[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





               WILL CHINA PROTECT INTELLECTUAL PROPERTY?
   NEW DEVELOPMENTS IN COUNTERFEITING, PIRACY, AND FORCED TECHNOLOGY 
                                TRANSFER

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

                                HEARING

                               before the

              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2010

                               __________

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










         Available via the World Wide Web: http://www.cecc.gov







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              CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

                    LEGISLATIVE BRANCH COMMISSIONERS

Senate                                House


BYRON DORGAN, North Dakota, Chairman  SANDER LEVIN, Michigan, Cochairman
MAX BAUCUS, Montana                   MARCY KAPTUR, Ohio
CARL LEVIN, Michigan                  MICHAEL M. HONDA, California
DIANNE FEINSTEIN, California          TIMOTHY J. WALZ, Minnesota
SHERROD BROWN, Ohio                   DAVID WU, Oregon
SAM BROWNBACK, Kansas                 CHRISTOPHER H. SMITH, New Jersey
BOB CORKER, Tennessee                 EDWARD R. ROYCE, California
JOHN BARRASSO, Wyoming                DONALD A. MANZULLO, Illinois
GEORGE LeMIEUX, Florida               JOSEPH R. PITTS, Pennsylvania


                     EXECUTIVE BRANCH COMMISSIONERS

                  Department of State, To Be Appointed
                  Department of Labor, To Be Appointed
                Department of Commerce, To Be Appointed
                       At-Large, To Be Appointed
                       At-Large, To Be Appointed

                 Charlotte Oldham-Moore, Staff Director

             Douglas Grob, Cochairman's Senior Staff Member

                                  (ii)















                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening statement of Hon. Byron L. Dorgan, a U.S. Senator from 
  North Dakota, Chairman, Congressional-Executive Commission on 
  China..........................................................     1
Levin, Hon. Sander, a U.S. Representative from Michigan; 
  Cochairman, Congressional-Executive Commission on China........     4
Feinstein, Hon. Dianne, a U.S. Senator from California; Member, 
  Congressional-Executive Commission on China....................     5
Murck, Christian, President, American Chamber of Commerce in the 
  People's Republic of China.....................................     7
Lee, Thea Mei, Deputy Chief of Staff, AFL-CIO....................     9
Frazier, Greg, Executive Vice President for Worldwide Government 
  Policy, Motion Picture Association of America..................    11
Suttmeier, Richard P., Professor of Political Science, Emeritus, 
  University of Oregon...........................................    14

                                Appendix
                          Prepared Statements

Murck, Christian.................................................    30
Lee, Thea Mei....................................................    34
Frazier, Greg....................................................    36
Suttmeier, Richard P.............................................    39

Levin, Hon. Sander...............................................    42
Smith, Hon. Christopher H., a U.S. Representative from New 
  Jersey; Ranking Member, Congressional-Executive Commission on 
  China..........................................................    43
Levin, Hon. Carl, a U.S. Senator from Michigan; Member, 
  Congressional-Executive Commission on China....................    44

                       Submissions for the Record

Prepared Statement of Robert W. Holleyman, II, President and CEO, 
  Business Software Alliance.....................................    46
``Piracy is a Danger to Entertainment Professionals,'' submitted 
  by the Department of Professional Employees, AFL-CIO (DPE) for 
  the Arts, Entertainment and Media Industries Unions Affiliated 
  with DPE, AFL-CIO Executive Council Statement, Orlando, 
  Florida, March 2, 2010.........................................    50

 
     WILL CHINA PROTECT INTELLECTUAL PROPERTY? NEW DEVELOPMENTS IN 
         COUNTERFEITING, PIRACY, AND FORCED TECHNOLOGY TRANSFER

                              ----------                              


                     WEDNESDAY, SEPTEMBER 22, 2010

                            Congressional-Executive
                                       Commission on China,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:18 p.m., 
in room 628, Dirksen Senate Office Building, Senator Byron 
Dorgan, Chairman, presiding.
    Also present: Representative Sander Levin, Cochairman; and 
Senator Dianne Feinstein.

  OPENING STATEMENT OF HON. BYRON DORGAN, A U.S. SENATOR FROM 
 NORTH DAKOTA, CHAIRMAN, CONGRESSIONAL-EXECUTIVE COMMISSION ON 
                             CHINA

    Chairman Dorgan.  I'm going to call the hearing to order.
    This is a hearing of the Congressional-Executive Commission 
on China. I'm Senator Byron Dorgan, Chairman of the Commission. 
We will be joined momentarily by other members of the 
Commission.
    The hearing today is on the subject of: ``Will China 
Protect Intellectual Property? New Developments in 
Counterfeiting, Piracy, and Forced Technology Transfer.''
    This country has a relationship with China that is very 
important, and will become even more important going forward. 
That relationship, however, has a number of very vexing, 
difficult issues attached to it, one of which is the issue of 
international trade. We run a very large trade deficit with the 
country of China. It is a deficit that is the highest trade 
deficit in the world with the United States.
    We also are very concerned, and have long been concerned, 
with China with respect to the safeguarding of intellectual 
property, and have been concerned about piracy and 
counterfeiting on intellectual property and other goods coming 
from the United States.
    I noticed in last week's Wall Street Journal a story that 
in many ways summarizes much of what concerns us, and one of 
the reasons that we have called this hearing. This hearing 
occurs a long while after the Congress passed PNTR [Permanent 
Normal Trade Relations] with China, and many of us had high 
hopes that there would be very dramatic changes as China joined 
the World Trade Organization [WTO] and China would take steps 
as a full partner in the international community of trade to 
protect intellectual property and to shut down piracy and 
counterfeiting.
    But China, in many ways, while making some progress and 
some success in other areas, in many ways China, I believe, has 
turned a blind eye to the issue of piracy and counterfeiting 
and has engaged in managed trade with the sole purpose of 
running a very large trade surplus with our country, or we a 
deficit with them, in a way that I think has been fundamentally 
unfair.
    But the Wall Street Journal story of September 16 says the 
following:

          China's government is considering plans that would force 
        foreign automakers to hand over cutting-edge electric vehicle 
        technology to Chinese companies in exchange for access to the 
        nation's huge market, international auto executives say.
          China's Ministry of Industry and Information Technology is 
        preparing a 10-year plan aimed at turning China into a world's 
        leader in developing and producing battery-powered cars and 
        hybrids, according to executives at four car companies who are 
        familiar with the proposal.
          The draft suggests that the government could compel foreign 
        automakers that want to produce electric vehicles in China to 
        share critical technologies by requiring the companies to enter 
        into joint ventures in which they are limited to a minority 
        stake, executives say.

    Then, finally, the plan is ``tantamount to China strong-
arming foreign automakers to give up battery, electric motor, 
and control technology in exchange for market access in 
China.'' This is just last week, but it goes on.
    It is interesting to me, in our trade relationship with 
China, we have this very large trade deficit, somewhere in the 
neighborhood of $250 billion a year. When we have trade 
negotiations and opportunities to work with the Chinese on 
trade--which should always be mutually beneficial if two 
partners negotiate trade issues, you ought to end up with 
something that is considered to be mutually beneficial--somehow 
we end up not quite in that area.
    Intellectual property--for example, movies--after 
negotiations, we're able to see 20 foreign movies into the 
Chinese marketplace. Twenty. Is it a wonder, then, that there 
is massive copying, illegal copying, of that intellectual 
property and then distributed and sold on the streets of China? 
Not to me, it's not. If our market is open to Chinese goods, 
why should the Chinese market not be wide open to our goods?
    It is not that the Chinese are not able to control 
counterfeiting and piracy. We had an interesting lesson with 
respect to the Olympics. The Olympic logo belonged to the 
Chinese Government. It was their property. When people on the 
streets of China began to take that logo and put it on pencils, 
and pennants, and so on and use it for their own purposes, the 
Chinese Government very effectively shut it down because that 
belonged to them. Demonstrating that they can shut this down 
ought to suggest to us that if they see this happening to 
American intellectual property, they could shut it down as 
well, but they choose not to.
    China, I think, has failed to comply with its commitments 
to protect intellectual property rights. It made that promise 
when it joined the WTO. I think that failure has a direct 
impact here in this country. The impact: Americans out of work, 
American jobs shift to China, misery from American 
manufacturing workers who used to have good jobs that paid 
well, with good benefits, that are now this morning putting on 
their clothes and going out and looking for a job. That's the 
impact of all of this.
    It has a profound impact on our country when you run a 
trade deficit of this size that represents a trade deficit 
intended by the Chinese Government, because of the managed 
trade system they wage, and also a trade deficit based on the 
kind of difficulty that we have making sure that our 
intellectual property is not hijacked in a foreign country, as 
has been the case in China too often.
    There have been some things that represent good news in 
China. The government has reformed some of its legal 
infrastructure. It's amended its copyright, patent, and 
trademark laws in order to be compliant with WTO rules. But the 
question is not too much that. The question is, how are these 
things enforced? Is there really an intent to enforce these 
areas as a part of the international community and 
international trade?
    Since China joined the WTO in 2001, we've seen about 2.5 
million jobs lost in the United States due to the U.S.-China 
trade deficit, that is, our deficit with China. Some of the 
great American brand names no longer are American; they have 
long since moved to China in search of cheap labor and so on. 
That's an issue that's related, but somewhat different than 
copyright and intellectual property infringement and 
counterfeiting.
    But the Chinese Government has really systematically 
refused to effectively police the black markets that exist for 
counterfeit and pirated goods. We had a USTR, U.S. Trade 
Representative's, 2010 Special 301 Report and it says, 
``Widespread IPR infringement continues to affect products, 
brands, and technologies from a wide range of industries.''
    China accounts for 79 percent of IPR-infringing goods 
smuggled into the United States. When you walk down the street 
of a major city--you walk down the street and see all kinds of 
people selling wristwatches, and purses, and scarves, and so 
on, most of it counterfeit. Our USTR says 79 percent of the 
intellectual property-infringing goods smuggled into the United 
States comes from China. That's $7.6 billion in 2009, a $900 
million increase over 2008.
    I won't talk about the market barriers and other related 
issues. I would just say that the healthy relationship that we 
hoped for and expect in the future with China is a relationship 
that does not now exist in international trade, and that 
relationship, in my judgment, must change.
    We must expect China, which has now joined the WTO, to 
abide by the rules, to aggressively enforce intellectual 
property rights, to shut down the issues dealing with 
counterfeiting and piracy, and to take effective action to 
demonstrate to us they are ready to become full partners in 
international trade in the way that we understand international 
trade should be conducted.
    It is also the case--and I have written a book about this 
subject of international trade--that it is unsustainable for us 
to have a $200-250 billion-a-year trade deficit with a single 
country. That's not sustainable and is going to have to change 
as well.
    But with all of that, let me just say that this Commission 
has been active in pursuing a wide range of subjects. I have, 
and so has my colleague, Representative Levin, who chaired this 
Commission previously, indicated where appropriate that certain 
progress has been made in some areas of China, but there are 
many other areas that have not yet begun to see the kind of 
changes that are necessary.
    Much of what we have done with this Commission has focused 
on those who have been sent to the darkest prisons of the rural 
areas of China for basic acts of free speech, and the violation 
of their human rights concerns us, and will always concern us. 
We, at this point, maintain the largest repository of 
information on prisoners in Chinese jails who are human rights 
prisoners, and we're going to continue to work on that. Today 
we're talking about a different subject: ``Will China Protect 
Intellectual Property? New Developments in Counterfeiting, 
Piracy, and Forced Technology Transfer.''
    I am joined by my colleagues, Representative Levin and 
Senator Feinstein. Representative Levin, would you wish to make 
an opening comment?

STATEMENT OF HON. SANDER LEVIN, A U.S. REPRESENTATIVE FROM THE 
    STATE OF MICHIGAN, COCHAIRMAN, CONGRESSIONAL-EXECUTIVE 
                      COMMISSION ON CHINA

    Representative Levin.  Thank you. It's my privilege to join 
you, Mr. Chairman and Senator Feinstein, during this uniquely 
busy time here in the Congress. You have covered the subject so 
well, so let me just add a few thoughts.
    Senator Dorgan, I think you were so right to point out the 
work of this Commission. It has done invaluable work in terms 
of human rights, including labor rights. Its charge from the 
very beginning also related to the rule of law, and that's the 
basic subject here today. It's really, this hearing, of utmost 
importance to our businesses and our workers, in part because 
they lose billions of dollars every year through the 
infringement of intellectual property rights in China.
    The Chinese Government has failed to comply with its 
commitments to protect intellectual property rights that it 
made in joining the WTO, and unfortunately it continues to 
undermine protections for intellectual property contained in 
its own laws, and so by shining a spotlight on this, the 
Commission has an important role to play. You mentioned, 
Senator Dorgan, the Wall Street Journal article. I think as we 
read it, we said to ourselves, something has to give.
    Indeed, China's industrial policies have had a common 
thread. They have a purpose and the effect of tilting the 
playing field to favor Chinese companies and against U.S. 
companies and workers, and those in other countries. As you 
said, this is not either a sound or a sustainable basis for the 
important mutually beneficial U.S.-China relationship, nor is 
it a viable foundation for the development of rule of law in 
China.
    Indeed, there is a widening chasm between what we hear from 
the Chinese Government about IPR protection and what we know to 
be true. For example, we hear that the legal infrastructure 
supporting intellectual property rights has improved. We hear 
that courts are becoming more professionalized and skilled at 
handling complex issues.
    We hear that Chinese rights holders are turning to Chinese 
courts to assert their rights more than in the past, and that 
there's been a measurable increase in the number of civil 
intellectual property cases in Chinese courts. We hear that 
foreign plaintiffs are winning intellectual property cases at 
increasing rates.
    That's what we hear, but this, unfortunately, is what we 
know: the American Chamber of Commerce in China surveyed its 
members this year, and found 63 percent rated intellectual 
property enforcement in China as ``ineffective.'' We know IPR 
infringement in China is more widespread than before. 
Counterfeit exports have increased. We know that the 
enforcement of IPR judgments is difficult in China and damages 
are still inadequate. The Chinese Government has often taken 
insufficient steps to address these difficulties.
    So in sum, we know that the Chinese Government could be 
doing far more--far, far more--to protect intellectual property 
rights. We know, for example, in 2009--and I'll just cover 
these briefly--79 percent of intellectual property infringement 
product seizures at the U.S. border were of Chinese origin.
    We know that China's State-Owned Assets Supervision and 
Administration Commission has the power to require state-owned 
enterprises to certify that all software they use is properly 
licensed, but that hasn't been required. We know that the 
production of counterfeit parts experienced a period of 
significant growth in China relating to auto parts and beyond, 
and we know that Chinese Government access barriers lead 
consumers to the black market.
    And let me say this very clearly: Chinese Government 
censorship leads consumers to the black market, and that in 
turn incentivizes the violation of IPR rights. The Chinese 
Government often denies the link between human rights and the 
commercial rule of law, but there is a clear link and the 
Chinese Government itself helps to create this link. There can 
be no doubt that Chinese flagrant abuse of international rules 
undermines the rule of law.
    There is no doubt that widespread intellectual property 
rights infringement in China continues to affect--and you 
mentioned this, Mr. Chairman--products, brands, and 
technologies from a wide range of industries, and imperils the 
health and safety of both American and Chinese consumers, and 
imposes billions of dollars of losses yearly on American 
business and workers.That is why change is necessary, both in 
the Chinese Government's behavior and in the action we take in 
response. So this is an important hearing for us, for the 
entire Congress, for the country, and I think for China and our 
relationships, so we look forward eagerly to the testimony 
before us.
    Thank you.
    Chairman Dorgan.  Congressman Levin, thank you very much.
    Senator Feinstein, would you like to make an opening 
statement?

    STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM 
CALIFORNIA; MEMBER, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

    Senator Feinstein.  Just a few. I come at this a little 
differently, and I want to thank you both for your concern. I 
mean, I've been going to China now for over 30 years, and I 
remember what life was like there before 30 years. I think we 
have to remember that. China is a country 5,000 years old. 
Prior to normalization in 1979, begun by the Shanghai 
communication in 1972, China had been closed to the west for 
150 years. It had been run by emperors that were arbitrary, 
arrogant.
    The transition from a rule of man to a rule of law, I 
think, has moved rather substantially in this 30-year period. 
It isn't there yet. It isn't what we want to see, but I think 
it has to be understood that movement is made. I have found in 
certain areas--and I'll give you one, on the piracy issue--I 
met with the President of China in the 1990s at the request of 
the motion picture industry and others, and I was assured that 
all the pirate companies in Guangdong had been closed. Somebody 
came in and gave me a list of 32 companies who owned them, 
where they were located, what they did. I sent this to the 
USTR, who then sent it to China, and they were all closed.
    Now, either this is wilful avoidance, or certain people in 
the government really didn't know. I'm not making a plea for 
the government. I think the government has to begin to 
understand what cyber-intrusion is doing, what intellectual 
property rights mean. I come from a State where intellectual 
property rights are extraordinarily important. I mean, this is 
innovation. This is movement and they must be protected, and 
there are laws to protect them, patent laws, copyright laws, 
all of this. In the Judiciary Committee, we have a patent bill 
that has just come out.
    The problem is, there is inconsistent dialogue. There is 
virtually not the kind of communication that should go on on an 
ongoing basis between officials of our government and officials 
of the Chinese Government. Constant, monthly working away at 
this. I think because of this long history of China, because so 
much of it just being the rule of man, that to get this to a 
modern commercial code, modern patents, a modern criminal code, 
is really an effort.
    I just wanted to say that because I think it's easy to make 
the judgment that China doesn't want to do any of this. I don't 
necessarily believe that's correct. I think we have to really 
press this issue home because it's extraordinarily important to 
the relationship.
    Chairman Dorgan.  Senator Feinstein, thank you very much 
for your perspective. You and I have been together in Beijing, 
and I know that you have a long association with the country of 
China and have had a lot to do with sister cities and various 
things. So, thank you for that perspective as well. We 
appreciate that.
    Senator Feinstein.  You're welcome.
    Chairman Dorgan.  We have four witnesses today. The first, 
is Christian Murck. Christian Murck is the president of the 
American Chamber of Commerce in the People's Republic of China. 
I'm told that he traveled here from Beijing yesterday to, among 
other things, come to this hearing. We appreciate it very much. 
You get the longest distance award today. We appreciate your 
willingness to make that effort.
    He was, in 2002, elected as president of the American 
Chamber in China. He is also the independent director of J.P. 
Morgan Chase Limited in China. From 2001 to March 2010, he 
served as Vice Chairman-Asia, Chief Executive-Asia, and 
Managing Director of China for APCO Worldwide. He's a graduate 
of Yale College, with a bachelor's degree, and Princeton 
University with a Ph.D.
    Mr. Murck, thank you for being with us. The full statements 
of all of the witnesses will be included as you have brought 
them to us, and we would ask each of the witnesses to 
summarize.
    Mr. Murck, you may proceed.

