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WILL CHINA PROTECT INTELLECTUAL PROPERTY? 

NEW DEVELOPMENTS IN COUNTERFEITING, PIRACY, 

AND FORCED TECHNOLOGY TRANSFER 

HEARING 

BEFORE THE

CONGRESSIONAL-EXECUTIVE 

COMMISSION ON CHINA 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 22, 2010 

Printed for the use of the Congressional-Executive Commission on China 

( 

Available via the World Wide Web: http://www.cecc.gov 

CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA 

LEGISLATIVE BRANCH COMMISSIONERS 

Senate House 

BYRON DORGAN, North Dakota, Chairman 

MAX BAUCUS, Montana 

CARL LEVIN, Michigan 

DIANNE FEINSTEIN, California 

SHERROD BROWN, Ohio 

SAM BROWNBACK, Kansas 

BOB CORKER, Tennessee 

JOHN BARRASSO, Wyoming 

GEORGE LeMIEUX, Florida 

SANDER LEVIN, Michigan, Cochairman 

MARCY KAPTUR, Ohio 

MICHAEL M. HONDA, California 

TIMOTHY J. WALZ, Minnesota 

DAVID WU, Oregon 

CHRISTOPHER H. SMITH, New Jersey 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

JOSEPH R. PITTS, Pennsylvania 

EXECUTIVE BRANCH COMMISSIONERS 

Department of State, To Be Appointed 

Department of Labor, To Be Appointed 

Department of Commerce, To Be Appointed 

At-Large, To Be Appointed 

At-Large, To Be Appointed 

CHARLOTTE OLDHAM-MOORE, Staff Director 

DOUGLAS GROB, Cochairman’s Senior Staff Member 

(II) 

(III) 

C O N T E N T S 

Page 

Opening statement of Hon. Byron L. Dorgan, a U.S. Senator from North 

Dakota, Chairman, Congressional-Executive Commission on China .............. 1 

Levin, Hon. Sander, a U.S. Representative from Michigan; Cochairman, Congressional-Executive Commission on China ...................................................... 4 

Feinstein, Hon. Dianne, a U.S. Senator from California; Member, Congressional-Executive Commission on China ............................................................. 5 

Murck, Christian, President, American Chamber of Commerce in the People’s 

Republic of China ................................................................................................. 7 

Lee, Thea Mei, Deputy Chief of Staff, AFL–CIO .................................................. 9 

Frazier, Greg, Executive Vice President for Worldwide Government Policy, 

Motion Picture Association of America .............................................................. 11 

Suttmeier, Richard P., Professor of Political Science, Emeritus, University 

of Oregon ............................................................................................................... 14 

APPENDIX

PREPARED STATEMENTS

Murck, Christian ..................................................................................................... 30 

Lee, Thea Mei .......................................................................................................... 34 

Frazier, Greg ............................................................................................................ 36 

Suttmeier, Richard P. .............................................................................................. 39 

Levin, Hon. Sander .................................................................................................. 42 

Smith, Hon. Christopher H., a U.S. Representative from New Jersey; Ranking 

Member, Congressional-Executive Commission on China ................................ 43 

Levin, Hon. Carl, a U.S. Senator from Michigan; Member, CongressionalExecutive Commission on China ........................................................................ 44 

SUBMISSIONS FOR THE RECORD

Prepared Statement of Robert W. Holleyman, II, President and CEO, Business Software Alliance ......................................................................................... 46 

‘‘Piracy is a Danger to Entertainment Professionals,’’ submitted by the Department of Professional Employees, AFL–CIO (DPE) for the Arts, Entertainment and Media Industries Unions Affiliated with DPE, AFL–CIO Executive Council Statement, Orlando, Florida, March 2, 2010 .......................... 50 

(1) 

WILL CHINA PROTECT INTELLECTUAL PROPERTY? NEW DEVELOPMENTS IN COUNTERFEITING, PIRACY, AND FORCED TECHNOLOGY TRANSFER 

WEDNESDAY, SEPTEMBER 22, 2010 

CONGRESSIONAL-EXECUTIVE

COMMISSION ON CHINA, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 2:18 p.m., in 

room 628, Dirksen Senate Office Building, Senator Byron Dorgan, 

Chairman, presiding. 

Also present: Representative Sander Levin, Cochairman; and 

Senator Dianne Feinstein. 

OPENING STATEMENT OF HON. BYRON DORGAN, A U.S. SENATOR FROM NORTH DAKOTA, CHAIRMAN, CONGRESSIONALEXECUTIVE COMMISSION ON CHINA 

Chairman DORGAN. I’m going to call the hearing to order. 

This is a hearing of the Congressional-Executive Commission on 

China. I’m Senator Byron Dorgan, Chairman of the Commission. 

We will be joined momentarily by other members of the Commission. 

The hearing today is on the subject of: ‘‘Will China Protect Intellectual Property? New Developments in Counterfeiting, Piracy, and 

Forced Technology Transfer.’’ 

This country has a relationship with China that is very important, and will become even more important going forward. That relationship, however, has a number of very vexing, difficult issues 

attached to it, one of which is the issue of international trade. We 

run a very large trade deficit with the country of China. It is a deficit that is the highest trade deficit in the world with the United 

States. 

We also are very concerned, and have long been concerned, with 

China with respect to the safeguarding of intellectual property, and 

have been concerned about piracy and counterfeiting on intellectual 

property and other goods coming from the United States. 

I noticed in last week’s Wall Street Journal a story that in many 

ways summarizes much of what concerns us, and one of the reasons that we have called this hearing. This hearing occurs a long 

while after the Congress passed PNTR [Permanent Normal Trade 

Relations] with China, and many of us had high hopes that there 

would be very dramatic changes as China joined the World Trade 

Organization [WTO] and China would take steps as a full partner 

2 

in the international community of trade to protect intellectual property and to shut down piracy and counterfeiting. 

But China, in many ways, while making some progress and some 

success in other areas, in many ways China, I believe, has turned 

a blind eye to the issue of piracy and counterfeiting and has engaged in managed trade with the sole purpose of running a very 

large trade surplus with our country, or we a deficit with them, in 

a way that I think has been fundamentally unfair. 

But the Wall Street Journal story of September 16 says the following: 

China’s government is considering plans that would force foreign automakers to hand over cutting-edge electric vehicle technology to Chinese 

companies in exchange for access to the nation’s huge market, international 

auto executives say. 

China’s Ministry of Industry and Information Technology is preparing a 

10-year plan aimed at turning China into a world’s leader in developing 

and producing battery-powered cars and hybrids, according to executives at 

four car companies who are familiar with the proposal. 

The draft suggests that the government could compel foreign automakers 

that want to produce electric vehicles in China to share critical technologies 

by requiring the companies to enter into joint ventures in which they are 

limited to a minority stake, executives say. 

Then, finally, the plan is ‘‘tantamount to China strong-arming 

foreign automakers to give up battery, electric motor, and control 

technology in exchange for market access in China.’’ This is just 

last week, but it goes on. 

It is interesting to me, in our trade relationship with China, we 

have this very large trade deficit, somewhere in the neighborhood 

of $250 billion a year. When we have trade negotiations and opportunities to work with the Chinese on trade—which should always 

be mutually beneficial if two partners negotiate trade issues, you 

ought to end up with something that is considered to be mutually 

beneficial—somehow we end up not quite in that area. 

Intellectual property—for example, movies—after negotiations, 

we’re able to see 20 foreign movies into the Chinese marketplace. 

Twenty. Is it a wonder, then, that there is massive copying, illegal 

copying, of that intellectual property and then distributed and sold 

on the streets of China? Not to me, it’s not. If our market is open 

to Chinese goods, why should the Chinese market not be wide open 

to our goods? 

It is not that the Chinese are not able to control counterfeiting 

and piracy. We had an interesting lesson with respect to the Olympics. The Olympic logo belonged to the Chinese Government. It was 

their property. When people on the streets of China began to take 

that logo and put it on pencils, and pennants, and so on and use 

it for their own purposes, the Chinese Government very effectively 

shut it down because that belonged to them. Demonstrating that 

they can shut this down ought to suggest to us that if they see this 

happening to American intellectual property, they could shut it 

down as well, but they choose not to. 

China, I think, has failed to comply with its commitments to protect intellectual property rights. It made that promise when it 

joined the WTO. I think that failure has a direct impact here in 

this country. The impact: Americans out of work, American jobs 

shift to China, misery from American manufacturing workers who 

used to have good jobs that paid well, with good benefits, that are 

3 

now this morning putting on their clothes and going out and looking for a job. That’s the impact of all of this. 

It has a profound impact on our country when you run a trade 

deficit of this size that represents a trade deficit intended by the 

Chinese Government, because of the managed trade system they 

wage, and also a trade deficit based on the kind of difficulty that 

we have making sure that our intellectual property is not hijacked 

in a foreign country, as has been the case in China too often. 

There have been some things that represent good news in China. 

The government has reformed some of its legal infrastructure. It’s 

amended its copyright, patent, and trademark laws in order to be 

compliant with WTO rules. But the question is not too much that. 

The question is, how are these things enforced? Is there really an 

intent to enforce these areas as a part of the international community and international trade? 

Since China joined the WTO in 2001, we’ve seen about 2.5 million jobs lost in the United States due to the U.S.-China trade deficit, that is, our deficit with China. Some of the great American 

brand names no longer are American; they have long since moved 

to China in search of cheap labor and so on. That’s an issue that’s 

related, but somewhat different than copyright and intellectual 

property infringement and counterfeiting. 

But the Chinese Government has really systematically refused to 

effectively police the black markets that exist for counterfeit and 

pirated goods. We had a USTR, U.S. Trade Representative’s, 2010 

Special 301 Report and it says, ‘‘Widespread IPR infringement continues to affect products, brands, and technologies from a wide 

range of industries.’’ 

China accounts for 79 percent of IPR-infringing goods smuggled 

into the United States. When you walk down the street of a major 

city—you walk down the street and see all kinds of people selling 

wristwatches, and purses, and scarves, and so on, most of it counterfeit. Our USTR says 79 percent of the intellectual property-infringing goods smuggled into the United States comes from China. 

That’s $7.6 billion in 2009, a $900 million increase over 2008. 

I won’t talk about the market barriers and other related issues. 

I would just say that the healthy relationship that we hoped for 

and expect in the future with China is a relationship that does not 

now exist in international trade, and that relationship, in my judgment, must change. 

We must expect China, which has now joined the WTO, to abide 

by the rules, to aggressively enforce intellectual property rights, to 

shut down the issues dealing with counterfeiting and piracy, and 

to take effective action to demonstrate to us they are ready to become full partners in international trade in the way that we understand international trade should be conducted. 

It is also the case—and I have written a book about this subject 

of international trade—that it is unsustainable for us to have a 

$200–250 billion-a-year trade deficit with a single country. That’s 

not sustainable and is going to have to change as well. 

But with all of that, let me just say that this Commission has 

been active in pursuing a wide range of subjects. I have, and so has 

my colleague, Representative Levin, who chaired this Commission 

previously, indicated where appropriate that certain progress has 

4 

been made in some areas of China, but there are many other areas 

that have not yet begun to see the kind of changes that are necessary. 

Much of what we have done with this Commission has focused 

on those who have been sent to the darkest prisons of the rural 

areas of China for basic acts of free speech, and the violation of 

their human rights concerns us, and will always concern us. We, 

at this point, maintain the largest repository of information on 

prisoners in Chinese jails who are human rights prisoners, and 

we’re going to continue to work on that. Today we’re talking about 

a different subject: ‘‘Will China Protect Intellectual Property? New 

Developments in Counterfeiting, Piracy, and Forced Technology 

Transfer.’’ 

I am joined by my colleagues, Representative Levin and Senator 

Feinstein. Representative Levin, would you wish to make an opening comment? 

STATEMENT OF HON. SANDER LEVIN, A U.S. REPRESENTATIVE 

FROM THE STATE OF MICHIGAN, COCHAIRMAN, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA 

Representative LEVIN. Thank you. It’s my privilege to join you, 

Mr. Chairman and Senator Feinstein, during this uniquely busy 

time here in the Congress. You have covered the subject so well, 

so let me just add a few thoughts. 

Senator Dorgan, I think you were so right to point out the work 

of this Commission. It has done invaluable work in terms of human 

rights, including labor rights. Its charge from the very beginning 

also related to the rule of law, and that’s the basic subject here 

today. It’s really, this hearing, of utmost importance to our businesses and our workers, in part because they lose billions of dollars 

every year through the infringement of intellectual property rights 

in China. 

The Chinese Government has failed to comply with its commitments to protect intellectual property rights that it made in joining 

the WTO, and unfortunately it continues to undermine protections 

for intellectual property contained in its own laws, and so by shining a spotlight on this, the Commission has an important role to 

play. You mentioned, Senator Dorgan, the Wall Street Journal article. I think as we read it, we said to ourselves, something has to 

give. 

Indeed, China’s industrial policies have had a common thread. 

They have a purpose and the effect of tilting the playing field to 

favor Chinese companies and against U.S. companies and workers, 

and those in other countries. As you said, this is not either a sound 

or a sustainable basis for the important mutually beneficial U.S.- 

China relationship, nor is it a viable foundation for the development of rule of law in China. 

