese over these problems?
Mr. GLICKMAN. Well, first of all, we have been working
closely with Susan Schwab and USTR. We know they are talking to
the Chinese government in a variety of venues and number of the
problems. We support their efforts. If the discussions do not
prove fruitful within a reasonably short period of time, we
will support their efforts in litigation. We have told them
that.
So, we would prefer that it be resolved through
negotiation, but if it is not, then it is time to fight with a
WTO case. We have been working quite closely with Susan Schwab
and her team. So, that would be my answer to you.
Mr. HERGER. Good. I appreciate that.
Could you also describe the many efforts that you and your
members have made to develop facts and evidence to use by the
USTR in any potential WTO case in the future?
Mr. GLICKMAN. Yes. We have spent a great deal of resources
in China and in the United States to determine the levels of
criminal activity, the thresholds of criminal activity, to
develop the factual basis by which a case can be brought, both
in terms of enforcement on piracy as well as market acts as
issues, not only working with ourselves but with our colleagues
up here as well.
This is a potentially incredibly lucrative market, but it
is the most extraordinarily frustrating market in the world to
get into. China is now in the WTO. I had some role in that
because in the Clinton Administration, I was actively involved
in the whole debate on PNTR.
So now that they are in this rules-based organization, they
have an obligation to follow it. If we don't, we are going to
have to litigate it.
Mr. HERGER. Absolutely. I would like comments from any of
the other panelists in this same area.
Ms. SCHROEDER. Well, I would totally concur with what Danny
says. We are working with USTR. We have been very pleased that
they have been working so hard. I think all of us want to make
sure that these negotiations aren't just more stalling or
humoring us. We have all been humored by the Chinese government
over and over again, as you pointed out and I pointed and
others. They promise they are going to fix it, but the fix is
for like maybe 3 hours or 24 hours, and then everything is back
to normal.
So, we really want to make sure this is really serious. I
think everybody is prepared to take action if we can't get
somewhere and get something that is real.
Mr. HERGER. Good. I think that point is so well taken. I am
sure the Chinese are listening.
Ms. SCHROEDER. I hope so.
Mr. HERGER. That we have been trying to work with them.
Ms. SCHROEDER. That is right.
Mr. HERGER. We prefer working with them first, but we are
preparing the case. They are in the WTO. We do have a format
now that we can move forward on. That is exactly what I
believe, on a bipartisan--this is not a Republican/Democratic
issue--that we as the United States are going to do.
Ms. SCHROEDER. You are so right.
Mr. GLICKMAN. Can I just reinforce what Mr. Levin said
about the Olympics? They are going to have a billion people,
maybe more, watching this on TV. They are going to have
millions of people going there. They have an opportunity to
show the world they want to play by the rules, or they have the
opportunity to show the world that they want to be an outlaw.
They protect their Olympic logo very, very visibly and very
aggressively because it is important to them. We have got the
Olympics coming there, and we have got to make it important to
them that they play by the rules.
Mr. HERGER. Absolutely. My time is about up, but anyone--
Ms. Ritter?
Chairman LEVIN. You have about 10 seconds.
Mr. HERGER. Ten seconds? Five seconds?
Ms. RITTER. Particularly for the complex issues in our area
that straddle intellectual property and the drug regulatory
regime, we appreciate the efforts that have been made by USTR
and the Commerce Department to try to work out, through
collaborating and negotiating with China, a better resolution
here.
Chairman LEVIN. All right. Let me just say--and Mr.
Blumenauer is next, someone who is involved with China PNTR a
bit, to understate it. It has been over five years. It is a
long time of noncompliance and of inaction.
Mr. Blumenauer.
Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate your
punctuating that point. There are a number of us who spent a
lot of time and energy in lesser roles here in Congress working
on PNTR, with the expectation--making the argument that in fact
this would give us leverage to protect the abuses that we had
seen in this country. I share your frustration.
Mr. Baranay, I remember the article in the Wall Street
Journal. It paralleled pretty graphically something that we had
in Oregon, where a little company was hijacked lock, stock, and
website and replicated in China. It is extraordinarily
frustrating. I admire your tenacity and the success,
apparently, that you are having in starting to move this
forward.
I guess I am curious about the push-backs that we have got.
In each case, there are some examples you have described of
working with the Chinese government. Mr. Glickman, you
mentioned that Chinese intellectual property is abused, and
again, this was part of the rationale we had with the
development of these Chinese industries that relied upon
protection of intellectual property, that there may be some
leverage that we get over time. Chinese consumers are at risk
because of a lack of protection. It tends to be self-
reinforcing.
I am curious if any of you have an idea of ways that we
have got leverage with the Chinese themselves to sort of
harness the forces that you are talking about, that we can in
some fashion use to sort of push and reinforce that effort. I
love, Dan, your example of the Olympic logo, that they are
zealous in their protection. Are there other areas, in academic
exchange, for example, where we have leverage or that there are
some of these collaborative areas in the industries that you
represent that we could be more aggressive?
Ms. SCHROEDER. I think you point out something very
important. For Democrats who are free traders, as I am and you
are, this is a very difficult thing because we all thought they
were going to play by the rules, and they didn't.
When you look at where we have some pressure points, I
think the main pressure point is when we can point out that
they could do something if they wished to. At every Chinese
university, for example, the government knows what is going on.
If they are pirating books at the university and putting the
university's seal on them, the government could stop that. They
can stop the pirated stuff being sold on the street. They are
selling these books on the street right under the nose of
officials.
Mr. BLUMENAUER. Right.
Ms. SCHROEDER. If they can shut the store down for 24 hours
until Danny leaves town, they can shut it down for good. Same
with the drug thing.
Mr. BLUMENAUER. Yes. Let me----
Ms. SCHROEDER. They can do these things.
Mr. BLUMENAUER. Let me be a little more specific. Using the
example of the university, we are involved, a number of us are
involved, with university exchanges. They are things that the
Chinese care deeply about. Is there a way that we can or should
be more aggressive in terms of, before these exchanges are
considered, that there is some sort of threshold understanding,
or that we work this into the discussion on some of these
agreements?
Ms. SCHROEDER. Well, we would love it if you would find out
that if they are pirating books at the university copy center
or that they are downloading electronic journals, like the New
England Medical Journal or whatever. That would certainly be
one pressure point you could put on with universities.
Mr. GLICKMAN. I might say that this is one area I think
that Secretary Gutierrez has been particularly effective in
articulating this every time he is over there. At whatever
levels he meets, he talks about this, the need, for example, to
improve enforcement of intellectual property, the need to work
in the Chinese legal and judicial system.
We ourselves have done a lot of training sessions for
Chinese jurists and lawyers, copyright officials, because it
true that they have a much more limited legal system than we
do. We are trying to help them bring that up to date.
One other thing I would point out is that there is a
rapidly growing Chinese indigenous film and music industry.
Those people are being affected very much as we are. We are
beginning to see them speak out because the creative rights are
being trampled.
Mr. BLUMENAUER. Mr. Chairman, I know my time is about
expired, but this is an area that I would hope that we might be
able to explore. I look in my State, where we have got Nike
with some interesting interrelationships. We have technology;
we have the largest Intel facility in the world, and there are
some partnerships there, and the academic exchanges.
Maybe there are ways that we could help refine ways with
some of these relationships, that we can find more constructive
ways to put in ground floor understandings that might give us
some traction.
Chairman LEVIN. All right. We will do that. There are also
the abilities to file complaints with the WTO, which tends to
turn talk into action.
All right. Mr. Weller.
Mr. WELLER. Thank you, Mr. Chairman. Good morning to our
panel. Mr. Glickman, I never had the privilege of serving with
you in the House, but I had the opportunity to work with you
while you were in President Clinton's cabinet. You and I share
a common interest in tall grass prairies in our responsive
States. I enjoyed our conversations on those particular
concerns.
In your testimony, Mr. Glickman, you make the comment that
while fake DVDs litter Beijing, fake Olympic logo materials are
impossible to find. So, you are saying that the Chinese
government is capable of enforcing IPR laws. Is that true?
Mr. GLICKMAN. Absolutely. Even with the decentralization of
the Chinese economy--I am not telling you everything comes out
of Beijing because it doesn't. It is a complicated society, and
there are multiple power centers throughout this country.
If they were to choose to fight this problem, they would do
it. In fact, we have seen it. In the area of DVDs, before major
events, film festivals, you will find the streets of China
empty of fake creative product from the movie industry, film,
television, or even music. Then it reappears again. So, they
can do it.
In discussions with Chinese local officials like Mayors of
cities, they talk about the fact that they recognize that it
can be done. In fact, on a couple of occasions, they have
mentioned the Olympics again as a hook, that they hope that
their country----
Mr. WELLER. Are you suggesting then that their enforcement
is selective?
Mr. GLICKMAN. It is selective. It is arbitrary. It is
intentionally vague in some cases. In some cases, it is just
not very well developed.
Mr. WELLER. You mentioned earlier in your opening comments
that there were 50 facilities that manufacture pirated DVDs. Do
you know the locations and addresses of these facilities?
Mr. GLICKMAN. In most cases we do. In most cases we have
given that information to the authorities. In some cases they
have taken action, and in most cases they haven't taken it as
aggressively as we would like. Some of these are run
decentralized fashion. Some of them are run by remnants of the
old People's Liberation Army. It is a complicated way to get
at.
Mr. WELLER. So, when it comes to enforcement, do they only
enforce when they are reminded that they need to? Or do you see
any proactive efforts other than Olympic logos that they are
proactive?
Mr. GLICKMAN. There has been, as Pat said--and I don't know
about in the pharmaceutical area--but there has been some, I
would say, less than full effort over the last year or so to
engage in enforcement actions, but I would have to tell you
they are not satisfactory.
Mr. WELLER. Mr. Baranay, you shared your experience with
going through the litigation process to address, and you were
successful. $64,000 doesn't seem like a lot of money from the
standpoint of an award, considering probably the impact of lost
business.
Do you believe that there is an unspoken acceptance of
intellectual property right violation by the Chinese
government, that they accept it unless they are reminded that
they need to do something about it as part of their agreements?
Ms. BARANAY. I think it is clear that as the Chinese
economy develops from, shall we say, the world's manufacturing
floor or the world's factory floor to an economy where they
themselves have intellectual property worthy of protection--I
would challenge most people to identify two or three Chinese
branded companies. People hesitate. It is very difficult.
Most Chinese products come into this country as private
label products of other manufacturers. As such, the Chinese
don't have a great incentive at the local level to protect
intellectual property. I see that changing with manufacturers,
particularly in the automotive industry developing their own
brand, or the appliance industry developing their own brands,
or in our case the automotive industry, automotive chemicals.
Yes, I think the selection--the enforcement is selective,
depending on the circumstances and depending on the pressure
that is brought to bear. I would say, though, that from a
systematic standpoint, when we have gone up against the Chinese
in the Chinese system, we have been treated fairly.
So, in that case, the laws seem to be in place and they
seem to be enforced, but we are an exception. We just maybe a
little more tenacious than others.
Chairman LEVIN. Ms. Ritter, do you agree?
Ms. RITTER. Well, I am----
Chairman LEVIN. You have got 20 seconds this time.
Ms. RITTER. I do agree that we have been able to get some
collaboration from the Chinese authorities. As I mentioned in
my testimony, raids and seizures are higher than they have ever
been, but you see a real falloff in whether cases make it all
the way through the system, and you don't see a lot of criminal
sanctions, especially at deterrent levels, actually getting
imposed at the end of the process.
So, I think the Chinese recognize the safety consequences
of counterfeit drugs, but there is a lot more to be done.
Mr. WELLER. Thank you.
Chairman LEVIN. Okay. Thank you, Mr. Weller.
Mr. Pascrell.
Mr. PASCRELL. Thank you, Mr. Chairman. Good morning, panel.
Ms. Ritter, China is seeking to build its own domestic
pharmaceutical industry. It already has manufacturing the
chemical capacity, as well as the workforce. Due to poor
intellectual property protection laws--we are talking about
that this morning--in many areas, and obviously due to the lack
of enforcement, much of the costly development of funding is
not required for that.
I don't know who is following the rules and what the rules
are and why they are even made. This is important, I think,
from a safety standpoint, and a worldwide threat, as many of
these drugs are exported, as you know. I don't want to get into
too much of that aspect of where those drugs are going, but
that is fascinating to look at that stream.
Second, from a trade perspective, it hurts the American
economy. It hurts New Jersey, and I have been there all my
life, so I am concerned about that. We employ about 62,000
people in New Jersey in the pharmaceutical industries, good
paying jobs.
The average job, Mr. Chairman, in New Jersey in the
pharmaceutical industry is $116,000. We don't want to lose
those jobs. They are very important, very significant. That
adds about $7 billion to New Jersey's economy, wages and
salaries.
The industry pays over $750 million in taxes in New Jersey.
So, a loss of these jobs and a loss of the industry is going to
be devastating, no less devastating than what we did to the
textile industry in New Jersey and a lot of other places, but
that horse is out of the barn, isn't it?
My question to you is this. The Chinese market is vital. A
mutual cooperation is therefore essential. Is this the wave of
the future if nothing is done about intellectual property
protection? Is that what we can expect 10, 15, 20 years from
now? What do you think?
Ms. RITTER. I think you have said it extremely well. We are
at a critical time in China. China does want to develop this
industry. They have got the science base to do it, to develop a
vibrant domestic industry.
For that industry to be legitimate and produce quality
products, they are going to have to address the counterfeiting
situation and the protection of intellectual property. Right
now, you have got a very dangerous situation, where we are
facing massive competition in that market from a host of
unregulated, unsafe suppliers.
Our estimates are that it is costing the industry several
billion dollars every year as a result of the lack of
protection in China. Just as you said, we employ hundreds of
thousands of people in the U.S., very good high tech jobs, very
good salaries, and there is absolutely a direct impact there.
Mr. PASCRELL. Yes. Those jobs are significant, no more
significant than the person who works in a textile factory or
in a small parts factory that, on the average, would be making
between 45,000 and 65,000. So, one job is not more important
than the other to me. I can only speak for myself.
Mr. Chairman, this is like how we built railroads in the
United States. We didn't allow every town to veto. We would
never have any railroads. So, we passed Federal legislation
dealing with communication. I don't expect every congressman is
going to be able to put his two cents in to whether or not a
trade bill makes sense or does not make sense.
I would think under Article I, section 8, that we should
have some input and not be willing to fast track our own
responsibilities, our own responsibilities, in putting a
decent, mutually respectful bill together. I am pro-trade. I am
not free trade, but we should be able to come to some
agreements on this and insist that the other party follow the
law.
If we don't do that, then is there teeth in the law? Is
there teeth enough in the law? Are we sincere enough to follow
up our own part, or we don't want to make any enemies? We don't
want to make anybody in the Chinese government angry at what we
are doing? I am not interested in making people angry. I want a
mutual agreement that is respectful of all of our
responsibilities. I thank you for your testimony.
Chairman LEVIN. Thank you.
Mr. Brady.
Mr. BRADY. Thank you, Mr. Chairman. Thanks to the panel.
These aren't new issues, but you have made very compelling
arguments why we need to turn the volume up on the enforcement
side of it.
Two questions, one dealing with WTO, another with Trade
Promotion Authority (TPA). We hear around here even today that
allowing China Most Favored Nation status in accession to WTO
was a huge mistake, that our problems with China began on that
day and our participation and engagement is causing us problems
because of our involvement in WTO.
I see it a bit differently than that, looking at the
enforcement mechanisms that have been used, are available as
the best way to level the playingfield. Do any of you believe
that America's allowing China to enter WTO was the wrong thing
to do?
Mr. GLICKMAN. I do not think it was the wrong thing to do.
I, as I said before, was somewhat involved in this when it
happened.
Mr. BRADY. Absolutely.
Mr. GLICKMAN. I was involved with a different industry
then, where I think the benefits were more clear than they are
in other industries, but I would rather have them in the tent
and subject to the laws and go after them--because, let me tell
you, the problems far preexisted the WTO accession, and the
imbalance of trade far predated that. We just now have to use
that law and use those rules to protect ourselves.
Mr. BRADY. Those tools are the ones that got us progress in
the advance to micro systems, computer boards, and in the fiber
board issues already. Your point is be more aggressive using
those tools to combat piracy in all those areas.
Let me ask another question. Trade promotion authorities
will expire July 1st of this year. You are all in industries
that have major markets overseas, have a big impact on whether
we are out there leveling the field for you to sell your books
and your pharmaceuticals and your movies and your air
conditioners.
In your belief, would it be wise for Congress to allow TPA
to expire July 1st? Does that level the playing field for your
industries?
Ms. SCHROEDER. I think that is a hard one. You ask a very
difficult question. I have always been a free trade Democrat,
which is a little lonely on my side of the aisle. I have always
voted for fast track when I was here. I think one of the
problems right now is the voters want us to have to be a little
more aggressive in making sure agreements are honored by both
sides.
I think China came into WTO, and it is great to have them
in the tent. China thinks, because they are so big, they can do
what they want. We will bend the rules our way rather than the
way the universal group has interpreted them.
So I think some hesitation you would find on this side,
that we would like to be in there, but under WTO accession, for
example, they were supposed to allow book publishers to be able
to be in the market. We have never been allowed in the market,
and it is now over 5 years later. So, those are the things that
make us hesitate a bit to advocate extending TPA.
Mr. BRADY. So, being out of the trade field while other
countries developed trade agreements that favored books from
other countries or products from other countries, that doesn't
harm your members at all?
Ms. SCHROEDER. It harms our members and we want to be in
there, but when we had a WTO accession that would have been
helpful to us and it still hasn't been implemented, then you
get a little worried. Basically our group has been very much
for free trade and for fast track. That is why they are working
so hard with USTR to try and consolidate gains we were supposed
to have gotten under the original WTO accession.
Mr. GLICKMAN. It is like--I think generically, I think that
the President needs fast track authority. I think the problem
is that the old--Reagan used to use this line, trust but
verify. The fact of the matter is, there is this feeling that
the Congress is not getting its position felt in areas like the
environment and labor issues where the executive branch may be
moving the thing along without any restrictions whatsoever.
I think, generally speaking, an executive needs that kind
of authority, but it is up to you to figure out a way to
protect your constituents on some of these changes where folks
are getting hurt as part of the process toward globalization.
Mr. BRADY. Well, I think right now we are looking at trying
to find common ground on workers rights, environmental rights,
trade adjustment, because there are jobs lost and you have got
to address issues like--and enforcement, which is the panel
here.
Any other thoughts before the Chairman--he is less likely
to gavel you down than me.
Chairman LEVIN. I think I will because we want to try to
stick to our time limits. Let's have some further discussions
about China PNTR and the involvement of a number of us who are
still in the Congress. We should do that.
All right. Let me go over the list, and I think my pal from
New York is next. Mr. Crowley?
Mr. CROWLEY. Thank you, Mr. Chairman. Thank you for your
presence today and your discussion.
I have a number of constituents who have come to my office
complaining about their copyright, their IP issues within China
itself, dual nationals or individuals who are American citizens
today, but born in China.
Mr. Baranay, I am not in the position today to discuss
those particular issues, as tempted as I am to want to talk
about them more openly, because I have--I believe in the carrot
and the stick approach. I am still using this carrot approach
with the Chinese government. I want to continue to do that, and
work with them to try to see if we can work through some of
these issues.
I also have been involved in the inter-parliamentary
exchange between the United States and China. I vice Chaired
that exchange in the last few Congresses and hope to in as the
Chair or co-Chair within this Congress, and look forward to
traveling once again to China.
I can tell you all that amongst the issues that we have
talked about, human rights has certainly been up there at the
top of the agenda, but then IP, IPR, has become a top two or
three issue or category of issues that we have been talking
about when we do go. So, I can tell you that in terms of
Members of Congress and our interaction with parliamentarians,
with government officials, I can tell you that whenever I have
been in a meeting with Chinese government officials here in the
States, the issue of IPR has been raised continuously.
I would, though, like to get a sense from you--and then,
Mr. Glickman, you may be able to, and Ms. Schroeder as well,
and Ms. Ritter, in terms of your umbrella groups, more or less.
You can speak a little bit more broadly because you are not in
any respects speaking for one company's point of view, but
talking in a broader sense--of what your relationship is.
Is there a counterpart? Do you have a counterpart in China?
What is your relationship with that counterpart, if it exists,
or is it developing? What are they doing in terms of, from
their side of the world, addressing the issue within the
Chinese government?
Then I would also like to know what you believe in terms of
what is happening with USTR. I know that USTR and the
ambassador has a tremendous amount on her plate, but what more
can they be doing to help open up some of the markets that you
are talking about?
I know, Mr. Glickman, you have talked specifically about
the limitation on films and distribution and access to markets
in China; and Ms. Schroeder, I know the same thing for you, and
maybe historically, a more difficult subject is text; and
pharmaceutical, obviously, as well.
Maybe if you can just give me the sense of what is your
counterpart, does it exist, and what is the relationship? Two,
what are the expectations that we should be asking for from our
own trade reps?
Ms. SCHROEDER. We do work very closely with the Chinese
Publishers Association, which is amazing. They are very strong.
Piracy hurts them equally. They love to stand with us. They are
a little hesitant to be too vigorous alone against their
government.
So we have worked with them, and I think that has been very
helpful. We still need more leverage. I think publishing is
unique because the Chinese want to control what people read.
That may be why they don't let our people publish internally or
import internally, but it has been very interesting. Even
though they don't let us come compete with them directly, the
local people are still very much for us because their stuff is
getting pirated, too.
Ms. RITTER. There is an association of research-based
pharmaceutical industries in China. A lot of the members there
are subsidiaries of global companies, so we are very well
aligned and do coordinate, and they try to work day in and day
out with the Chinese government on some of the issues that we
have discussed today.
We also work closely with USTR and also the Commerce
Department through initiatives like the Joint Commission on
Commerce and Trade on some of the issues I have discussed
today. We would like to see some of those issues elevated even
further--through that process, through the Strategic Economic
Dialog process that Treasury has led--to really make sure that
all of the various organs of the Chinese government that relate
to our problem are engaged and working toward finding a
solution.
Mr. CROWLEY. Mr. Chairman, can Mr. Glickman----
Chairman LEVIN. Yes, please.
Mr. GLICKMAN. I would just say a lot of the management of
the Chinese film industry is government, but a lot of the
creative side we work with quite closely because they are
becoming more outspoken in their concerns about this issue.
Second, in the Chinese system you have Beijing and you have
the regions. So, one of the more difficult things is figuring
out who is in charge, who is making decisions here, and where
is it coming from. That is something that we are doing in terms
of helping USTR as they look at the possibility of filing a WTO
action.
I do think that the biggest thing that can be done right
now is for the Chinese industry and government to see our
Government committed to taking legal action if it thinks that
it has got a case that can be brought legitimately.
Chairman LEVIN. Thank you.
There are two, maybe three of us left. So, let's see if we
can work ourselves in. That means we will start the second
panel a bit late. Mr. Meek? I think you are next. Then Mr.
Kind, and then Mr. Reynolds if he is able to return.
Mr. Kind. We are glad you could join us.
Mr. KIND. Well, thank you, Mr. Chairman. I want to thank
you for holding this very important hearing. I want to thank
the witnesses for testifying and giving us your perspective on
an immensely huge and important issue.
I think, Mr. Glickman, you are exactly right, that whenever
any of us in Government have the opportunity to go and travel
to China, whether it is Executive Branch officials or Members
of Congress, that we continuously raise this issue with the
Chinese officials and authorities so that they understand where
we are coming from in regards to the IPR issue.
I had the opportunity about a year and a half ago to do
just that with a delegation, meetings in Beijing and Shanghai.
It is complicated, and one of the things I am hoping you could
give us a little insight on here today is the scope of the real
challenges that we are facing because obviously, our
relationship with China is incredibly important. Outside the
Muslim world, it is probably going to be the most important
strategic relationship that we have with another country or
another region in this century.
Yet you wonder how much leverage we ultimately have over
them because I think they sense that we are so desperate to
gain market access that they are holding a lot of cards. Let's
face it, we have become incredibly dependent upon them to
finance our deficits. They are buying up a lot of our bonds
today, basically freeing up a lot of capital, keeping rates low
for us here. We have been very dependent on them in dealing
with the North Korean situation, too.
Yet what I am wondering is, looking at their laws, it seems
the laws are good on the books and the penalties are
sufficient. So, the question is, is this really a matter of
will on their part, not willing to do it? Or is it a matter of
capacity-building, that they need more help in order to develop
the infrastructure of enforcement? They have a lot of other
economic crimes, too, that they are worried about.
In talking to one official--I think it was the Mayor of
Shanghai--he said, you are going to see an improved effort for
enforcement once the Chinese start having more skin in the
game, and that is, starting to develop their own products that
they want IPR protection over. We are seeing that now with
their Olympic label and how tough and stringent they have
gotten enforcing the protection of their Olympic label.
Yet talking to another governmental official in Beijing, he
says, the problem is even bigger than any of that. It is really
cultural, based on Confucius' philosophy where if you adopt
someone else's ideas, whether it is a movie or music or written
material or some product, it is a form of a compliment and not
viewed as economic or intellectual theft in their culture.
So, I guess from your perspective, what is the scope here,
and where can we be most effective in encouraging them to do
the right thing as far as IPR protection? Do we need to be
thinking as far as more assistance with capacity-building and
helping them do a better job of enforcement?
I guess I will leave it open to anyone who has any thoughts
on this subject.
Ms. SCHROEDER. Let me just say with education you are
absolutely right. It is a very difficult thing to get any
government to try and deal with educational materials. They
want to take everything we have created in higher ed, and they
want to take it and get it into the brains of their people, and
then they come to compete against us.
You can understand. They say, well, it is out there, and I
guess it is a Confucian thing. You ought to be willing to give
this to us.
Mr. KIND. Right.
Ms. SCHROEDER. The problem is, those are very expensive
materials to create, very, very. When they pirate it all, what
can you do? Stopping campus piracy is a much less complex issue
than many of the other IP issues because the universities
really are under the control of the Chinese government.
Danny Glickman is absolutely correct that one of the
Confucian things about trying to deal with all of these issues,
the trade book issues and probably the pharmaceuticals and
everything, is the regions are different, and who is in charge?
It gets to be very, very confusing.
Universities aren't confusing, it is a very clear-cut area.
We really need more work, too, on what is going on with the
websites and the digitization of everything.
Mr. KIND. Right.
Ms. SCHROEDER. Allowing the world to download everything
free would kill all of us. You are seeing movies digitized,
too, aren't you? The Chinese are saying now they are going to
focus on it, but the question is, what does that mean, and are
they going to do anything about it? That is our frustration.
Mr. GLICKMAN. I think it was John Maynard Keynes who once
said, ``For every complicated problem, there is a simple and a
wrong solution.'' This is the classic example. This is a very
complicated problem. So, you have mentioned capacity-building.
It has got to be a big part of it. We have got to train these
people to understand the significance of a legal system in a
modern world with instant communication.
You also have to have an enforcement component of this as
well. We have got to make sure that we get the Internet and
powers of communication so that the restrictions and the
censorship there don't keep these people insulated from what is
happening in the rest of the world.
Going back to I think it was Mr. Weller's question--I am
not sure--about the WTO, the fact that they are in the
organization gives us some leverage, not a lot, but some, that
we didn't have before, but we have to remember that it is a
massive, complicated problem.
Mr. KIND. Thank you, Mr. Chairman.
Chairman LEVIN. Mr. Meek.
Mr. MEEK. Thank you, Mr. Chairman. I am excited by the fact
that we are having this hearing here today because this is so
very, very important.
As some of you know on the panel, I represent the State of
Florida, and I am the only Member on the Committee on Ways and
Means from Florida. We have a lot of companies in South Florida
and in Central Florida very excited about trade, very excited
about being the closest port to Africa and also to Latin
America. We have a number of headquarters there. Sony has a big
presence, I think, and their Latin music department. Also Perry
Ellis. A number of these companies.
They are talking to me more about China. They are talking
to me about the fact that we haven't leadered up enough to be
able to deal with China. I believe that we are running into a
situation, Mr. Chairman, where we are concerned about the guns
and the missiles and the people that we are at war with at this
particular time, and we are not concerned about the economic
issues that are happening right under our noses. U.S. companies
are being cut at the knees because of the lack of IPR in China.
Now, I have never been to China, but I can tell you from
what I have read and what I know at this point from U.S.
companies that are having problems as it relates to protecting
the hard work and the research, since we have our
pharmaceutical representative here, we are going to find
ourselves in deep water.
I am very interested in hearing from the panel if you have
the opportunity to enforce, need it be through our
international organizations or even as a Member of Congress.
What are some of the things that we should lean forward on and
letting our voice be heard? What are some of the things that we
can do to try to get China to do the right thing?
I believe it is the good cop/bad cop scenario. Of course
they are going to protect their own interests, but when it
comes down to--if you even look at the issue of steel, what
they have been doing with steel and hurting the market here,
hurting our suppliers here, because they have been able to use
it as a national security issue and manufacture steel.
Even in some of the areas of--I have Bacardi in my
district. I have Perry Ellis in my district. They are feeling
the effects of this. It is like no one--where is the police? No
one can enforce this. It is hurting their business.
So, I would love to hear, in the time that is left, from
any of you on the panel: What are some of the things, if you
had the opportunity to be in Congress at this time--I know some
of you have--but what kind of forward lean would you have to
make this hearing fruitful as we start to step off in this new
endeavor of not only enforcement but education with China?
Mr. GLICKMAN. One, Congressman, I would make sure that
there are resources for USTR, for Customs, for the enforcement
at the borders. It strikes me that we have not probably
dollared up the necessary resources to help find the problem
where it is taking place. I think those folks need that very,
very desperately. So, that would be one specific suggestion.
Ms. SCHROEDER. I would also say that when you meet with the
Chinese, ask them to do enforcement that passes the straight
face test. We got all excited when they raided universities,
but if you raid universities when they are out of session, you
are not going to find a lot, and so they also didn't find very
much.
So, the thing is, look. You have got the resources to do
it. Let's do it right and let's not play games with each other.
The straight face test, when it comes to enforcement, I think
is going to be very important.
Ms. RITTER. Excuse me. I would echo some of these themes,
and particularly the one of enforcement. Fake Chinese medicines
are a threat not only to Chinese patients, they are a threat to
patients around the world, and including in the United States
There have been some very high-profile cases of drugs,
often ordered over the Internet, coming in from China to the
United States and threatening our country. So, I think that is
a particularly important aspect of this problem we haven't
discussed as much today, but shouldn't be overlooked.
I think, again going back to the theme of capacity-building
and collaboration with China, particularly in the drug area,
the problems really are so complex and there are so many actors
involved in this that we have got to develop a broader
comprehensive framework there for addressing them. That is
going to take very high level attention.
Ms. BARANAY. If I could echo what Chairman Levin said, I
think the timing with the Olympics in 2008 is extremely
auspicious. I think that the world will be looking to China.
There is an opportunity here to put pressure on China that they
wouldn't necessarily--the timing is actually very good. They
understand IPR. It is just whether or not they are going to let
us make them play by the rules.
Mr. MEEK. Thank you, Mr. Chairman.
Chairman LEVIN. Well, thank you. An excellent question, and
an excellent panel. You represent four vital sectors--motion
picture, publishing, pharmaceuticals, and MEMA. So, we really
appreciate your participation. So we bid you farewell. Come
back and see us. The next panel will come forth.
[Pause.]
Chairman LEVIN. Let's go. We are bit behind schedule, but I
think this is going to work out.
Thank you all for joining us on this truly vital subject.
Mr. John Goodish--I will introduce you, if I might, all
together, and then you will take over--is the Executive Vice
President and Chief Operating Officer of U.S. Steel.
Frank Vargo is the Vice President of International Economic
Affairs for the National Association of Manufacturers.
John Bassett, III, is Chairman and CEO of Vaughan-Bassett
Furniture Company in Virginia.
James Tyrone. Mr. Tyrone is Senior Vice President of Sales
and Marketing for the NewPage Corporation.
Professor Navarro is at the University of California,
Irvine. If you came all the way, tell us how you managed. We
especially welcome you.
So, each of you, your testimony will be placed in the
record. If each of you could try to take just the 5 minutes,
that will leave us ample time. We will start in the order
mentioned. Mr. Goodish.
STATEMENT OF JOHN H. GOODISH, EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER, UNITED STATES STEEL, PITTSBURGH,
PENNSYLVANIA
Mr. GOODISH. I am happy to testify today about a topic that
is crucial not only to the U.S. steel industry but to all
American manufacturers. That is the growing concern about the
subsidies and State support of industrial capacity in China,
and the extreme impact we are seeing on global markets as a
result of these policies.
I would like to show you some slides that illustrate the
seriousness of the problem that we face. As you can see from
this first slide, there is a great deal of evidence that China
has the most heavily subsidized steel industry in the world.
Let me give you a few examples.
Press reports indicate that in 2000, 37 Chinese steel
enterprises took advantage of $7.5 billion in government-
directed financing through the debt to equity swaps. Also in
2000, China's government announced that $6 billion would be
spent to upgrade and transform the steel industry.
In July of 2005, China issued a new steel policy to guide
the industry for the next 15 years. This policy calls for
continuing subsidization of key steel projects, exports, and
technologies. Available evidence suggests that consistent with
this policy, significant government resources continue to flow
to the Chinese industry. Chinese subsidies take many forms,
including preferential tax treatment, subsidized materials and
energy, and discount loans.
On this second slide, you can see the result of these
massive subsidies. Over the last 10 years, China's steel
production has quadrupled, surging from an estimated 100
million metric tons in 1996 to approximately 420 million metric
tons in 2006. That is roughly the equivalent of building three
entire American steel industries in just one decade. No other
country has come close to adding so much new capacity, as shown
by China's production as a percentage of global production.
Slide 3 demonstrates that Chinese steel expansion has
accelerated in recent years. To understand the enormity of what
is taking place, consider that from 2003 to 2006, China's
increase in production was about twice the total yearly
production of either the United States or Japan.
My fourth slide shows that China's domestic market cannot
support all of that new capacity. China's steel trade balance
shifted by roughly 50 million metric tons from 2003 to 2006, as
China went from a major net importer to a large net exporter.
How are these developments affecting U.S. producers? As you
can see from slide 5, Chinese imports are flooding this market.
In fact, steel imports from China reached 5 million net tons
last year, more than double the 2005 level. Chinese steel
increasingly competes with our highest value products,
including corrosion-resistant steel, cold-rolled product, and
our oil country tubular goods. Now is the time to address this
import surge. We do not want a repeat of what happened in the
late nineties, when a flood of unfairly traded imports
precipitated a major crisis.
The USTR's recent decision to bring a WTO challenge with
respect to nine prohibited Chinese subsidies is a good first
step, but the USTR'S actions involve only a limited subset of
subsidies and does not in any way address the vast evidence of
enormous domestic subsidies that buildup many of China's
largest steel enterprises and continue to unfairly benefit
Chinese producers today.
There are a number of critical policy actions we can and
should take. First, we must strictly enforce our trade laws,
which often represent our only practical line of defense
against foreign producers whose market-distorting practices
would otherwise cause imports to overwhelm this market.
Secondly, we urgently need real China legislation. We
should apply our anti-subsidy law to the world's largest
subsidizer. We also urgently need real action on currency
manipulation, rather than allowing China to continue stringing
us along with talk and tiny adjustments.
Finally, we must preserve our anti-dumping and anti-subsidy
laws in the face of efforts to weaken them in the context of
international negotiations, such as the ongoing go-around and
the U.S.-Korean FTA talks.
We hope that you will send the clearest message possible
that you will reject any agreement that weakens our anti-
dumping or countervailing duty laws. If we act now together, we
can stop further unfair Chinese trade, make steel markets more
efficient, and prevent another steel crisis. Thank you.
[The prepared statement of Mr. Goodish follows:]
Statement of John H. Goodish, Executive Vice President and Chief
Operations Officer, United States Steel, Pittsburgh, Pennsylvania
I am pleased to be here today and to have the opportunity to
testify about a topic that is crucial not only to the U.S. steel
industry, but to all American manufacturers--that is, the growing
concern about subsidies and state support of industrial capacity in
China, and the extreme impact we are seeing on global markets as a
result of these policies.
Introduction
At the outset and to put this issue in context, it is worth keeping
in mind the massive and growing U.S. trade imbalance with China. The
U.S. trade deficit with China soared from around $84 billion in 2000 to
over $225 billion in 2006 (Figure 1). This exploding deficit is having
a devastating impact on U.S. manufacturing. Industries like ours are
losing core customers in this market, seeing basic industrial
capabilities evaporate, and witnessing the loss of whole industries.
The China problem with regard to the steel industry is especially
grave, but is really just one of the most vivid examples of a crisis
impacting American manufacturing generally.
[GRAPHIC] [TIFF OMITTED] T0304A.001
The trade imbalance with China and the rest of the world is having
especially grave effects on employment here in the United States, as
foreign exports--often unfairly traded--are costing American industries
both customers and capacity. Since 2000, the year we granted China
permanent normal trade relations (``PNTR''), the jobs of over 3 million
American workers have disappeared (Figure 2). What's especially
troubling is that these jobs have still not returned, despite
consecutive years of apparent economic recovery. This impact is due in
no small measure to the export-inducing industrial policies of
countries like China, which refuse to play by the rules.
[GRAPHIC] [TIFF OMITTED] T0304A.002
The steel industry, and indeed U.S. manufacturers generally, should
not and do not object to new manufacturing capacity overseas that
results from real-world investors putting their hard-earned money into
new facilities that are driven by market demand. But that is not what
is happening, particularly with regard to China. The invisible hand of
the market is not driving China's exploding exports. Rather, the Sino-
U.S. trade imbalance reflects the hand of Chinese government, and the
massive resources it has devoted to assisting its national industries.
As this committee well knows, China uses a wide variety of policy
tools to support industry and exports. Among these, deliberate
suppression of the Chinese currency's value is one of the most
significant. Indeed, in the view of many, currency manipulation
represents the biggest single subsidy provided to Chinese producers.
From 1994 until July 21, 2005, China pegged its currency (``yuan'' or
``RMB'') to the U.S. dollar at an exchange rate of roughly 8.28 yuan to
the dollar.\1\ The Chinese central bank maintained this peg by buying
as many dollar-denominated assets in exchange for newly-printed yuan as
needed to eliminate excess demand for the yuan.\2\ On July 21, 2005,
China made a slight modification to this peg, raising the value of its
currency by 2.1 percent, tying the value of the yuan to a basket of
currencies, and allowing the yuan to fluctuate by 0.3 percent on a
daily basis against the basket.\3\ The effects of this change have been
minor; as of this week the dollar was still worth 7.75 yuan.\4\ Given
that some experts believe that yuan was undervalued by as much as 40
percent,\5\ it is clear that the yuan is still not trading in line with
its true market value. This manipulation is at once a substantial
export subsidy and import barrier, making Chinese exports cheaper
abroad and increasing the price of U.S. goods in China.
---------------------------------------------------------------------------
\1\ Wayne M. Morrison and Marc Labonte, ``China's Currency: A
Summary of the Economic Issues'' (Congressional Research Service Report
for Congress) at 1 (March 17, 2006) (``Morrison and Labonte'').
\2\ Id. To obtain an idea of the magnitude of China's currency
manipulation, consider that one expert estimated the value of these
asset purchases to be $15 to $20 billion every month. See U.S.-China
Economic and Security Review Commission (hearing transcript) at 103
(Apr. 4, 2006) (testimony of Dr. C. Fred Bergsten, Director, Institute
for International Economics) (``USCC Hearing'').
\3\ Morrison and Labonte at 2.
\4\ See Universal Currency Converter, available at http://
www.xe.com/ucc/ (last visited Feb. 12, 2007).
\5\ Congressional Research Service Report for Congress, ``China's
Currency: Brief Overview of U.S. Options'' at 2 (Nov. 29, 2005)
(available at http://fpc.state.gov/documents/organization/57797.pdf).
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Other examples of Chinese industrial policy and market-distorting
behavior could easily be provided. These range from failure to enforce
intellectual property rights, to manipulation of raw material markets,
to limitations on trading rights, to requirements for technology
transfer, to a whole range of other unfair practices, many of which
explicitly violate WTO commitments. These market-distorting mechanisms
have been well-documented in government filings by the steel industry,
and many other industrial sectors.\6\
---------------------------------------------------------------------------
\6\ See, e.g., Letter from Barry D. Solarz, Vice President of the
American Iron and Steel Institute, to Gloria Blue, Executive Secretary
of the Trade Policy Staff Committee (Sept. 18, 2006).
---------------------------------------------------------------------------
Clearly, however, one of the most troubling and distortive aspects
China's trade regime is the topic of this panel: namely, China's
industrial subsidies. These are at once among the most blatantly unfair
and illegal aspects of China's policy, and the impact on world markets
is becoming more apparent every day. In short, the matter of Chinese
subsidies is one of the most crucial issues facing the global steel
industry, as well as many other industries, today.
Chinese Subsidies to the Steel Industry
There can be little doubt that, without subsidies past and present,
China's steel enterprises would look very different than they do today.
In the early 1990s, Chinese steel companies were widely viewed as
utilizing low technology equipment and suffering from low productivity.
Nonetheless, the Chinese government decided to inject massive funds
into these mostly state-owned companies in an attempt to create export-
oriented steel giants, with little or no regard for principles of
global supply and demand. According to published reports and
independent experts, very significant subsidies were granted during
1999 and 2000. Just to give a few examples:
In the late 1990s, the Chinese government reportedly
allocated $7.25 billion (RMB 60 billion) to fund bargain-rate
subsidized loans to state-owned steel enterprises for major technology
upgrades.\7\ According to this policy, discount loans were targeted to
certain ``key'' technology projects specified by the state's industrial
policies. In particular, the government reportedly aimed to encourage
production of high value-added steel products, including galvanized
sheet, cold-rolled sheet, and oil country tubular goods.\8\
---------------------------------------------------------------------------
\7\ OECD, ``The Reform of the Chinese Steel Industry'' CCNM/NIS/
DSTI(99)52 (Oct. 1999).
\8\ Id. at 7.
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Estimates suggest that at the end of the 1990s, over 50%
of China's steel firms were losing money.\9\ According to an OECD
report, the Chinese government bailed out several unprofitable state-
owned steel enterprises by transferring extensive debts the firms
couldn't repay. To accomplish these debt-to-equity swaps, the
government established and capitalized four ``Bank Asset Management
Companies.''\10\ These companies took on the enterprises' non-
performing loans, exchanging them for stakes in the failing producers
of dubious real value.\11\ Indeed, in 2000, the OECD expressed concern
that the swaps were nothing more than a ``free lunch'' for China's
largest state-owned enterprises.\12\ Estimates suggest that this ``free
lunch'' was enormous. In 2000 alone, 37 Chinese steel enterprises
reportedly took advantage of $7.53 billion in government-directed
financing through debt-to-equity swaps.\13\
---------------------------------------------------------------------------
\9\ ``Output controls boosting China's steel industry profit,''
Asia Pulse (Aug. 18, 2000).
\10\ OECD, ``Reforming China's Enterprises'' at 78 (2000).
\11\ Id.
\12\ Id.
\13\ ``China: Debt-to-equity swaps help steel makers,'' China Daily
(Mar. 26, 2000).
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Press reports from this period also describe the Chinese
government's effort to essentially force many steel enterprises to
merge, after which debts of the resulting merged entities held by
China's state banks were cancelled. In 2000, for example, reports
suggest that the write-off of debts following forced mergers saved
China's 100 largest steelmakers an estimated RMB 1.5 to 2 billion ($181
to $242 million) in interest payments.\14\
---------------------------------------------------------------------------
\14\ ``China's Metallurgical Industry Profits Soar in Year to
November,'' Asia Pulse (Jan. 23, 2001).
---------------------------------------------------------------------------
Also in 2000, China's government announced that $6
billion would be spent over the following few years to upgrade and
transform the steel industry.\15\
\15\ U.S. Department of Commerce, Report to the President: Global
Steel Trade at 146 (July 2000).
Moreover, these historical subsidies correspond to what is
apparently a longstanding official policy of the Chinese government to
artificially support the steel industry. China's five-year plans, which
address virtually every aspect of the country's economy, have
reportedly ordered governments at all levels to support the expansion
and technological renovation of the steel industry. China's ninth five-
year plan, covering the years 1996 to 2000, openly called for the
development of certain key production technologies, including
automobile, oil, and other advanced types of steel.\16\ The tenth five-
year plan, for 2001 to 2005, laid out a very detailed outline to
upgrade the entire steel industry.\17\ The plan designated ``core''
regional steel enterprises to be targeted with government support, and
even set export goals for each such enterprise.\18\ For example, the
plan designated Baosteel Corporation, now China's largest steel
producer, as the ``core'' enterprise for China's Eastern region, and
set an export goal of 3 million MT per year by 2005 for the
producer.\19\
---------------------------------------------------------------------------
\16\ National People's Congress, ``Outline of the Ninth Five-Year
Plan for Economic and Social Development'' at Art. 4.2.4.2 (Mar. 17,
1996) (available at http://www.npc.gov.cn/zgrdw/common/zw.jsp?label
=WXZLK&id=3506&pdmc=rdgb) (Chinese language document).
\17\ State Economic and Trade Commission of China, ``Tenth Five-
Year Plan for the Metallurgical Industry'' (Sept. 5, 2002) (available
at http://www.cas.cn/html/dir/2002/05/09/6332.htm) (Chinese language
document).
\18\ Id. at Art. 3.3.1.
\19\ Id. at Art. 3.3.1.3.
---------------------------------------------------------------------------
This explicit state planning, along with an apparent policy to
engage in widespread subsidization of the Chinese steel industry,
continues in China's most recent steel plan. In fact, in July 2005,
China's National Development and Reform Commission adopted a new
National Steel Policy to guide the industry's development over the next
15 years.\20\ Several of the policy's provisions indicate that China
continues--and will continue--to artificially support its steel
enterprises, placing particular emphasis on producing and exporting
high-technology steel products:
\20\ China National Development and Reform Commission, ``Steel
Industry Development Policy'' (July 20, 2005).
The policy states, ``there shall be supported and
organized the implementation of localization of steel industry
installations so as to improve China's research and development, design
and manufacturing ability of key steel industry technological
installations. The state will provide tax support, interest
subsidization support, scientific research funding support and other
policy support to support key steel projects constructed in reliance of
new domestically-developed installations.''\21\
---------------------------------------------------------------------------
\21\ Id. at Art. 16 (emphasis added).