 STATEMENT OF CHRISTIAN MURCK, PRESIDENT, AMERICAN CHAMBER OF 
           COMMERCE IN THE PEOPLE'S REPUBLIC OF CHINA

    Mr. Murck.  Thank you, Mr. Chairman. It's an honor and a 
pleasure to appear before you. I testified once before in front 
of this Commission in June 2002 before your Cochairman, who I 
believe at the time was Chairman of the Commission. I was 
pleased to discover on your Web site that that testimony still 
survives, hidden away in one of the far recesses of the 
archives.
    It gave me a chance to look at what I said eight years ago 
about intellectual property rights protection in China. One of 
the things I have tried to do in my current statement is review 
what has happened between 2002 and 2010. When we look at the 
enforcement regime and the legal infrastructure that supports 
intellectual property rights over that timeframe, we do see 
slow but discernible progress. That is based on a common point 
of view which is held in principle by both the United States 
and the Chinese: that intellectual property infringements are 
not only illegal, but undesirable, and are not a basis on which 
to build economic growth in a sustainable fashion.
    There is a substantial bureaucratic momentum, as well as a 
common interest of the American and Chinese business 
communities behind improving intellectual property rights 
enforcement. We are disappointed that the progress has been so 
slow and there are still some notable areas which remain to be 
improved, particularly with respect to copyright protection of 
motion pictures and music, and some others. But basically we do 
see a way forward and we do see partners that we have been 
working with for some time, and some of that is outlined in my 
statement.
    We are, at AmCham-China, turning our attention to a problem 
which is qualitatively different, where we do not share a 
common stance and a common approach. That is to a range of 
industrial policies often having to do with intellectual 
property. We are looking at the impact on our future market 
access and on American competitiveness.
    It appears to us that many of China's industrial policies 
can be seen as intended to strengthen national champion 
companies by encouraging them to acquire or develop 
intellectual property, and giving them protected domestic 
markets in which to gain scale with the ultimate objective of 
being globally competitive.
    In this case, the Chinese policies reflect considered, 
deliberate choices which are inimical to our commercial 
interests and which restrict both national treatment for 
foreign companies in the Chinese market and the development of 
a market economy. We were most alarmed by this development, 
starting late last year, by the release of a circular on 
indigenous innovation, which defined so-called indigenously 
innovated products in a manner which would exclude not only 
imported products, but also those of foreign-invested 
enterprises in China, and by the prospect that this might then 
be used in government procurement and State-owned enterprise 
procurement.
    Since then, there has been a very active dialogue on this 
subject and many Chinese senior leaders, including Premier Wen 
Jiabao last week at the World Economic Forum meeting in 
Tianjin, have responded that the draft regulations or the 2009 
regulations on this subject were improperly done, they have 
been changed, and that there is no intent to discriminate 
against the products of foreign companies.
    But our concerns are substantially broader than simply that 
one set of regulations. They go also to technology transfer 
issues of the kind that the Wall Street Journal cited, which 
is, I would emphasize, still in the planning stages and has not 
yet actually happened. They go to issues of standards and how 
standards are formulated. They go to the CCC [China Compulsory 
Certificate] mark and how that is conducted, and to a range of 
other issues, many of which are outlined in my full statement.
    These are qualitatively different from the issue of simply 
enforcing the rights of a trademark owner, or a patent holder, 
or a copyright holder. The Chinese market is one not only of 
very large scale, but also where there is very large future 
potential for growth. In many cases, it is simply too important 
strategically for companies to think about washing our hands 
and withdrawing.
    On the other hand, it is clearly a market which is going to 
be very different in the future, as it is today from our own, 
in that there will be a large state-owned sector. We have to 
come to terms with that fact and figure out what we can do to 
negotiate a mutually beneficial relationship between our 
economy and the Chinese economy in order to realize the benefit 
of the synergies and the growth potential which we think are 
there.
    Some of the suggestions that we might think about are 
included in my statement. I will just say that the Congress--
that is, the Senate Finance Committee--did a very useful thing 
by encouraging or requesting the ITC [U.S. International Trade 
Commission] to launch an investigation on this subject. We have 
supported that by arranging for our members to be interviewed 
by the Commission. But I think much more will have to be done 
to develop a broad strategy, both for the U.S. Government, and 
also for U.S. companies, about how to respond to both the 
potential, and also the competitive issues that we will face in 
the future.
    Some of the answer is in broader public sector/private 
sector partnerships, such as the aviation and energy programs 
that we are engaged in with support of the TDA [U.S. Trade and 
Development Agency]. Some of it is in better export promotion 
and strengthening the National Export Initiative. Some of it is 
in stronger action at the World Trade Organization, with 
respect to good cases have recently been brought by USTR, and a 
good deal of it lies in strengthening our own competitiveness 
in general.
    Much of our future is in our own hands; it doesn't depend 
on what China, or anybody else, does. I have in mind here our 
tax structure, our educational system, our fiscal deficit, and 
the whole range of other things that could be put under the 
category of national competitiveness.
    With that, I will refer you to my full statement and look 
forward to your questions. Thank you.
    Chairman Dorgan.  Mr. Murck, thank you very much. We 
appreciate your testimony.
    Next, we'll hear from Thea Mei Lee. Thea Mei Lee is the 
Deputy Chief of Staff at the AFL-CIO. Previously she worked as 
an international trade economist at the Economic Policy 
Institute in Washington, DC, and as an editor at Dollars and 
Cents magazine in Boston. She's the author of ``A Field Guide 
to the Global Economy,'' published by the New Press. Her 
research projects include reports on the North American Free 
Trade Agreement on the impact of international trade on U.S. 
wage inequality in the domestic steel and textile industries. 
She's a graduate of Smith College and has a master's degree 
from the University of Michigan.
    Thea, you may proceed. Thank you very much.
    [The prepared statement of Mr. Murck appears in the 
appendix.]

   STATEMENT OF THEA MEI LEE, DEPUTY CHIEF OF STAFF, AFL-CIO

    Ms. Lee.  Thank you so much, Mr. Chairman, Mr. Cochairman, 
and Senator Feinstein. It's a great pleasure to be here on 
behalf of the 11.5 million working men and women of the AFL-CIO 
to talk about this very important topic today. I think a lot of 
people assume that business cares about intellectual property 
rights [IPR] enforcement, but labor is not that interested.
    In fact, IPR enforcement is very important to many AFL-CIO 
members, not just in the entertainment and media industries, 
but also in the manufacturing sector. It's important to 
American jobs, wages, to innovation and economic growth, 
consumer safety, tax revenues, and the reputation of American 
products.
    It is also true that much of the labor movement's policy 
priorities with respect to China have focused on other issues, 
including currency manipulation, worker rights, and illegal 
subsidies, but the lax enforcement of IPR protections remains a 
key contributing factor to our lopsided trade relationship.
    Both in the arts and entertainment sector, where copyrights 
are routinely ignored, and in the manufacturing sector, where 
counterfeit parts and products are rampant, billions of dollars 
in revenue and thousands of good jobs are at stake. There's a 
common theme to many of the trade tensions between the United 
States and China.
    We've raised many issues over the years, including 
violations of workers' rights, workplace safety and health, 
consumer protections, and intellectual property rights. These 
are linked because they're part of a single coherent economic 
strategy on the part of the Chinese Government.
    It's an export-led strategy, which is disrespectful of 
international norms and basic human protections. So, these 
issues are all part of the same kinds of struggles and tensions 
that we have with the Chinese Government. We need our 
government to focus on how to address these in a more effective 
way than has been done in the past.
    Taking steps now to address the Chinese Government's 
flagrant violations of its international obligations with 
respect to IPR is crucial to setting a sustainable, long-term 
trajectory for our bilateral relationship. This really does 
have to do with the issue that Mr. Murck raised about forced 
technology transfer and innovation, and where the next 
generation of innovation happens.
    If the U.S. Government doesn't take more care to ensure 
that American workers and American businesses can benefit from 
the kinds of innovation and inventions that happen here in the 
United States, we will feel the impact of that for generations 
in terms of lost American jobs.
    We often hear business and government officials tout the 
promise of the Chinese market, and of course it is both large 
and fast growing, but meaningful access to that market for 
American producers and workers is severely undercut by IPR 
infringement.
    If American entertainment products and software cannot sell 
at a reasonable price in the Chinese marketplace and if the 
legitimate owners of those products are not able to receive 
their fair share of the revenues, then the size of the Chinese 
market is, for all intents and purposes, a tiny fraction of 
what it ought to be. Similarly, American products are in direct 
competition with Chinese-produced counterfeits, costing jobs in 
third country markets, as well as in the United States of 
America.
    Over many years, the U.S. Government has made repeated 
attempts to cajole, pressure, or convince the Chinese 
Government to improve its IPR enforcement record through the 
use of Special 301 cases, priority watch lists, the Joint 
Committee on Commerce and Trade talks, and finally, WTO cases.
    Each one of these things is important because it sends a 
message to the Chinese Government. But overall I'd have to say 
it has been a long, frustrating history of trying to deal with 
these issues in a piecemeal fashion. We haven't really seen the 
kinds of results we'd like to see, as you said, Mr. Chairman, 
in your opening remarks, and as Mr. Levin said as well. Over 
all, we still have enormous violations and a failure on the 
part of the Chinese Government to take this issue seriously and 
to give it the kind of attention it deserves.
    This summer, the U.S. Trade Representative filed a request 
for a WTO panel. That was an important case, which challenged a 
number of practices on the part of the Chinese Government, 
including the quantity and thresholds in China's criminal law 
that must be met in order to start criminal prosecutions or 
obtain criminal convictions for copyright piracy. It also 
contested the Chinese rules that allow IPR-infringing goods 
that are seized by the Chinese authorities to be released into 
commerce, following the removal of the fake labels. Of course, 
this totally undermines the whole point of removing these 
products from the marketplace.
    The third issue that USTR raised was also an important one: 
a challenge to the denial of copyright protection for works 
that are awaiting Chinese censorship approval. Under Chinese 
copyright law, there is no protection for these copyright 
holders before the censorship approval is granted. These are 
all enormously important issues.
    Let me just conclude by saying that the Commission has 
asked the question: ``Will China protect intellectual property? 
'' I believe that the answer in the end will depend on our own 
government's actions. We haven't really been successful to date 
in cajoling, or convincing, or persuading the Chinese 
Government to act effectively.
    The real key is going to be raising the price for non-
compliance so that it exceeds the gains that are currently 
being earned by violating the intellectual property rights 
norms. Until that happens, American workers and businesses will 
continue to pay a high price, and the Chinese Government will 
continue on its current short-sighted path. I look forward to 
your questions and I look forward to the rest of the testimony 
today.
    Thank you very much.
    Chairman Dorgan.  Ms. Lee, thank you very much.
    Next, we will hear from Mr. Greg Frazier, executive vice 
president for Worldwide Government Policy at the Motion Picture 
Association of America. He coordinates the development and 
execution of the government advocacy initiatives of the Motion 
Picture Association on behalf of its members. He has spent more 
than two decades in public service, lastly as Chief Agriculture 
Negotiator in the Office of the USTR, serving with the rank of 
ambassador. Before that, he was Chief of Staff at the U.S. 
Department of Agriculture from 1995 to 1999, and he has held 
several professional staff positions in the House of 
Representatives as well, and many other activities.
    He is a graduate of Kansas State University, and the 
University of Connecticut with a master's. Mr. Frazier, thank 
you for being with us.
    [The prepared statement of Ms. Lee and the statement of the 
AFL-CIO Executive Council appear in the appendix.]

    STATEMENT OF GREG FRAZIER, EXECUTIVE VICE PRESIDENT FOR 
  WORLDWIDE GOVERNMENT POLICY, MOTION PICTURE ASSOCIATION OF 
                            AMERICA

    Mr. Frazier.  Thank you, Senator. I appreciate the 
invitation to be here. I was listening to your opening 
statement and I thought: ``I'm not really sure what I can add 
to what Senator Dorgan said.'' You made the comment that, with 
a quota of only 20 foreign films allowed into China, is there 
any wonder that there's a movie piracy problem there.
    If you look at my statement and if you look at the comments 
that we and our members have made over the last couple of 
years, you put your finger on what we believe is the critical 
component to dealing with movie piracy in China.
    We start out by saying--most people don't realize this--
that the movie industry is a trade success story. The men and 
women who work in the movie industry--and it's not just in 
California, but it's all over the country--earn about half of 
their earnings from outside of the United States, so it's a 
real success story. There's a positive balance of trade for the 
U.S. movie industry in every country where it does business, 
including China.
    The Chinese market is a real paradox. We did a study a 
couple of years ago and we estimated that the movie piracy rate 
in China was 90 percent. That means, for every 10 DVDs sold in 
China, 9 were pirated.
    Yet, the Chinese market is one of the fastest-growing 
theatrical markets in the world. The member companies that I 
represent, that I work for, their box office revenues from 2008 
to 2009 doubled in China. This was a huge increase. If you look 
over the last two years, it has gone up about 100 percent, so 
it's a growing market. There's a demand for American 
entertainment in China.
    But if you put that in context, what they earned in 2009 in 
China is probably about what they will earn in the United 
States in the month of September. Growing market, lots of 
piracy.
    What's the problem? If you were in Beijing and you went 
from Mr. Murck's office and you were to take a walk to 
Tiananmen Square, I think you might be able to see what the 
problem is.
    You would leave Mr. Murck's office, and very soon you would 
get to the Silk Market. You would walk up to the Silk Market 
and somebody would come up to you and whisper, ``DVDs,'' and 
shove underneath your face a fistful of all of the latest 
movies that just opened in the United States this past weekend. 
You might conclude that there were lots of U.S. films available 
in China, and it would be a reasonable conclusion.
    If you kept walking quite a bit further, there's a mall 
near Tiananmen Square called Oriental Plaza mall. I would 
direct you to two places in that mall. On one end is an audio-
visual store--two stories. On the top story is equipment, on 
the bottom floor, is music and films. If you are patient enough 
and you look hard enough, you will find the American movies. 
It's probably about two rows of movies. Virtually none of them 
are current, none of them are new movies. They're fine movies, 
but they're not the latest releases.
    How does that square with what happened at the Silk Market? 
Why could I get anything I wanted at the Silk Market but I 
can't at the AV store?
    If you went down the mall a little bit there's a cinema in 
there. The cinema is as modern as any cinema that you would see 
anywhere in Washington, DC. You might see one American film 
playing there.
    So here is the paradox: There is an abundance of American 
movies in China. Unfortunately, most of them are pirated. As 
you said in your statement, China only permits 20 foreign films 
into its market every year. That's not just 20 from the United 
States, it's 20 from all destinations. Then there are further 
restrictions we face as I have summarized in my written 
statement on television programs and home entertainment 
products.
    So we believe that until we can get into that market and 
those barriers can come down, there's no way that we can 
compete with the Chinese pirates. Unfortunately, as other 
witnesses have said and as you have indicated, the pirated 
products that are coming out of China are showing up all over 
the world. This is not just a victimless crime. It's not just 
American men and women who are suffering.
    I'm not going to say every time we buy a pirated movie it 
goes to an organized crime syndicate, but the Rand Corporation 
released a report two years ago and it said more than likely 
not, when we buy a $2 DVD in the Silk Market in Beijing, that 
money is going to go to an organized criminal syndicate based 
in China, perhaps doing business all over the world.
    So what do we do about that? Again, in your statement you 
indicated, about the basics of the law, it needs changes, it 
needs refinements here and there. But the real problem, we 
believe, as you indicated, is lack of commitment from the 
Chinese authorities. When you were there during the Olympics it 
was almost impossible to find counterfeit Olympic logo 
material. They had an interest and a desire to protect it, and 
they did.
    From time to time, the Chinese Government launches these 
campaigns, they're going to clean up this city, this district, 
that district. And you know, they do for a week, two weeks, 
three weeks. But you go back, and the material is there. 
There's not a sustained role, sustained commitment to address 
that problem.
    After many years of dealing directly with the Chinese 
Government, dealing with the U.S. Government, the companies 
that I work for decided they needed to escalate this, so we 
went to the U.S. Government and we asked them to take a suit 
against China for its IPR violations and for its market access 
restrictions.
    I am pleased to say that after thousands of hours of work 
by this Administration and the previous Administration, the 
U.S. Government prevailed at the WTO in a case that made 
important challenges to China's market access barriers, and, 
therefore, the piracy problems in China.
    China has until the middle of March to come into compliance 
with the WTO ruling against it in the market access case. We 
believe that this is a critical time period on how China comes 
into compliance and what the future is, both in terms of our 
ability to grow that market and which we believe will go hand-
in-hand with dealing with the piracy problem.
    I guess I would close by saying that, the U.S.-Chinese 
relationship is complicated and there are many things at play, 
and movies are just one aspect. I also know you have very busy 
schedules, and so I appreciate you holding this hearing now 
during this busy time.
    At the same time all three of you and your colleagues meet 
with Chinese officials all the time. Senator Feinstein talked 
about how she's been going there for over 30 years and meets 
with people, and she is respected and known there. The extent 
to which you also have those meetings, the extent to which you 
engage with Chinese officials, don't forget to mention how 
important the market access barriers are to the growth of the 
U.S. film industry in the China market. Coming from the U.S. 
Congress, it carries a lot of import, it carries a lot of 
weight. The few words that you can talk about intellectual 
property problems, the market access problems, believe me, will 
go a long way and will be greatly appreciated by the companies 
that I work for and the men and women in the American film 
community. Thank you.
    Chairman Dorgan.  Mr. Frazier, thank you very much for the 
testimony. We appreciate your being here.
    Finally, we will hear from Richard Suttmeier, Professor of 
Political Science, Emeritus, at the University of Oregon. He 
has written widely on science and technology development issues 
in China. His current research includes an NSF-supported study 
of the role of science and technology in U.S.-China relations, 
the role of technical standards in China's technology policy, 
and the Chinese approaches to the management of technological 
risks. He is well-published and we're very pleased that he has 
come to join us today.
    Mr. Suttmeier, you may proceed.
    [The prepared statement of Mr. Frazier appears in the 
appendix.]

