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2005
INTELLECTUAL PROPERTY THEFT IN CHINA AND RUSSIA
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
MAY 17, 2005
Serial No. 109–34
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://judiciary.house.gov
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
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TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
ADAM SMITH, Washington
CHRIS VAN HOLLEN, Maryland
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
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Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
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BLAINE MERRITT, Chief Counsel
DAVID WHITNEY, Counsel
JOE KEELEY, Counsel
RYAN VISCO, Counsel
SHANNA WINTERS, Minority Counsel
C O N T E N T S
HEARINGS
Part I
INTELLECTUAL PROPERTY THEFT IN CHINA
Part II
INTELLECTUAL PROPERTY THEFT IN RUSSIA
OPENING STATEMENT
Part I (China)
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
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Part II (Russia)
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
WITNESSES
Part I (China)
Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative for Intellectual Property, Office of U.S. Trade Representative
Oral Testimony
Prepared Statement
Mr. Ted C. Fishman, Author and Journalist, China, Inc.
Oral Testimony
Prepared Statement
Mr. Myron Brilliant, Vice President, East Asia, U.S. Chamber of Commerce
Oral Testimony
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Prepared Statement
Mr. Eric H. Smith, President, International Intellectual Property Alliance (IIPA)
Oral Testimony
Prepared Statement
Part II (Russia)
Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative for Intellectual Property, Office of U.S. Trade Representative
Oral Testimony
Prepared Statement
Mr. Eric J. Schwartz, Vice President and Special Counsel, International Intellectual Property Alliance (IIPA)
Oral Testimony
Prepared Statement
Ms. Bonnie J.K. Richardson, Senior Vice President, International Policy, Motion Picture Association of America
Oral Testimony
Prepared Statement
Mr. Matthew T. Gerson, Senior Vice President, Public Policy and Government Relations, Universal Music Group
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Oral Testimony
Prepared Statement
APPENDIX
Material Submitted for the Hearing Record
Part I (China)
Prepared Statement of the Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
Prepared Statement of the Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia
Prepared Statement of the Honorable Elton Gallegly, a Representative in Congress from the State of California
Prepared Statement of the American Chamber of Commerce People's Republic of China
Article from the New York Times entitled ''The Pirate Kingdom'' by Pat Choate
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Part II (Russia)
Dear Colleague and Article entitled ''In Russia, Politicians Protect Movie and Music Pirates'' from the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
Prepared Statement of the Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
Prepared Statement of Tom Thomson, Vice President, Coalition for Intellectual Property Rights (CIPR)
Letter from the Recording Industry Association of America (RIAA) to President George W. Bush
Part I
INTELLECTUAL PROPERTY THEFT IN CHINA
TUESDAY, MAY 17, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
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Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:08 a.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chair of the Subcommittee) presiding.
Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order.
I am going to recognize myself and the Ranking Member for opening statements, and then we will proceed quickly to hear from the witnesses. And we very much look forward to their testimony.
Today, in what may be a first for the Judiciary Committee, this Subcommittee will conduct two back-to-back oversight hearings on the subject of international intellectual property theft. The first will examine the massive piracy and counterfeiting that persists in China. The second will focus on the Russian Federation which, according to one of our witnesses today, ''is the largest unregulated and unenforced producer of private optical discs in the world.''
One of the purposes of these hearings is to begin an examination of the role of intellectual property rights in promoting international respect for the rule of law. In whatever form it takes, the theft of intellectual property inflicts substantial economic harm on our country, our entrepreneurs, our innovators and, ultimately, on the American consumers.
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The losses incurred are not limited to those sustained by the traditional ''core'' copyright industries, but extend to virtually all manufacturers and industries throughout our economy.
The circumstances in China and Russia are unique, and clearly present separate challenges for U.S. policymakers. However, it is possible that the persistent failures of these two governments to adequately protect and enforce IP rights may be systemic and deliberate, rather than mere ''growing pains'' associated with the development of market economies.
We need to determine for ourselves whether it is credible to believe the Chinese government is serious about enforcing the legitimate IP rights of U.S. companies, when copyright piracy levels continue to average 90 percent, and the government refuses to even police their own computers by removing unlicensed software.
We need to assess whether the Chinese government has determined that they can continue to simply take without compensation the fruits of the investment, innovations, and industriousness of our most creative citizens.
We must begin to consider the true cost of IP theft; not by merely calculating the effects of lost revenues, but by assessing the competitive advantage that Chinese companies wrongfully acquire by paying pennies for the exact same tools and software that cost U.S. and other manufacturers thousands, and sometimes millions, of dollars.
Finally, we must ask whether we have done everything in our power to impress upon the Chinese government the seriousness we attach to respect for the rule of law and the protection of our most valuable commercial property.
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Our witnesses today will present overwhelming evidence that the theft of intellectual property in China has increased exponentially. This is in spite of the fact that successive U.S. governments have sought to engage China in the international rules-based trading system, and despite our active support for their accession to the WTO. In return, China committed to adequately and effectively protect the rights of intellectual property owners, something that to date the Chinese government has failed or chosen not to do.
At the conclusion of these two hearings, I hope we will not simply be asking, ''What is happening in China and Russia?'', but will have begun to focus on the more difficult question of, ''How do we solve this problem?''
That concludes my comments. And the gentleman from California, Mr. Berman, is recognized for his.
Mr. BERMAN. I thank you very much, Mr. Chairman, for scheduling these back-to-back hearings on this scourge of intellectual property piracy, with a focus on China and Russia. The problem we confront with both countries is the same: how to prevent billions of dollars in losses to the American economy as a result of an unfettered ability to pirate.
From almost the beginning of recorded history, China has served as a provider of desired goods. Marco Polo traveled the world to bring back goods made in the Orient. Today, China's economy has grown to include the manufacture of many different products, including clothing, purses, software, computers, and movies.
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While just as desired as the goods of Marco Polo's day, these modern goods often are not the legitimate product of the original source. Instead, these are goods that are copied, reverse engineered and, with limited investment and no payment to the creator, sold for a negligible price for China's 1.3 billion citizens, and exported in massive quantities to other countries, including America.
The impact of counterfeiting and piracy on American innovators and the general public is impossible to quantify with precision, but it is enormous. The Chinese government, and some Chinese companies, appear to have an interesting philosophy about piracy. They point to their robust laws on intellectual property, show you attempts at enforcement with a televised raid of a market stall, and describe their involvement in the issue by lending you educational materials for high schools on the importance of respecting intellectual property.
Piracy, they claim, is not to be tolerated. Yet the reality is that not only is piracy tolerated, but the government typically turns a blind eye to allow the benefits of piracy to accrue to Chinese consumers.
These cheaper products, it is argued, provide the Chinese population with the luxury items they desire but may not be able to afford. I have heard some in the Chinese government assert that the pirates are merely providing cheaper products for those who cannot afford to buy bread, in essence, functioning as ''Robin Hoods'' for these goods. Yet this argument holds little credence when those goods are openly exported around the world, disrupting existing markets for legitimate products.
As noted by the Chamber of Commerce, in the year ending October 31, 2004, the value of Chinese counterfeits coming into U.S. markets seized by the U.S. increased 47 percent. This Saturday, the Washington Post reported that—well, no.
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If the government in China sincerely wanted to stop piracy, it could; because they have. Clearly, when piracy hurts Chinese interests, the government has been motivated to step in. When teeshirt knockouts of the Beijing 2008 summer games were being sold, the government was quick to close down the shops and find the counterfeiters. In 2001, the government tore down 690 billboards that illegally associated products with the event, and ripped fake Olympic emblems off 67,000 taxis. When they want to, they can.
This Saturday, the Washington Post reported that the Administration will likely cap imports of clothing as a result of the glut of Chinese products entering the American market. There is a far more compelling case for the Administration to be forceful with China about its willingness to tolerate intellectual property violations.
A precondition to China entering the World Trade Organization was that it implement intellectual property protections. They have been given time to address this concern, and have failed. It is time for the Administration to bring a WTO case and confront China in a meaningful way. If we provide the will for them to put a stop to piracy, they'll find a way.
I look forward to hearing from our witnesses, Mr. Chairman, and especially from the U.S. Trade Representative's Office on what steps they are taking to protect America's most valuable treasure, our ideas and creations.
Mr. SMITH. Thank you, Mr. Berman. Without objection, other Members' opening statements will be made a part of the record.
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And before I introduce the witnesses, I would like to ask you all to stand and be sworn in.
[Witnesses sworn.]
Mr. SMITH. Thank you. Please be seated.
Our first witness is Victoria Espinel, who is the Acting Assistant U.S. Trade Representative for Intellectual Property in the Office of the United States Trade Representative. In that capacity, Ms. Espinel serves as the principal U.S. trade negotiator on IP. Ms. Espinel's office chairs the intra-agency committee that conducts the annual Special 301 review of the international protection of intellectual property rights. The latest report was published on April 29, 2005. Ms. Espinel holds an LLM from the London School of Economics, a JD from Georgetown University, and a BS in foreign service from Georgetown University School of Foreign Service.
I am told that this is Ms. Espinel's first time testifying before Congress. She'll be doing double-duty today, since she will also be testifying at our Russia hearing, as well. Now, we look forward to hearing her testimony, and welcome her to the Committee today.
Our second witness is Ted Fishman, the author of the best-selling book, ''China, Inc.: How the Rise of the Next Superpower Challenges America and the World.'' Provocative, timely, and insightful, Mr. Fishman's book has been favorably reviewed by numerous business and general interest publications. In addition to his book, Mr. Fishman has written for The New York Times, the Times of London, Harper's, and USA Today. Mr. Fishman is a graduate of Princeton University.
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Our next witness is Myron Brilliant. Mr. Brilliant serves as the Vice President for East Asia at the United States Chamber of Commerce. In that capacity, he is responsible for overseeing the U.S. Chamber's programs and policy in that region. His focus has been on strengthening and promoting the U.S.-China relationship. Towards that end, he formed the U.S. Chamber's China WTO Implementation Working Group in 2001; led efforts to secure congressional support for PNTR for China—we may ask you if you still are happy you did that—and currently heads the U.S. Chamber's international IPR initiative. Mr. Brilliant received his JD from American University's Washington College of Law; his BA in government and politics from the University of Maryland.
Our final witness is Eric Smith, who serves as the President of the International Intellectual Property Alliance, IIPA, which is based in Washington, D.C. IIPA is a private-sector coalition of six U.S. trade associations which represents over 1,300 companies that produce and distribute materials protected by copyright laws throughout the world. A co-founder of IIPA, Mr. Smith frequently serves as the principal representative of the copyright industries in WTO, TRIPS, and free trade agreement negotiations. Mr. Smith has a JD from the University of California at Berkeley, a BA from Stanford, and an MA from the School of Advanced International Studies at Johns Hopkins.
We welcome you all. Without objection, your entire statements will be made a part of the record. As you know, please try to limit your testimony to 5 minutes, both because that's the rules and because we're expecting votes in about 35 minutes.
Again, we appreciate you all being here. And Ms. Espinel, we'll begin with you.
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TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. TRADE REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF U.S. TRADE REPRESENTATIVE
Ms. ESPINEL. Thank you very much. Chairman and Members of the Committee, thank you for the opportunity to address your concerns over ineffective protection of intellectual property in the People's Republic of China.
As Ambassador Portman stated in his confirmation hearing testimony, we face major challenges in China. Our trade deficit, as you well know, with China last year alone was $162 billion, and part of that deficit is because the Chinese do not always play by the rules.
Estimates on copyright piracy, for example, from the copyright software and music industries are illustrative of the scope of the problem, with reports that 90 percent of all software installed on computers and over 90 percent of the market for sound recordings in China was pirated in 2003. These disconcerting statistics are emblematic of the problems that can be found in other industries.
After being sworn in just a couple of weeks ago, Ambassador Portman immediately reiterated his commitment to enforcing our trade agreements and the international obligations of our trading partners. He has ordered a top-to-bottom review of all trade issues with China, and plans to shift resources and people as appropriate to address these pressing concerns.
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I am here today because Ambassador Portman and this Administration place the highest priority on stemming the tide of IPR infringement in China. Counterfeiting and piracy in China are at record levels, and are affecting a wide range of U.S. business interests.
Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate products forced to compete against Chinese fakes. We want and look forward to working closely with you and your staff in combatting the theft of American intellectual property in China.
On April 29, USTR reported the results of its Special 301 out-of-cycle review on China. In this report, we concluded that while China has undertaken a number of serious efforts at the national level to address its IPR theft epidemic, particularly by amending laws and increasing raids against those selling pirate and counterfeit goods and by operating illegal production facilities, China is still not deterring rampant piracy and counterfeiting.
Piracy and counterfeiting rates in fact continue to grow, a situation that is hitting our small- and medium-size business the hardest. As a consequence, in our April 29 report we outlined a series of actions to ratchet up the pressure on China.
These include working with U.S. industry and other stakeholders, with an eye toward utilizing WTO procedures to bring China into compliance with its WTO TRIPS obligations, including the possibility of WTO litigation;
Invoking the transparency provisions of the WTO TRIPS Agreement, which will require China to produce detailed documentation on certain aspects of IPR enforcement that affect U.S. rights under the TRIPS Agreement;
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Elevating China onto the Priority Watch List, on the basis of serious concerns about China's compliance with its TRIPS obligations and commitments that China has made at the JCCT;
Continuing to monitor China's commitments made under our 1992 and 1995 bilateral agreements;
And intensifying the JCCT process, including the Intellectual Property Working Group which is scheduled to meet next week to significantly improve IP protection and enforcement in China.
China must expend the political capital necessary to deliver on its promise to substantially reduce IP infringement. China's Vice Premier Wu Yi recommitted to this at the April 2004 JCCT. We will work with our counterparts on the Chinese side, beginning with the upcoming meeting of the IPR Working Group, to impress upon China that patience within the Administration and on Capitol Hill has run and now is the time for results. We will also share our technical expertise with China, where possible, to overcome the many challenges that lie ahead.
Supplementing these bilateral IP efforts, we will continue outreach activities to U.S. stakeholders and our trading partners being harmed by the growth in counterfeit and pirate goods. One avenue through which we are seeking cooperation on this shared problem is the Administration's Strategy Targeting Organized Piracy, otherwise known as the STOP Initiative.
Since the announcement of STOP in October 2004, we have been working with the Departments of Commerce, including the U.S. Patent and Trademark Office, Homeland Security, including Customs and Immigration and Customs Enforcement, Justice, and State, to build international cooperation for a series of proposals that will stop the trade in fakes.
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Last month, a delegation representing these seven Federal agencies visited Singapore, Hong Kong, Japan, and Korea, generating much interest and fruitful discussions. In the coming months, we will continue our outreach so as to determine the activities that provide opportunities for cooperation to demonstrate tangible results. We would very much like China to participate in STOP, if it is prepared to do so and its participation would be useful.
On the domestic front, we will continue to work with U.S. industry to identify problems and address trade complaints related to China, as we did during the out-of-cycle review. This includes cooperating with industry on China's WTO TRIPS implementation and on the use of WTO procedures to address our serious concerns about China's compliance.
Industry's daily operations throughout the country provide us insight into China's IP regime at the local and provincial levels. We hope Congress will join us in encouraging industry's robust participation on this front, including those companies and associations representing the recording industry, motion pictures, software, chemicals, pharmaceuticals, and information technology. Their engagement and support on IP issues this year is key to our efforts to improve IP protection in China.
Lastly, we appreciate and will continue to work closely with Congress on these matters. We will press forward with the bilateral and multilateral strategy laid out before you, with the goal of improving the situation for American owners of intellectual property in China and worldwide.
We will continue to reach out to our trading partners to develop mechanisms to comprehensively combat IPR theft through multilateral fora such as APEC, the OECD, and the WTO. And we will continue to conclude agreements such as our free trade agreements that reflect the level of protection and enforcement of intellectual property in the United States.
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Mr. Chairman and Members of the Committee, thank you for providing me with the opportunity to testify. I look forward to your questions.
[The prepared statement of Ms. Espinel follows:]
PREPARED STATEMENT OF VICTORIA ESPINEL
Chairman Smith and members of the Committee, thank you for the opportunity to address your concerns over ineffective protection of intellectual property rights (IPR) in the People's Republic of China.
As Ambassador Portman stated in his confirmation hearing testimony, we face major challenges with China. Our trade deficit, as you well know, with China last year alone was $162 billion. And part of that deficit is because the Chinese do not always play by the rules. Estimates on copyright piracy, for example, from the computer software and music industries are illustrative of the scope of the problem, with reports that 90 percent of all software installed on computers and over 90 percent of the market for sound recordings in China was pirated in 2003. These disconcerting statistics are emblematic of the problems that can be found in other industries.
