V. Development of Rule of Law and the Institutions of Democratic Governance

V(f) COMMERCIAL RULE OF LAW AND THE IMPACT OF THE WTO

Developments in Commercial Rule of Law | Infringement of Foreign Intellectual Property | Market Access for Agricultural Products | Lack of Transparency in Regulatory and Administrative Processes | Barriers to Entry in Distribution for Foreign Companies | China's Large Procurement Market and Decreasing Foreign Supplier Access | Auto Industry Development

FINDINGS

• The Chinese government has made progress in bringing its laws and regulations into compliance with its WTO commitments. Though significant flaws remain, the new body of commercial laws has improved the business climate for foreign companies in China. With new, more transparent rules, the Chinese trade bureaucracy has reduced regulatory and licensing delays.
• The Chinese government tolerates intellectual property infringement rates that are among the highest in the world. Steps taken by Chinese agencies in the past 12 months to improve the protection of foreign intellectual property have not produced any significant decrease in infringement activity. The Chinese government has not introduced criminal penalties sufficient to deter intellectual property infringement.
• The Chinese government has not fully implemented the key WTO principles of national treatment, non-discrimination, and transparency in such areas as distribution and agriculture. To address these problems, the Chinese government must continue economic reforms, establish a more transparent and consistent regulatory and licensing system, implement and enforce distribution rights for foreign companies, and strengthen enforcement of intellectual property laws.

Developments in Commercial Rule of Law

The Chinese government has made progress in bringing its laws and regulations into compliance with its WTO commitments. Since joining the WTO in 2001, central, provincial, and local governments have reviewed more than 2,500 trade-related measures¹ and the Supreme People's Court (SPC) has reviewed all of its approximately 2,600 interpretations and related documents,² to ensure that they comply with WTO requirements. Despite these positive steps, the rule of law remains weak in China and this, among other factors, has hampered the timely and efficient implementation of China's WTO commitments.

Though significant flaws remain, the new body of commercial laws has improved the business climate for foreign companies in China.³ With new, more transparent rules, the Chinese trade bureaucracy has made some progress in reducing regulatory and licensing delays.⁴ The new laws and regulations have reduced uncertainty about contractual rights and obligations.⁵ Foreign companies are increasingly using Chinese courts to resolve business disputes, and the overall professional quality of judges has improved [see Section V(c)—China's Judicial System]. Improvements in the legal regime are the primary reason that more U.S. companies in China planned to expand their operations in 2005.⁶

The WTO principles of non-discrimination and transparency, introduced to government officials at all levels by the new commercial laws, are having a positive effect on some aspects of non-commercial public policy as well. A former Chinese trade negotiator noted that WTO transparency requirements have put pressure on officials to curb the use of internal, non-public rules to regulate corporate and citizen behavior.⁷ Chinese citizens, private companies, and government agencies have also used WTO terminology regarding national treatment when criticizing regulatory discrimination.⁸ For example, Chinese scholars have criticized the lack of "urban resident treatment," a term derived from the WTO term for nondiscriminatory treatment, for rural residents in regulations that favor urban residents [see Section III(j)—Freedom of Residence and Travel].⁹ In their discussions of such discrimination, both the central government and local governments have also used WTO-derived terms, promising expanded "urban resident treatment" to all citizens.¹⁰

Nonetheless, the Chinese government still maintains measures that undermine implementation of its WTO commitments. For example, although the Chinese government implemented WTO-mandated tariff reductions in a timely manner, Chinese customs officials continue to impose arbitrary tariff classifications on imports at different ports of entry.¹¹ Likewise, a new, draft Telecommunications Law could clarify the nature of market regulations and the procedures for foreign firms to gain the market access guaranteed in China's WTO commitments, but has yet to be published for public comment.¹²

The Chinese government has also proposed and implemented new measures that appear to protect and promote domestic industry and disadvantage foreign business, sometimes in contravention of its WTO commitments. A senior official at the Ministry of Commerce (MOFCOM) affiliated Beijing WTO Affairs Research and Consulting Center called on the Chinese government in late 2004 to focus on the "threats of imports and increased competition from foreign goods, services, and enterprises."¹³ Two measures, although now resolved, illuminate policy efforts to protect domestic industry. In 2004, the government sought to implement a new commercially onerous wireless networking standard that mandated technology transfers from foreign to domestic high-technology companies, despite a WTO commitment to use international standards except when ineffective or inappropriate.¹⁴ For over two years following WTO accession, the Chinese government maintained an export tax rebate for domestically produced integrated circuits designed to compel foreign firms to relocate their design and fabrication facilities to China.¹⁵ The U.S. government asserted that the policy violated a WTO prohibition against tax policies favoring domestic production.

The government has adopted a steel industry development policy that will raise barriers to entry for foreign companies by imposing high capital requirements and limitations on joint venture partners.¹⁶ Although this policy may be consistent with WTO requirements, it exploits broad WTO rules to protect or develop Chinese industries at the expense of foreign firms. The United States and China's other WTO partners will need to remain vigilant to ensure that the government's implementation of WTO obligations helps create a robust commercial legal system, rather than creating incentives to implement development policies consistent with WTO requirements, but acting as subtle barriers to trade.

Infringement of Foreign Intellectual Property

In the past year, the Chinese government continued to tolerate intellectual property (IP) infringement rates that were among the highest in the world.¹⁷ Copyright piracy rates in China currently exceed 90 percent in some industries,¹⁸ including rates of 95 percent for motion pictures and 90 percent for software.¹⁹ In 2004, U.S. Customs seized more Chinese products for trademark violations than from any other country.²⁰ In early 2004, Vice Premier Wu Yi committed her government to reducing the level of IP infringement in China immediately, and reiterated and expanded this commitment to senior U.S. officials at the U.S.-China Joint Commission on Commerce and Trade (JCCT) session in July 2005.²¹ As of the publication date of this Annual Report, the Chinese central government has intensified its efforts to combat infringement activities, but has not yet met this goal.