   STATEMENT OF RICHARD P. SUTTMEIER, PROFESSOR OF POLITICAL 
            SCIENCE, EMERITUS, UNIVERSITY OF OREGON

    Mr. Suttmeier.  Thank you very much, Mr. Chairman. I 
appreciate the invitation to join you here.
    I have about six points I'll try to make, very briefly. The 
first one, is that I think it is useful to always remember that 
this issue is occurring in a context where we have a global 
economy, but not really a global consensus on norms affecting 
intellectual property systems. That is true, I think, with 
regard both to the efficiency of intellectual property issues 
and intellectual property arrangements, and it is also true, I 
think, with regard, especially when we talk about the third 
world, to questions about fairness of the existing intellectual 
property regulations and institutions.
    Second, I think it is also useful to remember that, in 
China, this IP question manifests itself in somewhat different 
ways depending on the type of intellectual property you're 
talking about, whether it's patents, whether it's trademarks, 
whether it's copyrights. Different actors in China get involved 
in developing regulations and enforcement, and I think that 
that effects very much the way--we need to sort of parse out 
what the different types of IP issues are at different times.
    I would add that also pertains to industry, and I think it 
also increasingly pertains to the question of Chinese 
innovators as rights claimants. So if we begin to look at some 
fields of Chinese innovative activity we see certain kinds of 
patterns, and in other fields we see other kinds of patterns.
    Third, there clearly are changes in Chinese thinking, as 
you have heard already. I think it is worth keeping in mind 
comparative experience here; China is not the first developing 
country that has had serious IPR infringement problems, 
although it is clearly a very special case, as we all know.
    But one of the things that comparative experience suggests 
is that as we begin to have a community of Chinese innovators 
in China, they begin to develop an interest in stronger IP 
protection. I think we're beginning to see that in China and 
that is true at the level of individuals and individual 
companies, but also is manifested in the state itself.
    Now, I come to all this as a person who looks at larger 
industrial policy, and science and technology policy questions. 
To reinforce what Mr. Murck has said, the landscape is changing 
in China very quickly with regard to the role of intellectual 
property in the Chinese economy. With the launching of the big 
Medium- to Long-term Plan for science and technology [MLP] 
China's leaders are supposed to--through R&D activities and 
industrial policy measures--make China into an innovative 
society by the year 2020. This is where the indigenous 
innovation idea comes from. I address that a bit more in my 
written submission.
    But I think it's important to recognize that central to 
this whole national effort, which has really become a very 
important part of Chinese public policy, is to make China a 
creator, a producer of IP. I think that the government 
understands very well that it cannot realize its objectives if, 
in fact, we have a deeply flawed intellectual property rights 
protection system.
    Now, that's not to say that there are not very serious 
abuses, as you have heard, but I do think that it is important 
to try to get a sense of the context of that plan, because one 
of the things it's doing, is producing a whole series of 
incentives to make Chinese research institutes, universities, 
and especially companies more innovative. The policy is being 
operationalized by measuring IP output of one sort or another, 
whether it be professional papers from universities or patents 
from universities, research institutes, and companies.
    So people in the innovation system face strong performance 
measures and strong incentives to perform. The New York Times 
last week carried an interesting piece about China being a 
society preoccupied with testing in its educational system, 
with some saying how our students would do better if there was 
more testing. Well, testing is a reality for Chinese 
enterprises, for research institutes, and so forth. They do 
regularly face evaluation and one of the critical performance 
measures is IP output, especially numbers of patents.
    Now, one of the consequences of that is that we have seen 
an explosion of patenting, many of which can legitimately be 
regarded as ``junk patents.'' But this is a new dynamic element 
that affects the whole technology transfer issue, the 
government procurement question, et cetera, because what the 
government is trying to do is to make Chinese enterprises 
successful IP producers. They are taking a variety of measures 
to do that, some of which I think we will all agree are ill-
advised, and some of which, as Mr. Murck has pointed out, the 
Chinese are backing away from.
    So let me move toward a conclusion here by asking about the 
relationship of the IP question to innovation. Why does China 
increasingly attract so many innovators from around the world? 
IPR supposedly is important for innovation, but at the same 
time we all have heard that China's IPR system is very weak. So 
wouldn't we expect innovators to avoid China? I raise this, in 
part, in the context of your interest in wind power and clean 
energy.
    I think that this is a very important question as we think 
about the global economy. Technology transfer--and this goes to 
the forced technology transfer issue--is ultimately a business 
decision and has to be understood as such. But what we know 
about technology transfer decisions, and the role of 
intellectual property in innovation, is that even though there 
is intrinsic worth in the ideas found in IP, to capture value 
from that intellectual property you need other things.
    David Teece, who has written very wisely about all this, 
has called these other things ``complementary assets.'' So if 
we begin to think about the question of our future U.S. system 
of innovation, and the future Chinese system of innovation, I 
think we want to think not only about IPR and the strength of 
intellectual property protection, but also these complementary 
assets: Markets, market availability, scalability, finance, 
human resources, et cetera, which are very central issues for a 
lot of the clean technology questions.
    In my submission, I quote a recent piece that addresses 
that; the availability of financing; the existence of growing 
capabilities in research and development; supportive government 
policies that makes scalability and market growth more likely 
in China. All of those things, I think, are part of the 
complementary assets that make innovators attracted to China.
    So increasingly, I think we can talk about living in a 
global innovation system, or a global innovation network, where 
we can think about countries being nodes in that network.
    Fifteen years ago, China was a fairly insignificant node as 
a producer of IP, and as a magnet for other innovators. China 
is now growing as an increasingly important node toward a 
``super-node'' status. We have been the super-node in the past. 
We have been the place where creativity and innovation was 
possible, largely because we had the complementary assets as 
well as the very smart people who were attracted from around 
the world to come here. What we have to ask ourselves is, is 
China actually putting together that package now, and are we 
losing it? As I suggest in the paper, I think we have to think 
very hard about that.
    Thank you.
    [The prepared statement of Mr. Suttmeier appears in the 
appendix.]
    Chairman Dorgan.  Mr. Suttmeier, thank you very much for 
the interesting testimony. I think all four of you have given 
us a lot of things to think about.
    I don't want to over-simplify this, and there's a tendency, 
I think, for me and everyone to over-simplify this when we talk 
about our relationship with China. It's clear to me that the 
trade deficit we have is not sustainable, it's clear to me that 
we operate on different planes with different strategies.
    China has an export strategy. It wishes to maximize its 
exports, use its natural--I shouldn't say natural, use its 
political--advantages of lower wages and various things to be 
able to be attractive in foreign markets, while at the same 
time limiting foreign exports to the Chinese marketplace.
    Mr. Murck, you heard me quote the Wall Street Journal 
article entitled, ``China Spooks Auto Makers,'' and the portion 
says, ``The draft''--they're talking about the Chinese 
Government draft--suggests the government could compel foreign 
automakers that want to produce electric vehicles in China to 
share critical technologies by requiring the companies to enter 
joint ventures in which they are limited only to a minority 
stake. Is it the case that if you would like to--let's say that 
you have an electric car strategy and you've got technology and 
you want to produce in China, perhaps for sale in the Chinese 
marketplace, and you want to start a company in China, would 
you be able to start a company as an American businessman and 
own, let's say, 51 percent of that company?
    Mr. Murck.  The answer to your question is no. You would be 
limited to a 50/50 joint venture, which is the one, for 
example, that General Motors has now. In that context, General 
Motors controls the technology and has management control of 
the joint venture, and I think most people would argue that a 
significant portion of the value of that company today lies in 
the fact that they have a leading position in what is now the 
largest automobile market in the world. If you drive around 
Beijing in a Buick, which I do, very proudly, you will see lots 
and lots of other Buicks.
    Chairman Dorgan.  Let me ask you----
    Mr. Murck [continuing]. Now, the thing that's really 
interesting about the article, which is a report of a draft 
regulation, not something which has actually happened, is the 
assertion that the Chinese Government is considering a policy 
of allowing only a 49-percent foreign interest in a joint 
venture for these cars based on new technologies. That would 
imply that control of the technology and management would rest 
with the local party. That would certainly be an issue and that 
is precisely why the Wall Street Journal, and I think anybody 
else who sees this report, would be alarmed by it.
    Chairman Dorgan.  But outside of the General Motors 
example, it is routine, it seems to me, for China to require 
that the Chinese, in these circumstances, would have 
controlling interest. American companies would be allowed to 
own 49 percent of an enterprise.
    Ms. Lee, if that were the case in our country and we said, 
you know what, if you want to come over here and do some 
business, we are sorry, you can't do that unless you retain 
only a minority ownership here in the United States, would 
people say, what are you doing? I mean, that violates 
everything we understand about free, fair, and open trade. 
Wouldn't that be the response?
    Ms. Lee.  I think there are a lot of things that the 
Chinese Government does that we would find either odd or 
problematic here in the United States. Certainly the basic 
principles that China agreed to when it joined the World Trade 
Organization, of most favored nation, right of national 
treatment, and so on, are things that are pretty routinely 
violated by the Chinese Government.
    Chairman Dorgan.  Mr. Frazier, how did we get to the number 
of 20? Who was it that sat in a trade negotiation and said to 
the Chinese, ``Okay, you are right, we have a very big trade 
deficit with you, we need to sell you more, so you can go from 
12 movies a year to 20 movies a year? '' Good for us! Let's go 
have a big dinner and celebrate this success. Who was it on our 
side of the table?
    Mr. Frazier.  Senator, I don't know. I don't know who did 
it.
    Chairman Dorgan.  Well, you worked for USTR. Not 
necessarily then, but there had to have been someone who, out 
of some understanding that it was in somebody's interest to 
agree to 20 movies. Is that correct?
    Mr. Frazier.  You're absolutely correct.
    Chairman Dorgan.  Somebody signed up to that.
    Mr. Frazier.  Somebody signed up to it. The only logic I 
have for that number is it doubled it. The old quota was 10.
    Chairman Dorgan.  I understand that doubled. I thought it 
went from 12 to 20, but okay, so it doubled. But my 
understanding also is what I thought was born of ignorance at 
the time, someone on our behalf sat at a table and negotiated 
and said, okay, in bilateral automobile trade, once we are 
phased in completely on bilateral automobile trade, we will say 
to China, ``It will be all right for you to impose a 25-percent 
tariff when it's fully phased in on U.S. automobiles shipped to 
China to be sold in your marketplace, and we will impose only a 
2.5-percent tariff on Chinese vehicles sold in our place.''
    Now, China is ramping up an automobile export industry, we 
know. With a country with whom we have a very large trade 
deficit, we've said it will be okay if you have a 10:1 
advantage in tariffs. Someone had to have decided, on one part 
of the table, wearing a U.S.A. jersey, negotiating on behalf of 
our country, yes, that's in our interest. I've always tried to 
find out, who are these people?
    Mr. Frazier.  I don't know. I don't know. I was there at 
the time, but I had charge of the agriculture portfolio, so I 
can only speak to some of the agricultural issues.
    Chairman Dorgan.  All right. What should we do with respect 
to movies? Why should we believe, just to use movies as an 
example--there are a lot of products out there, but movies are 
an American success story.
    Mr. Frazier.  Right.
    Chairman Dorgan.  What should we expect of the Chinese with 
respect to the allowing of importation of U.S. movies? Should 
we have no limitation? Do we limit Chinese movies into the 
United States?
    Mr. Frazier.  No.
    Chairman Dorgan.  No. And should we expect that China would 
not limit the import of U.S. movies to China?
    Mr. Frazier.  Well, in an ideal world, yes, that's what we 
would expect. As I indicated, this is a growing market for the 
U.S. industry. The box office has doubled in one year; it has 
gone up by 150 percent in three years. It is not just 
Americans, American companies and American men and women who 
are profiting from that.
    It's the cinema owners in China, it's the people who work 
there, the people who provide the concessions, the people who 
provide the promotion, the advertisement. So there's a growing 
domestic industry that's profiting from the creative work of 
American men and women in the American film community. We see a 
classic win-win situation. If we can put more movies there, not 
only are we going to benefit, but the Chinese are going to 
benefit. But it's a tough road, I'll tell you.
    Chairman Dorgan.  I think we have lower expectations than 
we should of the Chinese as trade partners, and I think we 
ought to change that some. I'm not interested in a trade war, 
but I am interested in making sure we have mutually beneficial 
trading relationships. I don't think that is now the case with 
China.
    Mr. Suttmeier, you made some interesting points about 
innovations and innovators, and so one of the dilemmas we have 
had is that while it may be the case that China is birthing a 
whole new cadre of people creating intellectual property at 
home and so on, it's also the case in many circumstances 
they've determined it is much easier just to steal it.
    In the first book I wrote, I pointed out that the reports 
existed that the Chinese, when Viagra came out, simply re 
engineered Viagra and sold it in China of their own volition. 
They didn't need to buy it or import it, they just reengineered 
it and sold it. That goes on all the time, doesn't it?
    Mr. Suttmeier.  It does go on, Mr. Chairman. But I think 
what we're seeing, is a growing intolerance of the high level 
of dependence on foreign technology. That's what I think is 
behind all of this. The fact that it exists and the dependence 
comes through illicit forms, as well as quite legal forms, is, 
I think, what's troubling to the Chinese because what they see 
is that those who control the IP actually then controls the 
higher value-added activities of all kinds of economic 
activities.
    So what we're seeing is a push from the technical community 
now backed by senior political leadership, to change that 
balance. But you're absolutely right. One of the great problems 
that the research community faces in China is that industrial 
enterprises, people who are making things, whether it be Viagra 
or something else, have a very strong bias toward foreign 
technology. So one of the things that people are trying to do, 
is to change that bias and change the balance somewhat.
    Chairman Dorgan.  Mr. Murck, one of the things that I note 
in this country is that whenever we raise the question of 
unfair trade, shipping of American jobs overseas as a result of 
unfair advantage, closed markets, and so on, we are referred to 
as ``protectionist,'' some say ``isolationists,'' ``xenophobic 
stooges who just don't get it.'' It's a new world order. We 
need to be able to compete.
    You made a point earlier that I fully agree with. There are 
a lot of things we need to do in our own country to get our 
house in order: Fiscal policy, education policy, and so on. But 
even if we have done all of that and we were at a new plateau, 
having done everything we could do to set ourselves up as being 
extraordinarily competitive, when we are trading with a country 
that does not protect intellectual property rights and has a 
managed trade strategy of saying we intend to run a very large 
trade surplus with you, we intend that you be our cash cow for 
hard currency needs, and we're going to do it year, after year, 
after year as long as you're willing to allow that, and as long 
as those who are critical in your country are called 
isolationists or protectionists, nothing is going to change in 
your country.
    That brings me to the Chamber of Commerce. Mr. Donohue and 
others would take a listen to something I say and they'd say, 
well, shame on you, that's anti-business. I happen to think 
that an American business man or woman, today, producing a 
product that says, ``Made in America,'' in Pittsburgh or 
Bismarck, wanting to compete internationally and wanting to 
have a fair opportunity to compete internationally, has a very 
large gripe with this country, with the Chamber, and others who 
have supported a trade strategy that I think undermines our own 
economic interests.
    It's one thing for us not to be able to compete when the 
competition is fair. It's another thing to tie our hands behind 
our back and then say ``compete.'' We could do that after the 
second World War with anybody and beat them; we were bigger, 
better, stronger. We had the most. But these days, things have 
changed.
    So I mentioned the Chamber. The American Chamber of 
Commerce in these countries is very important. They have a very 
important role. On my first visit to Vietnam, the American 
Chamber of Commerce in Vietnam said something I'll never 
forget. They said, ``You know what we need in Vietnam? '' This 
was a time when it was coming out into a market system with a 
Communist government. ``We need more government.'' I said, 
``Really? '' They said, ``Yes. You can only do business when 
you can enforce contracts, when you have administrative 
practices.'' It is absolutely true, that is the case.
    So give me your perspective, Mr. Murck. I'm sorry for the 
lengthy question. Give me your perspective of what we can, and 
should, expect on behalf of American businesses producing here 
today, trying to compete in an international marketplace with 
the support of the Chamber of Commerce.
    Mr. Murck.  Well, thank you very much, Mr. Chairman, for 
that question. I think this would be a good time to point out 
that the American Chamber of Commerce in China is an 
independent organization, supported by our members on the 
ground, and we have no relationship other than a loose 
affiliation as a member with the U.S. Chamber of Commerce or 
Mr. Donohue. I count him among those who usually meet with me 
when he comes to Beijing, but I would say my influence on his 
thinking and his ideas, and those of the Chamber, is quite 
limited.
    I would also just like to circle back before responding 
directly to your question to the Viagra issue. You might be 
interested to know that the counterfeiters, at the time when 
Viagra was widely copied in China, engaged in all kinds of 
brand extension efforts, including soft drinks that were laced 
with Viagra, and my favorite is a hot dog that was also laced 
with Viagra. But at the end of day----
    Chairman Dorgan.  That was answering a question I hadn't 
asked, Mr. Murck.
    Mr. Murck.  Yes. I give you that for future use.
    Chairman Dorgan.  Thank you.
    Mr. Murck.  At the end of the day, Pfizer won its case and 
it is now purely an enforcement issue. That was one of the 
first major IPR cases contested vigorously. The clear winner of 
that case was Pfizer, so that is actually a positive example 
for IPR protection.
    With respect to the broader question of what you can expect 
from people like ourselves or the business community in 
general, I do think it is important that more American 
companies begin to compete actively in global markets. I do 
think there is more that we can do to make that possible in 
terms of export promotion and assistance of all kinds, and I've 
suggested in my statement some of the things of that sort. The 
German Government does a better job, for example.
    In terms of what we do with respect to our trade policy 
views, we always try to express them in terms of American 
national interest. I do firmly believe that the global 
competitiveness of American companies is in the national 
interest of the United States, including our ability to compete 
in China. For that reason, I'm really not too apologetic about 
the many policy statements that have come out of the American 
Chamber of Commerce in China over the last 10 years. Mr. 
Donohue can defend himself without any assistance from me.
    In terms of the strategy that the U.S. Government ought to 
adopt going forward, I would just like to associate myself with 
Professor Suttmeier's statement, which I think is very 
interesting and very sophisticated, and which poses the problem 
that we face very clearly.
    The industrial policy issue and the way in which it draws 
on IPR is a qualitatively different situation than the 
enforcement issue that we've been struggling with over the last 
10 or 15 years, and we need to have a better approach to how we 
are going to deal with the Chinese Government. We have to 
convince them, on the basis of mutual benefit, to change the 
way in which they're dealing with us.
    One aspect of that is prioritizing the protracted, but 
recently begun, negotiations to enter the government 
procurement agreement at the WTO. This is enormously important 
to us because China has a very large government sector, and 
there are a number of other things, such as a bilateral 
investment treaty, that would be other pieces of developing a 
new and broader framework for the way in which we work with the 
Chinese in the future.
    They have explicitly stated that their goal is to bring 
their global trade account into balance. So far, year-to-date, 
they're about 20 percent less in terms of their global surplus 
than they were a year ago, and a year ago it was less than 
2008. I think there is very good reason to believe that this 
will happen, but that doesn't mean the bilateral trade balance 
will come into balance. This is something that will continue to 
require very careful attention on your part and on the part of 
the business community. Thank you.
    Chairman Dorgan.  Mr. Murck, thank you very much. I fear 
that I have intruded on Congressman Levin's time.
    Congressman Levin, take as much time as you wish.
    Representative Levin.  I will take just a couple of minutes 
because I don't think there's any disagreement about the 
importance of our relationship. Sometimes it is misstated that 
there is a difference of opinion about the importance. Indeed, 
it is so important, in part because it is so large, and 
therefore, it is so complex. I have been trying to figure out, 
as the four of you testified: What are the differences in 
emphases and nuances? That isn't always easy to figure out. 
There are differences in emphases among the four of you and 
differences in nuances.
    So I'm not sure where to begin. I will ask that my 
statement be placed in the record, Mr. Chairman.
    Chairman Dorgan.  Without objection.
    [The prepared statement of Representative Levin appears in 
the appendix.]
    Representative Levin.  So let me just say this. I think 
it's clear that China has a strategy I think it's fairly clear, 
what its strategy is. You have outlined what the goals are. I 
think, though, there are some changes. I think you can describe 
fairly well what the strategy basically is. You mentioned about 
a certain level of technology by a certain given date. They 
have other goals, and I think their own strategy to achieve 
those goals.
    I think the problem is that our country hasn't had a 
strategy. Therefore, we tend to kind of do it piece by piece, 
and it's hard to fit the pieces together. In some respects, we 
haven't had a strategy because there have been some in this 
town who thought we did not need one, and that essentially the 
best way to handle these issues is to leave them alone and 
they'll work themselves out.
    For example, on government procurement, Professor, I think 
China decided it was better off not being a party to the 
agreement for a certain period of time. I don't think it was 
accidental. I think they sat down and figured out what would be 
best. I think they do that as to everything. It is further 
complicated, Mr. Murck, because a lot of the companies, 
American companies that do business in China, are global 
companies and they not only do business in China, and in many 
cases import to China, but also export from China. That is 
likely to increase.
    So I just want to urge, I think the importance of this 
hearing is to underline the need for our country to develop a 
strategy as to how we're going to handle a burgeoning 
development, a country that has become so important 
economically, that has different structures and different 
interests than we do.
    So when we talk about something that's mutually beneficial, 
I think we have to understand, that, as true in all kinds of 
competition, there will not always be answers that are 
immediately thought to be beneficial. That makes it more 
difficult to work them out. But our country had better put 
together a strategy as to how we're going to handle this 
relationship. Those who thought we could not have one, I think, 
or that it had to be outside of a larger structure, I think 
they were basically wrong.
    But the problem is, within this structure that now exists, 
the problems remain so compelling, for example, movies. You 
bring your perspective. You work with them. You tell the 
typical American citizen that China has complete access, while 
we have very limited, and that when we have access it's 
essentially overcome by pirated product. They have to ask 
themselves, how can this be? The same is true increasingly--and 
you referred to this, Mr. Murck--in the industrial sector. I 
thought it was excellent that GM--I was there before the plant 
was even built, and I'm glad General Motors went there.
    However, it creates problems as well as profit. When you 
have increasing counterfeiting of auto parts and you're likely 
to have, as a result of that proliferation of American 
enterprise in China, an increasing number of parts produced in 
China that come here that are counterfeited and compete with 
American-made products, I don't think it is workable that we 
not have some kind of a strategy.
    So maybe I won't ask questions, because I think the nuances 
in your testimony really indicate the need for us to work out 
within this country how we're going to handle this increasing 
trade with, and competition from, China. If, today, I asked any 
of you, what is our strategy, I think you would be somewhat 
hard pressed to indicate really what it is. It varies from 
industry to industry.
    I will just finish with this. I was at a solar plant in 
Michigan. It is three or four football fields long. They make 
solar panels. The person who manages it, who is the opposite of 
a xenophobe, took me aside after I had been through it and 
said, unless this country has a strategy in this renewable 
energy field, it is likely, in five years, every single solar 
panel installed in the United States will come from China, and 
not for just one reason. Currency is one, the subsidization by 
the Chinese, another. It may well be that some American 
companies will have an interest in those solar panel plants in 
China, but this fellow tells me that all of the workers in that 
company in Michigan, in five years, are likely to be out of 
work, and our company out of business, if this country does not 
get together itself.
    Then I went to another place that produces a very important 
ingredient in high technology, also in Michigan. This is a huge 
plant, with endless pipes that I can't begin to understand. The 
CEO says to me--he's the CEO--that unless we get ourselves 
together, it's unlikely, over a period of time, that that plant 
can survive.
    So, I left there saying to myself, we'd better get our 
heads together and not call each other labels if we have 
differences, and not use some of the old shibboleths, and not 
have deep cleavages before we even start to talk in this 
country. There is an urgency in terms of our relationship with 
China economically, and also, if I might close, in terms of 
human rights.
    This Commission has been invaluable in its creation and its 
work on human rights. I think the Chinese need to expect that 
we will not only insist on measures so that they abide by their 
commitments that were made when they went into the WTO, but 
also that we will continue to have an interest in the liberties 
of people in China.
    So I think this has been, Mr. Chairman, a really useful 
hearing and I salute--if I might say so, I'm a bit biased, I 
agree--the work of the Commission and its staff over these 
years since the creation of the Commission. It was part of 
PNTR. So, thank you very much.
    Chairman Dorgan.  Congressman Levin, thank you very much. I 
think the point you made that is so important, is this country 
and China will have a very important bilateral relationship. 
The question is, will it be mutually beneficial? I think most 
of the witnesses have indicated that there is movement in 
China. I think Senator Feinstein put it pretty well. Just go 
back 30 years and see what existed then and see what exists 
now, and there's movement. You can make a pretty strong case 
that things are better in China.
    But you also indicated there is some urgency to address 
these trade imbalances and the trade relationship with China. I 
agree with that. If we don't push the requirement to address 
them, we will, in 5 years, 10 years, and 15 years, see this 
drag on and on and on.
    Ms. Lee, tell me how it is that China can largely say to an 
American company, yes, you can produce over here, in fact, we 
would insist that you produce over here. You make something 
that we want to buy and you buy our products, China would say 
to us, so we have something that we want to buy from you. But 
in order to do that, we want your manufacturer to move to China 
and make it in China, and by the way, when you do, you are only 
able to own 49 percent of the company. Does that violate all 
kinds of WTO rules?
    Representative Levin. Mr. Chairman, if you'll excuse me. I 
hate to leave, especially at this moment, but I think I have to 
go to another appointment. So, I will have others tell me the 
answer to this salient question.
    Chairman Dorgan.  All right.
    Representative Levin.  Thank you. Thank you so much.
    Chairman Dorgan.  Congressman Levin, thank you very much.
    Let me, by consent, also ask that the full statement of 
Senator Carl Levin from the State of Michigan be included in 
the hearing record at this point.
    [The prepared statement of Senator Levin appears in the 
appendix.]
    Chairman Dorgan.  Ms. Lee, you've had time to think about 
that now.
    Ms. Lee.  Thank you, Mr. Chairman. It's an excellent 
question. It's one that has been a huge problem for us and for 
certain unions for many years. It is illegal under many kinds 
of rules, but they are difficult to enforce. It's called an 
offset agreement, where the Chinese Government negotiates with 
an individual company to make a sale--for example, aircraft--
and in exchange, both jobs and technology, often, are 
transferred to China.
    It's something that sometimes the companies aren't happy 
about, but they feel that it's impossible for them individually 
to protest because if they say no, then another company from 
another country could accept the deal and get the sale. Of 
course, they really want that sale badly. I don't know how many 
times we've raised this issue with our government and asked 
them to go to the Chinese Government and negotiate and so on.
    Part of the problem is that we don't have a united front 
among all the different governments that deal with China. Each 
one is afraid of losing that sale, so it becomes an issue. A 
lot of times these deals are made in secret. They're not 
explicit, they're not made public, so only the company itself 
knows exactly what deal was cut. It's not in their interest to 
publicize it widely. I think a lot of times these companies 
make a bad decision. They hope, well, it's not good to give 
away to technology on my wing production, but it's better than 
losing this particular sale. So it's a very short-sighted 
decision.
    What we need, obviously, is a much more concerted, 
multilateral approach to this problem. To date, we haven't 
gotten it. Whether it's through the OECD [Organisation for 
Economic Co-operation and Development], whether it's through 
the World Trade Organization, we need all the governments to 
come together with a united front. We need the companies to be 
up front about the kinds of deals that they're being asked to 
make. So far, we haven't had that kind of cooperation. It's 
been very frustrating for us and it costs us a lot of good 
jobs, and a lot of technology.
    Chairman Dorgan.  Mr. Murck, you represent the American 
Chamber. And thank you for clarify all of the relationships. My 
mentioning Mr. Donohue, I don't mean that in an unflattering 
light. He has his own view of issues and he pursues them very 
vigorously. But having said that, I hear from businesses who 
say, in order to sell into China we had to move our production 
to China, accept a minority ownership, and then we lost control 
of our intellectual property and they're very upset about that.
    I say, why don't you speak of that publicly? They say, we 
don't dare. We don't dare speak of that publicly. We would 
never be able to do any business with China in the future. So, 
do you hear some of those same stories, Mr. Murck? I mean, it's 
probably understandable why people in that situation--if 
they're going to sell into China, they've got to accept the 
dictums of the Chinese Government, and that's the way it is. 
They're certainly not going to want to complain publicly about 
it or they won't be selling there at all.
    Mr. Murck.  I think there are a couple of points that I 
would make. First of all, in the 1980s, after the Chinese 
economy began to be open in a serious way to foreign 
investment, which began only in 1979, the requirement at the 
time was that every foreign company had to joint venture. One 
hundred percent of them were joint ventures. That requirement 
has gradually been relaxed. When China entered the WTO, there 
are only a few sectors in which the joint venture requirement 
was maintained. One of them is automobiles, and there are some 
others. There are some that are totally closed to foreign 
investment even today, for example, upstream oil and natural 
gas production.
    Chairman Dorgan.  Was that in contravention of WTO or was 
that negotiated?
    Mr. Murck.  That was negotiated at the time.
    Chairman Dorgan.  All right.
    Mr. Murck.  The vast majority of our members are in China 
on a wholly foreign-owned basis, and it's relatively unusual 
nowadays for a joint venture to be established, except in those 
sectors which continue to be restrictive and which were 
negotiated as part of China's WTO accession. So I don't usually 
hear the complaint that you mentioned in exactly that form.
    However, the broader issue is absolutely there, that if you 
come to China and you bring your intellectual property into the 
market, it is necessary to take a very determined look at how 
to protect that IPR. There is now an emerging set of best 
practices which are outlined in my full statement which enables 
people to do that to a large extent, but it's still one of the 
major risks of coming into this market and something that 
everyone has to continue to focus on.
    With respect to technology transfer, these are always 
individual commercial decisions. I think companies need to 
understand that when they transfer technology today they are 
not only winning an immediate contract, but they may also be 
nurturing a future global competitor. The view that people take 
of entering into these technology contracts, as a result, has 
changed somewhat in the last few years. This is a new situation 
which we all have to face going forward.
    I would just say also that I think both myself and my 
colleagues on this panel would agree with Cochairman Levin's 
remark, that we don't really have a strategy and we need one. 
We are very interested in thinking about this, working with 
some other trade association partners. I know the U.S. 
Government is working on this as well, and hearings like this 
are a step in that direction.
    Chairman Dorgan.  Just two more questions, Mr. Frazier, and 
then I want to ask Mr. Suttmeier a question. Mr. Frazier, it 
seems to me key to many of these issues is to not only 
negotiate good trade agreements, but also have the capability 
to enforce them.
    One of my significant complaints about our trade laws in 
this country and the whole trade issue, is we tend to think, if 
we negotiate a conclusion in a trade agreement, and negotiators 
have in their mindset that to negotiate to an end and have an 
agreement is success. It's less important what's in it, if you 
get an agreement, that's called success. That's much easier to 
do than to enforce.
    In fact, recently, a couple of years ago, someone was 
trying to gather up all of the trade agreements we had 
negotiated with Japan so they could get them all in writing, 
because they discovered they couldn't even find them, let alone 
enforce them. So the question is, should we not expect, with a 
wide range of these issues, a more effective and more 
aggressive enforcement mechanism in the government, and where 
should that be?
    Mr. Frazier.  Well, clearly. And I agree with you, the 
negotiator's job is to negotiate an agreement, get a deal. When 
I was a negotiator, one of the most important lessons I learned 
is, you have to know when to step away. A done deal is not 
necessarily a good deal, and sometimes the best deal is no 
deal. That was based on my experience.
    Also from my experience when I was at USTR, as much time as 
I spent negotiating, I spent infinitely more time on the 
subject that you are raising: enforcement. How do I make sure 
that the other party is living up to its agreements? That is 
hard work. That is a lot harder than doing the negotiating.
    My own personal bias from my background, is USTR is the 
place to do it. They rely on Congress for more sources, they 
rely on other agencies in the Executive Branch for the 
expertise and the help to do it. But you put your finger on it. 
It's a lot of work, doing the enforcement.
    Chairman Dorgan.  Mr. Suttmeier, you indicated that because 
China is nurturing innovators inside of that country, that the 
failure to protect intellectual property will hurt people 
inside of the country that have been nurtured by government 
policy. So we should expect and understand that China, for its 
own selfish reasons, will begin to tighten in these areas.
    I understand the point you're making. I have very little 
confidence, however, that if we do nothing and our response is 
as it has always been, that there will be much difference 
moving forward on the protection of our intellectual property. 
You believe there will be, inevitably, improvement. Over what 
timeframe would you think there will be improvement sufficient 
so that we could expect the same kind of reasonable protections 
in China as we provide here?
    Mr. Suttmeier.  That may be quite some years. A different 
system, I think. It comes back, I think, a little bit to my 
very first point about whether or not you can expect the 
Chinese to subscribe to all of the assumptions and the norms 
about intellectual property that some people in this country 
do. But as you may know, even within this country we have a 
pretty wide range of views about whether our patent system is 
working or is it not working. It serves some industries better 
than other industries.
    I think that kind of churn, if you will, goes on in China 
as well. One of the additional complications in all of this, I 
didn't mention, but is in my written statement, is the role of 
local governments and the extent to which local governments, at 
the provincial and sub-provincial levels, are on the same page 
as the national government.
    So part of the enforcement problem is that we see local 
governments with increased authority to do something and yet 
they are not always doing the same thing that the central 
government or central policy would suggest. So it's difficult 
to answer your question, I think, because you're coming at it 
from really very different philosophical and institutional 
arrangements.
    Chairman Dorgan.  Yes. But I think in some ways it's a 
matter of will. The Chinese are very active, having thousands 
and thousands of people watching Internet traffic to try to 
shut off mainstream Chinese citizens from free access to the 
Internet. Right? That's a matter of will. They've decided, 
that's what we're going to do.
    Mr. Frazier made the point that when the Chinese Government 
owned as their own possession the logo for the Chinese 
Olympics, they were very tough in shutting down, to the extent 
they could, counterfeits, the pennants, the cups, and the 
pencils, and so on that were sold. They demonstrated, it seems 
to me, all that I know, at that point, if they have the will to 
shut something down, they shut it down.
    Mr. Suttmeier.  Senator, I think one of the ways I would 
respond to that, is that central authority and the will that 
you're talking about, is really one of the scarcest commodities 
in China. So the question then becomes, where does that 
commodity get allocated, to whom, and to what kind of a 
problem? So, yes. I think you can repeat this in many, many 
different areas of public policy. When you have a very high 
priority item or issue, such as the Olympics, you can mobilize 
that attention, you can mobilize that will.
    Chairman Dorgan.  Yes.
    Mr. Suttmeier.  It dissipates on a regular day-to-day 
basis.
    Chairman Dorgan.  Your point is a fair point about local 
government versus central government. But let me just say that, 
sitting in your chair, we have had people who have testified 
before this Commission who have spent years and years in 
Chinese prisons because of a national will and a central 
government that made decisions that reached way out into the 
villages, into rural areas. Where this national government in 
China wishes to affect behavior, it does. We know that because 
we know the names of people sitting in prison today because 
they spoke freely, because they went on the Internet, or did 
one thing or another.
    I think it is giving a pass to the central government to 
suggest that someone else might do something they're not aware 
of. It's a big old country. But my point is, when we have a 
trade relationship with China--and our relationship is one of 
engagement--we've long ago decided the best way to address the 
issue of China is through constructive engagement, and 
constructive engagement, we believe, through trade and travel 
will lead China toward greater human rights. I think there is 
some evidence that that has been the case. It's far from 
perfect, to wit, the folks that are now in prison whose names 
that we have, and photographs we have, for the most part.
    But despite that, once we decided to engage through 
constructive engagement and have a trading relationship with 
China, and understanding China is going to be a major part of 
our economic future--the economic future of the world for that 
matter--then the question is, under what conditions do we 
engage? Are they fair?
    What has happened, in my judgment, is China has had a very 
deliberate and very effective strategy, an export market 
strategy that exports to us and to others to the extent that 
they can, and then to the extent that they can, limit, as much 
as is possible, the import of goods from us to them. If you go 
to--again, in a book I wrote--a Wal-Mart store in China, go 
search for an American-made good, and you discover part of the 
problem.
    The point you have brought today is very interesting, 
Professor, and I'm pleased that you've done that. I had not 
thought about this before. It is certainly the case that if 
China is now breeding a new group of innovators to create 
intellectual property in the country, they inevitably at some 
point are going to want to try to protect that. But if it's 
over a long period of time, we're going to be stuck between 
here and there with unsustainable trade deficits and a weakened 
American economy.
    Mr. Suttmeier.  If I may, Senator, briefly.
    Chairman Dorgan.  Yes.
    Mr. Suttmeier.  To go back to your question about, what is 
the timeframe, it might be useful, in fact, to think a little 
bit about the evolution of the IP system, starting from 
virtually nothing in the mid-1980s to where they are today, 
referencing Senator Feinstein's observations as well. You then 
throw into that mix the fact that this is a very different 
place in 2010 than it was in 1985.
    I think there's a long way to go before you'll have all 
these vigorous and very robust innovators, but there are a lot 
of them beginning to emerge and I think they are not entirely 
happy with the conditions that are being faced, especially in 
things like software, but in other areas as well.
    Chairman Dorgan.  I thank you very much. We have been 
trying, on a number of occasions, mostly with respect to human 
rights and the issue of political prisoners in China, to shine 
all the spotlights in one spot. Today, we wanted to talk about 
the issue of intellectual property and related trade matters. I 
think the four of you have given us a lot of interesting 
information for the permanent record of this Commission to 
consider, and I appreciate, Mr. Murck, you coming to us from 
Beijing, and Mr. Suttmeier, you came from Oregon, is that 
correct?
    Mr. Suttmeier.  These days, only northern New York.
    Chairman Dorgan.  All right. Well, you didn't travel very 
far then. But I want to thank Thea Mei Lee and Greg Frazier. 
Thank you, Mr. Murck. Thanks to all of you for coming to 
provide testimony. We keep the records open for two weeks; if 
you wish to submit supplemental information you're welcome to 
do that.
    This hearing is adjourned.
    [Whereupon, at 4:00 p.m. the hearing was adjourned.]
                            A P P E N D I X