After being sworn in just a couple of weeks ago, Ambassador Portman immediately reiterated his commitment to enforcing our trade agreements and the international obligations of our trading partners. He has ordered a top-to-bottom review of all of our trade issues with China, and plans to shift resources and people as appropriate to address these pressing concerns.
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I am here today because Ambassador Portman and this Administration place the highest priority on stemming the tide of IPR infringement in China. Counterfeiting and piracy in China are at record levels and are affecting a wide range of U.S. business interests. Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate products forced to compete against Chinese fakes. We want and look forward to working closely with you and your staff in combating the theft of American IP in China.
On April 29, USTR reported the results of its Special 301 Out-of-Cycle Review on the IPR situation in China. In this report, we concluded that while China has undertaken a number of serious efforts at the national level to address its IPR theft epidemic, particularly by amending laws and increasing raids against those selling pirated and counterfeit goods and operating illegal production facilities, China is still not deterring rampant piracy and counterfeiting. Piracy and counterfeiting rates continue to grow, a situation that is hitting our small and medium size businesses the hardest. As a consequence, we outlined a series of actions to address our concerns:
1) Working with U.S. industry and other stakeholders with an eye toward utilizing WTO procedures to bring China into compliance with its WTO TRIPS obligations.
2) Invoking the transparency provisions of the WTO TRIPS Agreement, which will require China to produce detailed documentation on certain aspects of IPR enforcement that affects U.S. rights under the TRIPS Agreement.
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3) Elevating China onto the Priority Watch List on the basis of serious concerns about China's compliance with its WTO TRIPS obligations and commitments China made at the April 2004 U.S.-China Joint Commission on Commerce and Trade (JCCT) to achieve a significant reduction in IPR infringement throughout China, and make progress in other areas.
4) Continuing to monitor China's commitments under our 1992 and 1995 bilateral agreements (including additional commitments made in 1996).
5) Using the JCCT, including its IPR Working Group, to secure new, specific commitments to significantly improve IPR protection and the enforcement environment in China.
China must expend the political capital necessary to deliver on its promise to ''substantially reduce IPR infringement.'' China's Vice Premier Wu Yi committed to this at the April 2004 JCCT and in our 1995 bilateral Memorandum of Understanding on IPR. We will work with our counterparts on the Chinese side, beginning with the upcoming meeting of the JCCT IPR Working Group scheduled for the week of May 22nd, to impress upon China that patience within the Administration and on Capital Hill has run and that now is the time for results. We will also share our technical expertise with China where possible to overcome the many challenges that lie ahead.
Recently, the Chinese Government has increased its efforts to promote better IPR protection in China. We expect China to demonstrate these efforts will yield tangible results on IPR. In our OCR Report, we identified for China six specific results that in our view would be evidence that these efforts are succeeding, and have provided suggestions on how to achieve them. China must now take ownership of the problem and exercise the political leadership needed to show improvements in these areas, particularly at enhancing criminal enforcement, providing for a deterrent administrative enforcement system, allowing for fair market access for legitimate products, securing China's borders against exports of pirated and counterfeit products, protecting copyrights in the context of the Internet, and increasing the transparency of its legal system.
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Supplementing these bilateral IPR efforts, we will continue outreach activities to U.S. stakeholders and our trade partners being harmed by the growth in trade of counterfeit and pirated goods originating from countries such as China. One avenue through which we are seeking cooperation on this shared problem is the Administration's Strategy Targeting Organized Piracy, or STOP!.
Since the announcement of STOP! in October 2004, we have been working with the Departments of Commerce,(including the U.S. Patent and Trademark Office), Homeland Security (including both Customs and Border Protection, and Immigration and Customs Enforcement), Justice, and State to build international cooperation for a series of proposals to that will stop the trade in fakes. Last month, a delegation representing these seven federal agencies visited Singapore, Hong Kong, Japan and Korea generating much interest and fruitful discussions. In the coming months, we will continue our outreach so as to determine the activities that provide opportunities for cooperation to demonstrate tangible results. We would very much like China to participate in STOP! if it is prepared to do so and its participation would be useful.
On the domestic front, we will continue working with U.S. industry to identify problems and address trade complaints related to China, as we did during the Out-of-Cycle Review. This includes cooperating with industry on China's WTO TRIPS implementation and on the use of WTO procedures to address our serious concerns about China's compliance. Industry's daily operations throughout that country provide us insight into China's IPR regime at the local and provincial levels. We hope Congress will join us in encouraging industry's robust participation on this front, particularly those companies and associations representing the recording industry, motion pictures, software, chemicals, pharmaceuticals and information technology. Their engagement and support on IPR issues this year is key to our efforts to improve IPR protection in China.
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Lastly, we appreciate and will continue to work closely with Congress on these matters. We will press forward with the bilateral and multilateral strategy laid out before you with the goal of improving the situation for American owners of IPRs in China and world-wide. We will continue to reach out to our trade partners to develop mechanisms to comprehensively combat IPR theft through multilateral fora such as the APEC, OECD, and the WTO and will continue to conclude agreements such as our free trade agreements that reflect the level of protection and enforcement of IPRs in the United States.
Mr. Chairman and members of the Committee, thank you for providing me with the opportunity to testify. I look forward to your questions.
Mr. SMITH. Thank you, Ms. Espinel.
Mr. Fishman.
TESTIMONY OF TED C. FISHMAN, AUTHOR AND JOURNALIST, CHINA, INC.
Mr. FISHMAN. Thank you so much. I'm honored to be here. My written statement, and my book, China, Inc., and the attached New York Times articles that I provided offer a comprehensive view of why I think the Chinese intellectual property regime is so difficult to tackle.
In my spoken remarks, I'm going to focus on why I think the problem is going to grow, and just what kind of force I think this Committee will need to encourage the United States to exert in order to overcome it. And the underlying issue there is China's growth.
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The more China grows, the richer its people get, the more global its industries grow, the more difficult it is going to be to enforce intellectual property; because there'll be more people willing to pay for pirated goods, more businesses in demand of pirated goods. This is part of China's low-cost manufacturing machine and part of its industrial growth.
Over the last 20 years, there has been no enforcement of intellectual property rights in China, virtually none. And yet, China has still attracted about a trillion dollars in foreign direct investment. It has not been a disincentive for foreign investment to date. In fact, if anything, it's been an incentive; because when the world's manufacturers move to China, they also take advantage of factories that work on machines that are created on pirated platforms, on computer-aided design work stations that run on pirated platforms, on virtually everything inside a factory that is protected by some intellectual property somewhere else. Those move to China at no cost, and are an essential part to how China produces goods for the world at low prices.
If you want to assert an intellectual property protection regime in China, you're going to have to drive a wedge in between the interest in keeping China the world's low-cost manufacturing center, and the interest in keeping the United States a vital knowledge economy in which innovation is primary.
Look at China's growth. It is impressive by any measure. It is urbanizing and industrializing at a pace faster than any country in the history of the world. Within a generation, 300 million people will move off the farm, in which there is no technology virtually and it is the most basic of economies, into a rapid urban industrializing future. Every aspect of that urban industrialized future relies in some essential way on pirated technology—every aspect of it.
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And, you know, we shouldn't overlook how China's industrialization is also benefitting America's consumers. The China price, which is the lowest price available for goods in the world, has saved American consumers, on average, about $600 each a year over the last year and a half. Those numbers come from economist Gary Hufbauer at the Institute for International Economics.
And when you assert an intellectual property regime in China, you're going to see prices go up, and it's going to be the consumer that pays the price. But you're also going to have a conflict of interest among those who buy those goods in the United States. Any time you walk into a big-box store, say a large discounter, what you are seeing is seven out of ten of the goods on those shelves coming from China. Often, those goods are made on entire production lines that are created with pirated intellectual property. It is simply a fact. It is a component of the Chinese economy.
And China has very strong interests in not strengthening its IP. Do a thought experiment. If you were the leader of 1.3 to 1.6 billion people who were mostly desperately poor, in need of the world's best educational resources, in need of the world's best technology, and you could grant them this technology virtually for free, without consequence, and borrow the jewels from the rest of the world's economies and deliver them to your people, and put them on an equal plane with the world's most advanced industrial economies, would you make that choice?
That is the choice that the Chinese regime has made. And reversing that choice, or stopping that choice, requires an extreme willingness on the part of the United States to form a consensus on China, to drive a wedge between those strong interests which deliver wealth to the Chinese people, in the area of pharmaceuticals it delivers better health to the Chinese people, and in the area of education it delivers the most advanced technological products available in the world. That is a strong interest to overcome.
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And yet, right now we are at a juncture. In order to save our economy and the innovative nature of our economy, we have to make that choice. Thank you.
[The prepared statement of Mr. Fishman follows:]
PREPARED STATEMENT OF TED C. FISHMAN
Let me start with two bold statements. Intellectual property is now the most important issue in the economic relations between the United and China. Convincing the Chinese to consistently enforce laws that protect intellectual property, especially intellectual property held by foreigners, will impossible without a powerful assertion of American interests. My hopes for my testimony are to explain why China's current, exceedingly loose intellectual property regime is one of the engines of the country's amazing economic growth and thoroughly in that nation's interest. I will offer what I think are the essential choices we Americans must make in addressing China's intellectual property regime, choices that often pit one strong interest—such as our interests as consumers in search of low prices—against others—such as our need to protect America's knowledge economy.
Let me describe briefly the Chinese economic miracle that must be the backdrop for this discussion. Ever since the Chinese economic reforms began in earnest a little more than two decades ago, China has been growing faster than any large economy in the history of the world. China's actual growth statistics are a source of considerable controversy, but even conservative estimates are impressive. As a nation, China has almost certainly enjoyed an average growth rate above 8 percent for two decades running. China has lifted 400 million people out of the lowest depths of poverty, and in twenty years has seen the incomes of the average household climb four-fold. In a country where recently private enterprise was strictly forbidden, and where the government owned every business, the land under every home, and even the pots, pans forks and knives in the kitchen, there are today 85 million private businesses. The United States, in contrast, has around 25 million private businesses. In other words, the Chinese Communist Party has overseen the one of the greatest capitalist flowerings the world has ever seen. It is hard for Americans to imagine leaders who proudly call themselves Communists allowing such rampant and successful commercialization, and harder still to see how communism has nevertheless informed China's transformation. Yet, when looking at how China's government will act in the future, it pays to see how the country's communist leaders act for their country's welfare, rather than to take to usual tact, which is to demonize the Communists and to see them at odds with the best interests of the Chinese people. Make no mistake: I have strong reservations about China's government and sincere hope that China will look more like our democracy over time. Even so, in the context you are addressing today, we must acknowledge, and grudgingly admire how the Chinese have improved their lot and moved to the forefront of the world's economic powers.
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China's loose intellectual property regime allows the government to pass on to its citizens goods that make the Chinese people richer, smarter and healthier. They have solid reasons for doing business the way they do, and many of us would act in much the same way were we in the position the Chinese now find themselves in. Here's a simple thought experiment. Imagine you were the leader of between 1.3 and 1.6 billion people, most of them desperately poor and modestly educated. Suppose you could transfer to your people the jewels of the world's advanced industrialized nations, paying nothing for much of it and pennies on the dollar for some more. Suppose, in other words, you could steal the best technology, copyrighted materials, brand names and top entertainment for your wanting people. And imagine further that you had little expectation of being held to account for that theft. To the contrary, you would be rewarded for it. In fact, that theft would make your country an ever-more desirable home for the very international fashion, technology and knowledge enterprises you were so liberally borrowing from. Anyone here would make that choice—the choice which the Chinese government and people made and still do make every day. One of the precepts of good leadership is to make one's people prosperous and capable, and the Chinese practices have followed that hands down. The Chinese are indisputably richer today than ever before, the use of personal computers is widespread and expert and Chinese factories routinely run on the very same software that their competitors in America use. In all, China's creation of an extremely loose intellectual property regime has paid off handsomely. It is now time we exercise what means we have to enforce global rules that will also serve the American economy.
All of Hollywood, Bollywood and even French, Italian and Russian cinema is available for a pittance in the streets of China. Everyone on this committee knows about DVD pirating, but how many have seen how the markets work in the streets of China. One soon sees why there are only a handful of movie theaters in China. Travel up a crowded escalator at the entrance to a Shanghai subway stop on a Friday evening after work, and there at the top is a woman with a medium-sized duffle bag. She steps to the side, opens the bag and with great speed lays out hundreds of DVDs of the latest American movie hits. Immediately, she is rushed by commuters who snap up the disks at $.70 a piece. There are few movie theaters in China because women with gym bags, and men with crates of DVDs on their bicycles and stores in alleys, and sometimes on busy business streets are, in essence, China's movie theaters. The trade is so open that Chinese policeman can regularly be seen rifling through the bins of DVDs shops, not shutting them down, but shopping for a weekend's entertainment.
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China's lax policies on copyright protection offer the country the advantages of both bread and circuses. One expert I interviewed for my book, China, Inc. is Andrew Mertha, a political scientist at Washington University. Mertha, who has worked with Chinese and American officials on Chinese intellectual-property law, summarizes the circus side of things: ''If you're the Chinese leadership, do you want people idling around in the street, complaining about how unhappy they are, or do you want them home watching Hollywood movies?'' In other words, the government is slow to crack down on the piracy of entertainment products because these serve its social agenda. But is there any doubt that if vendors suddenly found a brisk market for DVD's promoting Tibetan independence or the virtues of Falun Gong, the outlawed religious sect, the DVD business would shrivel up overnight and all those anticounterfeiting laws on the books would find ready application? Indeed, when Sega's new online fantasy sports game ''Football Manager 2005'' had the gall to suggest that imaginary soccer leagues in Hong Kong, Taiwan and Tibet could be governed locally, rather than by the central government, China's Ministry of Culture banned the game on the grounds that it posed ''harm to the country's sovereignty and territorial integrity.'' Fines reached $3,600.
The two most cited examples of China's disregard for intellectual property are movies sold on pirated DVDs and software copied and sold at low cost in Chinese shops. Nearly every movie, and every piece of software in China (except those used by multinational companies operating in China) is somehow stolen. It seems right to criticize these practices, but Americans must also acknowledge how we are complicit in them. Anyone who has shopped for a DVD player in an American store in the last two years knows that prices have dropped dramatically. During their first few years on the market, DVD players were manufactured by a handful of large global consumer electronics companies, and the technology that went into them was protected by patents held by a few of the companies. Any company that wanted to make a DVD player had to pay the consortium that held the patent rights a license fee. Then, about four years ago, Chinese manufacturers began to make players without paying the license fees. They simply copied the technology and assembled the machines. In fact, they added functions to the players that made them better then any others on the market. One of those function was the ability to read poor quality DVD disks, the kinds that sell out of gym bags. The original intent of the Chinese makers was to sell to Chinese consumers, who make up the largest group of consumers of recorded entertainment in the world. Soon, instead of 5 or 6 foreign companies making and licensing DVD players, their were hundreds of Chinese manufacturers turning them out. Prices dropped from nearly $1,000 to around $50. Of course, the players did not stay in China. Today, there are $26 players for sale at America's big box stores and chain pharmacies and grocers. That is roughly the price of two movies. The chipset and license fee for a DVD player costs about $11. When one sees a $26 Chinese-made player on the selves of a discount store or drugstore, it is worth wondering how it could get there unless there were winks and nudges from American retailers who insist on ever-lower prices from their Chinese suppliers, but do not always insist that the goods they buy have the proper IP bona fides.
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The motion picture industry and the American software industry suffer in China. I have noticed, however, that when I bring up the issue of counterfeiting and piracy in China it is almost impossible to get the average American to feel pity for Hollywood or for software giants like Microsoft. Or even for big pharmaceutical companies that face their own China challenges. There is group for whom there is lots of sympathy, however. It is American manufacturers who face intense competition from China's low-cost manufacturing machine. And it is this group that may suffer the most from China's lax intellectual property regime.