Indeed, there is a widening chasm between what we hear from 

the Chinese Government about IPR protection and what we know 

to be true. For example, we hear that the legal infrastructure supporting intellectual property rights has improved. We hear that 

courts are becoming more professionalized and skilled at handling 

complex issues. 

5 

We hear that Chinese rights holders are turning to Chinese 

courts to assert their rights more than in the past, and that there’s 

been a measurable increase in the number of civil intellectual property cases in Chinese courts. We hear that foreign plaintiffs are 

winning intellectual property cases at increasing rates. 

That’s what we hear, but this, unfortunately, is what we know: 

the American Chamber of Commerce in China surveyed its members this year, and found 63 percent rated intellectual property enforcement in China as ‘‘ineffective.’’ We know IPR infringement in 

China is more widespread than before. Counterfeit exports have increased. We know that the enforcement of IPR judgments is difficult in China and damages are still inadequate. The Chinese Government has often taken insufficient steps to address these difficulties. 

So in sum, we know that the Chinese Government could be doing 

far more—far, far more—to protect intellectual property rights. We 

know, for example, in 2009—and I’ll just cover these briefly—79 

percent of intellectual property infringement product seizures at 

the U.S. border were of Chinese origin. 

We know that China’s State-Owned Assets Supervision and Administration Commission has the power to require state-owned enterprises to certify that all software they use is properly licensed, 

but that hasn’t been required. We know that the production of 

counterfeit parts experienced a period of significant growth in 

China relating to auto parts and beyond, and we know that Chinese Government access barriers lead consumers to the black market. 

And let me say this very clearly: Chinese Government censorship 

leads consumers to the black market, and that in turn incentivizes 

the violation of IPR rights. The Chinese Government often denies 

the link between human rights and the commercial rule of law, but 

there is a clear link and the Chinese Government itself helps to 

create this link. There can be no doubt that Chinese flagrant abuse 

of international rules undermines the rule of law. 

There is no doubt that widespread intellectual property rights infringement in China continues to affect—and you mentioned this, 

Mr. Chairman—products, brands, and technologies from a wide 

range of industries, and imperils the health and safety of both 

American and Chinese consumers, and imposes billions of dollars 

of losses yearly on American business and workers.That is why 

change is necessary, both in the Chinese Government’s behavior 

and in the action we take in response. So this is an important 

hearing for us, for the entire Congress, for the country, and I think 

for China and our relationships, so we look forward eagerly to the 

testimony before us. 

Thank you. 

Chairman DORGAN. Congressman Levin, thank you very much. 

Senator Feinstein, would you like to make an opening statement? 

STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR 

FROM CALIFORNIA; MEMBER, CONGRESSIONAL-EXECUTIVE 

COMMISSION ON CHINA 

Senator FEINSTEIN. Just a few. I come at this a little differently, 

and I want to thank you both for your concern. I mean, I’ve been 

6 

going to China now for over 30 years, and I remember what life 

was like there before 30 years. I think we have to remember that. 

China is a country 5,000 years old. Prior to normalization in 1979, 

begun by the Shanghai communication in 1972, China had been 

closed to the west for 150 years. It had been run by emperors that 

were arbitrary, arrogant. 

The transition from a rule of man to a rule of law, I think, has 

moved rather substantially in this 30-year period. It isn’t there yet. 

It isn’t what we want to see, but I think it has to be understood 

that movement is made. I have found in certain areas—and I’ll give 

you one, on the piracy issue—I met with the President of China in 

the 1990s at the request of the motion picture industry and others, 

and I was assured that all the pirate companies in Guangdong had 

been closed. Somebody came in and gave me a list of 32 companies 

who owned them, where they were located, what they did. I sent 

this to the USTR, who then sent it to China, and they were all 

closed. 

Now, either this is wilful avoidance, or certain people in the government really didn’t know. I’m not making a plea for the government. I think the government has to begin to understand what 

cyber-intrusion is doing, what intellectual property rights mean. I 

come from a State where intellectual property rights are extraordinarily important. I mean, this is innovation. This is movement 

and they must be protected, and there are laws to protect them, 

patent laws, copyright laws, all of this. In the Judiciary Committee, 

we have a patent bill that has just come out. 

The problem is, there is inconsistent dialogue. There is virtually 

not the kind of communication that should go on on an ongoing 

basis between officials of our government and officials of the Chinese Government. Constant, monthly working away at this. I think 

because of this long history of China, because so much of it just 

being the rule of man, that to get this to a modern commercial 

code, modern patents, a modern criminal code, is really an effort. 

I just wanted to say that because I think it’s easy to make the 

judgment that China doesn’t want to do any of this. I don’t necessarily believe that’s correct. I think we have to really press this 

issue home because it’s extraordinarily important to the relationship. 

Chairman DORGAN. Senator Feinstein, thank you very much for 

your perspective. You and I have been together in Beijing, and I 

know that you have a long association with the country of China 

and have had a lot to do with sister cities and various things. So, 

thank you for that perspective as well. We appreciate that. 

Senator FEINSTEIN. You’re welcome. 

Chairman DORGAN. We have four witnesses today. The first, is 

Christian Murck. Christian Murck is the president of the American 

Chamber of Commerce in the People’s Republic of China. I’m told 

that he traveled here from Beijing yesterday to, among other 

things, come to this hearing. We appreciate it very much. You get 

the longest distance award today. We appreciate your willingness 

to make that effort. 

He was, in 2002, elected as president of the American Chamber 

in China. He is also the independent director of J.P. Morgan Chase 

Limited in China. From 2001 to March 2010, he served as Vice 

7 

Chairman-Asia, Chief Executive-Asia, and Managing Director of 

China for APCO Worldwide. He’s a graduate of Yale College, with 

a bachelor’s degree, and Princeton University with a Ph.D. 

Mr. Murck, thank you for being with us. The full statements of 

all of the witnesses will be included as you have brought them to 

us, and we would ask each of the witnesses to summarize. 

Mr. Murck, you may proceed. 

STATEMENT OF CHRISTIAN MURCK, PRESIDENT, AMERICAN 

CHAMBER OF COMMERCE IN THE PEOPLE’S REPUBLIC OF 

CHINA 

Mr. MURCK. Thank you, Mr. Chairman. It’s an honor and a 

pleasure to appear before you. I testified once before in front of this 

Commission in June 2002 before your Cochairman, who I believe 

at the time was Chairman of the Commission. I was pleased to discover on your Web site that that testimony still survives, hidden 

away in one of the far recesses of the archives. 

It gave me a chance to look at what I said eight years ago about 

intellectual property rights protection in China. One of the things 

I have tried to do in my current statement is review what has happened between 2002 and 2010. When we look at the enforcement 

regime and the legal infrastructure that supports intellectual property rights over that timeframe, we do see slow but discernible 

progress. That is based on a common point of view which is held 

in principle by both the United States and the Chinese: that intellectual property infringements are not only illegal, but undesirable, 

and are not a basis on which to build economic growth in a sustainable fashion. 

There is a substantial bureaucratic momentum, as well as a common interest of the American and Chinese business communities 

behind improving intellectual property rights enforcement. We are 

disappointed that the progress has been so slow and there are still 

some notable areas which remain to be improved, particularly with 

respect to copyright protection of motion pictures and music, and 

some others. But basically we do see a way forward and we do see 

partners that we have been working with for some time, and some 

of that is outlined in my statement. 

We are, at AmCham-China, turning our attention to a problem 

which is qualitatively different, where we do not share a common 

stance and a common approach. That is to a range of industrial 

policies often having to do with intellectual property. We are looking at the impact on our future market access and on American 

competitiveness. 

It appears to us that many of China’s industrial policies can be 

seen as intended to strengthen national champion companies by 

encouraging them to acquire or develop intellectual property, and 

giving them protected domestic markets in which to gain scale with 

the ultimate objective of being globally competitive. 

In this case, the Chinese policies reflect considered, deliberate 

choices which are inimical to our commercial interests and which 

restrict both national treatment for foreign companies in the Chinese market and the development of a market economy. We were 

most alarmed by this development, starting late last year, by the 

release of a circular on indigenous innovation, which defined soVerDate Mar 15 2010 11:50 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 U:\DOCS\22SEP10.TXT DIEDRE
8 

called indigenously innovated products in a manner which would 

exclude not only imported products, but also those of foreign-invested enterprises in China, and by the prospect that this might 

then be used in government procurement and State-owned enterprise procurement. 

Since then, there has been a very active dialogue on this subject 

and many Chinese senior leaders, including Premier Wen Jiabao 

last week at the World Economic Forum meeting in Tianjin, have 

responded that the draft regulations or the 2009 regulations on 

this subject were improperly done, they have been changed, and 

that there is no intent to discriminate against the products of foreign companies. 

But our concerns are substantially broader than simply that one 

set of regulations. They go also to technology transfer issues of the 

kind that the Wall Street Journal cited, which is, I would emphasize, still in the planning stages and has not yet actually happened. 

They go to issues of standards and how standards are formulated. 

They go to the CCC [China Compulsory Certificate] mark and how 

that is conducted, and to a range of other issues, many of which 

are outlined in my full statement. 

These are qualitatively different from the issue of simply enforcing the rights of a trademark owner, or a patent holder, or a copyright holder. The Chinese market is one not only of very large 

scale, but also where there is very large future potential for 

growth. In many cases, it is simply too important strategically for 

companies to think about washing our hands and withdrawing. 

On the other hand, it is clearly a market which is going to be 

very different in the future, as it is today from our own, in that 

there will be a large state-owned sector. We have to come to terms 

with that fact and figure out what we can do to negotiate a mutually beneficial relationship between our economy and the Chinese 

economy in order to realize the benefit of the synergies and the 

growth potential which we think are there. 

Some of the suggestions that we might think about are included 

in my statement. I will just say that the Congress—that is, the 

Senate Finance Committee—did a very useful thing by encouraging 

or requesting the ITC [U.S. International Trade Commission] to 

launch an investigation on this subject. We have supported that by 

arranging for our members to be interviewed by the Commission. 

But I think much more will have to be done to develop a broad 

strategy, both for the U.S. Government, and also for U.S. companies, about how to respond to both the potential, and also the competitive issues that we will face in the future. 

Some of the answer is in broader public sector/private sector 

partnerships, such as the aviation and energy programs that we 

are engaged in with support of the TDA [U.S. Trade and Development Agency]. Some of it is in better export promotion and 

strengthening the National Export Initiative. Some of it is in 

stronger action at the World Trade Organization, with respect to 

good cases have recently been brought by USTR, and a good deal 

of it lies in strengthening our own competitiveness in general. 

Much of our future is in our own hands; it doesn’t depend on 

what China, or anybody else, does. I have in mind here our tax 

structure, our educational system, our fiscal deficit, and the whole 

9 

range of other things that could be put under the category of national competitiveness. 

With that, I will refer you to my full statement and look forward 

to your questions. Thank you. 

Chairman DORGAN. Mr. Murck, thank you very much. We appreciate your testimony. 

Next, we’ll hear from Thea Mei Lee. Thea Mei Lee is the Deputy 

Chief of Staff at the AFL–CIO. Previously she worked as an international trade economist at the Economic Policy Institute in Washington, DC, and as an editor at Dollars and Cents magazine in Boston. She’s the author of ‘‘A Field Guide to the Global Economy,’’ 

published by the New Press. Her research projects include reports 

on the North American Free Trade Agreement on the impact of 

international trade on U.S. wage inequality in the domestic steel 

and textile industries. She’s a graduate of Smith College and has 

a master’s degree from the University of Michigan. 

Thea, you may proceed. Thank you very much. 

[The prepared statement of Mr. Murck appears in the appendix.] 

STATEMENT OF THEA MEI LEE, DEPUTY CHIEF OF STAFF, 

AFL–CIO 

Ms. LEE. Thank you so much, Mr. Chairman, Mr. Cochairman, 

and Senator Feinstein. It’s a great pleasure to be here on behalf 

of the 11.5 million working men and women of the AFL–CIO to 

talk about this very important topic today. I think a lot of people 

assume that business cares about intellectual property rights [IPR] 

enforcement, but labor is not that interested. 

In fact, IPR enforcement is very important to many AFL–CIO 

members, not just in the entertainment and media industries, but 

also in the manufacturing sector. It’s important to American jobs, 

wages, to innovation and economic growth, consumer safety, tax 

revenues, and the reputation of American products. 

It is also true that much of the labor movement’s policy priorities 

with respect to China have focused on other issues, including currency manipulation, worker rights, and illegal subsidies, but the 

lax enforcement of IPR protections remains a key contributing factor to our lopsided trade relationship. 

Both in the arts and entertainment sector, where copyrights are 

routinely ignored, and in the manufacturing sector, where counterfeit parts and products are rampant, billions of dollars in revenue 

and thousands of good jobs are at stake. There’s a common theme 

to many of the trade tensions between the United States and 

China. 