---------------------------------------------------------------------------
Further, ``(t)he state provides export credit support to
encourage steel manufacturing and equipment manufacturing enterprises
to export domestic superior technologies and complete sets of
metallurgy equipments by means of combining industry and trade or
combining technology and trade.''\22\
---------------------------------------------------------------------------
\22\ Id. at Art. 27 (emphasis added).
---------------------------------------------------------------------------
The policy contains detailed plans for the shape and
composition of the Chinese industry, calling, for example, for a
reorganization of the steel industry by 2010 into a structure comprised
of two 30 million MT steel groups and several 10 million MT groups.\23\
---------------------------------------------------------------------------
\23\ Id. at Art. 20.
---------------------------------------------------------------------------
The policy micromanages many aspects of the Chinese steel
industry, including the size of new steel plants, the location of such
plants, and even the minimum size of blast furnaces to be
installed.\24\ The policy also bans all foreign companies from
controlling Chinese steel companies.\25\
---------------------------------------------------------------------------
\24\ Id. at Art. 12 (providing that the blast furnaces shall be
over 3,000 cubic meters, and that steel plants should have a capacity
in excess of 8 million MT).
\25\ Id. at Art. 23.
---------------------------------------------------------------------------
The policy declares that ``(m)ineral resources belong to
the state,''\26\ and that ``(t)he export of primarily processed
products of coke, iron alloy, cast iron, scrap steel, steel billet
(ingot) with high level of energy consumption and heavy pollution shall
be restricted.''\27\ Such restrictions suppress the price of steel
inputs for Chinese producers.
\26\ Id. at Art. 28.
\27\ Id. at Art. 30.
Available evidence suggests that significant government resources
are indeed continuing to flow to Chinese industry through the very
kinds of subsidies identified in the steel policy. For example, the
central government reportedly allows substantial income tax credits for
companies that purchase domestically made equipment for technology
upgrades.\28\ Moreover, the central and provincial governments provide
tax incentives for producers located in development zones. The U.S.
State Department reports that five special economic zones, 14 coastal
cities, hundreds of development zones and designated inland cities all
promote investment with ``unique packages of investment and tax
incentives.''\29\ Steel producers also reportedly receive subsidized
raw materials and energy. In this regard, China's government controls
the price of gasoline and electricity, allowing manufacturers to obtain
these vital items at subsidized prices.\30\ And, government control of
state-owned enterprises in a number of different sectors means these
enterprises can make below-cost sales to one another.\31\ Provincial
governments also reportedly subsidize steel inputs. In fact, just last
year, the government of Shanxi province agreed to provide state-owned
producer Shougang with coke and iron ore at a fraction of market
value.\32\
---------------------------------------------------------------------------
\28\ State Tax Administration, Technological Renovation of Domestic
Equipment Corporate Income Tax Exemption Notice (Jan. 17, 2000)
(available at http://www.jsgs.gov.cn/Page/
statutedetail.aspx?statuteid=2965) (Chinese language document).
\29\ U.S. & Foreign Commercial Service and U.S. Department of
State, Doing Business in China: A Country Commercial Guide for U.S.
Companies at 148 (2006).
\30\ USCC Hearing at 52 (Statement of Dr. Usha C.V. Haley,
Director, Global Business Center, University of New Haven).
\31\ Id.
\32\ ``Shougang to Set Up Steel JV in Shanxi Province,'' Steel Bus.
Briefing (March 2, 2006).
---------------------------------------------------------------------------
China's widespread intervention in raw material markets is another
area that has given rise to substantial concerns regarding ongoing
benefits to, and effective subsidization of, Chinese steel producers.
For example, China's steel policy provides that China's government may
block ``cut-throat competition'' for resources.\33\ In early 2006,
there were numerous press reports regarding efforts by the Chinese
government to influence negotiations between Chinese producers and
global suppliers of iron ore--making clear that the government would
``take necessary measures if prices were unacceptable and
unreasonable.'' \34\ China's imposition of export restrictions on
coking coal in 2005 also caused extensive disruptions on world markets,
and led the EU to threaten potential action under the WTO to deal with
the problem \35\--which clearly served to artificially lower input
costs for Chinese producers.\36\
---------------------------------------------------------------------------
\33\ See Steel Industry Development Policy at Art. 30 (``When
several domestic enterprises engage in cut-throat competition for
overseas resources, the state may exercise executive power to
coordinate, organizing (an) industrial alliance or deciding one
enterprise to invest so as to avoid cut-throat competition. The
enterprises shall obey national executive coordination.'')
\34\ See., e.g., ``China Stance Helped Limit Iron Ore Price
Increase,'' Dow Jones International News (June 21, 2006).
\35\ See ``China Continues Restriction Measure on Coke Export,''
Asia Pulse (June 24, 2005).
\36\ World Trade Organization, ``China's Transitional Review
Mechanism: Communication of the United States, G/MA/W/71 at 3, para. 9
(Sept. 6, 2005).
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China's continuing policy to subsidize its steel industry is
further reflected in the recent decision of the United States Trade
Representative to commence WTO consultations with China with regard to
nine WTO-prohibited export performance and import substitution
subsidies. It is noteworthy that the Chinese steel industry was
specifically identified as one of the key industries receiving support
under these programs. These programs involve, among other things,
preferential income tax and VAT treatment, below-market loans, and
policies to encourage the use of domestic, rather than imported,
materials.\37\ While the specific WTO-prohibited subsidies identified
by USTR represent only a small portion of the enormous level of state
support that has been provided by the Chinese government, they are
indicative both of the ongoing nature of the problem and the very clear
evidence of WTO violations.\38\
---------------------------------------------------------------------------
\37\ See United States Trade Representative, ``United States Files
WTO Case Against China Over Prohibited Subsidies,'' Press Release (Feb.
2, 2007).
\38\ China's failure to adequately enforce basic labor and
environmental standards has also, in the view of many, served to
provide Chinese companies with an unfair advantage in international
trade--and arguably served as a means of effective state support and
subsidization.
---------------------------------------------------------------------------
In sum, the evidence suggests that China's steel industry is the
most heavily subsidized in the world (Figure 3).
[GRAPHIC] [TIFF OMITTED] T0304A.003
Impact of Subsidies on World and U.S. Steel Markets
With all of this past and ongoing government support, it is not
surprising that China's steel production expansion is unprecedented in
the history of the global industry. In the time remaining today, I
would like to focus my remarks on the impact of government support for
Chinese steel industry--both on global and U.S. markets--and the steps
needed to combat further distortion of global steel markets. The fact
is that subsidies make a huge difference in the capacity and production
decisions of companies, and can and do act to badly distort market
outcomes. That is why it is imperative that policy makers take the
problem seriously and act aggressively to combat it.
Chinese steel production has exploded over the course of the last
decade--i.e., at the same time that many of the subsidies described
above were reportedly granted (Figure 4). In fact, Chinese crude steel
production more than quadrupled in the last ten years, growing from an
estimated 100 million MT in 1996 to approximately 420 million MT in
2006. This is the rough equivalent of building three entire American
steel industries in just one decade. Moreover, China's production
growth has far outpaced growth in the rest of the world. China's share
of world steel production skyrocketed from an estimated one-eighth in
1996 to over one-third in 2006, underscoring the unprecedented nature
and enormous magnitude of what China is doing.
[GRAPHIC] [TIFF OMITTED] T0304A.004
And the situation is quickly deteriorating. In fact, the most
colossal portion of China's steel production growth has occurred in
just the last few years. Between 2003 and 2006, it is estimated that
the increase in China's crude steel production alone was roughly equal
to the total production of Japan or the United States in 2006 (Figure
5). It is likely no coincidence that these are the years immediately
following some of the largest reported Chinese government payouts to
the steel industry. Though we are still working to understand the full
implications of this absolutely unprecedented industrial expansion, one
fact is clear: the Chinese market is not able to support the hundreds
of millions of tons of production capacity added in the last few years.
[GRAPHIC] [TIFF OMITTED] T0304A.005
This is evidenced by the fact that Chinese imports are bottoming
out while exports are skyrocketing, as Chinese producers seek markets
for their surplus production (Figure 6). In 2003, China was a net
importer of steel. Three years later, the situation flipped completely,
and China became a net exporter. Indeed, China's steel trade balance
shifted by nearly 50 million MT between 2003 and 2006 (Figure 7).
[GRAPHIC] [TIFF OMITTED] T0304A.006
I cannot emphasize enough how extraordinary, unprecedented, and
threatening these developments are. Let me walk you through the
serious, real-world consequences for our industry. We are being
inundated with surging volumes of Chinese imports. China shipped over 5
million NT of steel products to the United States in 2006, more than
double the level of Chinese imports in 2005 (Figure 8). By the end of
last year, we were importing more steel from China than from any other
country--including Canada. In fact, we were importing more steel from
China than from all 25 members of the EU combined.
It is also very important to note that Chinese imports are no
longer limited to low-end items. China is moving up the value chain,
increasingly competing with some of our most advanced products,
including corrosion-resistant sheet, oil country tubular goods, and
cold-rolled sheet. These products are among the most valuable to the
U.S. industry. And, as I discussed a few moments ago, Chinese state
policy explicitly targets these high-value products for subsidization.
The U.S. industry is very competitive, especially with regard to
these critical, high-value products. To give one example, U.S.
corrosion-resistant steel producers increased their productivity by 78
percent from 2000 to the first half of 2006. We can compete with any
steel producer in the world on market terms. But we simply cannot
compete with China's government resources. And we should not have to.
If China wants access to the markets of the world, it must play by the
rules--and put a stop to market-distorting subsidies.
[GRAPHIC] [TIFF OMITTED] T0304A.007
Need for Policy Action
In short, the China trade problem is grave, and the current trade
imbalance--fueled by unfair practices--is unsustainable. The last thing
we want is a repeat of the Asian crisis of the late 1990s, when
overproduction abroad resulted in a flood of cut-rate imports that put
the entire American steel industry at risk. The time for strong policy
action to prevent another crisis is now.
USTR's recent initiation of WTO consultations with regard to
certain Chinese subsidy programs is a step in the right direction. But
I would like to again underscore that the nine subsidy programs
identified by USTR are a very limited subset of the problem. In
particular, the USTR's action involves only WTO-prohibited subsidies
(i.e., so-called ``export'' or ``import substitution'' subsidies), the
majority of which relate solely to foreign-invested enterprises. The
USTR action does not in any way address the vast evidence of enormous
``domestic'' subsidies that built up many of China's largest steel
enterprises over the past several years and continue to unfairly
benefit Chinese producers today.
Again, the time to act is now, before the situation deteriorates
beyond our ability to meaningfully address it. There are a number of
crucial policy actions we believe Congress and the Administration must
take to address this problem:
First, it is absolutely critical that we strictly enforce
our trade laws. With regard to China and all of the other trade threats
America faces, this must be our highest priority. Our anti-dumping and
anti-subsidy laws constitute in most instances our only practical line
of defense against severe market-distorting practices that would
otherwise allow foreign producers to overrun this market. In this
regard, we need to ensure that China continues to be treated as a non-
market economy for purposes of our anti-dumping law--particularly given
the extensive evidence that China continues to control many fundamental
aspects of its economy. The first step of any China policy--and indeed
any manufacturing policy--should be a ``zero tolerance'' policy for
unfair trade.
Second, we also urgently need real China legislation.
There are some very obvious, easy steps that can be taken, such as
applying our anti-subsidy laws to China. It simply makes no sense to
exempt Chinese producers, particularly given the evidence that they are
among the most heavily subsidized producers in the world. We also
urgently need do something real on currency manipulation. Letting China
string us along with endless talk and tiny adjustments to the value of
the yuan is no solution at all, especially in light of the enormous
consequences of this flagrant manipulation. There are a lot of good
ideas out there to address market-distorting behavior in China, and we
sincerely hope that Congress will pursue them.
Finally, it is imperative that we keep our AD/CVD laws
strong in the face of relentless efforts to weaken them as part of
international negotiations. We have seen such efforts to weaken our
trade laws in the Doha round, and we are also seeing them in free-trade
agreement (``FTA'') talks, such as the ongoing U.S.-Korea FTA
negotiations. Weakening our trade laws as part of these talks could
very well make them unworkable to combat unfair trade from China and
other countries that disregard global rules. It is imperative that
Congress send the clearest possible message that it will reject any
agreement that weakens our AD/CVD laws.
Conclusion
We find ourselves at a critical moment. If we act now, we can guard
our nation against further unfair Chinese trade and prevent another
crisis impacting core American industrial sectors. Thank you for
supporting American manufacturing and the American steel industry, and
thank you for the opportunity to testify today.
Chairman LEVIN. Thank you.
Frank Vargo, welcome.
STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT OF INTERNATIONAL
ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. VARGO. Thank you, Mr. Chairman, Mr. Herger, Members of
the Subcommittee. I am very pleased to be here on behalf of the
National Association of Manufacturers (NAM) to talk about
China's trade-distorting subsidies.
No other trade subject comes anywhere near China as far as
commanding the attention of NAM companies. It is simultaneously
the greatest concern of many of our import competing companies
and one of the fastest growing markets for our exporters.
We want a positive and mutually beneficial and very
productive trade relationship with China, but to do so, we have
to see that the rules that China agreed to abide by are
actually followed. We have a range of concerns, including
currency, intellectual property theft, and subsidies.
Now, direct and indirect export subsidies have been a major
concern for NAM members for some time. We have heard quite a
few stories about Chinese products, for example, being imported
into the United States for less than the cost of the raw
materials.
One of our member companies, for example, makes hardware,
and gave us an example of a pair of pliers that can be imported
from China for a wholesale price of 49 cents, but the only
problem here is there is 61 cents of raw materials in them. So,
how does a Chinese company take those raw materials, machine
them, assemble them, package them, ship them across the Pacific
Ocean, and sell them for 49 cents? One answer would be they
were getting subsidies.
Now, as part of China's accession, China agreed to identify
its prohibited export subsidies and to eliminate them. Now, 5
years later, they have finally identified a range of subsidies.
USTR has been having discussions with them. Those discussions
have not been productive. So, now we have the beginning of a
trade case on those subsidies, and the NAM very strongly
supports this.
As we look at some of these subsidies, we believe they can
be very significant. I understand one subsidy, for example, is
that if you export 70 percent or more of your output, that your
income taxes are cut in half. That is pretty potent incentive.
They are not all export subsidies. On the other side, my
understanding is that one of the Chinese laws is that if you
buy Chinese-made equipment for your factory or your service
facility that you get--you can write 40 percent of that off
against your taxes. You get a 40 percent tax rebate. Well, that
again is a pretty powerful subsidy, and it particularly affects
American companies because we are a capital goods exporter. So,
we would be able to sell more equipment to China if we didn't
have to face these subsidies.
Then there are specific subsidies in industries--in machine
tools, tool and die, casting and forging. These are industries
from which we hear a lot of pain from our NAM members. There
could be more subsidies coming.
We noted in the questions that the U.S. Government put to
the Chinese at the WTO, among them was a statement that China's
Ministry of Commerce is in the process of selecting a hundred
Chinese auto or parts manufacturers to be designated as State-
level auto and parts exporters who will be targeted for special
financial and export credit support.
Now, we have no estimate of the overall effect that these
subsidies are having, but we can see from the magnitude that
they are very significant. Now, I know that a lot of people say
Chinese wages are so low that nothing else matters; you just
can't compete against them, but that is not so.
American manufacturers are very productive. As a matter of
fact, we estimate that the average labor cost in a U.S.
manufactured good is only 11 percent. Eighty-nine percent is
the cost of materials, energy, taxes, distribution, marketing,
and so forth, so that the concept that Chinese labor wages
trump all is just not true. We need to press for the
elimination of these subsidies. They are prohibited. They are
illegal. They shouldn't be there. We shouldn't have to deal
with them.
We want this just to be the beginning. These are the very
visible prohibited subsidies. We want the USTR and the Commerce
Department to investigate and press for more. We want to make
sure that they have the resources to do so. Appropriations are
not the jurisdiction of this Subcommittee or Committee, but we
hope that you will work to ensure that all the resources they
need are indeed provided.
Now, in addition, we believe that U.S. companies should be
able to bring countervailing duty cases against Chinese
subsidies. We have urged the Commerce Department to reverse its
20-year policy of not applying countervailing duty provisions
to non-market economies.
Now, the huge U.S. trade deficit with China continues to
grow. Last year it was 232 billion, up from 205 billion in the
year 2005. We have deficits with countries other than China,
and we have an overall manufactured goods deficit of 530
billion. That is huge.
When we address these deficits and look at how we get them
down, it is important that we deal with the facts. For example,
it is not uncommon to hear that the three million manufacturing
jobs lost in the United States were all due to increased
imports. That is just not true. There are many factors
involved.
Some were certainly lost to imports. Some were lost to the
export collapse that we had a couple of years ago. It is also
very true that we have been very, very productive in recent
years. As a matter of fact, if you look at the two graphs
attached to the last page of my prepared statement, you will
see that both in terms of the Federal Reserve Board's
production index and in terms of the manufacturers' factory
shipments from the Census Bureau, that we are at an all-time
high, and our 14 million workers today are product more than 17
million workers produced five years ago.
That is not to say we don't have a problem at all. We do.
We have too large a trade deficit. We have too large a trade
deficit with China. We should not put up with WTO-inconsistent
practices like these subsidies.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Vargo follows:]
Statement of Franklin J. Vargo, Vice President of International
Economic Affairs, National Association of Manufacturers
Mr. Chairman and Members of the Committee:
I am pleased to testify today on behalf of the National Association
of Manufacturers (NAM), the nation's largest industrial trade
association, representing small and large manufacturers in every
industrial sector and in all 50 states. We seek a vibrant, globally
competitive manufacturing industry in the United States.
No other trade subject comes close to commanding the attention that
China is getting from NAM companies. China is simultaneously the
greatest concern of many of our import-competing members and the
fastest-growing global market for large and small exporters and for
many companies that operate internationally. China has emerged within a
short span of two decades as a strong international competitor in a
wide range of manufactured products and a key market for U.S
manufactured exports.
The NAM seeks a positive and mutually-productive trading
relationship with China that reflects market forces as closely as
possible. China's emergence as a leading world economy has meant
significant new opportunities for many NAM members, including increased
exports and investment. At the same time, many import-competing U.S.
manufacturers see prices of Chinese products so low--sometimes even
lower than the cost of the raw materials--that it is difficult for them
to see how they can compete. Others see their customers moving to China
and cannot find new ones to replace them.
The NAM's concerns with China cover a range of issues, including
protecting intellectual property rights, maintaining a currency value
that reflects the strength of the Chinese economy and ending prohibited
government subsidization of industry.
We are also concerned that we are seeing a growing Chinese
industrial policy that favors domestic producers, making it more
difficult for foreign firms to participate in the Chinese economy.
While currency and intellectual property theft are huge problems for
NAM members and for our trade balance with China, I will confine my
remarks in this testimony to China's subsidies.
The NAM worked hard to support China's membership in the World
Trade Organization (WTO), and we remain fully supportive of that
membership. Bringing China into the WTO required it to begin following
the same trade rules as the rest of the world and to open its markets
more fully. It has now been over five years since China joined the WTO
and it is important that China implement its obligations fully.
There have been many positive benefits. Joining the WTO has
encouraged China to open its internal market to international trade and
foreign investment and adopt more market-oriented policies for
developing its economy after decades of state control and management.
At the same time, WTO agreements and principles have provided
internationally accepted standards for guiding and evaluating China's
policies affecting trade.
China has now been in the WTO five years, and the NAM concurs with
the Administration's 2006 Top to Bottom Review of China Trade Policy
that as a mature trading partner, China should be held fully to its
commitments. Unlike most other WTO members, China presents a unique
challenge for evaluating its WTO compliance. While the Chinese economy
has evolved significantly from a state-controlled model, it is still
not a market economy. Both the national government and local
governments play a significant role, directly and indirectly, in
determining business decisions and limiting competition in the
marketplace. Some of these policies appear to be driven by economic
policy goals aimed at artificially accelerating China's industrial
growth and export of manufactured goods.
The rule of law is essential to the free flow of trade in goods and
services and governments have a responsibility to adhere to their
commitments under the WTO and other international agreements. When
governments interfere in trade in violation of the rules, enforcement
is important to prevent the growth of distortion in global markets. The
NAM believes that the area of subsidies is no exception and, in 2004
and subsequently, the NAM Board of Directors has supported legislation
in Congress that would state clearly that U.S. countervailing duty law
should apply to both market and non-market economies.
Often U.S. companies can only surmise that inappropriate policies
are in place because they know that manufacturers operating on market
principles would not engage in similar practices (e.g., selling a
product at below the international price for the raw material input or
continuing to build new capacity when there is already oversupply on
the market.)
To ensure effective WTO compliance, U.S. agencies must be prepared
to investigate trade problems even when there is limited documentation
and other hard evidence that a violation of trade rules has occurred.
The NAM believes strongly in the rules-based trade system. As with any
country, when there are violations of trade rules, U.S. companies
should have recourse to WTO-consistent remedies under U.S. trade law.
The use of and access to legitimate trade law in cases where it is
warranted is necessary for mutually beneficial trade and is the best
defense against the growth of protectionism. If affected companies have
recourse when faced with unfair trade practices, there is a basic sense
that trade works to their benefit.
Direct and Indirect Industry and Export Subsidies
Direct and indirect industry and export subsidies are a major
concern of U.S. manufacturers, particularly those that compete against
Chinese-made products. Member companies and organizations have long
complained to us that Chinese enterprises must be receiving subsidies
because they appear to be selling their products in the United States
at below the cost of raw materials and shipping.
One of our member companies that makes hardware provides a typical
example. Their large retail customers in the United States are able to
purchase a particular pair of Chinese-made pliers for 49 cents. The
U.S. company makes virtually identical pliers, but the problem is that
the raw materials' cost in these pliers is 61 cents. This is not the
sales price of the U.S. pliers--just the cost of the raw materials. How
is it possible for a Chinese company to take 61 cents of raw materials,
process them into pliers, package them, ship them across the ocean, and
sell them for 49 cents? One way would be if the Chinese company were
receiving subsidies.
In 2001, China acceded to the WTO and agreed to be bound by its
provisions, expressly including the Subsidies and Countervailing
Measures (SCM) agreement. As part of China's accession, the Chinese
government acknowledged the existence of subsidies and agreed to notify
its subsidies to the WTO, and to terminate its prohibited subsidies
upon accession. Last April, several years after it was due, China
finally notified WTO members of government subsidy programs. China
listed 78 subsidy programs for the period 2001-04 covering a wide range
of programs.
China's list, appears incomplete, however, and did not include a
variety of policies and programs that NAM members believe are giving
substantial subsidies to Chinese industrial enterprises--such as those
provided by China's state-owned banks or by provincial or local
governments. Chinese enterprises, for example, appear to have access to
the automatic roll-over of unpaid principal and interest; loan
forgiveness; continued borrowing despite having non-performing loans;
and below-market interest rates.
The SCM agreement defines two categories of subsidies: prohibited
and actionable. The WTO defines prohibited subsidies as those that
require recipients to meet certain export targets, or to use domestic
goods instead of imported goods. They are prohibited because they are
specifically designed to distort international trade. They can be
challenged in the WTO dispute settlement procedure where they are
handled under an accelerated timetable. If the dispute settlement
procedure confirms that the subsidies are prohibited, they must be
withdrawn.
At the beginning of this month, after bilateral consultations with
China made little progress, the U.S. Trade Representative (USTR)
initiated dispute settlement proceedings against China, for what appear
to be prohibited export subsidies that China should have terminated,
but did not. The NAM strongly supports this action and urges that the
proceedings be moved forward as rapidly as possible.
For this initial case, USTR has chosen to focus on ``prohibited
subsidies.'' No evidence of an adverse effect is necessary in the case
of prohibited subsidies, unlike the situation in actionable subsidies.
A prohibited subsidy is prohibited. Period. All that need be
established in the case that is now being brought is that the Chinese
subsidies in the complaint fit the definition of a prohibited subsidy.
As we have looked at some of the subsidies in the complaint, there
does not seem to be much question that these subsidies are prohibited.
For example, I understand that in the case of one measure, enterprises
that export at least 70 percent of their production may be able to
enjoy a corporate income tax rate of 15 percent or lower rate instead
of the normal 30 percent rate. That is a very significant subsidy and
certainly can distort trade patterns in a way that would affect U.S.
imports.
I would like to comment in more detail about a number of subsidies
being granted to manufacturers that are illustrative of Chinese
subsidization.
Equipment Generally: Not all of the subsidies being challenged in
this WTO are export-oriented. Import-distorting subsidies are also
included. For example, both foreign firms and domestic firms in China
apparently get a tax write-off if they buy Chinese equipment for their
factories or business installations instead of purchasing imported
equipment. My understanding is that this takes the form of an income
tax refund equal to 40 percent of the value of the equipment purchased.
That is a huge incentive to buy domestically-made equipment rather than
imports--and definitely would be a prohibited subsidy.
Machine Tools: Additional subsidies appear to target particular
industries that the Chinese government wants to develop by giving them
preferred access to China's domestic market. One NAM member, for
example, told us that 70 Chinese machine tool companies making computer
numerically controlled (CNC) machine tools and related products can
have 50% of the value-added tax (VAT) rebated to them.
As the VAT tax is 17%, this is quite an incentive for them to lower
their prices and distort competition by tilting the playing field
against U.S. and other exporters. The machine tool subsidy is of
particular concern as China is proving an increasingly difficult market
to sell in to and Chinese exports of machine tools to the United States
are growing rapidly.
Tool and Die: The U.S. tool and die industry has a huge competitive
problem with Chinese companies, and China's notification to the WTO
shows that if Chinese producers buy die products produced by one of 160
specified Chinese die manufacturers, they will get 70 percent of their
VAT tax refunded.
Casting and Forging: Another U.S. industry that is having a very
difficult time competing against China is the casting and forging
industry. China's notification to the WTO stated that if Chinese
purchasers bought casting or forging products from one of 284
specialized Chinese casting and forging companies rather than
purchasing foreign imports, they could get a refund equal to 35 percent
of the VAT paid on those products.
Autos and Auto Parts: And yet even newer subsidies may be under
development. In questioning China's subsidy submission to the WTO, the
U.S. noted that ``China's Ministry of Commerce (MOFCOM) is in the
process of selecting 100 Chinese auto or parts manufacturers to be
designated as ?state-level auto and parts exporters' who will be
targeted for ?financial and export credit support.'
While we have no estimate of the overall effect these and other
subsidies are having, we believe the effect is likely to be very
substantial. The United States tends to be an exporter of capital
equipment, rather than consumer goods, so subsidies that put imports of
capital equipment into China at a disadvantage have a potentially
strong effect on U.S. exports. This includes many small U.S. companies.
In 2005, the latest year for which data are available, 22,000 small and
medium-size U.S. firms exported to China, up 50 percent in the time
since China joined the WTO. This number has likely continued to grow
rapidly since 2005. As these smaller companies attempt to establish a
marketing position in China, they already face ample obstacles without
having to compete against subsidized Chinese firms.
Some commentators have stated that Chinese wages are so low that
little else counts in competing with China. They overlook the fact,
however, that labor costs are only one factor in the production
process. U.S. manufacturers are highly efficient, with strong labor
productivity. In fact, Census Bureau data show that production worker
wages and benefits on average are only 11 percent of the cost of U.S.
manufactured goods--with 89 percent of the production cost being
materials, energy, overhead, marketing, distribution, profits, taxes,
and the like. We recognize that U.S. manufacturers need to work with
our own government to make the U.S. manufacturing environment a
competitive one. However, the idea that low Chinese labor rates trump
all is not true.
The U.S. government needs to press for the quick elimination of the
subsidies identified in the case just filed with the WTO. In addition,
the NAM wants USTR and the Commerce Department to continue seeking
information on other possible subsidies, in the form of loan
forgiveness and other forms of subsidy. Many of these subsidies may not
be ``prohibited'' and may fall in the ``actionable'' category requiring
considerable evidence of damage. The NAM hopes this subcommittee will
inquire as to whether those two agencies are adequately staffed and
funded for this exercise, and if not, we hope the subcommittee will
encourage the relevant appropriations committees to ensure an adequate
funding level.
In addition, the NAM believes that U.S. companies should be able to
bring countervailing duty cases against Chinese subsidies, and we have
urged the Commerce Department to reverse the 20-year policy of not
applying countervailing duty law in the case of non-market economies.
There are two reasons for a change in policy: first, when the Subsidies
and Countervailing Measures agreement was modified in 1994, the
definition of a subsidy was changed from one that looked at effects to
one that defined subsidies by what they are. Second, when China joined
the WTO, it expressly agreed to be bound by the terms of the Subsidies
and Countervailing Measures agreement, even agreeing to special
methodologies for use in assessing subsidies its non-transparent
economy.
The NAM supported HR 3283 in the 109th Congress, a bill that sought
to clarify the intent of Congress as being that countervailing duties
should be applicable to subsidies from non-market economies as well as
market economies. The NAM continues to support that concept, though we
seek some technical changes to last year's bill.
Finally, subsidized foreign investment is an issue that should be
explored. WTO agreements have long recognized that subsidies unfairly
distort trade in goods. The Agreement on Subsidies and Countervailing
Measures (ASCM) subjects those subsidies to disciplines and provides
remedies. Similarly, governments recognize that subsidies related to
trade in services distort markets and should also be addressed. Article
XV of the General Agreement on Trade in Services (GATS) acknowledges
that subsidies may distort trade in services. The GATS obliges WTO
member countries to enter into future negotiations on the subject and
to give ``sympathetic consideration'' to complaints.
Subsidies for the acquisition of assets distort the market for
those assets in much the same manner as trade subsidies. The United
States has long been an advocate for increased disciplines on
subsidies, including market-distorting practices that may escape the
current rules (such as government-directed credit) and stricter
disciplines to address certain types of adverse effects that are not
adequately dealt with under the current rules (e.g., overcapacity
caused by subsidies in the steel and fisheries sectors). New
consideration needs to be given to how we handle subsidized investment
in the future.
Putting China_and Trade_In Perspective
The huge U.S. trade deficit with China is continuing to grow. Data
just released by the Commerce Department show the 2006 merchandise
trade deficit with China was $232 billion up from $202 billion in 2005.
China now accounts for over 40 percent of our global non-petroleum
trade deficit.
Export growth to China is rapid, but starts from a small base. Last
year's 32 percent increase in exports to China resulted in a dollar
growth of $13 billion. The 18 percent import growth, though, resulted
in a $44 billion increase. As imports from China are five times as
large as exports to China, a significantly higher export growth rate
relative to the import growth rate is needed to stabilize and then
bring down the deficit.
It is noteworthy, though, that the increase in the deficit last
year was 15 percent, significantly below the 25 percent growth that has
been seen for some time. Now I am not implying that this is ``break out
the champagne'' news, but it is the first time we have seen a slowing
in the growth rate of our deficit with China. Nevertheless, the size of
the deficit and its continued growth underscore the need to utilize our
trade rights to eliminate subsidies and other distortions of trade with
China.
We have deficits with countries other than China, of course, and
our global manufactured goods trade deficit in 2006 was nearly $530
billion.But as we address these deficits, we must be realistic about
the effect they are having on our economy. It is important that we all
move forward with as good a grounding in the facts as possible.
For example, it is not uncommon to hear that U.S. manufacturing is
on its last legs, that we have been hollowed out and that our
production base has moved overseas. A look at the factory shipments and
industrial production data I have included as the last page of my
testimony shows this is not true. Measured by historical standards and
recent trends, U.S. manufacturing output is strong. This is not, of
course, the case for all sectors. While some are doing very well,
others are not. And within sectors some companies are doing well, while
others are struggling to stay afloat.
American manufacturing faces many problems and challenges. Global
competition is one, both in terms of import competition and in terms of
having to face trade barriers around the world and too many unfair
trade practices. But we have home-grown problems as well, in terms of
higher costs from taxes, regulation, energy costs, etc. In fact, when
we ask our member companies to name their biggest problem, they tell us
that health care costs and a shortage of skilled workers is at the top
of their list.
Some believe all our problems stem from trade, and that trade is
the reason that manufacturing has lost 3 million jobs in recent years.
Some commentators are fond of pointing out that the United States lost
3 million jobs in the ``NAFTA-WTO decade.'' The clear implication is
that NAFTA and trade generally are the cause of the 3 million job loss.
But that is untrue.
It is certainly true that between 2001 and 2003 nearly three
million manufacturing jobs were lost--a huge number, close to one in
every six jobs. The jobs have not come back since that time, with
manufacturing employment trending down gradually since 2003. But since
the U.S. manufactured goods deficit with NAFTA in 2001 was $38 billion
and the 2006 manufactured goods deficit with NAFTA was also about $38
billion, how could the job loss have been caused by NAFTA? Since there
was no increase in the manufactured goods deficit with NAFTA, it is
hard to see what kind of analysis would indicate NAFTA as the cause of
our job loss.
Many people are startled to learn that the manufactured goods
deficit with NAFTA is no larger than it was in 2001, for they look at
the overall trade figures with NAFTA and see a $55 billion increase
since 2001. However, this increase was entirely due to oil imports.
Mexico and Canada supply one in every three barrels of oil we import
from the world, and with the price of oil being what it is, the
petroleum deficit with them has soared--growing $55 billion.
Looking at the trade deficit more broadly, Dr. Lawrence Michel,
President of the Economic Policy Institute, testified before the full
Ways and Means Committee at the end of January that, ``In just the five
years from 2000 to 2005, more than three million manufacturing jobs
disappeared. We estimate that at least one-third of that decline was
caused by the rise in the manufactured goods trade deficit.''
That is possible, as in the period when those 3 million jobs were
lost, there was a big jump in our global manufactured goods deficit--a
$90 billion increase, in fact. But the inference most people seem to
draw from this is that it was imports that caused that job loss--
particularly U.S. multinational imports from low-wage countries. But
that is not what the figures show. The data show that the $90 billion
increase in the manufactured goods deficit in that period was due to a
$20 billion increase in imports, and a $70 billion drop in exports.
Thus, to the effect that trade was a factor in the job loss, about 80
percent of the trade impact came from falling exports, not rising
imports.
None of this is to say that U.S. manufacturing doesn't face serious
problems--including from import competition from China. We do, but as
we approach these problems we must do so armed with the facts and with
an understanding of how we got where we are and how best to solve our
problems so we can have the vibrant and growing manufacturing sector
this country cannot survive without. Manufacturing is how we will pay
our way in the world and manufacturing is the principal source of the
innovations and productivity that we need for continued increases in
our standard of living.
Thank you, Mr. Chairman, for holding this important hearing, and
the NAM looks forward to continuing to work closely with you, other
members of the committee, and the committee's excellent staff.
[GRAPHIC] [TIFF OMITTED] T0304A.008
Chairman LEVIN. Thank you very much.
[GRAPHIC] [TIFF OMITTED] T0304A.009
Mr. Bassett.
STATEMENT OF JOHN D. BASSETT, III, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, VAUGHAN-BASSETT FURNITURE COMPANY, GALAX, VIRGINIA
Mr. BASSETT. Thank you, Mr. Chairman and Members of the
Subcommittee. Good morning. My name is John Bassett. I am the
Chairman of Vaughan-Bassett Furniture Company headquartered in
Galax, Virginia. Vaughan-Bassett was founded by my family in
1919. We employ over a thousand workers at our furniture plants
in Galax, Virginia and Elkin, North Carolina.
I am also the Chairman of the American Furniture
Manufacturers Committee for Legal Trade. The Committee for
Legal Trade has 22 member companies that produce bedroom
furniture in the United States. I am testifying today on behalf
of Vaughan-Bassett and the Committee for Legal Trade.
Beginning in about 2001, U.S. imports of wood bedroom
furniture from China began to flood the U.S. market. In most
cases, the Chinese producers did not offer anything new; they
simply copied furniture styles that we were already
successfully making for the U.S. market and offered them at
much lower prices. Furniture became China's number one export
to the United States, measured by the number of containers
shipped. As a result, our industry lost enormous sales and a
large share of our market to cheap imports from China.
In 2003, we learned for the first time that a trade remedy
law, the anti-dumping law, was available to combat unfair
priced imports. We formed the Committee for Legal Trade and
filed an anti-dumping petition against imports of wood bedroom
furniture from China in October 2003.
Given the Commerce Department's longstanding practice not
to apply the countervailing duty laws to non-market economies
or countries, we did not file a countervailing duty petition
against the Chinese government subsidies.
In our anti-dumping case, the U.S. International Trade
Commission investigated the impact of dumped imports from China
during January 2001 through June 2004. During that period,
imports from China, having a landed value of about 3.8 billion,
contributed to the closing of over 65 U.S. furniture factories
that made bedroom furniture--today that figure is much higher--
and that employed over 18,000 workers. The Commission made a
unanimous decision in late 2004 that our industry was
materially injured as a result of dumped imports from China,
and an anti-dumping order was imposed.
Now let me come to the heart of the matter. I speak for all
of our members by saying, first, we would like to stay in
domestic manufacturing in this country. Two, as an
organization, we have supported NAFTA and we have supported the
General Agreement on Tariffs and Trade. We were prepared, and
are still prepared, to compete in a global marketplace. We have
modernized our factories. We have increased our efficiencies.
We have improved our quality. We have done all those things.
It was our understanding that our Government would provide
a level playing field for us. Our job was to compete; our
government's job was to create a playingfield that was level.
Now, with dumping, subsidies, and pegged currencies, we
question today if that playingfield is level.
Here is a problem I have. How am I going to look my workers
in the eye and tell them they no longer have a job, and it is a
result of illegal trade? That is a hard thing to do. I have got
to be able to look them in the eye as a corporate citizen and
tell them truth. The truth is, I have done everything in my
power to legally protect your job.
So, if the Administration will not do this, ladies and
gentlemen, as a corporate citizen I only have one other place
to come, and that is to my elected representatives, the U.S.
Congress.
Now, in final, I am not asking for a bailout. I am not
asking for a handout. I am not asking for a gift. We are asking
for one thing: Let us do our job, and would you please do
yours. Thank you very much.
[The prepared statement of Mr. Bassett follows:]
Statement of John D. Bassett, III Chairman and Chief Executive Officer,
Vaughan-Bassett Furniture Company, Galax, Virginia
Mr. Chairman, Mr. Herger, and Members of the Subcommittee:
Good morning. My name is John D. Bassett. I am the Chairman of
Vaughan-Bassett Furniture Company, headquartered in Galax, Virginia.
Vaughan-Bassett was founded by my family in 1919. We employ over 1,000
workers at our furniture plants in Galax, Virginia and Elkin, North
Carolina. I am also the Chairman of the American Furniture
Manufacturers Committee For Legal Trade. The Committee For Legal Trade
has 22 member companies that produce bedroom furniture in the United
States. I am testifying today on behalf of Vaughan-Bassett and the
Committee For Legal Trade.
Beginning in about 2001, U.S. imports of wooden bedroom furniture
from China began to flood the U.S. market. In most cases, the Chinese
producers did not offer anything new; they simply copied furniture
styles that were already successful in the U.S. market and offered them
at much lower prices. Furniture became China's number one export to the
United States, measured by the number of containers shipped. As a
result, our industry lost enormous sales and a large share of our
market to cheap imports from China.
In 2003, we learned for the first time that a trade remedy law--the
antidumping law--was available to combat unfairly priced imports. We
formed the Committee for Legal Trade and filed an antidumping petition
against imports of wooden bedroom furniture from China in October 2003.
Because of the Commerce Department's long-standing practice not to
apply the countervailing duty law to non-market economy countries, we
did not file a countervailing duty petition against Chinese government
subsidies.
In our antidumping case, the U.S. International Trade Commission
investigated the impact of dumped imports from China during January
2001-June 2004. During that period, imports from China, having a landed
value of about $3.8 billion, contributed to the closing of over 65 U.S.
furniture factories that made bedroom furniture and that employed over
18,000 workers. The Commission made a unanimous determination in late
2004 that our industry was materially injured as a result of dumped
imports from China, and an antidumping order was imposed in January
2005.
Although the Commerce Department determined in its investigation
that imports from China were being dumped, the dumping margins it
calculated were disappointing. The average dumping margin, and
resulting antidumping duty, was only about 7 percent. That duty has
certainly helped, but it has not come close to offsetting the amount by
which the Chinese prices undercut our prices. Also, the antidumping
duty has done nothing to offset the subsidies granted by the Chinese
government to its furniture industry.
Since filing our antidumping petition, we have learned that Chinese
subsidies for furniture makers include numerous tax breaks for
exporters, for companies located in specially designated economic
development zones, and for the purchase of machinery. Other subsidies
include free-land use to attract investment, reduced duties on material
inputs, and monetary incentives provided as part of an export promotion
program. Input suppliers such as lumber companies also receive
substantial subsidies, including more than $3 billion in grants in
2001-2004, low-cost and even interest free loans, debt forgiveness, and
numerous tax breaks. These subsidies to upstream suppliers are
particularly important because China does not enjoy any natural
competitive advantage in timber, but the Chinese government has decided
to create advantages by funding the development of fast-growth forests
and processing facilities.
Mr. Chairman, wooden furniture is made from lumber, which comes
from trees. The Chinese government owns the land where the trees grow,
owns many of the mills which produce the lumber, and owns many of the
factories that produce the furniture. It subsidizes the operations that
it does not own. In addition, the Chinese government manipulates and
undervalues its currency, giving its furniture exporters a 30-40
percent price advantage on top of all of the other subsidies.
These government preferences allow Chinese furniture producers to
sell their products at extremely low prices, resulting in injury to
U.S. furniture makers and U.S. workers. As a businessman, it makes no
sense to me that the U.S. government would not apply all available
trade remedies to imports from China. Giving China a free pass when it
comes to subsidizing their export-oriented industries is neither good
trade policy nor good economics, especially when the U.S. trade deficit
with China is at record levels.
The American Furniture Manufacturers Committee for Legal Trade and
Vaughan-Bassett Furniture urge this Committee to make sure that
Commerce applies the countervailing duty law to China and to do all
that it can to make our trade laws stronger to address dumped and
subsidized imports from China.
Chairman LEVIN. Thank you.
Mr. Tyrone.
STATEMENT OF JAMES C. TYRONE, SENIOR VICE PRESIDENT OF SALES
AND MARKETING, NEWPAGE CORPORATION, DAYTON, OHIO
Mr. TYRONE. Mr. Chairman, Mr. Herger, Members of the
Subcommittee, I would like to thank you for the opportunity to
appear before you today on the issue of trade with China. My
name is Jim Tyrone and I am Senior Vice President of Sales and
Marketing at NewPage Corporation.
NewPage was founded in 2005 when the company purchased
certain of the paper assets of MeadWestvaco. NewPage produces
several types of paper, including coated free sheet, a high-end
paper used in annual reports, promotional brochures, and other
types of publications. NewPage is headquartered in Dayton, Ohio
and we have production facilities in Rumford, Maine; Wickliffe,
Kentucky; Luke, Maryland; and Escanaba, Michigan; and a
converting and distribution facility in Chillicothe, Ohio.
Coated free sheet paper is a multi-billion dollar U.S.
industry. NewPage itself employs over 4,000 workers in the
United States. I would like to speak specifically today about
subsidies to coated paper manufacturers in China, and the
critical need for the United States Government to address and
offset these subsidies by using all tools at its disposal,
including U.S. countervailing duty law.
Unfair foreign competition has made it increasingly
difficult for us to maintain the optimism we had at the
founding of our company. In fact, NewPage recently had to
permanently shut down an entire paper line at its Luke,
Maryland facility as a result of unfair foreign competition.
The government of China provides very significant subsidies
to its domestic paper producers, and these subsidies are
injuring competing U.S. paper producers. Starting in the late
nineties, the government of China targeted its domestic coated
paper industry for rapid development. As part of this
development plan, the Chinese government provides low-cost
policy loans through government-owned banks. It also provides
grants for the development of new paper capacity, and tax
breaks based on export performance and domestic equipment
purchases.
Moreover, government banks in China forgave at least $660
million in loans they had provided to China's largest paper
producer, Asia Pulp & Paper, when that company declared
bankruptcy in 2003. These subsidies have had the effect of
vastly expanding China's capacity to produce coated free sheet
paper. As a result, in the United States, Chinese coated free
sheet market share has increased by an average of 75 percent
annually over the past 4 years based on publicly available data
despite having to ship their products thousands of miles to
reach the U.S. market.
In the face of increased unfair foreign competition,
NewPage filed anti-dumping and countervailing duty cases on
coated free sheet paper against China and two other countries,
South Korea and Indonesia, in October of last year. In
December, the International Trade Commission reached a
preliminary determination that the United States industry is
being injured as a result of the dumped and subsidized imports
from these countries. The Department of Commerce is now in the
midst of its own investigation of the cases.
The Department of Commerce investigation into subsidies to
Chinese paper producers is a historic one. In the mid-eighties,
Commerce found that it could not apply the countervailing duty
law to address subsidies in Czechoslovakia and Poland based on
its conclusion that subsidies in these non-market economies did
not make sense at that time.
However, much has changed in the global trade regime over
the last 20 years. China has become the world's third largest
exporting economy, and the current economic system in China is
vastly different than the command economies of the former
Soviet bloc countries.
Also, as noted earlier, China joined the WTO in 2001, at
which time it agreed to abide by global trading rules,
including the rules on subsidies, in exchange for increased
access to foreign markets. Moreover, while China retains many
of the elements of a non-market system, it has also instituted
policies to effect the development of particular industries
through a host of subsidy programs. Basically, China is a
highly subsidized non-market economy.
Commerce has the authority to apply countervailing duty law
to China right now, and should do so. Recently the People's
Republic of China (PRC) argued in the context of our case on
coated free sheet paper that the Commerce Department is legally
prohibited from applying the countervailing duty law to imports
from China.
It is inconceivable to me that China would expect to garner
all the benefits from WTO membership and yet argue that it is
not bound by the responsibilities that WTO participation
carries with respect to subsidies, responsibilities it
specifically agreed to in 2001.
I would urge the Members of this Committee to help ensure a
level playingfield by making clear to the Department of
Commerce and to the People's Republic of China that the
countervailing duty does in fact apply to China. I thank you
for your attention and would be pleased to answer any
questions.
