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Diplomacy in Action

92. Testimony, US Trade Representative Barshefsky, before Senate Foreign Relations Committee, Subcommittee on East Asian and Pacific Affairs, regarding 1995 IPR Enforcement Agreement (November 29, 1995)



November 29, 1995

Mr. Chairman, I appreciate the opportunity to appear before you today to discuss the Administration's trade policy toward China. More specifically, I am pleased to have the opportunity to update you on China's implementation of the 1995 Agreement on the Enforcement of Intellectual Property Rights.

The Administration has clear goals that it wants to achieve in its trade policy with China. First and foremost, we continue to pursue actively market opening initiatives on a broad scale for U.S. goods and services. U.S. businesses should have access -- and the necessary protection for their properties -- in China's market equivalent to that which China receives in the United States. Especially in light of our trade deficit with China, we expect to see greater reciprocity in our trade relationship -- with high growth in our exports to China in areas where U.S. companies maintain a comparative advantage. Second, a fundamental principle of our policy has been working to ensure that China accepts the rule of law as it applies to trade -- that is, ensuring that China's trade and economic policies are consistent with international trade practices and norms.

China is the world's fastest growing major economy, with real growth approaching 12 percent in 1994 and close to that this year. China is now the eleventh largest trading nation in the world, and in just a few years, will be one of the world's largest economies.

The United States is China's largest export market and the only major market in the world that is truly open to China's exports. Last year, close to 40 percent of China's exports went to the United States, including $39 billion worth of electric machinery, textiles, footwear, toys, and other products. Less than 2% of US exports go to China.

Our side of the bilateral trade equation is not nearly so rosy. U.S. exports to China rose only six percent last year, despite the competitive strength of our industries. Total U.S. exports to China last year stood at only $9.3 billion, leaving us with a deficit of almost $30 billion -- and, we are facing close to a $38 billion deficit this year. While the huge trade deficit with China is the result of many factors, China's multiple, overlapping barriers to trade and investment are clearly of serious concern.

Despite China's movement away from a centrally planned economy toward a quasi- market economy in recent years, China maintains one of the most protectionist trade regimes in the world. China appears to be following in the footsteps of other major trading nations in East Asia -- maintaining export-led growth while protecting its domestic markets. The failure to meet fundamental international standards -- such as national treatment, transparency, or the right to trade freely -- holds back the U.S. side of the bilateral trade equation and hurts U.S. businesses and workers.

Trade Policy

During that past several years, as a result of our bilateral initiatives, China has substantially liberalized its markets for hundreds of U.S. products, eliminating thousands of non- tariff barriers to industrial and agricultural products, reducing tariffs substantially on major products of export interest to the United States, making its trade regime much more transparent, and creating a new legal regime for intellectual property rights protection, among others.

U.S. access to China's market falls far short of what it should be, but it is far greater now than it was. As we continue to press China on market access issues, we also intend to continue to work with the Chinese Government in support of its economic reform program -- and, hopefully, to guide it in the direction of adherence to the rule of law and basic international norms and trade disciplines.

The United States has pursued an aggressive, but balanced, trade policy toward China. . To achieve our goals, we have put together a strong, complementary policy that combines bilateral and multilateral initiatives. Full implementation of these agreements is a top priority for the Administration.

Intellectual Property Rights

On February 26, the United States and China reached a landmark agreement to halt rampant Chinese piracy of U.S. books, movies, computer software -- piracy that had cost U.S. industries more than $1 billion a year. China also agreed to provide these leading edge industries -- industries in which we enjoy a comparative advantage and on which we are staking much of our future -- greater market access. This Agreement complemented the earlier 1992 IPR Memorandum of Understanding, in which China overhauled its IPR legal regime, and raised the standards of its copyright and patent regimes -- among other areas.

In the IPR Enforcement Agreement, China promised to establish an effective system of intellectual property rights enforcement. As we defined that system during the negotiations, China pledged to take effective measures to halt piracy, make structural changes in its IPR enforcement regime that will ensure effective enforcement over time, and provide market access for audiovisual companies and for those that produce computer software. In more specific terms, the Chinese Government agreed that it would: initiate a 9 month Special Enforcement Period, during which intense raids would be undertaken; set up intra ministerial task forces and strike forces that include the police; vigorously attack large-scale producers and distributors of pirated materials; clean-up the CD factories that continue to produce pirated products; set up monitoring systems to check pirated production of CDs, audiovisual works, books and periodicals, and computer software; punish administratively or through application of criminal penalties serious offenders; establish an effective border enforcement regime; allow establishment of joint ventures immediately in two major cities in China for audiovisual companies (with 13 cities to open by the year 2000); and permit the establishment, for example, of joint ventures for the production of computer software.

