[Senate Hearing 109-1105]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1105
IMPACTS OF PIRACY AND COUNTERFEITING
OF AMERICAN GOODS AND INTELLECTUAL
PROPERTY IN CHINA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TRADE, TOURISM, AND ECONOMIC DEVELOPMENT
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MARCH 8, 2006
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
63-758 PDF WASHINGTON : 2011
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
------
SUBCOMMITTEE ON TRADE, TOURISM, AND ECONOMIC DEVELOPMENT
GORDON H. SMITH, Oregon, Chairman
TED STEVENS, Alaska BYRON L. DORGAN, North Dakota,
JOHN McCAIN, Arizona Ranking
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
JOHN ENSIGN, Nevada JOHN D. ROCKEFELLER IV, West
GEORGE ALLEN, Virginia Virginia
JOHN E. SUNUNU, New Hampshire JOHN F. KERRY, Massachusetts
JIM DeMINT, South Carolina MARIA CANTWELL, Washington
DAVID VITTER, Louisiana FRANK R. LAUTENBERG, New Jersey
BILL NELSON, Florida
E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
C O N T E N T S
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Page
Hearing held on March 8, 2006.................................... 1
Statement of Senator Dorgan...................................... 2
Statement of Senator DeMint...................................... 20
Statement of Senator Smith....................................... 1
Witnesses
Alford, William P., Henry L. Stimson Professor of Law; Vice Dean
for the Graduate Program and International Legal Studies;
Director of East Asian Legal Studies, Harvard Law School....... 36
Prepared statement........................................... 38
Israel, Chris, Coordinator for International Intellectual
Property Enforcement, Department of Commerce................... 4
Prepared statement........................................... 6
Vargo, Franklin J., Vice President for International Economic
Affairs, National Association of Manufacturers................. 23
Prepared statement........................................... 26
York, Andrew, Vice President, Leupold & Stevens, Inc............. 29
Prepared statement........................................... 32
Appendix
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
statement...................................................... 49
Response to written questions submitted by Hon. Daniel K. Inouye
to:
William P. Alford............................................ 51
Chris Israel................................................. 49
Franklin J. Vargo............................................ 50
IMPACTS OF PIRACY AND COUNTERFEITING OF AMERICAN GOODS AND INTELLECTUAL
PROPERTY IN CHINA
----------
WEDNESDAY, MARCH 8, 2006
U.S. Senate,
Subcommittee on Trade, Tourism, and Economic
Development,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:35 p.m. in room
SD-562, Dirksen Senate Office Building, Hon. Gordon H. Smith,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Senator Dorgan and I are jointly holding
this hearing. We call it to order. This is the Subcommittee on
Trade, Tourism, and Economic Development. I thank Senator
Dorgan for suggesting today's topic. We will examine the impact
piracy and counterfeiting in China has on U.S. businesses. I
appreciate all of our witnesses who are here today for re-
arranging their schedules to be here, and I want to give a
special welcome to Andy York from Oregon who is here to talk
about problems his business has faced in China.
U.S.-China economic ties have expanded greatly in the last
several years. In 2005, total bilateral trade rose to an
estimated $286 billion up from only about $5 billion in 1980.
Today, China is the United States' third-largest trading
partner and our fourth-largest export market. While U.S.
exports to China have grown dramatically in recent years, so
too have Chinese exports to the United States. Last year, the
U.S. trade deficit, however, with China hit a record $203
billion.
Experts will tell you that while staggering, this number
also reflects goods produced by U.S. companies in China and
then shipped to the United States and sold to American
consumers. What is not reflected in this number is the billions
of dollars that U.S. producers lose because of illegal
reproduction of software, retail piracy and trademark
counterfeiting in China. My staff, in fact, showed me some
Zippo lighters that are ones genuine made there. And two others
are counterfeit, but they make clear though made there, that
they represent to be made in Bradford, Pennsylvania. Not
honest, not good. The reality is that the Chinese are consuming
U.S. goods, but they are not always paying for them.
According to the Congressional Research Service,
counterfeit goods represent between 15 and 20 percent of all
products made in China and account for about 8 percent of
China's GDP. The Business Software Alliance estimates that in
2004, the rate of software piracy in China was roughly 90
percent. And for motion pictures, the rate of piracy was
approximately 93 percent. In 2003, more than 66 percent of
imported counterfeit goods seized by the U.S. Customs Service
all traced back to China.
This December will mark the fifth anniversary of China's
accession to the WTO. When China acceded to it, it promised to
bring its intellectual property laws into compliance with WTO
rules. However, actual enforcement of China's IPR laws remains
a huge problem, and U.S. companies are still reporting large-
scale counterfeiting and piracy of their products in China.
Well, I look forward to hearing from today's witnesses, and
I'm pleased to turn the mike to Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Well, Mr. Chairman, thank you very much,
and thank you for agreeing to call this hearing. This is a very
important issue. You and I may have some differences of
agreement on trade, but I think we would share a concern, and
that is the concern about growing trade deficits, not just with
China, but with other countries as well and increased piracy
and counterfeiting of American goods. I want to run through a
few charts if I might, Mr. Chairman, and talk a little about
where we find ourselves. First, these are our trade deficits
with China, but if I put up a chart that showed our trade
deficit generally, it would look about like this. Almost a
third of our trade deficit is with China, but as you can see,
it's growing and growing and growing and getting worse and
worse and worse, and nothing ever changes. That's a $202
billion trade deficit with the country of China last year. The
second chart shows that China has not resolved critical
deficiencies in IPR, Intellectual Property Protection
Enforcement, and that comes from the U.S. Trade Ambassador's
Office. Actually, in April of 2004, China committed to us to
achieving a significant reduction in Chinese piracy. That was
April 2004. April 29, 2004, our U.S. Trade Representative said
that it not only didn't get better, it got worse. And so, what
have we done? We said, well, then we're going to put you on a
watch list. I mean, that's going to throw the fear of God into
that country. All of a sudden, they're going to be put on a
watch list. Let me just have the next chart. You will see that
despite the promises by the Chinese, Criminal Intellectual
Property Rights investigations in China have plummeted, have
gone down--way down. And finally, the next chart. This shows
that the majority of fake products or counterfeit products
coming into the United States, 67 percent are coming in from
the country of China. Let me point out, however, that China is
not without its ability to deal with these issues. The
Government of China--the Communist Government of China owns
this particular logo. China will be hosting the Olympics. And
so, they own this logo. And of course, there is some value in
owning that logo. The Government of China owns it. All of a
sudden, when that logo was created, some people on the streets
of China began peddling cups and banners and things with that
logo. They began pirating and counterfeiting something owned by
the Chinese Government. They shut it down just like that. I
mean immediately. They had people arrested and off the streets.
They wouldn't put up with piracy and counterfeiting on their
streets when it came to pirating and counterfeiting something
owned by the Chinese Government. Now finally, these two
automobiles, a Chevy Spark and Chery QQ--as you will see, Chery
is only one letter away from Chevy. This car--actually, the
Chery QQ was a subject of a court action. General Motors filed
an action against the Chinese saying that a Chinese automobile
company had stolen the production designs from General Motors
for this little Chery QQ car. This has been quietly settled out
of court with no one understanding what the settlement is, but
I show that for a reason. TIME Magazine says here come the
really cheap cars. Chinese pirate companies have long been
accused of illegally copying easy stuff like shoe polish and
digital movies. Now, General Motors says the Chinese firm
knocked off an entire vehicle, and Americans could soon start
buying its cars. Since this new story, we've had two other new
stories, significant ones, one following the auto show in
Detroit, Mr. Chairman, recently saying that in 2007, Americans
will begin buying Chinese cars shipped to this country. I want
to make one point about that. In our last bilateral trade
agreement, just to show that the issue is not exclusively
pirating and counterfeiting, some of it is fundamental gross
incompetence on the part of America's trade negotiators, in the
last bilateral trade agreement, our negotiators agreed to do
this with China. With respect to bilateral automobile trade
with China, we agreed that any U.S. automobiles we would sell
into China could be assessed a 25 percent tariff. Any Chinese
automobile sold in the United States would be assessed a two
and a half percent tariff. In other words, with a country with
whom we had a huge trade deficit already, a country of some 1.3
billion people who are going to want to drive cars, a country
that will have an automobile industry and is fast developing an
automobile export industry, we decided it would be just fine if
they imposed a tariff on bilateral automobile trade that is ten
times the tariff that we would impose on a Chinese car coming
to the United States. That is fundamentally incompetent. I--let
me just finally say, Mr. Israel, I'm glad you're here. I'm
going to have to be in and out a couple of times today, but I
appreciated your statement. You do say, however, under the few
positive developments in your statement, that President Hu
publicly acknowledged the problem. Look, President Hu not only
acknowledges it, he creates it. They understand it because they
create the problem. It is a strategy. It is a Chinese strategy
that this country doesn't have the nerve, the backbone or the
will to confront. At least let's start on a baby step. Let's
start on the baby step of dealing with piracy and
counterfeiting. It's not a baby step in its impact. $200
billion is what it cost American firms as estimated by the U.S.
Chamber of Commerce in the past year. So, let's at least start
there even if we have some other disagreements about the
bilateral trade arrangement. As you can see, Mr. Chairman,
having this hearing is very therapeutic for me, and I hope that
we will have kind of an interesting time talking about the
bilateral trade relationship between the U.S. and China and
what counterfeiting and piracy does to injure American
interests. Our Intellectual Property Rights are being
systematically injured every single day, and nobody frankly
seems to give a damn. We talk and talk and talk, and at the end
of these hearings, we do nothing. Let's hope perhaps, Mr.
Chairman, with your leadership and with the Congress putting a
spotlight on this, maybe times will be different. Thank you,
Mr. Chairman.
Senator Smith. Well, after this therapy, I hope you're
feeling better.
Senator Dorgan. I'm feeling much better, but I'm hoping I'm
feeling better after the testimony as well.
Senator Smith. Well, thank you, Senator, and we have as our
first witness, Chris Israel, who is the Coordinator for
International Intellectual Property Enforcement, U.S.
Department of Commerce. Chris, thank you for being here, and
the mike is yours.
STATEMENT OF CHRIS ISRAEL, COORDINATOR FOR
INTERNATIONAL INTELLECTUAL PROPERTY ENFORCEMENT,
DEPARTMENT OF COMMERCE
Mr. Israel. Thank you, Chairman Smith and Ranking Member
Dorgan. I appreciate the opportunity to be here today to
address the important issue of Intellectual Property Rights
Enforcement and challenge, and I hope--I do frankly hope that
my insight and assessment of some of the things the
Administration is engaged in does provide an advancement in
terms of the dialogue we're having and a bit more therapy. We
can all certainly use it on this issue because it is an
incredibly frustrating one.
I thank the Committee for its continued support and
leadership on issues concerning the protection of American
intellectual property.
My office works to leverage the capabilities and resources
of the U.S. Government to promote effective, global enforcement
of intellectual property rights. We have built a coordinated
enforcement model that includes Trade, Commerce, Law
Enforcement and Customs agencies. We certainly know the rising
tide of counterfeiting and piracy in China has created enormous
challenges for U.S. businesses. According to the U.S. Chamber
of Commerce, the statistic that was certainly discussed,
worldwide IP theft cost U.S. businesses approximately $250
billion annually. In a 2005 survey of the U.S.-China Business
Council, members listed IP enforcement as their greatest single
concern. Our industry reports that infringement levels in China
range from 85 to 95 percent for all copyright works, and in
2005, the value of copyrighted works that were pirated exceeded
$2.3 billion. In 2005, U.S. Customs reported that China was by
far the leading source of counterfeit products that were seized
at our borders, accounting for 69 percent of all seizures.
Today, I have brought a few examples of the counterfeit and
pirated goods from China that were actually seized by U.S.
Customs. These include pirated versions of well-known U.S.
software, counterfeit pharmaceuticals and dangerously low-
quality electrical equipment, which bears a counterfeit
Underwriter's Laboratory seal. Though we recognize China has
expanded their efforts, there are still critical deficiencies
in IP protection and enforcement. We certainly appreciate the
recent statements made by President Hu, by Vice-Premier Wu Yi
and others on improving IP enforcement in China. These are
steps in the right direction, but we need to see more than just
statements. It is crucial that China deliver on their
commitments. The U.S. Government is working on many fronts to
engage China on IP enforcement, and under President Bush's
leadership, we have developed a proactive strategy being
coordinated among a number of agencies. The Bush
Administration's China IP Strategy is built on four pillars:
one, bilateral engagement; two, the effective use of all of our
trade tools; three, the expansion of law enforcement
cooperation; and finally, direct work with our private sector.
We are utilizing all of our resources to effectively implement
our approach. First, we are working through the U.S.-China
Joint Commission on Commerce and Trade, the JCCT, to secure
bilateral IP commitments. In 2005, we negotiated a
comprehensive set of commitments with the Chinese Government to
reduce counterfeiting and piracy. These include increasing
criminal IP prosecutions in customs enforcement, using only
legal software in government offices and enterprises, shutting
down illegal consumer markets in China and joining the World
Intellectual Property Organization Internet treaties. The next
meeting of the JCCT will take place in Washington on April 11,
prior to the visit of Chinese President Hu. Second, we are
making effective use of all of our trade tools. U.S. Trade
Representative Portman recently announced the China Top-to-
Bottom Review, which assessed the benefits and challenges in
U.S.-China trade following China's first 4 years of membership
in the WTO. Also, the placement of China on the Special 301
Priority Watch List articulates our specific concerns and
indicates the significance we place on them. We are using every
trade tool at our disposal in the WTO, and we consider all
options to be on the table. We are awaiting China's final
response to our TRIPS Article 63.3 request and are considering
whether to file a complaint under the WTO dispute settlement
process for inadequate protection of IPR. Third, we have begun
to expand our law enforcement cooperation with the Chinese
Government. Attorney General Gonzales has laid the groundwork,
and our law enforcement agencies are working with their
counterparts in China to share information, expertise and
investigation techniques. And finally, we work actively with
the Private Sector to address their concerns and learn from
their experience. We are expanding the tools and remedies that
we offer industry from recording their trademarks with U.S.
Customs to educating small businesses and referring specific
infringement cases to Chinese officials. In addition, they are
critical advocates for progress in China as they are active
participants in that market.
Mr. Chairman, the Bush Administration is committed to
stopping intellectual property theft in China and providing
businesses the tools they need to flourish in a global economy.
China must deliver on their commitments and achieve measurable
results as they look to take their place among the world's
leading economies. As I work to coordinate the U.S.
Government's IP enforcement efforts, and with your continued
support and the partnership of this committee, we will be able
to do even more to provide American businesses and innovators
with the protection they need.
America's intellectual property is certainly one of our
most critical competitive advantages. It's essential to our
continued economic growth and to our technological leadership.
We must take advantage of the opportunity to work together to
better protect the knowledge industries of today so that we may
continue to see the innovations of tomorrow. Thank you very
much, and I welcome your questions.
[The prepared statement of Mr. Israel follows:]
Prepared Statement of Chris Israel, Coordinator for International
Intellectual Property Enforcement, Department of Commerce
Chairman Smith, Ranking Member Dorgan and members of the Committee,
I am pleased to join you today to discuss the challenge of
international intellectual property rights enforcement in China.
I want to thank the Committee for its continued support and
leadership on issues concerning the protection of intellectual
property. I look forward to the opportunity to work together to ensure
that the heart of America's innovation economy, its intellectual
property, is effectively protected around the world.
Combating piracy and counterfeiting is a top priority for the Bush
Administration. This prioritization is evident in the leadership shown
by President Bush. He has consistently raised IP enforcement with
foreign leaders, placed the issue on the agenda of the G8 and made it a
key part of the recent U.S./EU summit. He has also discussed our
ongoing concerns with leaders of critical markets such as China and
Russia. He has directed his Administration to address this issue
actively, aggressively and with a results-oriented approach.
We are leveraging the capabilities and resources of the United
States to promote effective, global enforcement of intellectual
property rights. My office works to coordinate the international IP
enforcement efforts of the Office of the U.S. Trade Representative, the
Department of Commerce--which includes the U.S. Patent and Trademark
Office and the International Trade Administration; the Department of
Homeland Security--which includes Customs and Border Protection; the
Department of Justice--including the FBI (Federal Bureau of
Investigation); and the State Department, among others. Our combined
efforts are extensive, and this allows us to bring even greater focus,
energy and prioritization to our IPR efforts.
I appreciate the opportunity to discuss this leadership, to address
the growing problem of counterfeiting and piracy in China, and the
Federal Government's efforts to help protect American intellectual
property and our industries.
Leadership and Prioritization
The reasons for the Administration's leadership on IP enforcement
and for its prioritization are clear.
First, few issues are as important to the current and future
economic strength of the United States as our ability to create and
protect intellectual property. U.S. IP industries account for over half
of all U.S. exports. They represent 40 percent of our economic growth
and employ 18 million Americans, who earn 40 percent more than the
average U.S. wage. The 2006 Economic Report to the President states
that IP accounts for over \1/3\ of the value of all U.S. corporations,
an amount equal to almost half of our GDP. Quite simply, our ability to
ensure a secure and reliable environment for intellectual property
around the world is critical to the strength and continued expansion of
the U.S. economy.
The enforcement of intellectual property rights also carries great
consequence for the health and safety of consumers around the world.
The World Health Organization estimates that 10 percent of all
pharmaceuticals available worldwide are counterfeit. The U.S. Federal
Aviation Administration estimates that 2 percent of airline parts
installed each year are fake--or about 520,000 parts. And we have seen
counterfeit circuit breakers that overheat and explode, brake linings
made of wood chips and cardboard, and fake power cords. In the world of
today's sophisticated criminal IP operations, if a product can be
easily counterfeited, has an immediate demand and provides a good
profit margin it will be copied. Consumer safety and product quality
are concerns obviously not on the minds of global IP thieves.
Finally, the theft of American intellectual property strikes at the
heart of one of our greatest comparative advantages--our innovative
capacity. Through the applied talents of American inventors,
researchers, entrepreneurs, artists and workers, we have developed the
most dynamic and sophisticated economy the world has ever seen.
And I truly believe the world is a much better place due to these
efforts. We have delivered life-saving drugs and products that make
people more productive. We have developed entirely new industries and
set loose the imaginative power of entrepreneurs everywhere. And, we
set trends and market best-of-class products to nearly every country in
the world.
A thriving, diversified and competitive economy must protect its
intellectual property rights. In the recent State of the Union,
President Bush outlined the American Competitiveness Initiative (ACI).
ACI strengthens the President's ongoing commitment to research and
development. We are creating a business environment that encourages
entrepreneurship and protection of intellectual property. And this
Administration is doing everything that we can to open markets and
level the playing field.
We value our heritage of innovation and exploration--it is not only
part of our history; it is the key to our future.
And this future--a future of innovation, exploration and growth
that benefits the entire world--rests on a basic, inherent respect for
intellectual property rights and a system that protects them.
Counterfeiting and Piracy in China
The rising tide of counterfeiting and piracy in China has created
enormous challenges for U.S. businesses. According to the U.S. Chamber
of Commerce, worldwide IP theft costs U.S. industry approximately $250
billion annually. In a 2005 survey of the U.S.-China Business Council,
members listed IPR enforcement as their greatest concern. Our industry
reports that infringement levels in China range from 85 to 95 percent
for all copyright works, and in 2005 the value of copyrighted works
that were pirated exceeded $2.3 billion. In 2004, U.S. Customs reported
that China was the number one source of counterfeit products that were
seized at our borders, accounting for 63 percent of all seizures. And
though we recognize that China has expanded their efforts, there are
still critical deficiencies in IPR protection and enforcement.