[The prepared statement of Mr. Tyrone follows:]
Statement of James C. Tyrone, Senior Vice President of Sales and
Marketing, NewPage Corporation, Dayton, Ohio
Mr. Chairman, Mr. Herger, and Members of the Subcommittee:
I would like to thank you for the opportunity to appear before you
here today on the issue of trade with China. My name is Jim Tyrone and
I am the Senior Vice President for Sales and Marketing at NewPage
Corporation. NewPage was founded in 2005, when the company purchased
certain of the paper operations of MeadWestvaco. NewPage produces
several types of paper including coated free sheet, a high end paper
used in annual reports, magazines, promotional brochures, coffee table
books and other types of publications. NewPage is headquartered in
Dayton, Ohio, and has production facilities in Rumford, Maine;
Wickliffe, Kentucky; Luke, Maryland; and Escanaba, Michigan; and a
converting and distribution facility in Chillicothe, Ohio. Coated free
sheet paper is a multibillion dollar United States industry. NewPage
itself has more than 4000 employees in the United States. I would like
to speak specifically today about subsidies to paper producers in
China, and the critical need for the United States government to
address and offset these subsidies by using all the tools at its
disposal including the U.S. countervailing duty law.
NewPage was founded with a great deal of optimism about the future.
In addition to being the largest coated paper manufacturer in the
United States, we have efficient, state-of-the-art mills, skilled and
dedicated employees, strong relationships with our customers,
strategically located mills and distribution facilities and growing
markets for our products. However, unfair foreign competition has made
it increasingly difficult for us to feel optimistic. In fact, NewPage
recently had to permanently shut down an entire paper line at its Luke,
Maryland facility as a result of unfair foreign competition.
The government of China provides very significant subsidies to its
domestic paper producers, and these subsidies are injuring competing
U.S. paper producers. Starting in the late 1990's the government of
China targeted its domestic coated paper industry for rapid
development. As part of this development plan, the Chinese government
provides low-cost policy loans through government-owned banks. It also
provides grants for the development of new paper capacity, and tax
breaks based on export performance and domestic equipment purchases.
Moreover, government banks in China forgave at least $660 million in
loans they had provided to China's largest paper producer, Asia Pulp &
Paper, when that company declared bankruptcy in 2003. The PRC has also
fostered the development of timber and pulp production in China--the
key inputs into paper production--with similar subsidized incentives.
These subsidies have had the effect of vastly expanding China's
capacity to produce coated free sheet paper. Much of this subsidized
production finds its way into export markets, particularly the U.S.
market, the most open in the world. Government subsidies allow Chinese
producers to sell at very low prices, permitting them to undercut
prevailing prices in the United States, and in third country markets.
This, in turn, has allowed Chinese producers to dramatically increase
their global market share. In the United States, Chinese coated free
sheet market share has increased by an average 75 percent annually over
the past four years based on publicly available data, despite having to
ship their products thousands of miles to reach the U.S. market
Ironically, and in contrast to U.S. paper producers, China has no
natural advantage in the production of paper. It does not have an
abundant supply of the requisite inputs, and must import much of the
pulp that it uses to make paper. As a result, the government of China
is now essentially underwriting the development and expansion of fast-
growth forests in China, to provide the timber and pulp that their huge
paper companies now need to produce paper.
In the face of increased unfair foreign competition, NewPage filed
antidumping and countervailing duty cases on coated free sheet paper
against China, and two other countries, South Korea and Indonesia, in
October of last year. In December, the International Trade Commission
reached a preliminary determination that the United States industry
producing coated free sheet paper is injured as a result of dumped and
subsidized imports from these countries. The Department of Commerce,
which has the responsibility to investigate allegations of dumping and
subsidization, is now in the midst of its own investigation.
The Department of Commerce investigation into subsidies to Chinese
paper producers is an historic one. In the mid-1980's, Commerce found
that it could not apply the countervailing duty law to address
subsidies in Czechoslovakia and Poland, based on its conclusion that
subsidies in those ``nonmarket'' economies did not make sense at that
time. Commerce has not since applied its countervailing duty law to
nonmarket economies. However, much has changed in the global trade
regime over the last twenty years. China has become the world's third
largest exporting economy, and the current economic system in China is
vastly different than the command economies of the former Soviet bloc
countries. Moreover, China joined the WTO in 2001, at which time it
agreed to abide by global trading rules--including the rules on
subsidies--in exchange for increased access to foreign markets.
Moreover, while China retains many of the elements of a nonmarket
system, such as a pegged exchange rate, control over labor and lending
rates, and the prices of certain inputs, it has also instituted
policies to effect the development of particular industries through a
host of subsidy programs implemented at the central and local
government levels. Basically China is a highly subsidized non-market
economy. It is imperative that the United States utilize the
countervailing duty law to address these subsidies.
Despite its WTO accession, and specific WTO commitments with
respect to government subsidies, it is truly incredible that the PRC is
arguing in the context of our case on coated free sheet paper, that the
Commerce Department is legally prohibited from applying the
countervailing duty law to imports from China. It is inconceivable to
me that China would expect to garner all the benefits from WTO
membership and yet argue that it is not bound by the responsibilities
that WTO participation carries with respect to subsidies--
responsibilities it specifically agreed in 2001 to uphold.
As I noted, Commerce has the legal authority to apply the CVD law
to China. But we welcome all efforts to offset subsidies, including
legislative efforts by this Committee and the WTO case brought by the
U.S. Trade Representative. The USTR has requested consultations
regarding nine subsidy programs in China that are prohibited under WTO
rules. NewPage believes that Chinese paper exporters benefit from
several of these subsidies, which we alleged in our countervailing duty
petition.
I would urge the members of this Committee to help ensure a level
playing field by making clear to the Department of Commerce, and to the
People's Republic of China, that the countervailing duty law does, in
fact, apply to China. I thank you for your attention and would be
pleased to answer any questions.
Chairman LEVIN. Thank you so much.
Dr. Navarro.
STATEMENT OF PETER NAVARRO, PH.D., PROFESSOR, UNIVERSITY OF
CALIFORNIA, IRVINE, THE PAUL MERAGE SCHOOL OF BUSINESS, IRVINE,
CALIFORNIA
Mr. NAVARRO. Thank you for the invitation. My message to
you today is a simple one. The Administration has
underestimated the scope of the China problem and overestimated
its ability to solve it. The ball is in Congress's court.
What I would like to do for you today is answer the
question: What do you do? I think the policy framework I have
offered in my table in the written testimony which is projected
on your screen gives you an idea of the scope of this problem
and a policy framework. Let me walk through this real quickly.
The first category is subsidies and tax preferences, which
the gentlemen have been talking about. These include things
like subsidized energy, water, telecommunications, free land,
free capital, value-added tax rebates. The important point to
grasp here is that even if the Trade Representative was wildly
successful in their recent complaints, it is only 17 percent of
the problem.
The same problem is with currency manipulation. This was a
subject, for example, of the Schumer-Gramm legislation that was
put before you. Unfortunately, the media perception was that
somehow was a magic bullet to the problem. When you net out the
import content, it is only 11 percent. It needs to be done,
currency reform, but it is not the magic solution.
The third problem was the subject of the first panel. Let
me say this: The first panel did not mention, I think, the most
important point regarding piracy and counterfeiting. It is not
just about the fact that American movie companies can't sell
their movies in China because they are copyrighted. It is the
fact that counterfeiters and pirates get real cost advantages
relative to us here in America.
They don't have to pay R&D; that hurts the auto
manufacturers and the pharmaceutical companies. They don't have
to pay marketing expenses for branding. Look, wouldn't we all
in America love not to have to pay Microsoft and Oracle and SAP
for our software needs? That is a critical point that needs to
be grasped.
Lax health and safety regulations, as well as lax
environmental regulations: China is the most dangerous place to
work in the world. It is the dirtiest country in the world. The
problem here is that these lax standards provide real cost
advantages to Chinese manufacturers. They don't have to worry
about dumping toxic chemicals in rivers. They don't have to put
scrubbers on their power plants. They don't have to train their
people. They don't put filters in their factories. The result
is a real cost advantage.
The sixth and seventh what I call the drivers of the
``China price'' are in the category of what I refer to as mixed
mercantilism rather than pure mercantilism. We have got both
labor costs and foreign direct investments here.
Labor, look, China has a comparative advantage in labor.
There is no question about it, but to the extent that they
don't have adequate health and safety regulations, that is an
issue. To the extent that they use slave labor, that is an
issue. They have contracts which are effectively indentured
servitude. They do not enforce the minimum wage which they have
on the books. These all factor into their labor advantage and
it hurts American workers.
The last thing here is foreign direct investment. Foreign
direct investment is running at over $60 billion a year right
now in China, and going up to 100 billion. When you have FDI,
you have got tremendous technology transfer, and you have got
tremendous acceleration of best management practices. You wed
that to a cheap labor force, and that is a powerful driver.
That is a comparative advantage they have.
Yet there still are mercantilist elements associated with
that. For example, 20 to 30 percent of the so-called foreign
direct investment in China is really attributable to what they
call the ``round tripping'' of capital. It comes from China,
out through Hong Kong, and it comes right back. It is attracted
by a variety of subsidies and tax preferences, which violate
the WTO, which are unfair trading practices, and which
partially account for their advantage there.
The point I am trying to make here is simply that if you
are going to do a good job of addressing the China problem, you
are going to need to take an omnibus approach. You can't do
this in a piecemeal fashion. You can't let the trade rep to
subsidies. You can't do just a bill on piracy. You can't pass
just a bill on currency manipulation because it is all these
things. These folks here who are trying to run companies are
dying by a thousand cuts.
So I would hope that the Congress would approach this in a
fashion. I do not believe that the Administration is capable of
handling this. They are distressed by other events, and plus
watching particularly the Treasury Secretary in his fruitless
efforts to bring China to the bargaining table has been very
discouraging.
So, I salute you, gentlemen and ladies, for having this
here today. I would be happy to answer any of your questions,
but please, this is a problem that we need to confront head-on.
[The prepared statement of Mr. Navarro follows:]
Statement of Peter Navarro, Ph.D., Professor, University of California,
Irvine, The Paul Merage School of Business, Irvine, California
Mr. Chairman and members of the Subcommittee. My name is Peter
Navarro, and I want to thank the members and staff of this subcommittee
for the opportunity to testify today on the crucial issue of U.S.-China
trade relations--specifically the role of a complex web of mercantilist
export subsidies in providing China with an unfair competitive
advantage over U.S. manufacturers.
As a biographical note, I am a business professor at the University
of California-Irvine and hold a PhD in economics from Harvard
University. My research has appeared in academic journals ranging from
the Journal of Economic Perspectives, the Journal of Business, and the
Rand Journal to the Harvard Business Review and China Perspectives. I
am also the author of a number of books on economics and public policy,
including The Coming China Wars: Where They Will Be Fought, How They
Can Be Won (Financial Times, 2006).
My value-added in this proceeding will be to provide members with a
conceptual framework with which to understand the broad scope of
Chinese mercantilist practices as well as to provide a more expansive
definition of what constitutes an unfair ``mercantilist export
subsidy.''
In this testimony, I will identify the eight major drivers of the
so-called ``China Price,'' which is a short hand term for Chinese
competitive advantage in world markets. Most importantly, I will
illustrate how fully 7 of these 8 China Price drivers are, in turn,
driven by a complex web of direct, indirect, and hidden mercantilist
export subsidies.
I shall conclude this testimony by urging Congressional
policymakers not to compartmentalize the various factors contributing
to China's unfair trade practices nor deal with them in piecemeal
policy fashion. Instead, I urge Congressional leaders to address
Chinese mercantilism in a comprehensive and integrated fashion that
hits all mercantilist points of the China Price compass. The framework
offered in this testimony may be helpful in the policy architecture and
design.
China's Clear and Present Danger to America
By practicing a highly evolved form of 18th century ``beggar thy
neighbor'' mercantilism, China is emerging as a 21st century economic
superpower. While consumers around the world have benefited from the
flood of cheap goods, China's broad portfolio of unfair trade practices
has resulted in the loss of millions of jobs in countries ranging from
the United States and Mexico to Brazil and Lesotho. Chinese
mercantilism is also depressing wage and income levels worldwide while
China's exploitation of lax environmental and health and safety
standards as competitive drivers is killing millions of Chinese workers
and citizens and generating significant regional and global pollution.
To understand both the breadth and depth of Chinese mercantilism
and its far ranging effects, it is essential to first understand the
mercantilist roots of the so-called ``China Price'' and the complex web
of direct, indirect, and hidden export subsidies that have so sharply
honed China's global competitive advantage. The China Price refers to
the ability of Chinese manufacturers to undercut global competitors by
as much as 50% or more over a wide range of manufactured goods. Today,
as a result of this powerful ``weapon of mass production,'' China has
emerged as the world's blue collar ``factory floor.''
The rapidity with which China has captured a wide range of markets
is breathtaking: Already, China controls over 70% of the world's market
share for DVDs and toys, more than half of the share for bikes,
cameras, shoes, and telephones; and more than a third for air
conditioners, color TVs, computer monitors, luggage, and microwave
ovens. It has established dominant market positions in everything from
furniture, refrigerators and washing machines to jeans and underwear
(yes, boxers and briefs). As it moves inexorably up the value chain,
China is now even making rapid inroads into the global auto market.
In wielding the China Price to capture these markets, China has all
but gutted many segments of blue collar manufacturing in countries
around the world. In this regard, it's one thing for America to lose
much of its blue collar manufacturing base to China. If the U.S. loses
its white collar science and technology base too, it will be Americans
living the peasant life rather than the Chinese.
Alarmingly, under the catalyst of Chinese mercantilism, the shift
of America's white collar science base has already begun. For example,
the American biotech and pharmaceutical industries are already well on
their way to offshoring much of their research and development and
production to China. Indeed, today, there are more than 300 biotech
companies in China, and nearly every major pharmaceutical company has
built, or is building, a research center in China.
An Expanded Definition of ``Export Subsidy''
Given current trends, it is crucial that U.S. policy makers
cultivate a much more sophisticated understanding of the phenomenon of
the China Price--as well as its mercantilist foundation and roots. In
cultivating this understanding, it is equally essential for U.S.
policymakers to use a broad definition of what truly constitutes an
unfair ``mercantilist export subsidy.'' The clear danger of using an
overly narrow definition is that policymakers will compartmentalize
various aspects of Chinese mercantilism, e.g., currency manipulation,
IP protection, and then attempt to deal with these issues legislatively
in a piecemeal fashion.
In this regard, while there are various legal and technical
definitions for what constitutes an illegal or prohibited export
subsidy in forums like the GATT and the WTO, the most useful economic
definition for policymaking purposes is an expansive definition of a
mercantilist export subsidy that includes any direct or indirect
government action or inaction that unfairly stimulates export activity
at the expense of trading partners.
For example, a direct government action would be the use of tax
rebates for exporters while an indirect action would be currency
manipulation, which is designed to undervalue a country's exchange rate
and thereby gain competitive advantage. More subtly, a government
inaction would be the sanctioning of counterfeiting and piracy despite
laws established to prevent such practices. Each of these direct and
indirect government actions and inactions may be thought of most
broadly as ``mercantilist export subsidies'' because their intent is to
encourage the country's export trade in ways which are clearly outside
the bounds of free and fair trade.
The table on the next page provides an overview of the eight major
drivers of the China Price and the various direct, indirect, or hidden
mercantilist export subsidies used by China to capture markets in world
trade. This table is based on a research project I conducted with a
large team of MBA students over a year long period at the University of
California-Irvine (Download The Report of the China Price Project at
www.peternavarro.com). The purpose of that project was to answer these
two questions: What are the major sources of Chinese competitive
advantage in world markets and to what extent is Chinese
competitiveness driven by fair versus unfair trading practices.
Column One of the table on the next page identifies the various
``Pure Mercantilism'' and ``Mixed Mercantilism'' drivers of the China
Price while Column Two indicates their relative importance in the China
Price equation. The third column may be of most interest to this
subcommittee. It identifies the array of mercantilist export subsidies
associated with each China Price driver.
[GRAPHIC] [TIFF OMITTED] T0304A.010
The first five China Price drivers represent a very pure form of
Chinese mercantilism and account for over 40% of China's competitive
advantage. These drivers include a pervasive system of subsidies and
tax preferences designed to stimulate the export economy, currency
manipulation which distorts the dollar-yuan exchange rate relative to
market forces, government-sanctioned counterfeiting and piracy, and a
set of lax, and laxly enforced, environmental and health and safety
regulations that fall far short of international norms and standards.
The sixth and seventh Chinese Price drivers are Foreign Direct
Investment and Low Labor Costs. These drivers may be characterized as
``Mixed Mercantilism'' because of various mercantilist elements which
enhance what would otherwise be a fair comparative advantage. (The
final driver, not pictured in the table, is a very sophisticated form
of industrial network clustering. See Report of the China Price Project
for details, www.peternavarro.com.)
China Price Driver #1: Subsidies, Tax Preferences, and Other WTO
Violations
Under state control, many Chinese state-owned manufacturers are
operating with the benefit of state-sponsored subsidies, including:
rent, utilities, raw materials, transportation, and telecommunications
services. That is not how we define a level playing field.
Former U.S. Department of Commerce Secretary Donald Evans
The first China Price driver encompasses a wide, but often
difficult to detect, array of mercantilist subsidies and tax
preferences that provide Chinese exporters with reduced costs. This
array includes subsidized energy and water as well as preferential
access to free or cheap land or rent.
Despite alleged reforms, China's state-owned banks also continue to
hold a large portfolio of non-performing loans. These NPLs often have
been issued in a preferential manner and without expectation of
repayment, providing many Chinese enterprises with essentially free
money. Despite numerous WTO-related complaints, China also continues to
use an extensive tax rebate system for its export industries.
China Price Driver #2: Currency Manipulation
To maintain its undervalued currency--and thereby sell it exports
cheap and keep foreign imports dear--China maintains a fixed currency
peg between the U.S. dollar and the yuan. To maintain that peg, China
must recycle large sums of its surplus U.S. dollars gained in the
export trade back into the U.S. bond market. Through such activity,
China has become the de facto ``central banker'' of the U.S., with its
net capital inflows roughly equal to that needed to finance the U.S.
budget deficit.
Chinese currency manipulation is an indirect export subsidy because
it artificially depresses the price of Chinese exports while inflating
the price of exports from the U.S. This is not the only effect of
Chinese currency manipulation, however.
More subtly, China's massive recycling of its surplus U.S. dollars
back into the U.S. bond market has helped keep long term interest rates
and mortgage rates artificially low. This, in turn, has helped
transform the typical U.S. home into an ``ATM machine.'' Indeed, many
Americans have become ``serial refinancers'' of their homes. By taking
equity out of their homes, they have managed to boost their consumption
in the short run, and much of what these serial refinancers spend is on
cheap Chinese imports. The practical effect has been a short run boost
to the economy. Longer term, this is a dangerous situation because it
is saddling U.S. consumers with more and more debt and U.S. homeowners
with more and more risk of defaulting on their mortgages.
China Price Driver #3: Counterfeiting and Piracy
China is the piracy capital of the world. It accounts for \2/3\ of
all the world's pirated and counterfeited goods and fully 80% of all
counterfeit goods seized at U.S. borders.
Chinese counterfeiting and piracy help lower production costs for
Chinese manufacturers relative to competitors in a number of ways that
vary in degree by industry. For example, Chinese counterfeiters don't
have to pay for R&D costs. This has been a particular stimulant to
sectors like autos and pharmaceuticals. Nor do Chinese pirates who
steal software have to pay for IT costs while Chinese counterfeiters
save on marketing costs because they don't have to build brand.
Chinese counterfeiting and piracy is a classic example of how
government inaction leads to a mercantilist export subsidy. Despite
highly publicized periodic crackdowns on counterfeiting and piracy by
the Chinese government, much of it remains state-sanctioned. Indeed,
stripped of Chinese rhetoric, counterfeiting and piracy represent a
cornerstone of the country's discretionary macroeconomic policies.
In this regard, it has been estimated that anywhere from 20% to as
much as a third of China's GDP is derived from counterfeit and pirate
activity. This intellectual property theft generates tens of millions
of jobs while keeping prices and inflation low. That's why, absent
outside pressure from the U.S. and other members of the global
community, China will continue to merely give lip service to IP
protection.
China Price Driver #4: Lax Health and Safety Standards
Lax health and safety standards represent an important hidden
mercantilist export subsidy. Under China's lax regulatory regime, China
has become one of the most dangerous places to work in the world.
The highest risk industries in China include building materials,
chemicals, coal production, machinery manufacture, metallurgy,
plastics, and textiles. Diseases ranging from silicosis and brown lung
to a variety of cancers caused by the ingestion, inhalation, or contact
with toxic chemicals and waste are endemic. Workplace injuries are
endemic.
The cost advantages to Chinese exporters derived from this lax
health and safety regime range from the use of cheaper equipment for
workers and fewer safety-related expenses to savings on training and
safety-related large capital expenditures. For example, Chinese textile
companies are unlikely to invest in anti-noise or dust control
equipment. Chinese coal mining companies tend to skimp on masks,
goggles, and emergency rescue facilities while a wet drilling system
costs as much as 60% more than a dry drilling system but significantly
reduces hazardous dust emissions.
In addition, the compensation of Chinese workers who are maimed or
dismembered in the production process is often reduced or withheld by
companies in China. This callous behavior results in a reduction in
liability costs for Chinese exporters relative to global competitors.
China Price Driver #5: Lax Environmental Standards and Enforcement
China's lax environmental regulations and weak enforcement likewise
provide Chinese exporters with a hidden mercantilist export subsidy.
There is, however, some irony in using the term ``hidden'' here.
China's air and water pollution are highly visible within China--with
Beijing, Shanghai, and China's industrial heartland often enveloped in
a toxic shroud. Meanwhile, America's air basins are also being
despoiled by Chinese ``chog,'' an equally toxic combination of smog,
particulate and hazardous substances like mercury, while much of the
acid rain falling in both Japan and South Korea is ``made in China.''
China lax environmental regime provides a variety of cost
advantages to its industrial sector. Enterprises save money on
protective equipment for workers. Many don't have to invest in
pollution control technologies while those that do invest save money by
not operating the equipment. Waste disposal costs are also considerably
reduced. The net result is a significant reduction in compliance costs
relative to competitors.
China Price Driver #6: Foreign Direct Investment
Among developing nations, China has become the leading destination
of Foreign Direct Investment (FDI). Since 1983, FDI has grown from less
than $1 billion a year to over $60 billion. 72% of China's FDI targets
manufacturing.
This China Price driver fits into the category of ``Mixed
Mercantilism.'' This is because that while much of FDI is attracted to
China because of China's comparative advantage in labor and the promise
of a burgeoning new market, FDI is also arriving on China's shores
because of various mercantilist aspects of the Chinese economy.
For example, both the aforementioned lax health and safety
standards and weak environmental laws and enforcement have helped
attract FDI from countries like Japan, South Korea, Taiwan, and the
U.S. where standards are much higher. This observation illustrates an
undesirable synergy between China's mercantilist policies and the
attraction of FDI.
Equally troubling is the pervasive practice of the ``round
tripping'' of Chinese capital. In particular, 20% to 30% of China's FDI
is estimated to be of domestic origin. It is the result of the ``round
tripping'' of mainland Chinese capital, primarily through Hong Kong
(and also the Virgin Islands). This round tripping of capital is
clearly mercantilist in nature and quite contrary to the spirit and
tenets of the WTO. This is because it is driven by the special
preferences awarded to FDI in the form of lower tax rates, land use
rights and subsidies, administrative support, and other subsidies as
well as by a desire to evade foreign exchange controls.
China's catalytic FDI provides a variety of competitive benefits.
It finances the transfer of the most technologically advanced
production and process technologies. It has brought with it managerial
best practices and skills as many FDI-financed enterprises are managed
by foreign talent. FDI is also often tied to the improvement of both
marketing and distribution skills. When all of these attributes are
tied to one of the least expensive labor forces in the world, FDI
becomes a powerful competitive driver. To the extent that a significant
component of FDI is driven by mercantilist elements, it represents a
hidden mercantilist export subsidy.
China Price Driver #7: Low Labor Costs
The China Price driver of low labor costs likewise fits into the
category of ``Mixed Mercantilism.'' While China has an undeniable
comparative advantage in its well-disciplined and well-educated
workforce, China's low wage costs are also driven by significant
mercantilist elements.
The aforementioned lax health and safety standards represent one
such element. In addition, there are the well-known problems of the use
of slave labor, the specification of labor contracts in a manner which
constitutes indentured servitude, the failure to pay the minimum wages
specified under law, and the lack of any right to freely associate or
organize into bargaining units or unions. Together, Chinese
mercantilism in the workplace provides Chinese exporters with an
additional unfair advantage over competitors.
Summary and Conclusions
The picture that emerges from this analysis of the China Price and
its economic drivers is that of a picture of a country singularly
intent on export-driven growth that uses a complex web of direct,
indirect, and hidden mercantilist export subsidies to beggar its
neighbors. The policy framework strongly suggested by this China Price-
Mercantilist Export Subsidy analysis is one that requires a
comprehensive, rather than piecemeal, policy approach.
In particular, rather than deal with each of the various aspects of
Chinese mercantilism such as IP protection or currency manipulation or
labor abuses with separate pieces of legislation, it may be far more
useful to develop an comprehensive, omnibus bill that hits all points
of the mercantilist China Price compass. It is to this goal that I urge
this subcommittee to direct all possible energies.
Chairman LEVIN. Thank you very much.
Well, there are eight of us, and there may be one or more
joining us. We are going to try to finish by 12:30. Why don't
we each take 3 minutes. I just want to take one minute, and
then maybe Mr. Herger, but then we will call on those who were
not here or able to question the first panel, and then we will
come back.
You were chosen on a bipartisan basis. I think Mr. Bassett
said it so well: The job of you in the private sector, your job
is to compete, and our job in the Government is to create a
level playing field; if not a level playing field, totally
level, a playable playing field. I believe that the subsidy
area is one of the most vivid examples of the failure of the
Government and this Administration to do so.
China went into the WTO December 2001. It has been more
than 5 years. There were some distinct responsibilities on
their part, including to file a subsidy document within the
first year. There was a failure to do that and failure to press
them to do that in any respect in the WTO, including the annual
report that we wrote into the China PNTR bill specifically.
So here we are today with massive subsidization on their
part in violation of their two obligations, and a failure to be
active. It has been an example of a passive approach, feeling
that it will work out, that the market will work out its own
problems, don't touch it. I think what you have said is that it
is our responsibility to enforce the rules so that the market
can work fairly. That hasn't happened.
Mr. Herger.
Mr. HERGER. Thank you very much, Mr. Chairman. I think the
point that Chairman Levin made really is right on. We need to
be enforcing these rules. I think the big question is, we see
China coming from an economy that was maybe early 20th century,
trying to move into the 21st Century here within a few years.
So, I think the real question is: How do we get there? How
do we get where we do have this access, where we are enforcing
the rules? I think that is really what is very important, that
in the process, we don't cut off our nose to spite our face,
but we make sure we are getting real progress that we are able
to--be able to note and be able to chart.
Mr. Vargo, I have a two-part question. You mentioned that
U.S. productivity and innovation can outweigh China's labor
advantage. I would like you to elaborate, and also focus on
China's labor laws. China has been accused of not providing
worker rights, e.g. child labor or mandatory prison labor,
which is something we can unanimously condemn.
Is that the source of China's advantage? If China adopted
and enforced every ILO standard and convention, would it
immediately lose its cost and labor advantage?
Mr. VARGO. Mr. Herger, I don't have the answer to that.
Certainly, their labor laws are very, very different from ours.
You read so many instances of terrible working conditions. The
overall wage level is quite low in China.
My point is that that is not the reason why they can sell
products in the United States as inexpensively as they are
being sold. Even if Chinese labor were free, if the average
cost of labor is 10 percent of our product and the cost of
transportation from China is 10 percent, that wipes it out.
There are other things going on here, which is why we are
concerned about currency and why we are particularly concerned
about subsidies. We do not know what will happen with the
elimination of these subsidies. We know they have to get rid of
them. They are against our interest. They are against China's
obligations.
I think when they get rid of them, we are going to see
quite a difference. As I look at these, they can be very, very
potent. There are other things I said--intellectual property,
currency, and others.
Mr. HERGER. Yes. Anyone else have a comment, like to
comment on this?
Mr. NAVARRO. Well, I would just refer you to that table.
Labor costs are about 40 percent of the China price advantage.
If you were to tighten up everything and kind of have American
rules over there, it would not solve the problem. There are
always other things going on, and subsidies and currency
manipulation are easily as or more important than the issue of
labor.
Mr. HERGER. Thank you very much.
Chairman LEVIN. All right. Let's follow our procedure that
we outlined. Mr. Reynolds, you will be next, if that is okay.
He didn't have a chance the first crack around.
Mr. Reynolds.
Mr. REYNOLDS. Some firms are impatient with the U.S. trade
remedies law in context with China because it is expensive to
bring many of these cases, and China seems to be such a
pervasive subsidizer of the economy. Naturally, the firms would
prefer the government to bear the expense of bringing WTO cases
to stop subsidization.
What is the difficulty in providing USTR with evidence
sufficient to bring WTO cases against a broad swath of
subsidies, and not just the ones that are part of the recent
China subsidy case? Any of the panel wish to comment on that?
Mr. NAVARRO. Let me say two things about that. First of all
is that the WTO rules really overly narrowly define just what a
subsidy is. So, the kinds of things that are done, it is
difficult to pin it down. It is like trying to nail water to a
wall.
The other thing is the issue of Chinese transparency. The
fact that they haven't complied since 2001 with the
transparency and report portion of that agreement has made it
very, very difficult for us to respond. So, those two problems
alone make it very difficult.
Mr. VARGO. Could I add to that? What you say is certainly
true. These trade cases are expensive. They are lengthy. For
our members, particularly our smaller members, it is much more
feasible to have WTO cases brought.
It is very difficult for our members--again, especially our
smaller members--to go do investigations and see what is going
on. So, we, as I noted in my prepared statement, want to see
USTR and Commerce investigate these more fully and take a
broader range of cases.
We are very pleased that this first case is being brought
focusing on prohibited export subsidies, which are, I think,
the easiest to prove, but we want more. We also want--even
though the cases are expensive, we want companies to have the
option of being able to bring the countervailing duty cases. We
also want the Administration to use section 421.
Chairman LEVIN. I think Mr. Bassett wanted to say
something.
Mr. REYNOLDS. I am sorry, I didn't hear the Chairman.
Chairman LEVIN. What?
Mr. REYNOLDS. I didn't hear you.
Chairman LEVIN. I think Mr. Bassett wanted to comment on
that. You shook your head. Mr. Bassett, did you want to comment
on that issue?
Mr. BASSETT. I only have one comment. I thoroughly enjoyed
listening to the professor give us the percentages of what each
of these advantages are. I have never had them before, but I am
going to contact him and get this in writing.
I would implore you people to do one thing. He wants you to
do everything. If you can't do everything, do something.
Chairman LEVIN. Amen.
Mr. BASSETT. Exchange part of this puzzle is out there. I
think so often, if we can't put the puzzle together, nothing
happens.
Chairman LEVIN. I thought you would have words of wisdom.
No, seriously. I think you sum it up beautifully, if I might
say so.
Mr. Blumenauer, Mr. Larson isn't back. Mr. Blumenauer?
Mr. BLUMENAUER. Thank you, Mr. Chairman. Again, I think
this panel was extraordinarily helpful in terms of getting at
the big picture from a variety of different perspectives. I
agree with Mr. Bassett. I thought Dr. Navarro's distinctions of
the various areas of advantage suggest why we do need to have a
comprehensive approach. I hope that we don't just do something,
but that we are able to look at it in a comprehensive fashion.
Mr. Bassett, in response to what you are saying, I think we
have an obligation to tell you in the business community, the
American companies and their workers, and the Chinese, that we
are serious about playing by these rules.
I found compelling the testimony about the non-market
exclusion no longer making any sense, if it ever did, and I am
hoping we can deal with something in terms of a broader
application of the countervailing duties.
I have, I guess, one question. I am listening in terms of
what happens with steel and with paper products, wondering if
any of these find their way into business activities in the
United States that in whole or in part involve investment of
taxpayer dollars.
Chairman LEVIN. Mr. Goodish, do you want to say a word
about that?
Mr. GOODISH. I guess I am not following the question
exactly.
Mr. BLUMENAUER. I am wondering if these products that you
are talking about that have been lavishly subsidized, that have
not been in full compliance of labor standards and the
environment, even for the Chinese themselves, if these products
ever find their way into government contracts where they are
used for construction, for manufacture, that is in total or in
part the result of taxpayer investment.
Mr. GOODISH. I think it would be very difficult for us as
the manufacturers to be able to assure you that they do not.
When you go to stamping plants and you see coils laying ahead
of the line that get stamped into automotive parts or truck
parts, I am not sure anyone could guarantee you that none of
that steel finds its way into a vehicle that the U.S.
Government or the American taxpayers don't buy at some point in
time.
There is just such a massive import of goods coming into
this country from China that are subsidized that I don't think
anyone could guarantee you that.
Mr. TYRONE. As it relates to paper products, I would
actually be very surprised if they did not. The reason that
would be the case is the countries that we filed the anti-
dumping and countervailing duty cases on represent 14 percent
of imports. So, it is a very large proportion, and I would be
very surprised if they weren't.
Mr. BLUMENAUER. I realize my time is expired, Mr. Chairman,
but I would like to explore--I am not interested in a lot of
bureaucracy; I am not interested in doing something that is
goofy, but it just seems to me that there may be some things
that we can do to make it difficult for taxpayer dollars to be
used for furniture purchases or paper purchases or metals or
whatever that are a result of inappropriate activities from a
country around the world.
Chairman LEVIN. It is an interesting point. Interesting.
Mr. BLUMENAUER. Thank you.
Chairman LEVIN. We will try to follow up.
Mr. Weller.
Mr. WELLER. Thank you, Mr. Chairman. This is a helpful
panel, and as we go through this process looking at what we
consider illegal subsidies, discussion of the definition of
what is a subsidy is helpful.
Mr. Vargo, he gave an example of an imported pair of
pliers, with raw materials costing more than the selling price
of the finished product. He used that as an example of a clear
and obvious subsidy by the Chinese.
Before the Trade Representative's office acted on such
cases, the WTO would likely ask about the evidence of subsidies
for case development. I ask Mr. Vargo, and if there are others
who would like to comment on this, would you go into further
detail?
Why isn't the uneconomically low price of a product
sufficient evidence? What more do you need to have to challenge
subsidies of Chinese makers of pliers and similar products?
Mr. VARGO. Well, to begin with, many of our companies don't
have the resources to have investigators go over and see just
why the prices are so low. They have evidence sometimes of
invoices offering the products, but that in itself is
insufficient information to bring a WTO case. the Commerce
Department has not applied the countervailing duty statutes to
non-market economies, so that route has not been open to them.
We hope that that door will open. I think at that point we
may see additional companies step forward with the information
they have and bring cases.
Mr. WELLER. Others want to comment on that question?
Mr. GOODISH. I think it is correct. It is extremely
difficult for us to be able to gather the facts on exactly what
the manufacturing cost is. You can go to endless research firms
that we use, such as World Steel Dynamics or J.P. Morgan, and
see from the production costs from a ton of steel, it costs as
much if not more to produce that ton of steel in China as what
it cost us to produce it in the United States. Yet we are now
seeing oil country tubular goods, as an example, coming to the
country for as much as $600 a ton under what our selling price
is, which actually takes it under what our manufacturing cost
is.
It is hard for us to believe that. We know what the world
market for iron ore is. We know what the world prices for coal
and coke are. While they have cheap labor, where we might use a
manhour and a half or two manhours in a ton of steel, they are
using 10 or 15. So, they really don't have the economic
advantage on labor because of the volume of labor that they
have in their facilities.
We also know with the limitation that they have on power
generation that they are also paying probably 8 to as much as
11 cents for power, which our power costs are raising but they
are not in that marketplace. They are in the 5 to 6 cents.
So, we know that it costs them as much to produce steel as
it costs us to produce steel. Yet we see their products coming
into the marketplace well under what our current market prices
are.
Mr. WELLER. Anyone else?
Mr. TYRONE. If I may, it was certainly our observation of
the prices being offered by Chinese producers relative to our
costs that led us to believe that there was some chance that
they were pricing below their costs.
Upon further investigation, we did in fact conclude that
based on our analysis, there was very good evidence of that,
such that we were able to convince both the International Trade
Commission and the Department of Commerce to take on both the
anti-dumping cases and the countervailing duty cases.
Commerce has done that preliminarily. They are doing the
investigation, and they have said that they are using this case
to reexamine their practice of not evaluating countervailing
duty on non-market economies.
Mr. WELLER. Thank you, Mr. Chairman.
Chairman LEVIN. Mr. Pascrell.
Mr. PASCRELL. Thank you, Mr. Chairman.
In your testimony, Mr. Vargo, on page 8 of that testimony
you talk about America's trade deficit. Two paragraphs in the
middle of that page discuss the relationship between imports
and exports and how exports have been reduced. So, it is not
simply imports that are affecting this deficit. It is the fact
that exports have been reduced significantly. I think this was
your point. Let me go back and ask you a question about that.
I am reading the testimony here of Mr. Bassett. Your Chair
could have been many industries in the past 20 years who have
gone through this particular experience, the fact that just in
a short period of time, 3 years, 65 furniture manufacturers had
to shut down, 18,000 jobs lost.
Now, that doesn't seem like a lot of jobs, but when you
begin to look at one industry after the other, when you
particularly look at the manufacturing sector, Mr. Vargo in his
testimony admitted to the fact that during that period of
time--maybe one more year--we lost 3 million manufacturing jobs
in the United States of America.
This is a very serious problem, a very significant problem.
Whether we are talking about looking at protecting a property
or whether we are looking at subsidies, we need to all address
this and be all on the same page. So, I can appreciate what you
are going through.
What happened, Mr. Bassett, to the infrastructure in each
of those 65 factories? I am very concerned about the
manufacturing infrastructure and apparatus. I am looking at the
apparatus. When we lose that apparatus, when we lose the
manufacturing mechanisms, when we need to go back and
understand the significance of manufacturing in this country,
we will not have the wherewithal or the material or the
mechanisms or the apparatus to deal with it.
Would you please quickly respond to that? Or am I making
much out of nothing?
Mr. BASSETT. You are right on. Well, not only are the jobs
we are losing--one of the problems I am having right now is so
many of my suppliers have disappeared. They are smaller, so you
don't hear about them, but trying to find people to buy from
because they have nobody to sell to is one of the main problems
we are going to encounter. I hope I don't go out of business
because I no longer-I have customers but I don't have
suppliers.
I am going to vary just a little bit and I want to tell you
gentlemen that one of the things I think that you ought to be
very cautious about, I read in the Washington Post yesterday
about a hearing that you had yesterday. It included, I think,
flowers for Valentine's.
Chairman LEVIN. Chocolate.
Mr. BASSETT. The proposition is that you can buy flowers
for Valentine's less expensively today than you ever bought
them.
Mr. PASCRELL. That is correct.
Mr. BASSETT. Which probably is true. I can't argue with
those facts. If the only premise for trade, gentlemen, is is
the price cheaper, then we are right on the right track.
Mr. PASCRELL. Well, doesn't it get you nervous, though,
when the representative of trade says that to this Committee in
response to a particular question? If that is the standard, if
that is the overall standard that we need to use and the
priority standard, we are in bigger trouble than we thought we
were.
Mr. BASSETT. I agree with you. Let me tell you the example
I use when people ask for it.
Mr. PASCRELL. Sure.
Mr. BASSETT. I come from a very small Southern town in
Southern Virginia. Years ago, when I was a young man, there
used to be a lot of bootlegging going on. Now, I want to tell
you, it was good liquor. It really was. It was good liquor. It
was cheap liquor.
Mr. PASCRELL. I will take your word for it.
Mr. BASSETT. But it was against the law to make it, to own
it, or to drink it. It was illegal. The ox that was getting
gored was the Federal and State governments. They did something
about it because they were losing their business.
The premise here is if price is the only thing that we look
at and we don't care how we get there, then we ought to go back
and let the bootleggers start up again.
Mr. PASCRELL. Mr. Chairman, can I ask one more quick
question?
Chairman LEVIN. Yes. I don't think we wanted to finish on
that point.
[Laughter.]
Chairman LEVIN. Though I think it is a very good one.
Mr. PASCRELL. Very illustrative.
Mr. NAVARRO. Can I just make one quick point on this?
Mr. PASCRELL. Yes, sir.
Mr. NAVARRO. There is a lot of focus in blue collar
manufacturing and how all those jobs have gone. I come here
today to tell you that the same thing is happening now in white
collar science-oriented jobs.
Mr. PASCRELL. Absolutely.
Mr. NAVARRO. If we lose those jobs as well, it is going to
be us living the peasant life.
Mr. PASCRELL. I agree with you.
Chairman LEVIN. Mr. Pascrell, one other thing. Don't lose
the power of Mr. Bassett's last point, though.
Mr. PASCRELL. I will not lose that. Thank you for bringing
that up.
Mr. Vargo, back to the question. What is your organization
doing to protect the interests of small and medium-sized
manufacturers in the threat that they face from China for
various reasons? What is your organization doing specifically
for the medium-sized, small-sized manufacturers?
Mr. VARGO. Several things. First of all, we are pressing
hard to ensure that the rules are followed, particularly in
this case in subsidies. We are pressing for some specific
changes in Chinese law to get better protection for
intellectual property. Believe me, that hurts small companies
as well as large companies.
So many of our small companies are exporters, we are also
pressing to get foreign trade barriers down. As you know, this
is a very open market, and we want other markets to be as open
to us in tariffs and in non-tariff barriers as we are to them.
So, that is a range of things we are doing.
All of the problems that our small companies face are not
trade-related. When you go out and talk with our companies, in
fact, the number one problem most of them say is, I can't find
the skilled workforce I need. My workforce is retiring. I can't
find the new ones.
So, we have a range of problems, and we are working on that
one, too. So, thank you for that.
Mr. PASCRELL. Thank you.
Chairman LEVIN. I wasn't going to mention this. We have a
minute left before we are supposed to recess.
Mr. Vargo, the Korea FTA is being negotiated. They have a
complete wall against industrial products, essentially, an
economic iron curtain. I am not sure the NAM has weighed in. We
have said to USTR, it is essential in those negotiations that
there be a tearing down of those walls over time. For example,
in automotive, we can't support reduction in tariffs unless
there is assured increase in access to the market, measurably.
I hope you would think about joining in to impress upon
USTR that, secondly, we had an interesting panel on currency a
couple days ago. It was informal, Republicans, Democrats,
sitting around with four experts. If I might ask, take another
look in terms of China.
Mr. VARGO. Mr. Levin, could I just quickly respond? We have
been pressing hard for a free trade agreement with Korea, not
because of tariffs but because of the non-tariff barriers. This
will be the first trade agreement the importance of which is in
getting non-tariff barriers down. That doesn't happen, then the
agreement just does not provide what we want.
Chairman LEVIN. It has to be measurable. We have to find a
way to tie their benefit from reduced tariffs to our access in
a measurable way. That is the outstanding issue on that part of
it. There are other issues in Korea. Some of us have said
firmly to USTR, find a way to do that or we won't support the
Korea FTA.
All right. We are going to stand in recess until 1:00. You
have been an outstanding panel. Thank you very much.
[Whereupon, at 12:29 p.m., the Subcommittee recessed, to
reconvene at 1:00 p.m., the same day.]
Chairman LEVIN. Well, maybe we'll begin. We had this break
for lunch. It's always dangerous, but we welcome you as the
Deputy USTR, Mr. Bhatia, and we did want to try to this time
reverse what has been the traditional order and have panels
come first so that USTR would have the panoply, the full range
of, at least a substantial range of points of view that you
could take into account.
Again, Mr. Herger and I welcome you. You have some written
testimony, and I'll, since it was provided in advance, I'll
assume that all of the members have had a chance to read it.
Not to limit your use of it, but to indicate that we'll put
it into the record. Why don't you just set forth in any way
that is most you think useful, informative and you can take not
hours, but don't worry about the green light, and just give us
the view of USTR, taking into account what you heard or were
told about in the morning, which I think was very productive. I
think Mr. Herger would agree.
Now I had some opening remarks. I won't repeat them, and I
think, Mr. Herger, is it all right? Should we just go into----
Mr. HERGER. Why don't we go into it?
Chairman LEVIN. Okay. So, we welcome formally, more
officially, the USTR, Trade Representative Karan Bhatia.
Welcome.
THE HONORABLE KARAN K. BHATIA, DEPUTY U.S. TRADE REPRESENTATIVE, OFFICE
OF THE U.S. TRADE REPRESENTATIVE
Mr. BHATIA. Thank you very much, Chairman Levin, Ranking
Member Herger. Let me start by noting that I'm really delighted
to be able to be here today to participate in what I understand
is the first of a series of hearings that you're going to be
conducting on U.S.-China trade relations. I am the Deputy U.S.
Trade Representative with principal responsibility for Asia and
Africa at USTR. I can tell you that there are few subjects that
I spend more time on or that are more complex, more challenging
or more important, frankly, than our relationship with China. I
truly am very pleased that the Subcommittee is devoting time to
this subject today.
I appreciate you taking cognizance of my written testimony,
and I won't repeat it, certainly not in its entirety. I thought
it might be helpful, though, given that this is the first of a
series of hearings, to put in context the specific focus that I
know is the focus of today's hearing, namely, subsidies and
IPR, perhaps into a little broader context. So if I can,
perhaps let me spend a few minutes providing a brief overview
of the U.S.-China trade relationship generally, and
developments in that relationship in the last 12 months.
Any summary of our interaction with China, of our trade
policy with China over the last 12 months I think has to start
with our top-to-bottom review of U.S.-China trade relations,
which we issued actually a year ago yesterday, so this is a
very timely hearing.
That review, which was a comprehensive, interagency
overview of U.S.-China trade relations, observed that the
policy of economic engagement that we have pursued with China
over the past 25 years, I would note it has been a policy
pursued largely on a bipartisan basis, across Administrations,
has benefited both countries, both United States and China.
The review noted that after a period in which U.S. trade
policy was largely focused on bringing China into the
international trading system, that relationship is now entering
a new phase, one in which China will be held fully accountable
for its WTO obligations as a mature trading partner, and will
be expected to play a greater role in strengthening the global
trading system commensurate with its economic heft and the
economic benefit it receives.