We’ve raised many issues over the years, including violations of 

workers’ rights, workplace safety and health, consumer protections, 

and intellectual property rights. These are linked because they’re 

part of a single coherent economic strategy on the part of the Chinese Government. 

It’s an export-led strategy, which is disrespectful of international 

norms and basic human protections. So, these issues are all part 

of the same kinds of struggles and tensions that we have with the 

Chinese Government. We need our government to focus on how to 

address these in a more effective way than has been done in the 

past. 

10 

Taking steps now to address the Chinese Government’s flagrant 

violations of its international obligations with respect to IPR is crucial to setting a sustainable, long-term trajectory for our bilateral 

relationship. This really does have to do with the issue that Mr. 

Murck raised about forced technology transfer and innovation, and 

where the next generation of innovation happens. 

If the U.S. Government doesn’t take more care to ensure that 

American workers and American businesses can benefit from the 

kinds of innovation and inventions that happen here in the United 

States, we will feel the impact of that for generations in terms of 

lost American jobs. 

We often hear business and government officials tout the promise 

of the Chinese market, and of course it is both large and fast growing, but meaningful access to that market for American producers 

and workers is severely undercut by IPR infringement. 

If American entertainment products and software cannot sell at 

a reasonable price in the Chinese marketplace and if the legitimate 

owners of those products are not able to receive their fair share of 

the revenues, then the size of the Chinese market is, for all intents 

and purposes, a tiny fraction of what it ought to be. Similarly, 

American products are in direct competition with Chinese-produced 

counterfeits, costing jobs in third country markets, as well as in the 

United States of America. 

Over many years, the U.S. Government has made repeated attempts to cajole, pressure, or convince the Chinese Government to 

improve its IPR enforcement record through the use of Special 301 

cases, priority watch lists, the Joint Committee on Commerce and 

Trade talks, and finally, WTO cases. 

Each one of these things is important because it sends a message 

to the Chinese Government. But overall I’d have to say it has been 

a long, frustrating history of trying to deal with these issues in a 

piecemeal fashion. We haven’t really seen the kinds of results we’d 

like to see, as you said, Mr. Chairman, in your opening remarks, 

and as Mr. Levin said as well. Over all, we still have enormous violations and a failure on the part of the Chinese Government to take 

this issue seriously and to give it the kind of attention it deserves. 

This summer, the U.S. Trade Representative filed a request for 

a WTO panel. That was an important case, which challenged a 

number of practices on the part of the Chinese Government, including the quantity and thresholds in China’s criminal law that must 

be met in order to start criminal prosecutions or obtain criminal 

convictions for copyright piracy. It also contested the Chinese rules 

that allow IPR-infringing goods that are seized by the Chinese authorities to be released into commerce, following the removal of the 

fake labels. Of course, this totally undermines the whole point of 

removing these products from the marketplace. 

The third issue that USTR raised was also an important one: a 

challenge to the denial of copyright protection for works that are 

awaiting Chinese censorship approval. Under Chinese copyright 

law, there is no protection for these copyright holders before the 

censorship approval is granted. These are all enormously important 

issues. 

Let me just conclude by saying that the Commission has asked 

the question: ‘‘Will China protect intellectual property? ’’ I believe 

11 

that the answer in the end will depend on our own government’s 

actions. We haven’t really been successful to date in cajoling, or 

convincing, or persuading the Chinese Government to act effectively. 

The real key is going to be raising the price for non-compliance 

so that it exceeds the gains that are currently being earned by violating the intellectual property rights norms. Until that happens, 

American workers and businesses will continue to pay a high price, 

and the Chinese Government will continue on its current shortsighted path. I look forward to your questions and I look forward 

to the rest of the testimony today. 

Thank you very much. 

Chairman DORGAN. Ms. Lee, thank you very much. 

Next, we will hear from Mr. Greg Frazier, executive vice president for Worldwide Government Policy at the Motion Picture Association of America. He coordinates the development and execution 

of the government advocacy initiatives of the Motion Picture Association on behalf of its members. He has spent more than two decades in public service, lastly as Chief Agriculture Negotiator in the 

Office of the USTR, serving with the rank of ambassador. Before 

that, he was Chief of Staff at the U.S. Department of Agriculture 

from 1995 to 1999, and he has held several professional staff positions in the House of Representatives as well, and many other activities. 

He is a graduate of Kansas State University, and the University 

of Connecticut with a master’s. Mr. Frazier, thank you for being 

with us. 

[The prepared statement of Ms. Lee and the statement of the 

AFL–CIO Executive Council appear in the appendix.] 

STATEMENT OF GREG FRAZIER, EXECUTIVE VICE PRESIDENT 

FOR WORLDWIDE GOVERNMENT POLICY, MOTION PICTURE 

ASSOCIATION OF AMERICA 

Mr. FRAZIER. Thank you, Senator. I appreciate the invitation to 

be here. I was listening to your opening statement and I thought: 

‘‘I’m not really sure what I can add to what Senator Dorgan said.’’ 

You made the comment that, with a quota of only 20 foreign films 

allowed into China, is there any wonder that there’s a movie piracy 

problem there. 

If you look at my statement and if you look at the comments that 

we and our members have made over the last couple of years, you 

put your finger on what we believe is the critical component to 

dealing with movie piracy in China. 

We start out by saying—most people don’t realize this—that the 

movie industry is a trade success story. The men and women who 

work in the movie industry—and it’s not just in California, but it’s 

all over the country—earn about half of their earnings from outside 

of the United States, so it’s a real success story. There’s a positive 

balance of trade for the U.S. movie industry in every country where 

it does business, including China. 

The Chinese market is a real paradox. We did a study a couple 

of years ago and we estimated that the movie piracy rate in China 

was 90 percent. That means, for every 10 DVDs sold in China, 9 

were pirated. 

12 

Yet, the Chinese market is one of the fastest-growing theatrical 

markets in the world. The member companies that I represent, 

that I work for, their box office revenues from 2008 to 2009 doubled 

in China. This was a huge increase. If you look over the last two 

years, it has gone up about 100 percent, so it’s a growing market. 

There’s a demand for American entertainment in China. 

But if you put that in context, what they earned in 2009 in 

China is probably about what they will earn in the United States 

in the month of September. Growing market, lots of piracy. 

What’s the problem? If you were in Beijing and you went from 

Mr. Murck’s office and you were to take a walk to Tiananmen 

Square, I think you might be able to see what the problem is. 

You would leave Mr. Murck’s office, and very soon you would get 

to the Silk Market. You would walk up to the Silk Market and 

somebody would come up to you and whisper, ‘‘DVDs,’’ and shove 

underneath your face a fistful of all of the latest movies that just 

opened in the United States this past weekend. You might conclude 

that there were lots of U.S. films available in China, and it would 

be a reasonable conclusion. 

If you kept walking quite a bit further, there’s a mall near 

Tiananmen Square called Oriental Plaza mall. I would direct you 

to two places in that mall. On one end is an audio-visual store— 

two stories. On the top story is equipment, on the bottom floor, is 

music and films. If you are patient enough and you look hard 

enough, you will find the American movies. It’s probably about two 

rows of movies. Virtually none of them are current, none of them 

are new movies. They’re fine movies, but they’re not the latest releases. 

How does that square with what happened at the Silk Market? 

Why could I get anything I wanted at the Silk Market but I can’t 

at the AV store? 

If you went down the mall a little bit there’s a cinema in there. 

The cinema is as modern as any cinema that you would see anywhere in Washington, DC. You might see one American film playing there. 

So here is the paradox: There is an abundance of American movies in China. Unfortunately, most of them are pirated. As you said 

in your statement, China only permits 20 foreign films into its 

market every year. That’s not just 20 from the United States, it’s 

20 from all destinations. Then there are further restrictions we face 

as I have summarized in my written statement on television programs and home entertainment products. 

So we believe that until we can get into that market and those 

barriers can come down, there’s no way that we can compete with 

the Chinese pirates. Unfortunately, as other witnesses have said 

and as you have indicated, the pirated products that are coming 

out of China are showing up all over the world. This is not just a 

victimless crime. It’s not just American men and women who are 

suffering. 

I’m not going to say every time we buy a pirated movie it goes 

to an organized crime syndicate, but the Rand Corporation released 

a report two years ago and it said more than likely not, when we 

buy a $2 DVD in the Silk Market in Beijing, that money is going 

13 

to go to an organized criminal syndicate based in China, perhaps 

doing business all over the world. 

So what do we do about that? Again, in your statement you indicated, about the basics of the law, it needs changes, it needs refinements here and there. But the real problem, we believe, as you indicated, is lack of commitment from the Chinese authorities. When 

you were there during the Olympics it was almost impossible to 

find counterfeit Olympic logo material. They had an interest and 

a desire to protect it, and they did. 

From time to time, the Chinese Government launches these campaigns, they’re going to clean up this city, this district, that district. And you know, they do for a week, two weeks, three weeks. 

But you go back, and the material is there. There’s not a sustained 

role, sustained commitment to address that problem. 

After many years of dealing directly with the Chinese Government, dealing with the U.S. Government, the companies that I 

work for decided they needed to escalate this, so we went to the 

U.S. Government and we asked them to take a suit against China 

for its IPR violations and for its market access restrictions. 

I am pleased to say that after thousands of hours of work by this 

Administration and the previous Administration, the U.S. Government prevailed at the WTO in a case that made important challenges to China’s market access barriers, and, therefore, the piracy 

problems in China. 

China has until the middle of March to come into compliance 

with the WTO ruling against it in the market access case. We believe that this is a critical time period on how China comes into 

compliance and what the future is, both in terms of our ability to 

grow that market and which we believe will go hand-in-hand with 

dealing with the piracy problem. 

I guess I would close by saying that, the U.S.-Chinese relationship is complicated and there are many things at play, and movies 

are just one aspect. I also know you have very busy schedules, and 

so I appreciate you holding this hearing now during this busy time. 

At the same time all three of you and your colleagues meet with 

Chinese officials all the time. Senator Feinstein talked about how 

she’s been going there for over 30 years and meets with people, and 

she is respected and known there. The extent to which you also 

have those meetings, the extent to which you engage with Chinese 

officials, don’t forget to mention how important the market access 

barriers are to the growth of the U.S. film industry in the China 

market. Coming from the U.S. Congress, it carries a lot of import, 

it carries a lot of weight. The few words that you can talk about 

intellectual property problems, the market access problems, believe 

me, will go a long way and will be greatly appreciated by the companies that I work for and the men and women in the American 

film community. Thank you. 

Chairman DORGAN. Mr. Frazier, thank you very much for the 

testimony. We appreciate your being here. 

Finally, we will hear from Richard Suttmeier, Professor of Political Science, Emeritus, at the University of Oregon. He has written 

widely on science and technology development issues in China. His 

current research includes an NSF-supported study of the role of 

science and technology in U.S.-China relations, the role of technical 

14 

standards in China’s technology policy, and the Chinese approaches 

to the management of technological risks. He is well-published and 

we’re very pleased that he has come to join us today. 

Mr. Suttmeier, you may proceed. 

[The prepared statement of Mr. Frazier appears in the appendix.] 

STATEMENT OF RICHARD P. SUTTMEIER, PROFESSOR OF 

POLITICAL SCIENCE, EMERITUS, UNIVERSITY OF OREGON 

Mr. SUTTMEIER. Thank you very much, Mr. Chairman. I appreciate the invitation to join you here. 

I have about six points I’ll try to make, very briefly. The first 

one, is that I think it is useful to always remember that this issue 

is occurring in a context where we have a global economy, but not 

really a global consensus on norms affecting intellectual property 

systems. That is true, I think, with regard both to the efficiency of 

intellectual property issues and intellectual property arrangements, 

and it is also true, I think, with regard, especially when we talk 

about the third world, to questions about fairness of the existing 

intellectual property regulations and institutions. 

Second, I think it is also useful to remember that, in China, this 

IP question manifests itself in somewhat different ways depending 

on the type of intellectual property you’re talking about, whether 

it’s patents, whether it’s trademarks, whether it’s copyrights. Different actors in China get involved in developing regulations and 

enforcement, and I think that that effects very much the way—we 

need to sort of parse out what the different types of IP issues are 

at different times. 

I would add that also pertains to industry, and I think it also increasingly pertains to the question of Chinese innovators as rights 

claimants. So if we begin to look at some fields of Chinese innovative activity we see certain kinds of patterns, and in other fields 

we see other kinds of patterns. 

Third, there clearly are changes in Chinese thinking, as you have 

heard already. I think it is worth keeping in mind comparative experience here; China is not the first developing country that has 

had serious IPR infringement problems, although it is clearly a 

very special case, as we all know. 

But one of the things that comparative experience suggests is 

that as we begin to have a community of Chinese innovators in 

China, they begin to develop an interest in stronger IP protection. 

I think we’re beginning to see that in China and that is true at the 

level of individuals and individual companies, but also is manifested in the state itself. 

Now, I come to all this as a person who looks at larger industrial 

policy, and science and technology policy questions. To reinforce 

what Mr. Murck has said, the landscape is changing in China very 

quickly with regard to the role of intellectual property in the Chinese economy. With the launching of the big Medium- to Long-term 

Plan for science and technology [MLP] China’s leaders are supposed to—through R&D activities and industrial policy measures— 

make China into an innovative society by the year 2020. This is 

where the indigenous innovation idea comes from. I address that 

a bit more in my written submission. 

