[Congressional Record Volume 142, Number 60 (Friday, May 3, 1996)]
[Senate]
[Pages S4672-S4676]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
THE CHINA IPR AGREEMENT
Mr. THOMAS. Mr. President, yesterday the U.S. Trade Representative
released its annual Special 301 report on the protection of U.S.
intellectual property rights [IPR] by foreign countries. It will come
as no surprise to my
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colleagues that topping the list of countries which routinely permit
the pirating of American IPR is the People's Republic of China [PRC].
In fact, the PRC is the only country identified as a ``priority foreign
country,'' meaning that its policies and practices--or lack thereof--
have had the greatest adverse impact on American goods.
The Subcommittee on East Asian and Pacific Affairs, which I chair,
has held three hearings on this issue. Let me share a little of what
the subcommittee has learned from those hearings with my colleagues.
Section 301 of the Trade Act of 1974 is the principal mechanism through
which an administration addresses unfair foreign trade practices.
Section 301 gives the President broad powers to enforce U.S. rights
under bi- and multi-lateral trade agreements, and to seek to eliminate
acts or policies of foreign governments that burden or restrict U.S.
commerce. In addition, it authorizes the President to retaliate against
such practices if negotiations to eliminate the objectionable practice
fail.
The Omnibus Trade and Competitiveness Act of 1988 amended the Trade
Act of 1974 to include what has been commonly called the Special 301
provision. Special 301 requires the U.S. Trade Representative [USTR] to
identify on an annual basis those countries that, inter alia, deny
adequate and effective protections for IPR; and those countries within
that category determined by the USTR to be priority foreign countries.
Such countries are those that ``have the most onerous or egregious
[policies].''
Section 302(b) of the 1974 act directs the USTR to initiate a Section
301 investigation within 30 days after a country is identified as a
priority. After such an investigation is initiated, the USTR is
required to determine within 6 months if the country engages in unfair
trade practices and if any retaliatory measures should be imposed.
Investigations may be extended 9 months if complex or complicated
issues are involved. At the end of the investigation, the USTR has the
discretion in deciding whether to retaliate.
As a means of increasing the effectiveness of the Special 301
provision, the USTR has divided into two lists those countries
perceived to be denying adequate and effective IPR protection but whose
problems are not as pronounced as priority countries: the priority
watch list [PWL], and the ``watch list'' [WL]. Countries placed on the
PWL are those the USTR considers to have made less progress in
strengthening IPR protection than those on the WL. These countries are
considered to have practices that meet all or some of the statutory
criteria for placement on the priority country list, but are seen as
making progress in negotiations to improve their IPR protection. WL
countries are those that the USTR believes to have better IPR
protection, but still need to be monitored.
USTR completed the first Special 301 review of foreign countries'
protection of IPR in April 1989. In that year and in 1990, the USTR
placed the PRC on its priority watch list, citing a lack of protection
of IPR and enforcement of intellectual property laws. IPR piracy in
the People's Republic of China [PRC] was rampant, especially in the
southern and eastern provinces close to Hong Kong such as Guangdong and
Jiangsu. Factories in these areas mass-produced pirated versions of
American computer software, compact discs, CD-ROMs, and audio/video
cassettes. Of the American computer software sold or produced in China,
over 94 percent was pirated; many Government ministries--including the
Trade Ministry--made extensive use of pirated software. CD's and audio/
video percentages ran close to 100 percent; video copies of movies were
being exported in China even before being released in the United
States. Trademark piracy was also prolific.
Consequently, in 1991 the PRC was designated a priority foreign
country. In January 1992, the People Republic of China and United
States signed a memorandum of understanding governing IPR protection.
Pursuant to the MOU, the PRC enacted a comprehensive body of laws
protecting IPR, and providing civil and criminal penalties for persons
violating those laws. As a result of that agreement, the PRC was
removed from the watch lists.