In the meantime, the U.S. government has set up an extensive program of training and assistance to help the Chinese government -- at the central and provincial levels -- to enforce IPR laws. We have tapped the resources of the Department of Justice, including the FBI, the Department of Commerce, including the Patent and Trademark Office, the Customs Service and others. For their part, as I am sure you will hear in detail from the industry witnesses today, U.S. industry has been providing substantial technical aid -- including training seminars, the provision of equipment and financial assistance.


Ten months after signing the Agreement, implementation is mixed. The Agreement is complex -- more than 30 pages of dense text -- and requires action at all levels of the Chinese Government. More important, the magnitude of the problem -- large-scale production of pirated products often with local government tolerance or, sometimes, with the participation of Chinese Government agencies -- requires a significant exertion of political will.

In that context, China has taken some significant steps to attack rampant piracy. Clearly, the environment within which anti-piracy efforts can be pursued is much improved now over even last year. The system is becoming more transparent -- recently, all of China's IPR laws, regulations, and administrative guidance were published, and public knowledge and understanding of IPR laws and regulations is much better than it was. If anything, consciousness of the need to protect IPR is higher in China, Hong Kong and Taiwan than it is in many countries and regions because of our and the Chinese government's intense efforts.

Piracy at the retail level has been markedly reduced in many major Chinese cities -- particularly along the booming southeast coast where U.S. losses have been the largest. According to Chinese Government statistics, since signature of the Agreement, Chinese enforcement officials have launched 3,200 raids, seized and destroyed as many as 2 million pirated CDs and LDs, 700,000 pirated videos, and 400,000 pirated books. China's procuratorate has separately launched investigations into more than 1,000 possible criminal copyright infringement cases, including 321 "serious cases" -- those in which illegal profits exceed 100,000 RMB (about $12,000). By contrast, last year enforcement was virtually non-existent. There have also been some criminal convictions to date.

In addition, China has made many of the structural changes mandated by the Agreement. China has set up intraministerial task forces in virtually all provincial capitals and many major cities, 30 in all. It has set up high-level, tough enforcement task forces in at least 18 provinces and major municipalities. In addition, China's courts have begun to render significant judgments against major IPR offenders. In a series of decisions rendered on cases brought by the Business Software Alliance, the Beijing Intermediate People's Court and other Chinese courts have ruled in favor of the BSA -- levying fines of up to $60,000, and damages as well. China has now established IPR courts in Beijing, Guangzhou, Shenzhen and other major centers of piracy, and has begun an active program to train Chinese judges in the enforcement of IPR laws.

Despite these steps, China's overall implementation of the Agreement falls far short of the requirements of the Agreement. Despite improved enforcement efforts, U.S. industries still estimate that they lost $866 million as a result of China's piracy in 1995. Resolution of these issues is one of the Administration's top trade priorities. Specific problems include the following:

CD Factories. Overall, while China has taken steps to clean up retail markets, it has done little effectively so far to attack the heart of the problem -- continuing, massive production, distribution, and export of pirated products. In particular, we remain deeply concerned that China has not honored its commitment to clean up production of pirated CDs in more than 29 factories throughout China. Under the Agreement, China was to have completed investigations of all factories by July 1, 1995, and to have taken measures to discipline, fine, or punish criminally factories that violated Chinese laws and regulations. To our great dismay, China has instead reregistered -- that is, given a clean bill of health to -- all but one of the CD factories. Factories producing pirated products have shifted their focus from production primarily of music CDs to higher value-added CD ROMS. The seizure of exports of pirated CD-ROMS, in particular, have risen by one hundred percent. Exports of music CDs, video-CDs and other high-tech products have not demonstrably declined. These pirated exports are reaching Hong Kong, Taiwan, Latin America and even the United States.

The potential economic damage to the U.S. software industry is enormous, if Chinese CD factories continue to produce and export pirated CD-ROMs in volume. A single CD-ROM produced in China and acquired in Hong Kong by the BSA recently contained Lotus' Supersuite (retails for $3300), Autodesk's AutoCad release ($4250), and Novell's New Ware ($2485) along with 100 other computer programs. The disk sold in Hong Kong's notorious Golden Shopping Arcade for $6.75. This and other disks are also sold in all of China's major coastal cities.