15 

But I think it’s important to recognize that central to this whole 

national effort, which has really become a very important part of 

Chinese public policy, is to make China a creator, a producer of IP. 

I think that the government understands very well that it cannot 

realize its objectives if, in fact, we have a deeply flawed intellectual 

property rights protection system. 

Now, that’s not to say that there are not very serious abuses, as 

you have heard, but I do think that it is important to try to get 

a sense of the context of that plan, because one of the things it’s 

doing, is producing a whole series of incentives to make Chinese research institutes, universities, and especially companies more innovative. The policy is being operationalized by measuring IP output 

of one sort or another, whether it be professional papers from universities or patents from universities, research institutes, and companies. 

So people in the innovation system face strong performance 

measures and strong incentives to perform. The New York Times 

last week carried an interesting piece about China being a society 

preoccupied with testing in its educational system, with some saying how our students would do better if there was more testing. 

Well, testing is a reality for Chinese enterprises, for research institutes, and so forth. They do regularly face evaluation and one of 

the critical performance measures is IP output, especially numbers 

of patents. 

Now, one of the consequences of that is that we have seen an explosion of patenting, many of which can legitimately be regarded 

as ‘‘junk patents.’’ But this is a new dynamic element that affects 

the whole technology transfer issue, the government procurement 

question, et cetera, because what the government is trying to do is 

to make Chinese enterprises successful IP producers. They are taking a variety of measures to do that, some of which I think we will 

all agree are ill-advised, and some of which, as Mr. Murck has 

pointed out, the Chinese are backing away from. 

So let me move toward a conclusion here by asking about the relationship of the IP question to innovation. Why does China increasingly attract so many innovators from around the world? IPR 

supposedly is important for innovation, but at the same time we all 

have heard that China’s IPR system is very weak. So wouldn’t we 

expect innovators to avoid China? I raise this, in part, in the context of your interest in wind power and clean energy. 

I think that this is a very important question as we think about 

the global economy. Technology transfer—and this goes to the 

forced technology transfer issue—is ultimately a business decision 

and has to be understood as such. But what we know about technology transfer decisions, and the role of intellectual property in innovation, is that even though there is intrinsic worth in the ideas 

found in IP, to capture value from that intellectual property you 

need other things. 

David Teece, who has written very wisely about all this, has 

called these other things ‘‘complementary assets.’’ So if we begin to 

think about the question of our future U.S. system of innovation, 

and the future Chinese system of innovation, I think we want to 

think not only about IPR and the strength of intellectual property 

protection, but also these complementary assets: Markets, market 

16 

availability, scalability, finance, human resources, et cetera, which 

are very central issues for a lot of the clean technology questions. 

In my submission, I quote a recent piece that addresses that; the 

availability of financing; the existence of growing capabilities in research and development; supportive government policies that 

makes scalability and market growth more likely in China. All of 

those things, I think, are part of the complementary assets that 

make innovators attracted to China. 

So increasingly, I think we can talk about living in a global innovation system, or a global innovation network, where we can think 

about countries being nodes in that network. 

Fifteen years ago, China was a fairly insignificant node as a producer of IP, and as a magnet for other innovators. China is now 

growing as an increasingly important node toward a ‘‘super-node’’ 

status. We have been the super-node in the past. We have been the 

place where creativity and innovation was possible, largely because 

we had the complementary assets as well as the very smart people 

who were attracted from around the world to come here. What we 

have to ask ourselves is, is China actually putting together that 

package now, and are we losing it? As I suggest in the paper, I 

think we have to think very hard about that. 

Thank you. 

[The prepared statement of Mr. Suttmeier appears in the appendix.] 

Chairman DORGAN. Mr. Suttmeier, thank you very much for the 

interesting testimony. I think all four of you have given us a lot 

of things to think about. 

I don’t want to over-simplify this, and there’s a tendency, I think, 

for me and everyone to over-simplify this when we talk about our 

relationship with China. It’s clear to me that the trade deficit we 

have is not sustainable, it’s clear to me that we operate on different 

planes with different strategies. 

China has an export strategy. It wishes to maximize its exports, 

use its natural—I shouldn’t say natural, use its political—advantages of lower wages and various things to be able to be attractive 

in foreign markets, while at the same time limiting foreign exports 

to the Chinese marketplace. 

Mr. Murck, you heard me quote the Wall Street Journal article 

entitled, ‘‘China Spooks Auto Makers,’’ and the portion says, ‘‘The 

draft’’—they’re talking about the Chinese Government draft—suggests the government could compel foreign automakers that want 

to produce electric vehicles in China to share critical technologies 

by requiring the companies to enter joint ventures in which they 

are limited only to a minority stake. Is it the case that if you would 

like to—let’s say that you have an electric car strategy and you’ve 

got technology and you want to produce in China, perhaps for sale 

in the Chinese marketplace, and you want to start a company in 

China, would you be able to start a company as an American businessman and own, let’s say, 51 percent of that company? 

Mr. MURCK. The answer to your question is no. You would be 

limited to a 50/50 joint venture, which is the one, for example, that 

General Motors has now. In that context, General Motors controls 

the technology and has management control of the joint venture, 

and I think most people would argue that a significant portion of 

17 

the value of that company today lies in the fact that they have a 

leading position in what is now the largest automobile market in 

the world. If you drive around Beijing in a Buick, which I do, very 

proudly, you will see lots and lots of other Buicks. 

Chairman DORGAN. Let me ask you—— 

Mr. MURCK [continuing]. Now, the thing that’s really interesting 

about the article, which is a report of a draft regulation, not something which has actually happened, is the assertion that the Chinese Government is considering a policy of allowing only a 49-percent foreign interest in a joint venture for these cars based on new 

technologies. That would imply that control of the technology and 

management would rest with the local party. That would certainly 

be an issue and that is precisely why the Wall Street Journal, and 

I think anybody else who sees this report, would be alarmed by it. 

Chairman DORGAN. But outside of the General Motors example, 

it is routine, it seems to me, for China to require that the Chinese, 

in these circumstances, would have controlling interest. American 

companies would be allowed to own 49 percent of an enterprise. 

Ms. Lee, if that were the case in our country and we said, you 

know what, if you want to come over here and do some business, 

we are sorry, you can’t do that unless you retain only a minority 

ownership here in the United States, would people say, what are 

you doing? I mean, that violates everything we understand about 

free, fair, and open trade. Wouldn’t that be the response? 

Ms. LEE. I think there are a lot of things that the Chinese Government does that we would find either odd or problematic here in 

the United States. Certainly the basic principles that China agreed 

to when it joined the World Trade Organization, of most favored 

nation, right of national treatment, and so on, are things that are 

pretty routinely violated by the Chinese Government. 

Chairman DORGAN. Mr. Frazier, how did we get to the number 

of 20? Who was it that sat in a trade negotiation and said to the 

Chinese, ‘‘Okay, you are right, we have a very big trade deficit with 

you, we need to sell you more, so you can go from 12 movies a year 

to 20 movies a year? ’’ Good for us! Let’s go have a big dinner and 

celebrate this success. Who was it on our side of the table? 

Mr. FRAZIER. Senator, I don’t know. I don’t know who did it. 

Chairman DORGAN. Well, you worked for USTR. Not necessarily 

then, but there had to have been someone who, out of some understanding that it was in somebody’s interest to agree to 20 movies. 

Is that correct? 

Mr. FRAZIER. You’re absolutely correct. 

Chairman DORGAN. Somebody signed up to that. 

Mr. FRAZIER. Somebody signed up to it. The only logic I have for 

that number is it doubled it. The old quota was 10. 

Chairman DORGAN. I understand that doubled. I thought it went 

from 12 to 20, but okay, so it doubled. But my understanding also 

is what I thought was born of ignorance at the time, someone on 

our behalf sat at a table and negotiated and said, okay, in bilateral 

automobile trade, once we are phased in completely on bilateral 

automobile trade, we will say to China, ‘‘It will be all right for you 

to impose a 25-percent tariff when it’s fully phased in on U.S. automobiles shipped to China to be sold in your marketplace, and we 

18 

will impose only a 2.5-percent tariff on Chinese vehicles sold in our 

place.’’ 

Now, China is ramping up an automobile export industry, we 

know. With a country with whom we have a very large trade deficit, we’ve said it will be okay if you have a 10:1 advantage in tariffs. Someone had to have decided, on one part of the table, wearing 

a U.S.A. jersey, negotiating on behalf of our country, yes, that’s in 

our interest. I’ve always tried to find out, who are these people? 

Mr. FRAZIER. I don’t know. I don’t know. I was there at the time, 

but I had charge of the agriculture portfolio, so I can only speak 

to some of the agricultural issues. 

Chairman DORGAN. All right. What should we do with respect to 

movies? Why should we believe, just to use movies as an example— 

there are a lot of products out there, but movies are an American 

success story. 

Mr. FRAZIER. Right. 

Chairman DORGAN. What should we expect of the Chinese with 

respect to the allowing of importation of U.S. movies? Should we 

have no limitation? Do we limit Chinese movies into the United 

States? 

Mr. FRAZIER. No. 

Chairman DORGAN. No. And should we expect that China would 

not limit the import of U.S. movies to China? 

Mr. FRAZIER. Well, in an ideal world, yes, that’s what we would 

expect. As I indicated, this is a growing market for the U.S. industry. The box office has doubled in one year; it has gone up by 150 

percent in three years. It is not just Americans, American companies and American men and women who are profiting from that. 

It’s the cinema owners in China, it’s the people who work there, 

the people who provide the concessions, the people who provide the 

promotion, the advertisement. So there’s a growing domestic industry that’s profiting from the creative work of American men and 

women in the American film community. We see a classic win-win 

situation. If we can put more movies there, not only are we going 

to benefit, but the Chinese are going to benefit. But it’s a tough 

road, I’ll tell you. 

Chairman DORGAN. I think we have lower expectations than we 

should of the Chinese as trade partners, and I think we ought to 

change that some. I’m not interested in a trade war, but I am interested in making sure we have mutually beneficial trading relationships. I don’t think that is now the case with China. 

Mr. Suttmeier, you made some interesting points about innovations and innovators, and so one of the dilemmas we have had is 

that while it may be the case that China is birthing a whole new 

cadre of people creating intellectual property at home and so on, 

it’s also the case in many circumstances they’ve determined it is 

much easier just to steal it. 

In the first book I wrote, I pointed out that the reports existed 

that the Chinese, when Viagra came out, simply re engineered 

Viagra and sold it in China of their own volition. They didn’t need 

to buy it or import it, they just reengineered it and sold it. That 

goes on all the time, doesn’t it? 

Mr. SUTTMEIER. It does go on, Mr. Chairman. But I think what 

we’re seeing, is a growing intolerance of the high level of dependVerDate Mar 15 2010 11:50 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 U:\DOCS\22SEP10.TXT DIEDRE
19 

ence on foreign technology. That’s what I think is behind all of this. 

The fact that it exists and the dependence comes through illicit 

forms, as well as quite legal forms, is, I think, what’s troubling to 

the Chinese because what they see is that those who control the 

IP actually then controls the higher value-added activities of all 

kinds of economic activities. 

So what we’re seeing is a push from the technical community 

now backed by senior political leadership, to change that balance. 

But you’re absolutely right. One of the great problems that the research community faces in China is that industrial enterprises, 

people who are making things, whether it be Viagra or something 

else, have a very strong bias toward foreign technology. So one of 

the things that people are trying to do, is to change that bias and 

change the balance somewhat. 

Chairman DORGAN. Mr. Murck, one of the things that I note in 

this country is that whenever we raise the question of unfair trade, 

shipping of American jobs overseas as a result of unfair advantage, 

closed markets, and so on, we are referred to as ‘‘protectionist,’’ 

some say ‘‘isolationists,’’ ‘‘xenophobic stooges who just don’t get it.’’ 

It’s a new world order. We need to be able to compete. 

You made a point earlier that I fully agree with. There are a lot 

of things we need to do in our own country to get our house in 

order: Fiscal policy, education policy, and so on. But even if we 

have done all of that and we were at a new plateau, having done 

everything we could do to set ourselves up as being extraordinarily 

competitive, when we are trading with a country that does not protect intellectual property rights and has a managed trade strategy 

of saying we intend to run a very large trade surplus with you, we 

intend that you be our cash cow for hard currency needs, and we’re 

going to do it year, after year, after year as long as you’re willing 

to allow that, and as long as those who are critical in your country 

are called isolationists or protectionists, nothing is going to change 

in your country. 

That brings me to the Chamber of Commerce. Mr. Donohue and 

others would take a listen to something I say and they’d say, well, 

shame on you, that’s anti-business. I happen to think that an 

American business man or woman, today, producing a product that 

says, ‘‘Made in America,’’ in Pittsburgh or Bismarck, wanting to 

compete internationally and wanting to have a fair opportunity to 

compete internationally, has a very large gripe with this country, 

with the Chamber, and others who have supported a trade strategy 

that I think undermines our own economic interests. 