As a result of China's continuing problems with IP theft, we posted
our first IP Attache in Beijing in 2004, and we will be posting 2
additional IP Attaches in China in 2006. In addition, since 2001, the
U.S. Government has conducted well over 50 training and capacity
building programs with Chinese Government officials.
U.S. Trade Representative Portman recently stated, ``as a mature
trading partner, China should be held accountable for its actions and
required to live up to its responsibilities, including enforcing
intellectual property rights . . . We will use all options available to
meet this challenge.'' It can be said that, so far, China has not lived
up to its responsibility to effectively enforce intellectual property
rights.
In China, effective enforcement efforts are undermined by: a lack
of sufficient political will, corruption, local protectionism,
misallocated resources and training, and a lack of effective public
education regarding the economic and social impact of counterfeiting
and piracy.
Though the problems of IP theft are great in China, let me first
mention a few positive developments.
President Hu publicly acknowledged the problem when he met with
President Bush last September and again in November. Also, the recent
statements by Chinese Vice-Premier Wu Yi on improving IPR enforcement
in China and encouraging Chinese businesses to take greater steps to
protect IP is definitely a step in the right direction. We also
appreciate the Vice-Premier's comments on ensuring that the Chinese
Government only uses legal software. The additional announcement, by
the Vice-Premier, that the Chinese Government is setting up 50
reporting centers for IPR violations throughout China is good news, and
we hope that these centers can be effective.
In December 2005, a Beijing court ruled in favor of several luxury
trademark brands in a suit to stop sales of knockoff handbags. In that
case, the court ordered the owner of the Silk Street Market to pay
damages and stop its vendors from selling the fake goods. This is an
important ruling because the Chinese courts are finally holding
landlords responsible for the illegal activities of their tenants.
In January 2006, Starbucks won a lawsuit against a local company
that had adopted its Chinese name and a similar logo. The Shanghai
court fined the company and ordered it to stop using the Starbucks'
name and issue an apology in a local newspaper.
In January 2006, the chocolate company Ferrero Rocher won a lawsuit
against a Chinese company that was producing a copycat version of its
well known gold-wrapped chocolates. The Chinese court ordered the
company to pay compensation and to stop producing the copycat product.
Though these are good examples, the problems in China run deep, and
we continue to work extensively with the Chinese Government on the
issues of counterfeiting and piracy.
U.S. Government China Strategy
The U.S. Government is working on many fronts to engage China on
IPR, and under President Bush's leadership, we have developed an
effective China IP strategy. The Bush Administration's China IP
Strategy is built on four pillars: bilateral engagement; effective use
of our trade tools; expanding law enforcement cooperation; and working
with the private sector. We are utilizing all of our resources to
effectively implement our approach:
1. Working through the U.S.-China Joint Commission on Commerce
and Trade (JCCT) to secure IP commitments;
2. Effective use of all of our trade tools:
a. The Office of the U.S. Trade Representative's China Top-
to-Bottom Review,
b. Special 301 Report,
c. The World Trade Organization (WTO) TRIPS Article 63.3
request and consider filing a complaint under the WTO dispute
settlement process;
3. Expanding Law Enforcement Cooperation with the Chinese
Government;
4. Private Sector Cooperation.
Joint Commission on Commerce and Trade (JCCT)
Established in 1983, the U.S.-China Joint Commission on Commerce
and Trade (JCCT) is a government-to-government consultative mechanism
that provides a forum to resolve trade concerns and promote bilateral
commercial opportunities.
Led on the U.S. side by the U.S. Secretary of Commerce and the U.S.
Trade Representative, and on the Chinese side by Vice Premier Wu Yi,
the status of the JCCT was elevated following the December 2003 meeting
of President Bush and Chinese Premier Wen to focus higher-level
attention on outstanding trade disputes. Of particular importance to
this committee is the work of the U.S.-China JCCT Intellectual Property
Working Group.
At the April 2005 JCCT session, the U.S. and China agreed to
establish an IPR Working Group so that U.S. and Chinese officials, IP
specialists, and law enforcement authorities could consult on specific
problems and cooperate on a range of IPR issues. Through the IPR
Working Group, we are working with the Chinese, helping them take
concrete steps toward significantly improving IPR protection and
enforcement.
President Bush has discussed the issue personally with Chinese
President Hu Jintao, and President Hu made further commitments during a
September 2005 United Nations speech. We need to see delivery on these
commitments and achieve measurable results as China looks to take its
place among the world's leading economic powers.
The next meeting of the JCCT will take place on April 11, prior to
the visit of Chinese President Hu. As the JCCT meeting approaches, it
is important to look at the status of the comprehensive set of
commitments from the Chinese Government to reduce counterfeiting and
piracy that were agreed to in the last meeting of the U.S.-China JCCT.
These include:
Increasing criminal IP prosecutions and customs enforcement,
Expanding law enforcement cooperation,
Using only legal software in government offices and
enterprises, and
Joining the World Intellectual Property Organization
Internet Treaties.
Out of the many commitments so far, only a few have been completed.
The Chinese Ministry of Public Security established an IP unit
responsible for overall research, planning and coordination of all IPR
criminal enforcement. The unit serves under the auspices of both the
Economic Crimes Investigation Division and the Social Order Division.
The Chinese Government recently put in place an IP Ombudsman, Yang
Guohua, at the Chinese Embassy in Washington. I met with him a few
weeks ago, and he has also begun meeting with U.S. rights holders.
The Chinese Government confirmed that the criminal thresholds in
the 2004 Judicial Interpretation (JI) are applicable to sound
recordings and that the JI makes exporters subject to independent
criminal liability. But there have not been any reported criminal cases
using the new thresholds.
We also have quite a few commitments that are still in progress and
others where there has been little if any movement.
By the end of 2005, China committed to use only legal software at
all levels of government and to extend this commitment to large
enterprises, including state-owned enterprises, this year. China claims
to have completed its government legalization program, but U.S.
industry says its sales data does not support this claim, and there is
no other evidence to show that China has moved forward to purchase and
use only legal software. In a recent interview, Commerce Secretary
Gutierrez stated that the use of pirated software by China is
``absolutely unacceptable'' and that this requires more attention from
the world community.
Also, as part of our discussions with the Chinese, we continue to
raise the issue of optical disc piracy. China needs to take steps to
eliminate all illegal optical disc production. Action especially needs
to be taken against those ``government licensed'' optical disc plants
in China that engage in this type of criminal activity. We consider
this an important issue for our copyright industry, and apart from the
significant economic damages, this type of piracy harms our cultural
and creative innovative capacity.
China has also agreed to regularly instruct enforcement authorities
throughout the country that copies of select films which are still in
censorship, and not yet ready for distribution are deemed pirated and
subject to enhanced enforcement. However, industry reports that
progress on this initiative has been very uneven.
This memorandum of understanding (MOU) between China and the Motion
Picture Association (MPA) protects only the 15 theatrical films
actually released in China. Industry reports that little progress has
been made on this initiative.
The Chinese legal system follows three routes: administrative,
civil and criminal. U.S. rights holders place primary importance on
criminal cases being filed against violators of IPR in China. In the
last JCCT meeting, China committed to increasing the number of criminal
prosecutions for IPR violations relative to the number of
administrative cases. This is important because it would send a message
to those who violate the law that they can not get away with just
paying a fine--IP theft is a crime, and there will be criminal
penalties.
China has also agreed to improve IPR enforcement at trade shows and
retail and wholesale markets. The United States is working with China
to: establish IPR monitoring centers at major trade fairs, set up a
training program, and host a trade fair IPR enforcement seminar to
educate U.S. and Chinese small and medium-sized enterprises (SMEs) on
how to enforce their IPR at an upcoming trade fair. China also agreed
to ``clean up'' Beijing's Silk Street Market and other well-known
consumer markets.
At the major consumer markets, it may appear at first glance that
the Chinese have made some progress. In January, the Shanghai
government announced its plans to shut down Xiangyang Market, that
city's biggest seller of fake goods. According to local reports, the
Mayor of Shanghai stated that the market had damaged Shanghai's
reputation, because approximately 80 percent of the city's
counterfeiting and piracy originates in that market. But that market
will not close until June 2006, and at that point, most of the vendors
will be moving to other markets, including one, southwest of the city,
in Longhua. These illegal markets which exist all over China, continue
to operate openly and notoriously. They must be shut down or
permanently be rid of infringing goods. The Chinese Government's
ability to take active steps to stop the sale and production of
counterfeit Olympic products demonstrates that they have this ability.
Also, China is working toward accession to the World Intellectual
Property Organization Internet Treaties. China recently sent a
delegation to the United States to discuss the legislative steps
necessary to accede to the WIPO Internet Treaties. We have problems
with China's draft legislative package and will continue to communicate
our concerns to China. It is important China get this right, so that
China's protections move forward and meet the needs of the digital age.
The proliferation of fake pharmaceuticals also creates serious
issues of health and safety. In China, there are certain factories that
are categorized as unregulated ``chemical factories'' but they
primarily manufacture the active ingredients for certain drugs. Our
interest is to have these ``factories'' come under the supervision of
China's Food and Drug Administration (FDA), so that they can be
monitored and regulated.
Additional issues include protecting undisclosed test data against
unfair commercial use for pharmaceutical products. We also need to see
clarification and improved coordination between China's patent office
and the SFDA to prevent generic drug companies from infringing on
pharmaceutical patents and producing patent infringing drugs.
Effectively Using All of Our Trade Tools
We are making use of all the trade tools that we have at our
disposal. As China takes its place as a player on the world economic
stage, we expect that it will live up to its international obligations
and uphold the rule of law.
USTR Top-to-Bottom Review
The Top-to-Bottom review assesses the benefits and challenges in
U.S.-China trade following China's first 4 years of membership in the
World Trade Organization. The Top-to-Bottom review announced several
actions that will be implemented by USTR and other U.S. Government
agencies; and I will mention a few of them here. First, USTR is
expanding their trade enforcement capacity to help ensure that China
complies with its trade obligations. USTR is establishing a China
Enforcement Task Force to be headed by a Chief Counsel for China Trade
Enforcement. Second, USTR is expanding its ability to obtain
comprehensive forward-looking information regarding China's trade
regime and U.S. trade policy practices by adding additional USTR
personnel and establishing an Advisory Committee for Trade Policy and
Negotiation (ACTPN) China Task Force. Third, USTR and the State
Department are discussing expanding U.S. trade policy and negotiating
capacity in Beijing to augment our current efforts and more effectively
pursue top priority issues, such as protecting IPR. Having a trade
negotiator on the ground is key. This individual will be in constant
contact with American businesses and Chinese officials, working to help
remove trade barriers, improve market access and improve IP
enforcement.
Through USTR, my office and our inter-agency team, the
Administration is improving coordination across the U.S. Government. We
are regularly reviewing our strategies and assessing the progress that
we have made so that we can continue to take the appropriate next
steps.
Special 301 Report
China's placement last year on the Priority Watch List (PWL)
reflects the significant level of concern that we have concerning
China's problems with IPR protection, enforcement and market access.
This ranking sends a global signal to our trading partners and to
companies seeking to do business in China. It also sends a strong
message to China that these concerns must be addressed.
World Trade Organization Mechanisms
In the fight against counterfeiting and piracy, we are using every
trade tool at our disposal, and we consider all options to be on the
table. As announced in its Special 301 Report last year, USTR filed a
formal request under Article 63.3 of the TRIPS agreement (Agreement on
the Trade-Related Aspects of Intellectual Property Rights), asking
China to detail the specific efforts it has taken to enforce IPR, which
includes China's application of criminal, administrative, and civil
remedies for infringement cases that affect U.S. rights holders. We
were joined in our Article 63.3 request by Japan and Switzerland, who
also submitted similar requests at the same time. Though China's
official response was less than forthcoming, we are working, alongside
our trading partners and with the Chinese Government, to fulfill this
request.
China's response will demonstrate whether it is serious about
enforcing its IPR protections in a transparent open manner.
The United States is the only country that has brought a case
against China in the WTO. And the U.S. Government is again left with no
choice but to consider filing another complaint against China this time
for inadequate enforcement of IPR. In this regard, USTR is working with
industry to evaluate facts and develop the necessary information on
this potential case.
Law Enforcement Cooperation
Another major priority is to expand law enforcement cooperation
between the U.S. and China. Progress is being made, and Attorney
General Gonzales laid the groundwork for expanded law enforcement
cooperation on IP cases during his trip to China in late 2005.
Our law enforcement agencies are already working with their
counterparts in China to share information, expertise and investigation
techniques.
The Department of Justice is looking to build on these existing
efforts and develop even stronger bilateral IPR law enforcement
cooperation.
The existing U.S.-China Joint Liaison Group (JLG) works to
facilitate criminal justice cooperation and has already discussed
criminal IPR enforcement on the plenary level.
The U.S. has requested that the Chinese agree to establish an IP
law enforcement experts group through the JLG. Expanding our IPR law
enforcement cooperation efforts would enable us to focus on developing
joint IPR enforcement operations and improve cooperation on criminal
investigations. In addition, our efforts, led by the Department of
Justice, would focus on the operational aspects and training linked to
China's criminal law enforcement efforts to address online piracy.
Though a nationwide crackdown on Internet piracy has not begun, as
China has committed to do, China has worked out a plan to focus on
copyright violations involving audio-video and software products,
including unauthorized using and sharing at Internet cafes and the
illegal operation of websites.
Building on the joint U.S.-China law enforcement effort called
Operation Spring, the U.S. and Chinese law enforcement authorities
recently joined forces in Operation Ocean Crossing, successfully
disrupting an organization engaged in the large-scale trafficking of
counterfeit pharmaceuticals. The action resulted in numerous arrests in
China and the United States and the capture of hundreds of thousands of
fake pharmaceuticals.
As I stated earlier, China was the number one source of counterfeit
products that were seized at the United States border last year. The
Chinese Government needs to better equip its Customs Authorities to
control the exports of counterfeit and pirated goods from China. An
important step that China agreed to take at the 2005 JCCT is to adopt
regulations that allow Customs to refer serious cases for criminal
prosecution. China should also reinstate provisions in its Customs
regulations to allow for fines up to 100 percent of the value of the
seized goods. To take forward China's JCCT commitments on better
customs enforcement, U.S. and Chinese Customs officials, subject to
confidentiality concerns, will be cooperating on the exchange of
infringement data and information on significant seizures. There will
also be technical exchanges on risk assessment and regulatory
improvements.
Private Sector Cooperation
Companies need to be aggressive advocates of their own IP. We are
working actively with the business community for assistance as we go
forward. They are our eyes and ears on the ground and know better than
anyone how inadequate IPR enforcement affects their businesses. My
office conducts active outreach with industry, and we want to hear
their stories and find ways to use the data that they have collected in
China. We will continue to work together to find solutions and lead
enforcement efforts.
We are working with U.S. and international trade associations such
as the American Bar Association, American Chamber of Commerce in China,
Business Software Alliance, Entertainment Software Association,
International Chamber of Commerce, International Intellectual Property
Alliance, International Federation of Phonographic Industries, Motion
Picture Association, National Association of Manufacturers, The
Pharmaceutical Research and Manufacturers of America, Quality Brands
Protection Committee, Recording Industry Association of American, U.S.
Chamber of Commerce and the U.S.-China Business Council, to name just a
few.
An important tool that we use is the IPR Case Referral Mechanism
(CRM) which was created by the U.S. Government to facilitate the
submission of individual U.S. company IPR cases through MOFCOM (China's
Ministry of Commerce) to relevant Chinese agencies. Our inter-agency
team reviews cases where the Chinese Government fails to provide
adequate protection of IPR to U.S. businesses, and after an internal
vetting process, sends approved cases to the Chinese Government to
facilitate their resolution. Five cases have already been submitted to
the Chinese through the Case Referral Mechanism.
Ambassador Clark Randt at our Embassy in Beijing holds an annual
IPR Roundtable which brings together senior Chinese officials and U.S.
business representatives. The Roundtable gives U.S. rights holders the
opportunity to discuss the problems they are facing and find the
solutions that they need.
Also, our Embassy and Consulate officers on the ground are a
valuable asset for U.S. companies. They play a critical role as IPR
``first responders,'' helping U.S. businesses resolve cases when their
rights are violated.
We know that companies are conducting investigations into IPR theft
and collecting data as they do business in China. But American
companies should not have to be the sole investigators of IP crime in
China. The Chinese Government needs to step up to the plate, conduct
investigations and stop the crime of IP theft that is occurring in
their country.
The Bush Administration's efforts to provide a secure and
predictable global environment for intellectual property is driven by a
commitment to foster U.S. economic growth, to secure the safety and
health of consumers everywhere, and an abiding respect for the great
American innovative spirit that has driven our Nation since its
founding and will determine our future.
Strategy, Organization and Focus
As this committee clearly understands, the problem of global piracy
and counterfeiting confronts many industries, exists in many countries,
apart from China, and demands continuous attention. With finite
resources and seemingly infinite concerns, how we focus our efforts is
crucial. I appreciate this opportunity to share with you the key areas
which make up the Administration's overall Strategy for Targeting
Organized Piracy. Through President Bush's leadership, we created a
five-point plan.
1. Empower American innovators to better protect their rights
at home and abroad.
2. Increase efforts to seize counterfeit goods at our borders.
3. Pursue criminal enterprises involved in piracy and
counterfeiting.
4. Work closely and creatively with U.S. Industry.
5. Aggressively engage our trading partners to join our
efforts.
By working more closely with other U.S. Government agencies, we
implemented that plan, and we have made progress. I'd like to share
with you some of the approaches that we are taking and the objectives
that we have set to improve global IP enforcement.
Last month, under the leadership of my office and the White House,
the National Intellectual Property Law Enforcement Coordination Council
(NIPLECC) held its first principals meeting this year. NIPLECC brings
together the leaders of the key operational entities within the Federal
Government that are responsible for IP enforcement. At the meeting, we
looked at better ways to coordinate our domestic and international IP
efforts in order to ensure the effective and efficient enforcement of
IP both at home and abroad. By establishing priorities and objectives
at a senior level, we are reinforcing our day-to-day activities and
ensuring that all of the agencies critical to the Federal Government's
IP enforcement efforts are closely coordinated and committed to a
common results-oriented agenda.
The Council is comprised of the Department of Justice (Assistant
Attorney General of the Criminal Division), the Commerce Department
(Under Secretary for Intellectual Property and Director of the Patent
and Trademark Office and Under Secretary for International Trade), the
Office of the U.S. Trade Representative (Deputy USTR), the Department
of Homeland Security (Commissioner of Customs and Border Protection)
and the State Department (Under Secretary for Economic, Business and
Agricultural Affairs).
NIPLECC has made a number of valuable contributions since its
creation in 1999, including the development of a comprehensive data
base that includes all recent IP law enforcement training provided by
the U.S. Government to developing and least developed nations as well
as delivering legislative suggestions to improve national IP laws
related to enforcement. However, there is unmet potential, and in my
role as Director of NIPLECC, I look forward to working with this
committee to ensure that we are maximizing the capabilities of NIPLECC.
A critical element in our overall coordination is the Strategy
Targeting Organized Piracy (STOP!) Initiative launched by the Bush
Administration in October 2004. STOP! has built an expansive
interagency process that provides the foundation and focus for all of
our efforts. This is the strategy that NIPLECC is implementing. STOP!
is led by the White House and brings together USTR, the Department of
Commerce, the Department of Justice, the Department of Homeland
Security and the State Department.
