[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

[[Page S4673]]

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

[[Page S4675]]

``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.

[[Page S4676]]

  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.

                          ____________________