By 1993, however, it was clear that the PRC was not living up to the
1992 MOU and the country was placed back on the priority qatch list.
The amount of factories known to be producing pirated goods had risen
from single digits to 29. These companies were exporting pirated goods
in alarmingly increasing numbers; production of CD's alone ran to 75
million while China's internal market could absorb only 5 million.
Moreover, enforcement was almost nonexistent. The National Copyright
Administration Office, located in less than half of China's provinces,
had few qualified employees and no real authority to prosecute
offenders. Compounding the problem, several of the factories were known
to have financial connections to local and national political figures.
In addition, several others were actually partially or wholly
Government- or PLA-owned.
On June 30, 1994, the USTR initiated another Special 301
investigation of the PRC. On December 31, that office issued a proposed
determination that the PRC's IPR enforcement practices were
unreasonable and burdened or restricted United States commerce. At the
same time, the USTR issued a proposed list of Chinese goods to which
tariffs of 100 percent would be attached as a retaliatory measure; the
list included approximately $2.8 billion of goods. The goods chosen
comprised 35 product categories of high-growth Chinese exports. Special
care was exercised to include items in which the Chinese Government had
a substantial involvement in producing, and to minimize any impact on
United States consumers by picking articles readily available from
other foreign or domestic sources.
The investigation period was then extended to February 4, 1995 to
facilitate continuing negotiations. On that date, though, having come
to no resolution with the Chinese, the USTR ordered the imposition of
the proposed tariffs effective February 26. Their intent was to allow
goods that were currently in transit between the two countries to
arrive before the tariffs were finally imposed. It also gave both sides
more time to negotiate. Had the tariff action taken affect, it would
have been the largest retaliation ever taken by the U.S. Government. At
the same time, the Chinese announced that they would respond with
retaliatory 100 percent tariff sanctions on a long list of United
States exports.
In the second week of February, the Chinese announced their
willingness to resume negotiations. Then-Deputy USTR Barshefsky
accepted the invitation of Wu Yi, the PRC's Minister of Foreign Trade
and Economic Cooperation, to come to China on February 20. In the
meantime, on February 15, the Chinese began a crackdown on the
pirating. Authorities raided and closed seven of the factories,
including two of the most notorious: the Shenfei factory in Shenzhen
and the Dragon Arts Sound Co. in Zhuhai. The two sides finally reached
an eleventh-hour accord on February 26, 1995, thereby narrowly averting
the trade war.
The agreement signed in Beijing had three principle goals: to take
immediate steps to stem piracy of IPR material, to make long-term
changes to ensure effective enforcement of IPR in the future, and to
provide United States IPR holders with greater access to the Chinese
market. As for the first goal, Beijing pledged to implement a 6-month
Special Enforcement Period beginning March 1 during which time the
Government would increase resources to target the 29 CD and laser disc
factories known to be engaging in pirated production, and confiscate
and destroy illegally produced output and the machinery used to produce
it. In addition, Beijing proposed to tighten its customs practices to
stem the exportation of illegal products.
As for long-term changes, the Chinese Government pledged to ensure
that Government ministries cease using pirated software. Furthermore,
the Government pledged to establish an effective IPR enforcement
structure consisting of IPR conference working groups at the central,
provincial, and local level to coordinate enforcement efforts, and to
ensure that the laws are strictly enforced. Similarly, the PRC stated
it would remodel its customs enforcement system after that of the
United States. Lastly, China would create a title verification system,
and would ensure that United States copyright holders have access to
effective and meaningful judicial relief in cases of infringements.
[[Page S4674]]
Finally, the PRC pledged to enhance access to its markets for United
States right holders. It agreed it would place no quotas on the
importation of U.S. audio-visual products, and would allow U.S. record
companies--subject to certain censorship concerns--to market their
entire catalog. United States companies were also to be permitted to
enter into joint ventures for the production and reproduction of their
products in the PRC.