STOP is the most comprehensive initiative ever advanced to fight
global piracy where it starts, block bogus goods at America's borders
and help American businesses secure and enforce their rights around the
world. STOP! has made significant progress in the past year, and we are
planning to build on this success. STOP! is an attempt to play offense
in the global fight against piracy and counterfeiting.
Through all of these initiatives, we are achieving results,
maintaining the commitment of senior Administration officials,
institutionalizing an unprecedented level of coordination within the
Federal Government and receiving attention around the world. The
message that we are delivering is--that the United States takes the
issue of IP enforcement very seriously, we are leveraging all of our
resources to address it and we have high expectations of all of our
global trading partners.
To help American innovators secure and enforce their rights across
the globe, we have new Federal services and assistance: We created a
hotline (1-866-999-HALT), which is staffed by specialized attorneys who
counsel businesses on how to protect their IP and work with callers on
how to best resolve problems. In cases where the individual or company
has properly registered its rights, its issue can then be referred to a
trade compliance team that will monitor their case and work to see what
next steps can be taken.
We also developed a website (www.stopfakes.gov) and brochure to
provide information and guidance to rights holders on how to register
and protect their IP in markets around the world.
We created downloadable ``IP toolkits'' to guide businesses through
securing and enforcing their rights in key markets across the globe.
These toolkits are available at the stopfakes.gov website, and cover
countries such as China, Russia, Mexico, Korea and Taiwan.
In November 2005, Commerce Secretary Gutierrez announced, the China
Intellectual Property Rights (IPR) Advisory Program. This program is
done in conjunction with the American Bar Association, the National
Association of Manufacturers and the American Chamber of Commerce in
China. It offers small and medium sized U.S. businesses free IPR
consultation with an attorney.
Also, we are providing training for U.S. embassy personnel to be
effective first responders to IPR issues in order to identify problems
abroad and assist rights holders before fakes enter the market and the
supply chain.
Next, we need to increase our efforts to stop fake and counterfeit
goods at America's borders: Customs and Border Protection (CBP) has
developed an online recordation tool for rights holders to record their
trademarks and copyrights with them. Additionally, CBP has also begun
implementing new risk assessment models and technologies to cast a
wider, tighter net on counterfeit and pirated goods and to stop these
goods from entering our borders.
We are working with our trading partners to share information and
improve our capabilities to assess and anticipate risks. We have seen
the results of this effort with the European Union. We have followed up
on the U.S./EU Economic Ministerial held last year, where leaders of
both governments committed to expand information sharing of customs
data.
We are also working to build international support and rules to
stem the flow of fake and counterfeit goods and keep them out of global
supply chains. We have conducted outreach to Canada, the European
Commission, France, Germany, Hong Kong, Japan, Korea, Mexico, Singapore
and the United Kingdom laying the basis for increasing cooperation on
IP enforcement. Outreach to other like-minded countries is underway.
Law enforcement must play a leading role in dismantling criminal
enterprises that steal intellectual property: U.S. law enforcement
agencies are also working closely with industry to gather information,
develop cases and bring convictions against the criminals who steal
their IP. We need to be as sophisticated and creative as the criminals.
It is important that government and industry work together with
coordinated efforts.
The U.S. Government (Department of Justice) has pursued numerous
large-scale operations targeting criminal organizations involved in
online piracy and trafficking in counterfeit goods. For instance, the
Department of Justice (DOJ) has indicted the four leaders of one of the
largest counterfeit goods operations ever uncovered in New England--
broke up a scheme to sell more than 30,000 luxury goods--including
handbags, wallets, sunglasses, coats, shoes, and necklaces, and found
the materials to manufacture at least 20,000 more counterfeit items.
The Department of Justice led Operation Site Down, an international
online piracy investigation culminating in the execution of over 90
search warrants and arrests in the U.S. and eleven countries abroad in
June 2005. Operation Site Down dismantled some of the largest and most
prolific high-level distribution sites preventing tens of million in
further losses to the content industry. To date, 44 individuals have
been indicted and ten convicted of felony copyright offenses.
As part of the STOP! Initiative, the Department of Justice formed
an Intellectual Property Task Force to examine how it could maximize
its efforts to protect intellectual property rights. In October of
2004, the Task Force Report was released and it included a
comprehensive set of recommendations on steps that the Department of
Justice could take to better protect IPR.
In addition the Department of Justice has executed measures to
maximize law enforcement's ability to pursue perpetrators of IPR
crimes. For example, we are increasing from 5 to 18 the total number of
Computer Hacking and Intellectual Property Units in U.S. Attorneys'
Offices across the country. This increased to 230 (two in virtually
every U.S. Attorney's Office in the country) the number of specially
trained prosecutors available to focus on IP and high-tech crimes. As
part of the Task Force recommendations, the DOJ also appointed an IP
Law Enforcement Coordinator for Asia, who is stationed in Bangkok. This
individual will work with DOJ officials in the Computer Crime and
Intellectual Property Section and the Office of International Affairs
to oversee their law enforcement efforts in the region.
The Administration proposed the Intellectual Property Protection
Act of 2005 to strengthen criminal intellectual property protection,
toughen penalties for repeat copyright criminals and add critical
investigative tools for both criminal and civil enforcement
authorities.
In addition, we have executed agreements to implement obligations
of the U.S./EU Mutual Legal Assistance and Extradition Agreements.
These agreements ensure cooperation regarding intellectual property
crimes with Austria, Belgium, Denmark, Finland, France, Hungary,
Ireland, Latvia, Lithuania, Luxembourg, Netherlands, Portugal,
Slovenia, Spain, Sweden, United Kingdom; and we have completed
negotiations with the nine remaining E.U. countries--Cyprus, Czech
Republic, Estonia, Germany, Greece, Italy, Malta, Poland and Slovakia.
Working closely and creatively with U.S. industry: As I mentioned
earlier, we are conducting extensive outreach with U.S. industry and
trade associations. Additionally, we are working with the Coalition
Against Counterfeiting and Piracy, a U.S. Chamber of Commerce and
National Association of Manufacturers led association--on the ``No
Trade in Fakes'' program to develop voluntary guidelines companies can
use to ensure their supply and distribution chains are free of
counterfeits.
We are also conducting post-entry audits to identify companies
vulnerable to IP violations and working with them to correct their
faulty business practices.
We are reaching out to our trading partners and building
international support. U.S. leadership is critical and we are active on
a number of fronts: When U.S. Government officials meet with our global
trading partners for bilateral and multilateral discussions, IP
protection and enforcement are always top priorities.
This Administration makes IPR a priority when negotiating new free
trade agreements as you saw most recently with CAFTA-DR (the United
States-Central America-Dominican Republic Free Trade Agreement).
In January, we met with European Union Officials at the White House
for a series of meetings to address global piracy. We are breaking new
ground and have begun to expand our cooperation with the EU--focused on
border enforcement, a strategy to address problems in developing
countries and working with the private sector. Particularly with China,
the EU announced that they will be posting an IP attache in Beijing.
At the G8 meeting, President Bush secured an agreement from fellow
leaders to focus on IP enforcement, and we plan on working with Russia
on IP issues during their presidency of the G8.
At APEC last year, we secured an endorsement of a U.S.-Japan
sponsored ``APEC Anti-Counterfeiting and Piracy Initiative'' to reduce
trade in counterfeit goods and to combat online piracy, while
increasing cooperation and capacity building. In close cooperation with
industry and a number of U.S. Government agencies, USTR led this
effort, which culminated last November in agreement by the leaders of
APEC's 21 member economies in a set of model guidelines to reduce trade
in counterfeit and pirated goods, and to protect against unauthorized
copies, and to prevent the sale of counterfeit goods over the Internet.
We are currently working to implement and expand these model
guidelines.
Also, the work of the U.S.-Russia IP Working Group remains a high
priority, as the United States, through USTR, and Russia work to
address a number of IP-related issues and steps that need to be taken.
Additionally, we have commissioned a study by the OECD (The
Organization for Economic Cooperation and Development) to examine the
impact of global counterfeiting and piracy. My office and our
interagency team have held several meetings with OECD officials to
follow-up and assist with this study. We are looking for sound,
reliable and accurate information to be produced with this study, so
that we may have accurate metrics that can be used effectively by our
principals and by industry as we continue building international
support to stem the flow of fake and counterfeit goods and keep them
out of global supply chains.
Next, the U.S. has conducted several hundred IP training and
capacity building programs around the world to improve criminal and
civil IPR protection. To that end, the Administration has established a
Global Intellectual Property Academy to consolidate and expand our
training programs for foreign judges, enforcement officials and
administrators.
We are continuing to expand our IP attache program in China and
positioning new attaches in Brazil, Russia and India. Having IP
attaches stationed in these countries will enhance our ability to work
with local government officials to improve IP laws and enforcement
procedures in addition to assisting U.S. businesses to better
understand the challenges of protecting and enforcing their IPR.
On the domestic front, we have education campaigns that take place
across America to teach small and medium sized enterprises how to
secure and protect their rights and where to turn for Federal resources
and assistance. It is important to note that only 15 percent of small
businesses that do business overseas know that a U.S. patent or
trademark provides protection only in the United States. Companies need
to make sure that they register for intellectual property protection
overseas. We had an education program in San Diego and a China-specific
program in Atlanta last week, and we have upcoming programs in
Nashville, Columbus and Northern Virginia. These events help educate
businesses on what intellectual property rights are, why they are
important, and how to protect and enforce these rights domestically and
internationally.
Mr. Chairman, the Bush Administration is committed to stopping
intellectual property theft in China and providing businesses the tools
they need to flourish in the global economy. As I work to coordinate
the U.S. government's intellectual property enforcement, trade and
education efforts; and with your continued support and the partnership
of this committee, we will be able to do even more to provide American
businesses and innovators with the protection they need. America's
intellectual property is important not just for her national security,
but it is also a necessary component in ensuring continued U.S.
economic growth and technological leadership. We must take advantage of
the opportunity to work together to better protect the knowledge
industries of today so that we may continue to see the innovations of
tomorrow. Thank you very much.
Senator Smith. Chris, to Senator Dorgan's point about the
enforcement that was seen as to the logo of the Olympics, do
you know if that was done at a Federal level, a high level in
China?
Mr. Israel. My understanding, Mr. Chairman, it was done at
a very high level in China. My understanding is that even prior
to the final decision made by the International Olympic
Committee to place the 2008 Olympics in Beijing, there was
federal legislation, national legislation that was put in place
in China to protect that logo, and a number of different
manifestations of that logo, different products that would come
from that logo. So, yes, it was done at a very senior level, a
national level in China.
Senator Smith. And most of this piracy, I assume, occurs
throughout China and they would count on local enforcement of
these copyright stealings, but apparently, it doesn't get that
far with the local area.
Mr. Israel. With regard to the logo?
Senator Smith. If the federal government or whatever they
call their central government----
Mr. Israel. Central government.
Senator Smith.--isn't directly involved there, is there
just no local enforcement?
Mr. Israel. Local enforcement is a huge challenge in China.
I think it's certainly something that's been pointed----
Senator Smith. Well, what stops it from your observation?
Is it----
Mr. Israel. With regard to the logo specifically?
Senator Smith. No, I mean anything, stealing anything. Is
it just local authorities that are complicit in it?
Mr. Israel. That's part of it. I think we see at a local
level the political pressure and will that's been exerted, and
Beijing has a very hard time making it to the local level. You
see local corruption. You see local protection of the points of
production of these products. In remote areas of China, they
employ a lot of people. They contribute to the local economy.
So, transferring the commitments that we have seen made by
senior officials in China to actual on-the-ground enforcement
actions throughout, you know, the very diverse and large
country is a huge challenge.
Senator Smith. Well, President Hu acknowledges it's a
problem and has demonstrated he can do something about it.
What's holding him up from--what are you seeing? I mean, are
you seeing any progress made?
Mr. Israel. We're seeing some progress. I think if you
look, there are some recent indications of progress locally and
in a couple of court cases in Beijing. Starbucks won a
trademark case late last year. There was a ruling against the
landlord of a very notorious counterfeit market in Beijing last
year, a case that was brought by trademark owners against that
landlord. A European chocolate company had a favorable ruling
in a Beijing court. So, I think we're seeing some anecdotal
things occur. I think that those are relatively new. I don't
know that those would have come out that way 2 or 3 years ago
had it not been for a lot of concerted pressure on the Chinese.
You're also seeing--according to the Chinese, they took about
2,500 criminal investigations of IP violations last year.
That's something they reported. Those are their numbers, so
there are challenges to addressing those. They are reporting
increased activity regarding their actions on IP violations in
China, and we're seeing some anecdotal progress. We're also
hearing from some individual U.S. companies who are stepping up
their own activities in China, developing their own enforcement
strategies, developing cases, taking them to Chinese
prosecutors and seeing some progress in that regard.
Senator Smith. Let me--for all the investment there has
been in China, my own sense is there would be a whole lot more
if there were, in fact, some confidence in IP protections. And
do you think that the Chinese leadership has an appreciation
for what it's costing them? Obviously, we can quantify what
it's costing us. Do they know what it's costing them?
Mr. Israel. I don't know that they have a specific
assessment of what it's costing them.
Senator Smith. Do you think they appreciate it?
Mr. Israel. In conversations that we have with them, they
state their appreciation of it. If you--there are statements
from Chinese leadership recognizing the need to protect
intellectual property as a way to foster their own economic
development and to spur an innovation-driven economy.
Senator Smith. And as the Chinese economy develops and
Chinese are actually producing their own intellectual property,
are they enforcing that?
Mr. Israel. I think that would be a big catalyst if there--
as there does grow a domestic IP-based economy in China. The
Chinese companies that are producing their own intellectual
property, they, in a well-known case, recently bought the PC--
the laptop PC business of IBM, and that's a very big investment
in a very innovative company. It's hard for me to fathom that
China wouldn't forcefully exert the intellectual property of
companies such as Lenovo and others.
Senator Smith. Well, I know I voted for China WTO, and I
don't know that I would today knowing what I know now in terms
of how this has played out. And I know we're going to be asked
to vote on Russia WTO, and frankly, they have a huge problem as
well. And so, if that country cares about WTO, this Senator
cares. And I'm only one, but they can't afford to lose many.
And the whole world knows that the Schumer Amendment passed by
a big margin. It didn't have my vote. It may have my vote next
time. And so, time's running out, and we're sick of it. Senator
Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. Let me
begin by stipulating that the previous Administration was in
office 8 years and did precious little to address this issue.
You've been in office--this Administration's been driving for 5
years and have not yet filed a complaint. Senator Lindsey
Graham and I have offered since the Senate resolution, asking
that you file a complaint. We have also offered a piece of
legislation saying we should withdraw our normal trade
relations on a permanent basis and make it an annual basis,
which creates the pressure on the Chinese. But let me ask
directly why have you not taken action in 5 years to deal with
this, especially because inasmuch as the fact that this deficit
is growing and growing and growing exponentially?
Mr. Israel. Well, as I stated, Senator, I mean, it
certainly is an issue that--and a question that's open. It's on
the table, and it's being considered by USTR, by Ambassador
Portman and that we're working actively with U.S. industry and
other stakeholders to address head on the question of bringing
a dispute resolution case against China. It's under active
consideration at this point.
Senator Dorgan. But why under active consideration if it's
$200 or $250 billion a year? We know that it has gotten worse,
not better after the 2004 promise by the Chinese. Why have you
not taken action at this point?
Mr. Israel. Well, you know, I think there have been a
series of commitments made by the Chinese. We've given some
time to see if those come to fruition. There is an active
discussion with industry, and we need to take into account the
views of American companies and how they think a WTO case would
impact the marketplace in China, and there are a number of
factors under consideration. And I think the challenges are
more evident than ever, and the frustration certainly remains
there.
Senator Dorgan. What's your time frame for making a
decision do you think on whether or not you will file an action
under WTO?
Mr. Israel. I'm not in a position today, Senator, to
discuss a time frame. I think it's obviously under the
leadership of Ambassador Portman of the U.S. Trade
Representative's Office. I'm simply not in a position to assess
a time frame. I can tell you we are--one piece of information
we're actively waiting for is the response to our Article 63
request that was made under the WTO for very specific
information from China about their enforcement activities. I
think that will be very useful information in the formulation
of a decision as well.
Senator Dorgan. Can I tell you why I think action hasn't
been taken? On the last day of employment at the U.S. Trade
Ambassador's Office about 2 or 3 years ago, a fellow who on his
last day gave a speech to a wheat group here in Washington,
D.C., and he explained to the group that--whose interest was
wheat sales to China, he explained to the group that the group
inside the Administration that works on this, Trade Policy
Group I believe it was, which is a number of different agencies
working together, had recommended that formal action be taken
against China, a complaint filed against China with respect to
wheat, and he said--but it was--that was denied--that
recommendation to take formal action against China with respect
to wheat trade was denied by the Administration because it
would have been considered a ``in-your-face'' thing to do to
China. And so, this fellow was unbelievably candid, I suppose,
because it was the last day at work. You almost never get that
kind of candid answer from someone who works in Trade or in any
administration. But he said, you know, the fact is they sat
around, decided action should be taken against China based on
the facts, but then no action was taken because it was
considered an in-your-face thing to do. Does that suggest, as I
often think is the case, that trade policy, instead of being
hard-headed economic policy is soft-headed foreign policy?
Mr. Israel. Senator, I am unfamiliar with the facts on the
wheat case. I think I would point to the very specific and
public statements that have been made by USTR, including the
out-of-cycle 301 Review of China last year where they stated
clearly that all options are on the table. And it's under
active consideration, the question of whether to bring a
dispute case against China, so, I think we're assessing the
input that we're receiving from U.S. industry. We're certainly
assessing and making determinations about the type of progress
we're seeing in China and whether we think it's on a trajectory
to continue to improve and whether the best step is to make a
WTO case at this point.
Senator Dorgan. Yes, I see some products on the table,
perhaps from the next witness, but we could go through a lot of
products. I understand China has reverse-engineered Viagra,
and----
Mr. Israel. Some of it here, actually.
Senator Dorgan.--I assume Pfizer is probably complaining to
you about that and probably should. But you know something, my
guess is China is not exactly shaking in their boots at the
fact that you might, at some point, take action because the
evidence from this country is we never take effective action.
We never do that. And no matter where this line goes with
respect to the trade deficit with China, it's now $202 billion
in a single year. You think of the imbalance there. No matter
where all this goes, no matter whether piracy and
counterfeiting get worse or better after they agree to make
progress, this country, by and large, sees its trade policy as
foreign policy. Our trading partners all see it as hard-nosed
economic policy. They will do to us what they can as long as
they believe they can, and I believe the Chinese, not just
based on this Administration, but based on a number of
administrations, will believe forever that we don't have the
guts to take action. We're not going to do anything. All we're
going to do is say that--President Hu recognizes the problem.
Yes, I hope so. He creates the problem and manages the problem
and makes it worse. I hope he recognizes it. I appreciate your
coming here, and I don't mean to diminish your work, but I
would say this--the proof 's in the pudding. At some point, you
either stand up--the Administration either stands up on behalf
of American economic interest against what is clearly unfair
trade, against counterfeiting and against piracy, or we just
say none of this matters, and we'll stop threatening because
the threats don't mean anything at some point. A threat only
means something if people believe there's leverage and intent
behind it. And so, Mr. Chairman, I have the numbers on how many
people in Commerce are spending time enforcing our trade
agreements with Japan and China and other countries. It's
minuscule. As you know, it's 11 and 18 and so on. We are a
country wholly uninterested in enforcing trade laws. We have
never been interested in enforcing them. Why? Because we run it
all through the State Department. We're worried we're going to
offend somebody. And so, the result is we lose money, we lose
leverage, we lose opportunity, and we lose jobs. So, Mr.