The review suggested that as we enter this new period, it
is appropriate to revisit U.S. trade policy and in fact to
readjust U.S. trade policy and priorities with respect to
China, and to do so in favor of enhanced use of enforcement
tools and more focused, coordinated and senior level dialog.
Now the top-to-bottom review set forward a number of key
objectives. I will tick off a few. First, strengthening the
focus on China's WTO compliance and adherence to international
norms. Secondly, ensuring that the bilateral trade relationship
offers more balanced opportunities and is equitable and
durable. Third, a focus on making U.S. trade policymaking with
respect to China more proactive and informed by more
comprehensive information and more coordination. Fourth,
encouraging China to participate more fully in the global
trading system, and fifth, ensuring that the United States
remains an active and influential player and trading partner in
the Asia Pacific region generally. The review set forward a
pretty detailed list of steps to achieve those objectives.
Looking back over the past year, I am pleased to report
that after we've had the opportunity to consult with Congress,
we moved forward full steam to implement the recommendations
laid out in the top-to-bottom review, and my written testimony
details those steps. Let me just touch on a couple orally here.
First, we demonstrated I think very clearly our willingness
to use WTO dispute settlement to hold China to its commitments
where necessary. We filed WTO cases on China's treatment of
imported parts. We filed another case recently on its use of
prohibited subsidies, and we were on the verge of filing a
third case last year challenging China's anti-dumping order
against U.S. exports of Kraft Linerboard when China rescinded
that order just hours before our filing.
In April, we held a meeting of our Joint Commission on
Commerce and Trade, our principal trade dialog with China, at
which we obtained Chinese commitments to address a number of
concerns about access to China's market, transparency and
enforcement of IPR.
We have launched a new and unprecedented provincial level
review of China's IPR enforcement efforts and look forward to
publishing the results later this spring.
We have held 61 meetings or briefings with Congress over
the past year on the subject of our China trade relationship,
and consult regularly on such topics as our WTO litigation
strategy, the Joint Commission on Commerce and Trade (JCCT)
dialog and the newly launched strategic economic dialog,
thereby I think strengthening the coordination among different
branches of Government that is important in dealing with China.
We have established new channels of communication with our
third country trading partners to coordinate trade policy with
respect to China. At USTR itself over the past year, we have
substantially bulked up our China-focused resources with the
creation of the position of the Chief Counsel for China Trade
Enforcement, the creation of a China Enforcement Task Force,
the addition of new staff in our China office, and the hiring
of a new USTR attache in Beijing.
These and many other actions I think that we have taken to
implement the top-to-bottom strategy over the past year
demonstrate to U.S. stakeholders, to China and to our other
trading partners that we do have a carefully crafted strategy
for how to engage China on trade matters, and that we have been
following it.
Now, Chairman Levin, Ranking Member Herger, I would be the
first to say that both the top-to-bottom review and the actions
taken to implement it are a means to an end. They are not an
end in itself. The end is a trade relationship with China that
is more balanced and the opportunities it offers more equitable
and more durable. Such a relationship is not going to be
achieved within the span of 12 months, but I am pleased to say
that there are some encouraging signs, and let me point to
three if I may.
First, based on the results just reported by the Commerce
Department, U.S. exports to China last year climbed by 32
percent. This suggests that the Chinese market is become more
accessible to U.S. companies and that Chinese consumers are
developing an appetite for America's highly competitive goods
and services.
China today has become our fourth largest export market and
the fastest growing major export market for the United States
in the world. China is helping to support thousands of American
jobs today and will support even more in the future.
Secondly, in its 2006 annual survey of members, the U.S.-
China Business Council reported that 81 percent of its members
surveyed report that their Chinese operations are profitable,
and 97 percent of respondents say they are optimistic about
prospects for their China business over the next 5 years.
Third, I would point to the fact that there have been a
number of important specific transactions opening the Chinese
market to U.S. companies in the past year, including the
acquisition of a stake in Guangdong Development Bank by
Citibank, the selection of Westinghouse for a five to eight
billion dollar nuclear power contract, and the signing of over
100 purchase agreements and contracts worth over $16 billion
last year in advance of President Hu Jintao's visit to the
United States
Now importantly, in citing these developments, I do not
mean to suggest that all is well in the U.S.-China economic
relationship. Significant challenges do remain. In particular,
as we detailed in a 2006 report to Congress on China's WTO
compliance that we issued last December, we are concerned by
signs that China could seek to slow down or pull back from the
market-oriented and WTO-consistent changes that they have been
making in their economy and instead pursue more State
interventionist or mercantilistic policies.
A retreat from continued reform I believe would slow
China's own economic development, dampen U.S. export growth,
preclude the leveling of imbalances and breed frustrations. So,
working to ensure that China does not slow down or retreat from
reform is a key objective.
Mr. Chairman, if I may just in conclusion have a brief note
on the two subjects that I know have been occupying your
thoughts and attention this morning, subsidies and IPR.
Chairman LEVIN. Take your time. Take your time.
Mr. BHATIA. Thank you. On subsidies and IPR, these are two
clearly critical topics. They are two topics that perhaps pose
some of the greatest challenges to U.S. trade policy and to our
engagement with China.
I would point out I think that both are being addressed
consistent with--that we are seeking to address both consistent
with the template we laid out in the top-to-bottom review. On
subsidies, and on IPR, we have pursued both enforcement and
dialog. Both are serious concerns for the United States. Both
are serious concerns for our other trading partners, and both
should be serious concerns for China.
On both IPR and the use of government subsidies that
distort trade and the global economy, China has at the most
senior level said the right things, but that is not enough. We
need to see changes in results on the ground, and we have made
that clear to China.
On subsidies, we have, as you know, filed a WTO case. On
IPR, we have made very clear that we are prepared to do so. At
the same time, we are pursuing focused and forceful dialog I
think in both areas to try to make progress consistent with our
goals outside of litigation, and we will continue to do both.
I have more detailed remarks on both subject, Mr. Chairman,
in the written testimony. I'm happy to elaborate on those areas
further, but I think perhaps let me stop here and I'd be happy
to respond to any questions that you or others would have.
[The prepared statement of Mr. Bhatia follows:]
Statement of The Honorable Karan K. Bhatia, Deputy U.S. Trade
Representative, Office of the U.S. Trade Representative
Introduction
Chairman Levin, Ranking Member Herger and distinguished members of
the Ways and Means Subcommittee on Trade, I am delighted to be able to
participate in the first of what I understand is to be a series of
hearings on U.S.-China trade relations. As the Deputy U.S. Trade
Representative with principal responsibility for our Asian and African
trade relationships, I can tell you that there are few subjects that I
deal with that are more important or more complex than our relationship
with China, and I'm very pleased that this subcommittee is devoting
time to this subject.
I understand that today's hearing is focused principally on two
topics: (i) subsidies and (ii) the enforcement of intellectual property
rights. I will touch on both subjects. But, especially because this is
the first of a number of hearings that the Subcommittee intends to
conduct, I thought it might be helpful to provide a brief overview of
the U.S.-China trade relationship generally and developments in that
relationship over the past 12 months.
Top-to-Bottom Review
One year ago yesterday, USTR issued a comprehensive, interagency
``Top-to-Bottom Review'' (``T2B'' or ``Review'') of U.S.-China trade
relations. That Review observed the policy of economic engagement the
U.S. has pursued with China for the past 25 years--on a largely
bipartisan basis across administrations--has benefited both countries.
The Review also noted that, after a period in which U.S. trade policy
was largely focused on bringing China into the international trading
system and urging China to implement its new WTO commitments during a
transition period, the relationship is now entering an important new
phase--one in which China will be held fully accountable for its WTO
obligations as a mature trading partner and will be expected to play a
greater role in strengthening the global trading system commensurate
with its economic heft and the economic benefits it receives. The
Review urged, as we enter this new period, the readjustment of U.S.
trade resources and priorities with respect to China--in favor of
enhanced use of enforcement tools and more focused, coordinated and
senior-level dialogue.
The T2B set forth a number of key objectives: (i) strengthening the
focus on China's WTO compliance and adherence to international norms,
(ii) ensuring that the bilateral trade relationship offers more
balanced opportunities and is equitable and durable, (iii) making U.S.
trade policymaking more proactive and informed by more comprehensive
information and more coordination, (iv) encouraging China to
participate more fully in the global trading system, and (v) ensuring
that the United States remains an active and influential economic and
trading power in the Asia Pacific region. The T2B also set forth a
detailed list of steps to achieve those objectives.
Top-to-Bottom Review_Implementation
Looking back over the past year, I am pleased to report that, after
the opportunity to consult with Congress, we have moved full-steam
ahead to implement the recommendations laid out in the T2B. Let me run
through a few:
We demonstrated our willingness to use WTO dispute
settlement to hold China to its commitments. Under Ambassadors Portman
and Schwab, we filed WTO cases on China's discriminatory treatment of
imported auto parts and use of prohibited subsidies. And we were on the
verge of filing a third case last year, challenging China's antidumping
order against U.S. exports of Kraft Linerboard, when China rescinded
that order just hours before our filing.
In April 2006, we held a meeting of the Joint Commission
on Commerce and Trade (JCCT). At that meeting, we obtained Chinese
commitments to address a number of concerns about access to China's
market, transparency, and enforcement of intellectual property rights.
President Bush also had an opportunity to discuss important economic
issues with President Hu Jintao during his visit to the United States.
In September, President Bush launched a new high-level
dialogue to address critical economic issues--the Strategic Economic
Dialogue (SED). The first SED meeting was held in Beijing in December,
and we have been pushing forward with a number of specific follow-up
discussions in anticipation of the next SED meeting here in May. To
further bolster the initiative, Secretary Paulson recently announced
that Treasury has appointed Ambassador Alan Holmer as Special Envoy to
China overseeing the SED process.
We have launched a new and unprecedented provincial level
review of China's IPR enforcement efforts, and look forward to
publishing the results later this Spring.
We have held dozens of sector--or issue-specific
negotiations with the Chinese in areas ranging from beef to
telecommunications, as we seek to ensure that China continues to open
its markets and honor its commitments.
We have held 61 meetings or briefings with Congress over
the past year regarding our China trade relationship and have regularly
consulted on such topics as our WTO litigation strategy, the JCCT
dialogue, and the SED.
We have created a senior-level China Task Force within
our Advisory Committee on Trade Policy and Negotiations.
We have established new channels of communication with
our third country trading partners to coordinate trade policy with
respect to China.
And at USTR, over the past year, we have substantially
strengthened our China-focused resources, with the creation of the
position of Chief Counsel for China Trade Enforcement, the creation of
a China Enforcement Task Force, the addition of new staff in our China
Office, and the hiring of a new USTR attache in Beijing.
These and the many other actions we have taken to implement the T2B
strategy over the past year have been important, both individually and
collectively. They demonstrate to U.S. stakeholders, to China, and to
our other trading partners that we have a carefully crafted strategy
for engaging China on trade matters, and that we have been following
it.
Of course, both the T2B and the actions taken to implement it are
means to an end, not an end in itself. The end is a trade relationship
with China that is more balanced in the opportunities it offers, more
equitable and more durable. Such a relationship will not be achieved
within the span of a mere 12 months. But I am pleased to say that there
are some encouraging signs. Let me point to three:
Based on the results just reported by the Commerce
Department, U.S. exports to China last year climbed by 32 percent. (By
contrast, I would note that China's exports to the U.S. increased by 18
percent.) This suggests that the Chinese market is becoming more
accessible for American companies, and that Chinese consumers are
developing an appetite for America's highly competitive goods and
services. China today has become our fourth largest export market, and
the fastest growing major export market for the United States in the
world. It is helping to support thousands of American jobs today and
will support even more in the future.
In its 2006 annual survey of members, the U.S.-China
Business Council reported that 81 percent of members surveyed reported
that their Chinese operations are profitable (with more than half
saying that profitability rates for their China operations meet or
exceed global profit margins) and 97 percent of respondents saying that
they are optimistic about prospects for their China business over the
next five years.
There have been a number of important transactions that
have helped to further open the Chinese market to U.S. companies--
including the acquisition of a stake in Guangdong Development Bank by
Citibank, the selection of Westinghouse for a $5-8 billion nuclear
power contract, and the signing of over 100 purchase agreements and
contracts worth over $16 billion in advance of President Hu Jintao's
visit to the United States last April.
In citing these positive developments, I do not mean to suggest
that all is well in the U.S.-China economic relationship. Significant
challenges remain. In particular, as detailed in the 2006 Report to
Congress on China's WTO compliance that USTR issued last December, we
are concerned by signs that China could seek to slow down or pull back
from the market-oriented and WTO-consistent changes they have been
making in their economy and pursue more state interventionist or
mercantilist policies. A retreat from continued reform would slow
China's own economic development, dampen U.S export growth, preclude
the leveling of imbalances, and breed frustrations. So, working to
ensure that China does not slow down or retreat from reform is a key
objective.
Let me now turn to the two specific topics at issue here today--
subsidies and IPR--and briefly discuss the most recent developments in
our dealings with the China on these two topics.
Subsidies
In testimony last year before the Senate Finance Committee, I
observed that the Chinese Government's role in directing the Chinese
economy, including through the use of subsidies, was one of the
principal concerns of USTR. The way we have approached this issue over
the past twelve months is entirely consistent with the
strategy laid out in the T2B--we are confronting this serious challenge
using both enforcement levers as well as dialogue.
As you know, just two weeks ago we announced that the United States
has requested consultations at the WTO over what we contend is China's
persistent use of prohibited subsidies. Basically, the United States
believes that China uses its tax laws and other tools to encourage
exports and to discriminate against imports of a variety of
manufactured goods. The subsidies at issue in this case are offered
across a broad array of industry sectors in China--including steel,
wood products, information technology, and others.
It is an important case--important because it challenges policies
that are tilting the playing field against our workers and companies,
important because it makes clear that we will use WTO dispute
settlement procedures to hold China to its commitments where dialogue
does not resolve our concerns, and--perhaps most of all--important
because it will help impel China to maintain a process of reform and to
redirect its economy towards a model of consumption-led, rather than
export-led, growth.
While we have filed this WTO case, we continue to engage in
dialogue with the Chinese on their use of subsidies. These discussions
are happening both at the sector-specific level--for example, our
recently created ``Steel Dialogue'' under the JCCT is enabling a
conversation among governments and industries of both sides--as well as
in connection with our broader economic dialogues, including the
Strategic Economic Dialogue. Industrial policies that limit market
access for non-Chinese origin goods and that provide substantial
government resources to support Chinese industries also remain a
concern.
Finally, although it does not fall within USTR's statutory purview,
I should note that the Department of Commerce continues to apply U.S.
trade remedy laws to ensure that unfair trade practices, whether
undertaken by the Chinese or others, do not distort the playing field
against U.S. companies.
IPR Enforcement
The Administration is similarly employing a dual-track approach in
the area of intellectual property rights. The rampant infringement of
intellectual property rights that persists in China, in spite of
efforts by central government officials to move against illegal
practices, not only robs U.S. businesses of billions of dollars a year
in legitimate sales, it also weakens China's development of its own
knowledge-based industries.
Over the past year, we have been working to prepare a WTO case that
challenges China's compliance with its WTO obligations in the area of
intellectual property rights enforcement. Last October, we informed
China that we would be filing such a case, but then agreed to hold off,
with the support of U.S. industry, when China asked for further
bilateral discussion. We have been holding those discussions, including
late last month in Beijing. We have also been raising with China
restrictions on market access. While these are not IPR issues per se,
they have a negative impact on the industries depending on intellectual
property, such as the copyright industry and, to a certain extent, they
exacerbate some of the problems with IPR enforcement. Thus far, no
settlement has been reached. We are consulting with Congress and with
industry on next steps. If we believe that negotiations offer a
reasonable chance of success, we will continue to pursue them--a
successfully negotiated outcome can be more efficient and as successful
as a litigated outcome. But if it becomes clear that negotiations will
not be successful, then we will proceed with WTO dispute settlement.
In the interim, of course, we continue to try to work with China
through various other avenues to address this serious problem. For
example, under Special 301, we are conducting a special review of
enforcement at the provincial and municipal levels of government where
much of the responsibility for day-to-day enforcement lies. We are also
continuing to press China to make improvements in its IP system through
the JCCT and SED.
It bears noting that at the highest levels of the Chinese
government there is a clearly stated commitment to tackle this problem.
In his remarks from the South Lawn of the White House in April,
President Hu affirmed that China is committed to ``strengthening the
protection of intellectual property rights.'' China's leadership
appears to recognize that the development of a more vigorous and
effective IPR enforcement system is critical not only to trade
relations with the United States, but also to China's own economic
development. The challenge confronting China is turning those stated
commitments into real results.
Thank you for the opportunity to testify. I will be happy to take
your questions.
Chairman LEVIN. Thank you very, very much. So, let's have a
good back-and-forth for a few minutes.
Mr. BHATIA. Great.
Chairman LEVIN. Others may join us, but with Mr. Herger and
myself, this is an important gathering in our eyes. Let me just
repeat what I said both on the record here and in talking to
others in the media.
I welcome the fact there's been this bottom-to-top or top-
to-bottom review, number one. It was long overdue. As I look
back since we had the controversial discussion of PNTR, which I
was very much involved in, the first years were really years of
very passive reaction. It was very disappointing. This is
before you came. I think it was harmful.
China went in with the assumption that it was much better
for it to be in than out, not only for them, but it would be
better for us, that there would be rules that they would need
to comply with. The problem is that while in some respects the
structure opened up their markets, there were so many
requirements that they failed to meet. We have this morning
discussed two of the areas, subsidies and IPR.
I don't think anybody can say that there was much more than
rhetoric. Essentially, there was a passive attitude, and that
was true of our position, this Administration's position within
the WTO, whether it was the annual review program that we
fought to get into the PNTR legislation, pursuing the
requirement that they file their subsidy report. So, I do think
it's good that we have shifted out of what might be called
neutral in terms of a car, the car I used to drive when I was
young, into first. It's now kind of different.
We really need to accelerate our attention to this, and
that's why we talked this morning about setting 2008 when the
Olympics will be in Beijing, for China to take a kind of leap
in terms of their compliance with their commitments.
You mentioned, Mr. Bhatia, the exports. I said this to
USTR, to your boss yesterday, our ambassador. Also talk about
imports. You talk about the percentage of increase in our
exports. It starts from such a low base. As you know, the
amount of our imports far exceed the amount of our exports. So
you have a continuing increase in our trade deficit. I just
wanted to bring your attention to an example of I think the
harmful failure of this Administration before your time.
We put 421 in there. It was part, as we said, at this very
place, it was part of what we worked out. We did so on a
bipartisan basis with a lot of controversy. The Administration
has failed to use it. I give you one example of the harm of
this failure. It relates to pipes and tubes from China. A case
was--it was filed. The ITC found harm. The Administration
decided not to take action, and in terms of thousands of net
tons, which happened since 2004 when it was 274, it's now 671
thousands. That's more than doubling.
You have to look at this in terms of the impact on
businesses and workers here. I know it means that some people
bought pipe more cheaply, but businesses and workers have been
displaced. So, try to carry back the message. Talk about the
whole glass.
Secondly--and by the way, I have the figures here in terms
of the exports and imports, and it's really clear, exports rose
by 13.3 billion '05 to '06, imports rose by 44 billion. So, if
you start with a low base, you'll get a higher percentage.
That's about as much as I learned in math.
All right, but now let's talk about subsidies, and then Mr.
Herger will take over. A long last, China filed its subsidies
report, right? Three or 4 years late.
Mr. BHATIA. Yes, that's right.
Chairman LEVIN. Okay. Now they identified 70, and that's
only a partial report, 70 subsidy programs, and they're
probably just the tip of the iceberg. Your notice, what you
started with, touches how many of these?
Mr. BHATIA. The case that we have--the consultations?
Chairman LEVIN. Right. It's not a case. These are the
consultations. So, they cover how many of the 70?
Mr. BHATIA. It's not a simple area. There are 9 subsidies
at issue. Some are in those 70 and some are things that we
found on our own. So, they're not--it's not an easy answer, but
there are 9 subsidies at issue.
Chairman LEVIN. By the way, a lot of these subsidies, some
of them were known years ago. I won't bother you with the list,
but many of them were known as early as '90, '91, and in some
cases, before.
Okay. So, you say of the 70--well, the consultation covers
9 of them?
Mr. BHATIA. Yes, that's right.
Chairman LEVIN. Okay. So, that leaves a lot of them out.
Mr. BHATIA. That's correct.
Chairman LEVIN. So, tell us as quickly as you can the
strategy why those 9, what about all the others?
Mr. BHATIA. Should I go ahead and respond now, Mr.
Chairman? Okay. Would you like me to respond--you had a couple
of other points that I'd be happy to touch on. Okay.
Chairman LEVIN. Touch on everything.
Mr. BHATIA. Okay. Why don't we start maybe with this last
one.
Chairman LEVIN. Okay.
Mr. BHATIA. Then I can go back through some of the others.
The Chinese subsidy notification was filed last spring after we
pushed substantially--during China's accession process, they
made a commitment, or indicated that they would seek to provide
the information about subsidies over the course of time. We--
this did precede me joining USTR, but over the course of that
period from 2001 onwards, there was a steady push to try and
get them to supply that information. Ultimately last year, they
did indeed supply it.
At that point in time, we reviewed obviously that list of
subsidies, looking for those that were actionable in the WTO,
to figure out what the consequences--and figure out what they
were. There are two types of subsidies that are effectively
actionable in the WTO. There are those that are prohibited, and
those that--the 9 that we have sought consultations right now
are what's called prohibited subsidies.
Two types of prohibited subsidies fall into that category.
The first are export-linked subsidies, subsidies that are
provided, say tax benefits or other things that are provided to
companies contingent upon them exporting as opposed to
producing for the domestic market; and import substitution
subsidies, those that are awarded conditional upon companies in
China using domestically made inputs rather than imported
inputs.
Those two types of subsidies are so clearly trade
distorting that the WTO has deemed them prohibited subsidies.
You don't need to prove injury. There are a variety of other
provisions that apply, and it allows you to move on a very fast
tract with respect to them. That is what we have done so with
respect to these 9.
The other subsidies, indeed, and you refer to the 61, and
there are--we pretty confident there probably are others out
there as well, but those are a more complex matter to litigate.
They may be actionable, they may not be actionable. Briefly,
without getting too deeply into the weeds here, for a subsidy
to be actionable under the WTO, what one needs to prove is a
couple of things. First of all, that there is a financial
contribution by the government. Secondly, that it is specific,
specific to an industry or industries. Thirdly, that there is a
benefit accrued by that industry or industries. Finally, that
it is having an adverse effect on the U.S. industry, that we
would be able to show that.
That is a much more complex endeavor, Mr. Chairman, than
simply demonstrating a prohibited subsidy. A prohibited subsidy
is basically a de jure case. An actionable, nonprohibited
subsidy that still might be in contradiction with the WTO
rules, requires the building up of a case, a very detailed,
factually driven case.
We have spoken with a number of industries about other
subsidies, including some industry--well, a number of
industries about subsidies that are of concern to them, and if
we believe that there is a strong case there to be brought, and
if that industry, frankly, provides us with the information
demonstrating that there is a strong case here, believe me,
we're not going to hesitate from using the WTO litigation route
if that proves to be the optimal way to proceed.
Mr. Chairman, maybe I could touch on a few of the other
things that you raised----
Chairman LEVIN. Please.
Mr. BHATIA [continuing]. In response. Actually, perhaps I
could just add one final point on subsidies. I think your
focusing this hearing on subsidies is extremely valuable, and I
think it is valuable because in my mind, and I think in our
eyes, the role of the Chinese government influencing and
directing its economy is perhaps the central challenge that we
face in our trade policy going forward. There are many other
challenges, IPR and other things are key, and don't mean to
diminish them.
Ensuring that China reforms--continues on the path of
reform that it has been on to move toward a more market-based
system of economic--a more market-based economy, I think is the
greatest challenge that we face, and I think subsidies is a key
window into that problem, and thus the importance of our case.
I think, frankly, I think it is a very important case that
we brought 2 weeks ago, because I think it will signal to the
Chinese and indeed to the rest of the world that we are
approaching this issue and we are going to be using the WTO
mechanism to address what we see as being a systemic problem.
This doesn't affect just one industry. This potentially affects
all industries, and it potentially distorts the global economy
as well as the Chinese economy. So, we are very cognizant of
the importance of the subsidies issue, and we'll continue to
pursue it.
If I perhaps could just touch on these other issues. The
421 case, the issue of 421 that you mentioned, Mr. Chairman,
during my tenure at USTR, I have been involved with one of
these cases, the steel pipe case that you reference, and
perhaps I could touch on that. I think it in some sense it
reflects the same analysis that applies to some of the other
cases.
We gave tremendously careful consideration to the 421
petition that was filed and did so relying upon and looking
closely at the ITC analysis that was done as well. As you know,
Mr. Chairman you were--you clearly were involved in the PNTR
decision. The 421 analysis ultimately involves and contemplates
a balancing test. One has to consider the national economic
interest as well as the injury to the affected industry.
That is precisely what we did in this case. I think there
were two reasons that drove the decisionmaking there. One is,
would the remedy that the industry was seeking ultimately have
been effective? Secondly, what was the national economic
interest? What did the balancing test counsel in favor of?
When you look at what the structure of this market was, we
could have imposed--had we imposed--let me put it that way. Had
we imposed the sought quotas on pipes coming out of China,
there were somewhere between 40 and 50 other countries that
were suppliers in this area.
So, I think there was a strong case, there was a very
strong case. There was, frankly, I think compelling evidence
that even had we imposed quotas, the effect of those quotas
would have been nullified through imports from other countries.
The second point to made on that subject is the balancing
test, the issue of the national economic interests. At the end
of the day, the ITC analysis that we were provided with
suggested that the damages to the general economy, the damage--
the cost to the general economy. Excuse me, not damage. The
cost to the general economy would have been five times greater
from imposing these than not imposing them, imposing the
quotas, which is not to suggest, I don't in any way mean to
suggest that we are not concerned about the fate of the workers
and the manufacturing plants that you were talking about.
Clearly, imports are important. They are important because
they bring into focus the impact of globalization and trade
with China, but we were administering, and I feel very
confident of this, we have administered 421 consistent with the
statutory language and the statutory intent.
Last, with respect to 2008 and China taking a leap--excuse
me, there are two other points. One is 2008. I am all for China
pushing forward--indeed, let me say it this way. We believe
China needs to be brought into compliance with its WTO
commitments, and 2008 is a bit far off, frankly. We are pushing
China on every WTO commitment that we are aware of where
they're not in compliance to bring them into compliance, and
yet China has emerged onto the global scene, and it will
continue--it will play an even larger role with the Olympics. I
agree with that.
Right now, and this is what our top-to-bottom review says,
China is certainly one of these major beneficiaries of
participating in the global trading system. It needs to live up
to that. It needs to demonstrate a responsibility there that is
commensurate with the benefit that it's getting. That means
being in compliance with its WTO commitments, that means being
in compliance with its JCCT commitments, and the top-to-bottom
review is the strategy to pursue to get them there.
Last, you point out the exports rose by 13 billion whereas
imports rose by 44. I'm not disputing those numbers at all.
There is a trade deficit. There is a trade deficit that in our
top-to-bottom review we have said is not sustainable
politically or otherwise, but I do think it is important to
note the growth, the trend in exports by U.S. exporters,
manufactured, services and agriculture, is encouraging. It does
show that China is a growing market for U.S. exports, and that
is creating jobs.
So, I appreciate the liberty to respond at length.
Chairman LEVIN. Just briefly--by the way, Mr. Vargo's
testimony about the drop in exports in manufacturing we want to
look at. Let me just say on the pipe and tubes case, I think
your looking at other suppliers is not consistent with the
intent of the language. In terms of national economic impact,
that always can be used as a reason, but this Administration
has turned down four out of four of the 421s when there was an
ITC recommendation. The message that sends is one of
complacence to a very unbalanced relationship.
As I leave and Mr. Herger takes over, we had testimony from
those in furniture. I'd like you to give us some specific
response, and also the testimony from the steel industry. There
has been a very major increase in steel production, as you
know, in China.
Mr. BHATIA. Yes.
Chairman LEVIN. Subsidization is clearly part of it. We had
better get ready to handle the issue of their increased imports
here from subsidized industries. We better get ready.
Mr. Herger.
Mr. HERGER. Thank you, Mr. Chairman. Welcome to our
Committee.
Mr. BHATIA. Thank you.
Mr. HERGER. Thank you for the work that you're doing.
Really listening to the testimony and the questions from both
sides of the aisle, it really sounds like we're on the same
page. I think the big concern is are we moving quickly enough?
Are we attacking the problem aggressively enough?
Yet putting this into perspective, just a decade and a half
ago, where China, where the entire free world had virtually no
contact at all with China, and to see how far we've come in
such a relatively small period, short period of time. Those of
us who have visited China, just to see this country taking off
from the bicycle era which it was when I first visited there
almost a decade and a half ago or so to just seeing what's
going on there.
Again, trying to put this in perspective, am I correct, of
all the trading partners, all the U.S. trading partners that
deal with China, is it correct that the United States is the
only trading partner that's actually brought a case against
China? I believe that was last year in the auto parts, and that
now we've brought a second case, an additional case, and yet we
have settled two or more without litigation?
Mr. BHATIA. Congressman, there are three cases, three
requests for consultation, basically, the commencement of cases
in the WTO that we have pursued. The first, a case with respect
to value-added taxes on semiconductors, that case settled. The
second is the auto parts case that we filed earlier--well,
filed last year. That case was brought by the United States,
but we were joined as co-complainants in that case by the
European Union and by Canada. So, effectively, the three of us
brought that case altogether.
The third is the subsidies case that we just brought, the
United States just brought last--two weeks ago.
Mr. HERGER. How many cases have other trading partners that
you--in addition to what you've just mentioned, Japan, other
trading partners, how many cases have they brought?
Mr. BHATIA. Against China? None.
Mr. HERGER. So, as few as we've brought, no one else has
brought any. This leads into my question. My concern is the
fact that other countries would seem to be free riding, at
least at this point, on the work that we've been doing, it
would seem the only country that's aggressively pursuing
dispute settlements with China is the United States.
Why would you say, why is it that other WTO members have
not raised concerns similar to ours with China's
implementation, and are we working with them in common areas of
concern?
Mr. BHATIA. I think, Congressman Herger, there's probably a
couple part answer to that.
Mr. HERGER. I might ask, these other countries are
experiencing the same concerns we are, aren't they?
Mr. BHATIA. Yes. Yes they are I think.
Mr. HERGER. It's not just the United States that's----
Mr. BHATIA. I think that is a fair point. To some extent,
China's commitments, have, as we've described, been phased in
over the course of time. So, the fact that China acceded in '01
and that you're now seeing a greater amount of litigation
recently I think is in part attributable to the fact that some
of those commitments they had periods of time to come into
compliance. I think that--I believe that you will see increased
litigation against China not only by the United States but by
others as we move further into that period effectively this
point forward, in which China is obliged to be in compliance. I
do think that's one case.
I think the United States, and I'm afraid this has been
true for a long time, has played the role of leader in the WTO
and elsewhere and in promoting compliance with global trading
standards and requirements, and we're doing it again here with
China. While we don't shy away from that role, we do it, I
would point out that we are working more cooperatively I
believe with our trading partners in a joint approach to
promoting responsible WTO-compliant behavior by China than in
years past.
I would point out the fact that with the auto parts case,
we did work very closely with our colleagues in the European
Union (EU) and Canada to bring that, that we have set up--last
year we have set up some mechanisms, standing mechanisms by
which we coordinate with our colleagues in the EU in Brussels,
in Tokyo and elsewhere on China enforcement issues.
They will probably tell you--some of the things we hear
from our trading partners abroad is it's got to be a multi-
pronged approach to China, that sometimes litigation is the
best way, sometimes dialog is the best way. We don't disagree
with that. We ourselves pursue both dialog and litigation, but
our view, as clearly expressed in the top-to-bottom, is that a
strong enforcement prong has got to be a key part of that, and
we look forward to our trading partners joining us in that
going forward.
Mr. HERGER. Sir, are we working with them? You mentioned
that the EU did join us in two of these, Japan. Do we have
others that are working with us? Are we working to involve
other countries as well to bring greater pressure on China to
do the, quote, ``right thing'' and to live up to their
commitments?
Mr. BHATIA. We are. We are, Congressman, and we do a fair
amount--I think there is not a meeting that goes by where I
don't meet with my EU counterpart, probably my Japanese
counterpart, and my counterparts increasingly in other
countries in the region where the subject of whether China is
in compliance with WTO commitments and what we can do to help
continue this process of reform does not come. So, we are
regularly in contact with them.
Mr. HERGER. Very good. Thank you.
Mr. BHATIA. Thank you.
Chairman LEVIN. Thank you very much. Mr. Crowley.
Mr. CROWLEY. Thank you, Mr. Chairman. Mr. Bhatia, welcome
to the Committee.
Mr. BHATIA. Thank you.
Mr. CROWLEY. Mr. Bhatia, my city, New York, has a strong
competitive advantage in the financial services sector,
something that myself and a number of Members of the delegation
guard very closely. New York companies are world leaders in
financial services, yet many of these firms continue to have
trouble gaining full access to the Chinese market even as our
markets remain open to both Chinese goods and to Chinese
services.
Can you describe some of the regulatory barriers to entry
for U.S. firms into the Chinese financial services market and
what is the Chinese government doing to reduce those barriers,
and why do those barriers continue to exist even now, 5 years
after China's entry into the WTO?
Mr. BHATIA. Congressman Crowley, the financial services
commitments that China made are a very high priority for us. We
recognize fully the importance of compliance with those
commitments, not only because financial services, as you
described, is a key area of, frankly, competitive advantage for
the United States, but in fact it is I think critically
important for China's own economic development; the
rationalization of the Chinese economy that it open itself up
in this area and it allow the sort of business practices and
the skill sets that American financial services companies can
offer to be able to promote the kinds of reforms and changes
that China needs.
So, I think this is a critically important area for us and
for China. China's commitments, as you may know, were to phase
out geographical client, scope of business limitations for
foreign entities that provide banking services within 5 years
of joining the WTO.
It also committed to remove market access limitations and
provide national treatment for foreign suppliers of payment and
money transmission services, including credit cards and charge
cards and debit cards, and that commitment was supposed to
become effective with respect to Ren Min Bi (RMB) denominated
business, Chinese currency denominated business, with respect
to the retail clients in China, no later than December 11th of
last year. There are a variety of other commitments, including
with respect to financial information, financial data
processing.
Now China has issued new regulations. At the end of last
year in November, just before the phase-in of the commitments,
they did issue new regulations that allow foreign banks that
incorporate in China as subsidiaries to provide a range of
services, including doing domestic currency business with
Chinese individuals.
We are working very closely with the financial community to
figure out whether these new regulations are in fact and in
practice bringing China into compliance with its WTO
compliances. We do--I will be frank--we do have some
preliminary concerns about the requirements and about
restrictions.
Let me also mention if I can with respect to electronic
payment services, I am disappointed, frankly, with China's--
that China has not yet taken any action to implement its
commitments to provide access to foreign providers by December
11th of last year, although we understand China may soon
release regulations in that area.
We are watching that area closely. We are, as I say, in all
of these areas in strong and steady contact with the business
community, and we raise the issues frequently with the Chinese.
Again, let me make clear, we will pursue ensuring that China is
in compliance with its obligations in this and in other
sectors, both through dialog and through use of WTO dispute
settlement if necessary and if appropriate.
Mr. CROWLEY. Figuratism is a form of subsidization as well,
I believe. I think that's what's going on China when it comes
to the financial services sector in particular.
The WTO subsidy case that USTR recently filed I think was a
good first step.
Mr. BHATIA. Thank you.
Mr. CROWLEY, but this case only covers 7 of the 70-plus
subsidies China recently reported to the WTO four years after
the required filing date, no less. Moreover, though, many
analysts do not be that China has fully notified the WTO, that
it's not fully complete in terms of the number of subsidies
that are offered.
Why didn't the USTR press the Chinese government to file
its subsidies in a timely manner, and what steps is USTR taking
to pressure China to eliminate those subsidies and to identify
nondeclared subsidies like favoritism?
Mr. BHATIA. Thank you, Congressman. Just in general, again,
if I can make the point that we believe that subsidies and what
they represent basically in terms of the Chinese government
attempting to pick winners and losers, to pick favorite
sectors, to direct their economy, is not only a problem with
respect to global imbalances, but fundamentally is a problem
for a China itself as it seeks to pursue a path of economic
development that is sustainable in the long run.
So, we are very much focused on the subsidies issue, as
evidenced by the case that we brought. The case I think will
have a--indeed, I already have reason to believe it is having a
significant--it has been taken notice of by the Chinese as
being an effort to correct policies that go beyond a single
sector, but rather deal with the role that the Chinese
government is playing in terms of influencing its broad
economy.
If I could respond to your specific questions about the
filing of the Chinese notification and then the remaining
subsidies. The filing of the notification--China was in its WTO
accession commitment--accession package--indicated that it
would seek to provide notifications over the course of time.
We, starting in '01 and continuing I can tell you until last
May when we received--April or May when we received the
notification, pushed the Chinese assiduously on this.
It was a major topic leading up to last year's JCCT, and
indeed was notified almost contemporaneously with the JCCT, and
it has given us some transparency into what is frankly a very
opaque system. So, there was a real value to that.
The 70 subsidies notified, some of those subsidies have
given rise to--their notification has given rise to the case
that we brought. Some of the subsidies that we are targeting in
the case frankly are things we discovered on our own, or were
aware of outside of the subsidies notification. So, that is how
we've pursued this.
The remaining subsidies are--the subsidies we have brought
dispute settlement over are in our view clearly prohibited
subsidies, by which we mean they are subsidies that are export-
related or import substitution subsidies. They are so trade
distorting that the WTO has clearly marked them off for
specific treatment regardless of whether there is injury and so
forth. That's that tranche of subsidies.
Beyond that, there are subsidies that may or may not be
actionable under the WTO. It is important to recognize that
just because it's a subsidy doesn't necessarily mean it's a WTO
actionable subsidy, but there are subsidies that we are looking
at and discussing with industry to see whether they meet the
relevant definitions of being a WTO actionable subsidy; namely,
that there is a financial contribution from the government,
that it is specific to an industry or industries, that there is
a benefit accrued by that industry, and that it causes harm.
If we see that pattern, and this really does depend upon
getting a lot of information from our own industry, to be
honest with you, but if we see that, we have made very clear we
will not hesitate to use WTO dispute settlement as well as
whatever other tools we have to try and address it. We do
believe that this, again, as I started out with, subsidies is
critically important.
Chairman LEVIN. Thank you. Let me just ask Mr. Crowley, Mr.
Crowley, before you have to go, is it possible that a Chinese
requirement that a financial services institution--institute or
institution--be a subsidiary of a Chinese entity, it's
conceivable that that's WTO consistent?
Mr. BHATIA. Mr. Chairman----
Chairman LEVIN. I think in answer to Mr. Crowley you said
that there was a new regulation.
Mr. BHATIA. Yes.
Chairman LEVIN. That it, I thought you said required that
the entity be a subsidiary?
Mr. BHATIA. The issue is subsidy versus branching, is what
we're talking about here. So, that these are regulations that
the Chinese have put out to try and bring themselves into
compliance with their WTO obligations that they have made, and
we are trying to figure out whether as applied those
requirements are going to be consistent with the WTO
commitments they made.
Chairman LEVIN. Their regulation says what regarding being
a sub or a branch?
Mr. BHATIA. The regulations allow foreign banks that have
incorporated in China to provide the range of services that
we're looking to allow our companies to be able to provide,
including domestic currency transacted business.
Chairman LEVIN. So, they would allow a completely foreign-
owned bank to have a full range of services?
Mr. BHATIA. We are trying to figure out whether the
regulations as applied are going to permit that or not.
Chairman LEVIN. If they don't, it would be out of
compliance?
Mr. BHATIA. It would, I think, Mr. Levin--I don't want to
misspeak to you on whether there would be a WTO case there or
not. I do know that our industry appears to be--well, our
industry is concerned about being able to get access to the
market. I think the subsidies versus branching issue is one
that may be less pressing than ensuring that they ultimately
have that access.
I'm happy to follow up with you on more detail on whether
the regulations specifically on the subsidies versus branching
issue are consistent with WTO requirements or not.
Chairman LEVIN. Okay. Lastly, when you referred to the
request for consultations, when you referred to that, it's
interesting that the footnotes, in the footnotes, you have your
references to specific Chinese regulations or whatever, and
most of them date back a number of years. So, it would seem
that the document you filed shows that these were regulations
or otherwise published by China many years ago.
Anyway, let's focus on the future now. By the way, I did
ask the staff to look at the data of the Chinese surplus, and I
guess you have to add the European Union countries together,
but our deficit so overshadows that of any other country. I
guess Canada is next. Japan, Mexico. So, we better be a leader.
We've got the biggest deficit.
All right, Mr. Herger. Do you have any further questions?
Mr. HERGER. Maybe one last question, Mr. Chairman. Mr.
Bhatia, the USTR brought the prohibited subsidy case against
China because these prohibited subsidies are openly and
publicly advertised.
The whole point of these subsidies was to attract foreign
investment with these subsidies, and that can only occur if
they are known and documented. Could you tell us what about the
hard cases of hidden subsidies and what is the USTR's plan to
root these out?
Mr. BHATIA. Congressman Herger, that is challenging. I
don't deny the fact that the case we were able to bring, we
were able to bring because it was a de jure claim, and it was--
they were subsidies that were well known, and indeed the
Chinese, with respect to some of them, had notified them.
There are hidden subsidies, subsidies that may occur in the
form of concessionary financing or real estate for which there
is not market prices charged or no price charged. There could
be a bank funding or loans that are not--that don't need to be
repaid or are forgiven. There are a variety of instruments that
we are concerned about.
The challenge we have, to be frank, is a lot of that is
very opaque. There isn't clear--there is not a great deal of
clarity in that. I think we are approaching it several ways.
First of all, we're working to try and make China more
transparent. We are through the various dialogs, both the
strategic economic dialog as well as the JCCTs, there is almost
always a transparency feature to those as we've tried to move
China along.
Indeed, I'd point to the last JCCT where one of the major
successful outcomes was a commitment by China to enhance
transparency with respect to at least regulations that it's
putting forward. So, transparency is a key aim and goal.
I think secondly, we are trying to gather as much
information as we can, principally by working with U.S.
industry, about the hidden subsidies. It is--I will readily
confess, it is not easy, but we are endeavoring to do so. We
are working using U.S. Government resources and we are working
using in collaboration with the private sector, and that's what
we'll continue to do.
Mr. HERGER. Very good. Thank you.
Chairman LEVIN. Well, thank you very much. It's been very
useful.
Mr. BHATIA. Thank you.
Chairman LEVIN. We'll be seeing much of each other.
Mr. BHATIA. I look forward to it.
Chairman LEVIN. We stand in adjournment.
[Whereupon, at 2:02 p.m., the hearing was adjourned.]
[Submissions for the Record follow:]
Statement of Advanced Medical Technology Association
We thank the Committee for holding this important Hearing today on
China's use of subsidies and abuse of intellectual property rights
(IPR) As you know, AdvaMed represents over 1,300 of the world's leading
medical technology innovators and manufacturers of medical devices,
diagnostic products and medical information systems. Our members are
devoted to the development of new technologies that allow patients to
lead longer, healthier, and more productive lives. Together, our
members manufacture nearly 90 percent of the $86 billion in life-
enhancing health care technology products purchased annually in the
United States, and nearly 50 percent of the $220 billion in medical
technology products purchased globally. Exports in medical devices and
diagnostics totaled $25.5 billion in 2005, and imports were $23.7
billion. The medical technology industry directly employs about 350,000
workers in the U.S.
The medical technology industry is fueled by intensive competition
and the innovative energy of small companies--firms that drive very
rapid innovation cycles among products, in many cases leading new
product iterations every 18 months. Accordingly, our U.S. industry
succeeds most in fair, transparent global markets where products can be
adopted on their merits, and IPR are protected. We strongly support the
Administration's effort to expand market access for U.S. products
abroad through the World Trade Organization (WTO negotiations and new
free trade agreements (FTAs), as well as oversight of market access
barriers in countries with which we have strong trade relationships. In
addition, we believe U.S. participation in trade agreements is most
effective when provisions are enforced.
Global Challenges
Innovative medical technologies offer an important solution for
industrialized nations, including Japan and European Union members that
face serious health care budget constraints and the demands of aging
populations. Medical technologies also provide a way for emerging
market countries, like China, to improve healthcare to their people,
who are increasingly expecting substantially better healthcare to
accompany rapid economic development. Advanced medical technology can
not only save and enhance patients' lives, but also lower health care
costs, improve the efficiency of the health care delivery system, and
increase productivity by allowing people to return to work sooner.
To deliver this value to patients, our industry invests heavily in
research and development (R&D). Today, our industry leads global
medical technology R&D, both in terms of innovation as well as
investment. The level of R&D spending in the medical devices and
diagnostic industry, as a percent of sales, more than doubled during
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11%
last year. In absolute terms, R&D spending has increased 20% on a
cumulative annual basis since 1990. Our industry's level of spending on
R&D is more than three times the overall U.S. average.
Despite the great advances the medical technology industry has made
in improving patient quality of life and delivering considerable value
for its innovations, patient access to critical medical technology
advances can be hindered by onerous government policies. Patients and
health care systems experience much less benefit from our industry's
R&D investment when regulatory procedures are complex, non-transparent,
or overly burdensome--all of which can significantly delay patient
access and drive up costs. In the future, patients will be further
disadvantaged if payment systems fail to provide appropriate payments
for innovative products--which will subsequently affect the
availability of R&D funds and the stream of new technologies.
The medical technology industry is facing these challenges around
the world as governments enact more regulations. While we support those
regulations that ensure product safety and efficacy, many others are
being imposed without scientific justification, and in non-transparent
processes, which only adds to costs and delays without improving
patient outcomes.
As governments prioritize difficult budget decisions, they
sometimes look to short-term decreases in health care expenditures
without accurately assessing the long-term implications. In most cases,
governments do not effectively measure the contributions medical
technology makes in enhancing patient outcomes and productivity as well
as expanding economic growth, which would more than offset the costs of
providing these products. Instead, governments often inappropriately
include reduced reimbursement rates as part of overall budget cuts.