American companies are not just creators of intellectual property, they are buyers of it. It can cost millions, or tens of millions or dollars to purchase and service the software to run an American company. Yet, Chinese competitors often pay nothing for the same technology, because it is simply stolen. Walk into the vast majority of Chinese firms that run computers and one will see one work station after another stuffed with $2 version of software that costs Western competitors hundreds of dollars to run. Or walk into any company that designs and manufactures highly engineered parts. A metal caster that has built a reputation for making precision parts—the kind that American companies excel at—typically designs its parts at engineering work stations manned by highly trained engineers who run proprietary software that can cost $50,000 to $60,000 a year to run. It is likely to have several such workstations, perhaps dozens or hundreds. Chinese competitors run the same software, but they are unlikely to have paid anything for it. It is easy to understand how low-cost labor contributes to China's low-cost manufacturing. So far, the low-cost of technology has been entirely overlooked. I cannot offer numbers of the total cost of this mismatch, but it is an essential part of the dynamic that drives manufacturing to China. The cost would almost certainly dwarf the losses in sales suffered by Hollywood or the software industry. As China moves up the economic feeding chain, this level of piracy will play against American companies more and more. Our economic health demands that we address this. One place to look is toward American companies that bring in Chinese-made goods that are made on pirated platforms. That's a daunting task, because nearly everything America buys from China achieves some of its cost competitiveness from China's loose intellectual property regime.
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China's loose intellectual property rules also transfer to Chinese industry valuable intellectual assets that can take American companies years and cost significant sums to develop. American automobile makers can spend half a billion dollars developing and building anew car, and take two years to do it. As soon as the car hits the market, Chinese manufacturers study it and look at how to copy it. Chery Motors, the company which will soon introduce Chinese built cars into the U.S. market has been accused by General Motors of pirating an entire GM car and beating GM to market with the Chery copy. It is not unusual for whole assembly lines to get duplicated in China, where the copiers need not worry about the cost of developing and designing the lines. Big business in the U.S. is vulnerable, but so are smaller firms where often one good idea, patented or kept proprietary in some other fashion, is the only truly valuable asset the firm has.
China's failure to police its intellectual property rules often looks less like ineffective government than a conscious policy to shift the highest value goods from other economies into the country. It is, in essence, the largest industrial subsidy in the world, and brilliantly, it costs the Chinese nothing. In 2005, China will most likely be the world's third-largest trading nation, and counterfeiters give the country's increasing number of globally competitive companies the means to compete against powerful foreign rivals that pay for their use of proprietary technologies. In a broader geopolitical context, China's counterfeiters deny the world's advanced economies, especially in the U.S. and Japan, the opportunity to sell to China the valuable designs, trademarked goods, advanced technology and popular entertainment that the Chinese urgently desire but cannot yet produce on their own. For the U.S., this mismatch is particularly punishing. Japan and Germany, which also suffer from China's policies, do not have the huge trade deficits with China that the U.S. does. One reason is because our export economy is far more dependent on the sale highly valuable, intangible and easily copied goods. Japan and Germany make the machines China needs to run. America makes the software that runs those machines. It is far more difficult for us to paid by Chinese users for what we make, though most of the rest of the world pays handsomely for it. Until we can get paid for what we make and the Chinese use, our deficits will worsen, not improve. Say, for example, that the value of the dollar drops against the Chinese yuan. Economists predict our trade situation will level out, but do not take into account that no matter what our goods cost, the Chinese will most likely continue to pay nothing for some of the most useful goods we make. And, as a result, their factories will continue to be able to beat even the most efficient American factories on price.
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We now have a golden moment in which we can still use our power as China's most important customer to enforce a change in its intellectual property regime. Action ought to be forceful and unequivocal. Our trade deficit with China alone—not counting the rest of our trade with the country—is more than ten percent of the entire Chinese economy. That is an astonishing figure, and in it we can find strength to exert rules over our trade with China. That may require a radical rethinking of past agreements, some brinksmanship with quotas and tariffs and other remedies. Without action, however, the U.S. is likely to find our entire economy copied in China and Americans paid little for the brainwork imported to make it run.
Mr. SMITH. Thank you, Mr. Fishman.
Mr. Brilliant.
TESTIMONY OF MYRON BRILLIANT, VICE PRESIDENT, EAST ASIA, U.S. CHAMBER OF COMMERCE
Mr. BRILLIANT. Mr. Chairman, Members of the House Judiciary Subcommittee, good morning. The U.S. Chamber appreciates your invitation today to appear at this important hearing on China's intellectual property record.
As the world's largest business federation, representing more than three million businesses, the U.S. Chamber of Commerce is keenly aware of the global threat of counterfeiting and piracy to American firms and workers. Counterfeiting and piracy is not a victimless crime. Counterfeiting and piracy are costing the U.S. consumers and American companies billions of dollars every year, and those numbers are going up.
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It damages investment and innovation, has devastating economic consequences for small businesses, puts a severe strain on law enforcement agencies, nearly always escapes taxation, threatens public and health safety, diverts government resources from other priorities, and has links to terrorism and organized crime.
IP theft will continue to be rampant without a concerted effort on the part of business and government. The U.S. Chamber has launched a three-part strategy aimed at mobilizing business and government to fight against counterfeiting and piracy. As part of our efforts, we have launched country-specific IPR initiatives in China, Brazil, Russia, India, and Korea, where the problems are particularly acute for American companies.
Let me now turn to offer specific views on China, the subject of today's hearing. The U.S. Chamber fully recognizes the importance of China's successful integration into the world economy. U.S.-China trade has boomed in recent years since China's accession into the World Trade Organization. U.S. exports to China have grown by 114 percent since 2000, five times faster than exports to any other country.
While the U.S.-China commercial relationship is of immense and growing importance to our membership, the U.S. Chamber feels strongly that China must do significantly more to comply fully and on time with its WTO, World Trade Organization, commitments; and in particular, in critical areas such as intellectual property rights.
And we are communicating our views directly to the Chinese. This week, U.S. Chamber President and CEO, Tom Donohue is visiting Beijing with a business delegation for high-level delegation discussions with the Chinese government, including Premier Wen Jiabao and Minister Bo Xi Lai, and talking to the Chinese about the need for more tangible immediate steps to crack down on counterfeiting and piracy.
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Next week, we will play host to a senior Chinese IPR delegation led by Vice Minister Ma Xiuhong, and we will again use the opportunity to seek clarification and assurances about their enforcement efforts.
Where do we stand? It is clear that the protection which China is actually providing fails to meet the standards of effectiveness and deterrence set out in the WTO TRIPS Agreement. IPR violations in China now severely affect all American industries, from consumer industrial goods, including medicine; to autos and auto parts, food and beverages and cosmetics; to copyright works, including entertainment and business software, movies, music, and books.
China is the single largest source of counterfeit and pirated products worldwide, and we believe that the scope of counterfeiting and copyright piracy in China worsened for most of our member countries in 2004. Infringement levels are at 60 to 90 percent, or even higher, for virtually every form of intellectual property in China. In the copyright industry alone, for instance, USTR estimates U.S. losses are between 2.5 billion and 3.8 billion annually.
The U.S. Chamber was heartened by the promises of Vice Premier Wu Yi at the April 20, 2004 Joint Commission on Commerce and Trade meetings, on the intention of the Chinese government to significantly reduce IPR violations. We acknowledge that the PRC government is taking important and constructive steps to improve coordination.
In a further positive development, we acknowledge that they have issued a long awaited judicial interpretation that covers frankly criminal prosecutions—could cover—and could strengthen, deter, and impact China's criminal enforcement efforts in the IP field.
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In 2004, China's government modestly improved its regulatory environment for IPR protection, and carried out raids and other enforcement actions at the central, local, and provincial levels.
Administrative penalties, however, mainly limited to fines and confiscation of fake products, remain too small to create deterrence. And despite some signs that new efforts are underway in 2005, China has not significantly reduced IPR infringement levels as Vice Premier Wu Yi promised at last year's JCCT meeting.
The U.S. Chamber remains concerned that the limited legal reforms and enforcement campaigns which commenced in China in 2004 are insufficiently bold. If tangible progress is not made in the months ahead, we believe that USTR should conduct a second Special 301 out-of-cycle review of China later this year, to assess China's implementation of the judicial interpretation and other enforcement efforts.
We would encourage the U.S. Government to continue to work through the JCCT and through other appropriate forums in the months ahead to identify specific action items for China to undertake. Those are outlined in our written testimony, but in the interest of time, I would note that we will be looking in particular to see if the Chinese take steps to add police resources in critical regions; criminalize export-related cases; introduce new enforcement guidelines that will significantly boost fines and other penalties imposed by administrative enforcement agencies. We want to see significant increases in the number of criminal IPR investigations, prosecutions, convictions, and deterrent sentencing.
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Let me just briefly touch upon Russia, the subject of the second hearing, as I was asked to do by the Committee. Russia's efforts to join the World Trade Organization in 2005 gives the U.S. Government a critical window of opportunity to seek from that country important commitments and progress on IPR enforcement. There is no question Russia's IPR problems, like China, are growing, and this is of concern to our membership.
We fully support USTR's decision to keep Russia on the Priority Watch List and to conduct an out-of-cycle review to monitor Russia on IPR in 2005, but—but—the U.S. Chamber also encourages our government to make it a priority to engage Russia on how that country will improve its IPR enforcement efforts in the context of its WTO accession talks. We must not lose that opportunity.
Thank you, Mr. Chairman, Members of the Committee. The U.S. Chamber and our members appreciate the opportunity to participate in today's House Judiciary Subcommittee hearing on intellectual property rights. Given the importance of this matter to the American business community, we look forward to staying engaged with this Committee. Thank you.
[The prepared statement of Mr. Brilliant follows:]
PREPARED STATEMENT OF MYRON BRILLIANT
Mr. Chairman, members of the House Judiciary Subcommittee, good morning. The U.S. Chamber appreciates your invitation to appear at this important hearing today on the importance of intellectual property rights to American companies.
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As the world's largest business federation representing more than 3 million members, the U.S. Chamber of Commerce is keenly aware of the global threat of counterfeiting and piracy to American firms and workers. In the Information Age, intellectual property (IP) is the ''gold standard.'' It must be protected as it is the cornerstone for economic prosperity in this new era. Yet, IP is under attack here in the United States and globally.
The problem goes by many names—counterfeiting, piracy, or knockoffs. The fact is the problem is getting worse worldwide. IP theft will not go away without a concerted effort on the part of business and government.
BREADTH OF THE PROBLEM
Counterfeiting and piracy are costing the U.S. consumers and American companies billions of dollars every year. But the problem is more insidious than that. It damages investment and innovation; has potentially devastating economic consequences for small businesses; puts a severe strain on law enforcement agencies; nearly always escapes taxation; threatens public and health safety; diverts government resources from other priorities; and has links to terrorism and organized crime.
Counterfeiting and piracy, once viewed, as ''victimless'' crimes mainly consisting of selling cheap products such as sunglasses and watches, have mushroomed in recent years to endanger every product. From dangerous substandard replacement parts for airplane engines, to ineffective pharmaceuticals, to illegally copied compact discs manufactured in clandestine factories around the world, sales of counterfeit and pirated products are skyrocketing. Profits from these illicit sales are being funneled worldwide into the pockets of everyone, from groups associated with known terrorists to organized crime elements.
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The problem of counterfeiting and piracy goes beyond the manufacture, distribution, and sale of cheap, unauthorized goods. It threatens our national security, lessens the value of legitimate brand names, and erodes the profits of nearly every business in America.
Some statistics might be helpful to illustrate the magnitude of the problem we face today. Approximately 5% to 7% of world trade is in counterfeit goods, according to the FBI, Interpol, and the World Customs Organization. That's the equivalent of as much as $512 billion in global sales. Of that amount, U.S. companies lose between $200 billion and $250 billion in global sales. U.S. Customs and Border Protection estimates that counterfeit merchandise is responsible for the loss of more than 750,000 American jobs. Finally, we would note that the World Health Organization (WHO) has estimated that counterfeit drugs account for 10% of all pharmaceuticals. Incredibly, in some developing countries, WHO suggests that this number is as high as 60%.
These statistics exemplify the U.S. Chamber's concerns about the growing epidemic of IP theft globally. It is time to act, to take real measures to thwart the growing threat of counterfeiting and piracy.
THE U.S. CHAMBER: MAKING A DIFFERENCE
The U.S. Chamber has launched a three-part strategy aimed at mobilizing business and governments to fight against counterfeiting and piracy.
Part one is education. We are working in the United States to educate businesses, the media, and lawmakers about the growing threat of this issue.
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Part two is enforcement. The U.S. Chamber is committed to bringing these criminals to justice. We are working with manufacturers, retailers, and law enforcement to disrupt the ability of counterfeiting networks to use legitimate distribution channels.
As part of our efforts, the U.S. Chamber established the Coalition Against Counterfeiting and Piracy (CACP) with the National Association of Manufacturers (NAM) to coordinate the efforts of the business community to stop counterfeiting and piracy. CACP is committed to increasing the understanding of the negative impact of counterfeiting and piracy by working with Congress and the administration to drive government-wide efforts to address this threat.
Part three is international. The roots of counterfeiting and piracy extend far beyond U.S. borders. The U.S. Chamber therefore recognizes the importance of tackling this issue in foreign markets. We have launched country-specific initiatives in priority countries, where the problems are particularly acute for American companies. Our initial efforts have focused on China, Brazil, Russia, India and Korea. But we will also be working with our members in other countries where the problem is also prevalent.
The remainder of my testimony will focus on our efforts in the international arena, in particular, on China and Russia which is the focus of today's hearing.
CHINA
The U.S. Chamber fully recognizes the importance of China's successful integration into the world economy. It is perhaps the greatest foreign policy challenge facing our country today.
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China as an Opportunity and a Challenge
As we noted previously during a recent Congressional hearing on U.S.-China economic relations, it is now trite to say that the U.S.-China commercial relationship is of immense and increasing importance to both the U.S. and Chinese business communities. U.S.-China trade has boomed in recent years. The United States ranked second among China's global trading partners in 2004, and China was once again the 3rd largest trading partner for the United States. U.S. exports to China have grown by 114% since 2000—five times faster than exports to any other country.
Year-on-year increases of U.S.-manufactured exports from 2003 to 2004 reveal positive trends: exports of U.S. power generation equipment increased by 34%; exports of electrical machinery and equipment increased by 27%; and exports of optics and medical equipment jumped by more than 30%. These statistics underscore the opportunities that China offers to U.S. exporters, to investors, and, more broadly, to U.S. economic development.
Yet, we also recognize that concerns are rising in many quarters over the U.S. trade deficit with China, rising competition from Chinese imports, and concerns about China's currency policy. The U.S. Chamber feels strongly that China must do significantly more to comply fully and on time with its World Trade Organization (WTO) commitments and, in particular, in critical areas such as intellectual property rights (IPR).
In our view, China has failed to adequately enforce its own laws and regulations when it comes to piracy and counterfeiting violations. This is an endemic problem with immense consequences for the U.S. economy, our companies, particularly for small and medium-size businesses, and public safety. We are committed to constructive engagement with the Chinese government on this and other issues; however, we want to see China move beyond words to actions that crack down on IPR infringements.
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This week, U.S. Chamber President and CEO Thomas Donohue is visiting Beijing with a business delegation for high-level discussions with China's government and business community. In particular, Mr. Donohue will be building upon recent discussions with Chinese officials in Washington, D.C. and China on the full range of issues in our commercial relationship, including the issue of IP protection and enforcement.
China's WTO Implementation Efforts
Briefly, let us turn to China's overall efforts to develop a market based on the rule of law and in accordance with WTO principles and disciplines.
Now in year four of China's WTO implementation, the U.S. Chamber believes that China's WTO implementation process is fostering positive changes in its trade and investment regimes.
We agree with the United States Trade Representative's (USTR's) December 2004 report to Congress, which stated that China ''deserves due recognition for the tremendous efforts made to reform its economy to comply with the requirements of the WTO.'' Moreover, we continue to believe firmly that engaging China in the rules-based trading system has resulted in important progress in key areas, particularly in tariff reduction, revising existing laws and drafting and passing new ones as well as educating its officials and companies about its WTO obligations.
Positive steps by China to implement outstanding and new WTO commitments not only improve the Chinese business environment for the benefit of U.S. and Chinese companies alike, but also underscore China's broader credibility in the global trading system. If China falters in meeting its commitments and its adherence to WTO disciplines, such as in the areas of intellectual property (IP) and transparency, there will be ramifications that will constrain the full potential of this relationship to the detriment of both countries as well as companies from both countries.
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Intellectual Property Rights
Upon its accession to the WTO over three years ago, China agreed to fully comply with Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement obligations. Yet, it is clear that the protection which China is actually providing fails to meet the standards of ''effectiveness'' and ''deterrence'' set out in TRIPS. IPR violations now severely affect virtually all industries, from consumer and industrial goods—including medicines, autos and auto parts, food and beverages, and cosmetics—to copyright works, including entertainment and business software, movies, music, and books. The scope of counterfeiting and copyright piracy in China worsened for most of our member companies in 2004, and we believe that this problem has reached epidemic proportions.