Israel, again, I didn't mean to use you for the opportunity to
make another speech, but I appreciate the work you do, but we
need a time frame. We need a decision, and we need to
understand that this country is willing to stand up for its
economic interests.
Mr. Israel. I would point to, and I certainly understand
that, Senator, and I think the frustration is very well known.
Chairman Smith, you mentioned Russia as well. I mean, there's
certainly a good degree of pressure being felt on that
relationship. Well, I was actually just in Russia last week and
had a chance to raise a number of these issues. I would point
to the fact that thus far, we're actually the only country
that's brought a WTO case to, I think, against China. We were
on the brink of bringing one regarding some craft liner board,
I believe it's called, within the last couple of months, and
the Chinese actually backed away from there, the posture that
they had--that had elicited us to potentially bring that case.
So, I think there has been some indication, certainly, that we
are willing--more than willing to bring cases against China.
And this is a--there are a lot of obvious calculations to this
one, and they're being assessed.
Senator Dorgan. Mr. Chairman, if I might have one more
minute, I did mention automobile trade with China. I should
mention at the same time that 99 percent of the vehicles driven
on the roads of South Korea are South Korean vehicles. Ninety-
five percent of the vehicles driven in the country of Japan are
Japanese vehicles. Last year, 730,000 Korean cars were shipped
by boat to the United States to be sold in our marketplace. We
sold 4,300 vehicles in South Korea, and the reason is obvious.
They're not interested in American products competing, and I
would urge you to take a look at the Dodge Dakota pickup
experience in South Korea and then ask yourself whether it's
China, Japan, South Korea or any number of others--if I had the
time, I'd talk to you about them, whether we are standing up
for our country's economic interests. The answer is a pathetic
answer. The answer is clearly no. So, on bilateral automobile
trade and a range of others who I take a look at, I say that
only because of the announcement recently by Ford and General
Motors about huge layoffs and closure of plants. Mr. Israel,
thank you.
Senator Smith. Chris, I wonder if instead of the Schumer
Amendment of--I think the duty was 23 percent. I don't know
whether 23 percent was----
Mr. Israel. 27, I think.
Senator Smith.--or 27 percent or where that number was
arrived at. How would it fit in WTO if we had a substitute
amendment here that calculated the duty according to the level
of theft?
Mr. Israel. I don't know how exactly it would fit into the
calculations of the WTO. I think if you play out what would
likely happen under the scenario that we did bring a WTO case
that went through the many years it would take to reach a final
resolution after appeals and all the things that happen, the
likely outcome would be the ability of the United States to
levy a countervailing duty against China in what we estimate to
be the impact that's being felt on the U.S. economy through
counterfeits. So, I don't know if we did that proactively--if
Congress did something like that proactively, I don't know what
the assessment would be.
Senator Smith. Would the Administration support it?
Mr. Israel. It's something we'd have to certainly consider.
I would be happy to----
Senator Smith. Senator Dorgan says he can answer that. But
I'm throwing this out because I just think a lot of us are
looking to give you leverage to enforce American intellectual
property that they have agreed to enforce as well, but clearly
are not.
Mr. Israel. Leverage is important, Senator, it's difficult
in these situations, as you know, to always find leverage,
always find ways you can play offense. I think we have--in our
discussions with China and other countries where we see this as
a problem, we don't hesitate to note the fact that the U.S.
Congress is exceedingly articulate and forceful in its views
about the protection of American intellectual property on
behalf of the companies and workers in your states, and that is
certainly something that's well understood, whether it's
Russia, China and any number of other countries. And I think
the ability of the Administration and the Congress to work
together to develop any and all leverage we can come up with is
a very positive thing.
Senator Smith. Well, I throw that out because I think the
mood in Congress has changed, not changing, it has changed, and
I just don't think we can keep going on on this basis with
these escalating problems. I think we have to do something for
the sake of our own Nation's economic future and the integrity
of our own laws and the respect of our own industries, not
protectionism, but----
Mr. Israel. Yes.
Senator Smith.--protecting what our Nation is frankly best
at, and that's new ideas, new products, new commerce that is
transforming the world, but if it's just stolen, it's value is
much diminished and our jobs are unfairly compromised. I
believe in free trade, I don't believe in being a big sucker.
We've been joined by Senator DeMint of South Carolina.
STATEMENT OF HON. JIM DeMINT,
U.S. SENATOR FROM SOUTH CAROLINA
Senator DeMint. Thank you, Mr. Chairman. I don't always
agree with Senator Dorgan, but I share a lot of his concerns,
and I'm coming from a different perspective because I have been
a free trader from a state that's not very free trade and was a
big part of helping to win the approval in the House of China
getting into the WTO. I felt it was critically important that
we put China in a rules-based system. But as you know, a rules-
based system is meaningless if we are not able to enforce the
rules. And my concern is--I mean, you could double or triple
the size of your department, but China is so big and growing so
fast, there is no way at all that we can litigate all the
violations that we--the only way it could possibly work is if
it's leadership in China was committed visibly, forcefully and
creating a legal structure in China that would stop this kind
of pirating. We can't do one case at a time. We'll just be
scratching the surface two decades from now. I know this
question's already been asked, but I guess it's a two-part
question at least, is first, if the leadership in China really
wanted to do it, do they have the legal structure, the
government structure, the cohesion to even do it, or is their
industry, which is very international--it's public-private in
many cases, it's government in some cases, is there any way to
even enforce this, or was my idea that doing business and
putting China in a rules-based system, was that a naive idea,
that they don't even have the capability to follow a rules-
based system in a country that large? And does it really--the
second part of my question is what can we do on this side, and
I know that you have created a position, an ombudsman, who took
position in February who is supposed to be an advocate for
American business. Again, that's one person against five
billion. I don't know how much they can really do, but I would
just like to have some assurance from you that you think there
is a social and government mechanism in China that could even
uphold the law if they wanted to. I'd like some indication from
you. In working with them, do you really think there's any
commitment at all for them to do that, or do we just need to
back away from this idea that we can do business as two trading
partners operating within the law? Is that a false idea?
Mr. Israel. I don't know that, Senator, I can be 100
percent reassuring to you that the infrastructure is completely
in place in China to enforce throughout the entire country,
across all the range of localities and across all the depths of
the industry that are there, the IP laws that are in place. I
think that is the big question, the capability of the
enforcement mechanisms in China to administer, forcefully and
effectively, the laws that they've put in place is really where
the challenge and the disconnect in China is. I do believe
we've seen indications that there is significant political will
in China to address this problem, and you asked the right
question. What happens then? And what capacity is there in
China to affect that political will and act on it? I think when
you look at some of the larger cities, when you look at
Beijing, when you look at Shanghai, there is a growing
capability of the law enforcement infrastructure there. There's
a recognition of the--and a better understanding of the
intellectual property laws. There's more acceptance of them and
willingness to take--to bring cases. They largely are still
brought on behalf of Chinese rights holders and very rarely
brought on behalf of foreign rights holders, let alone American
rights holders, but in some of the larger jurisdictions, we are
seeing some increased recognition of the problem and ability to
deal with it. And then you very quickly get into the inter-
lands of China, the outer areas of China, the outer cities, and
it becomes exceedingly difficult for that political will, for
that desire that has been expressed at a senior level in China
to manifest itself in a efficient, predictable and deterrent
intellectual property system, and that's what China committed
to do when they joined the WTO. They committed to have a rules-
based transparent deterrent IP enforcement system, and that
simply does not exist in China right now.
Senator DeMint. Well, I think we need to consider ideas
such as Senator Smith mentioned. If some find penalties, I hate
to mention the word terrorists or whatever, but if the
Administration doesn't come up with the idea, I very much
suspect that Congress will, and it may not be to my liking or
yours, but we don't feel like the--that the United States now
has the leverage or the will or the mechanisms in place to
enforce the laws that are on the books. So, something's got to
give, and its either got to come from your side or--I know it's
going to come from ours because when folks from the
protectionist side and the free trade side start getting
together, I think there's probably nothing that we couldn't do.
So, there are a lot of us who are pretty aggravated about it,
and a wait and see what happens in 2 years doesn't suit.
Senator Dorgan. Senator DeMint?
Senator DeMint. But I do--I appreciate you being here, too.
And again, I don't mean to pile on, but I think it's time to
put up the flags and say hey, we've got a problem.
Senator Dorgan. Senator DeMint, I actually refer to it as a
fair trade and the free trade side.
Senator DeMint. I see. Oh, OK.
Senator Dorgan. And then the protectionists, but Senator
DeMint, you weren't here when I described, I think, what
answers the--evidence that answers the question clearly. The
ownership of the logo for the 2008 Olympics in China is owned
by the Chinese Government. People in China began to counterfeit
on the street corners, on glasses and cups and banners, and the
Chinese Government shut it down immediately because they own
that. These were Chinese people trying to counterfeit and
pirate something owned by the Chinese Government. They clearly
effectively shut that down. So, that demonstrates, at least to
me, that they can, if they have the will, shut down that sort
of activity.
Senator Smith. Chris, I have a final question. If my
colleagues want a second round, they can as well. I've read
reports that in some cases, the piracy of counterfeited
products are connected, in fact, to organized crime. These
include optical disks, automobile parts, T-shirts, even
toiletry products. Is this--is that for real? Is this a real
problem, and what are your thoughts about the criminal nature
of this organization?
Mr. Israel. Very serious thoughts, Senator, I do think that
there are sophisticated global organized criminal enterprises
that are behind piracy and counterfeiting around the world.
It's relatively low risk, and it's high return.
Senator Smith. And it's in China?
Mr. Israel. And it's in China. It's in other places as
well. I do know that this is--that's a dynamic that obviously
has our law enforcement agencies very focused on this. Our
Department of Justice and our Customs agencies are exceedingly
focused on this for that very precise reason.
Senator Smith. Should we regard it as a national security
issue more than just a criminal issue?
Mr. Israel. I mean, our focus right now and the focus that
we have and that I personally have, our office is to address
this as a trade issue, as an economic issue. I would
respectfully defer the questions of national security to those
in a place to better assess the threats, the particular threats
that they see regarding national security, but we do know, as
you said, there are criminal and sophisticated organizations
behind this. We're trying to be sophisticated and organized in
our approach to combat them.
Senator Smith. Well, for the record, according to the U.S.
News and World Report, a counterfeit T-shirt operation funneled
money to an Egyptian sheik to help finance the 1993 attack on
the World Trade Center. So, that's why I asked the question.
And obviously, that's a hot issue around here right now.
Mr. Israel. Right.
Senator Smith. Do you know anything about China's
government-licensed optical disk plant?
Mr. Israel. A bit, I know it's something we've raised
frequently with them.
Senator Smith. And are you aware of any involvement of that
plant with organized crime?
Mr. Israel. I'm not aware of any specific--right now, I
think there are multiple plants. That's another problem.
There's many many optical disk plants in China that are
producing----
Senator Smith. This is a specific one that is government
licensed.
Mr. Israel. OK. I would need to probably get a little more
information and maybe get back to you with some precision on
that.
Senator Smith. Well, get some more information and I urge
you to look into it.
Mr. Israel. I will do that.
Senator Smith. Need a second round?
Senator Dorgan. Thank you, Mr. Israel.
Senator Smith. Thank you very much, Mr. Israel. We
appreciate your attendance with us, and we'll call up now our
second panel that consists of Mr. Franklin Vargo, who is the
Vice President of International Economic Affairs at National
Association of Manufacturers. And Mr. Andy York, my
constituent, he is the Vice President of Leupold & Stevens.
They have been in business since 1907. And if any of you are
hunters, you have used their scopes. Our final witness will be
Professor William Alford, Director of East Asian Studies at the
Harvard Law School, and Mr. Alford will discuss the scale of
the IPR problem in China and its potential implications on the
world economy. Mr. Vargo, why don't we lead off with you and
welcome. Pull the mike close to you so we can hear you.
STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT
FOR INTERNATIONAL ECONOMIC AFFAIRS,
NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Vargo. Thank you, Mr. Chairman, Mr. Dorgan. The NAM is
very pleased to testify today on one of the most serious
problems that we're facing out of China. That is
counterfeiting. We have other problems. We have a very, very
undervalued currency. We have problems of subsidies, but the
counterfeit products are a very serious problem as well. Lots
of people talk about the piracy of copyrighted products, CDs,
videos, et cetera, but the counterfeiting of trademark products
is a real problem with China as well. Just about everything
gets counterfeited, not just American products, Japanese
products, European products, and we have to parse the problem
out. It's bad enough that so much of the products sold in China
are counterfeit, but they don't stay within China's borders.
They go around the world. They don't just affect large
companies. Actually, large companies--the question's been asked
is China getting better. In honesty, their laws are getting
better. I think they're still deficient, but they're getting
better, and some of the large companies that operate within
China that have banded together in something called the Quality
Brands Protection Commission, the QBPC, have learned how to
work with the Chinese authorities, they've learned how to--they
can hire their investigators. Things are getting a little
better for them. But for the smaller companies, they just can't
afford this. And I have an example here of some products.
There's a great NAM member manufacturer in Fort Lauderdale,
Florida, Uniweld Products. They make refrigeration testing
equipment, and they have a big market in the Middle East where
there are a lot of refrigeration and air conditioning products
that's needed. So, their product--this is the genuine product
here. It's a very high-quality product that is in very high
demand. This is the fake Chinese product, exact same packaging,
says made in the USA, has Uniweld's warranty card in it. Same
sort of thing here, here we have the genuine product, and we
have the fake product, made in the USA.
Senator Smith. What are those?
Mr. Vargo. These are manifold testers, and these are
refrigeration manifold testers. They are, as I said, a very
high-quality product, but the market for their product in the
Middle East is being ruined by these Chinese fakes. They're not
a high-quality product. So, the company started noticing that
they're getting a lot of warranty cards being sent in, they
said geeze, you know, we're not selling that many products in
that part of the world. So, they have been working with the
authorities in the Middle Eastern countries to crack down and
are getting some relief there, but they don't have the funds to
hire investigators to go all around China and see where this is
being made and to go through the civil process and then into a
criminal process. So, we feel the laws in China are deficient.
You know, the counterfeiting is a--ought to be a crime. Now,
there is a threshold in China right now, and I'm not exactly
sure what it is, but it's too high, the dollar value or the
Yuan value of the goods that have to be seized. And also, the
goods are valued not at the value of the genuine goods, but at
the value of the fake goods, which is so much less. So, it's
difficult to get criminal prosecution. So, to many
counterfeiters in China, being caught is just a cost of doing
business. There is a civil fine. They move the equipment, they
go back into production. And we want them thrown in jail. We
want them to be locked up, and we want to throw away the key
and really make examples of them, not just a 6-month sentence
or something, but years because it is a very serious problem.
And there are some indications that the Chinese Government,
certainly in Beijing, sees this as a growing problem and is
trying to do more about it, but they really need to get at
their laws. They need something--remember that old TV series
``The Untouchables'' and Eliot Ness. You know, they need a
police strike force. Why should American companies or other
companies have to hire investigators, find out where the crime
has been committed and drag the police in. The Chinese police
ought to be doing that. So, we need more from them. We need
more out of China Customs. They ought to stop the stuff from
being exported. If a container-load of stuff is being exported
out of Shanghai or somewhere, and it says made in the USA, that
ought to be a tipoff that something's wrong here. We want U.S.
Customs to do more. And they are doing more, but we still need
more. And in third countries, particularly where we have trade
agreements that provide more rights against transshipment, we
want them to begin enforcing those agreements so we can really
make a dent in the problem. And it's not just a matter of
hurting the bottom line, it's a matter of the product's brand
reputation as well. But also, it's a matter of health. If you
get brake linings that are made of sawdust or you get fake
airplane parts or fake auto belts or fake window glass that's
supposed to be safety glass and is not, this is a real safety
problem. We have worked with the U.S. Government. We have
worked with USTR and Commerce and others, and more is being
done. We appreciate the STOP! Program. I think that Chris
Israel's position, we need to coordinate. There is so much
disjointed effort within the U.S. Government. They're doing
better, but we need more resources to go into this, and we need
to work with them more closely. I'd like to think that there
was a magic wand we could wave that would just bring a WTO
case. Bringing a WTO case is tough. The standard of evidence is
very high. We really--at the NAM, we're starting to talk with
our companies and trying to get the evidence that would be
necessary. And if we can accumulate a sufficient amount of
evidence, we won't hesitate to demand the U.S. Government bring
a WTO case, but that's a long process. You know, that's 2
years. Then, you've got 15 months to come into compliance. And
what's the remedy necessarily? Are they going to say now we,
you know, we're going to line up 30 people and throw them in
jail for life, and the problem is solved? The best way is to
get the Chinese to recognize that they've got to do something
about this. But failing that, and our patience is limited,
failing that, we certainly want to see our WTO rights pursued.
We appreciate your interest and your interest, the interest of
the whole Senate and the House. We need to see that the
Administration efforts are well funded. We need to do more for
small companies who just don't have the resources to deal with
this problem. Thank you.
Senator Smith. Thank you, Mr. Vargo.
Mr. Vargo. Oh, could I add one more point?
Senator Smith. Of course.
Mr. Vargo. Mr. Chairman, we're very very pleased at your
introduction of S. 2134 because it's not just a matter--we have
to protect our intellectual property because it's intellectual
property that allows us to compete against lower-wage
countries, but we have to continue to develop that technology.
And your bill, and I hope it will be marked up soon and
favorably, and we particularly like the advanced technology
program that you are trying to preserve and that as being
necessary. So, I just want to express the gratitude of
America's manufacturers. Thank you, sir.
[The prepared statement of Mr. Vargo follows:]
Prepared Statement of Franklin J. Vargo, Vice President for
International Economic Affairs, National Association of Manufacturers
Mr. Chairman and members of the Subcommittee,
I am pleased to have the opportunity to testify on behalf of the
National Association of Manufacturers (NAM) this afternoon on ``Piracy
and Counterfeiting in China.'' We applaud the Committee's initiative in
holding the hearing. The damaging impact of this illegal activity on
U.S. industry and the general public is serious and growing. And if we
don't get this problem under control, we are going to face severe
consequences for our businesses, workers and the health and safety of
our citizens.
The NAM is the Nation's largest industrial trade association,
representing small and large manufacturers in every industrial sector
and in all 50 states. Protection of intellectual property rights has
never been more important for U.S. manufacturers than it is today. Our
companies and workers--whether in Detroit, Los Angeles, Atlanta or
Houston--are competing in a global economy against rivals not only in
well established industrial countries but also, increasingly, in
emerging economies such as China, India, Korea, Taiwan and Malaysia.
These emerging economies, particularly China, are rapidly expanding
their industrial base on an extraordinarily large scale, taking
advantage of low labor costs, a less burdensome regulatory environment,
lower taxes and, in some cases, deliberate currency undervaluation.
America's ability to create and use intellectual property such as
patents, copyrights and trademarks provides U.S. companies with a
critical competitive advantage that helps to offset lower labor costs
and other advantages that these emerging economies have. Consumers also
benefit. The protection of trademarks and copyrights ensures that
consumers of U.S. products, whether these products are lifesaving
medicines, critical safety components in automobiles or software used
to manage complex industrial processes, have authentic products that
will perform with the high standards and quality assurances of the U.S.
producer.