In addition, the imprintation of SID codes on all CDs and CD-ROMS and implementation of a title verification system -- both bulwarks against CD piracy -- have also not been implemented effectively. To date, especially in the sound recording and computer software sectors, CD factories continue to violate the Agreement's requirement that all CDs and CD- ROMs will carry unique SID codes identifying the factory of production. China has also lagged in establishing a system to ensure that the legitimacy of the licenses for all foreign titles be verified by the National Copyright Administration and the relevant U.S. industry association.

Border Enforcement. Despite some initial seizures, China's Customs Service has not yet aggressively pursued infringers. Exports of pirated products continue to surge out of China's ports, especially in Guangdong Province, in the south. New regulations designed to provide Customs with enhanced enforcement powers fall short of the Agreement's requirements. The regulations contain significant loopholes and do not yet provide the basis for a sound border enforcement regime. As a result, the regulations place the burden for enforcement almost entirely on the shoulders of the right holder, while the Agreement requires Customs officials to act on their own initiative to investigate and seize pirated products. We are looking for effective enforcement against these exports.

We expect the Chinese Customs to fully implement the stipulations of the Agreement, including the establishment by year's end of a recordation system that permits rightholders to register their copyrights and trademarks with China's Customs Administration with the expectation of enforcement action. In addition, we expect Chinese Customs to take aggressive action to intercept and halt the massive outflow of pirated works from China. We have every confidence that the Chinese Customs Administration can take these measures; we simply await their doing so.

Market Access. The Chinese have given every indication that they intend to honor their commitments on market access, but to date, little has been achieved. The continued use of informal quotas, slow censorship approval rates, the use of censorship as a market access barrier, prohibitively high taxation and tariff rates for video products in particular, and a recent Chinese decision to incorporate a 50 percent "royalty tax" into the published tariff rate for sound recordings and video cassettes hinder market access. We expect these shortcomings to be remedied as China issues regulations that make the stipulations of the Agreement a reality.

Also disturbing, China's new investment regulations prohibit direct investment in the audiovisual sector, particularly in distribution, and in the construction of movie theaters and the like. These regulations harm the interests of U.S. companies that want to invest and trade with China.

Finally, China's trade ministry, MOFTEC, has interpreted the Agreement's provision permitting the formation of joint ventures in computer software as a ban on wholly-owned software companies. This interpretation is unsustainable. MOFTEC and the Ministry of Electronics Industry are attempting to use the Agreement to force U.S. software companies to form joint ventures and transfer their technology, and that is unacceptable.

Where the Chinese have accorded greater market access, U.S. companies have prospered. In motion pictures, for example, China has implemented the revenue-sharing arrangements stipulated in the Agreement, and five major U.S. motion pictures have been shown over the past year in Chinese theaters to huge, enthusiastic audiences. They include the Lion King and The Fugitive.

While in Beijing from 8-10 November, I held thorough discussions with China's trade minister Wu Yi, the Supreme People's Procuratorate, and other IPR enforcement agencies. I received assurances that these agencies are preparing to take tough action -- action that is in China's own self interest. We await results. In any event, we have informed the Chinese that we expect swift action against the offending CD factories and other major manufacturers and distributors of pirated works. We expect that China will be well on the way to sharply improved implementation of the Agreement by the February 26 anniversary date of its signing. If China does not satisfactorily implement the Agreement, the Administration will take decisive action.

Let me add one note. As a result of lax IPR enforcement by China, we now see a significant increase in pirated products in the Hong Kong domestic market. Intensified efforts to crack down on Hong Kong's retailers, distributors, and transhippers of these products are vital to our overall effort to protect copyrighted works in the region. We have requested that the Hong Kong Customs and Excise Department step up their raids of these pirates -- and focus beyond the hawkers at the retail level to the major organized distributors as well. In addition, the handing down of strict penalties and increasing the level of punishment works as a strong deterrent. We hope that the Hong Kong prosecutors will tackle major cases and put the major distributors out of business. Just as we have asked China to take increased action, we fully expect the Hong Kong government to take swift steps to stamp out this piracy.

Market Access

China has taken a number of steps to implement the 1992 Market Access Agreement. On transparency, for example, China has published numerous previously "confidential" trade laws, and regulations -- both at the central and provincial level. Clearly, without a transparent trade regime, it is impossible for foreign companies to know -- and therefore address -- the barriers that they face. Yet while more regulations are available in China today than ever before, companies continue to face "internal," unpublished regulations. Critical trade information -- such as information on China's import quotas -- remains unpublished. In too many instances, foreigners trading with China are flying blind.