In some cases, governments seek to reduce prices of medical
technologies in their country by fixing ceiling prices. In the longer-
term, patients in these countries and around the world will experience
less access to innovative medical technologies, as research and
development funds decrease. This is the situation we are facing in
China.
Obstacles Impede Market Access in China
AdvaMed looks to the U.S. government to pursue trade liberalization
throughout the Asia-Pacific region and to protect IPR Because of its
potential market size and government policies, China should remain a
focus of U.S. Government attention.
China has quickly become an important market for the U.S. medical
technology sector. The American Chamber of Commerce in China estimates
that the Chinese market for medical technology exceeds $8 billion and
is growing rapidly. It is on pace to surpass some of the key European
markets for medical technology in a few years. As global leaders, U.S.
medical technology firms already account for a significant portion of
sales in China and the position of these firms underscores the
importance of ongoing efforts with the U.S. government to open the
Chinese market further.
AdvaMed looks forward to working with Congress and the
Administration to address the following barriers:
A Lengthy and Costly Product Registration Process
Redundancy in the Registration Process
Lack of Transparency in Decision-Making
Inappropriate Price Controls
Counterfeiting and piracy of Medical Technology
For the medical technology industry, the Bush Administration's
efforts with China under the U.S.-China Joint Commission on Commerce
and Trade, as well as in less formal meetings, are critical for
allowing U.S. medical technology firms broader access to the burgeoning
Chinese health care market. The recently-launched U.S.-China Health
Care Forum initiative, led by the U.S. Department of Commerce and
supported by AdvaMed and other health care partners, holds great
promise as another vehicle for addressing many of the trade-related and
health policy-related barriers confronting U.S. medical technology
firms in China. We also endorse including healthcare under the
Strategic Economic Dialogue.
However, our trade agreements offer little leverage over some of
China's policies that adversely affect our industry's market access. In
particular, agencies in the Chinese Government appear to be pursuing an
industrial policy, implementing measures that support certain domestic
industries to take markets from foreign suppliers. Medical technology
is one such industry.
The National Development and Reform Commission (NDRC) and the
Shanghai Pricing Bureau (SPB)--which we believe are in close
coordination--are demanding sensitive price, cost and marketing
information from U.S. companies. We believe that this is part of
China's industrial policy for its national medical technology industry.
The State Council Opinions on Invigorating the Equipment Manufacturing
Industry issued on June 28, 2006 clearly identifies the medical
technology industry. In July 11, 2006, the NDRC issued a proposal to
collect sensitive information from our companies. This proposal
includes a policy rationale for controlling foreign manufacturers of
medical technology, with an allegation that technology ``monopoly''
causes monopoly prices--which, of course, is not the situation in our
highly competitive industry.
In addition, our company representatives report the theft of their
intellectual property by some domestic firms. The use of this
intellectual property obviously provides a competitive advantage,
because such domestic firms do not have to devote hundreds of millions
of dollars for research and development of their products. This means
that domestic firms can produce medical devices at lower cost than
foreign firms, not because of greater efficiencies but because they are
not investing in research.
The detailed price information which the SPB is giving to local
associations and which is likely to be shared more widely with domestic
associations that are closely affiliated with the Chinese Government
would increase the competitive advantage for domestic companies. Our
competitors in China would very likely be able to obtain detailed
product-specific price information, ranging from prices at origin, on
foreign markets, at import, for wholesale, and for retail. Foreign
companies would not have access to the same information about domestic
firms. This result is both unfair and harmful to competition. In the
United States, sharing price information among competitors would be
contrary to anti-trust laws. If companies know what others are
charging, there is a risk that prices will be coordinated and
competition will be harmed.
The regulations imposed on our industry to provide detailed cost
information would be unique. We know of no other industry in China that
would be subjected to these types of requirements and controls--with
the exception of the pharmaceutical industry for which China's
accession commitment to the World Trade Organization includes a
specific provision.
The net impact of these policies is an indirect subsidy for
domestic Chinese medical technology companies. Price controls favor
domestic Chinese companies. Such companies do not incur the R&D
expenses, since they simply use U.S. technology. And, domestic
companies have far lower overall production costs, for the many well-
known reasons that favor Chinese manufactures. In a free and open
market, our companies can compete effectively on the basis of quality
and service. In a price-regulated market, with our domestic competitors
receiving sensitive IP and economic information due to Chinese
Government policies, the U.S. medical technology industry's ability to
compete and to provide patients our innovative products is seriously
eroded.
The medical technology industry has made a proposal to address
China's legitimate concerns regarding rising healthcare costs and
inappropriate distributor mark-ups. We hope continued U.S. Government
support will provide us to opportunity to discuss this proposal with
NDRC officials.
We also endorse efforts to convince China to enforce IPR. The U.S.
medical technology industry depends on our ability to innovate and to
have our new products protected.
Conclusion
AdvaMed appreciates the shared commitment by Congress and the
President to expand international trade opportunities and encourage
global trade liberalization. We look to the U.S. Government to
aggressively combat barriers to trade throughout the globe, especially
in China. AdvaMed is fully prepared to work with Congress to monitor,
enforce and advance multilateral, regional and bilateral trade
agreements, particularly with our key trading partners.
Statement of American Forest and Paper Association
The American Forest & Paper Association (AF&PA) appreciates this
opportunity to present the forest and paper products industry's views
regarding U.S. trade with China. AF&PA is the national trade
association of the forest, pulp, paper, paperboard and wood products
industry. The industry accounts for approximately 6 percent of the
total U.S. manufacturing output, employs more than a million people,
and ranks among the top 10 manufacturing employers in 42 states with an
estimated payroll exceeding $50 billion. Sales of the paper and forest
products industry top $230 billion annually in the U.S. and export
markets. The more than 200 companies and related associations AF&PA
represents have a strong interest in ensuring that commitments made by
China are met so they can create a solid basis for the continued growth
of business opportunities.
As is the case with many U.S. manufacturing industries, we face
increasing domestic and international challenges. Since early 1997, 128
pulp and paper mills have closed in the U.S., contributing to a loss of
85,000 jobs, or 39 percent of our workforce. An additional 60,000 jobs
have been lost in the wood products industry since 1997.
China's spectacular economic growth in the last decade is having a
dramatic impact on the global economy. In the forest products sector,
the speed in which China has become a major player has greatly
influenced global supply and trade pattern. The increasing trade flows
also have frequently been associated with unsustainable harvesting and
illegal logging in other Asian countries and Russia that supply timber
to the Chinese market.
AF&PA worked hard with others in the American business community in
support of China's membership in the World Trade Organization (WTO).
Since its WTO accession in 2001, China has implemented many economic
and regulatory reforms that have allowed it to achieve tremendous
economic success. However, the government continues to use subsidies
and other industrial policies to protect and nurture Chinese
industries. In the paper and wood processing industries, the result has
been a substantial expansion in China's production and exports over a
very brief time period and a corresponding drop in market opportunities
for U.S. manufacturers. This is incongruous since China doesn't have
the fiber resources necessary for a competitive forest products
industry, and is largely dependent on imported fiber in the form of
logs and other wood products, wood pulp and recovered paper.
U.S. TRADE WITH CHINA
China has the fastest growing forest products industry in the
world. However, with limited forest resources, China has to import a
significant amount of raw material in the form of logs, chips, pulp and
recovered paper. The total value of Chinese forest products imports
reached $17.8 billion in 2006, an increase of 72 percent since 2000.
Imports include $6.5 billion in wood products and $7.1 billion in wood
pulp and recovered paper. However, China's drive to meet rising demand
by heavily investing in domestic production, has meant that imports of
products such as paper and paperboard have stagnated over the last six
years. In 2006, paper and paperboard imports amounted to $4.2 billion,
a decrease from a year earlier, and just 7 percent higher than in 2000,
at a time when China's paper and paperboard consumption in volume terms
rose by more than 70 percent.
China's imports from the U.S. increasingly consist of raw materials
in the form of wood pulp and recovered paper as furnish for the Chinese
paper industry; and of logs and lumber for manufacturing solid wood
products, furniture and other wood products. In 2006, China's imports
of these products from the U.S. amounted to $1.86 billion, or 66
percent of total U.S. forest products shipments to China. In the past
several years, raw materials have represented a very high, and growing
share of China's forest products imports from the U.S. For example,
imports of recovered paper from the U.S. rose by over 182 percent in
the 2002-2006 period to $1.27 billion. In addition, China's hardwood
logs imports from the U.S. almost quadrupled during this period to $109
million.
In contrast, Chinese exports of forest products to the U.S.
increasingly consist of processed and finished products. For instance,
Chinese exports of coated free sheet--a paper product suitable for
high-end print projects, magazines, advertising, and brochures--reached
$225 million last year, almost double the amount recorded in 2005, and
up from practically zero in 2000. Just ten years ago, China had no
capability to produce international grade coated paper. Furthermore,
Chinese exports of converted paper and paperboard products, such as,
packaging paper, boxes, cartons and school supply paper reached
approximately $1 billion in 2006, which represented 72 percent of all
Chinese paper product exports to the U.S. last year.
In terms of wood products, China continues to be an important
market for U.S. producers, particularly for hardwoods. China's imports
of U.S. hardwood lumber, logs and veneer exceeded $477 million in 2006.
Increasingly, many U.S. wood products are used in domestic application
for furniture, interiors and outdoor construction, but also for the
production of picture frames and other value-added wood articles
principally manufactured for export to the U.S., Europe and other
global markets.
China also is becoming a significant supplier of primary wood
products such as lumber and plywood. It is the second largest supplier
of wood product imports to the U.S., and the largest supplier of
plywood and veneer imports. According to U.S. trade statistics, the
U.S. imported $3 billion of lumber and wood products from China in
2006, almost treble the amount in 2002. Of the total, imports of
plywood and veneer were $982 million last year, a 60 percent increase
from 2005. We have received reports that some Chinese oak-faced plywood
has been mislabeled as birch-faced plywood in order to avoid the 8
percent duty on the former.
AF&PA believes that as long as China fails to fully comply with its
obligations as a member of the WTO the longer-term export prospects are
not encouraging for U.S. manufacturers of forest products. This is the
case as China's production capacity for paper and paperboard and for
lumber and wood products is rising rapidly, and for some grades in
excess of domestic demand, largely with the direction and support of
the government and government owned or government controlled banks.
Consequently, this is displacing imports in key grades and leading to
growing Chinese exports, a trend that will likely accelerate if current
non-market economic and trade policies remain in place.
ANTIDUMPING MEASURES
China has been very aggressive in using antidumping investigations
as a tool to protect and promote manufacturing sectors identified by
the government as growth industries. Since the late 1990's, U.S. paper
and paperboard producers have been subject to four antidumping
investigations specifically in those segments of the industry where
Chinese manufacturing capacity has been rapidly expanding, including
newsprint, coated printing paper and kraft linerboard. This section
will highlight several important issues from our industry's recent
experience in the kraft linerboard case which was terminated earlier
last year only after USTR informed the Chinese mission in Geneva that
the U.S. was going to ask for consultation under WTO proceedings.
Lack of Transparency and Failure to Make Timely
Disclosure: When China's Ministry of Commerce (MOFCOM) initiated
antidumping investigation against kraft linerboard imports it did not
make the full text of the petition immediately available to all known
affected exporters. This is inconsistent with the requirements of
Article 6.1.3 of the WTO Antidumping Agreement. Furthermore, when
MOFCOM issued the preliminary determination on May 31, 2005, it
formally refused to disclose to AF&PA the aggregate data on which it
based its injury determination. This is at odds with China's
obligations as it interfered with the ability of U.S. exporters to
defend their interests in this case. Full disclosure of all such
information should be provided. In explaining the reason for
terminating the final determination, MOFCOM acknowledged that the
investigating authorities failed to provide some basic facts to
interested parties before issuing the final determination.
Inadequate Injury and Causation Analysis: The preliminary
and final determinations in the kraft linerboard case didn't provide
evidence of a causal link between the subject imports and the alleged
injury to the Chinese domestic industry as is required by Article 3.5
of the WTO Antidumping Agreement. Specifically, MOFCOM failed to
adequately account for the alleged injury caused to the domestic
industry by its rapid expansion in capacity and production in excess of
the growth in demand. This is a fundamental failure to abide by WTO
rules, which mandate that an investigating authority examine the injury
caused by factors other than the subject imports to ensure that the
injury from such factors is not improperly attributed to imports.
Improper Cumulation: MOFCOM improperly cumulated the
linerboard products exported to China by the three other countries
subject to the AD investigation with the kraft linerboard exported by
the U.S. even though these products differed in significant respect
from the U.S. product, including quality, physical characteristics, and
price. The cumulation of these products violated Article 3.3 of the WTO
Agreement and contributed to the erroneous injury analysis.
Even though MOFCOM eventually rescinded the AD duties, this was
almost 2 years after the launch of the investigation. In the meantime,
the uncertainty created by the case caused long-term disruption and
loss of business for U.S. kraft linerboard suppliers.
SUBSIDIES
The Chinese government has encouraged the development of a world-
class forest products industry through domestic investment and
expansion of paper and forest products manufacturing operations. Many
of the measures used to achieve the rapid and massive industry
expansion that has taken place in China in recent years include direct
and indirect subsidies that may not be WTO-legal. Since many of the
Chinese forest products companies are engaged in international trade or
compete against imports, they have an unfair competitive advantage
versus U.S.-based companies that must rely on financing at market
rates.
In the past several years, AF&PA has examined and documented the
various financial, trade and policy measures that the Chinese
government is using to build its fiber resources and its pulp, paper
and wood processing industries. Our research found that the Chinese
government employs direct and indirect subsidies--for example grants,
low interest loans and debt forgiveness--to prop up state-owned
enterprises, introduce new technology, and build massive new production
capacity.
The Chinese government acknowledged just as much during the kraft
linerboard antidumping investigation noted in the previous section. In
the preliminary determination, MOFCOM explicitly acknowledged that the
Chinese linerboard industry was targeted for government promotion. Such
promotional policies explain the growth of domestic industry capacity
and production in excess of demand. The result has been an erosion in
market share for imports, both from the U.S. and others countries.
AF&PA was pleased that the United States, in October 2004,
submitted questions to China in the WTO on its subsidy practices,
including a series of specific questions on subsidies in the forest
products sector. China committed to respond to these questions by the
end of 2005. So far, however, China has failed to provide information
in response to the Article 25.8 request filed by the U.S. in 2004.
We note that China's 11th Five Year Plan might signal an important
change in emphasis from previous plans when it comes to government
policy toward industry. Based on publicly available information, it
seems that the new Five Year Plan has a more market oriented approach
toward economic development and addresses some of the ``unhealthy''
outcomes of China's rapid industrial expansion, namely the potential
for environmental pollution, excessive energy and water consumption,
and China's raw material deficit. We hope that greater government
concern about the negative impacts of excessive investment will lead to
more balanced and sustainable growth in China's paper production and
capacity. In the meantime, AF&PA supports the continued efforts by the
U.S. at all levels to impress on China the need to reign in and
ultimately eliminate industrial subsidies.
U.S. industries have not been able to resort to the use of
countervailing duty (CVD) law to counter subsidized imports from China.
Since 1984, the U.S. Commerce Department has not applied CVD law to
non-market economies (NMEs) such as China, even though the WTO does not
prohibit the application of CVD law to NMEs. AF&PA, and a large group
of U.S. industries, supports legislation to clarify the intent of
Congress by expressly providing for the application of CVD provisions
to China and other NMEs.
CURRENCY MANIPULATION
The controlled undervaluation of China's currency has nullified
that country's WTO market access commitments. While AF&PA welcomed the
slight revaluation of the Yuan in July 2005, the meager appreciation of
China's currency since that time in spite of the country's strong
economic, financial and trade performance indicates that the Chinese
government continues to tightly manage its currency to support its
export led growth. As a result, U.S. manufacturers, including U.S.
producers of forest and paper products, remain at a significant
competitive disadvantage when exporting to China or when competing in
the U.S. or third country markets against Chinese exports.
The Chinese government's active intervention in foreign exchange
markets to keep its currency undervalued offsets the market access
benefits the U.S. negotiated under China's WTO accession agreement. The
General Agreement on Tariffs and Trade (GATT) Article XV, now
incorporated within the WTO, addresses Exchange Arrangements and
stipulates that members should not take exchange rate actions which
``frustrate the intent of the provisions of this Agreement'', namely,
negotiated reduction of tariffs and other barriers to trade. For this
reason, AF&PA believes that the U.S. Administration should continue to
press the Chinese government to allow the value of its currency to
reflect economic fundamentals.
ILLEGAL LOGGING
The presence of illegally procured wood fiber in several
international forest products markets affects the competitiveness of
U.S. producers who operate legitimately within national and
international environmental and trade rules. In the case of China, U.S.
trade opportunities are directly affected by the abundance of illegally
harvested timber from a number of regional sources. China, which is the
world's second largest importer of wood products, is laundering much of
this illegal product through its manufacturing sector. It is estimated
that 40 percent of Russian logs entering China are suspicious
(potentially illegal) because of excess cutting, harvesting without
authorization or as undocumented/unreported exports. China's imports of
hardwood logs also come from countries with significant problems with
illegal logging (Indonesia is the largest supplier of hardwood to
China).
A study commissioned by AF&PA, Illegal Logging and Global Wood
Markets: The Competitive Impact on the U.S. Wood Products Industry
(November 2004), examined the flow of suspicious roundwood into the
lumber and plywood sectors estimated that the value of U.S. wood
exports could increase by over $460 million annually were there no
illegally harvested wood in the global market. The elimination of
illegally harvested wood in the global market would also have an effect
on the pulp and paper sector. China plays a key role in the global
equation.
Illegal logging, associated illegal border trade, and the use of
illegally obtained timber in manufacturing distort international trade
and reduce market opportunities for U.S. suppliers. China needs to take
immediate steps to improve its on-the-ground enforcement capabilities
and improve monitoring systems that better regulate cross border trade.
AF&PA supports comprehensive compliance efforts by the U.S. Government
to ensure that the U.S. industry has a fair chance to compete in China
and in third country markets where our industry competes against
Chinese suppliers.
REFERENCE PRICING
China applies reference prices when calculating duties for imports
of certain wood products. As these reference prices seem to be set
unreasonably high, the result is higher duties than would be the case
if the invoice value of the shipment was taken into account. Sources
also indicate that local customs officials develop their own reference
prices independently, which means different customs posts use different
reference prices.
It is unclear why China is applying reference prices when
calculating duties on wood products. The WTO rules on the calculation
of duties state that the ``transaction value'' is the primary method
from which to determine duties, and if the ``transaction value'' cannot
be easily determined, the rules set out a series of alternatives, for
instance, the value of an identical or similar imported good, which
must be agreed to between the importer and customs authorities.
Reference prices to determine duties are not permitted under WTO rules.
RESTRICTIVE CODES AND STANDARDS
Even though the U.S. has been successful in having China adopt U.S.
design values and grading rules for common species of U.S. softwood
dimension lumber into its revised GB50005-2003 (design code) and
GB50206 (inspection code), there is no requirement in either code
regarding materials quality conformance, such as requirements for
grade-stamps for dimension lumber, wood-based structural panels and
preservative-treated wood. This could potentially create quality
problems for these wood products and compromise safety for structures
built with such non-conforming structural products.
Currently, China is developing product standards for dimension
lumber, wood-based structural panels and engineered wood products and
fasteners. In some cases, local builders use non-structural plywood as
sheathing or floor material. Even though progress has been made in the
area of revising China's Timber Structure Design Code and Timber
Construction Inspection Code to incorporate U.S. design values, grading
rules and species, more work is needed regarding the development of
product standards, product certification inspections and building site
conformity inspections to ensure Chinese engineers, inspectors and
consumers can determine the quality of structural material. The absence
of a formal recognition of U.S. certification agencies and their
grading rules/marks, for example, may lead to an increase in the
counterfeiting of building materials, or misleading labels being placed
on products, which has already been evidenced in the Chinese
marketplace.
CONCLUSION
The rapidly developing Chinese economy should represent a strong
potential for increased exports of U.S. wood and paper products.
However, that potential has not been fully realized as a result of
economic and trade distorting practices outlined above. To ensure that
our industry has a fair chance to compete in the Chinese market, AF&PA
strongly supports comprehensive efforts by the U.S. Government to
ensure that China complies with its WTO market access commitments.
AF&PA believes that China has a long way to go in addressing its
economic and trade distorting policies and practices before it can be
considered to be a market economy. The Administration should address
the critical issues of antidumping practices, subsidies, currency
manipulation, restrictive codes and standards, and illegal logging in
ongoing discussions with the Chinese government.
AF&PA appreciates this opportunity to provide comments to the
committee on our industry's views about trade with China. We look
forward to working with the committee in the 110th Congress to address
these critical issues.
Statement of Americans For Fair Taxation, Conyers, Georgia
Trade policies through the WTO as the arbitrator places
restrictions on the U.S.'s negotiating powers. Rather than trying to
promote exports through free trade agreements with other countries,
Congress should enact needed tax reform legislation to make trading
with the United States a desired goal of other countries.
Free trade is never really free either. It is a convoluted set of
tax treaties negotiated not for the benefit of the employer/exporter,
but rather between the governments to produce a neutral equation of tax
revenues paid to each countries government coffers.
It would be in the United States best interest to push for an
overhaul of our tax system by replacing the income tax with H.R. 25,
The Fair Tax. A system that does not place any tax on exports to other
countries automatically drives other countries to manufacture or source
the manufacture of their goods here in the U.S., rather than their own
country or elsewhere. This drives up the desirability of the United
states for a trading partner with anyone since our goods will be
produces more cheaply than our current system allows.
American Apparel and Footwear Association
February 26, 2007
The Honorable Sander M. Levin, Chair
Ways and Means Trade Subcommittee
U.S. House of Representatives
Washington, DC
Dear Chairman Levin:
Thank you for providing us this opportunity to submit this
statement in relation to the hearing cited above.
The American Apparel & Footwear Association (AAFA) is the national
trade association representing the apparel and footwear industries, and
their suppliers. Our members produce and market apparel and footwear
throughout the United States and the world, including China. In short,
our members make everywhere and sell everywhere.
I would like to take this opportunity to briefly describe the
importance of China to the U.S. apparel and footwear industries and how
our relationship with China benefits U.S. apparel and footwear firms,
U.S. workers, U.S. consumers and, in turn, the U.S. economy. I will
also discuss our concerns and hopes for this relationship in the
future, particularly as it relates to the focus of this hearing--i.e.
Intellectual Property Rights (IPR) and subsidies.
Our Industry--Then & Now
But first, a little background on our industries. Our industries
have historically been among the most protected industries in the
United States--subject to decades of stiff protection in the form of
high tariffs and restrictive quotas (for apparel). Even today, U.S.
apparel and footwear imports from China are still subject to high
tariffs and, in the case of apparel, quotas.
Yet, this incredible protection failed to do the very thing it was
supposed to do, protect the U.S. apparel and footwear manufacturing
base. Today, more than 98 percent of all footwear and more than 90
percent of all apparel sold in the United States is imported. For
comparison, in 1980, only one-half of all footwear and less than one-
third of all apparel sold in the United States was imported.
Today, less than 630,000 people work in the manufacturing of
apparel, textiles and shoes in the United States--a loss of over 1.6
million jobs, or almost three-quarters of the entire manufacturing
workforce since 1974. Almost 1 million of those jobs have been lost in
the last decade alone.
Despite this seemingly bleak picture, the U.S. apparel and footwear
market is booming. Americans like their clothes, and their shoes, and
it shows. U.S. consumers spent a record $350 billion on apparel and
footwear last year, or an average of $1,800 for every man, woman and
child in the United States. Even as energy prices skyrocketed last
year, retail sales at clothing and footwear stores were 6.1 percent
higher than in 2005. The bottom line is that despite whatever economic
pressures face us, Americans still buy new things to wear. Americans,
however, are picky about their shoes and clothes, they continually want
an ever-wider variety of higher-quality shoes and clothes at lower
prices--and our industry has had to respond.
U.S. footwear and apparel firms have responded to these challenges
by transforming themselves from manufacturers into brands. Today's U.S.
apparel and footwear ``brands'' are more lean and more competitive than
ever--their goal is to provide the American consumer with what they
want--the best brands at the best prices, while still making a profit.
And the result of this is that U.S. apparel and footwear firms are
thriving, with many achieving profits last year--profits that go
directly back into the U.S. economy and ensure a competitive industry.
Further, while the industry has lost over one million manufacturing
jobs in the last decade, the industry has produced hundreds of
thousands of good-paying new jobs for U.S. workers--not in
manufacturing, but in such varied professions as design, research and
development, marketing, distribution, sourcing, warehousing,
management, administration and sales. Further, the industry directly
supports another 1.5 million plus jobs at retail establishments
throughout the United States.
The industry's transformation has directly benefited U.S.
consumers--particularly hardworking lower- and middle-income American
families--by lowering prices on one of the most basic staples every
man, woman and child needs. As a result of the industry's
transformation, apparel and footwear retail prices have declined some
10 percent since 1998, despite a 20 percent increase in overall retail
prices during the same period--saving American families countless
billions of dollars every year--money they pump back into the U.S.
economy.
Thanks to these lower prices, American families today spend a
smaller percentage of their income on shoes and clothes, a necessity
for every American, and instead spend more elsewhere. According to the
U.S. Department of Commerce's Bureau of Economic Analysis, the
percentage of the average American family's Personal Consumption
Expenditures (PCE) spent on clothes and shoes has dropped by almost
one-half since 1977--from 6.6 percent of total PCE in 1977 to less than
3.9 percent today. With consumer spending driving over 2/3 of our Gross
Domestic Product (GDP), the decline in U.S. apparel and footwear prices
has helped fuel the overall economy.
China's Relationship with the U.S. Apparel & Footwear Industry
The U.S. apparel and footwear industry could not have succeeded in
transforming into the success that it has become today without the
existence of China. Working for the most part with foreign-owned and
privately-held factories in China, U.S. apparel and footwear firms have
been able to give American consumers what they want--an ever-wider
variety of higher-quality shoes and clothes at lower prices.
Today, this relationship is stronger than ever. U.S. footwear and
apparel firms imported over $30 billion worth of footwear and apparel
from China. U.S. imports from China account for over 85 percent of all
shoes and over 25 percent of clothes sold in the United States.
Opening the Chinese Market to U.S. Apparel and Footwear Brands
There Has Been Progress, but More Must be Done
U.S. footwear and apparel firms, however, recognize that 95 percent
of the world's population lives outside the United States. Some of
their fastest growing markets are no longer in the United States or
Europe, but in China, or India or Brazil. U.S. apparel and footwear
firms are now truly global--they buy and sell clothes and shoes all
over the world. That is why AAFA's motto is--``We Dress the World.''
That is why our industry was one of the biggest supporters of China
entering the World Trade Organization (WTO), not just because of our
relationship with China as a supplier to the U.S. market, but because
we wanted to use WTO rules to open China--with the world's largest
middle class of 200 million people and growing--to U.S. brands. Since
China's WTO accession, our industry has worked closely with the U.S.
government and the rest of the U.S. business community to ensure that
China lives up to its commitment in opening up its distribution and
retail sectors. Thanks to our efforts, China has largely lived up to
those commitments, opening the doors to U.S. brands to sell into the
vast Chinese market. While U.S. brands have had some success in China
because of these efforts, restrictions still exist in these sectors. We
hope the Chinese fully live up to their commitments in these areas.
Intellectual Property Rights (IPR)
Moreover, we have been deeply disappointed with the progress made
to date on China's efforts to improve its Intellectual Property Rights
(IPR) enforcement. U.S. footwear and apparel brands have been subject
to rampant counterfeiting in China, stalling our efforts to break into
this important market.
This problem even affects us in our home market--the United States.
Every year, clothes and shoes top the list of counterfeit items seized
by U.S. Customs. We estimate that these seizures represent only a small
fraction of the total amount of counterfeit shoes and clothes entering
the U.S. market.
China must do more on IPR enforcement. While we continue to support
the dialogue between the U.S. and Chinese governments on this subject,
the Chinese must move beyond talk and take action. Otherwise, the U.S.
government must take action.
Subsidies
We applaud the Bush administration in initiating a case against
China in the World Trade Organization (WTO) again China's continued use
of WTO-Prohibited Subsidies. Such subsidies can truly distort trade in
certain products and industries. Further, the arbitrary nature of such
subsidies, where China has provided and then removed such subsidies
without notice, creates immense uncertainty for our industry.
Next Steps--the U.S. Apparel and Footwear Industry View
As we noted, China still has a long way to go in meeting its
international obligations--as both a major economic power and as a
major market for U.S. brands and U.S. products. We fully support the
current administration's efforts to address these many issues through
dialogue. As we also noted, however, our industry would support further
actions in specific instances where dialogue continues to produce less
than desired results.
I would, however, caution those who would propose certain
``remedies'' for the purpose of resolving many of these issues. First,
many of the proposed ``solutions'' clearly violate U.S. obligations
under international trade rules. While many might not be concerned
about this, this violation is of critical concern to our industry. As I
mentioned previously, U.S. apparel and footwear firms make and sell
everywhere around the world, including selling clothes and shoes made
in China into major markets like Europe, Brazil and India. Any action
taken by the United States against China that violates international
trade rules would not only be closely watched by these countries but
quickly replicated, closing these important markets to U.S. brands
Second, many of these proposed ``remedies'' would impose
significant penalties, in the form of punitive duties or other
restrictions, on some or all U.S. imports from China. As I have already
stated, virtually all clothes and shoes sold in the United States are
imported, with a significant portion being imported from China. Similar
situations exist for a multitude of other consumer products. If such
``remedies'' are imposed, those remedies would amount to huge new tax
on hardworking American families--at a time when many of these families
could least afford it.
Finally, such actions could actually hurt the very U.S.
manufacturing base these measures are supposedly trying to protect.
Regrettably, recent history has repeatedly demonstrated this fact--our
members' products--U.S.-made apparel and footwear--figured prominently
on foreign country retaliation lists in both the WTO dispute over
Foreign Sales Corporations (FSC) and in the WTO dispute over the Byrd
Amendment. These punitive measures severely crippled what remains of
the U.S. apparel and footwear manufacturing industries as it
essentially closed their primary export market for U.S.-made footwear
and apparel--Europe.
The U.S. apparel and footwear industry recognizes that many
important issues exist in the U.S.-China relationship--issues that
directly affect U.S. apparel and footwear firms. However, as in the
case of our industry, the relationship between the United States and
China is one that is critically important to and very intertwined with
the U.S. economy. Therefore, I urge policymakers to carefully consider
all aspects of this vital and complicated relationship before setting
new policy.
Thank you for your time and consideration in this matter.
Sincerely,
Kevin M. Burke
President & CEO
Statement of Coalition of Service Industries
China's Implementation of WTO Committments
Thank you, Mr. Chairman and members of the Subcommittee, for the
opportunity to express the views of the Coalition of Service Industries
(CSI) on U.S.-China services trade and China's implementation of WTO
services commitments. CSI is the leading business association dedicated
to reducing barriers to U.S. services exports and mobilizing support
for policies that enhance the global competitiveness of U.S. service
providers. Our membership consists of U.S. corporations and
associations engaged in many commercially important services sectors.
Many of our member companies have significant presence in China and are
deeply interested in China's full implementation of its WTO commitments
and the continuation of its sectoral reforms.
Since WTO accession, China has conducted comprehensive trade
reforms that opened key services sectors to foreign participants,
improved trade policy predictability, and expanded China's foreign
markets. According to the World Bank, Chinese global cross-border
services exports grew from $5.7 billion in 1990 to $62 billion in 2004.
China's exports in travel, IT and communication services were
especially strong. U.S. cross-border exports to China also increased by
61% from $5.6 billion in 2001 to $9 billion in 2005. The U.S. services
trade surplus with China now stands at $2.6 billion, and is based on
strong U.S. exports in business, professional, educational, financial,
and telecommunications services.
Despite the robust growth of U.S.-China services trade, China's
economy is unbalanced, because its policies continue to favor export-
oriented manufacturing sectors, as opposed to local consumption-
generated growth based on demand. As a result of these skewed policies,
Chinese services sectors have experienced lower growth than the goods
sector, and comprise only 41% of GDP. This is less than the average
services GDP in low and middle income countries, and much lower than in
the U.S., where private services are 78% of output, and 80% of private
sector employment.
The development of China's services sector is also hampered because
U.S. companies are still unable to take full advantage of its WTO
commitments due to erratic implementation. In our reviews of China's
services trade record, we specifically stressed systemic, cross-cutting
issues, such as market access and national treatment, poor services
infrastructure, the lack of transparency, the lack of intellectual
property rights (IPR) protection, and other challenges. We support the
U.S. Government's decision to raise these overarching issues at the
U.S.-China Strategic Economic Dialogue (SED), which we urgently hope
will also create a solid foundation for solving many sector-specific
trade impediments in other forums.
Structural and Systemic Issues for Strategic Economic Dialogue
CSI members support the objective that the SED process should
remove structural barriers that impede both China's growth and U.S.
access to its markets through trade and investment. Services sectors
have become increasingly important to China's further infrastructure
growth and global competitiveness. Therefore, we suggest that the SED
forum focus on the following systemic issues:
Increased Regulatory and Licensing Transparency
It is in China's interest to fully embrace regulatory transparency.
China made substantial WTO commitments to regulatory and licensing
transparency, such as notice and comment requirements for new trade
laws and regulations, improved licensing procedures, and judicial
review. However, full implementation of these commitments simply has
not taken hold in the Chinese bureaucracy. Chinese laws, regulations,
and administrative practices frequently change without warning, and are
frequently not applied uniformly. We are also concerned that China's
rules often provide regulators with broad discretion, resulting in
unpredictable rules and decisions.
A modern economy requires transparent government and regulation.
Transparent rule-making and licensing are one of the best ways to fight
corruption in China. Through consistent, adequate notice and comment
periods and the involvement of key stakeholders in the regulatory
development process, many outstanding specific trade and investment
problems U.S. companies continue to confront might be eliminated.
We also encourage the Chinese Government to seek active
participation by all stakeholders in regulatory reform. The review of
the postal legislation, for example, would benefit from active
consultation with the private express delivery industry. China should
also consult with the private sector on its pending telecom bill, draft
insurance law, and other important sectoral legislation. The
opportunity for meaningful public comment on China's legislative
measures is required by GATS rules on transparency and China's WTO
accession commitments on notice and comment.
Strengthening Key Regulatory Institutions
Chinese officials acknowledge that their regulatory agencies for
securities, insurance, and other services are not sufficiently
developed. China's trade negotiators have repeatedly used this argument
as a reason to deny better offers on services. We suggest that USTR,
Treasury, and other agencies offer technical assistance to help the
Chinese strengthen their regulatory institutions. For instance, the
Chinese telecom regulator is not sufficiently independent in its
functions and responsibilities from the state-owned telecom monopolies.
Enactment of a Telecom Law that would establish an independent
regulator could serve as the basis for a significant expansion of the
telecom sector and those industries that depend on competitive telecom
services. U.S. experience with telecommunication regulation could
surely be useful!
Financial Sector Modernization
The structural rigidities of the Chinese financial system are well
known. The system perpetuates bad loans from state banks to state
enterprises, starves small and medium services companies of funds and
encourages investment in sectors suffering from overcapacity, which
leads to China's continued exploitation of export markets. All this
results in poor savings returns for Chinese citizens and widespread
economic inefficiencies. Chinese leaders have indicated they are aware
of these shortcomings and of the need to strengthen the Chinese
financial services sector.
China's objective of modernizing its financial sector can be
achieved by continuing to liberalize foreign investment policies in the
financial services sector. China will need to redouble its efforts to
increase regulatory transparency, permit full foreign ownership of
investments, and offer a full choice of juridical form.
A more open market will allow foreign financial services suppliers
to introduce new and innovative products that could serve as models for
health insurance coverage, retirement savings, and accidental death and
dismemberment benefit plans. This will require full national treatment
for foreign firms in all areas affecting operation and expansion of
business.
Promoting Innovation and Technical Assistance
Because China and the U.S. share the goal of promoting innovation
in services to secure economic growth, both countries should
collaborate on research and development of the new field of ``services
science.'' Services science is a multidisciplinary field that combines
training for technology, science, management and engineering skills.
IBM is partnering with the Chinese Ministry of Education and leading
universities to develop this new academic field of study, and
collaboration between research universities in both countries provides
an excellent partnership opportunity.
We support and encourage China's ambitious goal of developing a
competitive IT and computer and related services sector. However, this
requires the Chinese Government's strong commitment to preparing a
globally competitive workforce. U.S. associations and their members
have the necessary expertise in the training and certification of
highly skilled IT services specialists, and can help Chinese
authorities to meet their export and domestic IT worker development
goals.
In its ``Opinion on the Reform and Development of the Insurance
Industry'' of June 26, 2006, the Chinese State Council states that
foreign insurers should be relied upon as a source of innovation and
high standards, and that market demand should be the driving force in
determining the need for new products. China Insurance Regulatory
Commission (CIRC) leadership endorses these goals. Nevertheless, the
current regulatory process does not allow for the rapid approval of new
products and appropriate tax treatment to encourage the sale of
sophisticated new policies. For example, CIRC has failed to allow
foreign carriers to provide political risk insurance for Chinese
companies with exposures in foreign markets, even though there is keen
demand for this product. Additionally, the inadequate tax deductibility
of producer commissions hinders the sale of sophisticated insurance
products.
Increased Market Access in Sectors Dependent on Intellectual Property
Rights (IPR) Protection
Elimination of China's trade barriers in audiovisual, software, and
IT goods and services is one of the factors that can help solve China's
piracy problem and foster sound investment and economic growth,
benefiting both U.S. and Chinese producers. However, current trade
barriers and regulations make it difficult for U.S. companies to enter
the Chinese market to supply legitimate IPR products, thereby ceding
the market to counterfeit and pirate products.
China's piracy and counterfeiting at the wholesale and retail
levels, end-user piracy, Internet piracy, multi-channel signal piracy,
and unauthorized access to 'overspill' satellite pay-TV programs remain
rampant due to lenient penalties, uncoordinated enforcement among local
and national authorities, and the lack of transparency in
administrative and criminal enforcement. The piracy rate for optical
media products and software is reported to be over 90 percent. China's
law still stipulates inadequate criminal liability for copyright
offenses, e.g., corporate end-user and Internet piracy, unclear
protection for temporary copies, and overly broad exceptions to
protection of computer software. Criminal prosecution of piracy remains
restricted by the Chinese criminal code, which requires a demonstration
that piracy is occurring for the purpose of making a profit.
Sector-Specific Issues for Joint Commission on Commerce and Trade
In addition to its overarching systemic issues, China should
resolve the following sector-specific issues, which are addressed
mainly at the Joint Commission on Commerce and Trade (JCCT). We
appreciate that the U.S. Government also raises these sector-specific
trade barriers at Transitional Review Mechanism (TRM) meetings in the
WTO, but we are disappointed at China's lack of responsiveness to these
efforts. It is essential that China honor its WTO services obligations
and carry out its commitments in the JCCT.
Financial Sercices
CSI has been working closely with the U.S. Government to urge the
Chinese leadership to implement its existing WTO commitments fully and
liberalize China's financial services sector further. The Chinese
Government should improve its WTO financial services commitments to
reflect the following principles: the ability to own 100% of
investments; establish in the juridical form of choice; enjoy non-
discriminatory, national treatment in all aspects of business; have
permission to supply services cross-border to sophisticated consumers;
and rely on greater regulatory transparency with effective notice and
comment periods. These principles would give U.S. financial firms new,
commercially meaningful opportunities in China.
Insurance
After issuing the amendment to China's Insurance Law in 2003, CIRC
followed with important implementing rules regarding the administration
of insurance companies, asset management, risk control and other
aspects of insurance regulation. We appreciate that CIRC also allowed
interested parties to provide comments on the draft Insurance Law.
Despite these developments, significant market access and national
treatment concerns remain:
Branching. The ability to grow business geographically
through branch and sub-branch expansion is the most important issue for
many foreign insurance companies in China. We are concerned that branch
approvals for U.S. providers are still being granted one at a time,
while established and start-up Chinese companies receive approval to
open multiple branches. This practice is contrary to international
practice, impedes competition, and most importantly violates China's
WTO national treatment commitment for insurance. Senior officials at
CIRC have confirmed to USTR their commitment to allow foreign companies
to establish multiple concurrent branches. We are pleased with this
statement, and would call on CIRC to confirm this intention in an
administrative clarification to all CIRC officials. Most important of
all is a change in actual practice.
Subsidiary Conversion Despite CIRC's effective requirement that
foreign-owned insurers convert their Chinese operations from branches
to subsidiaries (notwithstanding China's WTO commitment to allow
foreign general insurers to operate on either a branch or subsidiary
basis), the regulator continues to delay approval of companies'
applications for such conversion. This delay contravenes CIRC's own
regulation (Baojian Fa 45, page 3, section 6) that requires its
response to applications within two months. The delay--over a year for
some companies--has created uncertainty and confusion in corporate
planning as insurers eager to expand can only apply for permission to
open new offices three months after the conversion process is approved.
We urge CIRC to adhere to its own regulation and approve applications
on a timely basis.
Capitalization Requirements. CIRC should confirm that the
RMB 200 million capital requirement for initial establishment, whether
as a subsidiary or a branch, includes the right to establish sub-
branches without limitation on numbers, and without having to satisfy
any additional capital requirements. The Chinese government has yet to
provide its rationale for requiring additional capital of RMB 20
million for each additional branch, particularly given that any
additional branches would still be backed by the full asset base of the
admitted entity and have to comply with all CIRC solvency rules.
Overseas Utilization of Insurance Foreign Exchange Funds.
CIRC's Provisional Measures on the Administration of the Overseas
Utilization of Insurance Foreign Exchange Funds establish a qualifying
threshold (total assets of RMB 5 billion) for companies to invest their
foreign exchange capital in overseas funds or equities. CSI members are
concerned that even though this limitation applies to both domestic and
foreign providers, only the largest insurers, i.e., mostly domestic
companies, will have the necessary assets to qualify. Many foreign-
invested insurers will not qualify unless CIRC recognizes the assets of
the parent foreign company when determining the asset level of a
foreign-invested company.
Insurance Asset Management Restrictions. Under Article 8
of CIRC's Interim Regulations for Insurance Assets Management
Companies, only providers that have held licenses for more than eight
years are permitted to apply to establish an insurance asset management
company. Although China previously stated that this limitation applies
to both domestic and foreign providers, it effectively excludes all
foreign companies entering the market since China's WTO accession in
2001.
Reinsurance. Senior officials at CIRC have confirmed to
USTR their commitment to allow foreign reinsurance and insurance
companies to conduct cross border reinsurance with Chinese direct
insurers or reinsurers on a national treatment basis. We applaud this
action, and would call on CIRC to confirm this intention in an
administrative clarification to all CIRC officials. This clarification
should state that China will suspend implementation of the 2005
Regulations on Administration of Reinsurance Business, as the
regulation discriminates against foreign reinsurance companies by
requiring right of first refusal for 50% of each primary company's
reinsurance program with domestically admitted reinsurers. CIRC should
also clarify that for purposes of these measures a 100% foreign-owned
insurance operation may cede to a parent or affiliate insurance
company.
Acquired Rights. Companies operating in China at the time
of WTO accession are entitled to continue operating and geographically
expand their business on the basis of their previous juridical form.
Asset Management and Securities
Foreign firms are currently permitted to own 49% of joint-venture
asset management firms in China, consistent with China's WTO accession
commitments. We strongly urge China to go beyond its WTO commitments by
allowing foreign firms to choose their form of establishment and equity
participation levels, and permitting competition on the same basis as
domestic firms.
For asset management firms, the Chinese Joint Venture Rules require
foreign firms to have at least RMB300 million (U.S.$39 million) in
paid-in capital to qualify as a joint venture partner. This requirement
is significantly higher than in other jurisdictions, and serves as a
market barrier to U.S. companies. Asset management firms do not need
large amounts of capital to protect investors because their business is
not capital intensive, and client assets typically are not at risk if
the asset manager experiences financial difficulties.
A high regulatory capital requirement disproportionately affects
foreign asset managers because their operations are typically not as
significant as their operations in their home country. As a result,
domestic firms will be able to comply with a large capital requirement
more easily than foreign firms. Additionally, while large banks or
broker dealers may not find it difficult to meet high capital
requirements, many smaller, independent firms are part of the highly
successful asset management industry in the United States.
We are encouraged by recent developments that allow Chinese
nationals and corporations to invest in overseas markets as qualified
domestic institutional investors (QDIIs). We hope that the new rules
will be implemented in a fair and transparent manner that allows all
qualified asset managers--domestic and foreign--to participate on an
equal basis.
Although we are pleased that China took steps to open the A-share
market to foreign investors by adopting rules on qualified foreign
institutional investors (QFIIs), the CSRC and SAFE have been slow to
amend the rules to increase their practicality. We understand that
anticipated revisions would address many of our concerns, including a
reduction of the lock-up period from one year to three months and a
simplified approval process for remittances, but these revisions have
been delayed repeatedly. We urge greater liberalization of the QFII
regime to remove restrictions on investment by QFIIs.
Pensions
CSI members are pleased that the Chinese government has issued its
new enterprise annuity initiative to provide better retirement security
for its citizens. However, the new regulations are incomplete and
ambiguous. Thus, we suggest that the enterprise annuity rules be
clarified further, and implemented in a transparent and predictable
way. To ensure companies' compliance, China should specifically clarify
the licensing process and procedures, and provide information on the
regulatory and supervisory authorities, and operation requirements,
with a view to securing a level playing field among the various
financial services entities that offer such products. We would also
suggest that pension providers be permitted to apply for a
comprehensive license covering all required entities (Trustee,
Custodian, Record Keeping and Fund Management), such that they can
service all aspects, including a pension plan member's retirement plan.
In May 2005, it was reported that the Ministry of Labor and Social
Security (MOLSS) had stopped accepting applications for enterprise
pension funds. Although MOLSS has indicated that there will be future
application periods, it has not identified the date when applications
will be accepted again.
CSI members also suggest that China adopt a universal approach to
taxation of pension plans and that its tax regime enable employers to
make tax-favored contributions to employees' pension plans. Tax rules
should provide tax deferral for individuals that contribute to defined
contribution pension accounts, similar to U.S. 401(k) plans. As the
U.S. experience shows, tax incentives are essential for strong and
healthy development of private pension plans.