China is the single largest source of counterfeit and pirated products worldwide. Failure to control exports of these products is eroding our companies' profit margins, diminishing brand value, and, in many cases, endangering public safety. U.S. Customs statistics showed an increase of 47% in the market value of counterfeit goods seized in the year ending October 31, 2004. Statistics compiled for 2004 by other governments are expected to reflect a similar trend.
Increasingly, counterfeiting in China is harming small and medium-size U.S. enterprises. Many of these SME's do not have operations on the Mainland and confront a flood of Chinese knockoffs in the U.S. market or in third-country markets where they export. Smaller companies clearly have fewer resources to deal with investigations and legal action against pirates in China and their middlemen in other countries. Thus the need for more convincing and proactive government intervention is becoming increasingly apparent.
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The U.S. Chamber was heartened by the promises of Vice Premier Wu Yi at the April 2004 Joint Commission on Commerce and Trade (JCCT) meetings on the intention of the Chinese government to significantly reduce IPR violations. We also acknowledge that the PRC government, at the central level and under the leadership of Vice Premier Wu Yi and the Market Order Rectification Office of the Ministry of Commerce, is taking important and constructive steps to improve coordination among relevant agencies responsible for IP protection and enforcement.
The U.S. Chamber also notes some recent progress in the Chinese government's willingness to engage directly with companies and industry associations in addressing problem cases and cooperating on capacity-building.
In a further positive development, China's Supreme People's Court and Supreme People's Procuratorate issued a long-awaited Judicial Interpretation on December 21, 2004. This interpretation included a number of important changes that can strengthen the deterrent impact of China's criminal enforcement efforts in the IP field.
Regrettably, though, the Judicial Interpretation contains a number of problems that leave potentially gaping loopholes for infringers, and industry is closely monitoring their impact. Key examples include the following:
Unclear methods for calculating case values, including the lack of standards for valuing semifinished products and raw materials.
Lack of clarity whether trading companies caught dealing in fakes can be held criminally liable for counterfeiting and piracy.
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Lack of provisions to clarify the conditions under which vendors and accessories meet the requisite knowledge requirements to be held criminally liable.
Lack of provisions to criminalize repeat offenses by smaller-scale infringers.
Whether sound recordings are even covered by the Judicial Interpretation.
Significantly higher monetary thresholds for enterprises than for individual persons.
As the U.S. Chamber stated in its fall 2004 report on China's WTO implementation record, enforcement of IPR will not be effective until civil, administrative, and criminal penalties are routinely applied to IPR infringers. China's government modestly improved its regulatory environment for IPR protection and carried out raids and other enforcement actions at the central, local, and provincial levels in 2004. Administrative penalties, however, mainly limited to fines and confiscation of fake products—remain too small to create deterrence. Despite some signs that new efforts are under way (and there is an increased level of arrests and raids), China has not ''significantly reduced IPR infringement levels'' as Vice Premier Wu Yi promised at last year's JCCT meetings.
The U.S. Chamber remains concerned that the limited legal reforms and enforcement campaigns, which commenced in China in 2004, are insufficiently bold. More focused action plans are needed at both the national and local levels in order to bring counterfeiting and copyright piracy under control. While it will take time to design and implement such plans, we do not yet see a commitment on the part of the Chinese to developing them.
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Based on inadequate levels of IPR protection and enforcement in China, causing adverse impact on U.S. economic interests, the U.S. Chamber recommended earlier this year that USTR request consultations with China through the WTO and place China on the Priority Watch List in its 2005 Special 301 Report.
USTR elected a slightly different approach. As noted in its Special 301 Report released in April, USTR elevated China to the Priority Watch List for ''failure to effectively protect IP rights and to meet its commitment to significantly reduce infringement levels.'' While USTR did not act to immediately take China to the WTO for consultations, it did clearly note that it will work with American business to establish the basis for utilizing WTO procedures to bring China into compliance if infringement levels remain unacceptably high and if China fails to take robust enforcement actions.
The U.S. Chamber welcomes working with USTR and other government agencies further on this important issue. We believe that USTR should conduct a second Special 301 Out-of-Cycle Review of China later this year to assess China's implementation of the Judicial Interpretation and other enforcement efforts. Particular focus should be on reviewing the value of adding police resources in critical regions, criminalizing export-related cases, and introducing new enforcement guidelines that will significantly boost fines and other penalties imposed by administrative enforcement authorities.
In reporting its findings, USTR noted that overall counterfeiting and piracy rates are not declining since China's WTO accession. Some alarming statistics underscore our need to see more immediate robust actions in China.
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According to submissions made to USTR, infringement levels are at 90 percent or above for virtually every form of intellectual property in China. In the copyright industry alone, USTR estimates U.S. losses are between $2.5 billion and $3.8 billion annually. U.S. Chamber members in this area also note that internet piracy is quickly becoming an immense threat and serves to remind us that the lost sales could be even higher in years to come if the problem is not addressed.
The problem is not unique to industries impacted by piracy. USTR observed that in 2004 the ''value of Chinese counterfeits coming into U.S. markets seized by the United States increased 47 percent from US$94 million to US$134 million.'' Seizures from China accounted for 67 percent of all U.S. Customs' IPR seizures in 2004.
Given the facts noted above, the U.S. Chamber and its members seek convincing evidence from Chinese authorities that the IPR climate is improving and creating a climate of deterrence. This should include data that confirms a much more substantial increase in proactive government investigations into cases, and substantial increases in prosecutions, convictions, and incarcerations of counterfeiters and copyright pirates.
Aside from liaising with China in the WTO context, the U.S. Chamber strongly supports continuing efforts by the U.S. government to address China's failure to comply with its IPR commitments through the JCCT, other bilateral forums, and multilateral policy mechanisms. The U.S. government should continue to work through the JCCT and through other appropriate forums in the months ahead to identify specific action items for China to undertake that:
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(a) Demonstrate a significant increase in the number of criminal IPR investigations, prosecutions, convictions and deterrent sentencing;
(b) Implement administrative IPR enforcement actions that are deterrent;
(c) Demonstrate specific steps to combat copyright and trade infringing activities, including internet piracy;
(d) Make public available case rulings and IPR-related statistical data;
(e) Demonstrate steps Chinese customs authorities are undertaking that are leading to significant declines of exports of infringing products;
(f) Ensure that China removes administrative and other market access impediments that support illegal infringing activities and prevent the sales of legitimate foreign products; and
(g) Resolve high profile cases involving infringements of foreign IP owners thus establishing the primacy of the rule of law.
If China were to take such actions, tangible results could be achieved.
U.S. Chamber Action Plan
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The U.S. Chamber is prepared to support the Chinese and U.S. governments in its efforts to extend greater protection to foreign and Chinese IP owners. We have embarked on a targeted program offering on the ground capacity—building efforts in the provinces, fostering public awareness of the importance of IPR protection among the Chinese public, and advising on policy changes to better strengthen the legal framework.
The four main components of the U.S. Chamber action plan include:
(1) Spearheading high level dialogues with Chinese business and government leaders including here in Washington DC in late May with the Vice Minister of MOCOM and other ministries on IPR;
(2) Engaging local and provincial Chinese leaders on best practices, judicial and administrative training or related educational programs;
(3) Benchmarking progress with our American Chamber of Commerce in Beijing;
(4) Promoting public awareness in China by implementing a media strategy for re-branding IPR as not a ''victimless crime.''
To achieve these goals, the U.S. Chamber is also working closely with U.S. and Chinese governments, our corporate members, and counterpart associations, including with the AmCham network in China.
As noted above, we want to benchmark China's progress in implementing the new Judicial Interpretation through monitoring the number of judicial prosecutions, convictions, and jail sentences for IP crimes in 2005. In addition to monitoring the criminal enforcement, we want to collaborate with these partners to track enforcement by administrative authorities, including administrative fines, confiscations of production equipment, export enforcement, and the success of the government in transferring cases from administrative enforcers to the police for criminal prosecution.
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Looking Ahead
In our view, the burden of ensuring a reduction in China's piracy and counterfeiting levels in 2005 will ultimately hinge on the political will of local Chinese authorities as much as the national government. Police investigations into new cases need to be proactive and adequately resourced in order to send a proper message to criminal networks that are increasingly behind the problem.
The sincerity of China's pronouncements that it is serious about protecting and enforcing IP rights will further be tested by its willingness to eliminate loopholes for infringers in existing and new regulations and to resolve high-profile cases, such as the Pfizer patent case on Viagra and the General Motors auto case, that impact domestic and foreign IP owners.
Full protection under PRC law and enforcement of IPR in China as set forth in China's TRIPS obligations are critical to the interests of foreign and PRC companies in China, as well as to China's public health and safety, the integrity and attractiveness of China's investment regime, and its broader economic development goals. We hope that the PRC government will accelerate IP enforcement in 2005 by further enhancing national leadership and dedicating additional capital and resources. Only through aggressive measures will China's IPR protection enforcement regime be effective and respected.
China's accession to the WTO afforded it an opportunity to sell increasing quantities of products where it has a comparative advantage to the United States. But by tolerating massive counterfeiting and piracy, China is denying U.S. companies the chance to do the same in China. Moreover, by tolerating the export of such counterfeits, China strips our companies of the opportunity to use their comparative advantage—and thus WTO benefits—in third countries as well.
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Ultimately, it is essential that China purchase the foreign IP-based products it is illegally using. That would translate into billions of dollars in sales and exports by U.S. and other foreign companies and more accurately reflect the balance of trade between the U.S. and China.
RUSSIA
In addition to China, the U.S. Chamber has great interest in seeing significant progress in Russia's intellectual property enforcement efforts. This is made all the more pressing as Russia proceeds toward entry into the World Trade Organization (WTO) in 2005. This process gives the U.S. government a critical window of opportunity to require that, as part of its WTO accession, Russia make considerable efforts on its IPR-related commitments and their implementation.
Unfortunately, the sense of urgency that we all feel here today does not appear to fully register in the upper echelons of the Russian government. The Russian government has acknowledged that there is an intellectual property problem in Russia, and it has created government commissions and introduced meaningful legislation. However, new laws are not enough. The governmental commissions have so far achieved little and there is no consistent political will to address the real fundamental issues such as:
1) Better enforcement at all levels (e.g., customs, police, etc.);
2) Educating the public; and
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3) Making IPR a priority public policy issue that needs to be addressed immediately.
In short, the IP problem in Russia is not the law, except for geographical indications and a few other issues, it is enforcement.
The U.S. Chamber believes that Russia is at a critical crossroads, where it can turn from the significant source of IPR violations it is today, to becoming a key partner in the ongoing global efforts to safeguard IPR as the foundation of innovation. At the eve of its accession to the WTO, Russia faces a critical choice, where it can choose to invest in research and development and expand its intellectual assets, or go the other direction. The U.S. Chamber is committed to a constructive engagement with the Russian Federation to help it make the right choice and reform before it is too late.
The U.S. Chamber is therefore actively supporting and engaging with companies, government agencies, officials, business associations, especially the American Chamber of Commerce in Russia, and other groups dedicated to IPR protection and enforcement in Russia, especially the Coalition for Intellectual Property Rights (CIPR). The goal is to encourage the Russian government to take steps that will achieve tangible results in the fight against this economic plague.
Dimensions of the IP problem in Russia:
Although there is much need for better and more comprehensive statistical information on IP issues in Russia, the following trends should be highlighted.
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Clearly, there is a sense in the American business community that the Russian government has recognized that it has an IP problem. However, we feel that there is no consistent will to address the real fundamental issues such as better enforcement, educating the public, and making IPR a priority policy issue that needs to be addressed immediately.
As part of its 2004 reorganization, the Russian government restructured the regulatory structure for IP regulation and enforcement. Many Russian government officials who were IP experts and dealt with IP issues were removed from their positions. In their place appeared new officials with less knowledge and experience on major issues affecting industrial property and copyright protection. Other administrative changes resulted in decreased enforcement. There is also a latent lack of coordination between government agencies, which further worsens the problem. In addition, there is no strong political will to address IP issues from the top down in the Russian government.
IP rights-holders and consumers take very little action to defend their rights and resolve their problems. The Russian government clearly needs to focus on educating the public, and the business community needs to motivate its customers and its companies to become more involved in this issue.
The U.S. Chamber believes that IP violations are truly a global crime issue, and that no country can solve the problem alone, especially due to widespread border control issues. Russian IP problems are having a direct impact on other former Soviet republics, notably in Ukraine, in Eastern and Western Europe (countries now part of the European Union), and in the Middle East. Fake goods are produced in Russia, but Russia is also a transit point for fake goods made in Asia, notably China.
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Russia's exports of counterfeited and pirated product to the United States and other markets have a significant effect on the U.S and our businesses.
Statistics on IP in Russia:
USTR noted in its 2005 301 Report that:
''Certain aspects of Russia's IPR regime, including enforcement and data protection, appear to be inconsistent with Russia's obligations under the 1992 U.S.-Russian Federation Trade Agreement and thus would not conform to obligations which Russia needs to fulfill in order to join the WTO.''
USTR 301 Report points to staggering figures concerning piracy, which corroborate the urgency of the actions mentioned above. ''Piracy in all copyright sectors continues unabated, and the U.S. copyright industry estimated losses of $1.7 billion in 2004.'' ''The U.S. copyright industry reports the following levels of piracy: 66% in the recording industry, 80% in the motion picture industry, 87% for business software, and 73% for entertainment software.''
USTR 301 Report does not emphasize trademarks as an IP problem in Russia; however, industry associations, like the Moscow-based Coalition for Intellectual Property Rights (CIPR), have reported that trademarks violations (particularly counterfeits) are today no less important.
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Russian government officials acknowledge that there is an IP problem, while also acknowledging that they have no good data to detail the scope of the problem. According to the Russian Agency for Patents and Trademarks (Rospatent) official 2004 data, the turnover of counterfeit goods on the Russian market is 80 to 100 billion rubles (US$2.89 to $3.61 billion), and the government's budget loses up to 30 billion rubles (US$1.08 billion) in tax revenue. Russian Federation Deputy Head of the Federal Service for Consumer Rights Protection, Nadyezhda Nazina, spoke at an IP related Parliamentary hearing to the Russian Federation State Duma in November 2004. She stated that counterfeit and false products on the market are likely between 30% and 40%. Some Russian experts have speculated that counterfeit and pirated products make up at least 60% of the retail ''grey'' market in Russia.
We believe that Russian officials do not yet really have a full picture of the scope of the problem in their market. This is supported by statements made in March 2005 by Russian Federation Deputy of Culture and Mass Media, Leonid Nadirov, to the press when summarizing the results of a meeting of the governmental commission to fight IP violations. He stated ''we ourselves can't imagine how much counterfeit products are produced in Russia, in what geographic regions the production is occurring in, how much money is being stolen and how much taxes have not been paid.'' However, Mr. Nadirov said that by October 2005, the government ''should receive a real picture of the market situation, so that we can, in an understandable language, communicate with partners both inside the country and internationally.''
The U.S. Chamber encourages our government to make it a priority to engage Russia on how that country will improve its IPR enforcement efforts and data protection. We also fully support USTR's decision to keep Russia on the Priority Watch List and to conduct an ''out-of-cycle'' review to monitor Russia on IPR in 2005.
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CONCLUSION
The U.S. Chamber and our members appreciate the opportunity to participate in today's House Judiciary Subcommittee hearing on intellectual property rights.
As noted at the outset, IP theft is a global problem. Business and governments need to continue to work together to address the growing proliferation of intellectual property theft in the United States and globally. Once seen as a threat mainly to a few select industries, today, the theft of intellectual property is now so widespread that it touches nearly every industry and every country, including China and Russia.
It is not a victimless crime. It hurts legitimate established businesses, innovators, consumers, and governments that lose tax revenues.
With particular regard to China, we note that while China is now the fastest-growing trading partner of the United States, it also the single largest source of counterfeit and pirated products worldwide. Rapidly expanding bilateral economic and commercial ties underscore the market opportunities that China potentially offers to U.S. exporters and investors, which support the creation of high value-added jobs at home. Yet, the failure of Chinese authorities to date to crack down effectively on the manufacture, distribution and export of counterfeited and pirated products is eroding legitimate Chinese and foreign companies' profit margins, diminishing brand value, and, in many cases, endangering public safety.
China can and must do more to stop IP theft. The U.S. business community and others that vigorously advocated China's WTO membership premised their support on expectations that China is evolving into a more open and transparent market based on the rule of law. China's unsuccessful efforts to consistently enforce its IPR laws and to vigorously deter IP theft represent the most visible examples of these expectations remaining unfulfilled.