The Chinese government reported that the number of raids conducted and the quantity of pirated products destroyed have increased,²² but U.S. industry sources say that infringement of foreign intellectual property in China has grown worse since 2003.²³ High infringement rates continue, in part because Chinese authorities have not increased penalties against producers of pirated goods.²⁴ Infringement rates in South Korea and Taiwan that approached or exceeded 90 percent in the 1980s and 1990s were brought under control after the central government instituted new deterrent penalties and specific legal measures.²⁵ A specific licensing requirement for optical disc production, for example, helped the Hong Kong government curb piracy at its source.²⁶

The Chinese government has not introduced criminal penalties sufficient to deter IP infringement. The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights requires WTO Members to maintain criminal IP penalties, including monetary fines "sufficient to provide a deterrent."²⁷ Current provisions in China's Criminal Law are inadequate to deter infringement²⁸ and serious IP cases remain in the administrative enforcement system, which has proven ineffective at deterring violators.²⁹ In 2004, the Supreme People's Court (SPC) and Supreme People's Procuratorate (SPP) issued an interpretation on transferring IP infringement cases from administrative to criminal enforcement without sharing a draft of its decision with WTO members for comment, despite promising to do so.³⁰ The U.S. government subsequently determined that the revisions "did not go far enough to be an effective deterrent."³¹

Steps taken by Chinese agencies in 2004 to improve the protection of foreign IP have not produced a significant decrease in infringement activities. The SPC and SPP interpretation described above reduced the threshold for criminal IP infringement by 40 percent in some cases but still calls for calculating infringement using the retail value of the illegal goods, rather than the value of genuine products.³² Consequently, the new lower threshold will be limited in its effectiveness. In July 2004, China's Patent Reexamination Board invalidated a U.S. company's pharmaceutical patent after determining that the company did not submit sufficiently detailed laboratory data during the examination process, though the data was not required under Chinese regulations in effect when the examination took place.³³ In addition, government authorities had designated the U.S. drug a "controlled substance" in its marketing authorization despite the wide availability of counterfeit substitutes.³⁴ Chinese pharmaceutical makers are free to manufacture the U.S. company's drug without fear of government sanctions.

The Chinese government has ample enforcement resources, but appears to lack the will to prevent infringement of IP from thriving in China. One U.S. expert told a Commission Roundtable that local police generally resist efforts to shut down commercial infringers because large-scale pirating efforts support the local economy and have the financial support of key local officials.³⁵ The Chinese leadership's repression of Falun Gong demonstrates that police can stop the production of "illegal publications" when Party and government leaders believe it is in their best interest to do so.³⁶ Before the state banned Falun Gong in 1999, the spiritual group's materials were found throughout China.³⁷ Since the crackdown, the only publicly available materials in China that discuss Falun Gong are anti-Falun Gong materials published by the government.

Market Access for Agricultural Products

In the past year, the Chinese government took a number of actions that resolved significant bilateral concerns about agricultural trade. These actions included reopening China's market to U.S. poultry exports,³⁸ granting market approval for U.S. agricultural biotechnology products,³⁹ and increasing formal coordination efforts between inspection and quarantine officials in both countries.⁴⁰ In addition, the Chinese government's implementation of WTO agricultural commitments has generated greater institutional capacity among agricultural trade officials and made the administration of trade-related agricultural measures less cumbersome for foreign business. These changes helped China become the fourth largest export market for U.S. agricultural products in 2004, a market that was largely closed to the U.S. before China joined the WTO.⁴¹

Despite these positive steps, a number of serious problems still exist in the Chinese government's administration of agricultural trade. The government's inspection and quarantine system continues to implement discriminatory sanitary and phytosanitary measures with a questionable scientific basis. Officials with the General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) have maintained a ban on U.S. beef imports,⁴² even though the U.S. cattle surveillance system meets international standards.⁴³ The Chinese government maintained bans on Florida citrus and U.S. cherries entering the Chinese market through late 2004 despite the lack of a scientific basis for the decision.⁴⁴ AQSIQ has also set a limit for selenium in U.S. wheat that is lower than the international standard. The requirement, if enforced, could result in a significant decrease in exports of U.S. wheat to China.⁴⁵

The Chinese government sets preferential shipping rates and provides an export tax rebate on corn exports.⁴⁶ Both represent potential export subsidies that could run counter to WTO rules.⁴⁷ When it acceded to the WTO, China promised not to maintain any agricultural export subsidies and agreed to abide by WTO rules proscribing the introduction of such policies.⁴⁸ Since then, China has made additional declarations to the WTO Committee on Agriculture certifying that it does not maintain any export subsidies for agricultural products.⁵⁰ Although these payments appear to be WTO-consistent, this is the first time since WTO accession that the Chinese government has provided direct support to its agricultural producers and reverses the historical practice of using income generated by agricultural areas to support the urban population.