In light of the importance of intellectual property rights (IPR)
for manufacturers, the NAM has devoted considerable attention and
resources to addressing their concerns. The NAM is co-chairing the
Washington-based business Coalition Against Counterfeiting and Piracy
(CACP) that is seeking to raise awareness of international trade in
fake products and promote stronger efforts by government and business
to address the problem. We have lobbied for stronger enforcement
measures against counterfeiting in U.S. legislation and more resources
to strengthen cooperation with foreign governments, including the
Chinese Government. And we are seeking to mobilize manufacturers to
improve their own internal practices to prevent counterfeiting, for
example, by strengthening their supply chain systems to prevent fake
products from getting into the hands of suppliers and customers.
How big is the problem of global counterfeiting and piracy? It is
already huge and, according to our members, is getting worse--and China
appears to be the center of the biggest international counterfeiting
and piracy rings. The estimate of counterfeit products most widely used
by both industry and government is 5 to 7 percent of world trade or a
volume of products valued at over $500 billion annually.
Much attention has been given to the problem in China and other
countries of the widespread pirating of copyrighted products, such as
computer software, films and music. There is no question that this
remains a serious problem, and despite the attention it has received,
relatively little progress has been made. In China, for example, it is
estimated that less than 10 percent of films and software sold on the
market are authentic products.
The counterfeiting of manufactured products, however, is also
serious and affects a broad spectrum of U.S. industries: medicines,
auto parts, components for industrial equipment, personal care
products, chemicals, sophisticated computer routers and aircraft parts.
Counterfeit products, of course, result in financial losses to U.S.
companies when they are sold in place of legitimate products. But they
also are a very real threat to consumers. Examples of defective
products include:
Medicines that contain life-threatening ingredients or
grossly inaccurate dosages
Batteries that explode because of faulty manufacturing
Brake pads containing sawdust
Engine timing belts that break after only 1/5 the time of
the authentic product
Razor blades that don't shave despite the quality brand name
Refrigeration testing equipment that wouldn't test properly
Faulty consumer electrical products that had false testing
marks of a well known U.S. testing firm
U.S. brand name golf clubs that could break because of poor
quality production
The volume of the counterfeiting and piracy in China, according to
reports we receive, appears to be growing. But so is the sophistication
of those engaged in illegal production. The packaging of counterfeit
products has improved so much that even U.S. company marketing experts
have difficulty telling the authentic product from the counterfeit one.
Some pharmaceutical companies have told us that the only way they can
determine whether a suspected counterfeit product is real or fake is by
sending the item for testing at a company laboratory.
How counterfeiters manufacture fake products to avoid detection has
also become more sophisticated. One U.S. consumer products manufacturer
found that the counterfeiters were producing parts of the product in
six different locations stretching over 80 miles. Final assembly was
performed at different locations depending on the risk of detection.
Much of the counterfeit production in China is consumed in the
local market. But a substantial quantity is also showing up in markets
around the world--Russia, Saudi Arabia, the UAE, Mexico, Canada, Costa
Rica, Colombia, Uruguay and, of course, the United States. In one case,
Chinese and French police worked together to intercept 800,000 units of
counterfeit consumer products that were transiting Paris from China en
route to Uruguay.
Small companies face particular challenges in dealing with
counterfeiters. One small NAM manufacturer that makes refrigeration
testing equipment was not even aware that its products were being
counterfeited in China until it started getting requests for warranty
coverage in Saudi Arabia with products that had phony serial numbers
but looked nearly identical to the company's products. An investigation
revealed that the products came from China, but the company doesn't
have the resources to pursue the case there.
To qualify for membership in the World Trade Organization (WTO),
China had to bring its domestic IPR laws into conformity with standards
established by the WTO Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS). China's laws on defining
intellectual property rights did in fact improve. But the enforcement
of these rights still remains problematic.
On the positive side, the Chinese Government has been receptive to
discussing U.S. business concerns and taking some actions. The NAM
appreciates the high priority that U.S. Trade Representative Portman
and Commerce Secretary Gutierrez, and their predecessors, have given to
engaging their Chinese counterparts on counterfeiting and piracy.
Discussions on counterfeiting and piracy in the 2004 and 2005 U.S.-
China Joint Commission on Commerce and Trade (JCCT) were substantive
and resulted in specific commitments on issues important for U.S.
business. Key outcomes included:
China's pledge to significantly increase penalties and
crackdown on violators
Commitment to expand the range of IPR violations subject to
criminal (as opposed to solely civil) penalties and increase
the number of criminal prosecutions
Agreement to increase enforcement action by Chinese customs
to stop the import and export of counterfeit products
Assurance that Chinese Government entities would only use
legal software
Commitment to rid Chinese trade fairs of counterfeit
products
These are all important outcomes for U.S. manufacturers. Chinese
follow-through on these commitments, however, has been uneven.
Significantly, China did issue a judicial interpretation that permits,
in theory, more criminal prosecutions. Some companies report aggressive
enforcement actions by national and local authorities when detailed
evidence of counterfeiting was presented. In a number of cases brought
to our attention, police reportedly undertook extensive investigations
in several locations that resulted in the arrest of many suspects
(e.g., a dozen in one case) and the confiscation of hundreds of
thousands of counterfeit items. The Chinese Government claims that it
has taken many enforcement actions that resulted in the closing of
thousands of commercial establishments that sold counterfeit products.
In other positive developments, Starbucks announced earlier this
year that it had won a trademark lawsuit against a Chinese coffee chain
that was using its Chinese trademark. Luxury goods maker Louis Vuitton
also scored a victory recently when a Chinese court reportedly
sentenced two men to prison for exporting copies of its perfumes. And
in November 2005, General Motors reported that it had reached a
settlement with a Chinese auto company Chery that GM says acquired its
compact car designs and was producing automobiles identical to the GM
model.
Yet despite these positive anecdotes and Chinese claims of many
enforcement actions, companies continue to tell us that counterfeiting
and piracy in China is rampant, growing and on a very large scale.
Enforcement actions, even when vigorously undertaken, appear to have
little effect on the overall level of production and sale of
counterfeit products. Moreover, we continue to receive reports of
counterfeit products from China finding their way to countries around
the world. The reports indicate that the Middle East is a major market
for counterfeit products and transit point to third countries.
Manufacturers in other countries have also experienced similar
problems with counterfeiting and piracy in China. Counterpart business
organizations in Japan, Korea and Europe have told us that their
members are seriously concerned about the large-scale counterfeiting
and piracy of their products in China and the sale of these products in
the domestic market and abroad. The Korean newspaper Joong Ang Daily
reported on August 22, 2005, that two-thirds of electronics shops in
Beijing, Shanghai and Guangzhou were selling fake Samsung products and
that 30 percent of auto parts marked ``Made in Korea'' in eight Chinese
cities were found to be fake. Counterfeit Korean consumer electronic
products from China have been found in Peru, Israel and Egypt.
Chinese authorities continue to assert that the number of
enforcement actions against counterfeiters is large and increasing. The
authorities, however, have yet to provide detailed information on the
penalties imposed on those involved in the production and sale of
counterfeit products or the actions taken to close down factories and
commercial outlets engaged in the illegal activity. We are particularly
concerned that China has not substantiated its pledge to significantly
increase the number of criminal prosecutions for counterfeiting and
piracy.
China's failure to provide this information after repeated requests
led the United States to seek help from the WTO. On October 26, 2005,
the U.S. Trade Representative initiated a special process under Article
63.3 of the TRIPS Agreement to request that China release more detailed
information about its IPR enforcement efforts. The NAM supported this
action. We are disappointed that, thus far, China has not responded
positively to the request.
In the next several weeks, the Administration will have important
opportunities to seek further progress on improving China's performance
on IPR enforcement. On April 11, the JCCT will meet again in Washington
to review progress on the bilateral trade agenda, including IPR
enforcement. The participation of Chinese Vice Premier Wu Yi and our
two senior trade officials--Ambassador Portman and Secretary
Gutierrez--will permit a high-level exchange on key policy concerns and
a detailed review of past commitments, which in our view have not been
fully implemented. Then later in April, President Bush will be meeting
with Chinese President Hu Jintao to discuss the overall bilateral
relationship. We will be recommending that counterfeiting and improved
IPR enforcement receive priority attention at both meetings.
Barring a significant improvement in China's performance on IPR
enforcement, we see no alternative but for the United States to
consider filing a complaint with the WTO and requesting that a dispute
settlement panel determine whether China is living up to its TRIPS
obligations. The apparent small number of criminal prosecutions, for
example, suggests that China's IPR laws may not be adequate to ensure
enforcement of companies' rights. Similarly, the unevenness in IPR
enforcement among the different Chinese localities also seems to
indicate that the national government has not effectively implemented
the TRIPS agreement on China's behalf. The NAM is now exploring with
member companies and organizations whether it would be possible to
develop the kind of detailed information that would fully substantiate
these claims in a WTO dispute settlement case.
The NAM, however, does not believe that business and government
should leave resolution of the China counterfeiting and piracy problem
solely to the WTO. Business needs to do a better job to raise awareness
of the threat from international counterfeiting and the need to be pro-
active to fight against it, for example, by improving company and
industry practices on supply chain security. The NAM will be
encouraging this through the CACP as well as its own member working
groups.
U.S. agencies--particularly Commerce, State, USTR and Customs &
Border Protection--need to continue strengthening their efforts to
address counterfeiting and piracy in China and other countries. The
STOP! Initiative has provided a good framework to do this. We are
particularly pleased that more resources are now in place here in
Washington and additional IPR experts are being assigned to U.S.
embassies, including Beijing. We would urge even more attention to how
improved customs procedures in the United States and our trading
partners can be used to prevent the import and export of counterfeit
products.
Finally, we hope that Congress will also continue to support
efforts to stop international counterfeiting and piracy. First, we ask
that Congress ensure the enactment without further delay of the
Counterfeiting in Manufactured Goods Act (H.R. 32). At the time I was
preparing this testimony, we learned that the House had scheduled a
vote on March 7 to approve H.R. 32, as amended by the Senate. We
appreciate the Senate's earlier action on the bill. The legislation is
important because it will make it easier to prosecute individuals
engaged in the production and sale of counterfeit marks that are
intended for use on counterfeit products. We had been pressing other
countries to adopt similar legislation to fight counterfeiting, and the
United States would set a poor example if it hadn't done so. U.S. anti-
counterfeiting laws should be the gold standard, but we have a gap on
counterfeit marks that must be fixed.
Looking ahead, Congress also needs to ensure that U.S. agencies
have the resources to address a global problem that will have serious
consequences not only for U.S. industry but the entire U.S. economy if
it is not contained. The budget for the next few years will likely be
tight. We shouldn't short change anti-counterfeiting efforts that are
so important for U.S. economic interests.
Thank you for holding this hearing and giving the NAM the
opportunity to present its views.
Senator Smith. Thank you. Thank you very much. Andy York,
thank you for coming from Oregon, and thank you for your great
products for nearly a century now. You haven't been here that
long, but your products have.
Mr. York. Not quite that long.
STATEMENT OF ANDREW YORK, VICE PRESIDENT,
LEUPOLD & STEVENS, INC.
Mr. York. Good afternoon, Chairman Smith and Ranking Member
Dorgan. I'm pleased to join you today to discuss the impacts of
piracy and counterfeiting of American goods and intellectual
property in China. I want to begin my testimony by thanking the
Committee for your efforts to understand the impact that these
activities have on American business, large and small, and I
want to just take a few minutes to let you know how they're
impacting our business, Leupold & Stevens. As you mentioned, we
were founded in 1907. We're getting ready to celebrate out
100th year next year. We're a well-established manufacturer of
rifle scopes, binoculars, spotting scopes and rangefinders, and
we serve both the sports optics and tactical markets for our
law enforcement and military. We are based in Beaverton,
Oregon. We have been building rifle scopes since 1907. We have
approximately 600 employees, and we're a fifth-generation
family owned company. We registered the Leupold trademark in
the United States on January 12, 1971. And since then, we have
obtained registrations for Leupold in the European Union,
Australia, New Zealand, Hong Kong and Japan. Frankly, we
probably should have filed for a trademark in China decades
ago, but probably like a lot of small businesses, we were
unaware of the potential issues we would face in the Chinese
market. It wasn't on our radar screen. And frankly, with the
Tiananmen Square-related sanctions, rifle scope sales to the
People's Republic of China are prohibited. So, it's not an
active market for us. It became one on December of 2001, when
we learned that SAM Optics (Nantung) Company Limited had filed
in the People's Republic of China for the word Mark Leupold in
English for goods manufactured and sold by Leupold & Stevens.
We later learned that SAM Optics had also filed to register 19
applications for 16 other company's marks in the sports optics
and telescope market. These marks include BSA, Bushnell,
Swarovski, Simmons and Celestron among others. We later
learned----
Senator Smith. Can I ask you a question?
Mr. York. Yes, sir.
Senator Smith. You don't sell anything into China, though?
Mr. York. We do not. We source products in China. We do not
currently sell----
Senator Smith. It's prohibited, right?
Mr. York. It is prohibited. There is one potential sale
that we are exploring right now with the police department, I
believe, in Hong Kong.
Senator Smith. Thank you.
Mr. York. So, their law enforcement people know us fairly
well.
Senator Smith. But you have never seen any upside to the
China market?
Mr. York. There is not a lot of hunting in China.
Senator Smith. Got it.
Mr. York. BSA paid $25,000 to reclaim their mark from
another company in China, Asia Optical, who had registered
their mark, and we also learned from our council in China that
recently, SAM Optics sold one of these marks that had
registered for between $50,000 and $80,000. It is our
perspective that this is a fraudulent intent, a case of
fraudulent intent, to register the trademarks of other well-
known international brands for the sole purpose of attempting
to extort money from the rightful owners of these trademarks.
We have been fighting a legal battle for close to 5 years now.
We filed our own applications in both classes 9 and 13 in the
People's Republic of China. We have cited the Trademark Law,
the Paris Convention. We provided much evidence in the People's
Republic of China to support our claim that Leupold is a well-
known brand and is rightfully ours. The trademark office there
refused our application. They rejected our opposition to SAM
Optics in class 13. We have appealed that rejection, but it
could take several more years to ultimately get a decision.
Senator Smith. And are your products manufactured there,
not by you, but your intellectual property. Are they being
sold?
Mr. York. Yes, I'm going to tell you in a moment about some
products right now, some counterfeit goods that are showing up
in the international market for Leupold rifle scopes. I did
want to pick up on a theme earlier. China is a member of the
WTO. They've signed onto the World Intellectual Property
Organization. They've acceded to the Paris Convention, the
Madrid Agreement and Protocol, the Nice Agreement. They signed
the Trademark Law Treaty. They supposedly patterned their
trademark law after the TRIPS Agreement. However, it appears
that there has been a breakdown in the interpretation and
implementation of these standards into domestic law in China or
a failure to effectively enforce those laws, most likely both.
Further agreements must seek to ensure that provisions are
incorporated into domestic law in China exactly as enacted in
the signed international agreements. I want to talk to you now
about counterfeiting operations in China. Leupold sources many
finished-good products from China, including binoculars and
rangefinders. If we lose control of our mark, we are concerned
that our exports from China to Leupold are at risk of being
deemed counterfeit goods in China, and we would then be the
counterfeiter. We find that very ironic. Leupold is also
experiencing increased incidents of counterfeit goods, clones,
replicas and knock offs of our tactical rifle scopes on eBay
from sellers in the Hong Kong area. We are seeing these show up
in the United States, the European Union in Australia, and we
have reports form our distributors in Russia that those
counterfeit goods are now showing up in the Moscow area as
well. If we lose control of our market, we may face increased
risk that these tactical rifle scope copies could be legally
branded Leupold in the People's Republic of China. If they were
confused with the real thing and used in the line of duty by
our law enforcement officers or members of our military, the
potential for failure and the resulting consequences would be
significant. I wanted to let you know who uses our scopes and
how they are used by the Department of Defense, the Department
of Energy, the FBI, Border Patrol, Capital Police, Secret
Service, and Homeland Security. Ninety percent of all local
police departments in the United States, Special Forces and
SOCOM. They are used to fight terrorism, both domestically and
internationally, but I think it's the least that we can do for
these folks that put their lives on the line everyday to ensure
that the rifle scopes on their equipment are original equipment
and not knock offs. I want to read to you, if I can, just--I
know I'm going over here, one brief statement. This is a
correspondence that I've initiated with one of the knock off
sellers in Hong Kong. I think you have photos there that were
provided of our Leupold Mark 4 LRT. It's a long-range tactical
scope that our sniper teams use. It's a 3.5x10x40 product, and
you have a picture there of a counterfeit good being sold on
eBay. This is from a company called Sun Clear Trading,
operating out of Shanghai where I was inquiring about my
opportunity to import these goods into the United States,
posing as a wholesaler. I was glad to have your e-mail. I sell
a lot of scopes on eBay, and I export a lot of them to the U.S.
in your own market. Most of my scopes are excellent quality
with several tests of my customers. Leupold copy is the same
appearance as the original. It can be used on the real fire
weapon. Frankly, I can't guarantee the copy is 100 percent as
good as the original. Of course, you have to buy one or two for
a test. If you are satisfied with them, I can supply you a good
wholesaler price. The M1 sample fee is U.S. $100.
Senator Smith. Where did that originate, that e-mail?
Mr. York. This is a direct correspondence from me to a
seller on eBay.
Senator Smith. So, you just--you've invited the----
Mr. York. Posed as a buyer.
Senator Smith. Yes.
Mr. York. He's selling them for $100. The real scope sells
in the United States for a suggested retail of $1,400 and as
rightfully it should. These are scopes that are designed to
survive 5,000 hits on the equivalent recoil of a 375 H and H
Magnum and hold point of aim. The scopes that are coming--these
counterfeit goods are a little more than toys, look-alike toys.
So, it's very troublesome. It's very bothersome. You know,
we're extremely concerned about this trademark issue that we're
facing there. It's exacerbated now by what appears to be a
rapidly expanding counterfeiting operation, both in China, and
also, we have reports that it's out of Japan as well. We're
extremely concerned. We would like to thank you on behalf of
Leupold & Stevens for addressing this situation, not just for
ourselves, but obviously, for all Americans doing business in
China.
[The prepared statement of Mr. York follows:]
Prepared Statement of Andrew York, Vice President,
Leupold & Stevens, Inc.
Chairman Smith, Ranking Member Dorgan and members of the Committee,
I am pleased to join you today to discuss the impacts of Piracy and
counterfeiting of American goods and Intellectual Property in China.
I want to begin my testimony by thanking the Committee for your
efforts to understand the impacts these activities have on American
business, large and small. I would like to present to you today an
insight into one such American company, Leupold & Stevens, Inc., and
how piracy and counterfeiting are impacting our business. Your focus on
these issues is greatly appreciated and we think it holds great promise
that this Committee will identify and implement strategies that will
lead to further refinement of international intellectual property
standards and the corresponding domestic legislation where these
international agreements, conventions and protocols are interpreted
into the laws of the member countries.
Leupold & Stevens, Inc. is based in Beaverton, Oregon. We have been
in business since 1907. As our business has grown, we have expanded our
workforce to approximately 600 employees. Leupold is a fifth-generation
family owned company. We pioneered the manufacture of waterproof
riflescopes in 1947 and have steadily developed a worldwide reputation
for building the world's finest hunting scopes, binoculars, spotting
scopes and rangefinders, sold under the trademark LEUPOLD.
Over time, our brand has been built on the principle that every
customer is entitled to a square deal. Leupold has become legendary for
its rugged dependability, absolute waterproof integrity and lifetime
guarantee. This is an old fashioned guarantee from an old fashioned
kind of company: If any Leupold Golden Ring product is found to have
defects in materials or workmanship, we will, at our option, repair or
replace it. FREE. Even if you are not the original owner. No warranty
card is required. No time limit applies. These are the building blocks
that our brand and LEUPOLD trademark have been built upon.
