US-China Security Commission – Readout of Hearing on June 8, 2018

On June 8, 2018, I testified before the US-China Economic and Security Review Commission on “U.S. Tools to Address Chinese Market Distortions.” This was my second time testifying in the past three years.  My written submission is available here.  The written submissions of other speakers, including a video of the proceedings is available through this link.  The presentations of my colleagues were all excellent.

I suggested several non-tariff alternatives for dealing with IP-related concerns with China, and underscored the necessity of developing appropriate domestic government structures to engage China on technology and innovation issues.  For example, the Commission seemed generally supportive of raising the diplomatic rank of USPTO attaches overseas.   I also discussed the importance of data-driven analysis, including use of the case database to look at how foreigners actually fare in the courts.  The Commission seemed skeptical that the data captured some of the more egregious judicial cases of foreign mistreatment, which they viewed as undercutting the credibility of the data that is being generated.  In my written submission, I encouraged the Commission to consider a hearing devoted solely to transparency in the courts.

The President’s recent decision to impose tariffs on Chinese imports in response to Chinese IP practices may render many of suggestions superfluous for now.  Nonetheless, I believe the increasing complexity of China’s IP and innovation environment are issues that cannot be ignored.  As I noted in my written testimony:

“The US experience suggests that innovation flourishes in open ecosystems where there is a free flow of capital, talent and technology. At the same time, the US needs to address mercantilistic practices which not only pose competitive threats to the United States but can also undermine the innovative ecosystems that have driven growth in the US economy, such as exist in Silicon Valley. Any steps taken to reduce collaboration with China or any other country needs to be carefully evaluated about its potential impact on our own technological competitiveness.”

In a separate, but nonetheless related matter, I spoke at the IPBC Global 2018 Conference in San Francisco on June 12 regarding developments in IP monetization in China.  Here’s a good summary of my presentation.  I thought one of the more telling moments in the panel I participated in involved China’s Technology Import/Export Regulations.   One lawyer acknowledged that “the regulations are stupid” and that “what we try to do is have parties to a technology transaction acknowledge that the regulations exist and agree not to enforce them.”  I discussed the regulations as potential “landmines” which could be invoked at a later time by a licensee.  Many licensors appeared to be unaware of these regulations.

The TPP’s IP Challenge for China

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The release of the TPP text on November 5, 2015 has caused many friends in Chinese IP colleagues to wonder what implications, if any, there are for China’s development of its IP system.

China’s recent experience of bilateral investment or free trade agreements has not prepared it for a major regional  IP-related agreement such as the TPP.  China’s  FTA  experience has thus far focused on a limited range of issues, most of which are not “core” IP.   As one academic researcher noted “the majority of China’s RTAs [Regional Trade Agreements] focus… on specific categories of IPRs, namely GIs and genetic resources and traditional knowledge or border measures, often omitting any reference to other categories, i.e. copyright, patents, trademarks or IPRs enforcement.”    The last comprehensive IP agreement that China entered into was its accession to the WTO  with  adherence to the TRIPS Agreement (2001).  The TPP is however more comprehensive and forward looking than TRIPS.

The China-Swiss FTA (2013) calls for some important, but limited improvements in China’s IP regime, particularly in areas involving designs, customs protection and plant variety protection.  To take plant varieties as one limited example, the TPP requires all member countries to sign on to UPOV ’91.  This was a step that Switzerland, a member of UPOV ’91 since 2008, did not secure in its bilateral FTA with China despite Switzerland’s having a flourishing agroscience sector.   By any measure the demands that would be placed on China by acceding to the TPP would be greater than most of the developed world, particularly for countries like Singapore, Chile, and Australia that have concluded free trade agreements with significant IP chapters with the United States in the past several years.

Despite these challenges, it would be difficult for China to stay outside of a regional trade agreement that includes such important regional trade partners.  Leaving China outside of the TPP may also not be the most desirable IP strategy.  China is the second largest global economy with the largest IP system in the world, and with rapidly growing innovative sectors and global business models (including in e-commerce).   The TPP and the global trading system could also be greatly strengthened if China were to play a constructive role, conform to and join TPP, and if reformers in China were empowered to bring China in adherence to TPP to spur another effort at market-reform.   As Amb. Holleyman recently noted in discussing the TPP: “the rules that China adopts to promote IPR protection directly impact our economy.  If IPR protection in China were improved to a level comparable to the United States, U.S. net employment might increase by 2.1 million jobs and American companies would benefit from an estimated $107 billion in additional annual sales, according to U.S. International Trade Commission estimates.”