Legal reform that should liberalize market access for agricultural products is often ineffective because of local differences in implementation and unannounced rule changes that delay agricultural shipments. The Chinese government committed in several WTO agreements to apply its laws in a uniform manner, but central government agencies charged with addressing cases of conflicting application of national and provincial laws have not always been effective.⁵¹ U.S. exporters express concern that inconsistent application of China's inspection and quarantine regime is tied to whether or not the government believes that agricultural imports are necessary to compensate for shortfalls in domestic production.⁵² U.S. exporters say that they must pay Value Added Tax (VAT) on corn imports when their products enter China, but domestic producers allegedly "have no VAT directly applied."⁵³

Lack of Transparency in Regulatory and Administrative Processes

The Chinese government does not consistently publish drafts of trade-related measures,⁵⁴ and some government agencies do not circulate drafts of commercial laws and regulations to outside groups or individuals, domestic or foreign.⁵⁵ Some government agencies will circulate drafts on the condition that the outside party does not share the draft more widely.⁵⁶ The government's tendency toward secrecy runs counter to a WTO commitment to provide a meaningful opportunity for appropriate Chinese government authorities to receive comments from outside parties before laws and regulations are implemented.⁵⁷ To date, neither the State Council nor the Ministry of Commerce has published a draft of the Anti-Monopoly Law for comment.⁵⁸ The SPC and SPP did not release a public draft of their December 2004 "Interpretation Concerning Certain Questions of Using the Criminal Law to Handle Violations of Intellectual Property Rights," despite a central government commitment to do so.⁵⁹ Complaints later voiced by the U.S. business community regarding the Interpretation could have been avoided if the Chinese government had solicited comments in advance.⁶⁰

Despite these problems, the Chinese government has taken steps to increase official transparency. The 2004 USTR Report to Congress on China's WTO Compliance noted that the Ministry of Commerce has begun following administrative transparency rules set forth in 2003, and that these rules may serve as a model for other ministries and agencies.⁶¹ The same report found that China's ministries and agencies have a "much better record" in making new or revised laws and regulations available to the public soon after issuance, an improvement over pre-WTO accession practices.⁶² In March 2005, the Party and the State Council issued an opinion directing all levels of government to increase transparency by releasing more information on all their activities.⁶³ The document did not require decisions to be published, but suggested that disclosure should be the rule, not the exception.⁶⁴ Substantive legal changes related to transparency, such as amendments to the Administrative Litigation Law and consideration of the Administrative Procedure Law, have moved slowly [see Section V(b)—Legal Restraints on State Power].

China committed to mandate judicial review of trade-related administrative decisions when it joined the WTO in 2001.⁶⁵ The SPC took steps to fulfill this commitment in 2002, but split the court assignment process so that only intermediate or high people's courts may handle WTO-related cases and review anti-dumping decisions.⁶⁶ This reassignment and related personnel changes have produced a generally more professional judiciary, but the changes are not always sufficient to ensure independent judicial review in trade-related cases.⁶⁷

Barriers to Entry in Distribution for Foreign Companies

In 2004, the Chinese government adopted legal measures to comply with its WTO commitment to grant distribution rights to foreign companies, but the procedures and requirements for a distribution license constitute a barrier to market entry.⁶⁸ A foreign-invested enterprise (FIE) must form a new company with its own registered capital and legal personality before it can be licensed to distribute products in China.⁶⁹ Creating a new company requires both Ministry of Commerce and provincial government approval, and FIEs have found the licensing process slow and non-transparent.⁷⁰ In addition, FIEs with distribution licenses sometimes encounter local officials who oppose opening markets that could harm enterprises in their jurisdiction.⁷¹ During the July 2005 JCCT meeting, following significant efforts by the U.S. government and industry, China claimed to have cleared a significant backlog of applications for distribution licenses.⁷²

The Chinese government was late in issuing regulations to permit FIEs to sell directly away from a store or other fixed location. Under China's WTO General Agreement on Trade in Services (GATS) commitments, U.S. direct sales companies should have received permission to apply for licenses by the end of 2004. At the July 2005 JCCT meetings, the Chinese government said the State Council would enact a regulation permitting direct selling as soon as it finished its review and approved the measure.⁷³ In August 2005, the State Council issued both the Regulation on the Administration of Direct Selling and the Regulation Prohibiting Pyramid Selling, the measures governing direct selling.⁷⁴ They will come into effect in November and December 2005.

China's Large Procurement Market and Decreasing Foreign Supplier Access

The Chinese government has not begun the process of acceding to the WTO Agreement on Government Procurement (GPA), as it promised to do when it joined the WTO. Among other things, the GPA would prevent the Chinese government from discriminating against foreign suppliers in the procurement process. A Government Procurement Law enacted after China's WTO accession requires government agencies to give preference to domestic goods and services.⁷⁵ At the July 2005 JCCT meeting, China agreed to accelerate efforts to make an initial offer and to initiate technical consultations with other GPA members.⁷⁶

At the July 2005 JCCT meeting, China also agreed to withdraw a draft regulation that would limit government purchases of software products and services to domestic manufactures.⁷⁷ The regulation has caused concern among foreign suppliers of software products and services because it defines domestic software products and services narrowly and does not take into account the investment and work done by foreign software companies in China.⁷⁸ It has also raised concerns that the government will use it to limit market access for foreign software companies and that it will lead to increased technology transfer.⁷⁹ In contrast to drafts of many other trade-related laws and regulations, the government released the draft government software procurement regulation for public comment, and foreign software producers reviewed the regulation and consulted with the drafters about ways to improve it.