It’s one thing for us not to be able to compete when the competition is fair. It’s another thing to tie our hands behind our back and 

then say ‘‘compete.’’ We could do that after the second World War 

with anybody and beat them; we were bigger, better, stronger. We 

had the most. But these days, things have changed. 

So I mentioned the Chamber. The American Chamber of Commerce in these countries is very important. They have a very important role. On my first visit to Vietnam, the American Chamber 

of Commerce in Vietnam said something I’ll never forget. They 

said, ‘‘You know what we need in Vietnam? ’’ This was a time when 

it was coming out into a market system with a Communist government. ‘‘We need more government.’’ I said, ‘‘Really? ’’ They said, 

20 

‘‘Yes. You can only do business when you can enforce contracts, 

when you have administrative practices.’’ It is absolutely true, that 

is the case. 

So give me your perspective, Mr. Murck. I’m sorry for the lengthy 

question. Give me your perspective of what we can, and should, expect on behalf of American businesses producing here today, trying 

to compete in an international marketplace with the support of the 

Chamber of Commerce. 

Mr. MURCK. Well, thank you very much, Mr. Chairman, for that 

question. I think this would be a good time to point out that the 

American Chamber of Commerce in China is an independent organization, supported by our members on the ground, and we have 

no relationship other than a loose affiliation as a member with the 

U.S. Chamber of Commerce or Mr. Donohue. I count him among 

those who usually meet with me when he comes to Beijing, but I 

would say my influence on his thinking and his ideas, and those 

of the Chamber, is quite limited. 

I would also just like to circle back before responding directly to 

your question to the Viagra issue. You might be interested to know 

that the counterfeiters, at the time when Viagra was widely copied 

in China, engaged in all kinds of brand extension efforts, including 

soft drinks that were laced with Viagra, and my favorite is a hot 

dog that was also laced with Viagra. But at the end of day—— 

Chairman DORGAN. That was answering a question I hadn’t 

asked, Mr. Murck. 

Mr. MURCK. Yes. I give you that for future use. 

Chairman DORGAN. Thank you. 

Mr. MURCK. At the end of the day, Pfizer won its case and it is 

now purely an enforcement issue. That was one of the first major 

IPR cases contested vigorously. The clear winner of that case was 

Pfizer, so that is actually a positive example for IPR protection. 

With respect to the broader question of what you can expect from 

people like ourselves or the business community in general, I do 

think it is important that more American companies begin to compete actively in global markets. I do think there is more that we 

can do to make that possible in terms of export promotion and assistance of all kinds, and I’ve suggested in my statement some of 

the things of that sort. The German Government does a better job, 

for example. 

In terms of what we do with respect to our trade policy views, 

we always try to express them in terms of American national interest. I do firmly believe that the global competitiveness of American 

companies is in the national interest of the United States, including our ability to compete in China. For that reason, I’m really not 

too apologetic about the many policy statements that have come 

out of the American Chamber of Commerce in China over the last 

10 years. Mr. Donohue can defend himself without any assistance 

from me. 

In terms of the strategy that the U.S. Government ought to 

adopt going forward, I would just like to associate myself with Professor Suttmeier’s statement, which I think is very interesting and 

very sophisticated, and which poses the problem that we face very 

clearly. 

21 

The industrial policy issue and the way in which it draws on IPR 

is a qualitatively different situation than the enforcement issue 

that we’ve been struggling with over the last 10 or 15 years, and 

we need to have a better approach to how we are going to deal with 

the Chinese Government. We have to convince them, on the basis 

of mutual benefit, to change the way in which they’re dealing with 

us. 

One aspect of that is prioritizing the protracted, but recently 

begun, negotiations to enter the government procurement agreement at the WTO. This is enormously important to us because 

China has a very large government sector, and there are a number 

of other things, such as a bilateral investment treaty, that would 

be other pieces of developing a new and broader framework for the 

way in which we work with the Chinese in the future. 

They have explicitly stated that their goal is to bring their global 

trade account into balance. So far, year-to-date, they’re about 20 

percent less in terms of their global surplus than they were a year 

ago, and a year ago it was less than 2008. I think there is very 

good reason to believe that this will happen, but that doesn’t mean 

the bilateral trade balance will come into balance. This is something that will continue to require very careful attention on your 

part and on the part of the business community. Thank you. 

Chairman DORGAN. Mr. Murck, thank you very much. I fear that 

I have intruded on Congressman Levin’s time. 

Congressman Levin, take as much time as you wish. 

Representative LEVIN. I will take just a couple of minutes because I don’t think there’s any disagreement about the importance 

of our relationship. Sometimes it is misstated that there is a difference of opinion about the importance. Indeed, it is so important, 

in part because it is so large, and therefore, it is so complex. I have 

been trying to figure out, as the four of you testified: What are the 

differences in emphases and nuances? That isn’t always easy to figure out. There are differences in emphases among the four of you 

and differences in nuances. 

So I’m not sure where to begin. I will ask that my statement be 

placed in the record, Mr. Chairman. 

Chairman DORGAN. Without objection. 

[The prepared statement of Representative Levin appears in the 

appendix.] 

Representative LEVIN. So let me just say this. I think it’s clear 

that China has a strategy I think it’s fairly clear, what its strategy 

is. You have outlined what the goals are. I think, though, there are 

some changes. I think you can describe fairly well what the strategy basically is. You mentioned about a certain level of technology 

by a certain given date. They have other goals, and I think their 

own strategy to achieve those goals. 

I think the problem is that our country hasn’t had a strategy. 

Therefore, we tend to kind of do it piece by piece, and it’s hard to 

fit the pieces together. In some respects, we haven’t had a strategy 

because there have been some in this town who thought we did not 

need one, and that essentially the best way to handle these issues 

is to leave them alone and they’ll work themselves out. 

For example, on government procurement, Professor, I think 

China decided it was better off not being a party to the agreement 

22 

for a certain period of time. I don’t think it was accidental. I think 

they sat down and figured out what would be best. I think they do 

that as to everything. It is further complicated, Mr. Murck, because 

a lot of the companies, American companies that do business in 

China, are global companies and they not only do business in 

China, and in many cases import to China, but also export from 

China. That is likely to increase. 

So I just want to urge, I think the importance of this hearing is 

to underline the need for our country to develop a strategy as to 

how we’re going to handle a burgeoning development, a country 

that has become so important economically, that has different 

structures and different interests than we do. 

So when we talk about something that’s mutually beneficial, I 

think we have to understand, that, as true in all kinds of competition, there will not always be answers that are immediately 

thought to be beneficial. That makes it more difficult to work them 

out. But our country had better put together a strategy as to how 

we’re going to handle this relationship. Those who thought we 

could not have one, I think, or that it had to be outside of a larger 

structure, I think they were basically wrong. 

But the problem is, within this structure that now exists, the 

problems remain so compelling, for example, movies. You bring 

your perspective. You work with them. You tell the typical American citizen that China has complete access, while we have very 

limited, and that when we have access it’s essentially overcome by 

pirated product. They have to ask themselves, how can this be? 

The same is true increasingly—and you referred to this, Mr. 

Murck—in the industrial sector. I thought it was excellent that 

GM—I was there before the plant was even built, and I’m glad 

General Motors went there. 

However, it creates problems as well as profit. When you have 

increasing counterfeiting of auto parts and you’re likely to have, as 

a result of that proliferation of American enterprise in China, an 

increasing number of parts produced in China that come here that 

are counterfeited and compete with American-made products, I 

don’t think it is workable that we not have some kind of a strategy. 

So maybe I won’t ask questions, because I think the nuances in 

your testimony really indicate the need for us to work out within 

this country how we’re going to handle this increasing trade with, 

and competition from, China. If, today, I asked any of you, what 

is our strategy, I think you would be somewhat hard pressed to indicate really what it is. It varies from industry to industry. 

I will just finish with this. I was at a solar plant in Michigan. 

It is three or four football fields long. They make solar panels. The 

person who manages it, who is the opposite of a xenophobe, took 

me aside after I had been through it and said, unless this country 

has a strategy in this renewable energy field, it is likely, in five 

years, every single solar panel installed in the United States will 

come from China, and not for just one reason. Currency is one, the 

subsidization by the Chinese, another. It may well be that some 

American companies will have an interest in those solar panel 

plants in China, but this fellow tells me that all of the workers in 

that company in Michigan, in five years, are likely to be out of 

23 

work, and our company out of business, if this country does not get 

together itself. 

Then I went to another place that produces a very important ingredient in high technology, also in Michigan. This is a huge plant, 

with endless pipes that I can’t begin to understand. The CEO says 

to me—he’s the CEO—that unless we get ourselves together, it’s 

unlikely, over a period of time, that that plant can survive. 

So, I left there saying to myself, we’d better get our heads together and not call each other labels if we have differences, and not 

use some of the old shibboleths, and not have deep cleavages before 

we even start to talk in this country. There is an urgency in terms 

of our relationship with China economically, and also, if I might 

close, in terms of human rights. 

This Commission has been invaluable in its creation and its work 

on human rights. I think the Chinese need to expect that we will 

not only insist on measures so that they abide by their commitments that were made when they went into the WTO, but also that 

we will continue to have an interest in the liberties of people in 

China. 

So I think this has been, Mr. Chairman, a really useful hearing 

and I salute—if I might say so, I’m a bit biased, I agree—the work 

of the Commission and its staff over these years since the creation 

of the Commission. It was part of PNTR. So, thank you very much. 

Chairman DORGAN. Congressman Levin, thank you very much. I 

think the point you made that is so important, is this country and 

China will have a very important bilateral relationship. The question is, will it be mutually beneficial? I think most of the witnesses 

have indicated that there is movement in China. I think Senator 

Feinstein put it pretty well. Just go back 30 years and see what 

existed then and see what exists now, and there’s movement. You 

can make a pretty strong case that things are better in China. 

But you also indicated there is some urgency to address these 

trade imbalances and the trade relationship with China. I agree 

with that. If we don’t push the requirement to address them, we 

will, in 5 years, 10 years, and 15 years, see this drag on and on 

and on. 

Ms. Lee, tell me how it is that China can largely say to an American company, yes, you can produce over here, in fact, we would insist that you produce over here. You make something that we want 

to buy and you buy our products, China would say to us, so we 

have something that we want to buy from you. But in order to do 

that, we want your manufacturer to move to China and make it in 

China, and by the way, when you do, you are only able to own 49 

percent of the company. Does that violate all kinds of WTO rules? 

Representative LEVIN. Mr. Chairman, if you’ll excuse me. I hate 

to leave, especially at this moment, but I think I have to go to another appointment. So, I will have others tell me the answer to this 

salient question. 

Chairman DORGAN. All right. 

Representative LEVIN. Thank you. Thank you so much. 

Chairman DORGAN. Congressman Levin, thank you very much. 

Let me, by consent, also ask that the full statement of Senator 

Carl Levin from the State of Michigan be included in the hearing 

record at this point. 

24 

[The prepared statement of Senator Levin appears in the appendix.] 

Chairman DORGAN. Ms. Lee, you’ve had time to think about that 

now. 

Ms. LEE. Thank you, Mr. Chairman. It’s an excellent question. 

It’s one that has been a huge problem for us and for certain unions 

for many years. It is illegal under many kinds of rules, but they 

are difficult to enforce. It’s called an offset agreement, where the 

Chinese Government negotiates with an individual company to 

make a sale—for example, aircraft—and in exchange, both jobs and 

technology, often, are transferred to China. 

It’s something that sometimes the companies aren’t happy about, 

but they feel that it’s impossible for them individually to protest 

because if they say no, then another company from another country 

could accept the deal and get the sale. Of course, they really want 

that sale badly. I don’t know how many times we’ve raised this 

issue with our government and asked them to go to the Chinese 

Government and negotiate and so on. 

Part of the problem is that we don’t have a united front among 

all the different governments that deal with China. Each one is 

afraid of losing that sale, so it becomes an issue. A lot of times 

these deals are made in secret. They’re not explicit, they’re not 

made public, so only the company itself knows exactly what deal 

was cut. It’s not in their interest to publicize it widely. I think a 

lot of times these companies make a bad decision. They hope, well, 

it’s not good to give away to technology on my wing production, but 

it’s better than losing this particular sale. So it’s a very short-sighted decision. 

What we need, obviously, is a much more concerted, multilateral 

approach to this problem. To date, we haven’t gotten it. Whether 

it’s through the OECD [Organisation for Economic Co-operation 

and Development], whether it’s through the World Trade Organization, we need all the governments to come together with a united 

front. We need the companies to be up front about the kinds of 

deals that they’re being asked to make. So far, we haven’t had that 

kind of cooperation. It’s been very frustrating for us and it costs us 

a lot of good jobs, and a lot of technology. 

Chairman DORGAN. Mr. Murck, you represent the American 

Chamber. And thank you for clarify all of the relationships. My 

mentioning Mr. Donohue, I don’t mean that in an unflattering 

light. He has his own view of issues and he pursues them very vigorously. But having said that, I hear from businesses who say, in 

order to sell into China we had to move our production to China, 

accept a minority ownership, and then we lost control of our intellectual property and they’re very upset about that. 