A further systemic challenge is that the TPP appears to be based in part on its members experience on the difficulties in engaging China on IP.  As one former senior diplomat recently noted before a Japanese audience:

Rampant violations of intellectual property continue, state-owned enterprises are advantages over private competitors, and U.S. companies invested in China have become increasingly disillusioned by China’s unique standards and preference for “indigenous innovation”—not to mention evidence of large-scale cybersecurity violations…

TPP allows the U.S., Japan and our partners, to offer a high-standard, rules-based alternative to China’s state capitalism.

China has already acceded to all the major treaties enumerated as required for TPP accession with the exception of UPOV ’91 — namely the Madrid Protocol, Budapest Treaty,  Singapore Treaty, WCT. WPPT, as well as the Patent Cooperation Treaty, Paris and Berne Conventions, and of course the TRIPS Agreement.    I believe that most of the challenges to China are likely not in the form of adherence to required treaties, but in the more granular implementation of those treaties and in commitments that are not found in any current treaty that China is a part.  For example, in the pharma sector, the TPP contains extensive provisions on patent linkage, patent term restoration, and data exclusivity which go beyond the TRIPS Agreement.  In addition to these substantive IP issues, there are significant challenges in non-IP area chapters that affect commercialization and utilization of IP, such as in market access for lawyers, restrictions on state owned enterprises, e-commerce, and investor-state dispute resolution.

The focus in the TPP on treaties that support greater IP office to IP office cooperation in the TPP (e.g, PCT, Madrid), also underscores that this is a treaty that not only aims to raise substantive norms, but also aims to facilitate greater utilization of IP in the TPP region among its members to facilitate economic integration.   It would be wrong of critics to characterize this agreement as solely a North-driven effort to impose its IP norms on the South.  In addition to cooperative commitments, there are also provisions on genetic resources, access to medicines (aligning with the Doha Declaration), traditional knowledge and capacity building that reflect the interests of developing countries.

China’s recent past has shown that China can enter into WTO plus commitments on IP.  The most notable are China’s  joining the WIPO Internet Treaties, and thereafter hosting and ratifying the Beijing Treaty on Audiovisual Performances.  However, there are also important areas that have not been specifically addressed in recent trade-related agreements, such as trade secrets, have generally shown little norm setting progress since China first enacted its trade secret law in 1993, which had arguably been undertaken in response to US pressure in 1992.

The history of the past several decades of foreign engagement with China has, however, generally shown that linkage-based diplomacy, where trade concessions may be extended or removed in exchange for / or due to violations of IP-related commitments, has likely been the most effective single factor in driving IP-related changes in China.   Many of the key IP-related commitments  evolved in response to normalization of US-China trade relations, as well as WTO accession.

With modern China’s professed interests in becoming an innovative economy, will the TPP spur additional changes that are in China’s long term interests?  What kind of challenge does the TPP set for China’s own economic plans, including the revisions to the current five year plan, the National IP Strategy and China’s efforts to become a strong IP country?

While TPP members were negotiating the final text of their agreement, China’s state planners were drafting a new five year plan, which will further underscore China’s commitment to developing an innovation-oriented economy (see chart below, prepared by Barclays on frequency of ‘innovation’ in the current five year plan).  China will need to look at what it gains in TPP accession in exchange for IP commitments which China may believe it is not yet prepared for, but that in the long run will clearly benefit in the Chinese economy and enable it to become more innovative.  Hopefully, Chinese reformers will seize on the TPP as a way to drive a new era of economic reform, prosperity and IP harmony.

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Top picture: Amb. Robert Holleyman noted at a November 8, 2015 US Chamber event discussing TPP.

Pop Quiz on Chinese IP

Winter semester is back in session.  How would you fare on this pop quiz on Chinese IP?

True or false:

1.  The first patent filed in the United States by someone from China was by a “subject of the Emperor China,” prior to 1911. (Hint: the answer can be found on this blog)

2. The first bilateral agreement between the United States and China on IP matters was the Treaty of Friendship Commerce and Navigation in 1979.

3.  One of the principal exports of the United States to China was a traditional Chinese medicinal product, and was the subject of an early trade war.

4.  The first case involving imports of infringing copyrighted works into the United States from China occurred in the early 1800’s. (Hint: the answer can be found on this blog)

5.  The Chinese trademark office has been the largest office in the world for over 10 years (in terms of applications).

6.  China has more per capita civil copyright litigation than the United States, and more patents and TM litigation than the US too.

7.  A large share of the IP litigation in China is filed by foreigners. (Hint: the answer can be found on this blog)

8.  China’s property law was enacted years before its intellectual property laws, helping to pave the way for market reform.

9.  China’s State Intellectual Property Office is like the USPTO and grants trademarks too.

10.  China does not have any legal provisions on exports of counterfeit goods that are beyond the bare minima required by the WTO.

Click through for the answers!

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