On November 29, 1995, the subcommittee held a follow-up hearing to
examine the on-going implementation of the agreement and China's
compliance therewith. Since the signing of the agreement, several
industry associations had complained that the agreement was not being
fully implemented in the PRC and that the situation had degenerated to
the pre-agreement state of affairs. According to the industry, many of
the pirating factories that had been closed down in February 1995 had
reopened and were doing business as usual. In addition, the Chinese
Government had let pass several of the deadlines for action on its part
as specified in the agreement.
The subcommittee heard from the USTR and representatives of the IPR
industry (computer software, film, and recording industry). Then-Deputy
USTR Barshefsky testified that implementation had been ``mixed.'' On
the positive side, she noted that:
. . . the system is becoming more transparent--recently all
of China's IPR laws, regulations, and administrative guidance
were published, and public knowledge and understanding of IPR
laws and regulations is much better than it was;
[p]iracy at the retail level has been markedly reduced in
many major Chinese cities, particularly along the booming
southeast coast where U.S. losses have been the largest.
According to Chinese [g]overnment statistics, since signature
of the agreement, Chinese enforcement officials have launched
3,200 raids, seized and destroyed as many as 2 million
pirated CDs and LDs, 700,000 pirated videos, and 400,000
pirated books; and
[i]n addition, China has made many of the structural
changes mandated by the agreement. China has set up
ministerial task forces in virtually all provincial capitals
and many major cities, 30 in all. It has set up high-level,
tough enforcement task forces in at least 18 provinces and
major municipalities. . . . China has now established IPR
courts in Beijing, Guangzhou, Shenzhen and other major
centers of piracy, and has begun an active program to train
Chinese judges in the enforcement of IPR laws.
However, having noted these positive signs, she continued:
Despite these steps, China's overall implementation of the
agreement falls far short of the requirements of the
agreement. Despite improved enforcement efforts, U.S.
industries still estimate that they lost $866 million as a
result of China's piracy in 1995.
She then listed several of the more notable problems:
Overall, while China has taken steps to clean up retail
markets, it has done little effectively so far to attack the
heart of the problem--continuing, massive production,
distribution, and export of pirated products. In particular,
we remain deeply concerned that China has not honored its
commitments to clean up production of pirated CDs in more
than 29 factories throughout [southeast] China. Under the
agreement, China was to have completed investigations of all
factories by July 1, 1995, and to have taken measures to
discipline, fine, or punish factories that violate Chinese
laws and regulations. To our great dismay, China has instead
reregistered--that is, given a clean bill of health to--all
but one of the CD factories. Factories . . . have shifted
their focus from . . . music CDs to higher value-added CD-
ROMs. The seizure of exports of pirated CD-ROMs . . . in
particular have risen by one hundred percent. . .. The
potential economic damage to the US software industry is
enormous. . . .
A single CD-ROM produced in China and acquired in Hong Kong
by the Business Software Alliance recently contained Lotus'
Supersuite (retails for $3,300), Autodsk's AutoCad (retails
for $4,250), and Novell's New Ware (retails for $2,485) along
with 100 other computer programs. The disk sold in Hong
Kong's notorious Golden Shopping Arcade for $6.75.
She went on to note that Chinese compliance in the printing of SID
codes had not been effectively implemented, China's Customs Service had
not yet aggressively pursued infringers, and Chinese promises to open
market access to United States firms were not being kept. Industry
spokesmen expressed similar views, although they were markedly less
enthused about those areas in which Ms. Barshefsky claimed China had
cooperated.
At a joint Senate-House hearing just this last March, we learned that
the situation has been reported to have remained largely the same. A
review of many of the major provisions of the agreement show why the
USTR is so concerned. For example, the agreement calls for the Chinese
to investigate all CD production lines to ensure that titles being
produced there are legitimate. While the Chinese have assigned
investigators to some factories to ensure title verification procedures
are being followed and SID codes--a way to identify what factory a
particular CD came from--are being used. Yet according to the USTR, SID
codes are still not generally utilized and title verifications are
being almost uniformly ignored.