I say, why don’t you speak of that publicly? They say, we don’t 

dare. We don’t dare speak of that publicly. We would never be able 

to do any business with China in the future. So, do you hear some 

of those same stories, Mr. Murck? I mean, it’s probably understandable why people in that situation—if they’re going to sell into 

China, they’ve got to accept the dictums of the Chinese Government, and that’s the way it is. They’re certainly not going to want 

to complain publicly about it or they won’t be selling there at all. 

25 

Mr. MURCK. I think there are a couple of points that I would 

make. First of all, in the 1980s, after the Chinese economy began 

to be open in a serious way to foreign investment, which began 

only in 1979, the requirement at the time was that every foreign 

company had to joint venture. One hundred percent of them were 

joint ventures. That requirement has gradually been relaxed. When 

China entered the WTO, there are only a few sectors in which the 

joint venture requirement was maintained. One of them is automobiles, and there are some others. There are some that are totally 

closed to foreign investment even today, for example, upstream oil 

and natural gas production. 

Chairman DORGAN. Was that in contravention of WTO or was 

that negotiated? 

Mr. MURCK. That was negotiated at the time. 

Chairman DORGAN. All right. 

Mr. MURCK. The vast majority of our members are in China on 

a wholly foreign-owned basis, and it’s relatively unusual nowadays 

for a joint venture to be established, except in those sectors which 

continue to be restrictive and which were negotiated as part of China’s WTO accession. So I don’t usually hear the complaint that you 

mentioned in exactly that form. 

However, the broader issue is absolutely there, that if you come 

to China and you bring your intellectual property into the market, 

it is necessary to take a very determined look at how to protect 

that IPR. There is now an emerging set of best practices which are 

outlined in my full statement which enables people to do that to 

a large extent, but it’s still one of the major risks of coming into 

this market and something that everyone has to continue to focus 

on. 

With respect to technology transfer, these are always individual 

commercial decisions. I think companies need to understand that 

when they transfer technology today they are not only winning an 

immediate contract, but they may also be nurturing a future global 

competitor. The view that people take of entering into these technology contracts, as a result, has changed somewhat in the last few 

years. This is a new situation which we all have to face going forward. 

I would just say also that I think both myself and my colleagues 

on this panel would agree with Cochairman Levin’s remark, that 

we don’t really have a strategy and we need one. We are very interested in thinking about this, working with some other trade association partners. I know the U.S. Government is working on this 

as well, and hearings like this are a step in that direction. 

Chairman DORGAN. Just two more questions, Mr. Frazier, and 

then I want to ask Mr. Suttmeier a question. Mr. Frazier, it seems 

to me key to many of these issues is to not only negotiate good 

trade agreements, but also have the capability to enforce them. 

One of my significant complaints about our trade laws in this 

country and the whole trade issue, is we tend to think, if we negotiate a conclusion in a trade agreement, and negotiators have in 

their mindset that to negotiate to an end and have an agreement 

is success. It’s less important what’s in it, if you get an agreement, 

that’s called success. That’s much easier to do than to enforce. 

26 

In fact, recently, a couple of years ago, someone was trying to 

gather up all of the trade agreements we had negotiated with 

Japan so they could get them all in writing, because they discovered they couldn’t even find them, let alone enforce them. So the 

question is, should we not expect, with a wide range of these 

issues, a more effective and more aggressive enforcement mechanism in the government, and where should that be? 

Mr. FRAZIER. Well, clearly. And I agree with you, the negotiator’s 

job is to negotiate an agreement, get a deal. When I was a negotiator, one of the most important lessons I learned is, you have to 

know when to step away. A done deal is not necessarily a good 

deal, and sometimes the best deal is no deal. That was based on 

my experience. 

Also from my experience when I was at USTR, as much time as 

I spent negotiating, I spent infinitely more time on the subject that 

you are raising: enforcement. How do I make sure that the other 

party is living up to its agreements? That is hard work. That is a 

lot harder than doing the negotiating. 

My own personal bias from my background, is USTR is the place 

to do it. They rely on Congress for more sources, they rely on other 

agencies in the Executive Branch for the expertise and the help to 

do it. But you put your finger on it. It’s a lot of work, doing the 

enforcement. 

Chairman DORGAN. Mr. Suttmeier, you indicated that because 

China is nurturing innovators inside of that country, that the failure to protect intellectual property will hurt people inside of the 

country that have been nurtured by government policy. So we 

should expect and understand that China, for its own selfish reasons, will begin to tighten in these areas. 

I understand the point you’re making. I have very little confidence, however, that if we do nothing and our response is as it 

has always been, that there will be much difference moving forward on the protection of our intellectual property. You believe 

there will be, inevitably, improvement. Over what timeframe would 

you think there will be improvement sufficient so that we could expect the same kind of reasonable protections in China as we provide here? 

Mr. SUTTMEIER. That may be quite some years. A different system, I think. It comes back, I think, a little bit to my very first 

point about whether or not you can expect the Chinese to subscribe 

to all of the assumptions and the norms about intellectual property 

that some people in this country do. But as you may know, even 

within this country we have a pretty wide range of views about 

whether our patent system is working or is it not working. It 

serves some industries better than other industries. 

I think that kind of churn, if you will, goes on in China as well. 

One of the additional complications in all of this, I didn’t mention, 

but is in my written statement, is the role of local governments and 

the extent to which local governments, at the provincial and subprovincial levels, are on the same page as the national government. 

So part of the enforcement problem is that we see local governments with increased authority to do something and yet they are 

not always doing the same thing that the central government or 

central policy would suggest. So it’s difficult to answer your quesVerDate Mar 15 2010 11:50 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 U:\DOCS\22SEP10.TXT DIEDRE
27 

tion, I think, because you’re coming at it from really very different 

philosophical and institutional arrangements. 

Chairman DORGAN. Yes. But I think in some ways it’s a matter 

of will. The Chinese are very active, having thousands and thousands of people watching Internet traffic to try to shut off mainstream Chinese citizens from free access to the Internet. Right? 

That’s a matter of will. They’ve decided, that’s what we’re going to 

do. 

Mr. Frazier made the point that when the Chinese Government 

owned as their own possession the logo for the Chinese Olympics, 

they were very tough in shutting down, to the extent they could, 

counterfeits, the pennants, the cups, and the pencils, and so on 

that were sold. They demonstrated, it seems to me, all that I know, 

at that point, if they have the will to shut something down, they 

shut it down. 

Mr. SUTTMEIER. Senator, I think one of the ways I would respond 

to that, is that central authority and the will that you’re talking 

about, is really one of the scarcest commodities in China. So the 

question then becomes, where does that commodity get allocated, 

to whom, and to what kind of a problem? So, yes. I think you can 

repeat this in many, many different areas of public policy. When 

you have a very high priority item or issue, such as the Olympics, 

you can mobilize that attention, you can mobilize that will. 

Chairman DORGAN. Yes. 

Mr. SUTTMEIER. It dissipates on a regular day-to-day basis. 

Chairman DORGAN. Your point is a fair point about local government versus central government. But let me just say that, sitting 

in your chair, we have had people who have testified before this 

Commission who have spent years and years in Chinese prisons because of a national will and a central government that made decisions that reached way out into the villages, into rural areas. 

Where this national government in China wishes to affect behavior, 

it does. We know that because we know the names of people sitting 

in prison today because they spoke freely, because they went on the 

Internet, or did one thing or another. 

I think it is giving a pass to the central government to suggest 

that someone else might do something they’re not aware of. It’s a 

big old country. But my point is, when we have a trade relationship 

with China—and our relationship is one of engagement—we’ve long 

ago decided the best way to address the issue of China is through 

constructive engagement, and constructive engagement, we believe, 

through trade and travel will lead China toward greater human 

rights. I think there is some evidence that that has been the case. 

It’s far from perfect, to wit, the folks that are now in prison whose 

names that we have, and photographs we have, for the most part. 

But despite that, once we decided to engage through constructive 

engagement and have a trading relationship with China, and understanding China is going to be a major part of our economic future—the economic future of the world for that matter—then the 

question is, under what conditions do we engage? Are they fair? 

What has happened, in my judgment, is China has had a very 

deliberate and very effective strategy, an export market strategy 

that exports to us and to others to the extent that they can, and 

then to the extent that they can, limit, as much as is possible, the 

28 

import of goods from us to them. If you go to—again, in a book I 

wrote—a Wal-Mart store in China, go search for an American-made 

good, and you discover part of the problem. 

The point you have brought today is very interesting, Professor, 

and I’m pleased that you’ve done that. I had not thought about this 

before. It is certainly the case that if China is now breeding a new 

group of innovators to create intellectual property in the country, 

they inevitably at some point are going to want to try to protect 

that. But if it’s over a long period of time, we’re going to be stuck 

between here and there with unsustainable trade deficits and a 

weakened American economy. 

Mr. SUTTMEIER. If I may, Senator, briefly. 

Chairman DORGAN. Yes. 

Mr. SUTTMEIER. To go back to your question about, what is the 

timeframe, it might be useful, in fact, to think a little bit about the 

evolution of the IP system, starting from virtually nothing in the 

mid-1980s to where they are today, referencing Senator Feinstein’s 

observations as well. You then throw into that mix the fact that 

this is a very different place in 2010 than it was in 1985. 

I think there’s a long way to go before you’ll have all these vigorous and very robust innovators, but there are a lot of them beginning to emerge and I think they are not entirely happy with the 

conditions that are being faced, especially in things like software, 

but in other areas as well. 

Chairman DORGAN. I thank you very much. We have been trying, 

on a number of occasions, mostly with respect to human rights and 

the issue of political prisoners in China, to shine all the spotlights 

in one spot. Today, we wanted to talk about the issue of intellectual 

property and related trade matters. I think the four of you have 

given us a lot of interesting information for the permanent record 

of this Commission to consider, and I appreciate, Mr. Murck, you 

coming to us from Beijing, and Mr. Suttmeier, you came from Oregon, is that correct? 

Mr. SUTTMEIER. These days, only northern New York. 

Chairman DORGAN. All right. Well, you didn’t travel very far 

then. But I want to thank Thea Mei Lee and Greg Frazier. Thank 

you, Mr. Murck. Thanks to all of you for coming to provide testimony. We keep the records open for two weeks; if you wish to submit supplemental information you’re welcome to do that. 

This hearing is adjourned. 

[Whereupon, at 4:00 p.m. the hearing was adjourned.] 

(29) 

A P P E N D I X 

30 

PREPARED STATEMENTS

PREPARED STATEMENT OF CHRISTIAN MURCK

SEPTEMBER 22, 2010

Mr. Chairman and Members of the Commission: 

Thank you for the opportunity to testify before you on intellectual property rights 

in China. 

I speak on behalf of the American Chamber of Commerce in China, comprising 

over 1,600 companies and 2,600 individuals, and representing the commercial interests of the American business community in China. 

This Commission has a record of sustained attention to intellectual property 

rights protection in China for which we thank you. I testified before the Commission 

on June 6, 2002, and cited intellectual property rights as a case study of the impact 

of the rule of law on business. Revisiting this topic today, I will take the opportunity 

to comment on the progress, or the lack of it, in the past eight years, as well as 

new developments. 

Infringement of intellectual property rights has consistently been among the top 

business challenges reported by our members in our annual business climate survey 

conducted for the past twelve years. In the 2010 survey, it ranked eighth, behind 

inconsistent regulatory interpretation, management level human resource constraints, obtaining licenses, protectionism, bureaucracy, unclear regulations, and 

lack of transparency. IPR protection was described as critically important to 25 percent of the respondents, and very important to 45 percent. 30 percent said it was 

slightly important or not important. You will not be surprised to hear the sectors 

most impacted are IT, high tech, software, research-based pharmaceuticals, entertainment, and consumer brand owners for which IPR protection is a crucial element 

of the business model. Least affected are service providers such as consultants, law 

firms, financial services, accountants and the like. 

Our survey data confirms anecdotal evidence that IPR enforcement has gradually 

improved since 2002. In that year, 21 percent of respondents rated enforcement as 

totally ineffective, 63 percent as ineffective, and 16 percent as effective or very effective. In 2010, 11 percent rated enforcement as totally ineffective, 63 percent as ineffective, and 26 percent as effective or very effective. Given the attention and commitment of resources to this effort by the Chinese government, the U.S. government, 

and the private sector, such slow, modest improvement is a disappointment. 

Nevertheless there has been significant improvement in the legal infrastructure 

supporting intellectual property rights. 

Relevant laws are updated on a regular basis. The process takes about three years 

and circulation of drafts for comment is now routine. 

Courts are increasingly professional and fair, especially in large cities. Enforcement of judgments against individuals and small companies is difficult, but there 

is adequate enforcement against large companies. Damages are growing, but still inadequate by international standards. 

As a result of these improvements, litigation is now common, whereas in 2002 it 

was not. 