Auto Industry Development

The development of China's automobile industry in the past year has followed the industrial plan put forward by the Chinese government in 2004.⁸⁰ The Auto Industry Development Policy calls for consolidating China's auto industry from the current level of over 100 manufacturers to a smaller number of globally competitive companies.⁸¹ The policy specifically makes the creation of an export auto industry a priority and requires the protection of relevant intellectual property.⁸² The implementation of this policy has included the reclassification of imports of complete "knock-down kits" (kits of unassembled auto components requiring only assembly in China) as new automobiles, resulting in a substantially increased duty rate for those imports.⁸³

Although the Auto Industry Development Policy proscribes misuse of foreign intellectual property,⁸⁴ at least one Chinese auto-maker has benefited both from the government's policy to promote China's auto industry and from its tolerance of intellectual property violations. In December 2004, GM Daewoo, a subsidiary of General Motors, filed an unfair competition suit in a Shanghai court against Chery Automotive,⁸⁵ which received millions of dollars in subsidies from the Ministry of Science and Technology in 2004.⁸⁶ The suit alleges that Chery misappropriated GM trade secrets and used them to design its "QQ" model.⁸⁷ GM Daewoo also submitted a request to China's Patent Reexamination Board to invalidate the design patent Chery filed on the "QQ" model.⁸⁸ Chery subsequently filed a trademark application with the U.S. Patent and Trademark Office seeking to register the Chery name in connection with automobiles, and attorneys for GM have pointed out that similarities between "Chery" and the GM trademark "Chevy" would likely result in consumer confusion.⁸⁹

In August, the Ministry of Commerce issued a new Auto Trade Policy that regulates domestic trade in autos and automotive products as well as applying to the import and export of those goods.⁹⁰ The policy confirms that foreign investors may enter the domestic distribution market for autos, part of China's WTO accession commitment to open the distribution sector.⁹¹ It also prohibits the importation of used cars, used car parts, and right-side drive autos.⁹² According to an official from the Ministry of Commerce, this policy seeks to create a consolidated and competitive auto distribution industry in China.⁹³

Notes to Section V(f)—Commercial Rule of Law and the Impact of the WTO

1 Suan Yuanzhong, "The Research Committee on WTO Organizational Law has a Significant Role to Play" [Shimao zuzhifa yanjiuhui renzhong daoyuan], Legal Daily (Online), 8 January 04.

2 2002 Supreme People's Court Work Report, 11 March 02, sect. 2(4).

3 American Chambers of Commerce, PRC and Shanghai, 2004 White Paper, September 2004, ("From the perspective of the American business community on the ground, China's performance on WTO remains a cornerstone in laying the foundation for business success.").

4 Foreign-invested enterprises have enjoyed more and faster access to the Chinese market. "By the end of 2003, China had approved almost 400,000 foreign-invested enterprises (FIEs) with a contractual value of over $750 billion from 180 countries, including FIEs from 400 of the world's 500 largest multinational enterprises." James M. Zimmerman, China Law Deskbook, A Legal Guide for Foreign-Invested Enterprises (Chicago: American Bar Association, 2004), 1–2. In August, the Ministry of Commerce also reduced the time within which approvals for foreign-invested enterprises to one month for provincial level authorities and three months for national authorities. MOFCOM Time Limits for Approving FIE Projects [Waishang touzi shangye lingyu xiangmu shenpi shixian], issued 16 August 05.

5 American Chambers of Commerce, PRC and Shanghai, 2004 White Paper, 10.

6 Ibid., 10 (noting that WTO-compliant legal changes and a more open investment structure are the primary reasons for additional optimism by U.S. companies operating in China).

7 Yang Ruichun, "The Three Year Anniversary of China's WTO Accession: An Interview with Long Yongtu" [Zhongguo jiaru WTO sanzhounian zhichu Long Yongtu yu jizhe jiqing duihua], Southern Weekend (Online), 11 November 04.

8 Ibid.; Wan Xuezhong and Chen Jingjing, "WTO Entry Advances Formation of Rule of Law Concept" [Rushi cujinle fazhi liniande xingcheng], Legal Daily (Online), 4 January 05.

9 " 'City Resident Treatment' Late to Arrive" [Chidao de "shimin daiyu"], Red Net (Online) 17 February 04; "Experts Propose Registered Migrants Should Enjoy Same Benefits as Local Hukou Holders" [Zhuanjia jianyi Beijing liudong renkou beian dengji xiangshou shimin daiyu], Beijing News (Online), 29 May 05.

10 "Urban resident treatment" is a term taken from the WTO context that is used for rhetorical force to push local governments to change their policies with regard to migrants. Ge Yanfeng, Wang Xu, Tian Kai, "The Impact of WTO Accession on China's Society and Government Policy Choices-Completely Strengthens the Protection of Disadvantaged Communities" [Rushi dui zhongguo shehuide yinxiang ji zhengfu zhengce xuanze-quanmian jiaqiang dui ruoshi quntide baohu], State Council Development Research Center (Online), 16 May 02; "Xiamen's People's Congress Twelfth Session First Government Work Report" [Xiamenshi dishier jie remin daibiao dahui diyi ci huiyi zhengfu gongzuo baogao], Xiamen People's Government (Online), 3 December 02.

11 Office of the U.S. Trade Representative, 2005 National Trade Estimate Report on Foreign Trade Barriers, 30 March 05, 79.

12 Ibid., 112.

13 Cheng Dawei, "Post-Transition Period Will Test Our Wisdom," Economic Daily, 8 December 04 (FBIS, 10 December 04). The author repeatedly describes interaction with foreign competition as a threat to Chinese enterprises.

14 See Discussion of Wireless Local Area Network Architecture and Privacy Infrastructure (WAPI) in CECC, 2004 Annual Report, 87.

15 Office of the U.S. Trade Representative, USTR 2003 Report to Congress on China's WTO Compliance, 11 December 03, 32; Office of the U.S. Trade Representative, USTR 2004 Report to Congress on China's WTO Compliance, 11 December 04, 37.

