WTO Case Against China: Choose Your Battles Wisely

IP Dragon was away for a few days and the IP in China landscape has dramatically changed.

China came with its Action Plan on IPR Protection 2007.

China's Supreme People's Court and Supreme People's Procuratorate promulgated a new judicial interpretation that lowered the numerical thresholds for criminal IP infringements. See the draft version in English here.

Stan Abrams of China Hearsay, who wrote an informative series about the WTO case against China adds: "The General Administration of Customs passed a notice on April 4, 2007. The notice deals with infringing goods that are being auctioned off, and states that if infringing marks cannot be entirely removed, the goods must be destroyed. Moreover, the rights holders must be notified/consulted before the goods are auctioned."

Then US Trade Representative Susan Schwab announced April 9th that the US will request for consultations with China on IPR and certain market access issues for copyright intensive industries, see here. These issues are interrelated. In the research for my thesis about whether China is TRIPs compliant I wrote:

Market access restrictions are a contributory factor to intellectual property infringements[1]. The salient example is the limited number of movies that are annually allowed into the Chinese market[2]. Reasons for this restrictive policy is to protect the fledgling Chinese movie industry, or to protect the security of the state: some foreign movies are banned outright[3] [4], while the arrival of others is delayed by lengthy censorship reviews of Chinese authorities, and sometimes they are subject to blackout viewing periods during national holidays[5].

Notes
[1] "We cannot divorce the concept of market access from the question of piracy. In no case is that more apparent… [than] China", Bloomberg news agency quoted Pat Schroeder, president of the Association of American Publishers, as saying, InTheNews.co.uk, ‘Chinese copyright piracy faces US threat’, February 16, 2007, available at: http://www.inthenews.co.uk/money/news/finance/chinese-copyright-piracy-faces-us-threat-$1053067.htm.
[2] The number of foreign movies that can be shown in Chinese cinemas is limited to 20 movies per year.
One can argue that this stimulated pirated DVDs to the point that only 7 per cent of the DVD’s on the market are legitimate. Reuters, ‘Market access key to piracy fight’, The Age, December 8, 2006, available at: http://www.theage.com.au/news/World/Market-access-key-to-piracy-fight/2006/12/08/1165081128349.html.
[3] The criteria for censorship are: the state advocates to create excellent films that have both ideological content and artistic quality". They should "get close to reality, life and the masses"; be of "benefit to the minors' healthy growth"; and "try to transform backward culture and combat firmly the decadent culture". And maybe most important no politics can be involved in entertainment, Mary-Anne Toy, ‘Piracy still pays despite party line on what’s fit for Chinese eyes’, Sidney Morning Herald, February 10, 2007, available at: http://www.smh.com.au/news/world/piracy-still-pays-despite-party-line-on-whats-fit-for-chinese-eyes/2007/02/09/1170524304056.html.
[4] Five movies have been banned by censors, available at: http://en.wikipedia.org/wiki/List_of_banned_movies#China_.28People.27s_Republic_of.29
[5] USTR, Trade summary, 2005, pg. 112, available at: http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_NTE_Report/asset_upload_file469_7460.pdf.

The timing of China's action plan, judicial interpretation and notice is remarkable. As if to stave off this WTO dispute by patching some formal complaints. To no avail.

The question is whether the 60 day consultation period which advances any Dispute Reolution Body panel that will judge whether China digressed, is initiated by the US government, because it really believes it can proof the non-compliance of China and take advantage of a trade conflict with China, or that is was initiated for domestic consumption, because the Bush administration wants to look tough in the eyes of Congress.

Either way, the grace period of China, 5 years of their accession to the WTO has lapsed.

In my research for my thesis about whether China is TRIPs compliant I wrote:

An eventual formal complaint [1] could be based on the articles 41[2], 46[3] and 61 TRIPs[4]. The key question is whether it would be wise to do so. Peter Yu gives five reasons why the US [5] should not file a formal complaint based on the abovementioned articles. First, there is no clear definition for effective enforcement (41(1) TRIPs). What Yu writes about effective enforcement can also be said about the terms effective deterrent (article 46 TRIPs) and deterrent (article 61 TRIPs). The latter provision is mentioned a lot by industry trade groups, that encourage WTO members to base a case against China alleging its criminal remedies are insufficient to provide a deterrent, caused by alleged high thresholds. If it actually comes to a WTO dispute resolution settlement case, based on article 61 TRIPs, a way for the Dispute Resolution Body panel to measure the degree of sufficiency of deterrence could be to compare the thresholds of other WTO countries, preferably in the same developmental stage[6] and determine whether China’s thresholds are within a certain reasonable range. Second, a complainant country needs to have good evidence. The paradox is that although US companies and trade groups urge the US government to file a formal complaint against China, so that the USTR is asking companies to submit their complaints, only 35 companies have handed in their complaints[7]. The EU has a similar challenge in the preparation of evidence for a WTO case[8]. Companies want the problem of inadequate enforcement solved as long as it does not interfere with their direct personal interests[9]. The information China gives, based on the request of article 63 (3) TRIPs could be used as evidence, too. But if this were the only evidence, it would make the position of the complainant member very dependent on the willingness to share the information of the defendant member. Third, almost all of the existing WTO cases focus on more specific provisions, rather than a lack of general enforcement. Comparable cases were those filed by the US against Greece and one against the EU[10]. Fourth, an adverse WTO ruling should be calculated. Even countries as small as Antigua and Barbuda can prevail against the US if the WTO rules are on their side[11]. In a dispute settlement process it is likely that both parties win some major points. This should be taken into account when a country files a formal complaint against a defendant as formidable as China. Fifth, China needs guidance to help it make the transition to full compliance with WTO rules. Therefore well-conceived challenges before the WTO Dispute Settlement Body are needed to provide guidance during this critical period. WTO challenges will be particularly helpful in areas in which Chinese laws do not comply with more specific TRIPs provisions, as well as those in which the challenges are supported by prior WTO panel decisions.

Notes

[1] In September 2006, the United States, the EU and Canada did request that a dispute settlement panel examine their complaint that Chinese tariffs on imported auto parts were discriminatory, the first time a dispute with China had risen to this level in the WTO. James F. Paradise, ‘China’s Intellectual Property Rights Honeymoon’, available at:
http://www.asiamedia.ucla.edu/article.asp?parentid=57634.
[2] Paraphrasing partly article 41 TRIPs: Members shall ensure that enforcement procedures are available so as to permit effective action against infringement.
[3] Paraphrasing partly article 44 TRIPs: In order to create an effective deterrent to infringement, the judicial authorities shall have the authority to order that infringing goods be, without compensation, be disposed of outside the channels of commerce.
[4] Partial article 61 TRIPs: Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity.
[5] These arguments could apply to other countries as well.
[6] China’s developmental stage is difficult to compare, since it is both a developing country and a developed country. Also according to Andy Sun China is not a monolithic society or market: “Anyone who wants to do business, or have anything to do with Chinese markets should not think that way. It is actually a capsule of both time and space”, Andy Sun, ‘China and WTO compliance’, CASRIP Publication Series: Rethinking In’t Intellectual Property, 2000, no. 6., pg. 243, available at: http://www.law.washington.edu/CASRIP/Symposium/Number6/Sun.pdf.
[7] The USTR received only 35 submissions from the industry through the Section 301 submission procedures in 2005, USTR, ‘Out-of-cycle review’ 2005.
[8] One of the recommendations to the Directorate-General for Trade Policy of the European Commission is to sensitise the industry on the importance to provide all required data to support a WTO case, and guaranteeing the confidentiality of the information provided. Paul Ranjard and Benoît Misonne, ‘Study 12: Exploring China’s IP Environment’, Study on the Future Opportunities and Challenges of EU-China Investment Relations, February 15, 2007, pg. 22 and 26, available at: http://trade.ec.europa.eu/doclib/docs/2007/february/tradoc_133314.pdf.
[9] Probably because they fear this will have an averse effect on their ability to do business in China, or they expect trade tensions or retaliations which do their business no good. Guanxi (personal connections) and political capital is important in China. Peter K. Yu, ‘From Pirates to Partners (Episode II): Protecting Intellectual Property in Post-WTO China’, American University Law Review, Vol. 55, 2006, Part III Thinking Outside the IP Box, E. Reinvestment, pg. 127, available at: http://ssrn.com/abstract=578585., pg. 127.
[10] US claimed that Greece in one case and the EU in another violated articles 41 and 61 TRIPs by not providing effective enforcement of IPR. Both cases were eventually settled. Request for Consultations by the US, Greece, Enforcement of Intellectual Property Rights for Motion Pictures and Television Programs, WT/DS125/1, May 7, 1998; Request for Consultations by the US, European Communities, Enforcement of Intellectual Property Rights for Motion Pictures and Television Programs, WT/DS124/1, May 7, 1998.
[11] Panel Report, US, Measures Affecting the Cross-Border Supply and Betting Services, WT/DS285.R, November 10, 2004.