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Similarly, we believe that Russia should take aggressive steps to stem its counterfeiting and piracy problem. Our government should require Russia to show demonstrable evidence of efforts to crackdown on counterfeiting and piracy before it formally supports that country's accession into the WTO. This is an important opportunity to encourage more tangible actions on the part of Russia.
The U.S. Chamber, the world's largest business organization, will remain fully engaged on doing our part in waging a campaign against counterfeiting and piracy on behalf of American business. We will continue to lend our strong voice to ensure that China, Russia, and other countries take even more robust measures in this critical area.
Thank you, Mr. Chairman and members of the committee, for the opportunity to express the views of the U.S. Chamber and our members on this important topic. Be assured the protection of IP is a top priority of our organization and we look forward to working with the members of this Committee and Congress in finding constructive solutions.
Mr. JENKINS. [Presiding.] Thank you, Mr. Brilliant.
We'll now hear from Mr. Eric Smith.
TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE
Mr. SMITH. Chairman Smith, Ranking Member Berman, Members of the Subcommittee, it's an honor to appear before you at this very timely moment, shortly after USTR elevated China to the Priority Watch List, and just a few days before the Chinese IPR working group arrives in Washington to continue a dialogue with the U.S. Government on China's enforcement of IP rights and its failure to accord broader market access to U.S. copyright industries. We know that they will be listening to what this Subcommittee says about the current situation in China.
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Mr. Chairman, the copyright industries—business and entertainment software, filmed entertainment, recordings, and books and journals—are in dire straits in China. Piracy rates have hovered at over 90 percent in the more than 15 years that IIPA has been engaged with the U.S. and the Chinese governments.
Indeed, with new digital copying technologies and the Internet, the situation has even worsened. Every year, industries have lost conservatively between one and a half and two and a half billion dollars; in 2004, it was over two and a half billion dollars. These losses will grow unless this unacceptable situation is quickly reversed.
Before I elaborate on the difficult situation our industries face in China, let me note again what we have said before. The copyright industries now represent over 6 percent of U.S. GDP, and that number increases every year. We employ 4 percent of the U.S. workforce, and generated in 2002 over $89 billion in revenue in export—from exports and foreign sales.
This growth is fueled by the huge global demand for U.S. creative and high-tech products, with 50 percent of our revenue generated coming from international trade. It is the ability to enter and prosper in foreign markets that will allow us to continue this growth and employ new highly-paid workers at a rate that is double the economy as a whole.
In trade jargon, the U.S. has a huge comparative advantage in trade and copyrighted products. But as we know, in China, potentially the largest market in the world, that advantage hasn't even begun to be realized; while, as we know, China is continually taking advantage of their comparative advantage in so many areas, with a trade surplus of $162 billion.
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Of all the industry sectors represented in the U.S. economy, the copyright industries face a market more closed to them than to any other. Not only are nine-tenths of the Chinese market closed through piracy, but our industries suffer under onerous and sometimes discriminatory market access barriers. China's denial of effective market access prevents us from getting to know the market and establishing a presence that would enhance our ability to fight piracy.
Even if we were to reduce piracy by half in China, under the present circumstances, most of our industries could not satisfy the huge local demand, because of these barriers to effective market entry. In short, these two problems are indelibly interlocked.
About a year ago, Vice Premier Wu Yi was here with the U.S. in the JCCT process. The government committed at that time to ''significantly reduce IPR infringements,'' by taking a number of tough enforcement and regulatory measures. The bottom line is that 1 year later, even though more raids were run and products seized and the criminal thresholds, as was mentioned, reduced somewhat, there has been little effect on the market, and piracy rates have not come down.
Why? The answer is not new. There is still no deterrence in the Chinese enforcement system, no disincentive to continue to engage in piracy. Even exports of pirate product which slowed to a trickle after the 1996 section 301 action against China, have resumed, and are growing again.
China relies on an ineffective and uncoordinated administrative enforcement system which has not succeeded in all these years in reducing the rate of piracy. The system is characterized by woefully low fines. A study done by one of our members in raids they were involved in revealed that the average fine per unit of product seized exceeded only marginally the cost of a blank CD. To expect such a system to deter one of the most lucrative economic crimes is a flight of fancy. But China has to date simply refused to do what all other countries in the world do; namely, bring criminal actions with deterrent fines and jail terms.
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While it is difficult to be certain on these matters, our industries know of only a handful of cases involving criminal piracy prosecutions involving U.S. works in the last 10 years. Countries like South Korea, Singapore, and even Taiwan, have been able in the late '90's to reduce audio and video piracy, for example, from over 90 percent to less than 20 percent of the market, with aggressive and deterrent criminal enforcement. The Chinese can do the same.
We believe that the failure to use the criminal law to fight piracy is a violation of China's TRIPS obligations. We believe that the Chinese criminal law, because it does not encompass all acts of copyright piracy on a commercial scale, which is the TRIPS standard, also violates that agreement.
Because of the failure, despite repeated bilateral engagements, of the Chinese government to show the political will to lower these staggering piracy rates, IIPA urged USTR to engage in a new multilateral dialogue with China. Following USTR's announcements of the results of their out-of-cycle review, we are working closely now to develop the elements of a possible WTO case against China; unless China takes immediate action, making such a course unnecessary.
In my written testimony, Mr. Chairman, we have tried to give this Subcommittee a flavor of how hard it is to do business under these circumstances. Copyright theft in China is hurting America, and hurting China. Since I do not have time to detail these specific problems, I hope our written statement will cover those issues.
We ask two things: first, that China immediately commence criminal actions against pirates, with deterrent penalties; and second, that China now eliminate the onerous and destructive market access barriers that prevent U.S. copyright-based companies from doing real business in China.
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Thank you, Mr. Chairman, and I look forward to a lively and productive dialogue.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF ERIC H. SMITH
Mr. Chairman, Ranking Member Berman and other distinguished Committee members, IIPA and its members thank you for the opportunity to appear today to review China's record on enforcement of its copyright law against widespread piracy including China's compliance with its WTO-TRIPS obligations. This oversight hearing is extremely timely. Madam Ma, head of China's delegation to the IPR Working Group of the Joint Commission on Commerce and Trade (JCCT), will be in Washington next week, discussing these issues with the United States Government. Your interest in China's record is certain to illuminate those talks.
IIPA represents the U.S. copyright industries. Its six member trade associations consist of over 1,300 U.S. companies, accounting for millions of U.S. jobs. The copyright industries, in 2002, contributed over $625 billion to the GDP, or 6% of the U.S. economy and almost 5.5 million jobs or 4% of U.S. employment. These companies and the individual creators that work with them are critically dependent on having strong copyright laws in place around the world and having those laws effectively enforced. On average, the copyright industries generate over 50% of their revenue from outside the U.S., contributing over $89 billion in exports and foreign sales to the U.S. economy. Given the overwhelming global demand for the products of America's creative industries, all these numbers would be significantly higher if our trading partners, including China, that continue to allow piracy to flourish in their own economies were to significantly reduce piracy rates by enforcing their copyright law vigorously.
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IIPA'S SPECIAL 301 REPORT ON PIRACY IN CHINA
I have appended to our written testimony a copy of IIPA's comprehensive February 2005 Special 301 submission on China to the U.S. Trade Representative. In that submission we called for entering into a new, multilateral dialogue in the WTO with the Chinese government as a way to persuade it to take aggressive action—as promised in the Joint Commission on Commerce and Trade (JCCT) meetings over one year ago—to significantly reduce the rate of piracy in all IPR sectors including the copyright sector. We then provided a summary review of what had happened in China over the last year to redeem that commitment. Our conclusion: China has failed to comply with its commitment made over one year ago in the JCCT to significantly reduce piracy rates. While some modest reductions have occurred in some sectors, by no measure have piracy rates been significantly reduced. In fact little has changed in the marketplace for our members and their companies, despite reports of increased raiding activity and seizures of many pirate products. In my testimony today, I would like, for the record, to update that report and in the process to summarize it where appropriate. Our report tells the sad, frustrating story of the failure of an enforcement system to deter rampant piracy in the potentially largest market in the world.
RECENT ACTIONS BY THE U.S. GOVERNMENT ON CHINA
On April 29, 2005, USTR issued its decision resulting from the out-of-cycle review of China's enforcement practices announced on May 3, 2004. USTR reflected in this decision its deep concern over China's lack of progress in the enforcement area by elevating China to the Priority Watch List. It also announced a number of other initiatives, one of which was to work closely with our industries with an eye on utilizing WTO procedures to bring China into compliance with its WTO obligations. Since that time we have met with USTR to begin this process and will work intensively with USTR toward the mutual goal of bringing China into compliance with its WTO TRIPS obligations, its bilateral obligations to the U.S. in the 1995 and 1996 IPR agreement and action plan, and its commitments made to our government in the JCCT process.
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This process has now commenced in earnest. USTR will also be seeking information from the Chinese government under the transparency provisions of the TRIPS agreement, and is committed to using the JCCT process to encourage the Chinese government to implement key reforms on both the enforcement and the all-important market access front.
THE CHINESE MARKETPLACE FOR COPYRIGHT PRODUCTS: A RECORD OF FRUSTRATION AND FAILURE
Mr. Chairman, our industries are deeply frustrated by the lack of real progress by China in taking effective action to deter piracy and to open up its market to legitimate cultural and high technology copyright products. China remains one of the most closed markets in the world for the U.S. copyright industries. Onerous market access restrictions affect all our industries. Notwithstanding Premier Wen's pledge to address the $162 billion trade imbalance between the U.S. and China by increasing China's imports from the U.S., China is retaining—and, in some sectors, augmenting—market access restrictions for creative and high-tech products that represent America's comparative advantage.
Copyright piracy represents perhaps the largest barrier to effective market access in China. An average (and truly staggering) 90% piracy rate has persisted for years despite repeated ''strike hard'' enforcement campaigns, steamroller campaigns, and public statements from many high level government officials supporting stronger enforcement. While our Special 301 submission highlights the current situation in China, I wanted to give you a brief flavor of what copyright companies confront in trying to do business in China in face of these trade barriers and these inexcusably high piracy levels.
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THE PLIGHT OF THE COPYRIGHT INDUSTRIES DUE TO PIRACY IN CHINA
The Business Software Industry
Taking the business software industry first—one of our nation's most productive and important creative sectors: The software industry faces piracy rates in China of 90%, one of the highest in the world for that industry. China leads the world in the production and export of counterfeit software—software packages that are purposely designed to replicate the original legitimate product. Losses to U.S. software publishers were estimated by IIPA member, the Business Software Alliance (BSA), at $1.47 billion in 2004. China was the 6th largest market in the world for personal computers and ranked 26th in legitimate software sales. This increasing disparity not only damages the U.S. industry but hurts Chinese software developers as well.
China has failed to criminalize the most damaging type of piracy to the business software industry—the unauthorized use of software within businesses and government institutions. This is a violation of the TRIPS Agreement. Combined with the total absence of a criminal remedy is the absence of all but a few administrative actions against this type of piracy with woefully low and non-deterrent fines. As a consequence, piracy rates continue to remain at staggering levels.
To make matters worse, China is on the verge of shutting down access for U.S. and other foreign companies to the largest purchaser of software in China: the Chinese government. It would accomplish this by adopting draft government procurement regulations that would expressly favor Chinese software only. In short, the situation for this critical copyright sector is truly dire in China with no significant improvement in sight.
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The Motion Picture Industry
The U.S. motion picture industry is facing a 95% piracy rate in China (the highest in the Asia Pacific region, and among the highest in the world) which represents a worsening of the situation from the previous year. Losses to just the motion picture industry, from 1998 through 2004, are estimated at over $1 billion (not including losses from Internet piracy, which are growing alarmingly). While raids and seizures have increased somewhat following Vice Premier Wu Yi's 2004 enforcement campaign, administrative fines remain far too low to deter pirate activity and, as I will describe later, criminal cases have been extremely rare despite Chinese promises to use this TRIPS-required remedy. According to a recent newspaper report, the legitimate home video market in China represents about 5% of the estimated total market of $1.3 billion (which is itself a very conservative estimate). Of the 83 optical disc factories licensed by the government (and an unknown number of ''underground'' unlicensed plants), many continue to churn out pirate DVDs. The export of pirated home video product, which had slowed to a trickle after the U.S. Section 301 action (and threatened retaliation) in 1995–96, has resumed and is growing. The total optical disk plant production capacity, a significant amount of which is devoted to producing pirate product, is now close to 2.7 billion units annually. Optical disks sourced in China and containing pirated films have been seized in over 25 countries around the world. The massive quantity of pirated movie product available in China is evidenced by the fact that pirate prices start around $0.60 per unit, the lowest price in Asia. As with the other copyright industries, any enforcement that occurs is conducted by administrative agencies, with overlapping jurisdiction and often little coordination, and fines imposed are a mere ''cost of doing business.'' A recent anecdotal study, conducted by IIPA member, the Motion Picture Association (MPA) revealed that the average fine imposed per pirate home video product (DVD, VCD) seized in raids resulting from MPA complaints is only slightly higher than the cost of purchasing a blank disk—clearly of no deterrent value. The lack of deterrent administrative penalties is a key reason, in addition to the almost complete lack of criminal enforcement that piracy rates persist at 90% of the market and above.
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Accompanying and reinforcing this piracy situation are onerous market access restrictions, including a Government-owned, monopoly importer, very limited competition in distribution, and a quota of 20 theatrical films allowed into China annually on commercial terms. The pirates capture 100% of the market for films not permitted legally in China. Even those films permitted theatrical release suffer piracy rates of 70–75%, because of the long delays before most American films are given screen time. Another consequence of the lack of competition in importation and distribution is the non-competitive pricing in the Chinese market. Cumbersome licensing requirements burdens the retail sale of legal home entertainment product, holding down revenue potential and helping keep the market in the hands of the pirates. These barriers and those to all our industries must be removed in the JCCT process.
The Entertainment Software Industry
The entertainment software industry, one of the fastest growing copyright-based industries, faces similar high piracy rates and estimates the value of pirated videogames in the market at $510 million in 2004. Demand for entertainment software products is growing rapidly but is being soaked up primarily by the pirates. This demand is exemplified by the exploding popularity of ''massively multiplayer online role-playing games'' (MMORPGs) where literally thousands of players can compete against one another simultaneously. Demand for MMORPGs in China grew at 40–45% over expectations in 2004. This increasing demand has fueled, in part, the growth of Internet cafés in China. (It is estimated that there are close to 200,000 Internet cafés in the country, with a seating capacity of between 100–300 seats, of which 60% are involved in game play.) While U.S. game publishers, represented by IIPA member, the Entertainment Software Association (ESA), have engaged in some licensing of the cafés, the vast majority of the product used is pirated, either available at the café or downloadable from the Internet. This dire situation has been all the more exasperating since the Chinese government extensively regulates the activities of these Internet cafés and often and vigorously revokes licenses for actions the government deems inappropriate. However, as far as we know, the government has never sought to include in this extensive regulatory scheme prohibitions against the widespread and blatant piracy at these cafés in its business licenses (which are otherwise very thorough). Moreover, no copyright enforcement of any kind has occurred. The legal infrastructure governing the Internet still is not helpful to copyright enforcement. Takedown of pirate sites is negligible; penalties non-existent.
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Cartridge-based handheld games are also hard hit by the pirates with manufacturing and assembly operations throughout China with exports throughout Asia, Latin America, the Middle East and Europe. Enforcement attempts have been relatively successful in terms of raids and seizures but, like with other industries, administrative fines are non-deterrent and criminal enforcement action very rarely undertaken, even against factories generating millions of dollars in illicit profits. Entertainment software products are also subject to a protracted content review process, by two separate agencies contributing to market entry delays. Given the immediate nature of the demand and lifecycle of best selling games, this leaves the pirates virtually uncontested in the market prior to the official release of a new title. There are also Internet and investment restrictions that must be significantly eased or abolished.