We also encourage the Chinese pension regulator to promote high
sectoral standards and professional management by separating financial
companies' pension operations from other businesses. This can be done
through establishing pension subsidiaries, a trust entity, such as a
master trust, which would provide for financial protection of pension
plan members, or setting up a mechanism to better separate pension
assets from other assets.
Electronic Payment Services
Although China represents an extremely large potential market for
the vibrant U.S. electronic payments industry, U.S. electronic payments
providers, global leaders in these services, have very limited market
access in China. Currently, foreign electronic payments cards cannot be
issued by any bank (local or foreign) unless they are co-branded with
China UnionPay (CUP). CUP was established by the People's Bank of China
(PBOC) in 2002 as a monopoly domestic electronic payments provider and
processor. We believe these restrictions violate China's accession
commitments in financial services, which came into force on December
11, 2006.
The PBOC has asserted that allowing foreign banks to issue CUP
credit and debit cards to Chinese consumers by the December 11 deadline
was all that was required for China to meet its WTO commitments. This
is clearly not the case. China's GATS schedule requires that it provide
for unrestricted market access and national treatment for ``payments
and money transmission services, including credit, charge, and debit
cards.'' This means that China must allow financial institutions to
issue payment cards of their choice and permit foreign providers to
process both foreign currency and domestic currency transactions
without CUP involvement. Banks cannot be required to issue only one
brand or co-branded domestic payment cards.
In addition, China committed to unrestricted market access and
national treatment for ``advisory, intermediation, and other auxiliary
financial services'' for other financial services listed in its
schedule, including payments. China also committed to open market
access for the ``provision and transfer of financial information, and
financial data processing--by supplier[s] of other financial
services,'' and took no exceptions that would allow any domestic
payments processor to operate as a monopoly.
WTO also mandates that countries may not use standards to exclude
foreign service providers in sectors in which they have made specific
commitments. Thus, China must adopt standards for electronic payments
processors that are neutral in law and fact.
Telecommunications
China's narrow interpretation of market access opportunities for
foreign participants and lack of an independent regulator remain key
outstanding issues, which contradict its WTO accession commitments.
Specifically, foreign market entry is being delayed by the Ministry of
Information Industry's definition of value-added services (VAS) for
international value added network service licensing. The regulator has
construed the meaning of VAS in China's WTO commitments so narrowly
that any commercially important sectors, such as IP-virtual private
networks (IP-VPN) services demanded by global enterprises, are
excluded.
China's unreasonably high capitalization requirements for basic
services and the prohibition on resale absent a basic services license
have also greatly limited market access in both basic
telecommunications and VAS. We believe that resale should be permitted,
and subject to appropriately lower market entry requirements. Further,
the requirement that foreign telecom service providers may only enter
into a joint venture with one of the existing state-owned enterprise
telecom providers is problematic.
Contrary to its claims, China has not implemented its WTO Reference
Paper commitment to establish an independent regulator. The Chinese
Government still owns and controls all major telecom operators, and the
Ministry of Information Industry serves in the chain of command as a
leader rather than a regulator of the sector.
Despite the WTO commitment to discuss further sectoral
liberalization, China has yet to submit an improved telecom offer with
broader market access, including higher foreign equity participation.
The industry hoped that the JCCT Telecom Dialogue would offer a
useful vehicle to ensure China's WTO compliance and advance industry
interests in liberalizing its telecommunications market. The Telecom
Dialogue is already well into its second year with no tangible progress
evident. At last year's JCCT Plenary meeting, the U.S. government was
able to obtain China's commitment to address the capitalization
requirement. We look forward to its substantial reduction, but there
has been no progress to date.
Express Delivery
U.S. express delivery service (EDS) industry members are concerned
that the Chinese government has not yet released the details of its
plans for postal reform and that it has not taken into account the
serious concerns that the industry has expressed about the draft postal
law. The opportunity to review the postal reform plan and draft law,
and the opportunity for meaningful public comment on China's postal
measures are required by GATS rules on transparency and China's WTO
accession commitments on notice and comment.
The current (eighth) draft postal law--which industry has not been
allowed to see--reportedly attempts to narrowly define express delivery
services contrary to China's WTO market access commitments, and
includes national treatment violations for domestic delivery services.
The law would grant China Post a monopoly on letter delivery with two
exceptions. The first exception would allow for international express
letter delivery, subject to a separate set of regulations. The second
would apply to letters and certain official documents of more than 150
grams. However, the second exception is not available to foreign-
invested EDS suppliers, and would explicitly prohibit foreign-invested
enterprises from supplying domestic express letter delivery services in
China.
China's draft law and postal reform plan would apply a tax on all
entities operating under the expanded postal monopoly. The current
draft does not include specific percentages for a universal postal
service fund tax. We are concerned that this measure would result in
millions of dollars of lost revenue for U.S. companies and would
increase the cost of trade. At the same time, it is unclear how this
fund would be used by China Post, so there is a possibility that it
would be used to subsidize its express delivery services.
The draft would also grant new powers to the State Postal Bureau
(SPB) to regulate the international express industry. This includes
subjecting mergers and acquisitions of EDS companies' operations in
China to review and approval by the SPB.
We understand that the eighth draft includes several articles that
give state-owned China Post, its subsidiaries and branches, including
its express delivery arm EMS, many competitive advantages against
private companies. These advantages include exemption from traffic
regulations; expedited priority dispatch ensured by other
transportation companies; preferential access to air, rail and sea
transport; as well as potential tax breaks and subsidies. In addition,
postal enterprises that engage in competitive letter express businesses
like EMS are not subject to the licensing requirements that other
express delivery companies must follow.
China Post's Entrustments Issue
Despite Chinese government assurances and published regulations
stating that entrustment certificates from China Post would be
processed one time only and be valid for the duration of the firms'
international freight forwarder licenses (i.e., several years), the SPB
granted these certificates for a limited time only, most recently for
the calendar year 2007. Although those same assurances and regulations
state that firms would be granted one entrustment at the national level
and the new branches would be ``recorded'' with the SPB, the SPB has
directed companies to entrust locally. However, the local Postal
Authorities in headquarters' jurisdiction claim that they lack the
authority to entrust more than headquarters' operations. This
entrustment regime violates China's WTO commitments not to roll back
companies' market access rights and not to use licensing procedures to
restrain foreign competition.
Freight Forwarding and Logistics Services
Revised international freight forwarding (IFF) rules issued on
December 1, 2005, implement China's commitment to allow wholly foreign
owned IFF ventures, but regulations published by the Civil Aviation
Administration limit the ability of wholly foreign owned IFF
enterprises to provide the full range of such services. To book cargo
space on an airline in China, an IFF enterprise must obtain an Air
Freight Sales Agency License from the CAAC. There are two categories of
air freight sales agency licenses: Class A, which allows the holder to
book cargo space on international flights; and Class B, which allows
the holder to book cargo space on domestic flights. Wholly foreign
owned enterprises are unable to obtain these licenses, which are
available only to domestic firms and joint ventures.
We believe this restriction is a violation of China's WTO full
market access commitments in freight forwarding agency services (CPC
748 and 749) under ``Services auxiliary to all modes of transport.''
The explanatory note to the CPC system clearly and explicitly includes
aircraft space brokerage services. If China intended to require
licensing, and such licensing would have limited market access, such an
exception should have been explicitly scheduled in the services
schedule included in the Protocol of Accession.
Audiovisual, Publishing, and IT Products and Services
We encourage China to remove its limitations on foreign ownership
in distribution and video replication, publishing, TV stations, and
theater holding companies as one means to curb piracy. The elimination
of market access barriers to distribute foreign pay TV programs and
services, and an increase in the number of foreign revenue-sharing
films allowed into the Chinese market are also important. Some of the
piracy issues can be alleviated by allowing foreign media companies to
have a greater stake in their Chinese investments.
China's WTO accession commitments in audiovisual services allow for
foreign minority participation in cinema operations. However, China
refuses to permit foreign majority enterprises, except in select cases
that were grandfathered under a terminated experimental policy to allow
up to 75% foreign investment in select cities. China also insists that
the foreign partner cannot serve as Chairman of the cinema joint
venture even if approved by its board. In addition, China does not
permit the licensing of foreign pay television services, which stifles
the growth of its cable and digital platforms.
China increased the number of foreign revenue-sharing films allowed
into the market each year to 20, a minimal market opening measure. The
terms of the revenue-sharing contract are dictated by the Chinese
Government, and are not commercially reasonable by any standard. China
continues to disrupt orderly marketing by instituting blackout periods
when foreign films cannot be shown, and by imposing revenue targets.
The orderly distribution of home entertainment products is also
impaired by the imposition of rules restricting the choice of business
partners, and by the terms of commercial agreements. In addition, China
maintains primetime broadcasting and foreign content restrictions in
pay and non-pay television. All these restrictions, along with the
lengthy approval process, only serve to expand the spread of illegal
pirated content.
In the audiovisual distribution services sector, China is not
abiding by its retail distribution services commitments, which are to
allow foreign majority control with the ability to sell AV products.
Contrary to this commitment, China has restricted foreign majority
controlled retailers from securing AV retailing licenses.
In the publishing sector, control over content remains strict and
China has stated that it will not approve any more foreign titles under
Chinese publishing licenses except technical and scientific
publications. We find this decision troubling and urge China to
reconsider it.
Government Procurement of Software
We welcome China's commitment to begin formal Government
Procurement Agreement (GPA) negotiations and submit its Appendix I
offer by the end of 2007. In the interim, China should withhold
implementing new procurement regulations that do not conform to GPA
principles, including the Implementing Draft Measures on Government
Procurement of Software of March 2005. CSI members are concerned that
these draft measures provide for strong preferential treatment for
Chinese suppliers by restricting government procurement to domestic
software products. To qualify as ``domestic,'' these products must be
``manufactured'' in China and the China-based development cost of the
software must be at least 50%. The software copyright must also be
owned by a Chinese entity or first registered in China.
China's draft measures also contain a procurement preference for
open source software that is inconsistent with international practice,
the WTO Government Procurement Agreement, and sound, efficient, and
merit-based procurement policy. We believe that any procurement regime
should be based on performance, and not favor any technology or
licensing model.
The draft measures propose the possible purchase of foreign
software only on the basis of product-by-product waivers, and only if
the software provider satisfies unspecified requirements with respect
to the level of the company's investment, R&D expenditures, outsourcing
work performed, or taxes paid in China. Thus, this exception will
benefit a small group of providers, and will not promote the ultimate
goal of developing a competitive, advanced software industry in China,
based on international best practice.
China's domestic preference policy contradicts the general trend in
international trade and procurement law toward open, transparent,
technology-neutral, and non-discriminatory access to global markets.
The measures will severely limit market access of our members,
especially software companies, to China's government procurement, and
will create a dangerous precedent for other sectors. The rules also run
counter to the spirit of openness China committed to when it became a
WTO member and assumed observer status with respect to the WTO
Government Procurement Agreement.
Conclusion
China's WTO accession opened a very important services market to
U.S. suppliers, but China's services sector reforms must be fully
implemented and, for maximal benefit, go beyond WTO commitments. As
China's manufacturing experience shows, an open market provided many
benefits to the Chinese economy. There is no reason why the same policy
would fail in services.
China's full implementation of services commitments and continued
services trade liberalization can promote the development of its
services sectors, increase the inflow of services investment, and help
resolve its complex economic and social issues. To build the
infrastructure of a modern economy, China will have to rely on
sophisticated services offered by foreign companies.
As a large exporter, China also has a significant stake in
promoting globalization under the Doha Development Agenda. Despite its
growing role in global trade, China has not been an active proponent of
ambitious trade offers in services. The success of the Doha Round
depends on constructive participation of key developing countries, such
as China. We hope the Chinese Government will be a ``responsible
stakeholder'' and step up its negotiating efforts by submitting a high-
value services offer and encouraging other important developing
countries to do the same.
Statement of Usha C. V. Haley, University of New Haven,
West Haven, Connecticut
Thank you Trade Subcommittee Chairman Levin and honorable members
of the Committee of Ways and Means, for the invitation to address such
a distinguished and thoughtful group. I apologize for my inability to
be present as I am currently conducting research in Asia, but
appreciate the opportunity to present a written statement for the
record in lieu of my personal appearance. My statement focuses on the
roles and effects of on-the book and off-the book subsidies in the
Chinese market and their impacts on competition with U.S. products in
China.
In line with its admittance into the WTO, the Chinese government
agreed to implement most of its key commitments on the opening of
markets by December 2004. Yet, in February 2007, China's implementation
work remains incomplete. China's refusal to adhere to WTO compliance
efforts stems in part from its inability to accept the key WTO
principles of market access, non-discrimination and national treatment.
Additionally, market mechanisms in China remain undeveloped, making its
trade regime unpredictable and opaque. Although China implemented some
key reforms, it has continued to use an array of industrial policy
tools in 2006 to promote or to protect favored sectors and industries,
and these tools at times collide with China's WTO obligations.
Industrial subsidies in China derive from governmental dominance of
the economy and from various factors including the central, provincial
and municipal governments' strategic goals, patronage, and corruption.
The subsidies include direct and indirect components that affect both
the top and bottom lines of industrial operations. My statement stems
from research that I have conducted over the last eight years on
business in China, some of which has been published in my book, The
Chinese Tao of Business: the Logic of Successful Business Strategy
(John Wiley & Sons). My statement covers forms of subsidies in China,
impediments to monitoring these subsidies, specific subsidies for the
11th 5-year program period, Chinese governmental policies behind
subsidies, and finally, how subsidies affect the profitabilities of
foreign-invested enterprises (FIEs).
Forms of Subsidies
State subsidies primarily flow into State-Owned Enterprises (SOEs)
although some well-connected private firms also benefit from indirect
subsidies such as Special Market Information. Currently, the state
controls about half the industrial output and SOEs still account for
35% of urban employment. Almost all of China's heavy industry and much
of its technology lies in governmental hands. The government controls
about a third of China's economy through SOEs in key sectors such as
defense and utilities. The State Owned Assets Supervision and
Administration Committee (SASAC) directly manages the top 190 or so
SOEs, the biggest of which have international stock-market listings.
Subsidies exist in all industries that the Chinese state and
provincial governments considered economically or militarily strategic,
including Resource Extraction, Steel, Computing, Software, R & D,
Environmental Services and Conservation, and Autos.
The subsidies exist in various forms, including those directly
affecting international trade such as:
a. export subsidies for FIEs and SOEs that meet certain export
performance requirements. FIEs accounted for about 60 percent of
China's exports of manufactured goods in 2005. The vast majority of
FIEs that exporting goods from China have corporate ties to countries
neighboring China.
b. import-substitution subsidies that discourage purchases of
foreign products by providing generous incentives for companies in
China for buying domestic products rather than imports from the USA or
other countries.
The Chinese central and provincial governments support both on-the-
book and off-the book subsidies for domestic companies. Off-the book
subsidies are far more pervasive and influential but also far more
difficult to measure and to ascertain. Subsidies include:
1. Free to Low-cost Loans: The government exercises a vice-like
grip on banks, stock markets and bond issuance and these translate to
the ability to make grandiose loans. The most extreme statistics in the
financial sector deal with loans outstanding. In three years from 2002
to 2004, loans increased by 58 per cent, or $785 billion. In 2003, new
lending equaled almost one quarter of gross domestic product (GDP). A
credit binge fueled this latest boom. Half of all bank loans go to
SOEs. Most of these loans will never be repaid. Huawei for example, has
a $10 billion credit line from China Development Bank. Discounted
lending rates are also available to SOEs and domestic companies that
satisfy certain export performance requirements
2. Asset Injections: The SOEs' parent companies, usually
municipal governments or ministries, provide their protege s with
opportunities to acquire state-run businesses, such as toll bridges, at
highly preferential terms which help pay down their costs.
3. No Break-even: Poor book-keeping practices, and lax bottom-
line considerations, grant SOEs freedom from the need to make profits,
or to break even. ``Pure state-controlled enterprises'' have no
disclosure requirements.
4. Subsidized Purchases: SOEs can purchase their components and
raw materials below cost and directly from each other, affecting the
competitiveness of certain sectors in the global economy. This
tradition propelled the Chinese motorcycle industry's ability to buy
control of virtually all Indian motorcycle companies short of Bajaj and
turn them into assemblers of Chinese components.
5. International Bargaining Power: Beijing has used its enormous
buying power to intercede for its SOEs with foreign suppliers and to
reduce acquisition costs for raw materials. A recent example includes
the Chinese government's aborted attempt to bully down the cost of iron
ore for the Chinese steel industry below internationally-negotiated
price levels. The Chinese government has also secured contracts and
exploration rights abroad for its SOEs.
6. Labor Controls: The government exercises various methods to
control employees including the dang'an or employment dossier; and to
reduce labor costs through injection of part-time and migrant workers
and the use of prison labor. The government also offers exemptions from
mandatory worker-benefit contributions to companies that satisfy
certain export performance requirements
7. Tax Breaks: Many SOEs avoid taxation or reduce it through tax
breaks (although this can backfire if a company's management loses
favor). Income tax reductions and refunds are available to companies
that satisfy certain export performance requirements and that purchase
Chinese-made equipment and accessories rather than imports
8. Energy and Land Subsidies: The state subsidizes gasoline and
electricity. Currently, Beijing tightly controls the price of both
gasoline and electricity at well below their true economic levels. The
state also offers free land and utilities to SOEs and companies in key
strategic sectors.
9. Tariff and VAT Exemptions: The state offers Value-added tax
(VAT) and tariff exemptions to companies that satisfy certain export
performance requirements. The state also offers VAT refunds to
companies that purchase Chinese-made equipment and accessories rather
than imports
10. Sectoral Credit Allocation: The Chinese economy speeds up or
slows down on a sector-by-sector basis on credit allocations by
Beijing. Some sectors such as automotive, steel, ethylene and metals'
smelting have come off the boil. Others sectors such as coal, railways
and utilities are still getting huge infusions of policy-mandated
credit. Very high levels of bureaucratic interference characterize
credit allocations and industrial-project approvals in China and the
state banking system does not allow the market to price capital.
11. Stock Listings: SOEs and Collectives form over 93 percent of
the listing of approximately 1300 companies on China's Shanghai and
Shenzhen Stock Exchanges. Provincial governments pressure government
regulators to discriminate against private companies and give the
precious slots to their ailing state dinosaurs. Indeed, private
companies without state connections cannot obtain a listing on any
Chinese stock exchange
12. Cheap Technology: China runs a deficit on its technology trade
with the rest of the world and FIEs control 80 percent of technological
imports and exports in China. The Chinese have made little progress in
either basic research or advanced design in vital industries. Despite
this institutional flaw, SOEs such as Huawei owe much of their success
to lax enforcement of laws governing the theft of intellectual
property.
13. Control over Distribution Channels: Provincial and municipal
governments control distribution channels to allocate and to manage
market share, to protect favored industries from competition and to
shape investment patterns. Regulations on distribution incorporate
considerable ambiguities leading to both legitimate differences in
interpretation and considerable legal efforts to find loopholes.
Central and provincial governments routinely use this ambiguity to
confer privileges on favored companies or industries, and to withhold
normal rights from companies or industries as a form of protectionism.
Local administrators have been known to seize goods being transported
and to refuse transportation of goods through their jurisdictions.
Administrative guidance from various and competing sources can override
the basic laws or regulations either explicitly or unofficially.
Provincial or municipal governments may interfere with the national
limits on distribution by their generosity (to lure investment or to
meet local goals) or restrictions (to protect local interests). Guanxi
with local army officials assumes particular importance for
distribution. Some estimates suggest that the Peoples' Liberation Army
(PLA) controls distribution of goods for up to about 80 percent of the
Chinese population. Its control over manufacturing facilities also
makes the PLA China's largest and most diversified manufacturer of
industrial and consumer goods.
14. Special Market Information: Relevant information for strategic
decisions comes at a premium price in China and often includes what we
in the USA would consider Insider Information. In China, the central
government deliberately controls and disseminates information that it
considers of strategic importance. When restrictions on distribution
insulate foreign or Chinese companies from their customers, they also
cannot undertake direct market research and have to rely on less-
sophisticated surrogates. For example, General Motors' (GMs') interns
in Beijing have scoured the capital's streets to find out who is buying
their cars after the intermediaries get them, so that GM can build
guanxi with the buyers.
15. Undervalued Currency: The Chinese government's deliberate
undervaluation of the yuan makes U.S. products more expensive for
Chinese consumers who therefore purchase fewer of them. Conversely,
China's undervalued currency also makes Chinese products cheaper in the
USA, and therefore U.S. consumers purchase more of them, contributing
to the record-high and still-growing U.S. trade deficit. The
undervalued Chinese currency harms U.S. competitiveness and encourages
the relocation of U.S. manufacturing overseas while discouraging
investments in U.S. exporting industries.
Monitoring Subsidies in China
Lack of transparency affects ability to monitor all forms of
subsidy except perhaps Stock Listings. Opacity serves as a tax which
1. Reduces ability to determine the true efficiency and
productivity of China's labor and results in potentially sub-optimal
foreign direct investment (FDI) decisions until after commitments are
made. Consequently, our research has shown that FDI enjoys higher ROIs
and ROEs across entire industrial sectors in India against China,
including Capital Goods; Food Beverage and Tobacco; Materials;
Pharmaceuticals and Biotech; and, Software and Services.
2. Reduces the ability of U.S. domestic producers to prove
dumping, especially as so many of those affected are Small and Medium-
sized Enterprises with limited resources.
3. Magnifies the weakness of China's statistical system which
depends too much on reporting and too little on sampling; the
statistical system shows a systematic bias to over-report growth at the
bottom of the economic cycle and under-report it at the top, i.e. to
flatten out a much more volatile economic cycle. Recently, some foreign
companies have started constructing their own physical-activity indices
of everything from freight-barge traffic to power consumption and air
miles flown to find true economic indicators, but the enormous expense
constrains companies from doing this well.
4. Reduces the credibility of the SOEs' books. For example, in
2003, China's top 500 SOEs reported revenues of 4.07 trillion yuan up
25 percent from the previous year; and profits of 334 billion yuan, up
33 percent from the previous year. Only 87 of the 500 reported making
losses. Unfortunately, outright fraud aside, most SOEs' managers do not
know their real profits and tell their supervisors what they want to
hear
Unreliability in macroeconomic data also seriously compounds the
problem of estimating the effects of subsidies.
For example, in February 2002, the Chinese government
said that China's GDP had grown by 7.3 percent in 2001, making it the
world's fastest-growing economy. However, growth rates reported by
individual provinces told another story. Only one, Yunnan, said its
product had grown slower than the national rate. Taken together, the
provincial figures produced a national growth rate nearly two points
higher than the official rate! The National Statistics Bureau (NSB)
conducts sample surveys and uses these to estimate the country's GDP
and growth rate. The results have invariably disagreed with provincial
figures. In 1995, the GDP growth rate suggested by provincial data
averaged three percentage points higher than the figure of 10.5 percent
produced by sample surveys. Opinions vary as regards the accuracy of
the central government's estimates. However, in China, few scholars
publicly attempt any detailed justification of alternative figures
because of political sensitivity.
China's NSB also lacks the capacity to collect data
outside normal information channels and lower-level officials interfere
with its surveys. The numbers generated by provincial governments
remain an important criterion in evaluating local officials'
performance, creating an incentive for statistical falsification. The
pressure to exaggerate statistics grew in the late 1990s as Chinese
officials sought to pump up the economy to stave off the Asian economic
slump's effects. Beijing declared that the country had to grow at least
7 percent a year to create jobs and to forestall social unrest. Not
surprisingly, reported growth rates have not dipped below that level
since.
Officials may also routinely underreport other sensitive
data such as debt numbers, unemployment or even FDI to avoid tax
payments and governmental scrutiny. The central government's methods at
ascertaining the validity of data, a process it calls yasuo shuifen or
``squeezing the water'', involves sample surveys, price-index
adjustments and plenty of guesswork.
Technical difficulties, such as staff reductions among
statistical analysts, have enhanced errors in data. No comprehensive
measures exist for the size of the fast-growing private-business and
service sectors or even for what constitutes FDI.
The Chinese government strictly controls economic and
industrial data and even classifies some as state secrets. Routinely,
Beijing has overvalued SOEs' stocks of unsold goods, and underestimated
inflation. Other provinces underreport growth and activity: for
example, Zhegiang province in Eastern China may have underreported
growth to conceal the rapid development of private companies in its
economy. Additionally, affluent provinces, such as Guangdong in
Southern China, may have underreported growth to avoid paying more
taxes to the central government. However, without more systematic data,
economists cannot definitively state if these factors pushed up growth
or even if growth occurred.
Governmental officials downplay unemployment figures to
mask the suffering that economic reforms and restructuring have caused.
The official unemployment rate of 3.6 percent in 2001 excluded xiagang
workers (laborers receiving small, monthly stipends from former
companies and not counted as unemployed) that economists estimate to
number about 10 million. The official rate also excluded farmers who
left their fields to work in cities, a floating population of around
150 million unemployed migrants. Using international standards, China's
unemployment rate in 2001 approximated 7.6 percent in rural areas and
more than 8.5 percent in the cities, well above Beijing's red-flagged
figure to indicate inevitable social turmoil.
Most disturbingly, the central government's debt numbers
look highly erroneous. The Central Bank's governor, Dai Xianlong,
confessed to Parliament in April 2002 that national domestic debt
appeared much higher than the official numbers (16 percent of GDP)
suggested. Dai said the figure appeared closer to 60 percent of GDP if
one considered unfunded state-pensions' liabilities, local governments'
debts, and major banks' nonperforming yloans (NPLs). Dai's unusual
candor may mask more bad news. Independent economists have discovered
that Dai's statistics drew on China's yearbook GDP growth statistics.
Debt more realistically appears closer to 100 or 125 percent of GDP.
The Bank of China reported two different figures for its NPLs in 1999,
one using Chinese accounting standards, another Western; the latter
looms 2.6 times greater than the former. Moody's has openly called the
books of China's ``Big Four'' banks, ``meaningless''
Subsidies for the 11th Five-Year Program Period
I anticipate that all the subsidies that I identified will
continue. The 11th 5-year plan specifically identifies certain
strategically important industries that will receive state subsidies.
These include
1. Integrated circuits and software including technology for 90-
nanometer and smaller integrated circuits
2. New-generation networks including digital TV networks and
mobile communication
3. Advanced computing including technology for petaflop computer
systems
4. Biomedicine including commercial production of vaccines
5. Civil airplane including general purpose planes and
helicopters
6. Satellite applications including meteorological, oceanographic,
navigation positioning and telecommunication satellites
7. New materials including high-performance materials in
information biological and aerospace industries
Researchers may have more difficulties monitoring the rate of
subsidization as China's 11th Five-Year Plan has only two numeric
targets: per capita GDP in 2010 must be double the 2000 figure and
``each work unit must cut its use of energy by 20 percent of current
levels by 2010''. The plan fails to mention raising the price of
electricity and gasoline, and unlike the previous ten years, sets no
economic growth targets.
Governmental Policies Behind Subsidies
Our research has shown that despite recent deregulation efforts,
state consumption through its SOEs dominates the Chinese economy.
Figure 1 indicates difference in state domination of the Indian and
Chinese economies. Subsidies permeate SOEs and well-connected private
companies but do not extend to the bulk of private companies.
The subsidies appear huge. According to a World Bank study, 51
percent of all SOEs are losing money. Average current assets had risen
to 319 days of annual sales, suggesting that most of the SOEs' assets
lay in uncollectible bills or unsaleable inventory. In short, most SOEs
were illiquid and massive injections of government money kept them
alive.
The state offers subsidies to specific sectors and across sectors.
Generally, SOEs and well-connected private companies with strong
government network connections can access subsidies. The state is more
likely to offer subsidies to private companies that promote strategic
development efforts. The 11th Five-Year Plan identifies the following
foci for development:
1. Advanced computing.
2. Internet.
3. Programming.
4. Environmental services & resource conservation.
5. Energy production and reserves.
6. Value-chain positioning of Chinese manufacturing.
7. Space, satellite and space-launch related capabilities.
The state grants subsidies to companies that export, as well as to
those that serve the domestic markets. Political rather than primarily
economic considerations guide policies on subsidies. For example, many
provincial governments offer subsidies as rewards to those that
successfully manipulate government and business networks.
SOE reforms and strategic goals also shape policies on subsidies.
However, for China's leadership, SOE reforms do not include concerns
about profits or privatization. The reforms do not have as their goal
reducing the state's control over key sectors of the economy, but
rather making that control more effective. Consequently, the policies
aim to make SOEs efficient and big enough to have a strong
international presence such as the FIEs do. Specifically, the Chinese
government wants its own global stars. The SASAC, which oversees SOEs,
has the mandate to transform 30-50 SOEs into globally competitive
national champions by 2010. These include PetroChina, ChinaMobile,
Sinopec, CNOOC, Baosteel, China Aluminum, Shanghai Auto, Lenovo, TCL,
and Quingdao Haier. Korea's chaebol, rather than Japan's keiretsu
provide the guiding model for China's policy on industrial subsidies:
through subsidies, the state helps the national champions to diversify
their range of businesses and to link more closely to the state.
Some of the policies on subsidies stem from long and mid-range
strategic plans; others derive from emergent planning and mistakes. For
example, responding to the massive NPLs accumulated by Chinese banks in
the 1990s, the government ordered they reduce their NPL ratios--bad
loans as a proportion of total loans. However, this policy had
unintended consequences. China's banks are technically insolvent but
enjoy high liquidity. To cut NPL ratios, the banks merely increased the
denominator of the ratios: their loans. Lending rose rapidly, driving
growth as a side effect as NPL ratios fell from 28 per cent in 2002 to
13.2 percent at the end of 2004. Assisting the process were transfers
of old NPLs, made before the recent credit drive, to newly minted asset
management companies (AMCs). The largest banks shifted an initial $169
billion in 1999-2000 and another $50 billion last year. The AMCs have
become dumping grounds not just for commercial banks' NPLs but also for
the assets of failed investment conglomerates, securities businesses
and government-infrastructure projects. The state makes the AMCs issue
interest-bearing bonds for which it refuses to accept explicit
liability. Separately, Beijing has raided tens of billions of dollars
of foreign exchange reserves to shore up banks' capital.
Policies regarding subsidies become difficult to unravel as the
Chinese state encompasses central and local governments, with competing
and often conflicting agendas, and different bureaucratic and political
factions at the national level. Subsidies and the policies behind them
reflect this fragmentation and conflict. Thousands of warring units
that cohabit under the umbrella of the Chinese state control the SOEs.
Consequently, SOEs enjoy direct subsidies stemming from state
directives and elicit varying degrees of support.
AVIC, the national aerospace group, provides a good example of
subsides to an SOE serving a domestic market. Urged by Deng Xiaoping in
1985, AVIC had designed a civil airliner from scratch in less than 5
years. However, it only built two planes and even China's nationalized
airlines refused to buy them. Two decades later, AVIC has received
several tax breaks to build a small regional jet but has no idea of its
commercial prospects
Generally, despite stated policies, outsiders cannot ascertain the
true policies that underlie subsidies. A secretive and authoritarian
organization with unclear aims, closed to scrutiny and debate, controls
the Chinese state. More effectively placed subsidies appear in the SOEs
that the Beijing central government has classified as global champions.
However, recent examples illustrate their complexity. CNOOC, whose $19
billion bid for Unocal touched off volcanic reactions, is a Hong Kong-
listed firm 70 per cent owned by an unlisted parent company, all of
whose shares are owned by the central government agency, SASAC. Beijing
has helped CNOOC to acquire contracts to control foreign-energy
reserves and the company heavily relies on subsidized finance from
SASAC. Local governments control other SOEs. These include white goods
maker Haier (owned by the Qingdao city government), which launched an
unsuccessful bid for Maytag, and the municipally owned Shanghai and
Nanjing car companies that have spent the last several months picking
through MG Rover. These companies also receive subsidies in line with
Beijing's stated goals of creating state-owned multinationals and
retaining domestic control over key sectors, such as car making. The
demands of both the central government, which sets industry policy, and
their local government overlords, whose interests may conflict with
Beijing's industrial-policy goals, shape the subsidies the SOEs
receive, as well as the SOEs' evolution, strategies and policies.
Huawei, a maker of telecoms-network equipment, illustrates a third
level of policies and subsidies. Huawei is ostensibly privately owned,
although many of its shares are owned by the local state telecoms
authorities to whom it has sold equipment. It enjoys a $10 billion low-
interest credit line from the China Development Bank, whose mission is
to make concessional loans in support of the state's policy goals.
Huawei also has strong ties to China's military.
Profitability of FIEs in China
Few FIEs disclose the real performance of their Chinese operations.
Most estimates have relied instead on business surveys and anecdotes.
Our research reveals that only about one-third of the foreign companies
operating in China have ever made a profit there, and profits have been
concentrated in the hands of a few companies. In addition,
historically, foreign affiliates in China have lower profit margins
than their global average.
Despite some profitable FIEs, the trends on profitability have not
changed substantially since China's entry into the WTO. For example, in
1998, a survey of 229 FIEs by management consultants A. T. Kearney
showed that only 38 percent of all manufacturers were covering their
operating costs. If the companies had included their borrowing costs,
or costs of capital, fewer still could have claimed to have broken
even.
Another study done at the Chinese Academy of International Trade
and Economic Cooperation showed that about one-third of the 354,000
foreign companies operating in China in 2001 turned a profit. Yet, a
1999 survey by the American Chamber of Commerce in China showed that,
while 58 percent of its member companies had lower profit margins there
than in other global operations, 88 percent had plans to expand.
Deloitte & Touche's survey in 2002 confirmed that 90 percent of
foreign-owned companies in China planned to expand their operations
within the next three years. In 2003, about 424,196 foreign companies,
big and small, operated in China (MOFTEC). Michael Furst, Executive
Director of the American Chamber of Commerce, Beijing, informed us that
about two-thirds of its member companies were making some profits but
not up to anticipated levels, while about one-third were making losses.
These figures correspond to those from 2004.
A 2004 survey by China Economic Quarterly shows that the earnings
of U.S. affiliates in China, which includes the affiliates' profits,
and earnings booked through Hong Kong and Singapore, rose to $4.4
billion. When all other sources of profit are added--including royalty
and licensing fees and income from private services--these affiliates
earned $8.2 billion in 2004. However, U.S. companies made $7.1 billion
in Australia, a market of only 19 million. They earned $8.9 billion in
Taiwan and South Korea, emerging economies with a combined population
of 70 million and earned $14.3 billion in Mexico. Most respondents
could not achieve profit margins above their global average.
A large proportion of the earnings end up with a small number of
foreign companies that enjoy lucky breaks in China's heavily regulated
operating environment. For example, Mobile Telecommunications
encountered no vested interests in China and contributed about half of
the U.S. companies' mainland-reported earnings as recently as 2001.
However, from 2002, Chinese companies, subsidized by the state, moved
into mobile handsets and their cutthroat pricing destroyed profits in
that sector.
More recently, a consumer loan boom financed by state-run banks
underwrote an explosion in car sales that dropped later like a brick--
but Volkswagen, the market leader, still earned $1.2 billion in China
in 2003.
Five U.S. companies, including three car makers, accounted for one
third of equity profits that mainland affiliates reported. General
Motors alone booked $437 million in earnings. Fast-food companies Yum
Brands--owner of KFC--and McDonald's topped off the list. Fast-food
companies have consistently made profits in the Chinese domestic
economy. They face no competition from state interests and, as
services, are less prone to intellectual property abuses. Yum Brands,
which has 1,200 restaurants in China, and McDonald's, probably earned
about $200 million and the U.S. car companies in excess of $500m--
equivalent to about one-third of mainland equity income of $2.4
billion. These figures underline how small China's domestic markets may
be.
The exaggerated economic data can have significant effects on
perceived performance and projected performance of FDI in China. The
successful companies in our research did not rely on economic and
industrial data. As Elmar Stachels, Managing Director of Bayer China
Company, Ltd., told us ``You manage by objectives, objectives that must
be clearly stated--then determine what kind of tools you can use to
determine if you achieved them, but stick with your objectives. However
if it comes to financial figures, it will be challenging. What good
will numbers be if the base rates used for comparison of performance
are not reliable.''
China remains embroiled in overcapacity and excess production as
state investment and subsidies move across sectors, and companies'
profits correspondingly whipsaw. A year ago in the auto sector, sales
growth for many car models dropped from three digits to less than zero
in a few months. In steel, China flipped from a massive net importer to
a net exporter in less than a year. In the past nine months, the global
price of ethylene--a base constituent of plastics--dropped by half as
Chinese production capacity expanded 35 per cent this year and will
probably double in the next few years. Soon, smelted copper will join
the ranks: China has 2.5 million tons of annual production capacity and
another 2.5 million tons under construction. Similarly, in stainless
steel, China's annual production capacity approximated 2.5 million tons
at the end of 2004. Industrial projects and subsidies will expand this
to 10 million tons in five years.
Thank you again for providing me with this opportunity to present
some of my research on subsidies in China and effects on competitive
environments.
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Graphic link is currently unavailable
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Statement of National Electrical Manufacturers Association
Thank you for this opportunity to submit the following comments. In
recent years China has become the #3 export market and trading partner
for our industry (after Mexico and Canada), and three years ago NEMA
opened an office in Beijing with the assistance of the Commerce
Department's Market Development Cooperator Program. The office has
become a valuable resource for our members, providing assistance on a
wide variety of China-related matters including energy efficiency,
intellectual property rights protection, market access, standards and
certification.
Product counterfeiting is a major public safety and trade issue for
our industry. China in particular needs to keep on strengthening its
anti-counterfeiting measures and enforcement. As we have stressed at
the U.S. Ambassador's roundtables on this topic in Beijing and on
several other occasions, the U.S. electrical industry has fundamental,
ongoing concerns about intellectual property protections in the
People's Republic. NEMA members are all too often victimized there by
repeated, vast trademark infringement and piracy.
With regards to potentially ``subsidized'' product coming into the
U.S, some of our members have observed competition from extremely low-
priced Chinese electrical imports. Since the goods in question are
frequently not labor-intensively produced, these member companies are
concerned that the Chinese government may be subsidizing the purchase
of raw materials and/or providing them below cost via state-owned
enterprises. As you know, the Office of the U.S. Trade Representative
has just announced its intention to pursue a WTO case pertaining to
Chinese export subsidies, and we will be working with USTR as it
develops its approach.
NEMA is the trade association of choice for the North American
electrical manufacturing industry, including the subsidiaries of many
European-based corporations. Domestic production of electrical products
sold worldwide exceeds $120 billion. Founded in 1926 and headquartered
near Washington, D.C., its 430 member companies manufacture products
used in the generation, transmission and distribution, control, and use
of electricity. These products are used in utility, medical,
industrial, commercial, institutional, and residential applications. In
addition to its headquarters in Rosslyn, Virginia, USA, NEMA also has
offices in Beijing, Sao Paulo, and Mexico City.
Thank you for your consideration of these remarks.
______
NEMA CALLS FOR RENEWAL OF TRADE PROMOTION AUTHORITY
ROSSLYN, VA, February 12, 2007--The National Electrical
Manufacturers Association (NEMA) applauds U.S. Trade Representative
Susan Schwab's call today for the renewal of President Bush's Trade
Promotion Authority (TPA), which, barring Congressional action, is
currently scheduled to expire on July 1. NEMA seeks the reciprocal
opening of foreign markets through the elimination of tariff and non-
tariff barriers for electrical equipment worldwide. Without the TPA,
the U.S. government's ability to negotiate new free trade agreements,
thereby opening foreign markets to U.S. exports, becomes significantly
more difficult.
``Free trade is key to the economic growth of our industry,'' said
Evan Gaddis, NEMA president and chief executive officer. ``As economies
around the world grow, our members want the electrical equipment they
make to be used in new and developing infrastructures. With our own
domestic market already largely open, free trade agreements serve to
level the trading field for U.S. manufacturers.''
NEMA cited several rationales for U.S. negotiators to pursue all
avenues for advancing free trade in electrical goods--bilateral,
regional, or multinational:
Since the inception of the North American Free Trade
Agreement, Mexico has surged ahead of Canada to become the largest
export market and trading partner for NEMA members.
Since the elimination of many countries' medical
equipment tariffs under the last World Trade Organization negotiating
round, U.S. electro-medical equipment exports to many countries have
soared.
Since Beijing's entry into the World Trade Organization,
China has quickly risen to become the third largest export market and
trading partner for NEMA members.
Since implementation of the U.S. free trade agreements
with Chile and Australia in 2003, electrical equipment exports to these
countries have risen by 78 percent and 44 percent respectively.
Improving U.S. competitiveness through, for example, tort
and tax reform--rather than opposing free trade--is the best way to
sustain U.S. manufacturing.
Addressing and enhancing the effectiveness of the Trade
Adjustment Assistance program should be considered in the context of
the TPA debate.
Labor and environmental provisions in the TPA should be
weighed carefully because they can serve to undermine the overall
benefits of international economic integration.
NEMA is the trade association of choice for the electrical
manufacturing industry. Founded in 1926 and headquartered near
Washington, D.C., its approximately 450 member companies manufacture
products used in the generation, transmission and distribution,
control, and end-use of electricity. These products are used in
utility, medical imaging, industrial, commercial, institutional, and
residential applications. Domestic production of electrical products
sold worldwide exceeds $120 billion. In addition to its headquarters in
Rosslyn, Virginia, NEMA also has offices in Beijing, Sao Paulo, and
Mexico City.
Statement of Stewart and Stewart
Introduction
The protection of intellectual property rights (IPR) through
adequate laws and enforcement is one of the most serious and persistent
bilateral issues facing the U.S. and China. Although it is generally
conceded that China has revised its IP laws and improved its IP
legislative regime so as to comply with the WTO TRIPS Agreement and
other international IPR agreements, it is also generally acknowledged
that China's performance in enforcing IP rights has been far short of
adequate.
The rate of intellectual property piracy and counterfeiting in
China remains extremely high. The problem has been, and continues to
be, endemic. ``In July 2003, the State Council's Development Research
Centre estimated that the market value of counterfeit goods in China
was between U.S.$19 billion and U.S.$24 billion.'' \1\ The World
Customs Organization estimates that global counterfeiting exceeds $500
billion annually and that most of that originates in China.\2\ The
financial impact of Chinese IP piracy and counterfeiting on U.S.
businesses has been tremendously costly. In its 2004 WTO compliance
report, USTR estimated that U.S. businesses lost between $2.5-$3.8
billion annually due to piracy of copyrighted materials alone.\3\
---------------------------------------------------------------------------
\1\ Trade Policy Review, Report by the Secretariat, WT/TPR/S/161
(28 February 2006) at para. 303.
\2\ See Fakes!, Business Week, February 7, 2005.
\3\ It is estimated that global trade in fake goods amounts to
between 3% and 9% of total world trade. Studies by the OECD in 1998 and
the International Chamber of Commerce in 1997 estimated that
counterfeit goods made up 5-7% of world trade. See Enforcement of
Intellectual Property Rights, Communication from the European
Communities, IP/C/W/448 (9 June 2005) at fn. 1.
---------------------------------------------------------------------------
Compliance with Legal Regime Requirements of the WTO TRIPS Agreement
The general consensus is that China has largely complied with its
TRIPS commitments as far as establishing a compliant IPR legal
framework. Before WTO accession, China amended, revised, and improved
its framework of IPR laws, including copyright, trademark and patent
laws, so as to be in compliance with the WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS Agreement).\4\ After
accession, China agreed that it would adhere to the provisions of the
TRIPS Agreement, that is, China agreed to abide by internationally-
accepted norms regarding protection and enforcement of the intellectual
property rights of foreign companies and individuals (including the
U.S.) in China.\5\ Among the assumed obligations of the WTO TRIPS
Agreement, China agreed to:
\4\ Report of the Working Party on the Accession of China, WT/
MIN(01)/3 (10 November 2001) at paras. 251-252.
\5\ See generally Report of the Working Party on the Accession of
China, WT/MIN(01)/3 (10 November 2001) at paras. 251-305 (regarding
China's intellectual property rights commitments).
set minimum standards of protection for copyrights and
neighboring rights, trademarks, geographical indications, industrial
designs, patents, integrated-circuit layout designs and undisclosed
information;
set minimum standards for the enforcement of intellectual
property rights in administrative and civil actions;
set minimum standards, with regard to copyright piracy
and trademark counterfeiting, for the enforcement of intellectual
property rights in criminal actions and actions at the border; and
provide other WTO Members national and MFN treatment with
respect to protection and enforcement of intellectual property rights.
In general, as noted by the U.S. Trade Representative's Office in
its 2005 WTO compliance report, China has largely done a satisfactory
job with respect to amending its IPR laws to comply with the TRIPS
Agreement and bringing its laws into line with international norms in
most key areas although USTR notes that some improvements (e.g.,
Internet copyright protection) are still needed.\6\
---------------------------------------------------------------------------
\6\ See USTR, 2005 Report to Congress on China's WTO Compliance
(December 11, 2005) at 63.
---------------------------------------------------------------------------
The WTO recently conducted its first Trade Policy Review (TPR) of
China. The WTO Secretariat's TPR report provides an objective overview
regarding China's IPR regime. The report notes that China made major
revisions to its IPR laws in recent years, including the Patent Law
(2000), the Trademark Law (2001), and the Copyright law (2001), and
established an ``extensive and complex framework'' to administer and
enforce IPR.\7\ The report describes the basic provisions of these and
other IPR laws in China, and notes the importance of IPR to China's own
development because ``protection of intellectual property rights is
essential for ensuring the continued inflow of FDI and the associated
transfer of newly developed technologies, as well as fostering the
development of new technologies and services in China over the longer
term.''\8\ Moreover, the report indicates that as China ``makes an
effort to upgrade obsolete technologies and move production into higher
value added sectors, it recognizes that there is a need to improve
legislation on intellectual property rights as well as enforcement, in
order to attract private sector investment in new and high
technologies.'' \9\
---------------------------------------------------------------------------
\7\ Trade Policy Review: China, Report by the Secretariat, WT/TPR/
S/161 (28 February 2006) at para. 272.
\8\ Id.
\9\ Id. at para. 302.
---------------------------------------------------------------------------
WTO Secretariat Report Notes Continuing High Levels of IPR Infringement
and Inadequate IPR Enforcement in China
Notwithstanding China's efforts to enact IPR laws that comply with
its TRIPS obligations, the rate of IPR infringement continues to be
high and the level of enforcement of IPR continues to be inadequate.