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


                          Prepared Statements

                              ----------                              


                 Prepared Statement of Christian Murck

                           september 22, 2010
    Mr. Chairman and Members of the Commission:
    Thank you for the opportunity to testify before you on intellectual 
property rights in China.
    I speak on behalf of the American Chamber of Commerce in China, 
comprising over 1,600 companies and 2,600 individuals, and representing 
the commercial interests of the American business community in China.
    This Commission has a record of sustained attention to intellectual 
property rights protection in China for which we thank you. I testified 
before the Commission on June 6, 2002, and cited intellectual property 
rights as a case study of the impact of the rule of law on business. 
Revisiting this topic today, I will take the opportunity to comment on 
the progress, or the lack of it, in the past eight years, as well as 
new developments.
    Infringement of intellectual property rights has consistently been 
among the top business challenges reported by our members in our annual 
business climate survey conducted for the past twelve years. In the 
2010 survey, it ranked eighth, behind inconsistent regulatory 
interpretation, management level human resource constraints, obtaining 
licenses, protectionism, bureaucracy, unclear regulations, and lack of 
transparency. IPR protection was described as critically important to 
25 percent of the respondents, and very important to 45 percent. 30 
percent said it was slightly important or not important. You will not 
be surprised to hear the sectors most impacted are IT, high tech, 
software, research-based pharmaceuticals, entertainment, and consumer 
brand owners for which IPR protection is a crucial element of the 
business model. Least affected are service providers such as 
consultants, law firms, financial services, accountants and the like.
    Our survey data confirms anecdotal evidence that IPR enforcement 
has gradually improved since 2002. In that year, 21 percent of 
respondents rated enforcement as totally ineffective, 63 percent as 
ineffective, and 16 percent as effective or very effective. In 2010, 11 
percent rated enforcement as totally ineffective, 63 percent as 
ineffective, and 26 percent as effective or very effective. Given the 
attention and commitment of resources to this effort by the Chinese 
government, the U.S. government, and the private sector, such slow, 
modest improvement is a disappointment.
    Nevertheless there has been significant improvement in the legal 
infrastructure supporting intellectual property rights.
    Relevant laws are updated on a regular basis. The process takes 
about three years and circulation of drafts for comment is now routine.
    Courts are increasingly professional and fair, especially in large 
cities. Enforcement of judgments against individuals and small 
companies is difficult, but there is adequate enforcement against large 
companies. Damages are growing, but still inadequate by international 
standards.
    As a result of these improvements, litigation is now common, 
whereas in 2002 it was not.
    The Supreme People's Court reported over 30,000 cases closed during 
2009, a 29 percent increase on the prior year. Half of 2009 cases 
involved copyright disputes, 23 percent trademark disputes, 15 percent 
patents, 4 percent unfair competition, and 2.4 percent technology 
contracts, demonstrating the range of applicable law. A common 
assumption has been that once Chinese parties obtained intellectual 
property rights, they would seek enforcement. That is happening. In 
2009, 95 percent of lawsuits involved two Chinese parties. Chinese 
rights holders are turning to the courts to assert their rights in 
large numbers.
    Foreign parties litigate cautiously and they generally win. In 
Beijing's First Intermediate Court from 2002 to 2006, foreign parties 
won 60 percent of IPR cases. In Zhejiang Province, foreign plaintiffs 
won 95 percent of their cases from 2003-2008, and 99 percent in 2008.
    One of our member companies for the first time recently filed a 
high profile suit against a state-owned enterprise infringer, won, and 
collected material damages. Though they did not recover the extent of 
their commercial loss, half a dozen similar companies subsequently 
quietly initiated negotiations to settle similar infringement 
situations.
    While not completely satisfactory and limited by the difficulty of 
gathering evidence, litigation is now a much more realistic option than 
in 2002.
    As a general matter, however, infringement is still widespread and 
continues to evolve in order to evade enforcement.
    In my 2002 appearance before you, I suggested that an unintended 
consequence of WTO entry might be an increase in counterfeit exports. 
That has unfortunately occurred. Customs has increased inspection of 
outward bound containers, but is dependent on intelligence from rights 
holders. Recently, counterfeiters have shifted to small packages rather 
than container shipments, complicating the interdiction effort. The 
counterfeit supply chain has globalized, with distributors operating in 
the Middle East and Eastern Europe. The recorded country of origin of 
counterfeit goods entering the United States or European Union is often 
not China. Nevertheless, China is the known source of well over half 
the counterfeit goods seized at the borders of the United States and 
European Union.
    Counterfeiting has also gone online. In one case, a single 
individual was operating a virtual enterprise from his home where his 
website listed hundreds of fake products available, and manufacturing, 
storage, and shipping was outsourced to dispersed companies. He is now 
in jail, but his business model is no doubt flourishing in the hands of 
others. The issue of counterfeit goods for sale through online auction 
or purchasing sites is well-known. Internet intermediary liability is 
an under-developed area of law now receiving attention.
    Anti-counterfeiting enforcement now often requires investigation 
across both provincial borders within China and international borders.
    Cooperation among international enforcement agencies continues to 
lag the increasing sophistication of manufacturing, distribution, and 
sales of counterfeit goods.
    Copyright and patent infringement is equally widespread.
    I will leave the subject of music and film copyrights to my 
colleague on this panel, except to note that a significant part of the 
problem is caused by the limited number of foreign films permitted to 
be distributed legally in China every year. This is justified by China 
as necessary to protect consumers, enable censorship, and protect the 
domestic industry. It simply cedes a large market to pirates.
    China now ranks second globally in the number of personal computers 
shipped domestically, but 49th in revenues of international software 
vendors. Most of the gap is filled by pirated software. AmCham-China is 
particularly disappointed that despite clear regulations requiring 
computers to be shipped with legally licensed software, and requiring 
state-owned enterprises to use only legally licensed software, 
compliance by SOE's is still problematic. We call on the State-Owned 
Assets Supervision and Administration Commission to establish a 
credible, transparent software asset management program under which all 
centrally-owned SOE's will certify annually under audit that all 
software on their computers, including operating systems and 
applications software, is properly licensed.
    Over time best practices have emerged with respect to protecting 
intellectual property in China. An effective strategy usually includes:

         Registration of trademarks, patents, and copyrights so 
        that they are effective in China;
         Strong internal and technical controls, including 
        access limitations to intellectual property, control of 
        packaging, IP audits, limits on subcontracting, etc.;
         Contracts with employees, distributors, suppliers and 
        customers that include intellectual property provisions;
         Monitoring use of IPR by employees, competitors, 
        suppliers, and partners;
         An enforcement strategy including use of investigation 
        firms to gather evidence, supporting enforcement agencies in 
        administrative and criminal cases, and private litigation; and
         Active, targeted engagement with enforcement agencies 
        at central, provincial and local levels, both as an individual 
        company and through industry associations.