In addition, the agreement calls for the revocation of business
permits for factories involved in continuing illegal production. Yet of
the some 37 plants known to be operating illegally, only from 4 to 7--
depending on your source--have been closed. This leaves roughly 30
plants in operation with an annual production capability of from 150 to
200,000,000 units. Given that the PRC's domestic market demand for
legitimate products is only around 7,000,000 units, Mr. President, you
can see that leaves quite a large gap.
The agreement requires the Chinese Government to establish a
copyright verification system that would prevent the manufacture and
export of CD's without being cleared by the Chinese Government and
representatives of affected copyright owners. While such a system has
been formally established on paper, in practice U.S. copyright holders
have received only 5 requests for title verification in the past 18
months--yet experts estimate that over 60 million illicit CD's have
been produced since the February agreement.
The agreement called for the abolition of quotas and other
restrictions on the importation into the People's Republic of China of
audio products. However, there has been no change in that system.
Chinese officials alternately by denying the existence of a quota
system or suggesting that now is not the time to amend such a system.
Similarly, the agreement called for permitting US companies to enter
into joint ventures for the production and reproduction of audio
products. The Chinese side now claims that--contrary to the
understanding of United States copyright holders in 1995--this
provision means that they may participate in joint ventures for
manufacturing products and not to original production.
In response to the allegations from the USTR and industry Zhang
Yuejiao, Director General of the Treaty and Law Department of the
Ministry of Foreign Trade and Economic Cooperation [MOFTEC], recently
told China Daily:
Some overseas people have criticized China for not living
up to its promises on [IPR] protection. Such attacks are
totally groundless.
A lengthier statement from Chen Jian, a spokesman at the Chinese
Foreign Ministry, appeared in a recent edition of Beijing Review:
Protecting intellectual property rights is one of China's
basic state policies. Since adopting the reform and opening
policies, China has made tremendous efforts in the areas of
legislation, jurisdiction and law enforcement concerning the
protection of intellectual property rights. China has also
instituted a legal system for [IPR]. Over the past year,
China has adopted a series of measures to intensify law
enforcement activities, including a major crackdown on
piracy. We have achieved marked results in investigating and
regulating the audio-visual and publishing markets, as well
as in investigating and handling cases involving violations
of [IPR] by factories and individuals. Any criticism of China
for inadequately combatting piracy is groundless.
I should point out that IPR violations are an international
phenomenon existing in many countries, including the United
States. We are willing to exchange experiences and enhance
cooperation with other countries concerning IPR protection,
the United States included. Frequent threats of sanctions
will not only harm bilateral cooperation in IPR protection,
but also Sino-US economic and trade ties. We are opposed to
such practices.
A more recent trend in Chinese statements on the issue has sort of
taken the tone that ``the best defense is a good offense.'' In the past
few months, the Chinese official media have engaged in a media blitz to
counter assertions that the PRC is falling short of their obligations;
the cover of the April 22 Beijing Review carries a picture of the
deputy mayor of Chengdu, Wu Pingguo, holding up a pirated copy of
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``Windows '95'' under the heading ``No Piracy.'' The Chinese Government
has begun to answer allegations of its failures with countercharges
that the United States has failed to live up to portions of the
agreement by failing to provide promised technical and financial
assistance. In one of my meetings during my trip to the People's
Republic of China over the April recess, one of the officials with whom
I met even went so far as to say to me that while China was actually
living up to its side of the agreement 100 percent, American companies
were now engaged in wholesale piracy of Chinese IPR in the United
States.
Now, Mr. President, I will be the first to acknowledge that, as the
USTR has pointed out, the Chinese have made significant strides in
implementing some portions of the agreement. Fifteen years ago the
concept of intellectual property was a foreign one to the Chinese. In a
Confucian-based system, knowledge was felt to belong to everyone; the
Chinese even have a saying: ``You cannot steal a book.'' This
tradition, coupled with communism-based ideals that everyone works for
the benefit of his or her fellow citizens, are clearly antithetical to
the concept of IPR. Yet as a result of the agreement, the Chinese have
moved to put in place laws and enforcement systems to deal with the
problem. They have embarked on a campaign of educating citizens about
IPR, and have conducted a series of raids of retail outlets selling
illicit products. I applaud their efforts on this front.