The TRIPS Agreement requires China to implement effective enforcement
procedures and to provide civil and criminal remedies that have a
deterrent effect.\10\ China's efforts in the area of IPR enforcement
have fallen short of its commitments. The Secretariat's TPR report
states:
---------------------------------------------------------------------------
\10\ In particular, TRIPS articles 41 (general obligations) and 61
(criminal procedures) mandate effective enforcement of IPR.
---------------------------------------------------------------------------
The main problems identified by China's major trading partners
include: lack of coordination among the main enforcement agencies;
local protectionism and corruption; inadequate deterrence provided by
the system of administrative, civil, and criminal penalties; and a lack
of sufficient training of personnel.\11\
---------------------------------------------------------------------------
\11\ Id. at para. 303.
---------------------------------------------------------------------------
The Secretariat's report notes that enforcement of IPR in China is
``complex with a large number of responsible authorities.'' \12\ In
China, intellectual property rights may generally be enforced by two
means: first, administrative actions which consist of mediation by the
authorities, and second, judicial measures through the courts, which
include civil actions and criminal prosecutions.\13\ Under China's
criminal law, seven types of IPR infringement are crimes:
counterfeiting registered trademarks (Article 213); selling goods
bearing counterfeited registered trademarks (Article 214); illegally
producing and selling representations of registered trademarks (Article
215); forging another person's patent (Article 216); copyright
infringement (Article 217); selling infringing reproductions (Article
218); and infringing commercial secrets (Article 219).\14\
---------------------------------------------------------------------------
\12\ Id. at para. 304. The ``responsible authorities'' are: ``the
SIPO for patents and layout designs of integrated circuits; the SAIC
and its Trademark Office for trademarks and, along with the AQSIQ, for
geographical indications registration and administration; the National
Copyright Administration for copyright; the State Drug Administration
for protected medicines; MOFCOM (previously the State Economic and
Trade Commission) for administrative protection of agriculture-related
chemicals; and the Ministry of Agriculture and the State Forestry
Administration for the protection of new plant varieties. Enforcement
at the border is carried out by Customs, while the SAIC is in charge of
enforcement of laws against unfair competition, including the
protection of trade secrets. In addition, other government agencies
such as the State Press and Publication Administration and the Ministry
of Public Security are also involved in enforcement.'' Id.
\13\ Id. at para. 305.
\14\ Id. at para. 308.
---------------------------------------------------------------------------
Enforcement of IPR at the border is governed by Customs regulations
and administered by China Customs. Different enforcement procedures
apply depending on whether the IPR has been filed or recorded at
Customs beforehand. If recorded, ``Customs can seize the goods at the
border and inform the right-holder in writing if it is found that the
goods infringe the holder's IPRs.'' \15\ In this case, the ``right-
holder must provide an application letter requesting that the goods be
detained, along with a guarantee, within three days of receipt of the
notice from Customs.'' \16\ If the IPR is not recorded, then the right-
holder must apply to Customs with specified documentation.\17\ The
Secretariat's report notes that Customs has been increasingly active in
seizures and investigations of infringing goods, the number of
investigated cases rising from 330 in 2001 to 569 in 2002, 756 in 2003
and 1,051 in 2004.\18\
---------------------------------------------------------------------------
\15\ Id. at para. 310.
\16\ Id. at para. 310.
\17\ Id. at para. 311.
\18\ Id. at para. 311.
---------------------------------------------------------------------------
Despite China's IPR enforcement efforts, the Secretariat concludes
that a high level of IPR infringement continues and IPR enforcement
efforts to date have been inadequate.
Despite these efforts, it appears that enforcement remains weak and
infringement of intellectual property rights widespread. In addition to
inadequate deterrents provided through the prosecution system, it is
also claimed that ``local protectionism'' is a major cause of IPR
infringement. Local protectionism may be the result of discretionary
actions that give preference to local traders and producers, and of
local corruption, which may provide local manufacturers or traders of
counterfeit goods advance notice of police raids; there is also concern
that regional administrative agencies lack sufficient knowledge and
training in IPR enforcement.\19\
---------------------------------------------------------------------------
\19\ Id. at para. 313.
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American Businesses in China Continue to Face High Levels of IPR
Infringement
The American Chamber of Commerce in China (AmCham) recently issued
its 2006 White Paper in which it, inter alia, provides an overview of
the IPR experience of American businesses in China. In short, AmCham
finds that there has not been any notable improvement in the IPR
environment in China.
Five years after China's accession to the WTO, American businesses
confronting IPR enforcement issues in China are shifting their focus
from the symptomatic to the systematic. Across industries, American
companies have concluded that the returns on case-by-case adjudication
(whether through administrative, civil or criminal channels) are
insufficient to change the overall environment, and confidence in
existing IPR enforcement mechanisms remains low: a consensus is
emerging that reform is necessary at the most fundamental level.\20\
---------------------------------------------------------------------------
\20\ AmCham, White Paper 2006: American Business in China (2006) at
34; available at http://www.amcham-china.org.cn/amcham/show/
content.php?Id=1570&menuid=&submid=.
---------------------------------------------------------------------------
The White Paper reports that 55 percent of American companies
surveyed were ``negatively affected by IPR violations'' and that 41
percent said that ``counterfeits of their products increased.'' \21\
With respect to IPR enforcement, AmCham reports that ``generally
speaking, administrative enforcement is ineffective.'' \22\ Among
AmCham's findings:
---------------------------------------------------------------------------
\21\ Id.
\22\ Id. at 36.
---------------------------------------------------------------------------
In administrative actions, only 51% of surveyed companies were
satisfied with the degree of cooperation from Chinese officials;
System of transferring administrative cases to criminal courts does
not operate smoothly;
In court actions, less than half of surveyed companies were
satisfied with the degree of cooperation from Chinese court officials;
Despite lowered thresholds for criminal liability, overall criminal
prosecution remained low;
Only 22% of surveyed companies believe the 2004 Judicial
Interpretation of Threshold for Criminal Liability will benefit IPR
protection either moderately or greatly;
IPR enforcement in civil courts is hampered because the ``gathering
evidence is difficult; damages amounts are too low; and judgments are
problematic to enforce.'' \23\
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
Notwithstanding these less-than-optimistic findings, AmCham reports
that ``(n)onetheless, American businesses generally agree that
awareness of IPR issues has increased in China and that the Chinese
government is making efforts in this area such as in the formation of
the Leading Group that has been coordinating the Chinese government's
IPR campaign.'' \24\
---------------------------------------------------------------------------
\24\ Id. at 34.
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USTR's 2006 Special 301 Report
In April 2006, the U.S. Trade Representative's Office issued its
annual ``Special 301'' report concerning the adequacy and effectiveness
of intellectual property rights protection provided U.S. trading
partners. The report identifies China as a top IPR enforcement
priority.\25\ Given its recentness, the Special 301 report highlights
the current status of U.S.-China relations concerning IPR problems. The
report concretely summarizes the problem:
---------------------------------------------------------------------------
\25\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
China does not provide American copyright materials, inventions,
brands, and trade secrets the intellectual property protection and
enforcement to which they are entitled. China therefore remains a top
intellectual property enforcement priority.\26\
---------------------------------------------------------------------------
\26\ See USTR, 2006 Special 301 Report (April 28, 2006).
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USTR suggests that a failure to achieve adequate progress in
improving IPR enforcement will lead to a WTO dispute settlement case:
Faced with only limited progress by China in addressing certain
deficiencies in IPR protection and enforcement, the United States will
step up consideration of its WTO dispute settlement options.\27\
---------------------------------------------------------------------------
\27\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
The Special 301 report concludes that despite China's efforts to
battle piracy and despite increasing IPR court cases, ``overall piracy
and counterfeiting levels in China remained unacceptably high in 2005''
and affected a wide range of products, brands and technologies.\28\
USTR found that:
\28\ See USTR, 2006 Special 301 Report (April 28, 2006). Industries
affected by IPR piracy include ``films, music and sound recordings,
publishing, business and entertainment software, pharmaceuticals,
chemicals, information technology, apparel, athletic footwear, textile
fabrics and floor coverings, consumer goods, electrical equipment,
automotive parts and industrial products, among many others.'' Id.
estimated levels of piracy ``across all lines of copyright
business'' are 85-93%;
IPR infringing products from China made up 69% of all imported
goods seized by U.S. Customs at the U.S. border in 2005, an increase
from 63% in 2004;
some counterfeit products from China are potential threats to the
health and safety of U.S. consumers (e.g., pharmaceuticals, batteries,
auto parts, industrial equipment, toys, etc.);
3in addition to consumers and right holders, China itself is
directly affected by counterfeiting in lost taxes (e.g., it is
estimated that China failed to collect $3.2-4 billion in 2002 due to
counterfeiting).\29\
\29\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
Inadequate, ineffective IPR enforcement by China continues to be a
major failing. In general, USTR pointed out that ``enforcement efforts,
particularly at the local level, are hampered by poor coordination
among Chinese Government ministries and agencies, local protectionism
and corruption, high thresholds for initiating investigations and
prosecuting criminal cases, lack of training, and inadequate and non-
transparent processes.''\30\ In particular, USTR noted that ``China
suffers from chronic over-reliance on toothless administrative
enforcement and underutilization of criminal remedies.'' \31\ As
evidence, USTR cited China's own 2004 data showing that more than 99%
of copyright and trademark cases were handled by administrative systems
and less than 1% of cases were handled by the police. In effect,
because administrative fines are too low to be a deterrent to
infringement, potential fines from trademark and copyright piracy in
China have become merely costs of doing business. Although China agreed
in 2005 to increase the number of criminal IPR actions relative to
administrative proceedings, USTR reports no discernible relative
increase as of yet.\32\
---------------------------------------------------------------------------
\30\ See USTR, 2006 Special 301 Report (April 28, 2006).
\31\ See USTR, 2006 Special 301 Report (April 28, 2006).
\32\ For example, USTR states: ``According to Chinese data provided
in response to U.S. requests, China initiated no copyright retail cases
under Article 218 of its Criminal Law in 2004 and six cases in 2005.
Under Article 217 of the same law, covering copyright reproduction and
distribution, the number of cases initiated rose from 13 to 28. China's
self-reported numbers of trademark counterfeiting cases initiated also
rose from 53 to 98 under Article 215 (sale of counterfeit trademark
goods); from 163 to 221 under Article 213 (manufacture of counterfeit
trademark goods), and from 100 to 134 under Article 215 (manufacture of
counterfeit trademark labels).'' Id. Moreover, USTR notes that China's
State Administration for Industry and Commerce (SAIC) ``recently
indicated that the number of trademark cases transferred to the police
during 2005 was expected to be less than 0.3% of the total.'' Id.
Statistics for 2001-2004 regarding the transfer of administrative
cases to the courts are reported in the WTO Secretariat's Trade Policy
Review report, WT/TPR/S/161, at 154 (Table III.18).
----------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Copyright
Number of disputes 4,420 6,408 23,013 9,691
Number transferred to court 66 136 224 n/a
Trademarks
Number of disputes 41,163 39,105 37,489 51,851
Number transferred to court 86 59 45 96
----------------------------------------------------------------------------------------------------------------
Among the most egregious continuing problems in IPR enforcement,
USTR identifies the following issues:
Implementation of China's December 2004 Judicial Interpretation
on thresholds for criminal liability. Although this interpretation
lowered the thresholds for criminal liability (i.e., minimum values/
volumes required to initiate criminal prosecution), they are still too
high and, in USTR's view, ``a major reason for the lack of an effective
criminal deterrent.'' \33\
\33\ See USTR, 2006 Special 301 Report (April 28, 2006).
Valuation of infringing products. To determine whether infringing
products meet the threshold for criminal liability, China uses the
value of the infringing products, rather than the value of the genuine
goods. This method highly undervalues the infringing goods and
effectively provides a ``safe harbor'' to infringers.\34\
---------------------------------------------------------------------------
\34\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
Customs enforcement procedures. Certain provisions of China's
customs regulations fail to support border enforcement and, in fact,
appear to impose burdens on the IP right holder. These include:
the provision allowing right holders only 3 days to apply
for seizure of suspected infringing goods held by China customs;\35\
---------------------------------------------------------------------------
\35\ See USTR, 2006 Special 301 Report (April 28, 2006). Article 16
of China's Regulations of the People's Republic of China on Customs
Protection of Intellectual Property Rights states:
Where discovering any import or export goods suspected of
infringing an intellectual property right under Customs recordation,
the Customs shall immediately notify the holder of the intellectual
property right in writing of such suspected infringement. In case the
holder of the intellectual property right presents an application in
conformity with the provisions of Article 13 of these Regulations and
provide a security in conformity with the provisions of Article 14 of
these Regulations within three working days from the date of service of
the notification, the Customs shall detain the suspected infringing
goods, notify the holder of the intellectual property right in writing
of such detention and serve a Customs Detention Receipt on the
consignee or consignor. The Customs shall not detain the goods in case
the holder of the intellectual property right fails to present an
application or to provide a security within the period. (emphasis
added)
---------------------------------------------------------------------------
the provision regarding disposal of seized goods that
appears to require public auction, rather than destruction, of
infringing goods that are not purchased by the right holder or used for
public welfare.\36\
---------------------------------------------------------------------------
\36\ See USTR, 2006 Special 301 Report (April 28, 2006). Article 27
of China's Regulations of the People's Republic of China on Customs
Protection of Intellectual Property Rights states:
The suspected infringing goods under detention shall be confiscated
by the Customs where such goods are considered to have infringed an
intellectual property right by the Customs after investigation.
After confiscating the goods infringing an intellectual property
right, the Customs shall notify the holder of the intellectual property
right in writing of the information related to the goods of
infringement.
Where the confiscated goods infringing an intellectual property
right can be used for public welfare projects, the Customs shall hand
such goods over to the relevant public welfare bodies for use in public
welfare projects; where the holder of the intellectual property right
intends to purchase the goods, the Customs may have such goods assigned
to the holder of the intellectual property right with compensation.
Where either the confiscated goods infringing an intellectual property
right can not be used for public welfare projects or the holder of the
intellectual property right has no intention to purchase the goods, the
Customs may have such goods auctioned according to law after removing
their infringing features; where the infringing features can not be
removed, the Customs shall destroy the goods. (emphasis added)
---------------------------------------------------------------------------
Civil enforcement deficiencies. USTR notes that it ``continues to
hear complaints of a lack of consistent, uniform and fair enforcement
of China's IPR laws and regulations in the civil courts. Litigants have
found that most judges lack necessary technical training, court rules
regarding evidence, expert witnesses, and protection of confidential
information are vague or ineffective, and the costs of investigation
and bringing cases are prohibitively high. In the patent area, where
civil enforcement is of particular importance, the process is
inefficient and unpredictable. A single case can take four to seven
years to complete.'' \37\
---------------------------------------------------------------------------
\37\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
Other notable deficiencies in China's enforcement of IPR identified
by USTR include: ``profit motive requirement in copyright cases'';
``requirement of identical trademarks in counterfeiting cases''; ``lack
of criminal liability for certain acts of copyright infringement''; and
``need to establish minimum, proportional sentences and clear standards
for initiation of police investigations in cases where there is a
reasonable suspicion of criminal activity.''\38\
---------------------------------------------------------------------------
\38\ See USTR, 2006 Special 301 Report (April 28, 2006).
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China's Efforts to Improve its IPR Regime Have Shown Incremental
Improvements
While the problems of high IPR infringement and inadequate IPR
enforcement in China are serious and continuing, it must also be
acknowledged that China has expended great efforts to address the
problems and, although it has not yet achieved an acceptable level of
IPR enforcement, it has made some progress toward that goal.
In the WTO's Trade Policy Review of China, the Chinese Government
submitted a report that, inter alia, describes the steps it has taken
to establish its intellectual property rights regime. China believes
that it has worked strenuously to comply with its WTO TRIPS obligations
and, despite less-than-perfect results, has worked hard to strengthen
and improve enforcement of IPR.\39\ In sum, China states:
---------------------------------------------------------------------------
\39\ Trade Policy Review: China, Report by the People's Republic of
China, WT/TPR/G/161 (17 March 2006) at paras. 56-66.
---------------------------------------------------------------------------
China has made significant progress in IPR protection particularly
in building the IPR-related legal system and raising the consciousness
of the general public for IPR protection. However, the Chinese
Government is fully aware that like in all other countries the
protection of intellectual property rights is constrained by the level
of economic development and other conditions in reality. IPR protection
in China cannot be perfected overnight. The Chinese Government is
determined to continue its persistent and strenuous efforts to achieve
that goal.\40\
---------------------------------------------------------------------------
\40\ Trade Policy Review: China, Report by the People's Republic of
China, WT/TPR/G/161 (17 March 2006) at para. 66.
---------------------------------------------------------------------------
USTR also has noted that there have been some ``bright spots in the
areas of enforcement.'' \41\ For example, it finds that China's
``Mountain Eagle'' campaign against trademark infringement crimes has
actually increased arrests and seizures of infringing goods. In
addition, USTR is ``encouraged'' by (1) China's recent amendments to
rules governing transfer of administrative and customs cases to
criminal authorities, (2) the willingness of Chinese authorities on
their own to ``take ex officio enforcement action on behalf of U.S.
right holders without the need for a complaint'' (e.g., in Shanghai),
and (3) by initial enforcement actions against Internet piracy in
2005.\42\
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\41\ See USTR, 2006 Special 301 Report (April 28, 2006).
\42\ See USTR, 2006 Special 301 Report (April 28, 2006).
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Other notable actions taken by China that are intended to help
improve IPR education and enforcement include the following.
China's 2006 Action Plan on IPR Protection
China has issued a comprehensive and aggressive plan to address the
whole range of IPR issues. China summarizes the coverage of the Action
Plan as follows:
``The Action Plan covers 4 major areas: trademark, copyright,
patent and import and export, which involve the IPR protection plans
and arrangements of 11 departments including the Ministry of Public
Security, Ministry of Information Industry, Ministry of Commerce,
Ministry of Culture, Customs General Administration, State
Administration of Industry and Commerce, Administration of Quality
Inspection, Supervision and Quarantine, Copyright Bureau, State Food
and Drug Administration, State Intellectual Property Office, and
Legislative Affairs Office of the State Council.
``The Action Plan covers 9 areas: legislation, law enforcement,
mechanism building, propaganda, training and education, international
communication and cooperation, promoting business self discipline,
services to right holders, and subject research.
``In line with the Action Plan, in 2006 China will draft, formulate
and revise 17 laws, regulations, rules and measures relating to
trademark, copyright, patent and customs protection, and draft, improve
and revise 6 judicial interpretations.
``The IPR law enforcement efforts will include 7 dedicated
campaigns such as the ``Mountain Eagle'', ``Sunshine'' and ``Blue
Sky'', 8 regular enforcement initiatives and 20 specific measures.
``The government is going to establish a long standing mechanism
constituting 11 parts, including a service center for reporting and
complaining IPR violations and publicizing law enforcement statistics,
and 18 specific measures. 7 approaches and 39 measures will be adopted
to raise the general public's awareness of IPR protection.
``Twenty one IPR training programs will be organized under the
Project of Training Thousands of IPR Personnel.
``The focus of IPR related international exchanges and cooperation
will be on legislation, trade mark, copyright, patent and customs
protection, which will be facilitated through 19 exchange and
cooperation activities, out of which 7 will be between China and the
U.S.
``With a view to improving enterprises' consciousness and awareness
of IPR protection, 3 initiatives will be launched, including the
convening of a conference on enterprises' IPR protection and
proprietary innovation.
``Twelve specific measures covering 9 areas will be put in place to
better serve the right holders. Besides, countermeasure oriented
research will be conducted in 5 fields to strengthen IPR protection.''
\43\
---------------------------------------------------------------------------
\43\ http://www.ipr.gov.cn/ipr/en/info/
Article.jsp?a_no=3326&col_no=102&dir=200604.
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New China IPR Website
Recently, China's Ministry of Commerce (MOC) announced the launch
of an intellectual property rights protection website--www.ipr.gov.cn.
The MOC described its purpose as to introduce domestic and overseas
readers to China's laws, rules, policies and measures concerning IPR
protection and to enhance public awareness of IPR.\44\ The website
provides one-stop access to IPR-related news, policies, documents, laws
and regulations, information about IPR legal proceedings, and
government ministries involved in IPR administration and enforcement.
---------------------------------------------------------------------------
\44\ See Xinhua, China launches IPR protection website, People's
Daily Online (April 30, 2006); http://english.people.com.cn/200604/30/
eng20060430_262285.html
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Increasing Public Education and Awareness of IPR
From April 16-23, 2006, an ``Achievement Exhibition on China's IPR
Protection'' was jointly-sponsored by numerous Chinese ministries.\45\
In conjunction with the exhibition, China also held a ``China High-
level Forum on Intellectual Property Rights Protection 2006.'' \46\ In
addition, China's Ministry of Commerce announced in April 2006 that it
intends to set up special service centers in 50 cities to handle
domestic complaints regarding IPR infringement and provide IPR-related
consulting services in order to raise public awareness of IPR
protection.\47\
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\45\ Sponsors of the exhibition included the following: State
Council, the National Office of Rectification and Standardization of
Market Economic Order, the Propaganda Department of the CPC Central
Committee, Ministry of Public Security, Ministry of Commerce, Ministry
of Culture, State-owned Assets Supervision and Administration
Commission of the State Council, General Administration of Customs,
State Administration for Industry and Commerce, National Copyright
Administration, State Intellectual Property Office, and Information
Office of the State Council.
\46\ This exhibition ``was the first large-scale exhibition held in
China with the content of IPR protection.'' Chinese Premier Wen Jiabao
said that the exhibition showed the ``Chinese government's
determination to fight piracy.'' The Chinese government described the
exhibition as follows:
This exhibition had three areas including Department Area, Local
Area, and Enterprise Area. Department Area mainly displayed a general
description of IPR, trademark right protection, patent right
protection, copyright protection, customs protection of IPR, and
judicial protection of IPR in other related fields; Local Area mainly
introduced the progress in the Special Campaigns of IPR Protection in
15 key localities and the fruitful results of local enterprises'
independent innovation and fighting for their rights; Enterprise Area
focused on the following contents: Chinese enterprises' enhancement of
IPR protection awareness, competition under the IPR system, emphasis on
the development and innovation of own intellectual property, creation
of independent brands, promotion of the popularity and international
competitiveness etc.
See Achievement Exhibition on China's IPR Protection 2006 (May 8,
2006); available at http://www.ipr.gov.cn/ipr/en/info/
Article.jsp?a_no=4077&col_no=115&dir=200605.
\47\ IPR infringement complaints to go to special service centers,
China View (April 11, 2006); http://news.xinhuanet.com/english/2006-04/
11/content_4411135.htm.
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IPR Ombudsman
The Chinese government appointed, effective January 2006, an
Intellectual Property Rights Ombudsman at the Chinese Embassy in
Washington, DC. The role of the Ombudsman is to serve as the point of
contact for U.S. companies, particularly small- and medium-sized
businesses, respecting IPR issues in China.
China's gradual improvement in IPR enforcement is also reflected in
the year-to-year increasing number of seizures of IPR infringing goods
by China Customs.
China Customs IPR Seizures (2001-2005)
----------------------------------------------------------------------------------------------------------------
Year 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
Cases 330 573 756 1,051 1,210
----------------------------------------------------------------------------------------------------------------
Source: China Customs
In 2005, of the total 1,210 IPR seizures by China Customs, 51
(4.2%) were of imports, and 1,159 (98.4%) were of exports.
Of course, when evaluating China's IPR enforcement performance, one
should be mindful of the many practical problems that can impede
efficient enforcement. For example, in the case of border IPR
enforcement by China Customs, the level of performance will be affected
by the number of trained personnel available and assigned to the task
of inspection in the same way that the availability (or lack thereof)
of U.S. Customs personnel would affect border enforcement in the US.
Another consideration is that China Customs can only inspect a limited
percentage of containers, and, statistically, China Customs finds
containers without IPR problems 3 times more often than it finds
problem containers. Given these facts, local Chinese customs officials
may be reluctant to delay suspected infringing goods because of the
likelihood that the goods will ultimately be found non-infringing and
such a delay will affect the market.
In addition to actions by the Chinese government, there have been
some noteworthy victories in cases brought by IP right holders. Two
recent examples are:
Ruling against Silk Alley market landlords. Trademark owners of
five luxury goods brands (Prada, Chanel, Louis Vuitton, Gucci, and
Burberry) filed civil claims in mid-2005 against the landlord, Beijing
Xiushui Haosen Clothing Co. Ltd., for allowing merchants to sell knock-
offs on its premises. In December 2005, the Beijing No. 2 Intermediate
People's Court's found for the trademark holders, and in April 2006,
the Beijing High People's Court upheld the previous ruling.\48\
---------------------------------------------------------------------------
\48\ See, e.g., Luxury brands win trademark lawsuit, China Daily
(April 19, 2006); http://www.chinadaily.com.cn/ home/2006-04/19/
content_571000.htm.
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Pfizer's Viagra patent upheld. In 2004, China's patent review board
found in favor of Chinese generic drug makers who had challenged
Pfizer's patent on sildenafil citrate, the main component of Viagra. In
June 2006, the Beijing No. 1 Intermediate Court overturned the patent
review board's decision and upheld Pfizer's patent.\49\
---------------------------------------------------------------------------
\49\ See, e.g., China court upholds Pfizer's Viagra patent,
BusinessWeek Online (June 5, 2006) (http://www.businessweek.com/ap/
financialnews/D8I1TG680.htm?sub=apn_home_down&chan=db); Pfizer wins
patent protection for Viagra in China, China Daily (June 4, 2006)
(http://www.chinadaily.net/china/2006-06/04/content_607962.htm).
---------------------------------------------------------------------------
Moreover, as Jiang Zhipei, Chief Judge of the Property Rights
Tribunal of the Chinese Supreme People's Court, has observed:
``Domestic companies are the real impetus for improving IPR.'' \50\
Thus, improvement in the level of IPR protection and enforcement in
China is likely to increase to the extent that Chinese companies
recognize the importance of and need for effective IPR protection to
their own operations, as they increasingly innovate to compete in the
market.
---------------------------------------------------------------------------
\50\ Chris Buckley, On piracy, an advocate for China's progress,
International Herald Tribune (May 1, 2006); http://www.iht.com/
articles/2005/10/04/business/IPRjudge.php.
---------------------------------------------------------------------------
Though long and arduous the process might be, China will not make
any discount on the principles and goals on its IPR Protection, said
Yan Xiaohong, deputy chief of the National Copyright Administration of
China at a seminar on encouraging self-innovation and advocating the
use of authentic software.
If we do not protect IPR, we could not realize the goal of building
an innovation-oriented nation. China will continue to improve
legislation and law enforcement in IPR protection to create a sound
market environment for enterprises, said Yan.\51\
---------------------------------------------------------------------------
\51\ No discount in IPR protection, copyright watchdog, People's
Daily Online (May 12, 2006) (emphasis added); http://
english.people.com.cn/200605/12/eng20060512_265097.html.
---------------------------------------------------------------------------
AmCham agrees that innovation by Chinese companies will be an
important driver toward improved IPR protection in the future. AmCham
states in its 2006 White Paper:
Vigorous IPR enforcement is obviously a baseline condition
necessary for innovation to flourish.\52\
---------------------------------------------------------------------------
\52\ AmCham, White Paper 2006: American Business in China (2006) at
34.
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______
Successful realization of its innovation priorities is the upside
inducement for the Chinese to implement the fundamental reforms
necessary to guarantee protection of IPR.\53\
---------------------------------------------------------------------------
\53\ AmCham, White Paper 2006: American Business in China (2006) at
42.
---------------------------------------------------------------------------
In addition, in the future, the activities of industry groups and
associations may become an important means to improve IPR enforcement
in China. For example, it is my understanding that the China Trademark
Association (CTA) (www.cta.org.cn), a group composed of enterprises,
trademark agencies and trademark experts, provides its members various
services such as consulting, research, seminars and training, trademark
monitoring, and serving as a communications link between its members
and government agencies. To the extent that U.S. companies operating in
China become members of CTA and other similar groups, it is likely to
enhance the development and improvement of the IPR protection system in
China.
In sum, China is making gradual and incremental progress in
developing a more effective IPR protection and enforcement system, but
chronic, intractable problems remain. The question is--how fast China
can or will be able to move toward a level of IPR protection and
enforcement that is acceptable to its trading partners.
JCCT--The Primary Forum for U.S.-China Bilateral Negotiations on IPR
Since 1994, the main vehicle for U.S.-China bilateral dialogue
regarding IPR issues has been the annual meeting of the Joint
Commission on Commerce and Trade (JCCT). At the April 2004 JCCT
meeting, the U.S. and China made IPR issues one of their highest trade
priorities. At the meetings in 2004, 2005, and 2006, China committed to
undertake various actions to reduce IPR infringement and improve IPR
enforcement. In some cases, China has fulfilled its commitment and, in
some other instances, China is continuing its efforts toward completing
the commitment.\54\ USTR's Special 301 report cites the following
examples of China implementing IPR-related commitments made at the 2004
and 2005 JCCT meetings:
---------------------------------------------------------------------------
\54\ The U.S.-China Business Council has prepared a useful summary
of China's 2004, 2005, and 2006 JCCT commitments, with an indication of
their current status. See http://www.uschina.org/public/ documents/
2006/05/jcct-commitments.pdf.
---------------------------------------------------------------------------
``At the 2006 JCCT China reaffirmed its commitment, made at
previous JCCT meetings, to continue efforts to ensure use of legalized
software at all levels of government, and to adopt procedures to ensure
that enterprises use legal software, beginning with large enterprises
and state-owned enterprises.''
``China recently fulfilled a 2005 JCCT commitment by adopting
amended rules governing the transfer of administrative and customs
cases to criminal authorities, and has taken some steps to pursue
administrative actions against end-user software piracy.''
``China recently posted an IPR ombudsman to its Embassy in
Washington, who has facilitated contacts between U.S. government
officials and their counterparts in Beijing, and been a source of
information for U.S. businesses, including small and medium-size
companies.''
``China has also sought to expand enforcement cooperation as agreed
at the 2004 and 2005 JCCT meetings.'' In particular, China's General
Administration of Customs (GAC) and the U.S. Customs and Border
Protection (CBP) are developing a plan under which ``CBP will cooperate
with GAC to affect a four-part customs cooperation program aimed at
improving administrative IPR border enforcement in both countries,''
including such elements as data sharing, exchange of statistical
information on IPR border seizures, establishing a contact for matters
related to IPR-infringing goods, and technical exchanges (e.g.,
legislative/regulatory improvements, risk modeling and IPR recordation
administration).
``China is also taking steps to meet its 2005 JCCT commitment to
submit a legislative package to the National People's Congress in June
2006 for China to join the WIPO Internet Treaties.'' \55\
---------------------------------------------------------------------------
\55\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
The recently completed 2006 JCCT resulted in the following outcomes
on requests made by the U.S. aimed toward improving enforcement of
intellectual property rights:
In support of its commitment to significantly reduce intellectual
property rights (IPR) infringement levels, China agreed to the
following specific actions.
Pirated Optical Disks (ODs). The Chinese government has
taken action against 14 factories producing illegal optical disks and
has pledged to step up enforcement in this important area to combat
copyright piracy of films, music, and software. China and the U.S. will
also explore new ways to strengthen cooperation in this area.
Requirements to Install Legitimate Software. The Chinese
government has issued a notice requiring the pre-loading of legal
operating system software on all computers produced or imported into
China, as well as a notice requiring government agencies to purchase
computers with pre-loaded software. In line with these requirements,
several Chinese computer manufacturers have recently signed agreements
to purchase U.S. operating system software.
Ensuring Use of Legal Software in Government and
Enterprises. In addition to ongoing efforts to ensure use of legalized
software at all levels of the government, China has launched efforts to
ensure the legalization of software used in Chinese enterprises. In
addition, China has agreed to discuss U.S. proposals regarding
government and enterprise software asset management in the JCCT IPR
Working Group.
Rid Consumer Markets of Infringing Goods. The Chinese
government has agreed to intensify its efforts to ensure that public
markets in China are free of infringing products and has announced
enforcement actions in several major cities.
Individual Cases. The Chinese government agreed to help
ensure that individual IPR cases raised by the U.S. government with
China will be vigorously pursued.
Action Plan: China has announced a broad action plan to
improve enforcement of IP rights, including steps in the areas of
enforcement, legislation and education. Strongly implemented, these
steps could lead to significant improvement in the IP situation in
China.\56\
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\56\ The U.S.-China Joint Commission on Commerce and Trade (JCCT),
Outcomes on U.S. Requests (April 11, 2006); http://www.ita.doc.gov/
press/press_releases/2006/jcct_outcomes_041106.pdf.
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Potential for a WTO Dispute Settlement Case re IPR Enforcement
In its 2005 report to Congress, the Commission stated that
``China's principal IPR deficiency is effective enforcement of its
laws, which is among its WTO commitments.''\57\ The Commission further
observed that ``China's failure to protect IPR is clearly within the
jurisdiction of the WTO, given China's explicit obligations under the
TRIPS agreement,'' and then recommended that, ``(b)ecause China is not
making satisfactory progress in this area, the United States should
initiate action through the dispute resolution process at the WTO to
address China's failure to comply with both the criminal penalties and
enforcement provisions of TRIPS.''\58\
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\57\ 2005 Report to Congress of the U.S.-China Economic and
Security Review Commission, 109th Cong., 1st Sess. (November 2005) at
47 (citing TRIPS article 41.1: ``Members shall ensure that enforcement
procedures as specified in this Part are available under their law so
as to permit effective action against any act of infringement of
intellectual property rights covered by this Agreement, including
expeditious remedies to prevent infringements and remedies which
constitute a deterrent to further infringements. These procedures shall
be applied in such a manner as to avoid the creation of barriers to
legitimate trade and to provide for safeguards against their abuse.'').
\58\ 2005 Report to Congress of the U.S.-China Economic and
Security Review Commission, 109th Cong., 1st Sess. (November 2005) at
48.
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In its recently-issued Special 301 report, USTR said it was
``stepping up consideration'' of WTO dispute settlement options against
China with regard to IPR issues. In doing so, USTR did not identify the
grounds for any potential WTO complaint. However, a recent press report
states that USTR is considering a WTO case on the issue of thresholds
for IPR criminal liability.
The U.S. Trade Representative's office last week indicated that it
is getting closer to launching a WTO challenge against China's laws
that require certain thresholds to be met before intellectual property
rights violators can be hit with criminal penalties.
Informed sources have said since March that USTR is looking at a
case that attacks these thresholds, and industry sources this week
agreed that the new Special 301 report officially declares that these
thresholds are a serious problem.\59\
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\59\ USTR Hints at WTO Case Against China on IPR Criminal
Thresholds, Inside U.S.-China Trade (May 3, 2006).
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With respect to the basis for a TRIPS-based complaint, in general,
the TRIPS Agreement obligates Members to:
provide minimum standards of protection for copyrights and
neighboring rights, trademarks, geographical indications, industrial
designs, patents, integrated-circuit layout designs and undisclosed
information;
establish minimum standards for IPR enforcement in administrative
and civil actions and, respecting copyright piracy and trademark
counterfeiting, in criminal actions and actions at the border. TRIPS
requires that enforcement procedures have a deterrent effect; and
provide national and MFN treatment with respect to the protection
and enforcement of intellectual property rights.
A number of interested party groups, in focusing on China's
inadequate IPR enforcement, have recommended bringing a WTO case
against China based on alleged violations of TRIPS Article 41 (which
sets out the general obligations re enforcement of IPR) and/or Article
61 (dealing with criminal enforcement procedures). The following is a
representative sampling of such potential claims.
RIAA (testimony of Jay Berman to House W&M Committee, April 14,
2005):
TRIPS Article 41 states that ``members shall ensure that
enforcement procedures--are available under their law so as to
permit effective actions against any infringement--covered by
this Agreement, including expeditious remedies--which
constitute a deterrent to further infringements.'' China's
excessive reliance upon administrative sanctions in the form of
the seizure of infringing product and, if the guilty party
doesn't flee, the imposition of small fines, do not deter
further infringements.
TRIPS Article 61specifically requires that criminal penalties
``be applied in cases of willful trademark counterfeiting or
copyright piracy on a commercial scale.'' China has conducted
few prosecutions and made very few convictions for copyright
piracy. China has persisted in defining ``commercial scale''
through the use of complicated numerical thresholds and
ambiguous definitions which, despite the new Chinese ``judicial
interpretation'' described below, make it highly unlikely any
pirate will face criminal penalties.
Moreover, the remedies provided in China's criminal code are
only available in those instances where the pirate is making a
profit. The profit test is actually more difficult to meet than
the commercial scale requirement. A ``profit'' test violates
the TRIPS Agreement.
NAM (Comments to USTR re Special 301 out-of-cycle review,
February 14, 2005):
USTR should begin to prepare a WTO case and seek consultations
with China as soon as U.S. trade agencies believe they have
assembled sufficient information to take this step.
Such WTO consultations should present the breadth and depth of
China's failure to implement the intellectual property
protections as required by the WTO, and should present an
assessment of the economic cost to U.S. firms as well as the
threat to health and safety posed by tolerating the production
and export of counterfeit goods
IIPA (Comments to USTR re Special 301 out-of-cycle review,
February 9, 2005):
China does not presently meet its WTO/TRIPS commitments on
enforcement and particularly Articles 41, 50 and 61 (provide
enforcement which ``on the ground'' deters further
infringements, provide effective ex parte civil search orders,
and provide specific deterrent criminal penalties).
Intel (Comments to USTR re Special 301 out-of-cycle review,
February 14, 2005):
Chinese law's reliance on numerical thresholds as basis for
prosecutions and convictions will continue to create irrational
obstacles to criminal enforcement. China's Criminal Code
(especially articles 213-215) appears inconsistent with TRIPS
Article 61 which requires access to criminal enforcement in
counterfeiting cases on a ``commercial scale.''
Moreover, USTR's Special 301 out-of-cycle Review conducted in 2005
noted some potential bases of TRIPS violations.\60\
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\60\ See http://www.ustr.gov/assets/Document_Library/
Reports_Publications/2005/2005_Special_301/asset_upload
_file835_7647.pdf.
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``Article 63 of the TRIPS Agreement requires laws, regulations and
final judicial decisions and administrative rulings of general
application pertaining to IPR infringement be made publicly available
to rights holders. Despite this requirement, lack of transparent
information on IPR infringement levels and enforcement activities in
China continues to be an acute problem.''
``Article 61 of the TRIPS Agreement requires a criminal IPR
enforcement system with deterrent effect. Presently, however, criminal
enforcement in China has not demonstrated any deterrent effect on
infringers.''
``Articles 41 and 61 of the TRIPS Agreement require effective and
deterrent IPR enforcement. Consensus exists among rights holders,
however, that China's current IPR system relies too heavily on
enforcement by administrative authorities and is non-deterrent.''
``China has yet to implement any meaningful data protections for
pharmaceutical products, as required by Article 39.1 of the TRIPS
Agreement.''
In considering how to approach a potential WTO case, it would
likely be easier to succeed on specific allegations of TRIPS violations
as applied in China, in contrast to alleging generally that China's IPR
laws violate TRIPS obligations. A more general approach might, however,
if successful, produce a broader effect. Under WTO jurisprudence, it is
not uncommon for Members to allege that an underlying law ``as such''
may violate a WTO legal obligation or otherwise nullify or impair
benefits under the covered agreements, independent of any application
of that law.
At the WTO, there have been nine TRIPS disputes that have resulted
in panel reports. Six disputes have focused on specific aspects of IPR
laws and regulations rather than on IPR enforcement per se. These cases
and the TRIPS articles cited are:
India--Patents (U.S.), WT/DS50 (Articles 27, 63, 70.8 and 70.9)
Indonesia--Autos, WT/DS54 (Articles 3, 20 and 65)
India--Patents (EC), WT/DS79 (Article 70.8(a) and 70.9)
Canada--Pharmaceutical Patents, WT/DS114 (Articles 27, 30, 33 and
70)
U.S.--Section 110(5) Copyright Act, WT/DS160 (Articles 9.1 and 13)
Canada--Patent Term, WT/DS170 (Articles 33, 62.1, 62.4, 65, 70.1
and 70.2)
Article 41 sets out the general obligation that Members ensure that
enforcement procedures are available ``so as to permit effective action
against any act of infringement of intellectual property rights''
covered by TRIPS, ``including expeditious remedies to prevent
infringements and remedies which constitute a deterrent to further
infringements.'' Article 42 requires Members to provide fair and
equitable civil judicial procedures concerning the enforcement of any
intellectual property right covered by the TRIPS agreement. While
Article 42 is included in Section III of TRIPS (covering enforcement of
IPR), it is focused on procedures, not the general obligation of
Article 41 to provide effective IPR enforcement.
Three TRIPS disputes that resulted in panel and/or appellate body
reports have cited violations of TRIPS enforcement Articles 41 and/or
42, but in none of these cases did the panel or appellate body find a
violation. They are:
EC--Trademarks and Geographical Indications (U.S.), WT/DS/174
(Articles 1, 2, 3, 4, 16, 22, 41, 42, and 65)
The U.S. claimed that the EC's regulation was
inconsistent with Articles 41.1, 41.2, 41.4, 42 and 44.1 of the TRIPS
Agreement because it denied the owner of a registered trademark the
right provided for in Article 16.1 of the TRIPS Agreement, and because
it did not, with respect to a GI, provide the rights provided for in
Article 22.2 of the TRIPS Agreement. The U.S. requested a finding that
the enforcement obligations of the TRIPS Agreement applied to the EC
regulation to the extent that it made unavailable to right holders the
requisite enforcement procedures and remedies.\61\ However, the Panel
exercised ``judicial economy'' with respect to these claims and did not
address them.\62\
\61\ See Report of the Panel, EC--Trademarks and Geographical
Indications (U.S.), WT/DS174/R (15 March 2005) at para. 7.759.
\62\ See Report of the Panel, EC--Trademarks and Geographical
Indications (U.S.), WT/DS174/R (15 March 2005) at para. 8.2.
EC--Trademarks and Geographical Indications (Australia), WT/DS/290
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(Articles 1, 2, 3, 4, 16, 22, 24, 41, 42, and 65)
Australia argued that the EC failed to ensure that
enforcement procedures as specified in Part III of the TRIPS Agreement
are available under its law, contrary to Article 41.1 of the TRIPS
Agreement, as a consequence of, inter alia, the fact that the EC
regulation did not grant the Consultative Committee the authority
required by Articles 43, 44, 45, 46 and 48 of the TRIPS Agreement, and
did not provide judicial authorities with the authority required by
Articles 43, 44, 45, 46, 48 and 49. The Panel, however, ruled that
Australia's inclusion of claims under Articles 43, 44, 45, 48, and 49
in conjunction with Article 41 were not included in its original claim
and therefore were outside the Panel's terms of reference.\63\
\63\ See Report of the Panel, EC--Trademarks and Geographical
Indications (Australia), WT/DS290/R (15 March 2005) at paras. 7.44,
7.49.
U.S.--Section 211 Appropriations Act, WT/DS/176 (Articles 2, 3, 4,
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15, 16, 42)
The Panel found Section 211(a)(2) to be inconsistent with
Article 42 of the TRIPS Agreement but the Appellate Body reversed the
Panel's finding.\64\
\64\ See Report of the Panel, United States--Section 211 Omnibus
Appropriations Act of 1998, WT/DS176/R (6 August 2001) at para. 8.102;
Report of the Appellate Body, United States--Section 211 Omnibus
Appropriations Act of 1998, WT/DS176/AB/R (2 January 2002) at para.
231.
Although, in each of these cases, neither the panel nor appellate
body directly addressed a claim of a TRIPS violation based on Article
41 alone and its obligation of ``effective'' IPR enforcement, it is
interesting to note their tangential comments regarding the scope of
Article 41.\65\
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\65\ Report of the Panel, United States--Section 211 Omnibus
Appropriations Act of 1998, WT/DS176/R (6 August 2001):
8.97 In interpreting Article 42, we look next at its context. The
Article appears in Section 2 of Part III of the TRIPS Agreement, which
deals with the enforcement of intellectual property rights. The
inclusion of this Part on enforcement in the TRIPS Agreement was one of
the major accomplishments of the Uruguay Round negotiations as it
expanded the scope of enforcement aspect of intellectual property
rights. Prior to the TRIPS Agreement, provisions related to enforcement
were limited to general obligations to provide legal remedies and
seizure of infringing goods. Article 41 of Section 1 of Part III lays
down the general obligations applicable to all enforcement measures. It
provides, inter alia, that ``Members shall ensure that enforcement
procedures as specified in this Part are available under their law so
as to permit effective action against any act of infringement of
intellectual property rights covered by this Agreement'' (paragraph 1)
and that ``[p]rocedures concerning the enforcement of intellectual
property rights shall be fair and equitable'' (paragraph 2). Article
42--together with the other provisions of Section 2 of Part III--
elaborates upon the general obligations contained in Section 1 of the
same Part in respect of civil and administrative procedures and
remedies. As concerns the requirement of effectiveness, the object and
purpose of the enforcement provisions of Part III is expressed in the
Preamble to the Agreement, which recognizes the need of ``the provision
of effective and appropriate means for the enforcement of trade-related
intellectual property rights''.
Report of the Appellate Body, United States--Section 211 Omnibus
Appropriations Act of 1998, WT/DS176/AB/R (2 January 2002):
206. Section 1 of Part III lays out ``General Obligations'' of
Members. According to Article 41.1 of Section 1, Members are required
to ensure that enforcement procedures as specified in Part III are
available under their domestic law ``so as to permit effective action
against any act of infringement of intellectual property rights covered
by [the TRIPS] Agreement''. These enforcement procedures must include
expeditious remedies to prevent infringements and remedies which
constitute a deterrent to further infringements. At the same time,
these procedures must be applied in such a manner as to avoid the
creation of barriers to legitimate trade and to provide safeguards
against their abuse. These procedures provide for an internationally-
agreed minimum standard which Members are bound to implement in their
domestic legislation.
Report of the Panel, EC--Trademarks and Geographical Indications
(Australia), WT/DS290/R (15 March 2005):
7.48 The Panel considers that Article 41.1 imposes an obligation.
The language of that provision is expressed in terms of what Members
``shall'' ensure and is not hortatory. The substance of the provision
adds qualitative elements to the procedures specified in Part III
through use of terms such as ``effective'', ``expeditious'' and
``deterrent'' and is not redundant.
