Trade War Looming?

IP Newsletter, April 2007

Last month, we talked about the United States putting pressure on provincial and local government officials in China to improve enforcement of IPR. Shortly after our newsletter, the US Trade Representative announced she was requesting two separate formal WTO consultations with China concerning intellectual property right matters.

In the first case, the US claims that Chinese laws protecting copyrights and trademarks are inadequate. The second case involves market access. The US charges China with creating unnecessary legal barriers to impede American entertainment products such as movies, DVDs, music and publications from the Chinese markets. We will discuss the first case in this newsletter.

A request for formal consultation is the first step in the WTO mechanism for resolving disputes. This request gives parties 60 days to engage in high-level discussions in an attempt to resolve the dispute. If the parties fail to agree, the matter is referred to a WTO dispute-settlement panel for resolution.

Under WTO rules, other members may ask to participate in the consultations. So far, Japan and Canada have requested to do so. The European Union, China’s largest trade partner, has stated that, while it will follow the complaint as an observer, it will not join in the consultations. Instead, it will try to resolve its IP disputes with China through its own discussions with China.

Responding to the complaints, Chinese Vice Premier Wu Yi noted that the two countries have agreed to settle disputes through dialogue and that filing two cases simultaneously will have a negative impact and severely damage the existing intellectual property cooperation between the two countries. She said that China will proactively respond according to the related WTO rules and see it through to the end.

What are the issues requiring such a tough response?

The US has three complaints about existing Chinese IP laws.

The first is the threshold for initiating criminal proceeding. The Chinese Supreme People’s Court said recently that a minimum of 500 copies of infringing goods must be found to initiate criminal prosecution. Fewer infringing copies will only result in administrative fines and penalties. The US considers such fines and penalties as parking tickets not capable of deterring infringers from violating IP laws. The USTR wants the threshold to be significantly lowered to have a deterrence value.

Second, under current Chinese law, when counterfeiting goods bearing false labels and trademarks enter China, they are seized at the border. The infringing labels and trademarks are then removed but the goods are then sold to the highest bidder. Under WTO rules, such goods should not be allowed into the marketplace. The US considers current Chinese practice as unfair and creates consumer confusion and risk. It wants China to comply with WTO rules and destroy these seized goods.

Third, newly released published works entering into China must receive censorship approval before they can be distributed. Current copyright law does not give a copyright holder a right to complain about infringing works until censorship approval is granted. As the work awaits censorship clearance, infringing goods are copied and sold to Chinese consumers. This gives them a market lead because legitimate goods cannot be sold without censorship clearance. Until approval is granted, the copyright holder hasno legal recourse against infringers. The US wants this loophole closed.

There was a fourth issue concerning a law allowing prosecution for unauthorised reproduction of copyrighted works only if there was also unauthorised distribution. So long as an infringer does not distribute infringing goods, he will not face criminal prosecution. This issue appears to have been addressed by a recent judicial interpretation that did away with the unauthorised distribution requirement for triggering criminal prosecution.

Are these issues the first salvo of a trade war as some suggest?

The two trading partners have been having ongoing discussions about IPR enforcement. They have made significant progress over the years and cooperation has intensified and improved between them. There is genuine momentum unlikely to be derailed by the complaints.

When one looks beyond the headlines and considers the underlying issues, it is clear what the US is seeking are further incremental improvement and clarification of existing Chinese IP laws. The US is not seeking wholesale changes. Yet, the high-profile and unprecedented filing of two complaints give the impression that Washington is taking a very tough stand against Beijing and Beijing has responded just as forcefully. Are these issues sufficiently serious to trigger a trade war? It seems unlikely.

It will not be surprising if the parties announce a breakthrough as the 60-day consultation period comes to an end. The parties will announce with fanfare that they have resolved these disputes. Substantively, China will make minor tweaking of existing laws and judicial interpretations will be made clarifying enforcement issues. Both sides will then claim progress and pledge closer cooperation.

First shot of a looming trade war? Unlikely. Both sides face pressure from interest groups and a high-profile filing and quick settlement will help relieve some pressure ahead of next year’s Beijing Olympic Games.