But Mr. President, we have a clear agreement with the People's
Republic of China. And it is equally clear, regardless of their efforts
and despite their protestations to the contrary, that the People's
Republic of China is not fully living up to its obligations under that
agreement. I'm sorry, but they are not. They say they are, but to
paraphrase a saying of which Beijing is inordinately fond of
castigating us with, ``Actions speak louder than words.'' The main
problem is that while it is commendable that the government is going
after retailers, it continues to overlook the source of the products.
The excuse often heard is that China is a big country and the central
government cannot know at all times which factories are producing
illegal goods and where they are. Well, if those factories were
producing pamphlets calling for the overthrow of the Communist
government in Beijing, you could be quite sure that they would be shut
down in a heartbeat. Moreover, it is not as though the factories
involved in CD and related IPR production in China are mysterious
hidden entities, Mr. President; even I have a list of them:
Zhuhai Hua Sheng Magnetic Tape Factory, Dakengmei, Wanzai,
Zhuhai;
Zhuhai GLM Laser Master Matrix Mfg. Co., Zhuhai;
Shen Fei Laser & Optical System Co., Bagua Xi Lu, Shenzhen;
Zhong Qiao Laser Co., Bonded Industrial Area, Shatoujiao,
Shenzhen;
Guangzhou Yong Tong Audio-Visual Prod. Co., No. 14,
Shiguang Lu, Shiqiao, Punyu, Guangzhou;
Cai Ling Audio-visual Prod. Co., No. 17, Lingyuan Xi Lu,
Guangzhou, Guangdong;
Foshan Jinzhu Laser Digital Storage Disk Co., Block 10, No.
44, Xinfeng Lu, Foshan, Guangdong;
Foshan Jinsheng Electronic Co., 3/F Jinchan Building,
Zhangcha Lu, Kou, Foshan;
Foshan Xiandi Electronic Audio-Video Industrial Co., Dunhou
Gongye Daidao, Foshan;
Foshan City Nanhai Mingzhu Audio-Video Co., Jun Bridge,
Foping Gonglu, Tongshang Lu, Foshan;
Chaoyang City Jinfa Laser Disk Technology Co., Tongshan
Daidao, Chaoyang;
Zhongshan Yisheng Laser Disk Manufacturing Co., Chanjiang
Administrative Zone, Zhongshan, Guangdong;
Zhongqing Guosheng Laser Technology Co., Duancheng Industry
Estate, Duanzhou Yilu, Zhongqing, Guangdong;
Maoming Jiahe (Shuitong) Electronic City Co., No. 1, Jiahe
Lu, Shuitong Economic Dev. Zone, Maoming, Guangdong;
Xinhua Paiei Photoelectricity Co., Gaoxin Tech. Dev. Zone,
Hunagkong, Xinhui, Guangdong;
Zibo Yongbao Laser Audio-Video Co., Gaoxin Tech. & Industry
Development Zone, Zibo, Shantong;
Chengdou Lianyi Huaxing Audio-Video Production Co., 3/F
Huaneng Group, Chengdou, Plant at: Air Harbour, Gaoxin Lu,
Chengdou;
Hainan Anmei Laser Production Co., Yuejin Nan Lu, Digan,
Hainan;
Shanghai Lianhe Laser Disk Co., No. 811, Hengshan Lu,
Shanghai;
Suzhou Baodie Laser Electronic Co., Songling Town
Industrial Development Zone, Wujiang, Jiangsu;
Nanjing Dali Laser Audio-Video Co., Danchang Town (Pukou),
Nanjing, Jiangsu;
Hangzhou Huadie Photoelectricity Co., Liuxiaying Kou,
Hangzhou, Zhejiang;
Tianjin Tianbao Electronics Co., Wuqing Development Zone,
New Technology & Industry Park, Tianjin;
Heifei Wanyan Electronics Co., No. 127, Shushan Lu, Hefei;
Beijing Leshi Record Co., No. 1, Zhenwu Si Santiao,
Fuxingmen Wai Jie, Xi Xheng Qu, Beijing.