16 PRC Steel Industry Development Policy [Gangtie chanye fazhan zhengce], issued 20 July 05. The steel policy seeks to increase the domestic steel industry's capacity to compete globally. Ibid., art. 1. To accomplish this goal, the policy encourages domestic enterprises to "use domestic facilities and technology" while importing only "equipment and technology that cannot be made domestically or for which domestic supply is unable to satisfy the requirements." Ibid., art. 18. The policy prohibits foreign control over domestic steel enterprises and restricts foreign investment in the steel industry. Ibid., art. 23. Foreign companies wishing to invest in the domestic steel industry must have produced either 10 million tons of steel or 1 million tons of high-alloy specialty steel during the previous year. Ibid. If the foreign company can fulfill these requirements it may invest in existing Chinese steel facilities, but may not create new ones. "Steel Industry's New Plan Released—Steel Factories Access Closed Down" [Gangtie chanye xinzheng chutai—gangchang zhunru damen guanbi], Caijing (Online), 16 July 05.

17 Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 63.

18 E.g., Office of the U.S. Trade Representative, Results of Special 301 Out-of-Cycle Review on China, 29 April 05.

19 Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?, Staff Roundtable of the Congressional-Executive on China, 16 May 05, Written Statement submitted by Eric H. Smith, President, International Intellectual Property Alliance.

20 Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?, Written Statements submitted by Eric H. Smith and Daniel C.K. Chow, Robert J. Nordstrom Designated Professor of Law, Ohio State University Michael E. Moritz College of Law.

21 At the April 2004 meeting Wu Yi committed to specific actions and generally to "[s]ignficantly reduce IPR infringement levels" through methods including increasing penalties, conducting a nationwide enforcement campaign against IPR violations, and extending the ban on government use of illegal software to the local government level. "The U.S.-China JCCT: Outcomes," Department of Commerce Office of the China Economic Area (Online), April 2004. At the July 2005 meetings she made additional specific commitments including cracking down on the export of pirated products, increasing police cooperation on IP between China and the United States, and ensuring that the state-owned sector uses only legal software. "The U.S.-China Joint Commission on Commerce and Trade (JCCT) Outcomes on Major U.S. Trade Concerns," U.S. Department of Commerce and Office of the U.S. Trade Representative (Online), 11 July 05.

22 "Recent Developments in China's IPR Protection" [Zhongguo zhishi chanquan baohude xinjinzhan], White Paper of China's State Council Information Office, 21 April 05 (citing statistics on the levels of enforcement activity and results in the form of money spent, activities conducted, and materials seized or destroyed).

23 Both the American Chambers of Commerce in China and USTR reported in fall 2004 that the overall situation of IPR infringement is worsening. American Chambers of Commerce, PRC and Shanghai, 2004 White Paper, 28; Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 63.

24 One witness testified that the way to stop infringement is to use criminal enforcement mechanisms to go after pirates themselves, while another witness pointed out that one city, Yiwu, Zhejiang Province, contains vast markets for counterfeit product and that the production of counterfeit products there supported the local economy. Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?, Testimony of Eric H. Smith and Daniel C.K. Chow. China's State Council released a White Paper trumpeting the efforts China has made to protect intellectual property filled with statistics on the amount of enforcement that has occurred in recent years. There is no discussion in the document, however, of the effectiveness of these enforcement measures. "Recent Developments in China's IPR Protection," White Paper of China's State Council Information Office. TRIPs provides that criminal penalties "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." WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, art. 61 [hereinafter TRIPs Agreement].

25 "We have the examples of Korea, Taiwan, and other countries in the Asian region that have driven down piracy rates from, in the mid-1980s, 100 percent piracy in Taiwan and Korea, to— believe me— piracy rates at the latter part of the 1990s that were down to 15 percent. How did they do it? Very simple. They put pirates in jail. If it was not a jailable offense, they fined them at levels that were deterrent. Until China makes the political commitment to do that, it is not going to be able to deal with this problem." Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?, Testimony of Eric H. Smith.

26 "The HKSAR effectively deployed a new legal weapon that its neighbors should emulate: tough licensing regulations on optical media production and equipment import and export chased many pirate plants elsewhere, and scores of pirate facilities were taken down." International Intellectual Property Alliance, 1999 Special 301 Recommendations (Online), 15 February 1999.

27 TRIPs Agreement, art. 61.

28 PRC Criminal Law, enacted 1 July 79, amended 1 October 97, 14 March 97, 25 December 99, 31 August 01, 29 December 01, 28 December 02, arts. 213–20. The American Chambers of Commerce in China discuss the deficiencies in the criminal law. American Chambers of Commerce, PRC and Shanghai, 2005 White Paper, September 2005, 48 n.1 ("The most glaring deficiency in the current IPR regime is the one key law not revised when China joined the WTO— its criminal code. This should be revised to provide stronger protection, enhanced penalties and further clarification of standards.").

29 Office of the USTR, Results of Special 301 Out-of-Cycle Review on China, 4. Another aspect of this is evidentiary: in cases where the amount of goods seized does not exceed the threshold measured by the value of the infringing goods, records of additional sales may be used. Unfortunately, these records usually do not exist or are not seized with the infringing materials.

30 At the WTO, China specifically stated that it would share a draft of any measure that would revise or replace the previous SPC interpretation on transfers of IP cases from administrative to criminal enforcement with other WTO members. Minutes of the Meeting of 18 November 2003, WTO TRIPs Council, 4 February 04, para. 30 (the Representative of China stated that "[a]s a major arm in IP enforcement, the judiciary departments in China were also subjected to the principle of transparency, which was evidenced by the public soliciting of comments for judicial interpretations. The Supreme People's Court would further broaden the scope of commenting in the course of interpretation."); Minutes of Meeting of 1–2 December 2004, WTO TRIPs Council, 11 January 05, para. 276 ("Last year at the TRIPS Council, China had pledged to increase transparency by making judicial interpretations on IPR matters available for public comment."). In addition, it would have been helpful to publish a draft because issuing a new interpretation with lowered thresholds was a commitment China made at the 2004 plenary session of the JCCT, "The U.S.-China JCCT: Outcomes," Department of Commerce Office of the China Economic Area (Online), and the reception by U.S. trade officials might have been less negative if they had provided comments on a draft interpretation and had those comments favorably considered. Office of the USTR, Results of Special 301 Out-of-Cycle Review on China, 4.