    Companies with a presence on the ground and the revenue scale that 
justifies an active, multi-faceted effort can control the commercial 
impact of infringement. However, smaller firms or those without an 
active presence in China are seriously disadvantaged.
    In the past eight years, the U.S. and Chinese governments have 
devoted time and effort to this situation.
    There is a particularly productive engagement between the U.S. 
Patent and Trademark Office and the State Intellectual Property Office. 
Last week, for example, a patent workshop was held in Beijing organized 
by USPTO, SIPO, and the U.S. Chamber of Commerce. Among the topics 
covered were:

         The national security review required by the Patent 
        Law when patents registered in China are licensed abroad;
         Design and utility model patents, which meet a lower 
        standard of invention and are often unexamined, making them a 
        means of registering other's technology;
         Patent disclosure requirements, especially the 
        requirement that direct and indirect genetic resources be 
        disclosed on any biotech patent;
         Statutory damages;
         Compulsory licensing (we hope China will continue to 
        construe the grounds narrowly and avoid using compulsory 
        licensing);
         Invention remuneration (the issue is differences 
        between the national patent law and some provincial regulations 
        that has led to legal uncertainty);
         Software patents

    The same delegation participated this week in a workshop on bad 
faith trademark filings with Chinese, European, and Japanese 
representatives to review the law, procedural challenges and best 
practices to deter such filings.
    These topics give a good sense of the range of subjects under 
active technical discussion.
    Improving intellectual property rights protection has also been a 
major priority of the U.S. Embassy in Beijing, represented by the 
presence of an IPR Attache, the annual Ambassadors IPR roundtable, and 
many other programs.
    USTR and the Department of Commerce are actively engaged through 
the Joint Commission on Commerce and Trade, and its IPR Working Group.
    The business community is well-linked to all of these ongoing 
efforts.
    Our progress since 2002 can be described as a ``three yards and a 
cloud of dust'' offense, slowly grinding our way forward. It isn't very 
exciting, but we're better off than we were and we see a path toward 
the future. There is both bureaucratic momentum and the common interest 
of the Chinese and foreign business communities in improving IPR 
enforcement.
    Our attention at AmCham-China and in the foreign business community 
in China at large is shifting from enforcement to a new consideration: 
the impact on our market access and American competitiveness of Chinese 
industrial policies explicitly intended to strengthen national champion 
companies by encouraging them to acquire or develop intellectual 
property, giving them protected domestic markets in which to gain 
scale, and planning that they will then be globally competitive.
    I discussed this issue earlier this year in testimony at the 
International Trade Commission on June 15 and at the Ways and Means 
Committee on June 16.
    As the recovery from global economic crisis continues, China is 
embarking on rebalancing its growth model to move back to a balanced 
trade account and shift toward domestic demand as the driver of 
economic growth. At the same time, the economy is being restructured to 
be more efficient in its use of energy, natural 
resources, and capital. Significant investments are being made in 
health care and education. Wages, especially manufacturing wages, are 
growing strongly after a long period of stagnation. Part of China's 
strategy to adjust to new circumstances is to move its industrial 
sector up the value-added curve by encouraging the development of 
intellectual property through research and development, technology 
transfer, and adaptation of acquired technologies.
    Late last year, we and others were alarmed by the release of 
policies that appeared designed to exclude imported products and the 
products of foreign-invested enterprises from catalogues of products 
certified as the result of ``indigenous innovation'', with the 
likelihood that such catalogues would be used in government and SOE 
procurement. In response to comments from many quarters, the Chinese 
government entered into a serious dialogue. The Ministry of Science and 
Technology has removed the most egregious aspects of the 2009 
regulations from the 2010 draft. Premier Wen Jiabao on several 
occasions, most recently earlier this month at the World Economic Forum 
meeting in Tianjin, has directly stated that foreign-invested 
enterprises in China are regarded as Chinese enterprises and will not 
be discriminated against. These are welcome statements, but it is 
important to recognize that there are broader concerns about the future 
direction of Chinese policy and the market access of foreign companies.
    Our concerns include:

         Import substitution policies such as the Guiding 
        Catalogues of Major Indigenous Innovation Technologies and 
        Equipment of 2009, which specifies import substitution as a 
        goal.
         The Government Procurement Law directly discourages 
        procurement of imported products. China is not a member of the 
        WTO Government Procurement Agreement and its first offer to 
        join was not commercially meaningful; a second offer made in 
        July was a modest improvement, but much work remains to be 
        done.
         Standardization mandates such as the Ministry of 
        Industry and Information Technology requirement that the 
        Chinese WLAN Authentication and Privacy Infrastructure (WAPI) 
        standard be included with any Wi-Fi enabled mobile device. 
        Since this standard has not been commercially accepted 
        anywhere, including in China, this mandate is purely rent-
        seeking.
         The 2008 Patent Law expanded the grounds for 
        compulsory licensing, though China has not yet used them. It 
        also requires foreign companies in China to submit to a review 
        by Chinese authorities of whether a patent originated in China 
        ``relates to the security or vital interests of the State'', 
        including ``the substantial economic interest of the State'', 
        before it can be exported.
         The Standardization Administration of China is 
        developing standards rules that could lead to compulsory 
        licensing or licensing on non-commercial terms of foreign 
        technologies used in ``mandatory national standards'', and 
        possible anti-trust consequences for refusal to comply.
         Exclusion of representatives of foreign-invested 
        enterprises from participating in and/or voting in China's 
        standards setting committees.
         Exemptions from infringement in the patent law and 
        drug registration rules for ``research'' and ``non-commercial 
        use'' and for research for the purpose of 
        producing generic pharmaceuticals. These facilitate stockpiling 
        of infringing products, reverse engineering, and generic 
        competition with innovative pharmaceutical companies in advance 
        of patent expiration.
         Technology transfer on terms favorable to the Chinese 
        party required to win necessary government approval for large 
        contracts.
         Selective enforcement of the Anti-Monopoly Law, which 
        rarely reviews transactions involving no foreign party.
         Bid specifications that favor local producers, for 
        example in the wind power sector.
         The Multi-level Protection Scheme requiring that 
        technology infrastructure in key sectors runs on domestic 
        hardware and software where possible. This is already reducing 
        foreign market access in the banking sector.
         Sectoral restructuring policies that generally involve 
        consolidation driven by state-owned enterprise expansion as the 
        expense of the private sector, for example, in the coal 
        industry and also in the rare earths industry.

    These problems are qualitatively different from inadequate 
enforcement of intellectual property rights. We agree in principle that 
IPR infringement is illegal, undesirable, and a drag on China's 
development. We are working together toward 
solutions of a wide range of genuine practical difficulties to improve 
enforcement. We might wish that there were stronger political will on 
the Chinese side, or that better enforcement would be given a higher 
priority, and they might wish we were more patient, but we share a 
basic stance.
    The industrial policy issues listed above, however, reflect 
considered, deliberate policy choices inimical to our commercial 
interests that restrict both national treatment and development of a 
market economy.
    The underlying problem exposed by these policies is the very 
different regulatory and economic systems of our two countries. In 
China, the government's regulatory and planning bodies, state-owned 
enterprises, and the institutions of the Party all play a large role in 
managing the society and the economy. Only the first of these have 
counterparts in the United States and their role is much different. How 
should we relate to an economy and a market driven to a large extent by 
industrial policy?
    SOE's can be simultaneously customers, suppliers, partners, and 
competitors. The leaders of major SOE's are ministerial level 
officials, who often hold senior Party office as Central Committee 
members or alternate members. Yet given the size and growth potential 
of China's markets for many products, it is strategically necessary to 
compete successfully there in order to be a global leader. We cannot 
throw up our hands and abandon the market because of its differences 
with our. Of course, the same is also true for Chinese enterprises with 
respect to the U.S., EU, and Japanese markets, where Chinese home 
market advantages often turn into disadvantages.
    In our active discussions with the Chinese government and media, we 
often make the fundamental points that restricting competition stifles 
innovation, and that 
protected markets based on unique domestic standards prevent local 
firms from succeeding in global markets based on harmonized 
international standards. We recognize there is a vigorous policy debate 
within China, with many unresolved issues.
    In thinking about the future, the American Chamber of Commerce in 
China starts with the premise that it is realistic to think in terms of 
$3 trillion long-term goals:

          (1) Increasing US exports to China from $80 billion to $1 
        trillion annually;
          (2) Increasing the revenues of US firms producing goods and 
        services in China for the Chinese market from approximately 
        $100 billion to $1 trillion annually; and
          (3) Welcoming cumulative foreign direct investment from China 
        in the United States of $1 trillion. Just as Japanese capital 
        has contributed to job creation and economic development in the 
        United States, so too can Chinese direct investment, giving the 
        investors a deeper interest in our mutual prosperity and 
        broader exposure to our market norms.

    If we think in terms of building on the synergy between the U.S. 
and Chinese economies on this scale, what must be done?
    We suggest the following:

         We need to understand better China's policy framework. 
        Based on that understanding, we can better define the goals of 
        our trade negotiators and private companies. For this reason, 
        we have supported the investigation of the International Trade 
        Commission now underway by arranging for member companies to be 
        interviewed. We look forward to the ITC reports and hope that 
        they will provide useful strategic input for all parties. We 
        hope to contribute to an ongoing strategic discussion of U.S. 
        options.
         We support the National Export Initiative, noting that 
        China is our third largest and fastest growing export market.
         In support of the NEI, we support increased funding 
        for the Trade Development Administration. AmCham-China 
        participates in two private sector/public sector partnerships 
        in aviation and energy that bring together Chinese and U.S. 
        government agencies with American and Chinese enterprises in 
        capacity-building programs partially funded with seed money 
        from TDA. These are generating business opportunities as well 
        as institutional and personal relationships that will be of 
        last benefit to both countries.
         We also support increased funding for export promotion 
        through the Department of Commerce.
         We support reform of U.S. export controls on the 
        principles proposed by Secretary Gates in March of this year.
         We support prioritizing negotiation of China's 
        accession to the Government Procurement Agreement of the WTO, 
        with sub-central as well as central government commitments. 
        This would provide welcome assurance of future access to 
        important markets for both American and Chinese companies.
         We support resumption of negotiation of a bilateral 
        investment treaty to support both American investment in China, 
        recognizing the large role of the state-owned sector, and 
        Chinese investment in the U.S.
         Finally, we believe the United States must strengthen 
        its own competitiveness by examining R&D tax credits, 
        developing a forward-looking national energy policy, 
        maintaining immigration rules that attract talented engineers 
        and scientists to our country, improving our educational 
        system, reducing the fiscal deficit to a sustainable level and 
        similar measures. To a great extent, our fate is in our own 
        hands and does not depend on others.

    Thank you for the opportunity to appear. I look forward to your 
questions.
                                 ______
                                 

                   Prepared Statement of Thea Mei Lee

                           september 22, 2010
    Chairman Dorgan, Co-Chairman Levin, Members of the Commission, 
thank you for the invitation to participate in today's important 
hearing on behalf of the eleven and a half million working men and 
women of the AFL-CIO.
    Intellectual property rights enforcement is often assumed to be of 
interest only to business, but in fact, it is vitally important to 
American workers, as it impacts jobs, wages, innovation and growth, 
consumer safety, tax revenues, and the reputation of American products.
    Other issues (including worker rights, currency manipulation, and 
subsidies) have often dominated labor's policy priorities with respect 
to China, but the lax enforcement of IPR protections remains a key 
contributing factor to our lopsided trade relationship. Both in the 
arts and entertainment sector, where copyrights are routinely ignored, 
and in the manufacturing sector, where counterfeit parts and products 
are rampant, billions of dollars in revenues and thousands of good jobs 
are at stake.
    Moreover, taking steps now to address the Chinese government's 
flagrant violation of its international obligations with respect to IPR 
is crucial to setting a sustainable long-term trajectory for our 
bilateral relationship, especially with respect to technology transfer 
and innovation. This will impact American jobs for generations into the 
future.
    We often hear business and government officials tout the promise of 
the Chinese market, and, of course, it is both large and fast-growing. 
But meaningful access to that market for American producers and workers 
is severely undercut by IPR infringement. If American entertainment 
products and software cannot sell at a reasonable price in the Chinese 
marketplace, and if the legitimate owners of those products are not 
able to receive their fair share of the revenues, then the ``size'' of 
the Chinese market is, for all intents and purposes, a tiny fraction of 
what it ought to be.
    Similarly, American products are in direct competition with 
Chinese-produced counterfeits, costing jobs in third-country markets, 
as well as in the United States.
    As Paul Almeida, president of the AFL-CIO Department for 
Professional Employees, told a Senate committee this summer, 
``Intellectual property equates to jobs and income for American 
workers. Theft of intellectual property raises unemployment and cuts 
income. For too many workers in the United States today, both jobs and 
income are hard to come by. If the United States allows attacks on 
intellectual property to go unanswered, it puts good livelihoods at 
risk.''
    The breadth and depth of the IPR problem in China are vast. 
According to a 2008 USTR report on China: ``IPR infringement continued 
to affect products, brands, and technologies from a wide range of 
industries, including films, music and sound 
recordings, publishing, business and entertainment software, 
pharmaceuticals, chemicals, information technology, apparel, athletic 
footwear, textile fabrics and floor coverings, consumer goods, food and 
beverages, electrical equipment, automotive parts and industrial 
products, among many others.''
    In addition, IPR infringement means that American consumers face 
risk of substandard or even dangerous products in a wide range of 
areas. According to USTR, ``China's widespread counterfeiting not only 
harms the business interests of foreign right holders, but also 
includes many products that pose a direct threat to the health and 
safety of consumers in the United States, China and elsewhere, such as 
pharmaceuticals, food and beverages, batteries, automobile parts, 
industrial equipment, and toys, among many other products.''
    In terms of the global IPR enforcement problem, China looms large, 
especially in terms of counterfeited and pirated products. The GAO 
reports that, ``According to CBP data, seized counterfeit goods are 
dominated by products from China. During fiscal years 2004 through 
2009, China accounted for about 77 percent of the aggregate value of 
goods seized in the United States'' [GAO, ``Intellectual Property: 
Observations on Efforts to Quantify the Economic Effects of Counterfeit 
and Pirated Goods,'' 2010].
    Over many years, the U.S. government has made repeated attempts to 
cajole, pressure, or convince the Chinese government to improve its IPR 
enforcement record, through the use of Special 301 cases, priority 
watch lists, the Joint Committee on Commerce and Trade, and, finally, 
WTO cases.
    While there have certainly been some improvements in China's legal 
framework, violations of IPR remain rampant, and the Chinese government 
continues to introduce new and problematic policies, including most 
recently the indigenous innovation policy, which sought to impose 
technology transfer and purchasing requirements on companies seeking to 
do business in China, violating China's IPR and procurement 
commitments.
    This summer USTR filed a request for a WTO dispute panel, 
challenging several aspects of China's IPR law and enforcement regime. 
First, the request questioned quantitative thresholds in China's 
criminal law that must be met in order to start criminal prosecutions 
or obtain criminal convictions for copyright piracy and trademark 
counterfeiting. Second, the request contested Chinese rules for 
allowing IPR-infringing goods seized by Chinese customs authorities to 
be released into commerce following the removal of fake labels or other 
infringing features, contrary to WTO rules. Third, USTR challenged the 
denial of copyright protection for works awaiting Chinese censorship 
approval. Chinese copyright law provides no protection for copyright 
holders before censorship approval is granted.
    We appreciate USTR's initiative in bringing this case to the WTO 
and hope that our government will continue to insist that the Chinese 
government fully comply with international norms in this important 
area.
    Innovation and creativity fuel the most vibrant sectors of the U.S. 
economy, including the arts, entertainment and media sector and 
manufacturing. Both of these are enormously important to American 
workers, and both are hard hit by the Chinese government's failure to 
protect IPR.
    A recent AFL-CIO Executive Council statement on piracy laid out the 
challenge in the arts, entertainment, and media sector: ``Entertainment 
professionals may work for multiple employers on multiple projects and 
face gaps in their employment. Payment for the work they have completed 
helps sustain them and their families through underemployment and 
unemployment. For American Federation of Television and Radio Artists 
(AFTRA) recording artists in 2008, 90 percent of income derived from 
sound recordings was directly linked to royalties from physical CD 
sales and paid digital downloads. Screen Actors Guild (SAG) members 
working under the feature film and TV contract that same year derived 
43 percent of their total compensation from residuals. Residuals 
derived from sales to secondary markets funded 65 percent of the 
International Alliance of Theatrical Stage Employees (IATSE) [Motion 
Picture Industry] Health Plan and 36 percent of the SAG Health and 
Pension Plan. Writers Guild of America, East (WGAE)-represented writers 
often depend on residual checks to pay their bills between jobs; in 
some cases, the residual amounts can be as much as initial 
compensation. Online theft robs hard-earned income and benefits from 
the professionals who created the works.''
    In the manufacturing sector, the estimates of losses from 
counterfeiting run to billions of dollars. Again, the victims include 
workers, who face lost jobs and income. From auto parts to circuit 
breakers, counterfeiting endangers all of us with unreliable products. 
It then taints the original products with the inferior quality of the 
counterfeits. As with the arts, entertainment, and media industries, 
the consequences include a diminished incentive to invest and a 
downward spiral for U.S. workers and our economy.
    The question posed by the Commission is ``Will China Protect 
Intellectual Property? '' I believe that the answer depends on our 
government's actions. To date, despite many efforts, we have not done 
enough to insist that the Chinese government fully comply with its 
international obligations. Until the price for non-compliance exceeds 
the gains, American workers and businesses will continue to pay a high 
price, and the Chinese government will continue on its current short-
sighted path.
                                 ______
                                 