The Supreme People’s Court reported over 30,000 cases closed during 2009, a 29 

percent increase on the prior year. Half of 2009 cases involved copyright disputes, 

23 percent trademark disputes, 15 percent patents, 4 percent unfair competition, 

and 2.4 percent technology contracts, demonstrating the range of applicable law. A 

common assumption has been that once Chinese parties obtained intellectual property rights, they would seek enforcement. That is happening. In 2009, 95 percent 

of lawsuits involved two Chinese parties. Chinese rights holders are turning to the 

courts to assert their rights in large numbers. 

Foreign parties litigate cautiously and they generally win. In Beijing’s First Intermediate Court from 2002 to 2006, foreign parties won 60 percent of IPR cases. In 

Zhejiang Province, foreign plaintiffs won 95 percent of their cases from 2003-2008, 

and 99 percent in 2008. 

One of our member companies for the first time recently filed a high profile suit 

against a state-owned enterprise infringer, won, and collected material damages. 

Though they did not recover the extent of their commercial loss, half a dozen similar 

companies subsequently quietly initiated negotiations to settle similar infringement 

situations. 

While not completely satisfactory and limited by the difficulty of gathering evidence, litigation is now a much more realistic option than in 2002. 

31 

As a general matter, however, infringement is still widespread and continues to 

evolve in order to evade enforcement. 

In my 2002 appearance before you, I suggested that an unintended consequence 

of WTO entry might be an increase in counterfeit exports. That has unfortunately 

occurred. Customs has increased inspection of outward bound containers, but is dependent on intelligence from rights holders. Recently, counterfeiters have shifted to 

small packages rather than container shipments, complicating the interdiction effort. The counterfeit supply chain has globalized, with distributors operating in the 

Middle East and Eastern Europe. The recorded country of origin of counterfeit goods 

entering the United States or European Union is often not China. Nevertheless, 

China is the known source of well over half the counterfeit goods seized at the borders of the United States and European Union. 

Counterfeiting has also gone online. In one case, a single individual was operating 

a virtual enterprise from his home where his website listed hundreds of fake products available, and manufacturing, storage, and shipping was outsourced to dispersed companies. He is now in jail, but his business model is no doubt flourishing 

in the hands of others. The issue of counterfeit goods for sale through online auction 

or purchasing sites is well-known. Internet intermediary liability is an under-developed area of law now receiving attention. 

Anti-counterfeiting enforcement now often requires investigation across both provincial borders within China and international borders. 

Cooperation among international enforcement agencies continues to lag the increasing sophistication of manufacturing, distribution, and sales of counterfeit 

goods. 

Copyright and patent infringement is equally widespread. 

I will leave the subject of music and film copyrights to my colleague on this panel, 

except to note that a significant part of the problem is caused by the limited number 

of foreign films permitted to be distributed legally in China every year. This is justified by China as necessary to protect consumers, enable censorship, and protect the 

domestic industry. It simply cedes a large market to pirates. 

China now ranks second globally in the number of personal computers shipped 

domestically, but 49th in revenues of international software vendors. Most of the 

gap is filled by pirated software. AmCham-China is particularly disappointed that 

despite clear regulations requiring computers to be shipped with legally licensed 

software, and requiring state-owned enterprises to use only legally licensed software, compliance by SOE’s is still problematic. We call on the State-Owned Assets 

Supervision and Administration Commission to establish a credible, transparent 

software asset management program under which all centrally-owned SOE’s will 

certify annually under audit that all software on their computers, including operating systems and applications software, is properly licensed. 

Over time best practices have emerged with respect to protecting intellectual 

property in China. An effective strategy usually includes: 

• Registration of trademarks, patents, and copyrights so that they are effective 

in China; 

• Strong internal and technical controls, including access limitations to intellectual property, control of packaging, IP audits, limits on subcontracting, etc.; 

• Contracts with employees, distributors, suppliers and customers that include 

intellectual property provisions; 

• Monitoring use of IPR by employees, competitors, suppliers, and partners; 

• An enforcement strategy including use of investigation firms to gather evidence, supporting enforcement agencies in administrative and criminal cases, 

and private litigation; and 

• Active, targeted engagement with enforcement agencies at central, provincial 

and local levels, both as an individual company and through industry associations. 

Companies with a presence on the ground and the revenue scale that justifies an 

active, multi-faceted effort can control the commercial impact of infringement. However, smaller firms or those without an active presence in China are seriously disadvantaged. 

In the past eight years, the U.S. and Chinese governments have devoted time and 

effort to this situation. 

There is a particularly productive engagement between the U.S. Patent and 

Trademark Office and the State Intellectual Property Office. Last week, for example, a patent workshop was held in Beijing organized by USPTO, SIPO, and the 

U.S. Chamber of Commerce. Among the topics covered were: 

• The national security review required by the Patent Law when patents registered in China are licensed abroad; 

32 

• Design and utility model patents, which meet a lower standard of invention 

and are often unexamined, making them a means of registering other’s technology; 

• Patent disclosure requirements, especially the requirement that direct and indirect genetic resources be disclosed on any biotech patent; 

• Statutory damages; 

• Compulsory licensing (we hope China will continue to construe the grounds 

narrowly and avoid using compulsory licensing); 

• Invention remuneration (the issue is differences between the national patent 

law and some provincial regulations that has led to legal uncertainty); 

• Software patents 

The same delegation participated this week in a workshop on bad faith trademark 

filings with Chinese, European, and Japanese representatives to review the law, 

procedural challenges and best practices to deter such filings. 

These topics give a good sense of the range of subjects under active technical discussion. 

Improving intellectual property rights protection has also been a major priority 

of the U.S. Embassy in Beijing, represented by the presence of an IPR Attache ́, the 

annual Ambassadors IPR roundtable, and many other programs. 

USTR and the Department of Commerce are actively engaged through the Joint 

Commission on Commerce and Trade, and its IPR Working Group. 

The business community is well-linked to all of these ongoing efforts. 

Our progress since 2002 can be described as a ‘‘three yards and a cloud of dust’’ 

offense, slowly grinding our way forward. It isn’t very exciting, but we’re better off 

than we were and we see a path toward the future. There is both bureaucratic momentum and the common interest of the Chinese and foreign business communities 

in improving IPR enforcement. 

Our attention at AmCham-China and in the foreign business community in China 

at large is shifting from enforcement to a new consideration: the impact on our market access and American competitiveness of Chinese industrial policies explicitly intended to strengthen national champion companies by encouraging them to acquire 

or develop intellectual property, giving them protected domestic markets in which 

to gain scale, and planning that they will then be globally competitive. 

I discussed this issue earlier this year in testimony at the International Trade 

Commission on June 15 and at the Ways and Means Committee on June 16. 

As the recovery from global economic crisis continues, China is embarking on rebalancing its growth model to move back to a balanced trade account and shift toward domestic demand as the driver of economic growth. At the same time, the 

economy is being restructured to be more efficient in its use of energy, natural 

resources, and capital. Significant investments are being made in health care and 

education. Wages, especially manufacturing wages, are growing strongly after a long 

period of stagnation. Part of China’s strategy to adjust to new circumstances is to 

move its industrial sector up the value-added curve by encouraging the development 

of intellectual property through research and development, technology transfer, and 

adaptation of acquired technologies. 

Late last year, we and others were alarmed by the release of policies that appeared designed to exclude imported products and the products of foreign-invested 

enterprises from catalogues of products certified as the result of ‘‘indigenous innovation’’, with the likelihood that such catalogues would be used in government and 

SOE procurement. In response to comments from many quarters, the Chinese government entered into a serious dialogue. The Ministry of Science and Technology 

has removed the most egregious aspects of the 2009 regulations from the 2010 draft. 

Premier Wen Jiabao on several occasions, most recently earlier this month at the 

World Economic Forum meeting in Tianjin, has directly stated that foreign-invested 

enterprises in China are regarded as Chinese enterprises and will not be discriminated against. These are welcome statements, but it is important to recognize that 

there are broader concerns about the future direction of Chinese policy and the market access of foreign companies. 

Our concerns include: 

• Import substitution policies such as the Guiding Catalogues of Major Indigenous Innovation Technologies and Equipment of 2009, which specifies import 

substitution as a goal. 

• The Government Procurement Law directly discourages procurement of imported products. China is not a member of the WTO Government Procurement 

Agreement and its first offer to join was not commercially meaningful; a second 

offer made in July was a modest improvement, but much work remains to be 

done. 

33 

• Standardization mandates such as the Ministry of Industry and Information 

Technology requirement that the Chinese WLAN Authentication and Privacy 

Infrastructure (WAPI) standard be included with any Wi-Fi enabled mobile device. Since this standard has not been commercially accepted anywhere, including in China, this mandate is purely rent-seeking. 

• The 2008 Patent Law expanded the grounds for compulsory licensing, though 

China has not yet used them. It also requires foreign companies in China to 

submit to a review by Chinese authorities of whether a patent originated in 

China ‘‘relates to the security or vital interests of the State’’, including ‘‘the substantial economic interest of the State’’, before it can be exported. 

• The Standardization Administration of China is developing standards rules 

that could lead to compulsory licensing or licensing on non-commercial terms 

of foreign technologies used in ‘‘mandatory national standards’’, and possible 

anti-trust consequences for refusal to comply. 

• Exclusion of representatives of foreign-invested enterprises from participating 

in and/or voting in China’s standards setting committees. 

• Exemptions from infringement in the patent law and drug registration rules 

for ‘‘research’’ and ‘‘non-commercial use’’ and for research for the purpose of 

producing generic pharmaceuticals. These facilitate stockpiling of infringing 

products, reverse engineering, and generic competition with innovative pharmaceutical companies in advance of patent expiration. 

• Technology transfer on terms favorable to the Chinese party required to win 

necessary government approval for large contracts. 

• Selective enforcement of the Anti-Monopoly Law, which rarely reviews transactions involving no foreign party. 

• Bid specifications that favor local producers, for example in the wind power 

sector. 

• The Multi-level Protection Scheme requiring that technology infrastructure in 

key sectors runs on domestic hardware and software where possible. This is already reducing foreign market access in the banking sector. 

• Sectoral restructuring policies that generally involve consolidation driven by 

state-owned enterprise expansion as the expense of the private sector, for example, in the coal industry and also in the rare earths industry. 

These problems are qualitatively different from inadequate enforcement of intellectual property rights. We agree in principle that IPR infringement is illegal, undesirable, and a drag on China’s development. We are working together toward 

solutions of a wide range of genuine practical difficulties to improve enforcement. 

We might wish that there were stronger political will on the Chinese side, or that 

better enforcement would be given a higher priority, and they might wish we were 

more patient, but we share a basic stance. 

The industrial policy issues listed above, however, reflect considered, deliberate 

policy choices inimical to our commercial interests that restrict both national treatment and development of a market economy. 

The underlying problem exposed by these policies is the very different regulatory 

and economic systems of our two countries. In China, the government’s regulatory 

and planning bodies, state-owned enterprises, and the institutions of the Party all 

play a large role in managing the society and the economy. Only the first of these 

have counterparts in the United States and their role is much different. How should 

we relate to an economy and a market driven to a large extent by industrial policy? 

SOE’s can be simultaneously customers, suppliers, partners, and competitors. The 

leaders of major SOE’s are ministerial level officials, who often hold senior Party 

office as Central Committee members or alternate members. Yet given the size and 

growth potential of China’s markets for many products, it is strategically necessary 

to compete successfully there in order to be a global leader. We cannot throw up 

our hands and abandon the market because of its differences with our. Of course, 

the same is also true for Chinese enterprises with respect to the U.S., EU, and Japanese markets, where Chinese home market advantages often turn into disadvantages. 

In our active discussions with the Chinese government and media, we often make 

the fundamental points that restricting competition stifles innovation, and that 

protected markets based on unique domestic standards prevent local firms from succeeding in global markets based on harmonized international standards. We recognize there is a vigorous policy debate within China, with many unresolved issues. 

In thinking about the future, the American Chamber of Commerce in China starts 

with the premise that it is realistic to think in terms of $3 trillion long-term goals: 

(1) Increasing US exports to China from $80 billion to $1 trillion annually; 

34 

(2) Increasing the revenues of US firms producing goods and services in 

China for the Chinese market from approximately $100 billion to $1 trillion annually; and 

(3) Welcoming cumulative foreign direct investment from China in the United 

States of $1 trillion. Just as Japanese capital has contributed to job creation 

and economic development in the United States, so too can Chinese direct investment, giving the investors a deeper interest in our mutual prosperity and 

broader exposure to our market norms. 

If we think in terms of building on the synergy between the U.S. and Chinese 

economies on this scale, what must be done? 

We suggest the following: 

• We need to understand better China’s policy framework. Based on that understanding, we can better define the goals of our trade negotiators and private 

companies. For this reason, we have supported the investigation of the International Trade Commission now underway by arranging for member companies 

to be interviewed. We look forward to the ITC reports and hope that they will 

provide useful strategic input for all parties. We hope to contribute to an ongoing strategic discussion of U.S. options. 

• We support the National Export Initiative, noting that China is our third 

largest and fastest growing export market. 