31 Office of the USTR, Results of Special 301 Out-of-Cycle Review on China, 4.

32 Supreme People's Court and Supreme People's Procuratorate Interpretation Concerning Certain Questions of Using the Criminal Law to Handle Violations of Intellectual Property Rights [Zuigao renmin fayuan, zuigao renmin jianchayuan guanyu banli qinfan zhishichanquan xingshi anjian juti yingyong fal ruogan wentide jieshi], issued 8 December 04. Most enforcement in China occurs within an administrative system operated by the local administrations of industry and commerce. Analysts generally believe that the weak nature of such administrative enforcement has resulted in China's currently high levels of piracy and counterfeiting. The interpretation also broadened the circumstances that precipitate a transfer to criminal enforcement such as mandating criminal liability for accomplices, a situation that did not precipitate a transfer under the previous interpretation. On the negative side, however, the interpretation eliminated automatic transfer to criminal enforcement for repeat offenders and in cases involving well-known trademarks. Office of the USTR, Results of Special 301 Out-of-Cycle Review on China, 4.

33 American Chambers of Commerce, PRC and Shanghai, 2005 White Paper, 46 ("SIPO relied on new guidelines issued after the patent had been granted, and then did not allow the patentee the opportunity to meet the revised data provision standard of those guidelines."); "Viagra Patent Case Opens, Pfizer's Market Domination the Main Issue" [Weige zhuanliquan an kaishen huirui duba shichang dal e]" Xinhua (Online), 31 March 05.

34 "Pfizer Appeals China's Revocation of Viagra Patent," Bloomberg (Online), 28 September 04. China's State Food and Drug Administration also loosened the designation of the pharmaceutical product as a controlled substance, allowing it to be dispensed in pharmacies, following the Board's finding invalidating the patent. This loosening of control benefits the U.S. company as long as the appeal is active but is limited in effect by the rampant piracy in the market. Elaine Kurtenbach, "Pfizer Appeals Chinese Government Decision Against Patent for Viagra, "Associated Press (Online), 28 September 04.

35 "The role of counterfeiting in Yiwu, it is no exaggeration to say, supports the entire local economy and legitimate businesses, such as restaurants, nightclubs, warehouses, transportation companies, and hotels. All of them have grown up and they support the trade in counterfeit goods. If you shut down the trade in counterfeit goods in Yiwu, you will probably shut down the local economy. Because the government has invested in these wholesale markets, they are heavily defended at the local level." Intellectual Property Protection as Economic Policy: Will China Ever Enforce its IP Laws?, Testimony of Daniel C.K. Chow.

36 "Government Enforces Ban on Falun Gong Publications," Xinhua, 23 July 99 (FBIS 23 July 1999).

37 "'Truth' of 'Folk Cult' Falun Gong," Southern Weekend, 13 March 98 (FBIS, 13 March 98).

38 Chinese officials had barred the importation of U.S. poultry products following the discovery of one case of low-pathogenic avian flu in a bird in Delaware in February 2004. U.S. Department of Agriculture Foreign Agricultural Service, China Poultry and Products Semi-Annual 2005 Global Agricultural Information Network Report, 1 February 05, 3.

39 "'Measured Progress' at JCCT Meeting," Washington Trade Daily (Online), 12 July 05 ("The agriculture secretary also announced the approval by China of NK603, a variety of Round Up Ready corn—bringing the total Chinese biotech approvals to eight varieties of corn, two of cotton, seven of canola and one variety of soybeans.").

40 "U.S., China Agree to Food Safety Understanding at JCCT Meetings," Inside U.S.-China Trade (Online), 13 July 05.

41 U.S. Department of Agriculture Economic Research Service, China's Agricultural Imports Boomed During 2003–04, May 05, 2.

42 In late 2004, U.S. and Chinese officials reached an agreement in principle to restart imports of certain low-risk bovine products from the U.S. but these primarily constitute non-edible products that either contain no bovine products (cattle feed), reproductive materials (bull semen and embryos), and bovine products that have no proteins (non-protein beef tallow). "U.S., China Reach Deals to Resume Trade in Beef Products, Feed," Inside U.S.-China Trade (Online), 2 December 04. Importation of some of those products resumed in July 2005. General Administration of Quality Supervision, Inspection, and Quarantine Announcement No. 97 [2005 nian di 97 hao], issued 11 July 05.

43 China banned imports of U.S. beef following the discovery in December 2003 of a single cow in the U.S. herd with Bovine Spongiform Encephalopathy (BSE), commonly known as mad cow. "USDA BSE Update," U.S. Department of Agriculture (Online), 25 December 03. The U.S. Department of Agriculture has implemented a system, in place since June 2004, that has dramatically increased the number of U.S. cows tested for BSE and the current surveillance program complies with international standards maintained by the World Organisation for Animal Health (commonly known as OIE) for certification that beef is safe. "Statement by Agriculture Secretary Mike Johanns Regarding the OIE's Adoption of Changes to the International Animal Health Code Chapter on BSE," U.S. Department of Agriculture (Online), 26 May 05.

44 These two bans ended in late 2004, except for cherries from California. Office of the USTR, 2005 National Trade Estimate Report on Foreign Trade Barriers, 90–1.

45 The maximum residual level has not been enforced yet. Ibid., 91. WTO Members may avoid a claim that their phytosanitary measure lacks a scientific basis if they rely on an international standard. WTO Agreement on the Application of Sanitary and Phytosanitary Measures, arts. 3.1, 3.3.