                   Prepared Statement of Greg Frazier

                           september 22, 2010
    Mr. Chairman, Members of the Commission:
    Better access to the Chinese market lies at the heart of the 
American film community's strategy to protect the American jobs at risk 
from the attacks of Chinese film and television pirates. We cannot 
compete with free; Chinese film pirates are not only thieves, they are 
our competitors--competitors who we have subsidized.
    American men and women create and produce the entertainment Chinese 
pirates peddle; US finances underwrite the profits Chinese pirates 
stash into their bank 
accounts. Attacking this problem, leveling this playing field, and 
protecting the American jobs at risk are multifaceted--better Chinese 
laws and more commitment to enforce those laws--but unless the market 
barriers are removed, those efforts will fall short.
    China's filmed entertainment market is a paradox: Crippled by one 
of the highest piracy rates in the world--we estimated the piracy rate 
at over 90 percent in a recent study--the market for films for 
theatrical release is growing faster than most other markets. 2009 box 
office revenues for US companies doubled from 2008, but still only 
reached levels approximate to the US box office for less than one 
month.
    This growth is not coming at the expense of the Chinese industry--
American films are not threatening to crowd out the local industry--the 
Chinese film industry is growing rapidly as well. The number of 
domestic films produced in China has tripled since 2003, and box office 
from domestic films grew almost 50 percent from 2008.
                     market barriers = more piracy
    China's film market is also one of the most restricted in the 
world. MPAA's\1\ work to open the market is critical to growing jobs in 
the US industry, as well as being a key element of its content 
protection work in China: There is no shortage of US films in China; 
they are readily available in pirated form. The barriers China enforces 
only keep out the legitimate products and companies; the purveyors of 
pirated films have no regard for the rules enforced against US 
companies.
---------------------------------------------------------------------------
    \1\ The Motion Picture Association of America (MPAA) represents the 
six major US motion 
picture studios: Paramount Pictures Corporation; Sony Pictures 
Entertainment Inc.; The Walt Disney Studios; Twentieth Century Fox Film 
Corporation; Universal City Studios LLLP; and Warner Bros. 
Entertainment Inc.
---------------------------------------------------------------------------
    China maintains a quota on the number of foreign films it allows 
into its market each year: 20. In addition, it imposes several 
restrictions on US businesses in the home entertainment and television 
business that do not exist elsewhere. Keep in mind as you review the 
list of barriers that these barriers affect only legitimate businesses, 
the businesses that play by the rules. Just as the pirates ignore 
intellectual property rights, they are neither bound by nor feel any 
obligation to abide by the restrictions affect our members:

         Foreign Investment Restrictions--China limits foreign 
        ownership in cinemas and in video distribution companies to 49 
        percent. In the television sector, companies wholly or jointly 
        owned by foreign entities are prohibited from investing in the 
        broadcast industry.
         Television Quotas--China restricts foreign television 
        drama and film programming to no more than 25 percent of total 
        airtime, and other foreign programming to no more than 15 
        percent of total air time. Foreign programming is banned during 
        prime time and may not constitute more than 30 percent of pay 
        television channels. Foreign animation is restricted to no more 
        than 40 percent of total airtime and importers of foreign 
        animation must produce a like amount of domestic animation.
         Screen Quota--The government sets strict guidelines 
        for foreign films. The total time for foreign films cannot 
        exceed one-third of the total screen time.
         Import Duties--Import duties on theatrical and home 
        video products are sometimes assessed on the potential royalty 
        generation of an imported film, a method of assessment which is 
        excessive and inconsistent with international practice of 
        assessing such duties on the value of the underlying imported 
        physical media. Excessive import duties place a severe drag on 
        investments and impede distribution of legitimate filmed 
        entertainment product thus increasing 
        demand for pirate product.
         Retransmission of Foreign Satellite Signals--Local 
        cable networks may not carry foreign satellite channels without 
        government approval or landing permits, which currently are 
        limited to Guangdong and a handful of foreign channels. 
        Moreover, foreign satellite channels beaming into China are 
        required to uplink from a government owned encrypted satellite 
        platform. The annual fee for each channel remains excessively 
        high at $100,000.
         Restrictions on Retailers--Foreign retailers are 
        precluded from selling home video products without entering 
        into a qualifying joint venture with a Chinese firm. The number 
        of legitimate distribution points remains far less than the 
        number of pirate distribution points.
         Blackout Periods During Peak Seasons--The government 
        has historically decreed ``black-out periods'' during which no 
        new foreign films may be released, to prevent competition with 
        Chinese films released during the same period. Such blackouts 
        typically occur during national holidays or coincide with 
        political events.

    None of these barriers, however, cap the Chinese audience's 
appetite for the filmed entertainment the American film community 
produces. You can get virtually any US film you want in China. You may 
not find it in the cinema, the local television channel, nor video 
store, but you can find it--in pirated form, either as a counterfeit 
DVD or at a Chinese website that has obtained the product illegally.
    The export and transshipment of pirate optical discs from and 
through China continues to grow, especially pirate DVDs of US films. 
Transshipments flow out of China to destinations worldwide, including 
the US, through express mail and courier companies. The recent 
emergence of high-quality, counterfeit Blu-ray DVDs supplied in large 
volumes to businesses and consumers throughout the world over Chinese 
retail and auction websites is among the latest examples of China's 
export piracy problem.
    Unfortunately, too many look at the harm of buying an illegal DVD 
for $2.00 in the Silk Market as victimless, perhaps even as a souvenir 
of a trip to Beijing. Besides morally wrong, there are at least two 
other things wrong about that. First, it is not a $2.00 theft. Most 
likely, the movie on that disc was camcorded in a theater. Illegal 
camcords account for roughly ninety percent of all the illegal movies 
in the world, and China is becoming a haven for camcorders. In the 
first half of this year, our research indicates that 24 camcords 
occurred in China. A typical MPAA member company movie may cost as much 
as $100 million to make. So, the person who camcorded the movie, who 
stole it off the screen, committed a $100 million theft.
    Second, film piracy is not a victimless crime. According to a 
report the RAND Corporation produced in 2009, organized criminal 
syndicates around the world are frequently engaged in film piracy. It 
generates enormous profits at, unfortunately, 
little risk of apprehension. For example, the study identified Chinese 
gangs with operations as far away as the UK engaged in the trafficking 
illegal DVDs. It is possible the $2.00 you spend for that souvenir may 
not be going to an organized crime, but there is a very high likelihood 
it is.
                              what to do?
    The American film community, alone, and in cooperation with other 
industries and with the US government has engaged for years in a 
dialogue with the Chinese about amending and strengthening China's 
intellectual property laws.
    As the market increasingly turn to the online environment, we need 
to make sure it is a safe market and market in which the investment of 
the US film community can be protected. That is the case all around the 
world, and including in China.
    Our priority with respect to China's intellectual property laws 
today is urging China to address its Internet piracy problem. We 
believe China must provide adequate protection in the digital 
environment by criminalizing end-user piracy, adding reference to the 
exclusive rights provided in the law, criminalizing violations of the 
anti-circumvention provisions for technological protection measures 
(TPMs) and rights management information, criminalizing Internet 
offenses that are without profit motive but that have affect rights 
holders on a commercial scale, and eliminating distinctions between 
crimes of entities and individuals.
    To foster legitimate electronic commerce, it is imperative that 
China establish adequate liability for ISPs for piracy related offenses 
and satisfactory measures for notice-and-takedown of websites offering 
pirate materials. Such provision will foster a responsible partnership 
between the content industries and the delivery networks.
    The core of the problem, however, is whether the government has the 
will to protect the creative works American men and film produce. In 
your invitation to testify, you asked that I comment the various 
campaigns the authorities have undertaken over the years to enforce 
copyright violations. Some have been more successful than others. Many 
have simply been show campaigns, with little discernable results. Few, 
if any, however, have been enduring.
    Let me illustrate: Across the street from the Silk Markets was a 
store simply named ``DVD CDs.'' We prevailed upon the authorities to 
raid it not once, but three times in the course of years. I met with a 
senior Chinese official after the third of those and he bragged that 
the store had become a sporting goods and luggage retailer. After the 
meeting, we drove there and sure enough, through the windows I could 
see golf clubs and suitcases. When we entered, we were quickly ushered 
through a curtained passageway and into a back room with virtually any 
pirated DVD I could want.
    Commitment. The government has a legislative framework that, while 
it needs some improvement, is fairly good. In addition, it has shown it 
can clean up the streets and stop infringement--it was impossible, for 
example, to find any counterfeit Olympics' goods two years ago. And, we 
have increasingly seen in recent months the government crack down on 
online content it finds objectionable--mostly pornography and political 
content.
    But, that some commitment, that same will, has too often fallen 
short with respect to US filmed entertainment, to the detriment of your 
constituents working to produce it.
    We believe we have to continue to press the Chinese for more and 
more effective copyright enforcement. The work you and your colleagues 
perform in continuing to raise this problem is invaluable. The work the 
Administration has performed, and continues to undertake, is as well.
    That said, I do think it is time we give serious consideration to 
the effectiveness of some of the bilateral engagements on intellectual 
property rights. We do need to make a serious appraisal of the 
accomplishments of the Joint Committee on Commerce and Trade and its 
intellectual property rights working group. I cannot say today what the 
course is to improve it, but I can say we would be remiss if we were 
simply to continue business as usual.
    I do know we have to improve access to the Chinese entertainment 
market. I will conclude where I began: The men and women in the 
American film community produce the most anticipated, most watched, 
most memorable movies in the world. In artistic and business terms, 
they can, and do, compete with anyone. However, they cannot stay on the 
job if they have to continue to compete with pirates stealing their 
works. We cannot compete with free.
    We need to work to remove the barriers to the Chinese market--not 
overnight nor all at once, but to set a process by which the playing 
field levels. We believe that the next six months represents a unique 
window in that process. Last December, the World Trade Organization 
(WTO) ruled in favor of the complaint the US government brought against 
some of these key market barriers. And I want to thank, again, and 
commend the incredible effort the men and women of the Office of the US 
Trade Representative did in successfully pursuing this case.
    The Chinese government has committed itself to complying with this 
decision by next March. We applaud them for the commitment; we await 
the details. We believe it is critical--to grow US jobs and to protect 
the movies in China--that these barriers come down in a way that sets 
in place a dynamism in the Chinese market that enables the US film 
community to grow, and that sustains the growth in the Chinese 
industry.
    You and your colleagues meet with Chinese officials frequently. On 
this issue and on behalf of the Americans at work in the US film 
industry, if I could ask you one thing, it would be: Tell the Chinese 
officials how closely you are following their work to comply with the 
WTO ruling. Tell them how high a priority fulsome, good faith 
compliance is to improving the bilateral relationship. Tell them how 
important it is to China's place in the world, to it earning the 
respect of the international community, that it complies with its 
international obligations.
    And one more thing, tell them to see a US movie, a legitimate one.
    Thank you.
                                 ______
                                 

               Prepared Statement of Richard P. Suttmeier

                           september 22, 2010
    Mr. Chairman, Members of the Commission,
    It is a pleasure to be here with you today; thank you for inviting 
my participation. My comments will deal mainly with China's evolving 
technology and industrial policies, and the role of intellectual 
property in them. Let me make the following points and then attempt to 
answer any questions you may have.
    1. Concerns about intellectual property rights in China are 
usefully seen against the background of growing international attention 
to intellectual property. On one hand, countries and companies around 
the world are coming to see intellectual property as a key component of 
competitiveness; a number of national governments, including China, 
have introduced national IP strategies. At the same time, there is also 
considerable international dissatisfaction with the norms and 
procedures by which international IP regimes operate.\1\ Growing 
interest in clean energy technologies in the face of worries over 
climate change reinforce the increasing importance of IP but also 
highlight some of the areas of international dissensus.\2\
---------------------------------------------------------------------------
    \1\ One useful review of the variety of views currently found in 
the international discourse on IP can be found in Scenarios for the 
Future, a 2008 report of the European Patent Office.
    \2\ Bernice Lee, Ilian Iliev, and Felix Preston. Who Owns Our Low 
Carbon Future? Intellectual Property in Energy Technologies. London, 
Chatham House.
---------------------------------------------------------------------------
    2. We should recognize that there have been many changes in Chinese 
thinking about intellectual-property over the past two decades, 
including a variety of legal and institutional steps (e.g., new courts) 
taken to protect intellectual property. The growing number of Chinese 
innovators have acquired an interest in protecting IPR, and there is 
official recognition that China's aspirations for indigenous innovation 
are unlikely to be met without a far more credible intellectual 
property protection regime. At the same time, the production of 
intellectual property has also acquired a central role in Chinese 
thinking about their technological future and in the aggressive 
national technology and industrial policies now in course to realize 
that future. For the international community engaged with China, these 
changes are both encouraging and troubling. The encouragement comes 
from the sense that Chinese companies and the Chinese state see it in 
their interest to promote a more robust intellectual property 
protection system. The concerns come from the fact that the 
implementation of China's industrial policy sometimes puts the 
intellectual property rights of foreigners at risk.
    3. In 2006, China introduced its ``Medium to Long-Term Plan For 
Scientific and Technological Development'' (MLP). The plan is a very 
ambitious effort to make China an ``innovative society'' by 2020 by 
encouraging the development of ``indigenous innovation.'' The MLP puts 
a premium on the production of intellectual property; it expects that 
by the end of the plan period, the number citations to papers produced 
by Chinese scientists will have entered the world's top 10 countries. 
It also hopes to become part of the top 15 countries in terms of 
patents granted.
    The term, ``indigenous innovation'' is a rather imperfect rendering 
of the Chinese ``zizhu chuangxin,'' a term which defies easy 
translation and, as a result, has given rise to some confusion among 
English speakers. While ``indigenous'' captures part of the meaning, so 
might ``independent,'' ``homegrown,'' ``self-initiated,'' ``original'' 
and several other terms. In the face of confusion among foreigners and, 
indeed, among Chinese themselves, the Chinese Ministry of Science and 
Technology has suggested that zizhu chuangxin be understood as 
encompassing (1) genuinely ``original innovation'' (yuanshi chuangxin), 
(2) ``integrated innovation'' (jicheng chuangxin, or the fusing of 
existing technologies in new ways), and (3) ``re-innovation'' (yinjin 
xiaohua xishou zaichuangxin), which involves the assimilation and 
improvement of imported technologies. In desperation, some officials of 
the Ministry have suggested that zizhu chuangxin be translated simply 
as ``innovation.''
    Confusion over translation, however, should not mask the deeper 
policy and cultural significance of the term. It grows out of China's 
fear of dependency on foreign technology, and what that means for the 
development of national security capabilities and the relative gains 
that China's manufacturers might realize in the global economy. In 
addition, the concern for ``zizhu chuangxin'' has roots in a deep 
cultural concern that as a great civilization, China should again 
become a leader in science and technology, as it once was. With these 
considerations in mind, the term might better be translated as 
``sovereign innovation.''
    The ambiguity surrounding the meaning of ``zizhu chuangxin'' has 
meant that it has been available as a symbol for the policy 
entrepreneurship of various groups in China's technical community 
(membership in which is drawn from industrial, academic, and government 
circles). For some, it has justified the pursuit of techno-nationalist 
objectives intended to build up a China-focused national innovation 
system. For others, it supports a more techno-globalist vision in which 
growing Chinese capabilities in research and development are married 
with global technology flows and globalized R&D to produce and 
innovation system that is not bounded by narrow economic nationalism. 
The challenge for the international community is to identify and 
strengthen the hands of those with the latter orientation.
    The pursuit of ``zizhu chuangxin'' and the making of an 
``innovative society'' in China by the year 2020 involves a significant 
expansion of R&D spending. But China has long suffered from a serious 
gap between R&D activities and an inability to realize commercial and 
other gains from turning new knowledge into practical innovations. 
China is attempting to overcome this gap by incentivizing Chinese 
industrial enterprises to take the challenges of innovation seriously. 
Therefore a major thrust of the MLP is to transform Chinese enterprises 
into centers of innovation and leaders of the national innovation 
system. A variety of ``implementing policies'' in support of the MLP 
are intended to privilege Chinese enterprises and support the 
development of Chinese intellectual property and Chinese technical 
standards. These policies in support of ``indigenous innovation'' have 
tended to push China in the techno-nationalist direction, in the view 
of many foreign observers, and have elicited widespread international 
concern.
    The MLP contains targets for the development of products containing 
Chinese 
intellectual property as well as technical standards based on Chinese 
IP. As these targets have been operationalized, they have resulted in 
an incentive structure for Chinese companies, universities, and 
research institutes that rewards the filing of patents as a measure of 
success. It is not surprising, therefore, that there has been a steady 
growth in patenting over the past five years--although the quality of 
many of these patents has been questioned.
    The elements of this incentive structure include, in the first 
instance, the use of IP production (measured in terms of papers and 
patents) for evaluating R&D projects and for awarding new R&D grants. 
But, in addition, IP criteria have been built into government 
procurement policies, and policies for technical standards. Thus, in 
ways that are rather unusual by international norms, China has proposed 
that products qualifying for government procurement should contain 
Chinese intellectual property. Apart from the ambiguity of what this 
policy might mean (what is ``Chinese intellectual property''?; how is 
it determined?), foreign companies have been concerned that they will 
be excluded from an increasingly lucrative Chinese government 
procurement market, depending on how the policy is implemented. 
Although the central government appears to be backing away from the 
more draconian interpretations, local governments have substantial 
discretion in interpreting it and have been slower in adjusting policy 
implementation in ways that are more consistent with international 
norms.
    While the promotion of the development of Chinese IP as part of the 
MLP illustrates the growing importance of strong intellectual property 
rights protection in Chinese thinking, new policy proposals in the area 
technical standards illustrate the persistence of sympathies for weaker 
IP. In this case, China has in recent years been troubled by what it 
considers to be excessive royalty fees charged for the use of certain 
technical standards. As a result, it has shown considerable interest in 
trying to forge new directions for the ``patents in standards'' 
problem, such that the IP provisions of the Chinese standardization 
system would reflect what Chinese officials believe to be a ``fairer'' 
formula for royalty payments.
    4. There is no simple way to respond to China's ``indigenous 
innovation'' initiatives, especially when they are understood in terms 
of ``sovereign innovation.'' Nevertheless, responses along several 
tracks are appropriate. First, China should be pushed to honor its 
commitment to join the Government Procurement Agreement sooner rather 
than later. Second, the United States should build on its extensive 
science and technology contacts with China via commercial, academic, 
and government channels to promote a vision of innovation that 
transcends a limited and narrow techno-nationalism. A case can be made 
that some of China's policies in support of ``indigenous innovation'' 
actually work against the achievement of the ``innovative society'' 
goal, and this case should be made frequently and forcefully in 
contacts with Chinese policymakers and members of the technical 
community.
    Policies with regard to procurement and standards have led to the 
bureaucratization of IP issues, and the complexities of central 
government-local government relations in the implementation of policies 
have made things worse. As in other areas of Chinese public policy, 
policymaking and policy implementation are not as coherent as a ``China 
Inc.'' image might lead us to believe. It is unfortunate that the areas 
of incoherence can, and often do, impose costs on China's foreign 
commercial partners. A positive interpretation of these problems is 
that China is in a phase of development that makes incoherence 
inescapable, but is trending in the direction of greater coherence and, 
hence, a future with fewer conflicts over IP matters. A more troubling 
interpretation, though, is that China is on a trajectory which will be 
characterized both by greater policy coherence and policy development 
in the areas of IP and standards which will be more difficult to 
harmonize with international norms.
    What is less subject to interpretation, though, is that China is 
seriously and understandably committed to its own scientific and 
technological development and innovative capacity, and there is little 
that the international community can do to change this. Instead, 
members of the international community have to devise ways of 
exploiting that development by encouraging its further 
internationalization, monitoring its progress, and preparing for 
strategic interventions to take advantage of the new opportunities it 
will offer.
    5. In joining WTO, China has pledged that technology transfer 
requirements would not be a condition for foreign investment. That we 
continue to hear complaints about coerced transfers indicates that 
China is either ignoring its WTO commitments or has found new policy 
tools to induce transfers.
    In many industries, though, including clean energy, the Chinese 
market is so attractive to international companies that the wresting of 
some degree of technology transfer from investments is unavoidable. In 
raising this point, we are reminded that technology transfer, more 
often than not, is a business decision. We should also be reminded 
that, except in rare cases, the business value of intellectual property 
depends not solely on the quality of the intellectual contribution 
embodied in the IP, but also on the ``complementary assets'' which make 
it possible to exploit the value of the intellectual property.
    In the area of clean energy technologies, we are increasingly 
seeing that China is providing those complementary assets at a rate, 
and on a scale, that makes it a magnet for owners of IP to conduct 
business there. There have been a number of recent reports to this 
effect; I would call your attention to a most recent one issued by 
Agence France Presse, entitled ``China a Beacon for Foreign Clean Tech 
Firms.'' \3\ According to this account, China has surpassed United 
States this year as the most attractive market for investments in 
renewable energy technologies, in large part because it has become ``. 
. .a very good market to commercialize technology at scale. . . .'' 
Furthermore, China is providing the financial resources to facilitate 
the transformation of important technical ideas into commercial 
products. Quoting Nicholas Parker of the US-based Cleantech Group, 
``Things are tough for companies here (in the West). . . .we have a 
shortage of debt financing. The money for deployment, for building wind 
farms or for building a factory where you tend to use debt financing, 
has dried up due to the crisis on Wall Street. That shortage doesn't 
exist in China.'' Add to China's advantages the fact that it is 
creating an increasingly competent R&D system with a growing number of 
capable scientists and engineers. In short, China offers markets, 
financing, R&D capabilities, and a supportive policy environment for 
clean energy; it is not surprising that owners of intellectual property 
will risk IPR infringements by taking their business there.
---------------------------------------------------------------------------
    \3\ http://www.abs-cbnnews.com/business/09/19/10/china-beacon-
foreign-clean-tech-firms
---------------------------------------------------------------------------
    6. The points made above are intended to suggest that US thinking 
about intellectual property rights in China needs a fairly major 
overhaul. That there are IPR abuses in China is beyond doubt; they 
affect Chinese innovators as well as foreigners, and should be opposed. 
But it is also clear that the value of intellectual property is not 
solely intrinsic to the ideas themselves, but requires an environment 
rich in complementary assets for that value to be released. It is 
becoming increasingly clear that in the area of clean energy, policy 
failures resulting from what 
appears to be a broken political system in United States are leading to 
the squandering of the complementary assets we once had in abundance.
    The globalization of innovation puts a premium on both the ability 
to produce intellectual property, but also to exploit it. The global 
innovation system is usefully thought of as a complex network of 
interconnected nodes. The United States has been a ``supernode'' in 
this network for the last 60 years as the center of IP creation and IP 
exploitation and, importantly, a magnet for innovators from around the 
world. Many signs indicate that China is becoming a new ``supernode'' 
in spite of the difficulties of its IPR regime. While it is important 
for the United States to continue to work with China in moving that 
regime towards international norms, there clearly is a need for new 
thinking about intellectual property in China, and for a far more 
imaginative approach to engaging China on these issues.
                                 ______
                                 