Mr. President, at the time of reaching agreement the Chinese
Government knew--or should have known--what it was and was not capable
of in regards to IPR regulation and enforcement. And with that
knowledge, it went ahead and legally committed itself to a
comprehensive course of action--not to fulfill the terms partially, or
as it felt like it, or selectively, but a comprehensive plan. The
Foreign Ministry has stated that ``protection of IPR is a highly
complex undertaking that cannot be completely resolved in a short
time.'' Well, Mr. President, if such is the case, then the People's
Republic of China [PRC] shouldn't have agreed to do so.
I am a firm believer that once a country signs an agreement it should
adhere to it. Apparently, in theory, so are the Chinese; they
constantly berate us, and other countries, accusing us of failing to
live up to our agreements. Yet it is abundantly clear that the Chinese
side has not fully lived up to the agreement.
Now, Mr. President, that leaves us, as the aggrieved party, with few
options. First, we could ignore their breach and continue to allow the
PRC to flout the agreement. This would, though, have unfortunate
repercussions. It would demonstrate to the PRC, indeed to all of Asia,
that there is no price to pay for ignoring or otherwise failing to
implement agreements with the United States. I am quite sure that that
is not the kind of message we want to be sending.
Another choice would be to work quietly with the Chinese to resolve
those disagreements which remain outstanding to avoid having to rely on
other more public avenues to getting them to comply. Well, Mr.
President, we have tried that route with no success. Assistant USTR Lee
Sands has been to China several times since last year to try to work
things out; Acting-USTR Barshefsky has been to Beijing several times
with the same goal. Jason Berman, chairman and CEO of the Recording
Industry Association of America, has been to China; representatives of
the movie and computer software industries have been to China--all to
no avail.
So, Mr. President, we find ourselves faced with the only remaining
way to impress upon the Chinese the seriousness of the problem, our
disappointment at their failure to adhere to the agreement, and the
extent of the monetary loss we suffer: economic sanctions. This is not
a course of action which I relish, Mr. President; unilateral sanctions
are rarely an effective instrument of foreign or trade policy. They
have unavoidable consequences for the domestic economy; besides
effecting domestic industries which rely on imported goods from China,
they can also impact other businesses. To illustrate, the Chinese have
countered to suggestions of trade sanctions with a thinly-veiled threat
to United States business interests in China:
Should the US side go ahead with taking sanctions against
China, US commercial interests would in the end be seriously
harmed and that would amount to the US imposing counter-
sanctions against itself.
We have seen this before. Last year when sanctions were pending the
Chinese awarded several contracts which were considered safely in the
pockets of United States corporations to European competitors; the
signal was clear. Premier Li Peng recently travelled to France where he
signed several significant trade deals--most notably with Airbus--
pointedly aimed at reminding us that we are not their only trade
source.
The Chinese are quick to say that we should not resort to the
imposition of sanctions, that we should discuss the issue ``on the
basis of equality.'' Well, Mr. President, there is no equality in their
version of equality. Does equality exist when one party flouts an
agreement to the detriment of the other? I think not.
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So, Mr. President, I reluctantly, yet fully, support the USTR on this
issue. I urge the President to follow the USTR's recommendations, and
to do so soon. I realize that there are some in the administration who
are hesitant to press this issue for fear of rocking the boat--the same
reason for the administration's emasculated response to the Chinese
sales of ring magnets and the like to Pakistan--but failure to act will
only embolden the Chinese and will only serve to add fuel to the fire
of what already promises to be a raucous MFN debate.
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