Leupold & Stevens projects worldwide sales of well into the
hundreds of thousands of units in 2006, totaling in the hundreds of
millions of gross revenue dollars, for hunting scopes and related goods
sold under the mark LEUPOLD. The trademark LEUPOLD for hunting scopes
and related goods was first registered in the United States on January
12, 1971. Since then, Leupold & Stevens has obtained registrations for
the mark LEUPOLD in the member countries of the European Union,
Australia, New Zealand, and Japan.
Leupold sells its products to three unique markets; Hunting/
Shooting, Observation and Tactical. Our riflescopes are used for
hunting and target shooting all over this great country and, in fact,
all over the world. Our tactical line of riflescopes is used
extensively by law enforcement officers and by many branches of our
military. Our troops in Afghanistan and Iraq rely on our riflescopes on
a daily basis to complete their missions.
Aside from the U.S., we have distributors and/or representation in
Austria, Australia, Belgium, Bulgaria, Canada, Czech Republic, Denmark,
England, Finland, France, Germany, Holland, Ireland, Israel, Italy,
Japan, Kazakhstan, Latvia, Mexico, New Caledonia, New Zealand, Norway,
Poland, Portugal, Qatar, Romania, Russia, Serbia & Montenegro, South
Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Ukraine and the
United Arab Emirates. Although we source components and finished goods
such as binoculars and range finders from China, we do not export
riflescopes there due to Tiananmen Square-related Sanctions that are in
place at the U.S. State Department. If market conditions in China and
export laws were to change in the future, Leupold would consider
expansion into this market just as we have done elsewhere in the world.
Before we begin to recount the history of what has transpired in
regards to Leupold's efforts to trademark and protect our brand LEUPOLD
in China, I do want to state for the record that Leupold has strong
business partners in China. Most companies and authorities that we have
dealt with in China and certainly those relationships and partnerships
that are currently in place are based upon mutual respect, trust, honor
and proper business ethics. From Leupold's perspective, we find it most
unfortunate that with such positive business dealings with our many
partners in China that a single company could cause us such problems.
What is more troublesome however is that with the extent of trade
between China and the U.S. and all of the international agreements,
conventions and protocols that China has acceded to, one would think
that the PRC intellectual property laws would not allow such behavior.
That has not been the case, at least from our experience over the past
5 years.
In December 2001, Leupold & Stevens learned that an application for
the word mark LEUPOLD, in English, had been filed in the People's
Republic of China for goods including those manufactured and sold by
Leupold & Stevens. That application, filed for goods in International
Class 13, was owned by a company called SAM Optics (Nantong) Company
Ltd., hereafter SAM Optics. Note that Leupold & Stevens has never had a
relationship with SAM Optics in any capacity, either as a distributor,
retailer, or manufacturing partner.
Following counsel's advice, Leupold & Stevens filed trademark
applications in China in International Classes 9 and 13, covering all
the Goods it manufactures and sells in order to support filings to
oppose the SAM Optics application. The LEUPOLD trademark applications
were filed on January 21, 2002.
In preparing evidence to oppose the SAM Optics LEUPOLD trademark
application, Leupold & Stevens learned that SAM Optics had filed to
register 19 applications for 16 other companies' marks primarily in the
sports optics and telescope markets. These included such widely-known
marks as CELESTRON, SWIFT, BURRIS, BUSHNELL, SWAROVSKI, SIMMONS,
WALTHER, and BSA (See attached list of Marks). In January, 2002, at the
Annual SHOT Show, a representative of Leupold, Fritz Kaufman, met with
a representative of BSA, Roger Vallecorse, to discuss SAM Optics. Roger
Vallecorse followed up that meeting with an e-mail to Fritz Kauffman,
which I attach. In that e-mail, Roger Vallecorse offers to introduce
Leupold to SAM Optics, who had assisted BSA with buying back its mark
from another China company, Asia Optical, to whom BSA paid $25K. Roger
Vallecorse states that SAM Optics' motives in registering the marks
referred to above are to prevent those marks from being registered by
Asia Optical. Vallecorse, then, paints SAM Optics as a good guy--Asia
Optical are the bad guys. Note that Vallecorse's e-mail was copied to
both an officer of SAM Optics (Yin Zhu Hua) and the company lawyer (Guo
Jun).
We later learned from our counsel that SAM Optics sold one of the
marks (we do not know which one) for somewhere between $50,000 and
$80,000 (USD). This is the kind of experience that awaits U.S.
businesses seeking to register their trademarks in China.
SAM Optic's trademark registration pattern and practices were cited
in the opposition filed by our counsel on April 20, 2002. That
opposition was based on the bad faith of SAM Optics in seeking to
register LEUPOLD, among other marks. The opposition cited Article 31 of
the PRC Trademark Law, which states:
An application for the registration of a trademark shall not
create any prejudice to the prior right of another person, nor
unfair means be used to preemptively register the trademark of
some reputation another person has used.
The opposition also cited Article 6bis (1) of the Paris Convention
concerning protection for well-known marks, which states:
The countries of the Union undertake, ex officio if their
legislation so permits, or at the request of an interested
party, to refuse or to cancel the registration, and to prohibit
the use, of a trademark which constitutes a reproduction, an
imitation, or a translation, liable to create confusion, of a
mark considered by the competent authority of the country of
registration or use to be well known in that country as being
already the mark of a person entitled to the benefits of this
Convention and used for identical or similar goods. These
provisions shall also apply when the essential part of the mark
constitutes a reproduction of any such well-known mark or an
imitation liable to create confusion therewith.
Shortly after filing the opposition to the Sam Optics application
in Class 13, a second SAM OPTICS application for the mark LEUPOLD in
Class 9, for additional Goods manufactured and sold by Leupold &
Stevens, was published for opposition. Leupold & Stevens filed an
opposition against that application as well.
Leupold & Stevens had diligently filed to oppose both PRC
applications for the mark LEUPOLD, filed in bad faith by SAM Optics,
and it had filed its own applications in the PRC to protect its own
goods.
In October, 2005, the PRC Trade Mark Office refused Leupold &
Stevens application for the mark LEUPOLD: in November 2005, the PRC
Trade Mark Office rejected Leupold & Stevens opposition to the first
SAM Optics application opposition on the following grounds: that
Leupold & Stevens did not own a registration or application for the
mark LEUPOLD in the PRC for the same Goods--which was incorrect; and,
that the demonstration of trademark registrations, sales and
manufacturing volume, affidavits of fame of the mark, were insufficient
to prove that SAM Optics had filed in bad faith.
Leupold & Stevens is filing to appeal the rejection of its
opposition to the SAM Optics mark for LEUPOLD in Class 13. According to
our counsel, we will not receive a decision for 2 or 3 years. If
Leupold & Stevens loses this final appeal, and if it loses its
opposition against the Class 9 Application for the LEUPOLD mark owned
by Sam Optics, Leupold & Stevens will have no recourse except either to
pay whatever price SAM Optics sets for the registrations it has
obtained in bad faith or run the risk of being prosecuted for
infringement of its own mark, LEUPOLD, registered in China by SAM
Optics.
This is obviously just the type of Fraudulent Intent that numerous
international conventions, agreements and treaties have sought to
prevent. China became a member of the World Intellectual Property
Organization in 1980. China acceded to the Paris Convention for the
protection of Industrial Property on November 14, 1984 and became an
official member on March 19, 1985. China acceded to the Madrid
Agreement for the International Registration of Trademarks on October
4, 1989 and to the Madrid Protocol on December 1, 1995. China acceded
to the Nice Agreement concerning the International Classification of
Goods and Services (ICGS) on August 9, 1994. China signed the Trademark
Law Treaty (TLT) on October 27, 1994. Finally, China has patterned its
intellectual property law after The Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS).
While all of these efforts have contributed immensely to bringing
China's intellectual property laws up to internationally accepted
standards, a more basic question still remains: Do these international
agreements go into effect directly upon signing or are they only
implemented through the resulting domestic laws of those countries
signing the agreements? In China's case, it appears to be the latter
and it has been this translation or interpretation into domestic law in
China that the original intent of these international standards seems
to break down. What is possibly needed is stricter wording in these
international agreements that treaty provisions take precedence over
domestic trademark law provisions, and these treaty provisions must be
incorporated exactly as enacted in the signed agreements.
It is clearly not ethical or acceptable that SAM Optics runs out
and files trademarks in China for 19 well know international brands of
optical equipment with the sole intent being to extort a ransom from
those companies to purchase back trademarks which those companies
rightfully own by internationally accepted trademark standards.
Furthermore, it is absolutely not acceptable that China, after having
agreed to these international standards, fails to implement them into
law or to correctly apply those trademark laws which it has
implemented. How can it be that after all of the work that has gone
into setting these international standards that Leupold and Stevens,
Inc. cannot register and protect the LEUPOLD trademark in China, even
in the face of such a case of pure fraudulent intent by SAM Optics?
If Leupold loses control of the LEUPOLD trademark in China there
are resulting potential consequences that we are concerned about.
Leupold sources many finished goods directly from various manufacturers
in China, including range finders and binoculars. If these goods are
stopped for inspection at a point of export from China, with the name
LEUPOLD on them, we are concerned that we may run the risk of being
charged with attempting to illegally export goods branded LEUPOLD, a
trademark that we would not own in China. Ironically, we could be
viewed as the counterfeiter.
A similar concern exists in the fact that for some time there have
been counterfeit goods coming from China that are being sold on eBay as
Leupold clones, replicas or knock-offs. These products are marketed as
being the same as Leupold tactical riflescopes but without the Leupold
name on them. Whereas a true Leupold tactical scope may retail for over
$1000 (USD), these look-alikes will sell on eBay for about $100 (USD).
There are several sellers who apparently seem to be working out of the
Hong Kong area.
Our concern is that if we lose control of the LEUPOLD trademark in
China, these replica riflescopes could legally begin to appear with our
name on them and from all outward appearances would look just like an
original Leupold. Our Leupold tactical riflescopes are built to meet
the demanding requirements of our law enforcement officers and military
personnel. If these knock-offs are taken to be the real thing, which
they definitely are not, they could be mistakenly purchased either new
or years from now as used equipment by customers who mistakenly assume
them to be genuine Leupold tactical riflescopes. What would happen if
these look-alikes then failed in the line of duty? This is a very grave
scenario to say the least and the potential ramifications on Leupold
are substantial. Everything we have built over the past century under
the Leupold brand name would potentially be at risk.
I would like to conclude my testimony with a simple thought. Over
50 years ago, our company's founder, Markus Friederich Leupold declared
that, ``the customer is entitled to a square deal.'' That simple ideal
has driven our company to always strive to do the right thing and take
care of our customers. Mr. Chairman, after you read all of the
international agreements, treaties and protocols, ask yourself a simple
question . . . are American businesses getting a square deal when it
comes to intellectual property protection in China? I can tell you that
from Leupold's perspective we definitely are not. Thank you very much.
Fritz Kaufman
From: [email protected]
Sent: Friday, February 08, 2002 1:19 PM
To: [email protected]; [email protected]; [email protected]
Cc: [email protected]
Subject: Leupold Chinese registration/Meeting with BSA Optics at SHOT.
Gentlemen,
Thanks for stopping by to visit with us on the last day of the
show. I hope that you had a pleasant and uneventful return home.
RE Registration of Leupold Name in China
Pursuant to our discussion, please allow me to confirm that Asia
Optical (formerly Asia Optical Japan), under the direction of Mr. Misao
Ozaki, registered the name of BSA Optics in China and offered us the
alternative of either purchasing all of our Chinese made goods through
them or purchasing our name from them. Although I saw this as little
more than legalized extortion, we felt it was best to negotiate and pay
a USD 25,000 settlement which secured ownership of our name and allowed
us to get on with business.
In China, we were represented by the president of one of our
suppliers, Sam Optical's Yin Zhu Hua, and his chief counsel Guo Jun.
They were quite helpful in this regard and I recall Mr. Yin indicating
to me that he was going to register the names of all his current
customers as well as other U.S. and European optics firms with the
intention of blocking additional extortion/coercion attempts by Asia
Optical.
Significant animosity remains today in the eastern provinces of
China, especially Jiangsu where the Japanese military committed
numerous atrocities on civilian populations. As such, it is likely that
Yin's efforts to register the names of companies other than his
customers' were not entirely altruistic in nature. In any case, I am
sure that you will find him to be highly motivated to assist you in
this regard. However, do note that today is the beginning of the
Chinese new years holiday and most businesses and government offices
will be closed through at least the end of the next week.
Ozaki's actions were completely reprehensible and if I may be of
any further assistance, do not hesitate to call on me. After IWA, I
will be in China for several weeks and not opposed to following up
directly with Yin and Guo on your behalf.
With best regards,
Roger J. Vallecorse,
VP Purchasing and Technical Services,
BSA Optics
cc: Michael Guo (Guo Jun) [email protected]
Yin Zhu Hua [email protected]
Senator Smith. Andy, have you ever had a warranty claim
made to you for one of these counterfeit products?
Mr. York. I think probably--that would have come to my
attention, so I am not aware that that has happened as yet.
Senator Smith. How much quantity are you aware of that has
come here with your brand on it from China?
Mr. York. You know, I just started into this really
diligently last week in preparation for this hearing, and I
searched on eBay from a couple of these sellers, and it looks
like it's in the neighborhood of 500 tactical scopes per year
roughly that I can track through that one channel. I don't have
a good idea of how many may be coming in through different
wholesalers.
Senator Smith. Outrageous. Professor Alford.
STATEMENT OF WILLIAM P. ALFORD, HENRY L. STIMSON
PROFESSOR OF LAW; VICE DEAN FOR THE GRADUATE
PROGRAM AND INTERNATIONAL LEGAL STUDIES; DIRECTOR OF EAST ASIAN
LEGAL STUDIES, HARVARD LAW SCHOOL
Professor Alford. Chairman Smith, Ranking Member Dorgan,
thank you very much for inviting me to appear today. The
infringement in China of American intellectual property is
obviously very harmful to both the Americans and to Chinese. I
know this firsthand. Parts of my book on intellectual property
in China entitled To Steal A Book is an Elegant Offense, which
comes from the old Chinese saying, have recently been
reproduced in China without authorization and without
attribution, and sadly enough, by one of China's leading
professors of intellectual property law. I brought one copy of
the book. You open it up, and there are parts of my book just
used without any acknowledgment that they're from my book. You
know, the problem is not that China lacks laws against
infringement. As the USTR and most observers have noted,
China's laws, the formal laws on the books, are largely
consistent with its international obligations, although as Mr.
Vargo noted, improvements could be made. The real problem, the
principal problem, instead is one of enforcement. You know,
it's tempting to see this as only a matter of will, namely that
if the Chinese Government, which after all, is not a democratic
government, wants to, it can bring this illicit behavior to
halt fairly quickly, or if it doesn't want to, that we in the
U.S. then have sufficient pressure that we can bring to bear to
force it to do so. Will or lack of will on the part of the
Chinese Government clearly is very important. I wouldn't be
honest if I suggested otherwise. Will, when it's there,
accounts for some of the improvements such as, for example, the
establishment in major cities courts of special intellectual
property chambers and the courts that are among--they have
among the most capable Chinese jurists. And lack of will,
clearly, is evident than what we've heard already in the
discussion today in the Chevy automobile matter, in the fact
that there's a city called Yiwu in Zhejiang Province that's a
major distribution center known far and wide, specializing in
infringing products and the inadequate staffing of the Customs
Service and the National Copyright Administration and so forth.
The Chinese Government clearly can and should do much more
to ensure protection for intellectual property, and we in the
U.S. should maintain the type of vigilance called for in the
USTR's Top-to-Bottom Review. But I also believe that we need to
understand that there are other dimensions to this problem that
are important to take into account, not as an excuse for
illegal behavior, but in order to come up with the most
effective strategy possible for the U.S. Let me just mention a
couple here.
The legacy of Confucianism, which was a dominant ideology
in China before the 20th century, and of communism mean that
intellectual property still remains a fairly novel idea for
many of the people in China, and that there continues to be an
insufficient sense that stealing a book is not elegant, but
it's illegal. And we need also to appreciate that because of
the weakness of institutions in China today, the problems of
local favoritism, of inexperience, of corruption that have
impeded the enforcement of intellectual property are not
unique, but in fact, they're mirrored in virtually every other
area of the law, including areas that Beijing cares about very
much.
There were, for example, more than 75,000 instances of
civil unrest in China last year. One could also look at
Internet filtering where the Chinese Government is trying hard
to constrain it, but is not entirely effective. As a result of
all this, a strategy on our part that's premised entirely on
foreign pressure or principally on foreign pressure and that
envisions a relatively quick solution will not, I fear,
suffice.
In addition to maintaining some pressure, we need to do
what we can to promote rights consciousness in general in China
and to help build better institutions in a stronger civil
society. History, after all, tells us that intellectual
property protection flourishes most fully in societies in which
citizens have private expression and other such interests to
protect, are keenly aware of their rights, are able to band
together to protect those rights and have well-developed
institutions through which to vindicate those rights.
China has a long way to go on these accounts, but as civil
society and private enterprise are beginning to emerge, we can
see the beginnings of a domestic constituency that has its own
valuable intellectual property and other interests to protect,
a constituency that by advancing such interests, also serves to
advance ours in ways that we as foreigners cannot do as
directly or as effectively.
We are certainly correct to hold the Chinese Government to
its word when it announces as the state council, the principal
administrative arm of the Chinese Government, recently did that
stronger intellectual property enforcement is crucial to the
fostering innovation China needs for its growth. We certainly
absolutely should hold them to their word, but I think it also
behooves us to work as best we can to promote both the popular
consciousness among the Chinese people generally and the
domestic institutions in China that are necessary to make
better protection of intellectual property rights--indeed, all
rights a reality. Thank you very much.
[The prepared statement of Mr. Alford follows:]
Prepared Statement of William P. Alford, Henry L. Stimson Professor of
Law; Vice Dean for the Graduate Program and International Legal
Studies; Director of East Asian Legal Studies, Harvard Law School
Mr. Chairman and distinguished members of the Subcommittee:
I want to thank you for inviting me to appear. My name is Bill
Alford and I am the Director of East Asian Legal Studies at Harvard Law
School.
I have been studying the law of the People's Republic of China
since before there was much to study (i.e., in 1970), and I first began
to focus on intellectual property issues there in the 1980s--initially
as a practicing lawyer at a law firm in Washington representing
American companies doing business in China, and subsequently as a
scholar who has both taught in China (I was a co-founder in the early
1980s of the first academic program in American law in the PRC) and
conducted research there. Indeed, my interest in writing about
intellectual property law issues in China as a professor grew out of
the challenges I had to deal with as a practitioner. What I would like
to do today is to share with you some of what I have learned about the
setting that gives rise to the problem of intellectual property
infringement in China (the subject that brings us here), and to offer a
few comments about its implications.
To do so is not to offer an apology for it. The scale of the
problem, as we all know, remains massive, and harmful to Chinese and
Americans alike. Beyond economic harm, fake medicines and counterfeit
auto and airplane parts, by way of illustration, have the potential to
cause grave, if not fatal, injury. Indeed, at a much less important
level, I am a victim myself. Significant parts of my book on the
subject--entitled To Steal a Book is an Elegant Offense: Intellectual
Property Law in Chinese Civilization \1\--have recently been reproduced
commercially without authorization, attribution or compensation--by no
less than a professor of intellectual property at one of Beijing's
leading universities!
---------------------------------------------------------------------------
\1\ Stanford University Press (1995).