  Prepared Statement of Hon. Sander Levin, a U.S. Representative From 
    Michigan, Cochairman Congressional-Executive Commission on China

                           september 22, 2010
    The topic of today's hearing is of the utmost importance to 
American workers and American business. American workers and businesses 
lose billions of dollars each year to Chinese intellectual property 
rights infringement.
    The Chinese government has failed to comply with the commitments to 
protect intellectual property rights that it made as a member of the 
WTO, and it continues to undermine protections for intellectual 
property contained in its own laws and regulations. By shining a 
spotlight on how China's flagrant abuse of international rules 
governing intellectual property rights undermines the rule of law, this 
Commission has an important role to play.
    The headline of a recent and detailed Wall Street Journal article 
says it all: ``China Spooks Auto Makers: Foreign Companies Fear New 
Rules on Electric Cars Will Erode Intellectual Property.'' The article 
notes that ``China's government is considering plans that could force 
foreign automakers to hand over cutting-edge electric-vehicle 
technology to Chinese companies in exchange for access to the nation's 
huge market.'' The article goes on to say that China's Ministry of 
Industry and Information Technology is preparing a 10-year plan ``that 
could compel foreign automakers that want to produce electric vehicles 
in China to share critical technologies by requiring the companies to 
enter joint ventures in which they are limited to a minority stake.'' 
The article notes how Beijing's program of so-called ``indigenous 
innovation'' discriminates against foreign companies, and is said to be 
``aimed at gaining control of foreign intellectual property.''
    China's industrial policies have a common thread: they have the 
purpose or the effect of tilting the playing field to favor Chinese 
companies and against U.S. companies and workers. That is not a sound 
or sustainable basis for a mutually beneficial U.S.-China relationship. 
Nor is it a viable foundation for the development of the rule of law in 
China.
    There is an ever widening chasm between what we hear from the 
Chinese government about the protection of intellectual property in 
China, and what we know to be true about the protection of intellectual 
property in China.
    We hear that the legal infrastructure supporting intellectual 
property rights has improved; we hear that courts are becoming more 
professionalized and skilled at handling complex issues related to 
intellectual property; we hear that Chinese rights holders are turning 
to Chinese courts to assert their rights more than in the past, and 
that there has been a measurable increase in the number of civil 
intellectual property cases in Chinese courts; we hear that foreign 
plaintiffs are winning intellectual property cases at increasing rates.
    That is what we hear. But this is what we know:
    We know that the American Chamber of Commerce in China surveyed its 
members this year and found that 63 percent rated intellectual property 
rights enforcement in China as ``ineffective.'' We know that 
intellectual property infringement in China is more widespread than 
before, and that counterfeit exports have increased; we know that 
enforcement of intellectual property judgments is difficult in China, 
that damages are still inadequate by international standards, and that 
the Chinese government has not taken sufficient steps to address 
difficulties in the gathering of evidence; we know that high value and 
volume thresholds must be met in order to initiate criminal prosecution 
of intellectual property infringement, that administrative fines are 
too low and civil damages too inadequate and imposed too infrequently 
to serve as deterrents, and that infringers view them merely as a cost 
of doing business.
    In sum, we know that the Chinese government could be doing far more 
to protect intellectual property rights, but it is not doing so.
    We know that in 2009, 79 percent of intellectual property-
infringing product seizures at the U.S. border were of Chinese origin; 
we know that China's State-Owned Assets Supervision and Administration 
Commission has the power to require Chinese state-owned enterprises to 
certify that all software they use is properly licensed, but that it 
has not required state-owned enterprises to provide such certification; 
we know that production of counterfeit auto parts experienced a period 
of significant growth in China in recent years, and that a significant 
portion of counterfeit auto parts in China are manufactured in areas 
the Chinese government has designated as auto parts export zones.
    We know that the Chinese government's market access barriers lead 
consumers to the black market. We know, for example, that to enforce 
its policies of censorship, the Chinese government limits the number of 
foreign films, books, and other media that may be distributed legally 
in China. We know that these limits effectively create markets for 
pirates. It is bad enough that Chinese government censorship practices 
violate international human rights standards. But let me state this 
clearly: Chinese government censorship leads consumers to the black 
market, and that, in turn, incentivizes the violation of intellectual 
property rights. The Chinese government often denies the link between 
human rights and the commercial rule of law. But the link is clear, and 
the Chinese government itself creates this link. Chinese government 
censorship leads to the violation of intellectual property rights.
    There can be no doubt that China's flagrant abuse of international 
rules undermines the rule of law. There is no doubt that widespread 
intellectual property rights infringement in China continues to affect 
products, brands, and technologies from a wide range of industries, and 
imperils the health and safety of both American and Chinese consumers, 
and imposes billions of dollars of losses yearly on American businesses 
and workers.
    Change is necessary--both in the Chinese government's behavior, and 
in the action we take in response. I look forward to our witnesses' 
testimony.
                                 ______
                                 

  Prepared Statement of Hon. Christopher Smith, a U.S. Representative 
From New Jersey, Ranking Member, Congressional-Executive Commission on 
                                 China

                           september 22, 2010
    Thank you, Mr. Chairman, and welcome to everyone this afternoon.
    Mr. Chairman, the Global Intellectual Property Center estimates 
annual U.S. losses caused by intellectual property infringement of 
almost $125 billion in the automotive, recording, pharmaceutical, and 
software industry industries alone, and we know that the Chinese 
government is the cause of most of the problem.
    China tolerates--in some cases, probably, encourages--widespread 
infringement of American intellectual property rights, and then exports 
U.S.-property rights infringing products right back to us. According to 
the U.S. Trade Representative's 2010 ``Special 301 Report,'' 79 percent 
of infringing products seized at our border were of Chinese origin. I 
wonder how many jobs that translates into--how many American jobs would 
return if key foreign countries enforced the intellectual property 
agreements they signed?
    I hope our witnesses address this question, as well as discuss the 
tools the executive branch has to take truly decisive action to protect 
American intellectual property--our workers and our economy. In the 
Trade Act of 1974, Congress provided the executive with all the 
authority it needs to remedy many trade injustices--injustices to our 
own workers as well as to foreign workers exploited in sweatshops. The 
executive branch has rarely made use of these--in fact, in 2006 then-
Congressman Ben Cardin and I joined the AFL-CIO in a Section 301 
petition to President Bush, which was denied, and I recently urged AFL-
CIO leaders to petition President Obama under Section 301 of the Trade 
Act. In that petition the issue was the denial of the basic worker 
rights in China, and its adverse effect on American workers, and 
Section 301 provided WTO-consistent remedies. So we have two very 
serious issues here--the harm done to U.S. workers, and the 
exploitation of Chinese workers.
    Mr. Chairman, our government has a responsibility to take action 
here. The unemployment rate was just reported as 9.6 percent in my 
state, New Jersey, and in fact is 9.6 percent nationally--and this 
means millions of people struggling to make house payments, to feed 
their families. We need to ensure the President and the USTR are using 
all the tools they have to fix the problem.
                                 ______
                                 

 Prepared Statement of Hon. Carl Levin, a U.S. Senator From Michigan, 
          Member, Congressional-Executive Commission on China

                           september 22, 2010
    I commend the Chairman and Cochairman of the CECC for holding this 
important hearing. Despite nearly 10 years as a member of the WTO, 
China continues to engage in unfair trade practices. Two areas of 
concern I would like the Commission to look at are the actions China is 
taking to favor its domestic renewable energy technology sector and 
automotive parts counterfeiting.
    We should all be alarmed by China's attempts to dominate the 
renewable energy industry through measures that discriminate against 
foreign manufacturers. China does this by requiring the use of domestic 
suppliers and production for green and renewable technology. This was 
validated in USTR's 2009 Special 301 report on China which noted U.S. 
industry concerns about the possibility that Chinese laws or policies 
in a variety of fields might be used to unfairly favor domestic 
intellectual property over foreign intellectual property. The report 
stated the concerns are, ``especially acute in light of Chinese 
Government policies that appear to establish a procurement preference 
for domestically innovated products.'' China also requires a 
significant percentage of these products be exported, in order to 
guarantee that its domestic companies will dominate this important 
sector.
    China is trying to have it both ways: protecting its home market 
while exporting most of its production. The New York Times reported 
that China protects its domestic producers by requiring that 80 percent 
of the equipment used in Chinese solar power plants be made in China. 
At the same time, over 95 percent of China's solar panel production is 
exported to the United States and Europe.
    China also has designs to dominate clean car technology. According 
to the Wall Street Journal, China is preparing a 10-year plan to turn 
China into the world's leader in developing and producing battery-
powered cars and hybrids. The draft plan suggests that China could 
compel foreign auto makers who want to produce electric vehicles in 
China to transfer critical technology by requiring those companies to 
enter into joint ventures where the foreign auto maker would be limited 
to a minority stake. I agree with the foreign auto executive that said 
it is, ``tantamount to China strong-arming foreign auto makers to give 
up battery, electric-motor, and control technology in exchange for 
market access.'' With such government mandated policies in place, once 
all of the technology is transferred the Chinese joint venture partner 
will become a competitor.
    At a time when American manufacturers are working hard to compete 
in the emerging field of green technologies, China must not be allowed 
to unfairly or illegally undermine those efforts. The United Steel 
Workers of America has filed a trade petition accusing China of 
violating the WTO by subsidizing exports of clean energy equipment. I 
have urged the administration to investigate these allegations.
    I am also concerned about the counterfeiting of auto parts, 
concerns that extend beyond monetary losses to U.S. firms and directly 
impact human health and safety. A counterfeit auto part could be the 
wheel or the brakes on your car. Since counterfeit parts are often 
substandard and produced with inferior materials, they put lives at 
risk. The Motor & Equipment Manufacturers Association (MEMA) recently 
testified that most counterfeits appear to be made in China.
    The Gates Corporation, headquartered in Denver, CO, with operations 
in Michigan, is a major manufacturer of a range of belts used in motor 
vehicles and has faced a number of cases of counterfeit belts 
worldwide. When Gates tested pirated timing belts it found they were 
inferior to the genuine part with a significantly shorter lifespan. A 
counterfeit timing belt may wear and fail prematurely with serious 
cost, health, and safety consequences. A consumer advocacy group in 
China relying on Chinese media reports estimates that 70 percent of 
aftermarket auto parts in China are counterfeit and that approximately 
13 percent of car accidents are due to fake auto parts.
    In addition to the safety issues, American companies' investments 
in innovation and technology development are at risk. The auto parts 
industry's losses due to counterfeiting are enormous. MEMA 
conservatively estimates that counterfeit goods cost motor vehicle 
suppliers up to $12 billion globally in lost sales every year. Market 
researchers Frost and Sullivan estimated in 2006 that the global losses 
to motor vehicle suppliers due to counterfeiting would be as high as 
$45 billion in 2011. In 2007 Ford Motor Co. stated that counterfeit 
auto parts cost it nearly $1 billion a year. We cannot continue to 
allow these types of American investments and innovations to be stolen 
by foreign competitors.
    For almost 20 years the United States has been aggressively 
pressing China through Section 301 trade cases to improve its 
intellectual property protection regime. Yet China continues to be the 
number one source country for counterfeit and pirated goods seized in 
fiscal year 2009, accounting for 79 percent or $204.7 million of the 
total value seized. The USTR's 2010 Special 301 report continued to 
list China on the Priority Watch List and stated that China continued 
to be a major focus of U.S. concerns. Even though China made some 
progress in improving its enforcement regime, the USTR said piracy 
rates remained at ``unacceptable levels.'' The Chinese Government 
itself estimates that counterfeits constitute between 15 percent and 20 
percent of all products made in China and are equivalent to about 8 
percent of China's annual gross domestic product.
    China's trade distorting practices need to be aggressively 
investigated by the USTR as we work to hold China to its WTO 
commitments in international trade.

                       Submissions for the Record

                              ----------                              


   Prepared Statement of Robert W. Holleyman, II, President and CEO, 
                       Business Software Alliance

                           september 22, 2010
    We applaud the Commission for holding this very important hearing 
on IP protection in China. This is a critical issue for BSA and our 
members.
    BSA is an association of the world's leading software companies and 
their hardware partners around the world.\1\ BSA members create 
approximately 90 percent of the office productivity software in use in 
the United States and around the world.
---------------------------------------------------------------------------
    \1\ The Business Software Alliance (www.bsa.org) is the world's 
foremost advocate for the software industry, working in 80 countries to 
expand software markets and create conditions for innovation and 
growth. Governments and industry partners look to BSA for thoughtful 
approaches to key policy and legal issues, recognizing that software 
plays a critical role in driving economic and social progress in all 
nations. BSA's member companies invest billions of dollars a year in 
local economies, good jobs, and next-generation solutions that will 
help people around the world be more productive, connected, and secure. 
BSA members include Adobe, Altium, Apple, Autodesk, AVEVA, AVG, Bentley 
Systems, CA Technologies, Cadence, Cisco Systems, CNC/Mastercam, Corel, 
Dassault Systemes SolidWorks Corporation, Dell, HP, IBM, Intel, Intuit, 
Kaspersky Lab, McAfee, Microsoft, Minitab, PTC, Progress Software, 
Quark, Quest Software, Rosetta Stone, Siemens, Sybase, Symantec, 
Synopsys, and The MathWorks.
---------------------------------------------------------------------------
    The software industry has proven to be a remarkable engine for jobs 
and economic growth. The software and related services sector employed 
almost 2 million people in the United States in 2007 in jobs that paid 
195 percent of the national average wage. This sector contributed more 
than $261 billion to US GDP in 2007, making it the largest of the US 
copyright industries.
    The packaged software industry's overseas earnings contributed a 
$37 billion surplus to our nation's balance of trade in 2009. As much 
as 60 percent of revenues for the leading US software companies are 
generated from sales outside US borders.
    A few months ago the Chief Executive Officers of twelve BSA member 
companies came to Washington, DC to meet with Congressional leaders and 
the President's senior economic team. Their message was simple--the US 
software industry is key to the US economy and China is a critical 
market for our future growth.
    Two Chinese practices stand in the way of American software 
companies' ability to compete in China: massive illegal use of software 
(nearly 4 out of every 5 computer programs installed on personal 
computers (PCs) in China last year were being used illegally) and the 
development of ``indigenous innovation'' policies that limit our access 
to a broad swath of the Chinese market.
    The indigenous innovation issue has received high-level attention 
from the US government over the past year and BSA applauds this. 
Progress, however, has been slow in getting China to rethink and 
suspend its problematic indigenous innovation policies--from government 
procurement, to standard-setting, to certification requirements--that 
pose significant market access restrictions for US software and other 
technology companies. These policies are characterized by significant 
preferences for domestic firms and requirements seeking to compel 
transfers of technology as a precondition for market access. More 
action is needed.
    Given its broad-based impact on the US economy, we believe the 
pervasive use of illegal software in China needs intensified attention 
from the US government as well.
    It is now an established fact that software and computers have 
changed the world in which we live. Information technology has made us 
more efficient, more productive and more creative. Software and 
computers deliver results on national priorities such as health care, 
energy, infrastructure, education, and e-government.
    Software has been at the heart of this technology revolution. It is 
also a big part of the US industrial base, whether it is the software 
used by steel companies, the autos we drive, or the energy saving 
appliances we use in our daily lives. Software drives productivity and 
innovation in almost every economic sector, helping businesses of all 
sizes perform better in good times and bad.
    We believe our country's ability to create jobs depends in large 
part on our ability to export. We support the President's ambitious 
National Export Initiative (NEI) goal of doubling US exports of goods 
and services over five years. We stand ready to do our part, but cannot 
do so if a market as critical as China is out of reach because of high 
levels of software piracy.
    Here are the facts. Our annual Global Software Piracy Study 
undertaken by market research firm IDC estimates that nearly 4 out of 
every 5 software programs 
installed on PCs in China widely used in the government, enterprises 
and by consumers in 2009 were unlicensed. The Study conservatively 
estimates that the commercial value of those programs is $7.6 billion. 
That is double what it was just 4 years ago. In stark contrast, the 
estimated revenues from sales of PC software from US producers in China 
were around $1 billion.
    But these numbers, large as they are, understate the problem.
    Nearly as many PCs were sold to businesses in China in 2009 as to 
those in the United States. Our country's total exports to China in 
2009 were $70 billion. If Chinese enterprises were to actually pay for 
just the PC software they use, we conservatively estimate that total US 
exports to China could grow by at least 5 percent. The impact would be 
higher when the broader universe of packaged software is considered. 
This gives you a good picture of what is at stake.
    The economic harm due to the illegal use of software in China has 
broader consequences here at home for US jobs. Products made in China 
by enterprises that use illegal software hurt American competitiveness 
and in many cases displace US jobs. Our companies pay for their 
critical inputs of production, such as software, while many of their 
Chinese competitors do not. Chinese products made with illegal software 
enter our markets and undercut our goods and services. In practical 
terms this harms US jobs.
    We need to think of the problem of illegal use of software in a 
different way. The problem is more pervasive, more complex, and more 
pernicious than it was just a few years ago. Quite frankly, the term 
``piracy'' is outdated. It does not even begin to capture the breadth 
of the problem.
    So what should we do?
    We believe the United States should develop a comprehensive 
results-based trade policy with China in place of the one-off, issue-
by-issue approach that guides the current relationship. Our primary 
measure of success should be increased US exports of goods and 
services.
    At a recent Senate Finance Committee hearing, responding to a 
Senator's comment that US-China economic policy was too focused on 
``soothing words,'' Treasury Secretary Geithner said ``[t]he test of 
these things is not what people say and it's not how many meetings you 
have. The test is what actually happens to the terms and conditions 
that US companies compete on.''
    We agree wholeheartedly.
    For over 20 years, the United States has engaged China in round 
after round of discussions aimed at one-off issue resolution at 
periodic ministerial meetings, including improved protections for 
software and other forms of intellectual property. These efforts have 
resulted in some positive changes, but not enough. Meaningful results 
for our sector, as measured by increased exports of goods and services, 
have been lacking.
    As a key element of developing and implementing a result-based 
trade policy, we should hold China accountable for its commitments to 
combat software piracy. For example, in 2004, as part of the bilateral 
US-China Joint Commission on Commerce and Trade (JCCT) negotiations, 
China committed that government entities would only use legal software. 
The United States has an Executive Order that requires this. Soon after 
this commitment was made, the Chinese government self-declared that it 
had fulfilled this promise, though provided no means for verification. 
The Chinese government also committed in the JCCT that state-owned 
enterprises (SOEs) would use only legal software and later made 
assertions that this had generally been accomplished.
    Since these commitments were made, software sales by US-based 
companies have hardly budged while illegal use of PC software in China 
as a whole has doubled to $7.6 billion. At present, SOEs and other 
Chinese enterprises regularly use unlicensed software to operate their 
businesses, safe in the knowledge that there are no consequences.
    Our overall goal should be increased exports of goods and services, 
but there are some immediate steps that we think should be taken.
    The US government should press the Chinese government to:

         Devote resources to enforcement against software 
        piracy that are commensurate with the scope of the problem.
         Cooperate with industry's efforts to bring civil cases 
        to enforce software license compliance, including cases against 
        SOEs.
         Implement verification and audit systems to measure 
        performance in fulfilling commitments on government and 
        enterprise legalization.
         Make software piracy by enterprises subject to 
        criminal penalties.

