The United States Trade Representative's (USTR) recent commencement of two WTO cases against China for alleged intellectual property rights (IPR) violations represents a change from the previous Bush administration policy of resolving IPR disputes through mutual dialogue and cooperation. It is widely believed that political pressure from the new Democratic majority in Congress provided the impetus for the U.S. government's new dual track approach for dealing with US-China IPR disputes, cooperation when possible, and confrontation when necessary.  Regardless of the reasons for the change, the impact of the U.S. WTO actions are likely to be far reaching with implications for the U.S.-China commercial and trade relationship.

Dual Track Approach: Confrontation and Cooperation

Following the end of China's 5-year transition period as a new WTO member, the US government stated that they would begin to pursue a dual track approach to resolving US WTO concerns. The official US policy is one of continued cooperation with China to seek mutually satisfactory resolutions through regular and ad hoc bilateral meetings.

However, when bilateral discussions fail to yield satisfactory results according to the American perspective, the U.S. will proactively exercise its WTO rights through the initiation of dispute settlement against China.

Mark Cohen, of the U.S. Patent and Trademark Office and Intellectual Property Attaché for the U.S. Embassy in Beijing, said that the U.S. does not plan to use the WTO as a first option to resolve IPR disputes with China.

"In general, I can say that the U.S. government has no great desire to file requests for WTO consultation. We prefer to settle matters bilaterally by negotiation.  However, the WTO mechanism exists to resolve issues that are difficult to resolve bilaterally and can shed a new light on old issues."

Understandably American companies and the American business community in China have been reticent to comment about the U.S. government's decision to go to the WTO for fear of alienating or upsetting the Chinese government. James Zimmerman, Chairman of the American Chamber of Commerce in China (AmCham), advised us that AmCham has no official position on the new WTO cases.

Clearly, the American business community favors cooperation over confrontation.  Mr. Zimmerman in his statement at the China High-Level Forum on Intellectual Property Rights Protection 2007, cited as an example of cooperation, the signing by Amcham of a Memorandum of Understanding with the Chaoyang District Government in Beijing on October 10, 2006 to create a Copyright Infringement-Free Zone. 

While Mr. Zimmerman acknowledged that the availability of pirated DVDs is still a concern, he stressed that, "the MOU is a document that focuses on raising public awareness of IP rights and enforcement. Since the MOU is a document that focuses on raising public awareness, we believe that it has been effective in that regard. The MOU is not an enforcement tool per se. AmCham members are engaged in carrying out the terms of the MOU, which the Chaoyang District Government has fulfilled. Its an ongoing project."

It is virtually undisputed that that China has made great progress in developing an IPR system, with even the USTR acknowledging China's progress with respect to the IPR problem in its press release.  Similarly, Mr. Cohen also noted China's commitment of resources to IPR while questioning their allocation.  "China has devoted considerable resources to protection and enforcement of IPR; however, some serious consideration might be given to reallocating those resources in light of China's current development. China's National Copyright Administration needs vastly more enforcement officials. China's Trademark Office needs to dramatically increase staff to reduce pendency while improving quality".

While progress has made and the Chinese government has allocated resources for IPR protection and enforcement, the widespread proliferation of infringing Chinese goods remains a problem, which the U.S. government refuses to ignore.

Mr. Cohen said, "Infringing Chinese goods are found throughout the world. Certain highly competitive U.S. industries, such as our music, motion picture and publishing sectors, find that their products are widely available with limited deterrence particularly on a retail level."

WTO Process: Consultation Meeting Between the U.S. and China in Geneva June 6-8

WTO procedures provide for a 60-day consultation period in which the parties to a given dispute are to meet to resolve their differences. As such, the U.S. and Chinese governments met in Geneva from June 6-8th to see if they could resolve the disputes contained in the complaints themselves before a panel is established by the Dispute Settlement Body of the WTO.

China's official Xinhua News Agency reported that during the two-day meeting China defended itself against charges of piracy, and said that China has always attached great importance to the protection of intellectual property rights.

China asserted that Article 1.1 of the Agreement on Trade Related Aspects of intellectual Property Rights (TRIPS) provides that WTO members ‘shall be free to determine the appropriate method of implementing the provisions of the TRIPS Agreement within their own legal system and practice'.  With respect to the four main issues that the US raised in its complaint, China said that ‘it firmly believes such measures are fully consistent with the TRIPS Agreement and should bear no blame'.

The Chinese mission to the WTO argued that the U.S. had failed to correctly understand China's legal system and basics concepts concerning IPR protection. They complained that the U.S. prepared a long list of questions, but afforded China only one week to respond and said China's efforts at IPR protection were designed not only to help its own economy grow, but was also part of global efforts by the international community to enhance global IPR protection.

Impact of the WTO Actions on Future US China Cooperation in IPR

The strategy of the U.S. government to pursue a more confrontational approach towards China with respect to IPR disputes is clearly controversial. In fact, it can be argued that the U.S. governments WTO actions may be counterproductive, and will only lead to a curtailment of cooperation between the respective governments on IPR matters.

Mark Cohen strongly disagrees that America's resorting to the WTO process to resolve its IPR claims is counterproductive and sees potential benefits for the US- China relationship

"There is nothing counterproductive about asking a country to demonstrate compliance with its WTO commitments and resolving a long-standing issue.  Indeed, initiation of a WTO case suggests that there is a greater, not lesser need for mutual understanding and real exchange. We cannot ask ourselves to do anything less than we would expect of rights holders-to reasonably respect and enforce their rights in accordance with the law."

However, Mr. Cohen does consider that the WTO cases may hurt cooperation in some respects.

"Of course, certain regions and ministries in China may choose to curtail cooperation. This would be regrettable, and it could lead to increased misunderstandings, which is in neither country's best interests."

Conclusion

The U.S. government's dual track approach to IPR disputes and its decision to bring WTO cases against China represents a watershed in the U.S.-China economic and trade relationship. No longer will bilateral cooperation be the sole basis for resolving IPR disputes with China.

Clearly the U.S. government has calculated that resorting to the WTO dispute resolution process will increase the U.S. government's leverage in pressuring China to crackdown on piracy and counterfeiting.  The manner in which the U.S. government's decision will impact future U.S.-China cooperation concerning IPR matters is less evident. In fact, at the recent Strategic Economic Dialogue held in May, progress was reportedly made between the governments over customs cooperation issues. This demonstrates that it is unlikely that cooperative efforts on IPR issues between the two governments will cease; however, there likely will be an increase in tensions, especially in the short term.

As long as piracy and counterfeiting continue to be a problem, the U.S. government will continue its dual track approach. Consequently, the recent U.S. WTO claims against China for IPR violations will undoubtedly not be the last time the U.S., or China for that matter, resorts to the WTO dispute resolution process with respect to IPR issues.