46 Rebates of VAT paid upon export exist for many products but this year the rebate appears to provide a subtle means to effect a specific transfer payment to corn producers. By calculating the rebate from a fixed base price instead of the contract price for corn, Chinese authorities can raise the rebate in spite of market conditions. For 2005, even though the market price has dropped following a large 2004 harvest, the fixed base price has increased from 860 RMB/ton to 1100 RMB/ton. This artificially raises the value of the VAT export rebate from 112 RMB/ton to 143 RMB/ton, regardless of contract price. U.S. Department of Agriculture Global Agricultural Information Network (GAIN) Report, People's Republic of China Grain and Feed Corn Trade Update 2005, 21 March 05, 3. This is while corn exports from China have been increasing. In early 2005, the U.S. Foreign Agricultural Service raised by one-third its estimate of the value of corn exports from China, all regulated by the Chinese government. In February 2005, the Chinese government issued a 3 million metric ton (mmt) corn export quota, compared to a 1.4 mmt export quota issued for the first half of 2004. China's trade in corn is primarily with countries in the Asia-Pacific region and, except for some small quantities in border areas, is all outbound. These subsidies could affect U.S. corn exports by undercutting the price for corn in existing U.S. overseas markets, but since China's corn exports are still small compared to those of the United States, this effect is probably not occurring yet. China does not import corn from the United States. U.S. Department of Agriculture Global Agricultural Information Network (GAIN) Report, People's Republic of China Grain and Feed Corn Trade Update 2005, 21 March 05, 2–3.

47 Office of the USTR, 2005 National Trade Estimate of Foreign Trade Barriers, 94; Working Party Report on the Accession on the People's Republic of China to the WTO, 10 November 01, para. 234. The WTO Agreement on Agriculture allowed its original exporting members to eliminate impermissible export subsidies over a period of years. "Agriculture: Fairer Markets for Farmers," World Trade Organization (Online). Because finding a subsidy requires an investigation and interpretation of the relevant rules, discussions on these issues are always ongoing, often with no resolution for years. Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 58.

48 Working Party Report on the Accession of the People's Republic of China to the WTO, 10 November 01, para. 234. Once eliminated, China may not introduce any new export subsidies. WTO Agreement on Agriculture, art. 9.

49 Notification of the People's Republic of China, WTO Committee on Agriculture, 7 September04; and Notification of the People's Republic of China, WTO Committee on Agriculture, 5 April 05.

50 The U.S. government has reported on the Chinese government's changing approach to the agricultural sector, from a source of tax revenue in both food and cash terms to an eventual participant in export-led growth. Recent changes have seen ineffective attempts to provide structural support. In 2004, the Chinese government began to attempt to make transfers that would directly benefit farmers. United States Department of Agriculture Economic Research Service Electronic Outlook Report, China's New Farm Subsidies, 28 February 05, 2.

51 The Ministry of Commerce announced the creation of a mechanism to address inconsistent application of law in 2002 but it is not clear whether agricultural agencies have instituted similar mechanisms nor the current status of the MOFCOM office. Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 83.

52 China and the WTO: Assessing and Enforcing Compliance, Hearing of the U.S.-China Economic and Security Review Commission, Statement submitted by Gary C. Martin, President and Chief Executive Officer, North American Export Grain Association, 3–4 February 05, 353 (asserting that the requirements of AQSIQ's document No. 73 have given inspection and quarantine officials the ability to cause these problems for U.S. grain shipments).

53 Ibid., 358.

54 Protocol of Accession of the People's Republic of China to the WTO, Part I.2(C)2.

55 U.S. Chamber of Commerce, China's WTO Implementation: A Three-Year Assessment, September 04, 10; Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 82; American Chambers of Commerce, PRC and Shanghai, 2004 White Paper, 28.

56 For example, drafts of the Anti-Monopoly Law, under consideration for almost a decade, have been widely circulated among foreign and domestic experts.

57 Protocol on the Accession of the People's Republic of China to the WTO, I.2(C)2.

58 The Law has been through over twenty drafts. The drafting group, which was at the State Economic and Trade Commission (SETC) and moved to the Ministry of Commerce in 2003 when some of SETC's functions were absorbed by the Ministry of Commerce, submitted a final draft to the State Council's Legal Affairs Office for consideration. Two sections of the American Bar Association provided comments to the drafting group in 2003 while the draft was still at the Ministry of Commerce. American Bar Association (Online), Joint Submission of the American Bar Association's Sections of Antitrust Law and International Law and Practice on the Proposed Anti-Monopoly Law of the People's Republic of China, 15 July 03. Three Sections of the ABA provided additional comments to a subsequent draft this year after the State Council returned the draft to MOFCOM for further redrafting. American Bar Association (Online), Joint Submission of the American Bar Association's Sections of Antitrust Law, Intellectual Property Law and International Law on the Proposed Anti-Monopoly Law of the People's Republic of China, 19 May 05. While the comments are publicly available, as indicated in these citations, the State Council provides the drafts themselves on the condition that they not be shared outside the group responsible for drafting the comments.

59 Office of the USTR, Results of Special 301 Out-of-Cycle Review on China, 4.

60 The first publication of the Interpretation was on December 22, 2004, the day it became effective, even though the document itself is dated December 8, 2004. If the Chinese authorities had sought comments on the draft before promulgating the final Interpretation, they could have answered certain complaints about the infringement valuation methodology and the high threshold of infringement required to transfer cases from administrative to criminal enforcement.

61 Office of the USTR, 2004 Report to Congress on China's WTO Compliance, 81.

62 Ibid., 82.

63 State Council, CPC Central Committee Opinion on Advancing the Improvement of Government Openness [Guanyu jinyibu tuixing zhengwu gongkai de yijian], issued 24 March 05.