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In addition to the cases above, the U.S. filed two other sets of
WTO dispute settlement cases respecting IPR enforcement, but they were
resolved by mutual agreement without going to a panel. They are:
Denmark--Measures Affecting the Enforcement of IPR, WT/DS83
Sweden--Measures Affecting the Enforcement of IPR, WT/DS86
U.S. alleged that Denmark & Sweden failed to make
provisional measures available in the context of civil proceedings
involving IPR, and this violated TRIPS Articles 50, 63 and 65
EC--Enforcement of IPR for Motion Pictures and Television Programs,
WT/DS124
Greece--Enforcement of IPR for Motion Pictures and Television
Programs, WT/DS125
U.S. claimed that a significant number of TV stations in
Greece regularly broadcast copyrighted motion pictures and television
programs without the authorization of copyright owners.
U.S. contended that effective remedies against copyright
infringement did not appear to be provided or enforced in Greece in
respect of these broadcasts.
U.S. alleged a violation of Articles 41 and 61 of the
TRIPS Agreement.
In sum, as asserted by various companies, interest groups, and the
USTR, there are multiple potential grounds for alleging TRIPS
violations by China, whether focused on deficiencies in China's IPR
laws ``as such'' or on specific cases of inadequate and ineffective IPR
enforcement. The case against copyright infringement of movies and TV
programs in Greece provides a prior example of a specific IPR case.
There are many specific instances in China of inadequate enforcement of
its IPR laws, such as the issue of criminal liability thresholds being
too low to be a deterrent to infringement, to which this example could
be applied. Alternatively, a potential case could be based on the claim
that specific aspects of China's IPR laws ``as such'' violate its TRIPS
obligations and have resulted in nullification or impairment of
benefits to the U.S. A determination of the best approach would likely
depend on the amount and quality of specific evidence of TRIPS
violations available, as well as strategic policy decisions as to
whether it would more advantageous to take a targeted approach or to
focus on achieving as large an effect as possible.\66\
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\66\ In contrast to the dispute settlement path, the EC has made a
number of submissions to the WTO TRIPS Council urging the Council to
``carefully examine compliance of Members with the enforcement
provisions of TRIPS.'' See Enforcement of Intellectual Property Rights,
Communication from the European Communities, IP/C/W/448 (9 June 2005)
at para. 3. In particular, the EC said:
19. It is unquestionable that the TRIPS Agreement establishes the
freedom of each Member to determine the appropriate method of
implementing its provisions. However, ultimately such implementation
must allow the adequate prosecution of the objectives of TRIPS.
20. In that respect, the EC would like to recall that, according to
Article 41.1 of the TRIPS Agreement, ``Members shall ensure that
enforcement procedures as specified in this Part are available under
their law so as to permit effective action against any act of
infringement of intellectual property rights covered by this Agreement,
including expeditious remedies to prevent infringements and remedies
which constitute a deterrent to further infringements . . .''. Hence,
we have an obligation to take account of the present situation and find
the ways to combat and reduce counterfeiting and piracy.
21. Considering the TRIPS Council assignments, in particular its
task to ``monitor the operation of this Agreement and, in particular,
Members' compliance with their obligations hereunder . . .'' explicitly
mentioned in Article 68 TRIPS, there is no doubt that this Council is
the appropriate forum to address the issue.
22. In view of the above, the EC submit that the deficient
enforcement of IPRs is a major concern that should be carefully
considered in the forthcoming months.
Id. at paras. 19-22 (emphasis in original). The EC recently renewed
its proposal that the TRIPS Council foster a dialogue among WTO Members
with a view to identifying solutions to implementation deficiencies on
IPR enforcement. See Enforcement of Intellectual Property Rights,
Communication from the European Communities, IP/C/W/468 (10 March
2006).
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The Way Forward Requires Practical Approaches
The above discussion describes how IPR issues have been playing
out. The practical question before us, however, is how the U.S. and
China can make real progress in improving IPR protection and
enforcement. At this point, based on my past research and presentations
to the Commission as well as my experiences in China meeting with
government and industry officials, I would like to offer some personal
observations on the way forward.
While a WTO case is always a possibility, the U.S. generally tries
to work with new Members to provide assistance in achieving their
obligations rather than to turn to the dispute settlement path. The
ultimate object is an acceptable IPR system in China. It is hoped of
course that additional pressure applied to China will lead to greater
and better results. But we are at this stage so far from an acceptable
situation that it would be useful to look ``outside the box'' for
possible solutions.
First, to the extent China can accomplish ``quantum leaps'' in IPR
improvement by means of government mandate, all the better. Thus,
China's directive regarding use of genuine software on government
computers and pre-loading of genuine software on all computers
manufactured or imported into China is a positive development.
Second, China can and should make changes to their statues and
regulations to improve and enhance IPR protection and enforcement.
Thus, for example, it would be a helpful development if China would
revisit the subject of IPR criminal liability and provide real
deterrence.
Third, there is a need to reduce the portion of trade that needs to
be reviewed or inspected for possible IP violations by Customs here and
there. For example, the U.S. and China could look to the programs that
U.S. Customs and Border Protection have instituted as models, such as
C-TPAT (Customs-Trade Partnership Against Terrorism) program. C-TPAT is
a voluntary government-business initiative aimed at strengthening and
improving the overall international supply chain and U.S. border
security. Among the benefits to those who participate in C-TPAT are
reduced number of CBP inspections (therefore, reduced border delay
times) and priority processing for CBP inspections. The U.S. and China
could apply the same model to their IP trade issues. Thus, they could
enlist the private sector to become partners in IP border enforcement.
Like C-TPAT, those who participate could benefit from lessened border
scrutiny, fewer inspections, and expedited customs processing. The goal
of such a program would be to identify IP-compliant importers and their
suppliers who would be subject to reduced inspections so that the
customs authorities could focus heightened scrutiny on high-risk
importers. The cost of increased inspections for high-risk imports
could be passed on to the import community, which would allow the
government to hire more border inspection resources. The point is that
there is a need for innovative programs that will provide an incentive
for importers to work with their foreign suppliers to guarantee that
the goods they import from China are IP compliant.
Fourth, there is a gap in IP enforcement rights that needs to be
closed through appropriate legislation. Specifically, the U.S. should
consider legislation to ensure that companies that buy IPR-protected
equipment have some legal ability to reach imported products made on
IP-infringing equipment. It is the case that in certain situations,
manufacturing equipment protected by intellectual property rights has
been misappropriated by foreign equipment manufacturers. Such IPR-
infringing equipment has then been used to produce other products which
are exported to the U.S. U.S. companies that lawfully use IPR-protected
equipment to manufacture similar products are disadvantaged by having
to compete with imported products manufactured using IPR-infringing
equipment. Currently, this situation is not addressed by U.S. law for
the downstream industry. It is critical that U.S. companies lawfully
producing products using IPR-protected manufacturing equipment who are
forced to compete with producers using IPR-infringing equipment be
permitted a legal means to sue the beneficiaries of IP-infringing
equipment.
Statement of R. John Theriault, Pfizer, New York, New York
Pfizer is a diversified, global health care company and the world's
largest pharmaceutical company. Our core business is the discovery,
development and marketing of innovative pharmaceuticals for human and
animal health, and we are committed to ensuring the integrity of those
products when they reach the market.
We have developed a focused anti-counterfeiting program to protect
the integrity of our products and supply chain. Staffing for that
program now includes seventeen security professionals, including two
based in Hong Kong, one based in Beijing, and one based in Shanghai.
Since expanding our presence in China in 2004, we have seen remarkable
results, including a steady increase in the number and quality of
enforcement actions taken, some of which are discussed in detail below.
In China, we have successfully partnered with the Public Security
Bureau (PSB), the Ministry of Public Security (MPS), the State
Administration for Industry and Commerce (SAIC), and various provincial
offices of both the SAIC and the State Food and Drug Administrations
(SFDA) to identify and raid counterfeiters. The partnership is grounded
in trust, facilitated by Pfizer's anti-counterfeiting training programs
with the Chinese and our sharing of leads. While there is still much
room for improvement in regard to the enforcement of Intellectual
Property rights in China, the following facts indicate that some
progress is being made.
2006 Seizures and Arrests
Recent enforcement actions by Chinese authorities demonstrate the
improved protection of Pfizer's intellectual property rights:
Of the more than 8.9 million counterfeit Pfizer tablets
seized globally, more than 4.2 million (47.94%) were seized in China
Of the 2289 kg of active pharmaceutical ingredient (API)
for Pfizer products seized globally, 98.07% (2245 kg) was seized in
China
Of the 506 arrests made globally for IP violations, 113
(22%) were by Chinese authorities
In response to leads provided to them, the SFDA and local
FDAs inspected pharmacies in 50 cities, confiscating counterfeit
medicines, imposing stiff financial penalties and, for the most severe
violations, closing pharmacies and detaining their owners.
78 herbal medicines containing sildenafil citrate, the
API for Viagra, were removed from the retail market by Shanghai FDA
Between February 2006 and February 2007, China Customs
made eleven export seizures, totaling 196,484 counterfeit Viagra
tablets
Investigation and Case Studies
Overall, our relationship with Chinese authorities has been
productive and positive. The following case studies are representative
of our recent accomplishments in the region.
International Internet Distribution Network Disrupted (2005)
``Operation Cross Ocean'', a joint investigation by MPS and U.S.
Immigration and Customs Enforcement (ICE), resulted in Chinese
authorities seizing ten lines of manufacturing equipment as well as
counterfeit pharmaceuticals valued at $4.3 million (USD), four printing
machines and counterfeit packaging, in what one U.S. Customs official
has described as ``one of the most significant investigations involving
counterfeit pharmaceuticals.'' The network, which relied on the
Internet to attract brokers and customers, included hundreds of brokers
in the U.S. and EU and, based on records seized, appeared to have been
in operation for at least two years. Chinese authorities arrested the
ringleader, David Wang aka Li Wenhui, and at least 10 others; U.S.
authorities arrested one of Li's U.S. brokers.
Between August 27 and September 1, Chinese authorities executed two
raids. In the first, which took place in Tianjin, they seized 230,000
counterfeit ED tablets, including 130,000 counterfeit Viagra, and
arrested the ringleader, David Wang. In the second, they raided a
factory in Zheng Zhou City, which was identified as Li's source.
Authorities, who made an additional 10 to 12 arrests, have provided
preliminary reports of the seizure of 10 lines of manufacturing/
packaging equipment, 400,000 counterfeit Viagra tablets, 200 kg of
sildenafil citrate (enough for approximately 1.4 million 100mg
tablets), and an undisclosed quantity of counterfeit Lipitor. Based on
business records that were also seized, it would appear that the
network has been in operation for at least two years.
Raids Net Almost Two Million Counterfeit Tablests (2005)
The January 2005 raids by the MPS were credited by authorities as
one of China's best cases under the ``Mountain Eagle'' campaign
designed to capture IP violators and pursue criminal charges. The
raids, which were coordinated in three cities and included a licensed
and very successful pharmaceutical factory in Guangdong, China, netted
almost 2 million counterfeit Pfizer tablets--1,000,000 Lipitor; 499,200
Norvasc; and 446,400 Viagra--as well as production equipment including
punches and dies for Pfizer products.
200 Officers Mobilized for Raids (20060)
An investigation referred by Pfizer to PSB Guangdong resulted in
the seizure of more than 10.7 million counterfeit tablets from various
pharmaceutical companies, including 1.14 million Viagra and 100 kg
sildenafil, enough to manufacture 700,000 100mg tablets. Through our
investigation, we had identified Cao Ming as a major manufacturer and
international distributor of counterfeit pharmaceuticals. During the
joint investigation that followed, one manufacturing site and two
warehouses were identified as part of the criminal operation.
Authorities mobilized 200 officers to conduct raids at the three
locations. In addition to the finished tablets and API, they seized 30
pieces of equipment used to manufacture the counterfeits and made 33
arrests.
Factory in Guangzhou Dismantled (2006)
Based on information we provided, authorities dismantled a factory
in Guangzhou, capable of producing 5000 kg of sildenafil citrate a
month. The raids, conducted by more than 70 Guangdong Provincial and
Guangzhou PSB officers, were the culmination of a year-long
investigation conducted by the Chinese authorities. During the raids
they conducted, authorities made twelve arrests and seized 1514 kgs
sildenafil citrate (Viagra), 7 kgs tadalafil (Cialis), and more than
100 machines used to manufacture the APIs. According to authorities,
those operating the factory knowingly sold API to a number of
counterfeiters throughout China. We continue to work with authorities
to identify those customers.
Harsh Sentences Imposed on IP Violators
In two separate cases, defendants arrested in late 2005 based on
information provided by Pfizer received harsh jail sentences.
In the first, Wang WeiPing was sentenced to 10 years in jail and
fined approximately $250,000 following his conviction for the
manufacture and sale of counterfeit pharmaceuticals. Wang had been
arrested in November 2005 after his factory was raided and
approximately 400,000 counterfeit Viagra and 2.4 counterfeit Cialis
were seized. This represents the quickest conviction and harshest
sentence imposed to date by the Chinese courts.
In the second, four defendants were sentenced to terms ranging from
1 to 8 years for their participation in a criminal network that had,
since 2001, sold more than 60,000 kg of sildenafil citrate to
counterfeiters.
Other Major Seizures by Chinese Authorities
January 2005: almost two million counterfeit tablets:
1,000,000 Lipitor; 499,200 Norvasc; and 446,400
Viagra July 2005: 100,000 counterfeit Viagra tablets +
100 kg API (700,000 100mg tablets) and counterfeit U.S. packaging.
Follow up investigation led to raid on printing factory and seizure of
more than 80,000 U.S. type bottle labels and patient information
February 2006: 1,840,000 counterfeit Viagra tablets + 200
kg API (1,400,000 100mg tablets)
August-September 2006: 87,400 counterfeit Norvasc tablets
+ 100 kg API (28,840,000 5mg tablets)
CONCERNS
Despite these successes, there are still areas of concern:
Defects in PRC Criminal Code (JI)
``Harmful enough'' Standard
Prosecution of cases involving counterfeit medicines remains a
concern, since the burden of proof rests with the brand owner. For
example, a company can be charged with drug counterfeiting under the
current criminal law but unless the illicit product is proven ``harmful
enough to endanger human health'', it is virtually impossible to
initiate a criminal investigation on ``drug counterfeiting''. The
standard for the legal term ``harmful enough'' was set by a 2001
Judicial Interpretation on Criminal Cases of Production and Sale of
Fake and Inferior Products, which is often too high and impractical for
efficient criminal prosecution. (The rationale here is that it is easy
for drug counterfeiters to acquire the kind of active ingredient they
need from chemical companies or even over the Internet.) The standard
for a harmful substance to be ``harmful enough to endanger human
health'' is also both ambiguous and outdated. In addition, we have
found that the procedural requirement of acquiring a certificate from a
provincial-level, SFDA-designated drug inspection agency as a
precondition to initiating criminal investigation presents even more
hardship for criminal sanction against drug counterfeiting.
Method of Calculating Value
In December 2004, the Supreme People's Court disseminated the
Judicial Interpretation on Issues Concerning Application of Laws in
Handling Criminal Cases Involving the Infringement of Intellectual
Property (``New JI''). While Pfizer applauds the positive impact this
New JI has had on enforcement by materially reducing the monetary
thresholds to trigger criminal IPR prosecutions and giving clarity on
some of the key terms of IPR crimes in the Criminal Code, we are is
still concerned with drawbacks, including methods for calculating the
value of infringing products.
Unregulated API: No Criminal Liability
An important factor contributing to the counterfeit drug problem in
China is that bulk chemicals with medical uses, broadly available from
under-regulated chemical manufacturers, are increasingly becoming the
source of APIs used in the production of counterfeit medicines. This
view is supported by the easy access that the public has to API
products on the Internet and the fact that almost no requirements are
imposed on purchases of API products, which can easily be turned into
counterfeit drugs by the purchasers. Pfizer favors strengthening
China's regulations relating to the manufacture and sale of bulk
chemicals having medical use and the creation of an SFDA-led inter-
ministerial task force to investigate and supervise the manufacture and
sale of API substance labeled as ``chemical products''.
Especially relevant to the pharmaceutical industry, is that
supplying API in bulk form may not be subject to criminal liability for
IPR infringement under either the Criminal Code or the New JI.
Statement of United States Chamber of Commerce
The U.S. Chamber believes that the economic and commercial
relationship remains at the core of broader bilateral engagement with
China. This core must be nurtured--especially because it provides clear
benefits to both countries. China should move to address problems of
concern to the U.S. business community; the U.S. Congress and
Administration should avoid yielding to the temptations of
protectionist policies; and across America, we must ensure that we have
policies in place--e.g., on healthcare, education, tax policy,
incentives and funding for research and development, etc.--that support
our continued status as the world's most dynamic and innovative
economy.
The U.S. Chamber applauds the Department of Treasury and other
participating branches of the U.S. government for organizing the
constructive Strategic Economic Dialogue (SED) with the Chinese on a
range of topics deemed vital to U.S.-China relations. We hope that the
SED will improve mutual trust and understanding and lead to improved
results for American business as well as serve as a substantive
complement to the Joint Commission on Commerce and Trade (JCCT). The
JCCT remains an essential forum for resolving bilateral disputes and
securing improvements to the business environment in China for American
business. The Chamber will continue to support both dialogues by
providing the U.S. government with our membership's priorities and
timely analysis of both the challenges and opportunities in our
economic and commercial engagement.
Notwithstanding the many challenges in the bilateral commercial
relationship, the Chamber underscores that the relationship continues
to offer significant benefits and opportunities to U.S. exporters,
investors, and the broader U.S. economy. According to recently released
statistics, exports to China grew by 32 percent from 2005 to 2006,
making it the fastest growing major market for U.S. goods. Since
China's accession to the World Trade Organization (WTO) in 2001, U.S.
exports to China have grown over 150 percent, five times faster than
they have to the rest of the world.
Given the breadth of its membership, the Chamber has seen how the
China market has become an integral component in the successes of large
multi-nationals and small- and medium-size enterprises (SMEs) alike.
Through a number of innovative programs, including our China Business
Initiative--the nation's leading, sustained grassroots education
program on China business opportunities--the Chamber continues its
commitment to expanding export opportunities to China for American SMEs
and to ensuring that our member companies have the necessary tools to
compete in the China market.
Indeed, despite their challenges accessing the market, SMEs have
found China to be a relatively welcoming export market. Of the 21,360
U.S. firms known to have exported merchandise to China in 2004 (the
last year for which data are available), 19,201, or 90 percent, were
SMEs.
The number of SMEs exporting to China has been rising much faster
than the number of large companies. From 1992 to 2004 the number of
SMEs exporting to China surged by 511 percent, compared to 128 percent
for large-company exporters. Together, SMEs represent 35.1 percent of
all known merchandise exports to China--compared with only a 28.6
percent share of U.S. exports to the world as a whole.
These data, among others, underscore the tremendous benefits U.S.
companies and workers gain from our economic relationship with China.
That said, we emphasize that there needs to be continued and
significant progress on critical issues of concern to American business
if the bilateral economic and commercial relationship is to endure and
deepen.
Specifically, we hope to see timely progress from China in the
following areas:
Industrial Policies: Some in the Chinese government and
academic circles believe China can spur growth and innovation through
government directed industrial policies, including measures that tilt
the playing field in favor of Chinese firms. Such policies are bad for
China and will lead to significant, increased trade frictions with the
United States. China should resolve concerns regarding its domestic and
outbound investment and industrial policies in various ``strategic''
sectors, particularly as many of these sectors--from financial services
to autos to telecommunications to energy--remain closed or mostly
closed to foreign investment by American companies. Moreover, the
Chamber believes that China should refrain from utilizing non-trade
laws to impose non-tariff barriers on U.S. products and suppliers.
Recently announced initiatives to promote ``self-reliant innovation''
by decreasing China's use of foreign technologies are worrisome to the
Chamber and our members. Of immediate concern to U.S. industry is
ensuring that China's evolving competition laws; proposed patent law
reforms; proposed standards policies, regulations, and policies; and
government procurement regime are non-discriminatory and transparent
and fully respect the rights of U.S. inventors and authors.
Subsidies: The Chamber publicly supported the U.S.
government's recent action to bring a case in the WTO against China for
offering prohibited subsidies for exports and import substitution. We
believe that China should provide a much more detailed report to the
WTO on its use of subsidies, with particular attention to subsidies of
state-owned companies provided through its banking system, provincial
government-level subsidization, and the amount of subsidies involved.
Currency: On the currency issue, the Chamber believes
that China should move as quickly as possible to a system that allows
market forces to determine the exchange rate of the renminbi. Given
this goal, we strongly support Treasury Secretary Henry Paulson's
efforts in the context of the SED to encourage broader financial sector
reforms that will enable China to accelerate its removal of capital
controls and allow market forces to fully determine the value of its
currency. The U.S. Chamber also believes that any legislation against
China's currency regime that would be inconsistent with the rules of
the WTO would be an ineffective and counterproductive tool. Such
measures could amount to a steep tax on millions of lower-income
American consumers and could engender legitimate Chinese retaliation
against U.S. exports to China.
In late March, U.S. Chamber President and CEO Tom Donohue will
travel to China for high-level discussions with China's government and
business community and to host a global forum on innovation and the
protection of intellectual property rights (IPR). The forum is but one
example of the U.S. Chamber's continuing commitment and leadership on
the global stage to foster multilateral cooperation with governments,
member companies, and business associations around the world, including
our counterparts in China, to address the serious challenges associated
with the counterfeiting, piracy, and patent theft that harm American
businesses and the U.S. economy.
During his visit, Mr. Donohue will continue to press the Chinese
government to protect and enforce the IPR of American firms operating
inside and outside the China marketplace. He will also travel to one or
two provinces to promote cooperation in provincial and local efforts to
improve protection and enforcement of domestic and foreign intellectual
property (IP). The U.S. Chamber continues to work closely with the
People's Republic of China (PRC) government and the Chinese business
community at all levels of society to develop constructive and
effective solutions to outstanding IPR protection and enforcement
challenges. These efforts, along with the overarching IPR protection
and enforcement challenges, are discussed below.
Intellectual Property Rights
Over the past three years the central government of China has
sharply increased its efforts to improve IPR protection in China.
Progress has been made in certain areas, although the overall the level
of IPR violations in China during 2006 did not improve from previous
years and remains at critical levels. Advances within China have been
offset to some degree by apparent increases in Chinese exports of
counterfeit and pirated goods, facilitated to a great extent by the
Internet.
The central government and a number of provincial governments
appear committed to dealing more proactively with counterfeiting and
copyright piracy going forward, and cooperation with industry and with
IPR enforcement authorities in the United States has increased.
Significant reductions in the levels of piracy and counterfeiting in
the market are, however, the only true measures for determining the
fulfillment of these commitments.
Progress and Ongoing Challenges
The Chinese government took important steps between 2004 and early
2006 to improve legislation on IPR protection and at the same time
increased the number of criminal cases against trademark
counterfeiters. For example, the government reported a 52 percent
increase in the number of criminal convictions for IPR offences during
2006. However, the total number of such cases was only 796, and most of
these cases appeared to involve local IPR owners, rather than foreign
parties. Further, a majority of foreign companies polled in one recent
industry survey indicated that counterfeiting in China during 2006 had
either remained the same or worsened.
The Chinese government recently reported the results of robust
administrative enforcement campaigns undertaken in 2006 to address
optical disk and online copyright piracy. Still, American film, music,
software, and book publishers report that these campaigns only appeared
to reduce the superficial visibility of piracy, and overall losses
remained at critical levels during 2006--anywhere between 85 percent
and 95 percent for optical disks. Meanwhile, our members report that
China is increasingly the preferred location for copyright pirates to
establish Internet servers providing access to pirated films and music
distributed worldwide.
China's General Administration of Customs meanwhile reported a 100
percent increase in seizure of infringing goods (mainly counterfeits)
during 2006, to 2,473, involving goods valued over U.S.$25 million.
This laudable increase in enforcement does not appear, however, to have
slowed the overall growth of counterfeit exports from China. The
Department of Homeland Security (DHS) disclosed that China (including
the Hong Kong SAR) was the source of 87 percent of all infringing items
seized at America's borders last year, and the value of seizures from
China and Hong Kong almost doubled, to over U.S.$135 million.
The PRC pledged at the April 2006 JCCT that ``IPR trial chambers
will be open in courts across China'' and that ``50 IPR Infringement
Reporting Centers will be set up in 50 key cities in China.'' The
Chinese government completed the establishment of these centers in late
August 2006, and they may prove useful for IP owners that have in the
past been confused as to the correct authority with which to file
enforcement complaints. But it remains unclear whether these centers
will have other functions, such as the job of intervening when
difficulties arise in the course of administrative transfers to
judicial authorities or with protectionism. We hope the Chinese
government will move to address this issue.
The PRC also announced at the April 2006 JCCT that it had issued a
notice requiring the pre-loading of legal operating system software on
all computers manufactured in or imported into China as well as a
notice requiring government agencies to provide adequate budget for,
and the purchase of computers with pre-loaded legal software. In line
with these requirements, several Chinese computer manufacturers signed
agreements last year to purchase U.S. operating system software. These
announcements built upon commitments undertaken by China at the July
2005 JCCT to complete its legalization program designed to ensure that
all central, provincial, and local government offices use only licensed
software, and to extend this program to enterprises (including state-
owned enterprises) in 2006. This is a very positive step.
Moreover, China issued new Internet regulations last year to
protect IPR in the digital environment. While helpful, the Chamber has
concerns regarding the scope of the rights protected by the new law and
vague terminology in the law that could result in significant
loopholes. An effective Internet law is critically important given the
rapid uptake in broadband in China, the increase in Internet piracy,
and the fact that all peer-to-peer web sites streaming broadcast
content without authority are headquartered in China.
These commitments underscore the central government's efforts to
improve IPR protection and enforcement, and create a basis for optimism
that the Chinese government will continue to achieve progress in IPR
protection. However, because there has not been a substantial reduction
in the scope and depth of the overall IPR problem over the last two
years, and to ensure sustainable forward movement in areas where strong
commitments have been made, more aggressive actions, especially in the
areas of enforcement and transparency, are urgently needed.
The Need for Deeper Reforms and Additional Policy Resources
There are many factors which contribute to ongoing IPR problems in
China. Foremost among them is China's lack of sufficient criminal
enforcement, and a corresponding lack of resources, training, and
awareness at the local level. These are problems which are symptomatic
of IPR enforcement in most countries, regardless of their level of
development. But the U.S. Chamber and its partner organizations believe
that the problems in China are particularly acute given their size and
scope. Both the central and local governments can--and must--do better,
not only to comply with WTO obligations, but also to promote long-term
growth and innovation in China.
Central authorities have also been unable to implement more timely
and effective improvements in certain local hot-spot regions across the
country, including the Chaoyang District of Beijing (home of the Silk
Market), and elsewhere. Local protectionism remains a key barrier to
progress, and one which will require greater political commitment in
the coming months and years if it is to be overcome.
There are, however, steps proposed by foreign governments, industry
and China's own IPR experts that the central government can take in the
short- to medium-term which can lead to more progress in the fight
against IPR infringements. These include structural changes, including
the updating of the PRC Criminal Code, clarification of existing laws
and regulations to eliminate loopholes and simplify enforcement
procedures, the introduction of greater transparency and information
sharing, and other measures.
While the WTO technically renders IPR protection as a ``trade
issue'', we hope the Chinese government recognizes that foreign
concerns over China's difficulties in IPR protection are motivated by a
good faith desire to promote the rule of law, to stop the growth of
organized crime, and to facilitate the growth of a vibrant healthy
economy for both Chinese and foreign enterprises equally. We are
particularly cognizant and appreciate that China's desire to ascend the
value chain and develop an economy based on innovation rather than low-
cost manufacturing are driving its new focus on IP.
In this regard, the U.S. Chamber is monitoring closely China's
post-WTO accession use of industrial policies--including antitrust law,
standard setting, and patent reform--to foster the development of
strategic sectors and that could reduce the value of foreign-held IPR.
We are closely tracking several different draft laws and regulations
that could substantially weaken legal protection for U.S. rights'
holders, and we would be pleased to provide the committee with
additional information on this topic.
U.S. Chamber China Intellectual Property Action Plan
The U.S. Chamber is hopeful that more intensified dialogue and
research on these structural problems and ongoing legislative changes
in China's IPR regime will take place during 2007, in tandem with
continued exchanges and training activities undertaken in cooperation
with the Chamber's provincial government initiatives.
Beginning in 2004, the U.S. Chamber has attempted to promote
change, raise capacity and awareness and strengthen industry and
government cooperation on IPR protection in China through a number of
its own initiatives. These are summarized below:
(1) Enhancing coordination of policy messages delivered to the U.S.
and Chinese governments on China IP concerns.
(2) Providing an overarching, inclusive platform for substantive
dialogue on IP-related legal and policy matters between U.S. corporate,
legal, and academic IP experts and Chinese government officials at the
national, provincial, and local levels.
(3) Establishing new benchmarking initiatives at the national and
provincial levels to more accurately monitor the government's
performance, including effectiveness in IPR enforcement, and
responsiveness to domestic and foreign industry concerns. Just last
month, the Chamber signed a memorandum of understanding with the
Jiangsu Provincial IP authorities, which includes collaboration on
education, training, and benchmarking. The Jiangsu provincial
leadership and its IP authorities have demonstrated substantial good
will in our engagement, and we are hopeful that we can achieve
measurable progress in IP protection and enforcement for both American
and Jiangsu companies.
(4) Creating new joint working groups in the provinces to
collaboratively identify obstacles in enforcement at the provincial and
local level and to generate possible solutions.
(5) Conducting joint enforcement seminars in Guangdong, Jiangsu,
and Zhejiang provinces to educate local stakeholders and further
research important IP issues. The Chamber has conducted many seminars
in China and in the United States since July 2005, and will conduct
additional seminars on IPR protection and enforcement in Jiangsu and
Guangdong later this year.
In the year ahead, the Chamber will continue to work with all
levels of the PRC government with the goal of reducing the level of
counterfeiting and piracy of IPR in China. To strengthen IPR protection
and enforcement, the Chamber will stimulate expert discussions on a
wider range of necessary legal reforms, introduce more international
``best practices,'' and continue efforts to raise awareness.
Furthermore, the Chamber plans to expand its program of targeted
seminars with provincial authorities and initiate a broader range of
cooperative projects both with individual ministries and other U.S.,
Chinese, and foreign industry associations.
Conclusion
The U.S. Chamber and our members appreciate the opportunity to
participate in China's continuing development. We applaud the many
cases in which Chinese authorities have worked closely with the U.S.
business community to implement WTO commitments as well as to resolve
disputes that have arisen during the implementation process. As stated
at the outset of this testimony, China is now the fastest-growing
trading partner of the United States. Rapidly expanding bilateral
economic and commercial ties underscore the market opportunities that
China offers to U.S. exporters and investors, which support the
creation of high value-added jobs at home.
But China can and must do more. The U.S. business community and
others that vigorously advocated China's WTO membership premised their
support on expectations that China is evolving into a more open and
transparent market based on the rule of law. China's unsuccessful
efforts to consistently enforce its IPR laws and to vigorously deter IP
theft represent the most visible examples of these expectations
remaining unfulfilled.
Similarly, China has continued its reliance on state guidance and
industrial policies--capitalization requirements, mandated national
technology standards, subsidies, investment restrictions--in key
sectors. Not only are such policies a breach of the spirit of China's
market access commitments and openness that China embraced when joining
the WTO, but they also give credibility to China's critics who doubt
China's commitment to create a business environment that values equally
the economic contributions of domestic and foreign companies. Thus, the
need for both proactive and substantive government efforts remains
pressing.
Given the manner in which issues across all aspects of the
relationship impact each other, the U.S. Chamber applauded the
Department of Treasury and other participating branches of the U.S.
government, along with their Chinese counterparts, for organizing the
SED. The Chamber has provided input to the U.S. government on priority
issues for our membership--including capital markets, industrial
policy, IPR, health, energy, and transparency--since the inception of
the SED, and we will continue to work with the relevant agencies
through the various SED working groups. The Chamber also continues to
strongly support the JCCT as an important forum for discussion and
resolution of issues of concern, many of which have been touched on in
this testimony. The importance of progress on IPR, and the need to
address concerns with regard to market access in a number of
industries, can not be underestimated.
The Chamber underscores, however, that for all the fits and starts,
for the examples of China's sluggish WTO compliance, none of these
trumps the value of engaging the world's most populous nation in the
rules-based trading system. For all those who care about the future of
our economy, jobs for Americans, stability and peace in the world, the
protection of global health, and the advancement of environmental
quality and human rights, we must continue to encourage China to become
an active and committed member of the world trading system. Working
within the WTO framework remains the most promising path to progress
and is vastly superior to approaches that seek to punish and isolate
this emerging global power. Moreover, in demanding that China adhere to
the standards of a rules-based trading system, we too must honor those
rules and take no action that is illegal under WTO agreements.
Statement of U.S.-China Business Council
Like all World Trade Organization (WTO) members, China is required
to provide legal protection against intellectual property infringement
and to provide penalties for enforcement that are sufficient to deter
future violations. Despite this obligation, inadequate protection for
intellectual property continues to impede U.S. companies in China.
Respondents to the U.S.-China Business Council's (USCBC) 2006
membership survey ranked intellectual property rights (IPR) enforcement
as China's most serious shortfall in implementing its WTO commitments.
Though 33 percent of respondents said there had been some improvement
in China's IPR enforcement, more than half of survey respondents said
there had been no improvement in China's enforcement of IPR in the
previous 12 months.
As policymakers consider ways to address China's problems in IPR
protection, it is important to keep in mind that ``IPR'' is a broad
term encompassing many distinct areas, including copyrights,
trademarks, patents and trade secrets. Companies view the IPR problem
differently depending on their industry and the nature of their
problem. A motion picture company sees the problem differently from a
pharmaceutical company, and both have a different view than an
industrial company. The severity of the problem is different for each
sector, the policy redress is different, and importantly, the actions
companies support are different in each of these areas. Furthermore,
for some companies, particularly in the media sectors, IPR problems are
aggravated by market-access restrictions that limit the availability of
legitimate products to Chinese consumers. In the end, a differentiated
approach to the IPR problem in China--one that accounts for the unique
problems and solutions in the various areas--is the most productive way
to achieve advancement for U.S. companies on this issue.
The ineffectiveness of China's IPR enforcement regime stems in part
from China's primary reliance on administrative authorities, which are
able to impose only very low penalties to enforce IPR laws, instead of
the court system, in which civil suits and criminal prosecutions could
impose higher penalties on IPR infringers. PRC courts handled only 385
IPR-related cases in 2004, according to China's 2005 White Paper on
IPR. In contrast, local copyright administrations resolved nearly 9,500
copyright infringement cases, local administrations of industry and
commerce handled nearly 52,000 trademark violations, and local patent
administrations dealt with roughly 10,000 patent infringement cases.
While government agencies are generally responsive to the requests of
IPR holders to take administrative actions against infringers, the low
penalties these government bodies can impose without court
authorization serve as only a minimal deterrent to future
infringements.
To be fair, China's central government has taken a number of steps
in an attempt to address these and other issues that limit the
effectiveness of its IPR enforcement. These steps generally have been
in response to the U.S. government's persistent pursuit of improving
IPR protection via the Joint Committee on Commerce and Trade (JCCT)
process. In March 2006, China's National IPR Working Group, an
interagency body under the State Council and chaired by Vice Premier Wu
Yi, issued its 2006 IPR Protection Action Plan. Though much of the plan
focuses on ways to promote innovation, it also expresses an intention
to boost enforcement activities. Most of the plan's provisions are
still in the implementation process, so its effectiveness cannot yet be
fully determined.
Stemming from the action plan, China's Supreme People's
Procuratorate, the Ministry of Public Security (MPS), the Ministry of
Supervision, and the Leading Group on National Rectification and
Standardization of Market Order jointly issued an opinion in March 2006
to facilitate the transfer of IPR cases from administrative agencies to
public security bureaus for criminal investigations. MPS and the
General Administration of Customs in March 2006 also jointly issued
rules to boost coordination in IPR cases involving products scheduled
for export. China has also conducted a handful of special IPR
enforcement campaigns in accordance with the action plan. These include
Mountain Eagle, aimed at copyright violators; Sunshine, designed to
clear cities of pirated recorded materials; and Blue Sky, targeted at
individuals who distribute infringing products at trade fairs.
Continuing in China's pattern of taking incremental steps toward an
improved IPR environment, the Ministry of Culture issued in November
2006 regulations giving local culture authorities more tools to address
piracy of recorded music and cinema products. In December, the Beijing
Number One Intermediate Court ruled that Pfizer, Inc.'s patent on the
drug Viagra is valid, thereby reversing an early ruling that had
revoked the patent and had allowed Chinese producers to legally
manufacture what were, in essence, counterfeit pills. Also in December,
the PRC National People's Congress approved the World Intellectual
Property Organization Copyright Treaty and Performances and Phonograms
Treaty, thus meeting a commitment China made at the 2006 session of the
JCCT. In early 2007, China's Supreme People's Court issued an opinion
that could streamline judicial proceedings on IPR cases and make them
more accessible and cost-effective for companies protecting their
rights.
These are welcome steps, but China's legal capacity for effectively
protecting IPR remains limited. China's use of value thresholds to
determine whether IPR infringers face criminal charges reduces the
efficacy of Beijing's recent steps to facilitate criminal prosecutions
of IPR violators. These thresholds, although lowered in China's Supreme
People's Court December 2004 judicial interpretation, provide a
loophole for IPR infringers to escape criminal prosecution by, for
example, keeping the value of inventory stored at any one location
below the threshold level. Moreover, calculations to determine whether
the thresholds have been met are based on the price of the counterfeit
product rather than that of the legitimate--and higher priced--product
it imitates. China's use of numerical value thresholds appears to be
inconsistent with its commitments as a signatory of the WTO Agreement
on Trade Related Aspects of Intellectual Property (TRIPS), which calls
for criminal sanctions in all cases of IPR violations on a ``commercial
scale.'' The Supreme People's Court is reviewing its 2004 judicial
interpretation as part of the action plan; U.S. officials should press
for a TRIPS-consistent application of criminal sanctions on IPR
violations.
For its part, USCBC has urged the PRC government to take this
course. In numerous meetings in 2006 with Vice Premier Wu Yi and other
senior and working-level PRC officials in various agencies, USCBC
advocated the abandonment of thresholds and the adoption of the
``commercial scale'' criteria. USCBC complemented these meetings with a
written submission to several PRC government bodies suggesting detailed
changes to PRC laws that would provide for an enhanced legal framework
for enforcing IPR protection. Those recommendations are attached to
this statement. Adopting the ``commercial scale'' criteria and other
changes to its laws governing IPR enforcement would be important steps
the PRC government can take to benefit numerous companies in a broad
array of sectors.
To fully solve the country's IPR protection problems, China must
make improvements in several areas on a sustained basis. China must
engage in initiatives such as increasing enforcement resources;
training prosecutors and judges in IPR investigations and case law; and
educating officials and the public at all levels on how IPR
infringement harms China's consumers and the development of its own
innovative economy. Greater market access for legitimate products would
provide consumers an alternative to pirated products. And, specific
revisions to aspects of China's legal code--including the revision of
the current thresholds used to determine criminality--are important
steps to addressing this top problem faced by U.S. companies in China
and, increasingly, in other markets.
RECOMMENDED IMPROVEMENTS TO CHINA'S IPR LAWS AND REGULATIONS
INTERPRETATION BY THE SUPREME PEOPLE'S COURT AND SUPREME PEOPLE'S PROCURATORATE ON SEVERAL ISSUES OF CONCRETE
APPLICATION OF LAWS IN HANDLING CRIMINAL CASES INVOLVING INTELLECTUAL PROPERTY
----------------------------------------------------------------------------------------------------------------
(DECEMBER 22, 2004)
----------------------------------------------------------------------------------------------------------------
EXISTING SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
The Judicial Interpretation includes thresholds for determining Eliminate thresholds for criminal violations,
copyright, trademark and patent criminal violations. and define criminal violations as infringing
activities that occur on a ``commercial
scale.'' Revise Criminal Code Articles 214,
217, and 218 accordingly.
----------------------------------------------------------------------------------------------------------------
Articles 5 and 6 specify that violations must have been made Eliminate the requirement that copyright
with the purpose of making profits. offenders be proven to have acted with profit-
making motive. Replace with language that
adjudicates cases based on inflicted harm.
----------------------------------------------------------------------------------------------------------------
No provisions stipulating the treatment of unauthorized rental, Confirm that unauthorized rental, broadcast,
broadcast, and exhibition of software, film, sound recordings, and exhibition of software, film, sound
and other works. recordings, and other works may be transferred
for criminal prosecution.
----------------------------------------------------------------------------------------------------------------
N.A. Suggested additions:
----------------------------------------------------------------------------------------------------------------
Make repeat offenders subject to automatic
criminal liability.
----------------------------------------------------------------------------------------------------------------
In cases where no sales transaction occurs or
no sales records exist, make criminal
penalties applicable based on value of
inventory, using the victim's price.
----------------------------------------------------------------------------------------------------------------
Include presumptions of knowledge for
landlords on intellectual property (IP)
crimes, including counterfeiting trademarks,
pirating copyrighted material, or providing
production technology.
----------------------------------------------------------------------------------------------------------------
Restrict access for violators to raw materials
and other ancillary services like electricity,
in accordance with international practice.
----------------------------------------------------------------------------------------------------------------
Confirm that criminal liability applies to end-
users of infringed software.
----------------------------------------------------------------------------------------------------------------
PRC CRIMINAL CODE
----------------------------------------------------------------------------------------------------------------
EXISTING SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
Part I, Chapter 4, Section 1, Article 64 requires that illegally Include provision that property used in the
obtained property be recovered or restitution and compensation commission of a crime shall be confiscated and
paid. destroyed.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 214 does not specify that Include the export, rental, and possession of
exports constitute a type of sale. counterfeit trademark goods as types of sale
under Article 214.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Articles 217 and 218 specify that Eliminate the requirement that copyright
violators must have acted ``for the purpose of reaping offenders be proven to have acted with profit-
profits.'' making motive. Replace with requirement that
offenders be proven to have inflicted harm.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 218 sets the threshold Remove all value thresholds for criminalizing
for the crime of knowingly selling pirated copyright works at trademark and copyright violations and define
RMB 100,000 and sets the threshold for knowingly selling violations as infringing activities that occur
counterfeit trademark goods at RMB 50,000. on a ``commercial scale.''
----------------------------------------------------------------------------------------------------------------
Criminalize end use of pirated copyright works
or counterfeit trademark goods, including
unauthorized rental, broadcast, or exhibition
of software, film, sound recordings, or other
works.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 219 limits punishment for Eliminate ``significant loss'' threshold for
violating commercial secrets to those who cause ``significant violations.
loss.''
----------------------------------------------------------------------------------------------------------------
N.A. Suggested addition:
----------------------------------------------------------------------------------------------------------------
Subject violators with repeat offenses to
stronger penalties.
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PRC CRIMINAL PROCEDURE LAW
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EXISTING SUGGESTED MODIFICATION
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Part II, Chapter II details the standards for criminal Allow public security bureaus (PSBs) to
investigations. Article 83 indicates that cases are filed and initiate investigations based on prima facie
investigations conducted ``upon discovering criminal facts or evidence of probable cause so that assets may
criminal suspects.'' be frozen before raids are conducted.
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N.A. Suggested addition:
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Revise the Opinion on Promptly Transferring
Suspected Criminal Cases during Administrative
Investigation, issued by the Supreme People's
Procuratorate, Ministry of Public Security
(MPS), Ministry of Supervision, and Leading
Group on National Rectification and
Standardization of Market Order, and the
Interim Rules on Strengthening Cooperation
between PSBs and Customs in IPR Enforcement,
issued by the General Administration of
Customs (GAC) and MPS, to clarify PSB
obligations to file cases and initiate
investigations based upon reasonable suspicion
of crime.
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PRC IMPLEMENTING REGULATIONS TO THE TRADEMARK LAW
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EXISTING SUGGESTED MODIFICATION
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Chapter VII, Article 52 sets the maximum fine for violations of A minimum fine that is sufficient to deter
trademarks at three times the illegal revenues or, when future infringements should be specified to
revenues cannot be calculated, at less than RMB 100,000. remove the infringer's monetary incentive.
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Include punitive damages sufficient to deter
future infringements.
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N.A. Suggested additions:
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Require violators to pay for storage and
destruction costs for counterfeit goods.
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Mandate that counterfeit merchandise be
destroyed.
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IMPLEMENTING MEASURES ON THE PRC CUSTOMS IPR PROTECTION RULES
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EXISTING SUGGESTED MODIFICATION
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Chapter 3, Article 15 requires brand owners to post a bond to Mandate the transfer of bonds from Customs to
request Customs to seize possible infringing goods. Once people's courts so that two bonds are not
Customs seizes the goods, Chapter 4, Article 27 requires brand required.
owners to get an order from a people's court to sustain the
validity of the seizure, which requires a second bond with the
people's court.
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Chapter 4, Article 26 gives Customs 30 working days to report to Provide IP owners with immediate access to
IP owners with the findings of their investigations. information on counterfeiting cases gathered
by Customs.
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Chapter 4, Article 27 stipulates the conditions for transferring Include presumptions of knowledge in the
cases from Customs to people's courts. transfer rules that include individuals who
would have reasonable grounds to know IPR
violations are occurring.
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Stipulate that if counterfeit labels are not
on the products but being shipped with
products, the products can be seized as well.
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Make trading companies liable for counterfeit
products shipped using their permits or under
their names.
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Require import/export companies to make public
information on destination and purchaser/
receiver of counterfeit shipments.
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Create a system to monitor counterfeiters
involved in previous Customs seizures and list
their names publicly. Require future shipments
from the same counterfeiters to undergo
Customs auditing for a specified period of
time.
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Chapter 4, Article 29 allows travelers to carry a ``reasonable This provision should be deleted--no
amount of counterfeit or pirated goods for personal use.'' counterfeit or pirated goods should be allowed
to be used or carried under the law.
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N.A. Suggested additions:
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Apply presumption of knowledge and criminal
procedures to factory suppliers and trading
companies that export counterfeit and pirated
goods.
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Give Customs power to impose fines that are
sufficient to deter future infringements on
exporters of counterfeit and pirated products.
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