In addition, as a direct result of the Agreement, China has removed over a thousand quotas and licenses on a wide-range of key U.S. exports such as telecommunications digital switching equipment, computers, many agricultural products, medical equipment and many others. In fact, as a direct of the Agreement, China lifted its infamous Document 56 -- which limited procurement of digital switching equipment to three non-U.S. suppliers -- and as a result, U.S. telecom companies are now selling over a billion dollars annually of digital switching equipment. Computers is another area were we have seen success. Today, U.S. computer companies dominate China's computer market; accounting for over 60 percent of the market.

Yet while China has removed these quotas and licenses, we are very disturbed by an increasing trend in China to erect new barriers to these exports. So-called "registration requirements," a 17 percent surcharge on imports and recently released guidelines on electronics joint ventures -- which mandate 70 -100 percent of production be exported -- keep out the very products that should be enjoying greater market access as a result of the Agreement.

In the Agreement, China agreed to base standards for the export of U.S. agricultural and livestock products on sound science. China has typically used unscientific standards as a means to block U.S. exports. Since 1992, we have signed a number of protocols with China that have opened the door to U.S. exports of such products as apples (from Washington and Idaho), cherries (from Washington), live cattle, bovine embryos, and bull semen. On some key agricultural products, however, China continues to use unscientific standards to block U.S. exports -- especially citrus fruit and wheat from the Pacific Northwest. This year we placed China on the Super 301 watch list for these practices and will continue to press China for results. Wu Yi, China's Trade Minister, has given me her assurance that she will become personally involved in the agricultural issues, and we expect to see genuine action.


In addition to implementation of previous commitments, we are pressing forward bilaterally -- and multilaterally -- with services initiatives. In addition to goods, the United States is the largest exporter of services in the world, and the most efficient, highest quality producer of services that range from financial services to engineering and construction. We have been pursuing discussions with the Chinese on services issues for the past two years. Right now, we are focusing bilaterally on two key sectors -- value-added telecommunications and insurance. In each instance, U.S. companies and workers are the best in the world at providing the relevant service. And, in each instance, the Chinese -- with little or no domestic industry of consequence -- have severely restricted or prohibited access to their market. Finally, in each instance, the assistance of U.S. companies is vital to China's own modernization efforts.

During my recent meetings in Beijing, as well as Ambassador Kantor's meeting with Minister Wu at the APEC meeting in Osaka, we pressed the Chinese for action on the full range of our concerns. In addition, our negotiators are planning to hold consultations on all of the issues that I have mentioned during the month of December. We would be happy to share the results of those discussions with the Committee. We expect the Chinese to live up to their commitments and take steps to open their markets to U.S. goods and services and to protect our intellectual property. If not, we are prepared to make full use of the legislative and administrative tools available to us.


Let me turn to another important issue in our trade relationship with China -- China's accession to the World Trade Organization -- the WTO.

In his recent meeting with President Jiang, President Clinton reiterated U.S. support for China's accession to the WTO on the basis of a commercially viable package. Earlier this month, I visited China at the request of the President to present the Chinese with a "roadmap" on China's accession. This roadmap defines for China what we mean by a commercially viable agreement.

The WTO is a rules-based system of rights and obligations encompassing everything from tariffs to agriculture to intellectual property rights and services. One of the major achievements of the Uruguay Round was the so-called single undertaking. This means that all of the economic issues addressed in the WTO constitute a single package of rights and responsibilities that all of its members have accepted. The WTO is not a menu from which one can simply pick and choose.

In the roadmap, we have crystallized for China the basic political decisions that it must make in each substantive area covered by the WTO. On the basis of our discussions, I hope that China can now better determine if it intends to move forward. The timing of China's accession is up to China -- it depends on the obligations China is prepared to accept. A genuine negotiation on China's accession must begin first with a determination by the Chinese Government that it intends to abide by WTO disciplines.

In addition, China must come to terms with the legal and commercial commitments required of all WTO members. This includes a standstill obligation -- China must stop erecting new barriers to replace those previously removed. At the same time, the United States is willing to be pragmatic and practical -- while maintaining our high standards. Our substantive approach is fully consistent with that of China's other major trading partners.

China is an important trading power. But with this status comes obligations and responsibilities. In his discussions on the WTO, President Clinton made clear that the United States stands ready to negotiate a genuine commercial accession agreement. We await China's response.

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