---------------------------------------------------------------------------
Rather, I want to discuss the broader context because I believe
that understanding it is crucial if we are to appreciate the nature of
the problem and what part our government might play in addressing it.
China today has a fairly complete set of intellectual property
laws--most observers agree that in terms of law on the books, China for
the most part has met its obligations under the TRIPS agreement of the
World Trade Organization. As the United States Trade Representative
noted less than year ago in announcing the results of its ``out-of-
cycle review'' of China vis-a-vis intellectual property matters,
``China's central government has made largely satisfactory progress in
bringing China's IPR laws and regulations into line with China's WTO
obligations.'' \2\ To be sure, there are calls for a number of further
refinements, including stiffer penalties and greater ease of action
against wholesalers and re-sellers of infringing items,\3\ and the
Chinese Government has announced that it is contemplating some
noteworthy provisions--including possibly simplifying the patent
application and examination process, increasing penalties for
infringement, and establishing specialized intellectual property
courts.\4\ But still, by and large, China's laws are, on their face,
not the principal problem.
---------------------------------------------------------------------------
\2\ United States Trade Representative, ``Out-of-cycle Review
Results,'' posted on the USTR website, April 29, 2005 (last visited
March 6, 2006). It should be noted that at the end of this review, the
USTR elevated China to its Special 301 ``Priority Watch'' list because
these laws were not adequately enforced. The view that China now has a
reasonably complete body of intellectual property law at the national
level is shared by others. Scott M. Flicker and Matthew S. Dunne, in
``China has Stepped up IP Enforcement Recently,'' The National Law
Journal, May 9, 2004, indicate that ``China is a party to every major
intellectual property convention and treaty, and its laws and
regulations are mostly up to the rigorous standards imposed by . . .''
the WTO's TRIPS agreement. Also, Alex Scott with Andrew Wood, for
instance, in ``Intellectual Asset Management,'' Chemical Week, January
18, 2006, describe ``China's IP regulations . . . as now among the
toughest in the world,'' citing Ian Harvey, ``chairman of the
Intellectual Property Institute (London) and former CEO of
pharmaceutical technology transfer company British Technology Group
(London).''
\3\ Joseph Simone, ``SPC and SPP Issue New Criminal Liability
Standards for IP Crimes,'' China Law & Practice, February 2005.
\4\ Xinhua, ``China to Revise Patent Law,'' November 24, 2005.
---------------------------------------------------------------------------
What China lacks is uniform, effective enforcement of those laws,
resulting in the large intellectual property infringement both in China
and in the export market that brings us here today.
It is tempting, of course, to view this as a matter of will--or
lack of will--which has implications for how we would want the U.S.
Government to approach the matter. People who hold this view basically
believe that if the Chinese authorities were willing to crack down and
enforce their laws with sufficient vigor, the problem would largely go
away. The logical concomitant of that is that our government ought to
be marshalling its energies to bring as much pressure as possible to
bear on the Chinese authorities to do just that. And indeed, the U.S.
Government has been endeavoring to do just that over the past decade
and a half, threatening, during the first Bush Presidency and the
Clinton years, to impose what, at the time, would have been the most
substantial trade sanctions in U.S. history.
Will is certainly not irrelevant. On the positive side, the
importance of will clearly is evident in the fact that China has
established specialized intellectual property chambers at the
intermediate court level in many major urban centers and has chosen to
staff these chambers with some of the Nation's best trained and most
capable judges, including many with advanced degrees. And it is better
than not that the State Council--the primary administrative entity in
the Chinese Government--has recently unveiled a comprehensive 15-year
blueprint for scientific and technological development that makes the
argument that China needs better legal protection to foster the
innovation necessary for continued economic growth.\5\ On the negative
side, will--or the lack thereof--clearly helps explain such things as
the government's toleration of things like the Chery automobile, the
city of Yiwu (in Zhejiang) whose economy was heavily dependent on its
being a distribution center for infringing goods, and the fact that the
National Copyright Administration continues to be inadequately staffed
(having some 200 persons for enforcement issues nationwide).
---------------------------------------------------------------------------
\5\ Xinhua, ``China to Accelerate Implementation of National IPR
Strategy,'' February 9, 2006.
---------------------------------------------------------------------------
And yet we would be mistaken if we think that we are here dealing
only with a matter of will and that if we bring enough pressure to
bear, we can effect the type of change we would like to see. As
mentioned, the U.S. has tried that in Republican and Democratic
administrations alike to limited avail. There are, I would suggest,
very fundamental challenges that are a product of China's history, her
present institutional structure, and her course of future development
that we need to heed if we wish to enhance the prospects for
intellectual property protection in China--and particularly if we hope
to contribute to building a China in which more is done through the
private sector and through civil society than through the state.
History ought not to be an excuse for inadequate adherence to
international obligations nor is it all-determinative--Hong Kong and
Taiwan are Chinese, after all, and they each seem to have addressed
their infringement problems more effectively--but nor can history be
ignored if our goal is a realistic strategy. As I discuss in the
beginning of my (pirated) book in detail, there was essentially nothing
comparable to our idea of intellectual property protection prior to its
introduction by the West in the early 20th century. Confucianism, the
pre-eminent ideology in pre-20th century China, venerated the past and
extolled its emulation as a way for individuals both to understand its
lessons and demonstrate their respect for it. In the words of the
Confucian Analects, the seminal text of Confucianism, ``The Master
[Confucius himself] said `I transmit rather than create; I believe in
and love the Ancients.' '' \6\ More practically, the emperors who ruled
China prior to the 20th century were, indeed, concerned about
unauthorized publication but for the purpose of controlling rather than
promoting private expression.\7\
---------------------------------------------------------------------------
\6\ Arthur Waley, trans., The Analects of Confucius, Book 7,
Chapter 1 (1938).
\7\ Alford, To Steal a Book is an Elegant Offense: Intellectual
Property Law in Chinese Civilization (1995).
---------------------------------------------------------------------------
Western ideas of intellectual property rights were introduced early
in the 20th century but, unfortunately, much of what was introduced
then was done via threats, and intended chiefly to protect foreign
property--which has meant that it was and, to some degree, continues to
be, readily associated in many Chinese minds with foreign impositions
rather than understood as useful for China's own development.\8\
Furthermore, the chaos that characterized much of the first half of the
20th century and the impact of Marxism that marked much of the next
three decades, meant that it was not until the 1980s--scarcely more
than a generation ago--that one began to see the introduction of modern
ideas of intellectual property in China, and even now, for many
citizens, these remain novel ideas.
---------------------------------------------------------------------------
\8\ Id.
---------------------------------------------------------------------------
Compounding the task of grounding intellectual property in China is
the nature of that nation's institutions today more generally. We tend
to think that because China is not a democracy, its leaders have the
ability fully to assert their will as they wish. It would, however, be
more accurate to say that even in areas about which they care deeply--
such as endeavoring to control the flow of information--their efforts
fall well short of what they would like to accomplish. Beijing can and
does assert itself with regard to the Internet or the Falungong, often
with considerable impact, but still, coercion ultimately is no
substitute for effective institutions that run on their own and enjoy
popular support. It is hard to think of an area of Chinese law today
that routinely operates as intended. The problems of local favoritism,
insufficient expertise, and corruption that aggravate enforcement of
intellectual property rights also crop up across the board in Chinese
legal affairs.
Appreciating the relevance of history and of institutions
underscores why pressure alone, especially if principally from outside,
is not enough. External pressure has a role (and it would be naive or
disingenuous to suggest otherwise) but I doubt that we (even working
with our allies) possess sufficient pressure to get the Chinese
authorities to embrace policies that they otherwise would not be
inclined to follow and which, in any event, they still lack the
institutional infrastructure fully to carry out. Moreover, even if we
did possess such pressure, I believe that we are better advised to be
at least as concerned with enlisting the support of, and enhancing the
capabilities of, non-state actors as we are with encouraging
officialdom to exert more control, particularly when it comes to
publication and other media of expression.
If we want to create a better climate for intellectual property
protection in China, we need, in addition to the type of external
vigilance called for in the well-crafted ``Top to Bottom Review'' of
the USTR,\9\ to do what we can to promote better and broader public
understanding there of rights generally, and to help build better
institutions--even as we appreciate that these entail long-term
processes and that their ultimate shape will (and should) rest
primarily with the Chinese people. With respect to rights, this means
not only working to educate people about intellectual property rights
but about rights more generally, for, as I argue in my book, it seems
unrealistic to expect that people will heed complex abstract rights of
foreigners if they are not accustomed to asserting their own
fundamental rights.
---------------------------------------------------------------------------
\9\ United States Trade Representative, ``U.S.-China Trade
Relations: Entering a New Phase of Greater Accountability and
Enforcement: Top-to-Bottom Review,'' February 2006.
---------------------------------------------------------------------------
This also means that there ought to be more support--from our
government and from private sources alike--for programs that foster the
development of legal institutions and the growth of civil society, such
as, but not limited to, the State Department's rule-of-law initiatives,
as well as efforts more specifically tailored to intellectual property.
Contrary to the conventional wisdom, a greater attention on the part of
the business community to issues of human rights is likely to advance,
rather than impede, the realization in China of important economic
objectives such as greater protection for intellectual property rights.
The reason for this is that there is a far closer correlation
between a strong civil society and strong intellectual property
protection than there is between a strong state and strong intellectual
property protection. Put differently, intellectual property protection
flourishes in states that nurture free expression and free association.
This ought not to be surprising when you think that in such states,
citizens have more private expression and other private interests to
protect, have a greater rights consciousness, are better able to band
together to protect their interests, and have more in the way of
rights-protecting institutions on which to call.
We are seeing early evidence of this in China. As civil society and
private business have started to emerge, we are seeing the beginnings
of a domestic constituency with valuable intellectual property and
other interests of their own to protect. As Chemical Week magazine
observes, ``China's efforts to increase IP Protection is linked to the
fact that the country has increasingly more IP of its own to protect.''
\10\ Indeed, in 2004, some 95 percent of infringement litigation was
initiated by PRC plaintiffs. This phenomenon has the potential to
diminish the idea that intellectual property is something foreign at
the same time that it is creating allies in the effort to improve
enforcement, as the Quality Brands Protection Committee (comprised of
foreign-invested firms) has been discovering as it works informally
with Chinese companies to seek better protection.
---------------------------------------------------------------------------
\10\ Alex Scott with Andrew Wood, ``Intellectual Asset
Management,'' Chemical Week, January 18, 2006.
---------------------------------------------------------------------------
But lest we make too much of this, we need be mindful of two
caveats. The first is that even as we see the role of non-state actors
growing, we ought not to underestimate the ongoing role of the Chinese
state. One hopes that the State Council's call for more attention to
the legal protection of Chinese innovation can be turned to the
protection of intellectual property rights in general, but we should
also remember that Chinese authorities have also of late been
expressing concern that intellectual property rights may account for
what some see as an excess flow of royalties out of China.
And second, we do need to appreciate that the very same economic
changes that are nurturing potential allies, by definition also have
the potential to make them strong future competitors. The Chemical Week
story quoted above also states that ``Chinese patented technologies
will soon begin to enter the global market, with electronic goods
coming in the next 5 years and pharmaceuticals in up to 15 years, he
[Ian Harvey of the Intellectual Property Institute (London)] says.
`China is on the verge of becoming a major technology and IP generator,
creating a tidal wave of patents likely to wash over the U.S. and
Europe's shores in the next decade, enabling China to dominate
significant technology areas,' he adds.'' Indeed, we are already
beginning to see Chinese companies thinking about how to use
intellectual property law, anti-trust law, their economic power, and,
of course, the assistance of the state, to protect and advance their
own interests against leading foreign companies as well as domestic
competitors at home and even abroad.\11\
---------------------------------------------------------------------------
\11\ An example would be the recent suit by Netac, a Shenzhen
producer of flash memory external storage drives, in Texas against a
U.S. company alleging infringement of a U.S. patent. AFX News Limited,
``China's Netac Files IPR Lawsuit Against U.S.-based PNY Technologies--
Report,'' Forbes, February 16, 2006.
---------------------------------------------------------------------------
In any event, I do hope that these modest observations are of some
use to you, and I stand ready to try to answer any questions you may
have about them.
Senator Smith. Professor, I'm going to ask this for my own
edification. I understand why the legacy of communism would
leave the notion of ownership as a fairly weak concept in the
civics of China, but you also represented that the teachings of
Confucius were similar? Well, I'm just curious.
Professor Alford. Sure.
Senator Smith. What did Confucius say that said that this
stuff doesn't matter?
Professor Alford. Right, so I offer this not as an excuse.
After all, we can look at Hong Kong or Taiwan and see that
Confucian-oriented societies can reach much more effective
levels of intellectual property protection than the PRC
mainland itself, but Confucian ideology celebrated the past,
that people were to find the content of the moral norms, the
way they were supposed to behave, by looking to the past, by
imitating, by emulating the past, by copying the past, not a
slavish copy, but borrowing from the past and putting their
imprint on it. And so, the idea that there would be strong
private property interests in the expression of ideas wasn't
something celebrated in Confucianism. Also, to the extent that
the Chinese state before the 20th century regulated
publication, it was not, again, to protect private property
interests in it, but to suppress a heterodox, to suppress
dissident publication.
Senator Smith. But to your----
Professor Alford. It's not an excuse----
Senator Smith. Yes.
Professor Alford.--Senator Smith.
Senator Smith. Well, and to your point, Hong Kong and
Taiwan certainly are evidence that whatever the Confucian
legacy, it certainly is not ultimately an impediment to the
rule of law as it relates to private property.
Professor Alford. Agreed, agreed.
Senator Smith. I'm actually encouraged from what you said
about the point that as an economy develops there and people
are allowed to own property, that perhaps attitudes are
changing, but you may actually have hit on the root of this
problem in terms of local conduct toward the property of
others, that there's a real cultural education that has to go
on before people will just automatically respect the notion of
property of others.
Professor Alford. Again, I offer that not as an excuse or
justification for behavior that is inconsistent with
obligations that the Chinese Government has undertaken
voluntarily, but I do think it is part of what explains why it
is so frustratingly slow.
Senator Smith. But you're seeing change?
Professor Alford. Well, I don't want to overstate it, but
we see some change--some change. I mean----
Senator Smith. I actually think that that's fairly
threshold, that there would be that change if there's going to
be effective enforcement beyond just the Chinese Government
getting more engaged in as big a country with as large a
population as they have.
Professor Alford. I think that's right. I think it's
ultimately not realistic too soon that the Chinese Government
can do it all by itself, and I'm not sure that I personally
would want that to be the case. I'm not sure I'd want to
encourage the Chinese Government to, as a general matter, make
its presence even more felt in the lives of ordinary people
everyday. In other words, yes, they do need to enforce their
laws far more seriously than they have in this--in other areas,
but I think a better long-term strategy is in addition to try
to help cultivate civil society, better rights consciousness so
that Chinese citizens, Chinese actors, Chinese companies will
also be pushing for similar goals.
Senator Smith. Well, thank you to Mr. Vargo and Andy. A
question, Senator Dorgan and I can come up with a bill that
calculates the amount of theft and that determines the duty.
Would you support--would your organizations support that? And
Andy, would you want to see that money given to the companies
that have been the victims or go into the Federal Treasury?
Mr. York. I think it'd be something we'd want to look into.
I'm fairly confident we'd support that kind of legislation. I
think that would be a good move. As far as where the dollars
go, if it was shut down, and the piracy and the counterfeiting
was shut down, I don't really see how it's costing our company,
at that point, any additional dollars. I think that there are
probably some better uses for that money in our economy right
now that this money could be used----
Senator Smith. You just want it to stop?
Mr. York. I'd like it to stop----
Senator Smith. OK.
Mr. York.--and I did want to make one comment about, the
receptivity to the government in China to change, and this is
hearsay. This is from another seller on eBay, but they do say
that this brand new Leupold Mark 4 M3 clone version illuminated
mil-dot optical scope was made for the China military army. And
so, I don't know. That would be something we'd want to look
into and find out just really how receptive their government
really is to knock-off products if, indeed, they're purchasing
knock-off products for their own use.
Senator Smith. Do you think they are purchasing that?
Mr. York. Well, I--this buyer claims that. They could just
be making a marketing claim here, but I think it'd be something
we'd want to investigate and look into.
Senator Smith. Sounds to me like that would be a dumb thing
if they're as unreliable as you just described.
Mr. York. Yes, I think it would be.
Senator Smith. Mr. Vargo?
Mr. Vargo. We want to solve the problem. I have a hard time
seeing how that particular approach would be helpful because
it's so difficult, first of all, to identify where the
counterfeit products are or value them, and if we could find
that, whether there are other things that we could do that
would be a lot easier. I would like to see us spend a lot more
effort and put a higher priority on the part of our customs
service and other customs services and just stop the trade, and
I do think there's more that can be done there. I don't think
that either we or China have put enough emphasis on the role of
China customs here. A lot of our effort has gone into working
with them on their laws. And as Professor Alford notes, there
has been a payoff from that. And there is a gradual change
there, and we can see a growing number of prosecutions, but
it's still very slow. In our view, the most effective way to
handle this problem would be to intercept the goods at the
border, and that is where we are putting more emphasis with the
U.S. Government now.
Senator Smith. Well, I think we would share your belief
that the best thing to do is to stop what's happening, but it
seems to me from what I've heard today, we don't have a lot of
tools other than long WTO processes and warm, fuzzy words about
there's a problem. In the meantime, there's wholesale larceny
taking place. And interdicting it at the border is fine if it's
our border, but if it's going to other places in the world, as
you have pointed out----
Mr. Vargo. Right.
Senator Smith.--these products, we have no ability to stop
that.
Mr. Vargo. Mr. Chairman, we haven't put enough emphasis
there. I was just looking at some things on the Internet as I
was preparing to come before you today and noticed that in
Saudi Arabia, for example, the Saudi Chamber of Commerce has
just set up an anti-counterfeiting task force because they're
very concerned by what they see as 30 percent of the auto parts
in Saudi Arabia being counterfeit and substandard and also
noting that this affects the legitimate customs collections and
revenues of the Saudi Government, and so it is for other
governments as well.
Frankly, from our point of view, there hasn't been enough
emphasis on working with the customs forces of countries around
the world, and we think that that would be one of the most
effective things that could be done--certainly not the only
one, but we want to see a lot more done there.
Senator Smith. Good point. Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you. I was thinking a
bit about Ronald Reagan's old story about the child that sees a
pile of manure and then thinks there must be a pony somewhere.
We talk about--I'm not suggesting any testimony was a part of
that description.
[Laughter.]
Senator Dorgan. We talk about improvement of laws and the
growing number of prosecutions, but Mr. Vargo, you just talked
about the growing number of prosecutions. In fact, we do trade
agreements, that I have voted against, with other countries
that have perfectly fine laws. They just don't enforce them at
all. So, having better laws or even having laws that relate to
this is completely irrelevant unless they are enforced. Second,
the issue of growing prosecutions on piracy and counterfeiting
in China is a myth because, as I showed you on the chart,
prosecutions are diminishing, not growing. And from the 2004
admonition by this country to China to the April 29, 2005,
statement by USTR, things got worse, not better.
So, I mean, I understand that everybody, when we talk about
this, wants to try to say a little something positive because
there's so much negative, but boy, there's precious positive,
and it should not include there are more prosecutions because I
think the evidence suggests just the opposite. Mr. Vargo?
Mr. Vargo. Well, Senator, from what we hear from our
companies, I would have to disagree. Now, it's still very
small, and it is still a benefit to the companies that can
really afford to do their investigations, but in that respect,
it does seem to be getting a little better. But this, you and I
are on the same page with the vast bulk of it.