64 Ibid. sect. 2 ("It is required that all individual items regarding administrative management and public service should be accurately published, except for those related to state secrets and commercial secrets or personally identifiable information received lawfully, strictly in accordance with laws, regulations, and related policy rules.").

65 Protocol of Accession of the People's Republic of China to the WTO, Part I.2(D) ("Such tribunals shall be impartial and independent of the agency entrusted with administrative enforcement and shall not have any substantial interest in the outcome of the matter.").

66 Veron, Mei-Ying Hung, "China's WTO Commitment on Independent Judicial Review: Impact on Legal and Political Reform," 52 Am. J. Comp. L. 77, 79–80.

67 Ibid., 81–2.

68 Ministry of Commerce Measures for the Administration of Foreign Investment in the Commercial Sector [Waishang touzi shangye qiye guanli banfa], issued 16 April 04.

69 American Chambers of Commerce, PRC and Shanghai, 2004 White Paper, 164.

70 Ibid., 162.

71 Ibid., 166 (noting that trade and distribution rights face many barriers protecting local and regional markets); World Bank, China and the WTO: Accession, Policy Reform, and Poverty Reduction Strategies, 7 September 04, 147–8 (This local protectionism is "evident at the departmental and district levels . . ." through ". . . policies and regulations [that] are often designed according to the self-interest of the department or district involved. . . . Local governments do not have identical rules and regulations, and they always want to protect their local companies.").

72 "The U.S.-China Joint Commission on Commerce and Trade (JCCT) Outcomes on Major U.S. Trade Concerns," U.S. Department of Commerce and Office of the USTR.

73 Ibid.

74 Regulations on the Administration of Direct Selling [Zhixiao guanli tiaoli], issued 23 August 05; Regulations Prohibiting Pyramid Selling [Jinzhi chuanxiao tiaoli], issued 23 August 05. Neither of these measures were published until September 3, 2005.

75 PRC Government Procurement Law, enacted 29 June 02, art. 10.

76 "The U.S.-China Joint Commission on Commerce and Trade (JCCT) Outcomes on Major U.S. Trade Concerns," U.S. Department of Commerce and Office of the USTR.

77 Ibid.

78 Those measures define domestic software and then require government agencies to purchase domestic software and software-related services. Measures for the Implementation of Software Government Procurement (Version Seeking Comments) [Ruanjian zhengfu caigou shishi banfa(zhengqiu yijiangao)], issued 18 April 05, art. 2 ("These measures refer to domestic software including domestic software products and domestic software services. Domestic software products take final form in the PRC, their copyright belongs to a PRC natural or legal person or other organization, and domestic development cost are not less than 50 percent of the total development cost of the software product. Domestic software services are computer information systems integration, information systems engineering inspection as well as other related specialized technology services furnished by a PRC natural or legal person or other organization, and of which the part of the software services that are foreign-supplied services do not exceed 30 percent of the service program's cost.").

79 "Industry Says China Software Rule Threatens $100 Million in Exports," Inside U.S.-China Trade (Online), 20 January 05; U.S.-China Economic Relations, Hearing of the Committee on Finance, United States Senate, 23 June 05, Opening Statement of Chairman Grassley, 2. Chinese press reports on software procurement stress the importance of using such rules to take markets away from foreign suppliers. "Chinese Domestic Software Breaks Microsoft Monopoly, Gets the Upper Hand in Government Procurement" [Guochan ruanjian dapo weiruan longduan, zhengfu caigou shuliang zhan youshe], Xinhua (Online), 28 March 05.

80 PRC Auto Industry Development Policy [Qiche chanye fazhan zhengce], issued 21 May 04.

81 Ibid., art. 13.

82 Ibid., art. 4.

83 Management Measures for Imports of Auto Parts Having the Characteristics of a Complete Automobile [Guocheng zhengche tezhengde qiche lingbujian jinkou guanli banfa], issued 28 February 05, art. 21.

84 The Auto Industry Development Policy seeks the development of a strong export industry but also specifically proscribes misuse of foreign intellectual property. PRC Auto Industry Development Policy, arts. 4 and 20.

85 "GM Charges Chery for Alleged Mini Car Piracy," China Daily (Online), 18 December 04. The SPC transferred the case to the Beijing No. 1 People's Court in 2005. "GM Daewoo Files Suit Against Chery," China Daily (Online), 9 May 05.

86 Although Chery was converted into a privately-owned enterprise after it ended its affiliation with the Shanghai Automotive Industry Corporation Group in 2003, it nevertheless received tens of millions of dollars for research and development from Ministry of Science and Technology in 2004. Su Yang, "'Give Advice' to Chery" ["Zhizhao" Qirui], Business Financial Global (Online), 1 May 05.

87 "GM Daewoo Files Suit Against Chery," China Daily (Online), 9 May 05.

88 "GM Sues Chery's QQ for Unfair Competition: Plagiarizing the Spark" [Tongyong dayu qisu qirui QQ buzheng jingzheng: chaoxi xuefolan], China Youth Daily (Online), 17 December 04.

89 Jim Mateja, "Why is GM Chery-picking a fight with Bricklin?," Chicago Tribune (Online), 18 May 05; "PRC Car Maker Vows To Go Ahead With Overseas Expansion Despite Piracy Allegations," China Daily, 23 May 05 (FBIS 23 May 05) (noting that GM has not confirmed that it will take this action).

90 Ministry of Commerce Auto Trade Policy [Shangwubu qiche maoyi zhengce], issued 10 August 05.

91 Ibid., art. 45.

92 Ibid., art. 37.

93 "MOFCOM Market Development Department Officials Decipher the 'Auto Trade Policy"' [Shangwubu shichang jianshesi fuzeren jiedu "qiche maoyi zhengce"], Xinhua (Online), 23 August 05.