China’s IPR Enforcement, Regulations Challenged
The US has initiated two new WTO complaints against China, charging that Beijing is tolerating intellectual property rights violations and maintaining trade barriers against books, music and other copyrighted goods.
The first of the challenges deals with China’s allegedly inadequate enforcement of intellectual property rights (WT/DS362/1). The US claims that China is not doing enough to enforce copyright and trademark protection on a wide range of goods such as books, CDs and DVDs. Washington argues that Beijing sets an unacceptably high bar for punishing copyright infringements with criminal prosecution, allowing large-scale commerce to take place in pirated movies and music with the threat of little more than an administrative fine. On 9 April, US Trade Representative Susan Schwab said that under Chinese law, police raiding a business would have to find at least 500 ‘infringing works’ in order to launch a criminal prosecution. “The thresholds create a safe harbour for the pirates, and the pirates are only too willing to take shelter there,” she said, explaining that businesses dealing in pirated goods take care to remain just short of the threshold level, and thus avoid serious punishment.
The US is also seeking a ruling on whether China’s practice of removing fake logos from seized counterfeit products before auctioning the goods to the highest bidder – instead of destroying the illegal copies – is consistent with WTO rules. In addition, the complaint targets China’s practice of withholding copyright approval to works until they go through the country’s censorship approval process. This creates incentives for pirates, “leaving only the leftovers for the legitimate property rights owner” once the copyright has been granted. Washington also wants China to clarify whether its laws do not treat the unauthorised reproduction of copyrighted works (such as DVDs) as a criminal offence unless it is accompanied by distribution of them.
Canada, the EU, Japan and Mexico have joined the dispute as third parties.
The second US complaint (WT/DS636/1) focuses on the Chinese government’s requirement for books, journals, movies and music to be imported by state-approved or staterun companies. Washington claims that this violates Article XI.1 of the General Agreement on Trade in Services, which prohibits Members from applying “restrictions on international transfers and payments for current transactions relating to its specific commitments.” According to the complainant, China agreed in its accession protocol to “fully open the right to trade (i.e., the right to import goods into China and to export goods from China) within three years after accession.” The EU has requested third party rights in the dispute.
Beijing Issues Sharp Rebuke
The Chinese Ministry of Commerce said the US decision to file complaints at the WTO was “contrary to the consensus between the leaders of the two nations about strengthening bilateral trade ties and properly solving trade disputes,” and was likely to “seriously undermine the co-operative relations the two nations have established [as well as] adversely affect bilateral trade.”
China’s Vice Premier Wu Yi vowed her country would “fight [the US complaints] to the end,” adding that – by taking China’s IPR and market entry regimes to the WTO – the US had ignored the great progress China had made in protecting intellectual proprty rights. According to Ms Wu, nearly a 1000 people were arrested last year for IPR violations.
Shortly before the new cases were filed at the WTO, Chinese antipiracy officials carried out the biggest raid of the year 2007, seizing 1.64 million illegal DVDs and 30 machines used to erase source identification codes. On 15 April, thirty million pirated discs and 11 million illegally published books and magazines were destroyed in a government-led campaign.
China Auto Parts Update
In related news, the first panel hearing in the China auto parts dispute is scheduled for late May. At issue are different tariffs imposed by China on parts of automobiles. Canada, the EU and the US allege that the 25 percent tariff levied on imported parts that make up more than a certain threshold of the finished vehicle is designed to bolster China’s own car part industry, giving manufacturers incentives to favour domestic over imported parts and pushing foreign suppliers to relocate production to China. The complainants also say the 25 percent tariff – the same as that for completed cars – exceeds China’s scheduled commitments for car part imports, which are taxed at around 10 percent (Bridges Year 10 No.6, page 6).
According to sources familiar with China’s defence, the country is likely to argue before the panel that the measures in question were adopted to prevent car manufacturers from importing all the parts from abroad at a 10-percent tariff rate and then assembling the vehicle in China, instead of paying the 25 percent duty for a fully assembled imported automobile. China reportedly intends to invoke the General Interpretive Rule 2(a) of the Harmonised System (HS) of tariff codes used at the WTO, under which it says customs authorities should consider as a complete article any group of parts and components that has the ‘essential character’ of that article. Thus, parts can be taxed at the rate of a finished product if they account for the ‘essential character’ of it, even when the imported parts do not make up 100 percent of the fully assembled product.
China also faces a WTO dispute over allegedly granting prohibited subsidies to domestic industries. The case was launched by the US in February 2007 (Bridges Year 11 No.1 page 10). On 2 May, the US modified its complaint to take into account China’s termination of advantageous loan guarantees to large exporters and the adoption of a new enterprise income tax regime, which removes some of the disputed export-contingent taxbreaks. Australia, the EU, Japan and Mexico have joined the dispute as third parties. Mexico has also initiated proceedings of its own on the same grounds as the original US complaint.