And I don't think their laws are adequate. I think that
counterfeiting is a criminal act, and the states and the
provinces should be prosecuting it, and clearly, they are not.
Senator Dorgan. One of my thoughts about this for some
time, and I may be right or wrong, I don't have the foggiest
idea, is that the National Association of Manufacturers and the
U.S. Chamber of Commerce, just to name two, two of the more
prominent, very significant, prominent organizations have never
really pushed to say we want action. They do talk, both of them
talk about these things, but really stop short of getting to
the starting gate here of wanting to push.
And one of the reasons I've thought about that is, that
perhaps your membership includes a fair number of firms that do
business here and also have moved plants to China and other
countries and really don't want our country to take action. Am
I--disabuse me of that if I'm wrong.
Mr. Vargo. I will disabuse you because certainly, we have
large companies, small companies, we have importers, we have
exporters, we have companies that produce in China, companies
that produce around the world. On average for our large
members, two thirds of their production is here in the United
States, and one third is around the world.
But the companies large and small are affected by
counterfeiting, and we have not pulled back at all. Again, if
there was some magic wand that we think could be waved, we
would demand it. Now, we are looking at a possibility of a WTO
case, but we're also--the NAM is a very pragmatic organization.
We want to focus on what would really make a difference, and
that brings me back to the one thing on customs where you could
really make a difference.
And again, the laws in China, we are seeing more
prosecution. I just noticed it for the first time that a
retailer was prosecuted under the criminal statutes in China
for selling counterfeit golf equipment.
But this is still very small, you know. And if we let it go
at the rate that it is going, it's much--we don't have that
kind of patience. And as you see, the trade deficit is getting
worse and worse, and one figure you may not be aware of is that
the U.S. deficit in manufactured goods worldwide grew about $55
billion last year with the whole world. $40 billion of that
growth came out of China. Only $15 billion came with the rest
of the world. So, it's a very serious problem. Counterfeiting
is part of it. Believe me, currency is a very big part of it,
and there are other reasons as well.
Senator Dorgan. Right. I'm not so sure that--you said we
don't have the patience. I'm not so sure our patience isn't
biblical. I'm not so sure we don't have the patience of Job.
Let me show you. I only went back to 1996, but I was actually
on the House Ways and Means Committee when Sam Gibbons and
others were saying you know, we have a $5 billion trade deficit
with China, and we're going to fix that. I said no, it's going
to get much, much worse. No, no, we're going to fix it, they
said. It's going to get fixed with this issue. But if I went
back further, I'd show you the origin of this. But the fact is
all the way along here we keep thinking--now this is the
imbalance in trade, but you can trace, it seems to me,
counterfeiting and piracy just with these lines as well. I'm
not so sure we don't have patience that really is straining the
American public. The reason you can't hold a meeting about
trade any place in the world anymore without having 10,000 or
20,000 people show up in the streets is because I think people
understand what's going on, and they're furious about it, and
it relates to their jobs. And all of the institutions are
worried about taking or suggesting any definitive action
because it will upset the--my colleague, Senator DeMint, said
it perfectly. He describes it as protectionists and free-
traders, which is a perfectly worthless description.
That is not the choices, protectionists and free-traders.
It is those of us who want to be engaged in trade, that we
believe it is fair between our countries and those who will not
accept unilateral free trade agreements that are not mutually
beneficial. The basics of a trade agreement must be mutually
beneficial, especially bilateral and multilateral agreements.
So--I really regret, Mr. Chairman, I have a 4 o'clock event
that I have to be at, but I wish I had time to talk to
Professor Alford and to thank Mr. York.
Mr. York, you've come a long way, but you have demonstrated
the issue of counterfeiting in a very dramatic way, a product
that you create and you sell, and the knock-off is an
extraordinarily cheap imitation. And so, how do you compete?
How do you compete with the $100 knock off if the real thing
with real quality costs $1,400? The answer is you can't
compete.
And Professor Alford, you haven't come quite as far, but
good plane service, I guess, between here and Boston. I
appreciate your work, and I think you've demonstrated with your
book as well what happens. You wrote the words, and someone in
China decides to copy them and sell them as theirs. I mean,
that's piracy and counterfeiting. And so, I thank all of you on
the panel, and I especially want to thank Senator Smith. I said
when we started we may not come at this from the same point in
the compass, but I think in many ways, it doesn't matter
whether you're a so-called free trader or a fair trader. At
some point, you conclude that what is happening is now
unsustainable and that our country has to stand up for it's
economic interests. If you set up conditions in which we must
compete, and we can't, then shame on us. But if you set up
conditions in which the competition is fundamentally unfair to
those who risk their capital and the workers who go to their
jobs everyday, and they can't compete because it's unfair, then
shame on us for not taking action.
So, that's the point. So, Mr. Chairman, thank you very much
for agreeing to hold this hearing. I think it has been very
constructive.
Senator Smith. Thank you very much, Senator Dorgan, and
I've got a 4 o'clock as well, but I have one more question.
Andy York, you said in your testimony that you do business in
lots of different countries.
Mr. York. Yes, sir.
Senator Smith. And Europe, was that one of them?
Mr. York. Europe, I could read you a list. It's very
extensive.
Senator Smith. OK, but it's all over the world?
Mr. York. It's all over the world, yes.
Senator Smith. Do you have these problems anywhere else?
Mr. York. As I said, we are getting feedback from our
distributor in Moscow that he's being impacted with counterfeit
goods----
Senator Smith. OK.
Mr. York.--coming from China as well, and I know that there
are--these same sellers, that are working out of Hong Kong, are
listed with sites in Australia and in the European Union as
well.
Senator Smith. So, before anybody else seeds the WTO on our
vote, you'd want us to deal with that, wouldn't you?
Mr. York. It would be very helpful, yes. It's not just an
issue in the United States, it is a global issue.
Senator Smith. Can you name any other country or region
where you're having a problem?
Mr. York. Those are the only ones that I have concrete
evidence of at this point.
Senator Smith. China and Russia.
Mr. York. China and Russia, and I know that we're getting--
that they're selling products into Australia and the European
Union. I assume that it's much larger than that. I think if
you're a counterfeiter, I don't know why you'd try to restrict
your markets.
Senator Smith. I don't know either, but we have to stop
them. Gentlemen, all of you, you have added measurably to the
Senate record today, and our understanding of what you're up
against, and we pledge out best efforts to do something about
it and apply pressure where we need to because it's wrong and
ought to be stopped. And this is wrong, and we'll do our level
best to stop it and get more action than we've had to date.
With that, we're adjourned.
[Whereupon at 4 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
It amazes me that the movie industry, one of our only industries
that can claim a positive trade balance, lost $280 million to piracy
and counterfeiting in China last year, and it is losing an additional
$100 million more each year. That is astounding. No one can disagree
that piracy is rampant, it is a problem with real consequences, it
shows little sign of abating. and it requires much stronger enforcement
efforts.
However, there is an odd and troubling irony to this problem.
Piracy has become such a large part of the Chinese economy that
eliminating it could lead to economic problems elsewhere in the world,
including here in America. Piracy accounts for 8 percent of China's
GDP. If that were abruptly erased, the impact could be widespread.
To date, China has not lived up to the agreements it made to join
the World Trade Organization (WTO). We realize that China will not be
compliant overnight. However, the Chinese Government should have made
far greater progress by now.
I would like to hear more from our witnesses today about the
realities we are facing. What must be done to stop the counterfeiting
and speed up the compliance?
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Chris Israel
Question 1. In 2004, the USTR, the DOC, the Department of Justice,
and the Department of Homeland Security (DHS) released an initiative
called Strategy Targeting Organized Piracy (STOP!). The initiative
benefits innovators and manufacturers that have been negatively
affected by piracy and counterfeited goods by exposing criminal
networks, stopping trade of pirated goods at U.S. borders, and helping
small businesses secure and enforce their rights in overseas markets.
The MPAA estimates that its members lost $280 million to Chinese
piracy, up from $180 million in 2003. Increases of $100 million per
year in piracy losses will swallow our movie industry whole if left
unaddressed. The problem is only getting worse. What is the STOP!
Initiative going to do to get this problem under control?
Answer. Stopping copyright piracy, including motion picture piracy,
is an important goal of the STOP! Initiative. The problem of global
piracy and counterfeiting confronts many industries, exists in many
countries and demands continuous attention. As part of STOP!, the Bush
Administration is taking steps to increase our efforts to seize
counterfeit goods at our borders and aggressively engage our trading
partners to join our efforts.
With China we recognize that though they have expanded their
efforts there are still critical deficiencies in IPR protection and
enforcement. The Administration has an IP Attache on the ground in
Beijing, who will soon be joined by additional IP experts, to work with
U.S. rights holders and the Chinese Government to stop illegal optical
disc production and piracy. A key element of the Bush Administration's
IP strategy with China is bilateral engagement, which is conducted
primarily through the U.S.-China Joint Commission on Commerce and Trade
(JCCT). As part of our JCCT discussions with the Chinese, we continue
to raise the issue of optical disc piracy and make it clear that China
needs to take steps to eliminate all illegal optical disc production.
Also, China has agreed to regularly instruct enforcement authorities
throughout the country that copies of select films which are still in
censorship, and not yet ready for distribution are deemed pirated and
subject to enhanced enforcement. And the Chinese Government recently
signed a memorandum of understanding with the Motion Picture
Association (MPA) to protect the 15 theatrical films released in China.
However, we understand that much work remains on both of these
initiatives and we plan on pushing these issues, among others, at the
upcoming JCCT on April 11th and as part of our ongoing initiatives in
STOP. We plan on continuing to work with the motion picture industry,
and are leveraging our resources to actively address the issue of
copyright piracy.
Question 2. Please describe the specific services that the STOP!
Initiative provides to small businesses that have piracy issues in
China.
Answer. To help American innovators secure and enforce their rights
across the globe, the STOP! Initiative has put in place several new
Federal services and assistance: Including, the STOP hotline (1-866-
999-HALT), website (StopFakes.gov) and a China-specific IP toolkit. In
November 2005, Commerce Secretary Gutierrez announced, the China IPR
Advisory program. This program is done in conjunction with the American
Bar Association, the National Association of Manufacturers and the
American Chamber of Commerce in China. It offers small and medium sized
U.S. businesses free IPR consultation with an attorney. Each of these
programs under STOP! helps provide businesses with the resources and
assistance they need to level the playing field and deal with potential
piracy issues in China.
Question 2a. How many American businesses use the services
provided?
Answer. The Bush Administration's extensive outreach efforts have
allowed us to reach countless American businesses and help to empower
American businesses with the tools they need to secure and enforce
their rights at home and abroad. In the first 3 months of 2006 the
StopFakes.gov website received over 20,000 visits. In FY 2005, the STOP
Hotline received over 950 calls and, so far, during the first quarter
of FY 2006 we received over 550 calls. During our four 2005 IP Road
Show events, in Salt Lake City, Phoenix, Austin and Miami we had a
total of 740 SME representatives in attendance.
Question 2b. Have small businesses made more suggestions for
assistance they would need in China, and if so what were they?
Answer. We are working actively with the business community for
assistance as we go forward. They are our eyes and ears on the ground
and know better than anyone how inadequate IPR enforcement affects
their businesses. My office conducts active outreach with industry, and
we want to hear their stories and find ways to use the data that they
have collected in China. We will continue to work together to find
solutions and lead enforcement efforts.
In China we currently have an IP attache in Beijing and plan on
adding an additional attache in the near future. The Administration's
attaches enhance our ability to work with local Chinese Government
officials to improve IP laws and enforcement procedures in addition to
assisting U.S. businesses to better understand the challenges of
protecting and enforcing their IPR in China.
Another important tool that we use is the IPR Case Referral
Mechanism (CRM) which was created by the U.S. Government to facilitate
the submission of individual U.S. company IPR cases through MOFCOM
(China's Ministry of Commerce) to relevant Chinese agencies. Our inter-
agency team reviews cases where the Chinese Government fails to provide
adequate protection of IPR to U.S. businesses, and after an internal
vetting process, sends approved cases to the Chinese Government to
facilitate their resolution. Five cases have already been submitted to
the Chinese through the Case Referral Mechanism.
Also, Ambassador Clark Randt at our Embassy in Beijing holds an
annual IPR Roundtable which brings together senior Chinese officials
and U.S. business representatives. The Roundtable gives U.S. rights
holders the opportunity to discuss the problems they are facing and
find the solutions that they need. Our Embassy and Consulate officers
on the ground are another valuable asset for U.S. companies. They play
a critical role as IPR ``first responders,'' helping U.S. businesses
resolve cases when their rights are violated.
______
Response to Written Question Submitted by Hon. Daniel K. Inouye to
Franklin J. Vargo
Background: The National Association of Manufacturers (NAM) has
made a submission to the U.S. Trade Representative (USTR) on Chinese
violations regarding the protection of Intellectual Property (IP) and
the growing counterfeiting problem. The NAM had pushed for the USTR to
engage in more formal actions through the World Trade Organization
(WTO) to force the Chinese to increase enforcement of the laws it has
on its books.
Question. The Chinese have had difficulties in integrating its
citizens into a market-based economy. Counterfeiting has become a
source of employment for the poor. It has been estimated that
counterfeit goods constitute about 15-20 percent of all products made
in China and account for approximately 8 percent of China's gross
domestic product (GDP). If the Chinese enforced IP protections as it
should, it could potentially create economic chaos. How do the Chinese
solve this problem quickly without creating economic dislocation?
Answer. China is undoubtedly the largest source of counterfeit and
pirated products in the world today. Anecdotal information suggestions
that fake products are displacing billion of dollars in legitimate
sales in China and a substantial amount of sales in third-country
markets, particularly in developing countries. Fake products cover a
wide range of sectors from pharmaceuticals and consumer health care
products to auto parts and testing equipment. Copyright experts
estimate that over 90 percent of the software sold in China is
counterfeit.
We often hear that the reason Chinese authorities, particularly at
the local level, do not crack down more forcefully on counterfeiters is
because China needs to generate as much manufacturing employment as
possible to absorb excess labor flooding into the cities from rural
areas. Counterfeit production, it is claimed, offers the opportunity to
employ some of this excess labor. These views, however, ignore the many
negative consequences of unchecked counterfeiting for the Chinese
economy.
Failure to curtail counterfeiting and protect foreign brand
names is hurting China's own efforts to move up the value chain
and develop its own brands that can be sold at quality-brand
prices, for example, as Lenovo, the owner of IBM personal
computer maker technology, is seeking to do.
Counterfeit products made in China, often of inferior
quality and below required technical standards, damage the
overall reputation of Chinese manufactured products and gives
them lower status in the market place.
Unchecked counterfeiting discourages foreign investment. We
hear frequently from manufacturers that they limit their
investment in China out of fear that advanced manufacturing
technology will be stolen or used in counterfeit production.
Foreign investment in China has reached record levels but could
be even higher if brand names and other intellectual property
were more effectively protected.
Proponents of counterfeiting also overlook the costs to
Chinese consumers of counterfeit products. Fake pharmaceutical
products pose enormous health risks for Chinese consumers and,
according to Chinese press reports, result in thousands of
deaths every year. Consumers face other hazards from: fake
brand-name batteries that explode due to improper manufacture;
counterfeit car parts (e.g., brake pads and timing belts) that
do not function because they don't meet accepted international
technical standards; testing equipment (e.g., for refrigeration
equipment) that provide faulty results; razor blades that don't
shave; and personal care products that contain harmful chemical
ingredients.
Over the past 20 years, the Chinese economy has undergone a
dramatic transformation from a centrally directed, state-controlled
system to a more market-oriented model that encourages large-scale
shifts in employment between sectors. In the process, millions of
workers employed at state industrial enterprises were displaced. While
closing plants engaged in counterfeit production could well cause some
localized and short-term dislocations, China would also benefit from
the positive economic effects of protecting intellectual property and
brand names. Chinese workers have demonstrated a remarkable resiliency
and adaptability to economic change and opportunity. It is by no means
clear that the disruption from enforcing intellectual property rights
would be more severe than other economic changes that have occurred in
recent years.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
William P. Alford
Background: Professor Alford contends that two of the hurdles to
Chinese adoption of western style intellectual property (IP)
protections are the differing historical paradigms of how IP
protections were used and cultural differences. The Chinese were forced
to accept Western legal concepts after the Opium Wars in the 1840s and
had to accept western IP concepts as a condition to join the World
Trade Organization (WTO), even before the Chinese themselves internally
changed its approach to protecting IP. Copyright statutes only recently
appeared in the Chinese legal system, with the National People's
Congress adopting legislation in 1990. Present day efforts to apply
economic pressure on the Chinese, through threats of tariff sanctions,
may force them to pass Western-type patent, trademark, and copyright
legislation, but it will not ensure compliance and enforcement of such
laws so long as they are perceived as outside impositions. Professor
Alford sees this as one of the main reasons for Chinese reluctance to
adequately enforce the protections on the books.
Question 1. I understand that the Chinese think it improper to give
an individual ``ownership'' over a concept that was likely built
through contributions from the community. Furthermore, the country's
recent history with Communism and ownership of real property, much less
conceptual property, is foreign.
China's entrance to the WTO was predicated on protection of
intellectual property rights in accordance with the WTO Agreement on
Trade Related Aspects of Intellectual Property Rights (TRIPS). While
China did overhaul its legal regime so as to be facially compliant with
TRIPS, it did not improve enforcement. Can the Chinese overcome the
views of its own people to comply with the WTO TRIPS mandates?
Answer. Thank you, Senator Inouye, for this probing question. You
are, of course, correct that China did commit itself to the level of
intellectual property protection called for in the TRIPS agreement when
it joined the WTO. And you are also correct that China did, indeed,
revise its laws so as to be compliant with those obligations.
Enforcement does, indeed, continue to be a very serious problem, as
the testimony of each panelist today indicates. I think that it is
important to understand the impact of history and culture--but by that
I am not suggesting it is an excuse. After all, China's government has
taken on certain obligations and should be expected to live up to them.
Intellectual property law was not, as I try to show in my book, an
indigenous idea in China. Ideas, though, about the nature of property
in general have begun to change in important ways during the past
quarter century in China. If we want further to promote respect for
intellectual property, I think we need a multi-faceted approach.
External pressure alone will not work and I, for one, am not sure that
I want the U.S. using whatever influence we have to strengthen the hand
of the Chinese Government vis-a-vis its citizens. I think it is
important that we do what we can to strengthen civil society there so
that Chinese citizens will have more reason to and more vehicles
through which to seek to protect rights, including intellectual
property rights. If we want our IP protected, we need a domestic
constituency there for rights protection generally. It can't really be
done for us (that is, foreigners) alone or for IP alone.
Question 2. How did other Asian countries with a history of poor
Intellectual Property (IP) protection, like Japan and Taiwan, manage to
overcome their historical barriers to come to protect IP vigorously?
Answer. The experience of Japan and Taiwan bear out my argument
about how respect for intellectual property grows. Foreign pressure
alone was not enough (though it surely had a role). Serious change has
come about as civil society and democratic political institutions--and
a domestic private constituency for intellectual property law--have
grown. Taiwan is an especially good example of this. Prior to its
democratization in the late 1980s, Taiwan was notorious for its failure
to adhere to its international intellectual property obligations. Since
that time, the picture is much improved (though some challenges remain
there and in Japan, as is also the case here in the U.S.). Again, there
is a certain common sense to this--that as citizens have more to
protect by way of rights generally, and more vehicles through which to
protect it, the quality of protection will be greater than in a
situation of greater state limits on rights and on citizens' capacity
to organize themselves and to vindicate their rights.