The Book Publishing Industry
The U.S. book publishing industry, represented by IIPA member, the Association of American Publishers (AAP), faces both significant offset printing of pirated books, primarily in translated editions, and massive commercial photocopying of textbooks and reference books on and near University campuses. There are 580 licensed state-owned publishers in China, 50 of which are considered major. There are only a few privately owned publishers but they must buy publishing rights from the state-owned publishers. U.S. publishers issued 4500 translation licenses in 2004, a significant number but far below China's potential. All the best selling books are then virtually immediately pirated by outlaw ''printers'' and made available through independent bookstores, stalls and street vendors. To give an example, the famous self-help bestseller ''Who Moved My Cheese'' sold over 3 million copies in China. It is estimated, however, that the pirates sold another 6 million copies. The Harry Potter books, and other best sellers like Hilary and Bill Clinton's books ''Living History'' and ''My Life,'' John Grisham's books and others all face a similar fate from the pirates. Former General Electric President, Jack Welch's biography, ''Winning,'' has sold over 800,000 copies but with an equal number of pirate copies available in the market. English language textbooks are also heavily photocopied in their entirety and there are six known websites which make available entire copies of textbooks that are downloaded and then photocopied. Enforcement against this vast piracy is spotty and all done administratively through the local and national copyright bureaus. Any resulting administrative fines are non-deterrent. We know of no criminal enforcement. The book publishing industry also faces market access barriers—U.S. publishers are not permitted to publish, sign authors, or print their books in China.
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The Recording Industry
The recording industry, represented by IIPA member, the Recording Industry Association of America (RIAA) did experience a minor reduction in the piracy rate for sound recordings, from 90% in 2003 to 85% in 2004 in ''hard goods'' piracy, but with significant increases in Internet piracy. Losses remain in excess of $200 million per year from continued optical disk manufacture and distribution within the Chinese market and significant levels of audiocassette piracy (still an important format in China). The recording industry faces many of the same problems with optical disk piracy confronting the motion picture industry. Millions of pirated music CDs are readily available throughout China. Some of these pirate products have found their way into the export market. China continues to rely on its failed administrative enforcement system, which relies on numerous inspections, product seizures and, when the pirate doesn't flee, the imposition of small, non-deterrent fines.
Internet piracy in China, as in other countries in the world, has become a huge problem for the recording industry. Thousands of active websites such as www.9sky.com and www.chinaMP3.com are giving away, or offering links to, thousands of pirated songs. (These not-for-profit acts of piracy are not criminalized in China, as they are, for example, in the U.S.). International criminal syndicates are apparently using Chinese servers to hide their illicit activity (www.boxup.com) and many Asian pirate sites are doing a thriving business in China, such as www.kuro.com from Taiwan.
Market access restrictions are severe, contributing to piracy and market losses. U.S. record companies cannot ''publish'' or release a recording without permission of a state owned company and cannot manufacture, distribute or engage in retailing of its products, which artificially segments the market and makes it extraordinarily difficult for this world class industry to participate in the Chinese market. Its products are subject to censorship while domestic (as well as pirate) recordings are not—a national treatment violation.
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All in all, the copyright industries estimate their total losses in excess of $2.5 billion in 2004 due to piracy in China. The simple fact remains that these losses and the 90% piracy rates will NOT be significantly reduced without subjecting major piracy to criminal enforcement accompanied by deterrent penalties and substantially increasing the administrative fines specified in the copyright law and imposing them in practice. To date, even after the JCCT commitments, this has NOT happened and there is a real question whether the Chinese government as a whole (Vice Premier Wu Yi has been a staunch defender of better enforcement) can muster the political will to take these absolutely necessary actions—actions that have been key to significant reductions in piracy levels in other countries in which our companies operate. China cannot exempt itself from the rules—that enforcement against piracy requires deterrence and criminal remedies. The global community recognized this when it fashioned the Article 61 criminal obligation in TRIPS and it has proven to be the case in practice.
ACTIONS TO BE TAKEN BY THE CHINESE GOVERNMENT
If piracy rates are to be significantly reduced as committed by Vice Premier Wu Yi in the JCCT and if China is to come into compliance with its TRIPS obligations, it must take the following actions.
China should significantly liberalize and implement its market access and investment rules, including and in addition to those already made in the WTO, and improve the overall business climate in China to permit effective operations by all copyright industries. This should be a major objective in the JCCT.
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Immediately commence criminal prosecutions using both the monetary and new copy thresholds and carry these forward promptly to impose deterrent penalties. The Economic Crime Division of the Public Security Bureau should be made responsible for all criminal copyright enforcement and be provided sufficient resources and training to very substantially increase criminal enforcement under the new Judicial Interpretations. Further amendments should be made to those Interpretations, particularly to include sound recordings.
Under the leadership of Vice Premier Wu Yi, constitute a single interagency authority at the national and provincial/local levels to undertake administrative enforcement against piracy of all works. This authority would have the would have the full authority to administer fines and to refer cases to the Ministry of Public Security and the Supreme People's Procuratorate for criminal prosecution, under referral guidelines that are equal to or better than the Judicial Interpretations. Such authority must have the full backing of the Party Central Committee and the State Council. Far greater resources must be provided to this enforcement authority. All administrative enforcement, and enforcement by Customs at the border, must be significantly strengthened.(see footnote 1)
Adopt, in a transparent manner with the opportunity of public comment, a full and comprehensive set of regulations governing protection and enforcement on the Internet, including the liability of Internet Service Providers, which follow the recommendations made in IIPA's Special 301 submission, including effective ''notice and takedown'' mechanisms and without unreasonable administrative evidentiary burdens. Establish within this single interagency authority described above special units (at the national, provincial and local levels), whose purpose is to enforce the law and these new regulations against piracy on the Internet.
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Amend the Criminal Law to comply with the TRIPS Article 61 requirement to make criminal all acts of ''copyright piracy on a commercial scale.'' These must include infringing acts not currently covered, such as end user software piracy and Internet offenses conducted without a profit motive. Also amend the Criminal Code provisions requiring proof of a sale, to require instead proof of commercial intent, such as possession with the intent to distribute.
Significantly increase administrative penalties/remedies, including shop closures, and monetary fines and impose them at deterrent levels.
Permit private companies and trade associations to undertake anti-piracy investigations on the same basis as local companies and trade associations.
Through amended copyright legislation or regulations, correct the deficiencies in China's implementation of the WCT and WPPT, and ratify the two treaties.
Significantly ease evidentiary burdens in civil cases, including establishing a presumption with respect to subsistence and ownership of copyright and, ideally, permitting use of a U.S. copyright certificate, and ensure that evidentiary requirements are consistently applied by judges and are available in a transparent manner to litigants.
The copyright industries will be working closely with USTR to prepare the necessary elements of a WTO case should the TRIPS obligations of China described above and in our submission not be fully implemented. This work is now ongoing. We are grateful for the support of the Chairman and members of this Subcommittee in working with us to monitor China's progress and to ensure that it takes these actions and avoids further confrontation with its trading partners on the issue of copyright piracy.
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Thank you.
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Mr. JENKINS. Thank you, Mr. Smith.
Since I have ascended to the Chair this morning, I'll recognize myself for the first questions.
Ms. Espinel, shortly after I started a law practice down in Tennessee, a really nice lady came into my office. A national company, a storage and moving company, had lost her Oriental rug. She had moved from Washington, D.C., to Rogersville, Tennessee. And previously, she had been represented in this loss by a big, 50-member law firm.
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She came into my office, and I inquired about—but the negotiations had gone on for months and months and months, and nothing had happened. So I inquired about whether anybody had talked to her about filing a lawsuit. She said ''No.'' And that very day, I filed a lawsuit. And within a very short period of time, there was a recovery.
Now, to bring that to this situation, I liked Mr. Berman's suggestion. I liked his question in his opening remarks. You know, why are we not in the WTO court? That's the only jurisdiction that's available to us; isn't it?
Ms. ESPINEL. Thank you. As outlined in my testimony, we have made clear in the OCR report that was issued about 2 weeks ago that we are prepared to fight aggressively to protect our intellectual property in China. We have—our overall goal, I think the goal that we all share, is to significantly reduce the rampant piracy and counterfeiting in China. That may be through an intensified JCCT process; that may be through WTO litigation. There may be other means. There will probably, likely, I think, be a combination of means. And we are actively considering all of those options.
But beyond mere consideration of those options, we are also actively engaged with our industry now, including the recording industry, the motion picture, IIPA; including specifically some of the people testifying for you here this morning. They have been working very hard with us to develop our options, including the option of WTO litigation. And we look forward to their continued cooperation and hard work with us.
We are—this is a top priority for the Administration. This is a top priority for Ambassador Portman, as he has made clear in his confirmation hearings and also to his staff. He is in the process of reassessing our strategy, to see if there are ways in which it can be improved. But I can assure you that we are looking for the most effective mechanism that we can use to address this very significant concern.
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Mr. JENKINS. Well, I, personally, don't have as much confidence in the WTO as I have in the courts in east Tennessee. But I don't think this matter of inaction will lead us anywhere, and I think it's time that we took some action somewhere, based upon everything that we heard this morning.
And I would ask Mr. Fishman, Mr. Brilliant, Mr. Smith, if they would agree with that. Or what do you think the best strategy is? Mr. Fishman?
Mr. FISHMAN. Well, certainly, you shouldn't give up your WTO options. But there are other options. You know, one of the groups that's very complicit in China's intellectual property regime, loose as it is, is our American buyers of Chinese products, big buyers of Chinese products.
If you look at a DVD player, before the Chinese entered the market, a DVD player made with a licensed chipset and licensed software cost about a thousand dollars. The Chinese decided to enter that market. In very short order, there are about 300 companies in China producing DVD players without any licensed technology below it. The price went down to about $30.
Those players are now in American stores. And if you don't think that there's a wink and a nudge on the part of American buyers of those DVD players, the big-box stores that line their shelves with them, for the Chinese manufacturers to drive prices down by not paying the intellectual property license fees that they owe them, then you have something else coming.
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Maybe one course to consider is: How do you address the problem by looking at American companies, who feed our $170 billion trade deficit with China by bringing in goods that are made in virtually every Chinese factory which uses pirated technology?
Mr. JENKINS. Thank you, Mr. Fishman. Mr. Brilliant?
Mr. BRILLIANT. I'd make a couple of observations. First of all, I think the U.S. Government is prodding China along, and is continuing to put pressure on the Chinese government to act in this area—with mixed results to date, no question. But I think the Chinese government understands this is a top priority of the U.S. government.
I think the American business community has also over the last year and a half, 2 years, amplified its voices on this issue. I mentioned already in my oral remarks that our president/CEO, Tom Donohue, was in discussions this week with Premier Wen Jiabao and Minister Bo Xi Lai.
More importantly, though, I think there is a broad array of industry associations and companies that are engaged in this issue today, that perhaps were not engaged a couple of years ago. The issue is that important to CEOs of big and small companies.
In terms of next steps, we actually did encourage USTR to seek WTO consultations. In our submission to the USTR as part of the out-of-cycle review, we encouraged WTO consultations because we do believe that China is falling short of its obligations under the WTO, and that we do believe that they need to do more, specifically in the area of enforcement and police investigations. And so we did encourage China—sorry, USTR to take that next step, and proceed with WTO consultations. We continue to believe that may be a necessary step. And we would urge USTR to exhaust all options, including perhaps a second out-of-cycle review later in the year.
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I think the JCCT is an important process, and I think we are looking to that as well, to see what assurances and what actions China is taking to really deal with this issue. But as others have testified, and as I have already indicated, what we need to see is Chinese political action. And we need to see it at the local as well as the provincial level.
What we need to see is prosecutions. And what we need to see is not just the street vendors put away but, frankly, the owners of these illegal operations. And until we see real evidence of that, then we don't have the deterrence in the marketplace that we need.
And then, finally, I would just say that we should test the market ourselves. U.S. companies should press in China for enforcement actions. If we press for enforcement actions in China, and China fails to follow through on those actions, that would be more evidence that their enforcement mechanisms are not working.
Mr. JENKINS. Thank you, Mr. Brilliant.
My time has expired. The Chair will now recognize the Ranking Member from California, Mr. Berman.
Mr. BERMAN. Thank you very much, Mr. Chairman. I have several questions. I'd appreciate it if the witnesses could respond rather quickly.
But the first one that just comes to mind, Mr. Brilliant, in your very forceful answer to the previous question, and your testimony, you seem to blithely ignore the suggestion of Mr. Fishman that one strategy for dealing with what's going on is to—is essentially to go after American companies selling products not because—cheaper not because of labor costs or other kinds of comparative advantage, but because they are built on pirated and counterfeited intellectual property; and holding the stores and the retailers and the distributors of those products in this country accountable, apart from what else we might do with China. What do you think of that suggestion?
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Mr. BRILLIANT. Well, I mean, I think we looked at all options.
Mr. BERMAN. Well, what about that one?
Mr. BRILLIANT. I think the short answer would be that we have had discussions with our own industries about steps that they can undertake to ensure that we are not selling counterfeit and pirated products. That's not a simple process, but I think that is an important step that we can undertake here in the United States. And certainly, we welcome——
Mr. BERMAN. Well, if a Chinese DVD is using counterfeited chips in its product, and it's being sold in U.S. stores, should the companies that own those stores have any accountability for that?
Mr. BRILLIANT. Well, I think those stores that perhaps are selling those products should, first of all, be made aware of that. And second, they should take steps to make sure that those products are not being sold in their stores. That's accountability to begin with.
In terms of legal liability, I'm not in a position comment; except that I will say that U.S. companies need to clean their own house, as well.
Mr. BERMAN. Okay. Ms. Espinel, in a column a couple of days ago in the New York Times, Pat Choate, who I don't generally agree with on trade issues, writes a compelling couple of paragraphs, which I'd like to read to you. First of all, on the issue of the WTO and bringing actions, he points out that the Clinton Administration brought 17—13 intellectual property cases at the WTO against other nations. All of them were resolved to the U.S.'s satisfaction. We've seen not one in the past 4 years.
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And essentially, he concludes that China hasn't met its intellectual property obligations, which you seem to agree with, and that the U.S. has failed to leverage the WTO mechanisms that might bring China into compliance.
Although China has passed laws that accord with WTO requirements, the Trade Representative has reported—and as you said here—that enforcement of those laws was inconsistent, ineffective, and discriminatory against foreigners. It found intellectual property infringement in China to be rampant, with violations worsening. This is your agency.
China has created a Potemkin Village of intellectual property protections. The WTO provides a way to confront that problem. If the U.S. can prove to a three-judge WTO panel that China is out of compliance and is harming intellectual property owners, it can seek damages. If WTO grants such a judgment, the U.S. can impose tariffs on Chinese goods.
Understanding that there's more dialogue and more meetings and more rounds and more watch lists, in the end, aren't all of those avenues more effective if China thinks that such a decision is imminent? And to the extent that those things haven't produced success, isn't that the way to go? And what could we expect, in terms of that kind of action by the Administration?
Ms. ESPINEL. Thank you. I'd be happy to respond. And with your permission, I'd also like to respond briefly to the question that you put to Mr. Brilliant, or at least give you another aspect of it.
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With respect, though, to the question that you just asked, I think it's important to remember that a WTO case against China would be a new area for WTO litigation, in the sense that this would be a case not necessarily just against deficiencies in the Chinese statutes, but also against their enforcement. And that is one of the reasons why——
Mr. BERMAN. We have never brought a case against a country with good statutes and no enforcement?
Ms. ESPINEL. The intellectual property cases that we have brought have hinged on facial deficiencies in statutes. And this is one of the reasons why our very close cooperation with industry is key to this. However, I can tell you that we are committed to ensure that China is compliant with its obligations. And we will take WTO action if, in consultation with you and with our industry, we determine that this is the most effective way to fix the problem that we are resolved to fix.
Mr. BERMAN. And what would—on the horizon, when would such a conclusion be reached?
Ms. ESPINEL. Well, we are actually at the moment involved in very intense discussions with certain sections of our industry; in particular, the copyright industry. They have been—as I noted, they have been working very hard with us to develop our WTO options, so——
Mr. BERMAN. Is 6 months a reasonable time frame?
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Ms. ESPINEL. I think it might be. I think to some extent it will be—the time line will be guided by our consultations with our industry. But given the focus and the hard work that is going into this, both on the part of USTR and with our industry, I think that that could be a reasonable time line.
Mr. BERMAN. Thank you.
Mr. SMITH. [Presiding.] Thank you, Mr. Berman. Let me recognize myself for questions, and say I'm sorry for my brief absence, but I had to go to another Committee to vote on a markup of a piece of legislation. As a result, my questions may overlap some of the questions that you've already been asked, and let me know if that's the case.
Ms. Espinel, let me begin with you. And it sounds like I'm following up on a couple of things that had been raised. I was going to page 2 of your written testimony, where you list a series of five actions that you think need to be taken to address our concerns; the concerns being, as you pointed out and as other witnesses have pointed out, that basically counterfeiting and piracy in China are at record levels. And I assume that that means unacceptable to everybody involved.
