USTR Releases 2nd Annual Report on WTO Compliance by PR China

December 18, 2003. The Office of the U.S. Trade Representative (USTR) released a report [73 pages in PDF] titled "2003 Report To Congress On China's WTO Compliance".

The report is dated December 11, 2003. It is the USTR's second annual report submitted to the Congress pursuant to Section 421 of the U.S.-China Relations Act of 2000, which is codified at 22 U.S.C. § 6951. The USTR released its first report [55 pages in PDF] on December 12, 2002. See also, story titled "USTR Reports to Congress on PR China's WTO Compliance" in TLJ Daily E-Mail Alert No. 567, December 13, 2002.

In intellectual property rights (IPR) protection, the report finds that China's compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) has been "largely satisfactory" to the extent that Chain has passed laws, regulations and rules. However, the report finds that IPR enforcement in China "remains ineffective".

In telecommunications, the report finds that "China has not yet established an independent regulator in the telecommunications sector" and that "the problems in the telecommunications sector have increased".

Intellectual Property Rights. The just released second report addresses intellectual property rights (IPR) at length. It first reviews China's obligations under the TRIPS Agreement, including its obligations to bring its laws into compliance. The report finds that "Overall, China's efforts to bring its framework of laws, regulations and implementing rules into compliance with the TRIPS Agreement have been largely satisfactory, although some improvements still need to be made."

It elaborates that "As reported in detail in 2002, U.S. experts carefully reviewed China's new IPR laws, regulations and implementing rules and, together with other WTO members, participated in a comprehensive review of them as part of the first transitional review of China before the WTO's Council for Trade-related Aspects of Intellectual Property Rights (TRIPS Council) in September 2002. A further review took place during the transitional review before the TRIPS Council in November 2003. While this process identified various areas where China could make improvements, and the United States and U.S. industry continue to press China to do so, overall the legal changes made by China are major improvements that move China generally in line with international norms in most key areas."

The report also identifies the new laws adopted by China in 2003. It states that "In the patent area, the State Council issued the Amendments to the Patent Law Implementing Measures. In the trademark area, the State Administration of Industry and Commerce issued the Rules on the Determination and Protection of Well-Known Trademarks, the Measures on the Implementation of the Madrid Agreement on Trademark International Registration and the Measures on the Registration and Administration of Collective Trademarks and Certification Marks. In the copyright area, the National Copyright Administration of China issued the Measures on the Implementation of Administrative Penalties in Copyright Cases. These regulations and implementing rules have generally been well-received by U.S. companies as steps toward full compliance with China’s TRIPS Agreement obligations. China is also reportedly drafting revisions to its 2001 Internet-related implementing rules. This development is welcomed by U.S. companies because loopholes in those rules have allowed copyright infringement on the Internet to become a growing phenomenon in China."

However, the report identifies that "China still had not acceded to the 1996 World Intellectual Property Organization (WIPO) Internet-related treaties, which entered into force in 2002 and have been ratified by many developed and developing countries."

The report notes that "China is not obligated under WTO rules to accede to the WIPO treaties", but adds that the U.S. "considers these treaties to reflect international norms for providing copyright protection over the Internet. While China’s existing regulations and implementing rules do address certain copyright issues related to the Internet, and China is in the process of drafting further Internet-related implementing rules, the United States has urged China to promptly accede to the WIPO treaties and harmonize its regulations and implementing rules with them fully."

The report is more critical of China in the area of enforcement. It finds that while the "TRIPS Agreement requires China to implement effective enforcement procedures and to provide civil and criminal remedies that have a deterrent effect" there is not "effective IPR enforcement at the local level". It identifies "lack of coordination among Chinese government ministries and agencies, local protectionism and corruption, high thresholds for criminal prosecution, lack of training and weak punishments."

The report finds that as a result, "In 2003, IPR infringement in China continued to affect products, brands and technologies from a wide range of industries, including films, music, publishing, software, pharmaceuticals, chemicals, information technology, consumer goods, electrical equipment, automotive parts and industrial products, among many others."

The report then examines the weaknesses in China's administrative enforcement, criminal enforcement, and civil actions for damages.

With respect to administrative enforcement, the report states that "China continues to take a large number of administrative enforcement actions against IPR violators. However, they are not having a deterrent effect." The report identifies several reasons, including that fines are artificially low, that "evidence showing that a person was caught warehousing infringing goods is not sufficient to prove an intent to sell them", and that administrative authorities rarely forward an administrative case for criminal investigation.

With respect to criminal enforcement, the report states that "At present, criminal enforcement has virtually no deterrent effect on infringers. China's authorities have pursued criminal prosecutions in a small number of cases, and a lack of transparency makes it sometimes difficult to find out if they resulted in convictions and, if so, what penalties were imposed. If this situation is to change, China needs to revise its laws and regulations and to prosecute a much higher percentage of IPR infringers, particularly those engaged in commercial-scale counterfeiting or piracy and repeat offenders."

Finally, with respect to civil enforcement, the report finds that while IPR holders are increasingly bringing civil actions, and China's IPR courts have shown "increasing sophistication", nevertheless, "U.S. companies complain that there is still a lack of consistent and fair enforcement of China’s IPR laws and regulations in the courts. They have found that most judges lack necessary technical training and that court rules regarding evidence, expert witnesses, protection of confidential information are vague or ineffective. In addition, in the patent area, where enforcement through civil litigation is of particular importance, a single case still takes four to seven years to complete, rendering the new damages provisions adopted to comply with China's TRIPS Agreement obligations less meaningful."

Telecommunications. The USTR report also addresses telecommunications.

First, the report summarizes China's obligations. It states that "In its accession agreement, China agreed to permit foreign suppliers to provide a broad range of telecommunications services through joint ventures with Chinese companies, including domestic and international wired services, mobile voice and data services, value-added services, such as electronic mail, voice mail and on-line information and database retrieval, and paging services. The foreign stake permitted in the joint ventures is to increase over time, reaching a maximum of 49 percent for most types of services."

In addition, "China also accepted key principles from the WTO Agreement on Basic Telecommunications Services. As a result, China became obligated to separate the regulatory and operating functions of MII (which has been both the telecommunications regulatory agency in China and the operator of China Telecom) upon its accession. China also became obligated to adopt pro-competitive regulatory principles ..." (Parentheses in original.)

The report notes that in December 2001, China "issued regulations on the administration of foreign-invested telecommunications enterprises." However, these regulations "establish high capital requirements (in basic and value-added telecommunications services) that pose a barrier to entry for many potential foreign suppliers". (Parentheses in original.)

Moreover, the report states that "China has not yet established an independent regulator in the telecommunications sector. The current regulator, MII, while nominally separate from the current telecommunications operators, maintains extensive influence and control over their operations and continues to use its regulatory authority to disadvantage foreign firms."

The report continues that "Over the last year, the problems in the telecommunications sector have increased." For example, in states that in April of 2003, "MII reclassified several telecommunications services from the value-added category to the basic category, contrary to widely accepted international practice and, in some instances, in apparent contravention of the spirit, if not the letter, of China's scheduled commitments."

Also, "MII also placed restrictions on what new services could be classified under the value-added category. These moves are likely to limit the ability of U.S. firms to access China’s telecommunications market. Under China’s Services Schedule, basic services are on a slower liberalization schedule, and MII subjects them to higher capitalization requirements. Indeed, MII requires suppliers of basic services to satisfy an excessive registered capital requirement of RMB 2 billion ($241.2 million)."

Also, "MII continues to process applications very slowly for the few foreign-invested telecommunications enterprises that have attempted to satisfy MII's licensing requirements."