    The United States should also undertake a full examination of 
available trade policy remedies to address these concerns. This would 
include assessing whether 
actions can be brought under the World Trade Organization (WTO) and 
whether China's practices are a form of unfair competition that can be 
addressed by US trade laws.
    The challenges that we face due to software piracy are now being 
compounded by Chinese policies that restrict our access to the Chinese 
market. Over the past several years, the Chinese government has issued 
a series of ``indigenous innovation'' policies that erect barriers to 
US software and other products in a quest to promote domestic 
champions. These Chinese policies discriminate against foreign firms 
through a web of preferences for Chinese-developed technology and 
standards and compel American and other foreign companies to relocate 
their R&D to China or lose the ability to sell there.
    To counteract the harm caused by these policies, the US government 
must press the Chinese government to suspend current policies that 
create market access barriers and compel IP transfers, and engage in a 
meaningful dialogue on non-discriminatory approaches to promote 
innovation.
    We accept that we have to do our part to help ourselves. We are 
doing several things. Our members continue to invest on average more 
than 7 percent of revenues in R&D, with some investing close to 20 
percent. We are determined to improve on our already world leading 
software products. This investment will enable us to innovate, compete 
and create jobs in the United States. In China, we have had a long-
standing program to pursue enforcement actions against enterprises that 
illegally use our software and to educate users about the importance of 
using legal software. To date, these efforts have produced limited 
results. We are committed to retooling and upgrading those enforcement 
and education efforts and are now in the midst of implementing a new 
enforcement plan in China.
                 software piracy in the chinese market
    The current rate of illegal software use in China is staggering. 
Recent estimates from the market research firm IDC indicate that nearly 
4 out of every 5 copies (79 percent) of PC software installed in China 
in 2009 were illegal, with a total commercial value of $7.6 billion. 
These are industry averages, and understate the dire situation that 
piracy creates for many of our companies.
    A leading source of these losses is what we describe as ``end-user 
piracy''--the unlicensed use of software by Chinese businesses and 
other enterprises. Chinese authorities do not view the unlicensed use 
of software by enterprises as a crime. As a result, US software 
companies must rely on China's civil and administrative systems to 
pursue these infringers. The vast scale of the problem, the generally 
modest civil and administrative remedies available, and the time and 
expense of pursuing actions against individual companies mean that, in 
practice, the software industry is largely powerless to deter, let 
alone stop, the widespread illegal use of its products in China.
    End-user piracy is not limited to so-called private enterprises 
engaged in commercial activity in China. Far from it. Unauthorized use 
of software is also extremely widespread in government agencies and in 
China's massive SOEs and the companies they own. China has repeatedly 
committed in the JCCT that all government agencies--including 
provincial and local government authorities--and SOEs would use only 
licensed software. US industry has seen little progress on these 
commitments.
    Other forms of illegal software use are also prevalent. For 
example, hard-disk loading of software--where PC manufacturers and 
resellers install unlicensed software onto PCs before their sale--is 
widespread. After years of effort by the software industry and 
considerable pressure from the US government, China issued a Decree in 
2006 stating that all PCs produced in or imported into China must have 
legal operating system software pre-installed. While implementation of 
this Decree resulted in a modest increase in software sales in the 
first year, progress since that time has been minimal, hindered largely 
by the government's unwillingness to verify that China's PC makers are 
complying with the Decree.
    Physical goods piracy--including manufacture and sale of pirate CD-
ROMs, each containing thousands of dollars worth of illegal business 
software, and counterfeiting of a virtually unlimited range of computer 
hardware and devices--also proceeds largely unhindered. And Internet 
piracy flourishes in China. China's Internet population is now by far 
the largest in the world, estimated at 384 million users--a figure 
greater than the entire US population. The Chinese government has not 
effectively acted to stop Internet users and website operators from 
distributing unlicensed software within and outside the Chinese market.
                         the impact on us jobs
    While this illegal software use takes place thousands of miles from 
US shores, its impact is felt right here at home, in cities and towns 
across America.
    By refusing to pay for the software they use, Chinese businesses 
artificially reduce their expenses and gain a competitive advantage 
over US firms. This enables Chinese companies to develop and 
manufacture products more cheaply than their US competitors.
    In short, the illegal use of software by Chinese companies not only 
deprives US software firms of sales and revenues, but allows these 
Chinese companies to undercut the sales of goods and services by their 
US competitors, reducing the revenues of US companies, and depriving US 
workers of good jobs.
    The US International Trade Commission is currently undertaking an 
investigation to better understand the scope of intellectual property 
infringement and China's indigenous innovation policies and the 
implications for US competitiveness and jobs. We are taking advantage 
of the opportunity to participate in this investigation and believe 
that the results, particularly the new economic models that may result 
from this work, should provide valuable information for policymakers.
                      a results-based trade policy
    US industry, with the strong support of the US government, has long 
pressed China to protect intellectual property rights. In response, 
China has taken steps to improve its IP regime, such as modifications 
to its copyright and trademark laws, and the adoption of a regulation 
aimed at Internet piracy. More generally, as part of its WTO accession, 
China committed to following the rules-based trading system and 
providing adequate intellectual property protection.
    But gaps remain, and enforcement of the laws is inadequate. The 
result is that US industry losses due to software piracy continue to 
grow.
    Indeed, the list of needed actions by the Chinese government 
identified in the US Trade Representative's ``Special 301'' process 
earlier this year is extensive. The list includes enforcement-related 
improvements, legislative changes and market access issues. 
Specifically, increases in the number of criminal prosecutions and 
administrative actions against copyright infringers, greater resources 
for, and training of, IP enforcement authorities, the assignment of 
judges with IP expertise to hear criminal cases, and amendments to a 
number of laws including the copyright law, the criminal law, and the 
regulations that govern Internet enforcement.
    Historically, industry and the US government have measured China's 
progress towards improved intellectual property protection based on 
whether China adopted these or other specific legislative and 
enforcement-related measures and on commitments made by the Chinese 
government as part of the Strategic & Economic Dialogue (S&ED), JCCT 
and other bilateral negotiations. It is abundantly clear, however, that 
this approach is not working as all of us had expected. The Chinese 
government has not fulfilled many key commitments and has clearly not 
undertaken the more sweeping steps necessary to meaningfully reduce 
intellectual property theft.
    In the next 12-18 months, the market for PCs sold to businesses in 
China is expected to become the largest in the world, and yet the 
outlook for software sales is dismal. On this, the past does not offer 
grounds for optimism. The rate of PC software piracy in China has 
declined only 7 percentage points since 2005--from 86 to 79 percent in 
five years. At this rate, it will take over 40 years for China's piracy 
rate to come anywhere close to the level in the United States (20 
percent).
    We urge the US government to consider moving away from measuring 
progress based on whether or not China amends a specific law or 
undertakes a discrete commitment. Instead, we need to move to a system 
that measures the actual results of China's actions in terms of 
increased exports of US software and reductions in software piracy in 
the Chinese market.
    Such a results-based trade policy would align well with President 
Obama's National Export Initiative. The President set a goal of 
doubling US exports in the next five years, an increase that the 
Administration projects will create over two million new US jobs. 
Increased exports of goods and services will also help to drive US 
economic growth more broadly; growing US exports contributed nearly 2 
percentage points to US economic expansion in the last six months of 
2009 alone.
    This same results-based approach should be applied to China. The 
immediate goal should be to increase US software exports to China by 50 
percent over the next two years. Given the extremely high levels of 
software piracy in China, this benchmark would be reasonable to achieve 
through a decrease in the software piracy rate. Utilizing clearly 
defined, concrete and measurable benchmarks to assess progress would 
help the United States evaluate the US-China trade relationship more 
accurately and encourage China to take meaningful steps to reduce 
illegal software use across the Chinese economy.
               china must abide by its trade obligations
    In parallel with the use of increased exports as the measure for 
progress, it is necessary to ensure that China takes seriously its 
international obligations and other commitments.
    The Chinese government appears to have taken the view that it can 
turn a blind eye to widespread illegal software use with no fear of 
violating its obligations as a member of the WTO--and with no fear of 
sanctions for its actions.
    The US government needs trade tools to challenge Chinese practices 
that have the effect of depriving the United States of benefits that it 
legitimately expects from China's membership in the WTO. Chief among 
these, in our view, is China's need to make meaningful progress in 
reducing illegal software use and increasing market opportunities for 
US software suppliers.
    A WTO remedy that merits consideration is that of a non-violation 
``nullification or impairment'' claim, under Article XXIII of the 
General Agreement on Tariffs and Trade. Such actions are appropriate 
where a WTO member's conduct, while not violating the letter of the 
agreement, nonetheless denies or impairs a benefit accruing to another 
party under the WTO.
    Moreover, as discussed above, the high-levels of software piracy in 
China also provide an unfair competitive disadvantage for Chinese firms 
that use unlicensed software to produce goods and run their operations 
in competition with US firms. We would suggest that this practice may 
be a form of unfair competition subject to action under US trade laws.
                               conclusion
    My testimony here demonstrates the stark reality that BSA members 
are facing in China.
    As US Trade Representative Kirk recently remarked, ``[i]ntellectual 
property theft in overseas markets is an export killer for American 
businesses and a job killer for American workers here at home.'' While 
we believe that the United States must 
continue to pursue a strong economic relationship with China, China's 
persistent failure to protect the intellectual property of US products 
and innovations and its discriminatory ``indigenous innovation'' 
policies seriously undermine this relationship. More importantly, 
China's actions are costing US jobs.
    We urge the members of the Commission to explore new solutions to 
address this challenge--including results-based trade policies and 
application of new trade remedies--in order to better protect US 
innovators, US industry and US workers. We stand ready to assist the 
Commission in this endeavor. Thank you.
                                 ______
                                 

           Piracy is a Danger to Entertainment Professionals

 Submitted by the Department for Professional Employees, AFL-CIO (DPE) 
for the Arts, Entertainment and Media Industries Unions Affiliated with 
                                  DPE

  afl-cio executive council statement, orlando, florida march 2, 2010
    Motion pictures, television, sound recordings and other 
entertainment are a vibrant part of the U.S. economy. They yield one of 
its few remaining trade surpluses. The online theft of copyrighted 
works and the sale of illegal CDs and DVDs threaten the vitality of 
U.S. entertainment and thus its working people.
    The equation is simple and ominous. Piracy costs the U.S. 
entertainment industry billions of dollars in revenue each year. That 
loss of revenue hits directly at bottom-line profits. When profits are 
diminished, the incentive to invest in new films, 
television programs, sound recordings and other entertainment drops. 
With less investment in future works comes less industry activity that 
directly benefits workers: fewer jobs, less compensation for 
entertainment professionals and a reduction in health and pension 
benefits.
    Combating online theft and the sale of illegal CDs and DVDs is 
nothing short of defending U.S. jobs and benefits. In the case of 
music, experts estimate that the digital theft of sound recordings 
costs the U.S. economy $12.5 billion in total output and costs U.S. 
workers 71,060 jobs.\1\ In the motion picture industry, piracy results 
in an estimated $5.5 billion in lost wages annually, and the loss of an 
estimated 141,030 jobs that would otherwise have been created.\2\
---------------------------------------------------------------------------
    \1\ Siwek, Stephen. (8/21/07). The True Cost of Sound Recording 
Piracy to the U.S. Economy. Retrieved from: http://www.ipi.org/IPI/
IPIPublications.nsf/PublicationLookupFullText/5C2EE3D2107 
A4C228625733E0053A1F4
    \2\ Siwek, Stephen. (9/20/06). The True Cost of Sound Recording 
Piracy to the U.S. Economy. Retrieved from: http://www.ipi.org/IPI/
IPIPublications.nsf/PublicationLookupFullText/E274F77 
ADF58BD08862571F8001BA6BF
---------------------------------------------------------------------------
    Illegal CDs and DVDs have afflicted even live theatre. Websites 
sell illegal DVDs of Broadway shows, which reduces sales of tickets and 
authorized CDs and DVDs. Selling illegal CDs or DVDs of plays, musicals 
and other shows not only steals the work of the entertainment 
professionals, but makes quality control impossible.
    Most of the revenue that supports entertainment professionals' jobs 
and benefits comes from the sale of entertainment works including sales 
in secondary markets--that is, DVD and CD sales, legitimate downloads, 
royalties and, in the case of TV shows or films, repeated airings on 
free cable or premium pay television. Roughly 75 percent of a motion 
picture's revenues comes after the initial theatrical release, and more 
than 50 percent of scripted television production revenues are 
generated after the first run.
    In most work arrangements, a worker receives payment for his or her 
effort at the completion of a project or at set intervals. The 
entertainment industry, however, operates on a longstanding unique 
business model in which compensation to workers--pay and benefit 
contributions--comes in two stages. Film, television and recording 
artists, as well as film and television writers, receive an initial 
payment for their work and then residuals or royalties for its 
subsequent use. Those payments also generate funds for their health and 
pension plans. The below-the-line workers, the craft and technical 
people who manage equipment, props, costumes, makeup, special effects 
and other elements of a production, also receive compensation for their 
work, while payment for subsequent use goes directly into their health 
and pension plans.
    Motion picture production is a prime example. The professionals 
involved with the initial production of a film--the actors who perform, 
the craftspeople behind the scenes, the musicians who create the 
soundtrack and the writers who craft the story--each receive an initial 
payment for their work. When that work is resold in the form of DVDs or 
CDs, or to cable networks or to airlines or in foreign sales, a portion 
of these ``downstream revenues'' are direct compensation to the film 
talent or recording artists who were involved in those productions or 
recordings.
    These residuals help keep entertainment professionals afloat 
between projects. Entertainment professionals may work for multiple 
employers on multiple projects and face gaps in their employment. 
Payment for the work they have completed helps sustain them and their 
families through underemployment and unemployment. For AFTRA recording 
artists in 2008, 90 percent of income derived from sound recordings was 
directly linked to royalties from physical CD sales and paid digital 
downloads. SAG members working under the feature film and TV contract 
that same year derived 43 percent of their total compensation from 
residuals. Residuals derived from sales to secondary markets funded 65 
percent of the IATSE MPI Health Plan and 36 percent of the SAG Health 
and Pension Plan. WGAE-represented writers often depend on residual 
checks to pay their bills between jobs; in some cases, the residual 
amounts can be as much as initial compensation. Online theft robs hard-
earned income and benefits from the professionals who created the 
works.
    There are tools that can be used to fight digital piracy. Internet 
service providers (ISPs) have the ability to find illegal content and 
remove or limit access to it. To be truly effective, these sanctions 
must depart from the costly and ineffective legal remedies 
traditionally employed to counter theft of copyrighted material. The 
European Union is developing and implementing model policies for which 
the trade union movement is providing strong and critical support. 
These policies illustrate that there are answers that make sense in a 
digital age.
    At the core of any effort to combat digital theft is reasonable 
network management, which should allow ISPs to use available tools to 
detect and prevent the illegal downloading of copyrighted works. With 
respect to lawfully distributed content, ISPs should not be allowed to 
block or degrade service so that both consumers and copyright would be 
protected.
    The unions of the AFL-CIO that represent professionals in the Arts, 
Entertainment and Media Industries (AEMI) include Actors' Equity 
Association (AEA), the American Federation of Musicians (AFM), the 
American Federation of Television and Radio Artists (AFTRA), the 
American Guild of Musical Artists (AGMA), the International Alliance of 
Theatrical Stage Employees, Moving Picture Technicians, Artists and 
Allied Crafts (IATSE), the International Brotherhood of Electrical 
Workers (IBEW), the Office and Professional Employees International 
Union (OPEIU), the Screen Actors Guild (SAG) and the Writers Guild of 
America, East (WGAE). The AEMI unions are wholly in support of the 
widest possible access to content on the Internet and the principles of 
net neutrality, so long as intellectual property rights--and the 
hundreds of thousands of jobs that are at stake--are respected.
    Some would like to portray the debate over Internet theft as one in 
which a few wealthy artists, creators and powerful corporations are 
concerned about ``giving away'' their ``product'' because they are 
greedy and cannot change with the times to create new business models. 
The hundreds of thousands of people represented by the AEMI unions of 
the AFL-CIO are a testament to the falsity of that proposition.
    Online theft and the sale of illegal CDs and DVDs are not 
``victimless crimes.'' Digital theft costs jobs and benefits. It is 
critical, at this important moment in the evolution of the Internet and 
potential Internet policy, for union members and leaders to publicly 
and visibly engage in a sustained effort to protect members' 
livelihoods, the creation and innovation that are the hallmark of their 
work and the economic health and viability of the creative industries 
in this country. The AEMI unions and other unions in U.S. entertainment 
stress that pirated content is devastating to the entertainment 
professionals who create the underlying works.
    The AFL-CIO strongly supports the efforts of the AEMI unions and 
the Department for Professional Employees, AFL-CIO, to combat piracy. 
It commends their work with government and industry to develop workable 
solutions to protect the interests of their members. The AFL-CIO urges 
its affiliate unions to educate their members about the adverse impact 
of piracy; to support efforts to ensure that government officials and 
lawmakers are aware of, and support the protection of, entertainment 
industry jobs that will be lost to online theft; to encourage their 
members to respect copyright law; and to urge their members, as a 
matter of union solidarity, to never illegally download or stream 
pirated content or purchase illegal CDs and DVDs.