What I'm interested in, you list these as a series of actions. I'd like to know specifically what actions you intend to take, and when you intend to take them. And let me pick out four of these five. The first is utilizing WTO procedures to bring China into compliance with WTO TRIPS obligations. What—you say you have an eye toward using those procedures. I'm really more interested in not looking, but in acting. And what specific actions might you take?
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Ms. ESPINEL. I think we are resolved to go to WTO litigation if we determine that that's the most effective strategy to accomplish what our overall goal is, which is reducing piracy and counterfeiting. And that goes to the answer to the question——
Mr. SMITH. Right.
Ms. ESPINEL.—I gave to Congressman Berman. We are working with our industry to develop these options, right now.
Mr. SMITH. When Mr. Berman asked you if 6 months was a reasonable time frame, you didn't really answer that question specifically. I hate to be too hard on you your first time to testify before Congress, but could you be explicit in the time frame?
Ms. ESPINEL. Well, I hate to make promises that I can't keep.
Mr. SMITH. You're learning fast. All right. [Laughter.]
Ms. ESPINEL. Because I think a lot of that will depend on our consultations with industry. But I certainly think that could be a reasonable time line.
Mr. SMITH. Okay. Let me go to a couple of other items here. You say you want to require China to produce detailed documentation on certain aspects of IPR enforcement. When will those requests and documentation be made?
Ms. ESPINEL. Very soon. There is no time line under the WTO procedures for us to make that request, but this is something that we have announced that we are going to do. We are in the process of preparing the request, and we are planning to file it very soon.
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Mr. SMITH. Right. And also, of course, with the recent appointment of Rob Portman, you're, I'm sure, reviewing a lot of the policies and taking additional initiatives that you might not otherwise take as a result of Mr. Portman's personal interest. And I'm sure that's the case, too.
What about elevating China onto the Priority Watch List. You put China sort of in the middle position, but chose not to put China in a priority foreign country category. Why was that, when its violations are so egregious and it's so obvious?
Ms. ESPINEL. Well, as you probably know, China hasn't been on the watch list in any category for the last decade or so. And we thought, frankly, given the level of disappointment, and seriousness of the concerns that we had with China, it was important that they be returned to the Priority Watch List. And we felt that that was a strong signal, frankly, of the level of unhappiness.
Mr. SMITH. Perhaps that's the first step. And maybe you'll get to the next-higher step, given the response by China, perhaps?
Ms. ESPINEL. Yes.
Mr. SMITH. Okay. Good. Thank you. Let me ask you a question that—or to respond to a recommendation made by Mr. Brilliant in his testimony. He said USTR should conduct a second Special 301 out-of-cycle review of China later this year, to assess China's implementation of the judicial interpretation and other enforcement efforts. You've talked about that a little bit, but what about that suggestion?
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Ms. ESPINEL. Frankly, all options are on the table at this point. I think we're willing to consider any approach that we think would effectively address that, in consultation with our industry. So we will take, as we always do, any suggestions made by our industry quite seriously.
Mr. SMITH. I can't fault you for saying all options are on the table; since that's the phrase President Bush used with regard to Social Security reform. But can you tell us when you might take some of those options?
Ms. ESPINEL. Well, with respect—as I said, with respect to the request for additional information, the transparency procedures under the WTO, that's a request that we're planning to make very soon.
In terms of whether or not we decide to initiate a second out-of-cycle review, or decide to go to WTO litigation, I think the time lines that we've discussed earlier are probably reasonable ones——
Mr. SMITH. Realistic? Okay.
Ms. ESPINEL.—based on where we are with industry at this point.
Mr. SMITH. Okay. Very good. Thank you, Ms. Espinel.
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Mr. Fishman, I wish we had more time to talk about your book. You've no doubt read Thomas Fishman's—Thomas Friedman's book, The World is Flat. And you saw the cover article—I think it was Newsweek—a couple of weeks ago on China, as well. We underestimate China at our peril, I think, in many, many ways.
In my time remaining—I don't know what happened to my 30-second warning yellow light, but we'll work on that. And if the Members will indulge me, what I'm going to ask the remaining three witnesses to do, very quickly—Mr. Smith, Mr. Brilliant, and Mr. Fishman, if you had one suggestion for what the U.S. should do to try to engage China in enforcing and respecting our intellectual property rights, what would be that suggestion for our Administration?
Mr. Smith, we'll start with you, and work down real quickly. And then, Ms. Espinel, we're not going to have time for you to respond, but perhaps you can in writing, to their three suggestions. And I also have two other questions to submit to you in writing, as well.
Mr. SMITH. I think we have to make clear to the Chinese government that they're in jeopardy. We can do that both bilaterally, and we need a credible—we need to take—the U.S. Government needs to take a credible position with respect to moving toward a WTO case in the next few months, as Ms. Espinel said.
I think that China needs to feel a lot of pressure, before they're going to move on this issue. There are a lot of domestic forces that are against it. And the more pressure we can bring to bear, and the more that this Congress can do to help in that effort, the closer we will come to that objective.
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Mr. SMITH. Okay. Thank you, Mr. Smith.
Mr. Brilliant, go beyond, if you will, your four suggestions in your testimony. You talk about spearheading, engaging, benchmarking, and promoting. Specifically, what would you want the Administration to do?
Mr. BRILLIANT. Well, our testimony does cover both our actions as well as what we suggest that the USTR does. But what I would just say is follow up on previous comments, and just say we need to continue the pressure and we need the Administration to build toward a WTO case, if the facts warrant it. That means industry supporting it, but it also means that USTR needs to let the Chinese understand that these are challenging times, that we need tangible evidence of progress.
And that's the second point I'd make; which is we need to get out of the JCCT some sort of contract from the Chinese saying exactly what they're going to do in terms of dealing with the prosecution issue, dealing with police investigations, dealing with custom enforcements. We need some sort of litany—or really, a line-by-line contract from the Chinese to show that they're really serious about taking action.
Mr. SMITH. Thank you, Mr. Brilliant. And finally, Mr. Fishman.
Mr. FISHMAN. My one suggestion is a two-step process. The first is to form a domestic consensus on China. And part of that has to do with the future of our economy; stressing that the future of our economy is both industrial and innovative, and that needs to be protected. And that means asking consumers to make a sacrifice in order to maintain our standard of living.
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And the second is to rethink all of the mechanisms that you've talked about today. There's a lot of dickering that can go on in the context of WTO, but the stakes are enormously huge. And there's billions and billions of dollars coming into this country based on counterfeit platforms. You might have to put a tax on all of that stuff, in order to force a change.
We have a small window when this can happen. The window is now. Our trade deficit with China right now—our deficit alone, not our total trade—is 14 percent of their economy. If we put a tax on that 14 percent of the economy, you will see rules change very, very quickly.
Mr. SMITH. Okay. Thank you, Mr. Fishman. I appreciate all your responses.
The gentleman from Virginia, Mr. Goodlatte, is recognized for his questions.
Mr. GOODLATTE. Mr. Chairman, thank you very much for holding this very important hearing. I have an opening statement that I didn't have an opportunity to give, and I'd ask that that be made a part of the record.
And I'd like to just point out a couple of figures that I have. It's estimated that in China 95 percent of motion pictures and 90 percent of business software are pirated. And in Russia, 80 percent of all motion pictures and 87 percent of business software are pirated.
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Considering that the core copyright industries account for 6 percent of the U.S. gross domestic product, and the total copyright industries account for approximately 12 percent of U.S. GDP, it's clear that America's businesses are facing a very serious problem.
Mr. Smith, what evidence have you found that piracy and counterfeiting are being used to fund organized crime in Russia and China? And why are piracy and counterfeiting such attractive funding mechanisms in those countries?
Mr. SMITH. Piracy has become one of the most lucrative businesses in Asia; indeed, throughout the world. By our best information, organized criminal syndicates, organized principally out of Taiwan, Hong Kong, and into the mainland, and in other countries in East Asia, have a solid lock on this business. And their lock is so solid that it is very difficult for governments to unlock it. And it's going to require major political will of those governments to break these syndicates.
Now, that process has started in many of the countries in Asia. I don't believe it's started in China. And we need to get about that business immediately. I know the STOP Initiative that the U.S. Government has initiated is an effort at least to get at international organized crime through international cooperation of justice departments in those regions.
But there is no question that organized crime and terrorism and gun running and money laundering are all part of a piece, and it's growing. And until we—this becomes an urgent matter and a zero-tolerance issue, it's going to continue to grow, because there's just too much money in this business.
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Mr. GOODLATTE. Thank you. Mr. Brilliant, are you aware of instances where counterfeit goods have actually caused serious bodily injury or death?
Mr. BRILLIANT. I know in the case of China that has happened. There was the instance involving baby formula, but there are other examples. There have been examples regarding auto parts——
Mr. GOODLATTE. Brakes.
Mr. BRILLIANT. Brakes.
Mr. GOODLATTE. And airplane parts, too.
Mr. BRILLIANT. Right. So there are examples where faulty equipment has been cited as a cause for bodily harm. I think there is a real public health and safety component to this issue. We've all highlighted that. And certainly it's true, not just in the pharmaceutical area, but across a wide range of industries.
And that just adds to our concern that this be not just a priority of the U.S. private sector, but also the U.S. Government; which it is, I think, today.
Mr. GOODLATTE. Thank you. Ms. Espinel, we heard Mr. Fishman's very forceful arguments about some of the things that we could do. I wonder if you could tell us what remedies are available to better ensure that China and Russia live up to their domestic and international obligations to protect intellectual property rights. And what more can the U.S. do in this regard?
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Ms. ESPINEL. Well, with China there are a number of steps that we outlined a couple of weeks ago in the OCR report that we released. And those include our elevation of China to the Priority Watch List; intensifying the JCCT process, in particular with respect to the Intellectual Property Working Group meeting that is going to be meeting next week; working with our industry in order to develop our WTO options; invoking the transparency procedures of the TRIPS Agreement, in order to require China to give us detailed information about its enforcement actions. I think we'll also require it to take a serious look at the deficiencies in its system.
These are a number of actions that we have already announced that we are going to take, but of course, we are also—and as Ambassador Portman has made clear, this is a top priority for him. And he made that clear at his confirmation hearing. He's made that quite clear to his staff. So we are also in the process, in consultation with our industry, of discussing what other options they might be. And of course, we would also be looking to this Committee for leadership and guidance in that process.
Mr. GOODLATTE. How close do you think we are to imposing tariff sanctions on China, along the lines of what Mr. Fishman suggested?
Ms. ESPINEL. With respect to intellectual property?
Mr. GOODLATTE. Yes.
Ms. ESPINEL. I think the range of options that we're looking at right now include the ones that I've just outlined. Of course, at the conclusion——
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Mr. GOODLATTE. How long would it take? If we were to start that process today, how long would it take before we would see actual sanctions imposed on China?
Ms. ESPINEL. Well, WTO litigation generally takes somewhere between—I mean, it's a little hard to say, as in all litigation—but somewhere, I'd say, between a year and two. And partly, that depends on whether or not the trial court decision, so to speak, is appealed by China.
Of course, there may be progress made by China. And we will absolutely be pressing them to continue to make progress, if we go down the WTO road; that we not wait till the conclusion of a case and the imposition of sanctions to see progress from China.
Mr. GOODLATTE. Well, thank you. I know Mr. Portman is brand new to the job, but I hope the ambassador will take a close look at making some of those decisions very quickly in this regard.
Ms. ESPINEL. He absolutely will.
Mr. GOODLATTE. Thank you very much, Mr. Chairman.
Mr. SMITH. Thank you, Mr. Goodlatte.
The gentleman from California, Mr. Schiff, is recognized for his questions.
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Mr. SCHIFF. I thank the Chairman. And I just had the opportunity—one of the reasons I'm late this morning, I just had the opportunity to meet with the Chinese ambassador today, and to raise this issue personally.
I want to get your thoughts—and I apologize if we're covering ground we've covered already—but what is—what steps do you believe that China could effectively take to curtail this problem? My impression is that China is very capable of cracking down on dissenting viewpoints. They have the capability, certainly, of cracking down on illegal products.
What should China be doing that they're not doing? What evidence do we have that this is a conscious economic decision on China's part? And what are the constructive steps that we can take here in Congress to change China's behavior vis-a-vis pirated goods?
Mr. FISHMAN. I'd like to tackle that. I regard China's loose intellectual property regime as the largest industrial subsidy in the world. It transfers to China all of the gems of the world's advanced economies at no cost to the Chinese government. So it's a large subsidy that costs them nothing, and costs us everything.
If you want to know what the Chinese can do more of, it's virtually everything. But there's no will there to do it. And the will has to come from somewhere else. It has to come in the form of a cost. Because right now, their intellectual property regime enriches its people and benefits its people greatly. And we ought to have some grudging admiration for how they've run this so far, because it's gotten them to where they are and it's also created a country which we would love to do business with now because it's increasingly wealthy.
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But right now, we're at an inflection point, where we have to act in order to preserve what we have. And you could get any action that you want. If pirated DVDs included something about Falun Gong or Tibetan independence, you would see enforcement happen on day two.
Mr. SCHIFF. Right.
Mr. FISHMAN. But it's a little bit more mysterious when you go into a manufacturing plant that's making ''widgets,'' but they have 20 or 30 or 100 engineering stations, each of which in the United States would cost 50 or 60 thousand dollars a year to run, a proprietary piece of software; but they run for zero cost in China. Those factories are the kinds of factories that churn out goods to us. And unless you look to the world's customers of those goods, those Chinese factories have no incentive to spend extra millions on intellectual property license fees.
Mr. SCHIFF. And what's the most effective pressure point that the U.S. can bring to bear to get China convinced that it's in their economic interest?
Mr. FISHMAN. Well, there's been a lot of talk on this among the witnesses, about what individual companies can do to bring pressure. But individual companies have very few options, because there are so many ways to pressure them in China to transfer technology there.
You really need a public solution, and a widespread solution from the United States. And that has to be some kind of extreme brinksmanship or actual action that taxes everything in China that's made on a pirated platform that comes into the United States. And until you get that kind of broad-scale action, you will get no turn of sentiment in China on intellectual property.
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Mr. SCHIFF. Can you address, any of you on the panel—I know this is a little bit off-topic—but the issue of Chinese restrictions, for example, on the type of software that their government agents—vendors purchase, that essentially excludes American exports in that area?
Mr. SMITH. Let me see if I can answer that. Right now, there's a pending regulation before the Chinese government to—for the Chinese ministries to procure only Chinese software. And there was a hearing last Friday before the Government Reform Committee, I believe, that dealt exactly with this problem, discrimination against American software publishers.
I mean, this is the kind of thing—following up on what Mr. Fishman said—that is exactly the wrong strategy. Maybe right, from a very narrow point of view; but it is our view that China's ultimate economic welfare does not lie in continuing to build a copying nation.
They are never going to go up the value chain, if they continue to do what they are now doing. They will continue to have trade friction with the rest of the world. We're trying to elicit the Japanese and the Europeans now to work with us to try to fight this problem.
And the mechanics of fighting it aren't that difficult. Other countries have done it. Other countries have reduced piracy rates. China can do it. I think Mr. Fishman is right: What are the incentives?
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Part of those incentives are disincentives; and that includes the possibility of retaliation through a WTO case, and things like that. I believe——
Mr. SCHIFF. Is the WTO the most effective leverage that we have in dealing with—or are there interconnections between issues of the valuation of the Chinese currency or other economic issues that are a more powerful lever for us to use?
Mr. SMITH. I mean, I think there's a lot of pressure that can be brought to bear that's outside the IP area. I mean, everybody is now talking about the Chinese currency and all and—you know, and there's defense issues. There are a number of intersections. And the importance of China—or the interrelationship of China and the United States and that trade relationship is extremely important.
And China cannot continue to just thumb their nose at the United States on these issues, when our most productive industries can't even get into the market or, as Mr. Fishman said—and this is not so much true in the copyright area—product is coming out of—just flowing out of China that's counterfeit. There are remedies to that at the border of the United States. And I'm not speaking to what recommendations Mr. Fishman has made.
But there is no question that China must—it's not a question of whether; it's a question of when. They have to deal with this problem. We hope that the U.S. Government, and all of us, and the U.S. Congress, are in a position to convince the Chinese that it should be now, before this gets to the brink of disaster.
Mr. BRILLIANT. If I could just briefly comment, industrial policy is at the heart of some of this. I mean, government procurement issues, standards, intellectual property, that folds into an industrial targeting policy of the Chinese government. We have to not only deal with this issue bilaterally; we have to deal with it multilaterally.
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The WTO is a multilateral system for dealing with it. But another component, we need to bring in the Europeans and Japanese and others to increase the pressure on the Chinese to act. Because if we act just bilaterally—unilaterally—in our actions, that won't—the Chinese will go elsewhere. They'll deal with other markets. And that would cost American businesses, as well.
So we need to bring in the multilateral community into our fold. And I think the U.S. Government needs to do more on that front. I know there's actions underway, but that's an area where we need to progress further, is bringing in the Europeans and the Japanese and others who share our concerns about the policies in China.
Mr. SCHIFF. Thank you.
Mr. SMITH. Mr. Schiff, the gentleman's time has expired. Thank you for your questions.
Mr. Forbes and Mr. Issa, would you all be able to come back in 15 minutes, if we take a quick recess for these two votes? And then we'll finish up at that point. That'll be great. I hope the witnesses can stay, as well.
We'll recess for about 15 minutes, and then reconvene about 25 or 20 of 12:00, and finish up the questions then. Thank you.
[Recess.]
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Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will reconvene, and we will resume our questions. And we will go to the gentleman from Virginia, Mr. Forbes, for his.
Mr. FORBES. Thank you, Mr. Chairman. And thank all of you for being here today. This is an important topic. Mr. Smith said earlier that he hoped we could have a lively and productive dialogue, and in the time periods we've got, it's very difficult to do that. But I just want to throw out a couple of things to you. And I'm going to ask you two questions at the end of that.
But I remember years ago going to a high school baseball game. And I got there a little bit late, and it was the fourth inning. And when I sat down on the bleachers, the team that was supposed to win, that was going to the State championship supposedly, was down eight-to-nothing, and it was the fourth inning. And this old man sitting beside me looked at me, and he said, ''Don't worry. Don't worry. They're taking this very seriously.'' He said, ''They're going to do everything it takes to win.''
In the seventh inning, they were down 12-to-nothing. And he looked at me and said, ''Don't worry. Don't worry. They're taking this very seriously. They're going to do everything it takes to win.''
At the bottom of the ninth inning, it was 15-to-nothing. And he looked at me and he said, ''They should have taken this more seriously.'' He said, ''They didn't do what it took to win.'' And I don't want us to be in the ninth inning of this ball game, and be saying the same thing.
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And some of the concepts are simple, and some are very complex. The simple ones are these. You know, we have ideas and creative talent that springs from the investment we put in a free society. China has cheap labor. You can steal ideas and creative thoughts. You cannot steal cheap labor.
My big concern is, when you look at this $162 billion trade deficit, it's more now than just dollars and cents in the economy. Just 5 years or so ago, when the Chinese went to the Soviets to buy weapons, they were using IOUs. Today, they're using our cash to modernize their military. And their weapons are pointed at us. They don't have anybody else to point them to.
And my question is that the word games just don't seem to be working. I led a delegation to China in January. We'd just started a China Caucus. And you all know what happens is, when you meet with them to have a little chat, if you've got an hour, for the first 50 minutes, they talk; and then they give you 10 minutes, and you know they're not paying attention to anything you say in those 10 minutes.
Mr. Brilliant, you know, you raised some good ideas here. And you indicate if we enforce intellectual property rights, consumers will pay more. But that would be true here, too. If we didn't enforce intellectual property rights here, consumers wouldn't pay as much.
And when we talk about it being difficult to form a consensus because consumers would pay more, I have never had a consumer call me and say, ''I want you to vote for a particular issue, because I'm going to get a DVD player $30 cheaper.'' It's the businesses that are selling the DVD players that are calling us and pushing some of these policies. So, you know, I feel that it's time for us to stop ''going to be doing everything that's necessary to do this and win this.'' But it's important for us to actually take some steps to do something.
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And my two questions to you are these. I measure a whole lot about what we're going to do in the future by what we've done in the past. When I was in China, I asked the embassy people, I asked everybody I met with, ''What have we done right, and where are we winning?'' And I didn't get many good answers.
And so the question that I would ask for you is—again, not putting a whole lot of stock in ''going to study this,'' and ''going to do something down the road''—when we're dealing with China, what have we specifically done right in this matter? And where are we winning?
And if each of you would give me—Mr. Brilliant, if you could give me—since you've got such a great name, we'll just—you have a brilliant name.
Mr. BRILLIANT. A brilliant name. First of all, what we've done right is getting China into the multilateral trading system. By getting them in the WTO, we do have opportunities to bring cases and——
Mr. FORBES. But help me with that, because when I talk to the average citizen—and you know, I supported—I mean, you know, so I'm not arguing—but I'll look at people, and they just laugh at me now and they say, ''See, we told you. You were going to be able to get them in there and get them to enforcement.'' We haven't been able—we're not winning on that argument.
Mr. BRILLIANT. Well, I think, first of all, it's a lot better to have them in the camp than to have them out of the camp. Prior to 2000, we had less options in our arsenal than we do today. So I'm not arguing that we haven't—we need steps further to deal with this issue of intellectual property rights; but we have made progress by having them in the WTO. First of all, it binds them to rules that are internationally recognized.
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Mr. FORBES. But that they're not abiding by.
Mr. BRILLIANT. Well, I think, first of all, they have made some important cuts in the area of tariffs. They've improved transparency. There are things they are doing. It's not a perfect situation. By no means are they complete in their WTO accession process. But there are things they are doing. They are making tariff cuts; they are improving transparency; they are implementing trading rights; they're dealing with distribution issues. But by no means does that mean we have complete market access. But it would have been a lot worse if they had stayed out of the world trade system.
The other thing is that China benefits, itself, from being part of a multilateral community. And that, I think, helps move them, and modernizes their economy. They see the benefit, as well. They're bringing cases, as well. And that means something. That means that they understand the value of playing by the same game.
Now, they're not abiding by all the rules that we want them to abide by. And certainly, in the topic of this hearing, they have fallen well short of our understanding and expectations in the area of intellectual property rights. But I think they have—I think it is to our benefit to have them in the trading system.
Mr. SMITH. In a few minutes, you're going to have a hearing on Russia, and Russia is not yet in the WTO. Hindsight is easy; but if we go back and look at what the situation was when China joined the WTO, for the IP industries we would probably want to do a lot more in that protocol than we did do.
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And we hope to God that we do it in the Russia protocol, and we don't allow Russia to join with a totally ineffective enforcement system, and then drag this thing out. That's probably what we should have done back then.
I would only add that before China joined the WTO, we had the one example where I think there was a success with China. And China, faced with $2 billion worth of retaliation in 1995 and '96, closed their CD factories and stopped the export of pirate product. And that lasted five or 6 years. So that was a success.
And hopefully, we can not only convince the Chinese that it is in their interest to do this—and Mr. Fishman's rather bleak view is quite disturbing. We think we can convince them. We think it's the right answer. A lot of countries have also agreed that it's the right answer to protect intellectual property for the long-term growth of their country. But if we can't convince them, then we have the WTO.
Mr. FISHMAN. I think one thing we ought to look at is the trade deficit number. The trade deficit number is impressive for a lot of reasons; just impressive because it says how much more we spend on Chinese goods than they spend on us. But it's also the most direct measure we have of how much American companies are profiting in China.
It's American companies that bring in that $162 billion worth of extra goods. This year, the statistics might rise far beyond that. I've seen numbers running as high as $240 billion as a trade deficit with China in the next year.
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That is the barrier that we face. There's a lot of profit being made by doing business with China. And they are growing richer from it, and American companies are growing richer from it. And if we need to move in to protect American industry, we have to look at which industries you're going to protect.
Right now, it is the large companies in the United States which are moving as fast as they can to China, to change their supply chains and move them to China as fast as they can, and cut the rugs out from under medium- and small-sized businesses in this country.
Well, for most medium- and small-sized manufacturers in this country and many service businesses, the only valuable piece of property that they own is some core piece of intellectual property that they've developed in-house. And they are extremely vulnerable to that moving to China and feeding the large companies which are trying to move all their production over there.
Ms. ESPINEL. One of the things the Administration has done in the last year is intensify the JCCT process. And we have seen some real successes coming out of that. For example, the new judicial interpretations that were issued by the Chinese at the end of last year.
However, I would say that we agree with you that we need to do more, and that we need to engage with China in a new way. I think it is fair to say that we are entering into a new phase of our relationship with China.
Ambassador Portman is well aware of the concern that you have, the criticalness of this issue to our economy, to our industry, to Congress. And we have—as I've mentioned before, we announced a couple of weeks ago a series of actions that we are taking to intensify the pressure on China.
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But at the same time, Ambassador Portman is reexamining our strategy and our options, to find the most effective way we can to address this problem.
Mr. SMITH. Thank you, Mr. Forbes.
The gentleman from California is recognized. And I might say, to my knowledge, he's the only Member of the Judiciary Committee that actually holds patents, himself. And we look forward to his questions.
Mr. ISSA. Thank you, Mr. Chairman. And I got those patents by founding an electronics company 25 years ago. And I no longer own the company. I divested when I came to Congress. And I'm glad I did, because in preparation for this hearing I received from the general counsel of the company I founded, but do not own, something that's—and I would ask that this material be allowed to be inserted in the record.
Mr. SMITH. Without objection.
Mr. ISSA. Thank you. So ordered.
[The information referred to follows:]
INFORMATED PROVIED BY KC BEAN, VICE PRESIDENT & GENERAL COUNSEL, DIRECTED ELECTRONICS, INC.
Bean10.eps
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Mr. ISSA. And what they did, which I think is noteworthy here, to show you just how bad—and particularly, for our Trade Representative—things are, after I left the company, Directed Electronics bought a company called ADS—famous speaker manufacturer, speaker and amplifier, very high-end. And they were already manufacturing some of their products—and had been for decades—in China; actually, for more than a decade, almost two decades. And so I have a picture of the authentic ADS product, and I'll send it down. This is going to be included in the record. And I have a picture of the counterfeit.
Now, the amazing thing is, it's less than 20 miles from the real factory to the fake factory. And when the company, according to the general counsel that sent me this, began the process of making them aware that a product that is trademarked all over the world was being counterfeited in China, sent into China, and that as a result the trademark, which had been acquired by the fake company, was invalid and fraudulently applied for, in every sense, they got a resounding ''No Answer'' from China. And that continues till today.
And there actually was—I only brought this part, but if you'd like, I do have that many inches that they've gone so far. And this was because I mentioned in a conversation that we were going to hold a hearing. China is not, in my opinion, going to do anything, unless we pull the trigger on some of those sanction capabilities.
And I would—I think I would be remiss if I didn't mention that the DVD example, from my standpoint, makes no sense. Those are patents, U.S. patents. You can get an injunction against Circuit City, Best Buy, or the person supplying them, in a matter of hours. Phillips and others could do that.
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So I would hope that that not go in the record as the best example. Because I think that most of China's violations have more to do with when there is no patent, when the intellectual property is not easily seen. And certainly, when it comes to their domestic market—and much of this product is being sold to the domestic market—what they've decided to do is not let us into the domestic market at all; but rather, supply it themselves. And ignoring intellectual property gives them that ability.
And that market, as chairman Bill Gates and others have noted, is going to be huge. And that's why so many companies are putting an emphasis on getting access. And that, perhaps, is the story not told today.
I would have a specific question for Ms. Espinel. Isn't there a tendency—and if there absolutely isn't, please say it in those terms. Isn't there a tendency for our ongoing problems with North Korea to cause us to soft-pedal the trade portion, the valuation portion?
When I was there with Chairman Hyde in China, now over 2 years ago, that 1-hour discussion was 50 minutes on North Korea. And some note-taker, you know, put a check mark when we started talking about intellectual property.
Isn't that one of our challenges with China? That if this were the country of my grandparents, Lebanon, we'd demand that they change their rights and they enforce them and they do it, or we sanction them. With China, isn't their size and their strength and their geopolitical influence part of our problem?
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Ms. ESPINEL. I think the situation in China is very complex, for all of the reasons that you just mentioned. And I would add another one to that. I think, given the size of China, I think it is a difficult market even for the Chinese government to control the problem that they're facing.
That said, I agree with what other people have said here today, that this is a time for the Chinese government to demonstrate the political will that I think they can demonstrate to get a handle on the problem before it goes any further, and to correct the problem and reverse the situation that they've created.
In terms of USTR's relationship with China, Ambassador Portman has made quite clear, I think feels quite strongly, that IP protection is one of the top priorities that we have with China. And I think he is quite willing to press that issue with China as far as we need to, in order to effectively address this problem.
Mr. ISSA. And just one follow-up question. This problem—I know that just in one area, you cited 2.5 billion; but this problem represents a substantial portion of the trade deficit. How do we get whole, when we're talking about tens of billions of dollars of losses to our economy? And that's not to our economy in the abstract; that's to particular individuals, to particular companies, to particular workers, that are going on every day.
It has been more than—I mean, to be honest, Rob Portman's predecessor came in with exactly the same statements that you're giving us today about why this was important. And how many—how many hundreds of thousands of U.S. jobs and how much was lost as a result of saying we were going to act; but inaction?
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Why is it that this Committee should believe that, until you actually show us action, that you're going to show us action? What's different now than it was 2 years ago?
Ms. ESPINEL. Well, one thing that I think is different, actually in the last couple of weeks, is the out-of-cycle review determination that we've made. As I've mentioned before, we have intensified pressure in the JCCT in the last twelve months.
We also conducted this extraordinary out-of-cycle review against China, and announced the results of that and the aggressive actions that we would take as a result of that, a couple of weeks ago. And those include things like elevating China to the Priority Watch List, which I think has sent a very clear signal to China; one that, I might add, they are quite unhappy about.
We have publicly announced that we are working with our industry to develop our WTO options, and we are actively engaged in that process. We have publicly announced that we will be invoking the WTO TRIPS Agreement procedures for transparency, in order to acquire information from China. So I think we have already outlined a fairly aggressive series of actions that we will be taking.
And in addition to that, I mean, we are looking very actively to see what our other options are. I think it seems to me that it's clear, given the scope of the problem in China, there is not going to be one single effective approach; but rather, a combination of approaches that we have already either started in train, or maybe, in consultation with you and with our industry, able to develop over the next few months.
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Mr. ISSA. Thank you, Mr. Chairman. This could go on, if only we had time.
Mr. SMITH. Thank you, Mr. Issa. That was a very good question, and a good response, as well.
Mr. Berman has one more quick question to ask, and as I do. And then we'll adjourn.
Mr. BERMAN. I think I'm not asking you to respond here, but if you could respond in writing, Mr. Smith in his testimony—he didn't really touch on it much in his testimony, but in his written testimony, talks about at least two different limitations on market access for films and music—one quotas; the other one, requirement of permission to retail music—and raises issues of discrimination, tests put on here that aren't put on Chinese produced music.
I'd like to know, number one, to your mind, do those violate China's international commitments? And secondly, what efforts are being made specifically on those market access limitations by the Trade Representative's Office? And if you would be willing to put that in writing, I'd be very grateful.
And I'd only say that, Mr. Issa, notwithstanding the problems, at least China is being very helpful with respect to North Korea.
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Mr. SMITH. Thank you.
Mr. ISSA. You know, funny he should note that——
Mr. SMITH. Thank you, Mr. Issa. No response is necessary right now.
I do have a quick question to ask, myself, Ms. Espinel, and that is this. What can American industry do to help you make the case that you need to make in order to get the enforcement we need from China?
Ms. ESPINEL. As I mentioned, we have been working closely with some segments of the industry. And I would encourage them to continue to cooperate with us, as they have been doing, to continue the hard work that they have been doing, to help us build the factual record that we need in order to bring the best case possible.
Mr. SMITH. Okay. You need specific examples, specific figures, documentation, and so forth?
Ms. ESPINEL. Yes. Exactly.
Mr. SMITH. Okay. Thank you, Espinel [sic].
Ms. ESPINEL. Thank you.
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Mr. SMITH. All right. Thank you all for being here. We appreciate your testimony. It's been very, very helpful. And I might add, I think this is the first such hearing that this Subcommittee has had on this important subject in probably many, many years. But we intend to go forward and work with—work with Ms. Espinel and our new ambassador to try to effectuate change of the kind that we want.
We are going to adjourn this hearing now, and then in about 5 minutes we will resume our hearing schedule and start the next hearing.
[Whereupon, at 12:15 p.m., the Subcommittee was adjourned.]
Next Hearing Segment(2)
(Footnote 1 return)
In the area of trademark enforcement undertaken by one ESA member company and involving handheld and cartridge based games, the new Judicial Interpretations are unclear on whether the authorities are able to seize components and parts that make up the counterfeit products. This is essential and must be clarified.