• In support of the NEI, we support increased funding for the Trade Development Administration. AmCham-China participates in two private sector/public 

sector partnerships in aviation and energy that bring together Chinese and U.S. 

government agencies with American and Chinese enterprises in capacity-building programs partially funded with seed money from TDA. These are generating 

business opportunities as well as institutional and personal relationships that 

will be of last benefit to both countries. 

• We also support increased funding for export promotion through the Department of Commerce. 

• We support reform of U.S. export controls on the principles proposed by Secretary Gates in March of this year. 

• We support prioritizing negotiation of China’s accession to the Government 

Procurement Agreement of the WTO, with sub-central as well as central government commitments. This would provide welcome assurance of future access to 

important markets for both American and Chinese companies. 

• We support resumption of negotiation of a bilateral investment treaty to support both American investment in China, recognizing the large role of the stateowned sector, and Chinese investment in the U.S. 

• Finally, we believe the United States must strengthen its own competitiveness by examining R&D tax credits, developing a forward-looking national energy policy, maintaining immigration rules that attract talented engineers and 

scientists to our country, improving our educational system, reducing the fiscal 

deficit to a sustainable level and similar measures. To a great extent, our fate 

is in our own hands and does not depend on others. 

Thank you for the opportunity to appear. I look forward to your questions. 

PREPARED STATEMENT OF THEA MEI LEE

SEPTEMBER 22, 2010

Chairman Dorgan, Co-Chairman Levin, Members of the Commission, thank you 

for the invitation to participate in today’s important hearing on behalf of the eleven 

and a half million working men and women of the AFL–CIO. 

Intellectual property rights enforcement is often assumed to be of interest only to 

business, but in fact, it is vitally important to American workers, as it impacts jobs, 

wages, innovation and growth, consumer safety, tax revenues, and the reputation 

of American products. 

Other issues (including worker rights, currency manipulation, and subsidies) have 

often dominated labor’s policy priorities with respect to China, but the lax enforcement of IPR protections remains a key contributing factor to our lopsided trade relationship. Both in the arts and entertainment sector, where copyrights are routinely 

ignored, and in the manufacturing sector, where counterfeit parts and products are 

rampant, billions of dollars in revenues and thousands of good jobs are at stake. 

Moreover, taking steps now to address the Chinese government’s flagrant violation of its international obligations with respect to IPR is crucial to setting a sustainable long-term trajectory for our bilateral relationship, especially with respect 

35 

to technology transfer and innovation. This will impact American jobs for generations into the future. 

We often hear business and government officials tout the promise of the Chinese 

market, and, of course, it is both large and fast-growing. But meaningful access to 

that market for American producers and workers is severely undercut by IPR infringement. If American entertainment products and software cannot sell at a reasonable price in the Chinese marketplace, and if the legitimate owners of those 

products are not able to receive their fair share of the revenues, then the ‘‘size’’ of 

the Chinese market is, for all intents and purposes, a tiny fraction of what it ought 

to be. 

Similarly, American products are in direct competition with Chinese-produced 

counterfeits, costing jobs in third-country markets, as well as in the United States. 

As Paul Almeida, president of the AFL–CIO Department for Professional Employees, told a Senate committee this summer, ‘‘Intellectual property equates to jobs and 

income for American workers. Theft of intellectual property raises unemployment 

and cuts income. For too many workers in the United States today, both jobs and 

income are hard to come by. If the United States allows attacks on intellectual property to go unanswered, it puts good livelihoods at risk.’’ 

The breadth and depth of the IPR problem in China are vast. According to a 2008 

USTR report on China: ‘‘IPR infringement continued to affect products, brands, and 

technologies from a wide range of industries, including films, music and sound 

recordings, publishing, business and entertainment software, pharmaceuticals, 

chemicals, information technology, apparel, athletic footwear, textile fabrics and 

floor coverings, consumer goods, food and beverages, electrical equipment, automotive parts and industrial products, among many others.’’ 

In addition, IPR infringement means that American consumers face risk of substandard or even dangerous products in a wide range of areas. According to USTR, 

‘‘China’s widespread counterfeiting not only harms the business interests of foreign 

right holders, but also includes many products that pose a direct threat to the 

health and safety of consumers in the United States, China and elsewhere, such as 

pharmaceuticals, food and beverages, batteries, automobile parts, industrial equipment, and toys, among many other products.’’ 

In terms of the global IPR enforcement problem, China looms large, especially in 

terms of counterfeited and pirated products. The GAO reports that, ‘‘According to 

CBP data, seized counterfeit goods are dominated by products from China. During 

fiscal years 2004 through 2009, China accounted for about 77 percent of the aggregate value of goods seized in the United States’’ [GAO, ‘‘Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated 

Goods,’’ 2010]. 

Over many years, the U.S. government has made repeated attempts to cajole, 

pressure, or convince the Chinese government to improve its IPR enforcement 

record, through the use of Special 301 cases, priority watch lists, the Joint Committee on Commerce and Trade, and, finally, WTO cases. 

While there have certainly been some improvements in China’s legal framework, 

violations of IPR remain rampant, and the Chinese government continues to introduce 

new and problematic policies, including most recently the indigenous innovation policy, which sought to impose technology transfer and purchasing requirements on 

companies seeking to do business in China, violating China’s IPR and procurement 

commitments. 

This summer USTR filed a request for a WTO dispute panel, challenging several 

aspects of China’s IPR law and enforcement regime. First, the request questioned 

quantitative thresholds in China’s criminal law that must be met in order to start 

criminal prosecutions or obtain criminal convictions for copyright piracy and trademark counterfeiting. Second, the request contested Chinese rules for allowing IPRinfringing goods seized by Chinese customs authorities to be released into commerce 

following the removal of fake labels or other infringing features, contrary to WTO 

rules. Third, USTR challenged the denial of copyright protection for works awaiting 

Chinese censorship approval. Chinese copyright law provides no protection for copyright holders before censorship approval is granted. 

We appreciate USTR’s initiative in bringing this case to the WTO and hope that 

our government will continue to insist that the Chinese government fully comply 

with international norms in this important area. 

Innovation and creativity fuel the most vibrant sectors of the U.S. economy, including the arts, entertainment and media sector and manufacturing. Both of these 

are enormously important to American workers, and both are hard hit by the Chinese government’s failure to protect IPR. 

A recent AFL–CIO Executive Council statement on piracy laid out the challenge 

in the arts, entertainment, and media sector: ‘‘Entertainment professionals may 

36 

1The Motion Picture Association of America (MPAA) represents the six major US motion 

picture studios: Paramount Pictures Corporation; Sony Pictures Entertainment Inc.; The Walt 

Disney Studios; Twentieth Century Fox Film Corporation; Universal City Studios LLLP; and 

Warner Bros. Entertainment Inc. 

work for multiple employers on multiple projects and face gaps in their employment. 

Payment for the work they have completed helps sustain them and their families 

through underemployment and unemployment. For American Federation of Television and Radio Artists (AFTRA) recording artists in 2008, 90 percent of income 

derived from sound recordings was directly linked to royalties from physical CD 

sales and paid digital downloads. Screen Actors Guild (SAG) members working 

under the feature film and TV contract that same year derived 43 percent of their 

total compensation from residuals. Residuals derived from sales to secondary markets funded 65 percent of the International Alliance of Theatrical Stage Employees 

(IATSE) [Motion Picture Industry] Health Plan and 36 percent of the SAG Health 

and Pension Plan. Writers Guild of America, East (WGAE)-represented writers often 

depend on residual checks to pay their bills between jobs; in some cases, the residual amounts can be as much as initial compensation. Online theft robs hard-earned 

income and benefits from the professionals who created the works.’’ 

In the manufacturing sector, the estimates of losses from counterfeiting run to billions of dollars. Again, the victims include workers, who face lost jobs and income. 

From auto parts to circuit breakers, counterfeiting endangers all of us with unreliable products. It then taints the original products with the inferior quality of the 

counterfeits. As with the arts, entertainment, and media industries, the consequences include a diminished incentive to invest and a downward spiral for U.S. 

workers and our economy. 

The question posed by the Commission is ‘‘Will China Protect Intellectual Property? ’’ I believe that the answer depends on our government’s actions. To date, despite many efforts, we have not done enough to insist that the Chinese government 

fully comply with its international obligations. Until the price for non-compliance 

exceeds the gains, American workers and businesses will continue to pay a high 

price, and the Chinese government will continue on its current short-sighted path. 

PREPARED STATEMENT OF GREG FRAZIER

SEPTEMBER 22, 2010

Mr. Chairman, Members of the Commission: 

Better access to the Chinese market lies at the heart of the American film community’s strategy to protect the American jobs at risk from the attacks of Chinese 

film and television pirates. We cannot compete with free; Chinese film pirates are 

not only thieves, they are our competitors—competitors who we have subsidized. 

American men and women create and produce the entertainment Chinese pirates 

peddle; US finances underwrite the profits Chinese pirates stash into their bank 

accounts. Attacking this problem, leveling this playing field, and protecting the 

American jobs at risk are multifaceted—better Chinese laws and more commitment 

to enforce those laws—but unless the market barriers are removed, those efforts will 

fall short. 

China’s filmed entertainment market is a paradox: Crippled by one of the highest 

piracy rates in the world—we estimated the piracy rate at over 90 percent in a recent study—the market for films for theatrical release is growing faster than most 

other markets. 2009 box office revenues for US companies doubled from 2008, but 

still only reached levels approximate to the US box office for less than one month. 

This growth is not coming at the expense of the Chinese industry—American 

films are not threatening to crowd out the local industry—the Chinese film industry 

is growing rapidly as well. The number of domestic films produced in China has tripled since 2003, and box office from domestic films grew almost 50 percent from 

2008. 

MARKET BARRIERS = MORE PIRACY

China’s film market is also one of the most restricted in the world. MPAA’s1 work 

to open the market is critical to growing jobs in the US industry, as well as being 

a key element of its content protection work in China: There is no shortage of US 

films in China; they are readily available in pirated form. The barriers China enforces only keep out the legitimate products and companies; the purveyors of pirated 

films have no regard for the rules enforced against US companies. 

37 

China maintains a quota on the number of foreign films it allows into its market 

each year: 20. In addition, it imposes several restrictions on US businesses in the 

home entertainment and television business that do not exist elsewhere. Keep in 

mind as you review the list of barriers that these barriers affect only legitimate 

businesses, the businesses that play by the rules. Just as the pirates ignore intellectual property rights, they are neither bound by nor feel any obligation to abide by 

the restrictions affect our members: 

• Foreign Investment Restrictions—China limits foreign ownership in cinemas 

and in video distribution companies to 49 percent. In the television sector, companies wholly or jointly owned by foreign entities are prohibited from investing 

in the broadcast industry. 

• Television Quotas—China restricts foreign television drama and film programming to no more than 25 percent of total airtime, and other foreign programming to no more than 15 percent of total air time. Foreign programming 

is banned during prime time and may not constitute more than 30 percent of 

pay television channels. Foreign animation is restricted to no more than 40 percent of total airtime and importers of foreign animation must produce a like 

amount of domestic animation. 

• Screen Quota—The government sets strict guidelines for foreign films. The 

total time for foreign films cannot exceed one-third of the total screen time. 

• Import Duties—Import duties on theatrical and home video products are 

sometimes assessed on the potential royalty generation of an imported film, a 

method of assessment which is excessive and inconsistent with international 

practice of assessing such duties on the value of the underlying imported physical media. Excessive import duties place a severe drag on investments and impede distribution of legitimate filmed entertainment product thus increasing 

demand for pirate product. 

• Retransmission of Foreign Satellite Signals—Local cable networks may not 

carry foreign satellite channels without government approval or landing permits, which currently are limited to Guangdong and a handful of foreign channels. Moreover, foreign satellite channels beaming into China are required to 

uplink from a government owned encrypted satellite platform. The annual fee 

for each channel remains excessively high at $100,000. 

• Restrictions on Retailers—Foreign retailers are precluded from selling home 

video products without entering into a qualifying joint venture with a Chinese 

firm. The number of legitimate distribution points remains far less than the 

number of pirate distribution points. 

• Blackout Periods During Peak Seasons—The government has historically decreed ‘‘black-out periods’’ during which no new foreign films may be released, 

to prevent competition with Chinese films released during the same period. 

Such blackouts typically occur during national holidays or coincide with political 

events. 

None of these barriers, however, cap the Chinese audience’s appetite for the 

filmed entertainment the American film community produces. You can get virtually 

any US film you want in China. You may not find it in the cinema, the local television channel, nor video store, but you can find it—in pirated form, either as a 

counterfeit DVD or at a Chinese website that has obtained the product illegally. 

The export and transshipment of pirate optical discs from and through China continues to grow, especially pirate DVDs of US films. Transshipments flow out of 

China to destinations worldwide, including the US, through express mail and courier companies. The recent emergence of high-quality, counterfeit Blu-ray DVDs 

supplied in large volumes to businesses and consumers throughout the world over 

Chinese retail and auction websites is among the latest examples of China’s export 

piracy problem. 

Unfortunately, too many look at the harm of buying an illegal DVD for $2.00 in 

the Silk Market as victimless, perhaps even as a souvenir of a trip to Beijing. Besides morally wrong, there are at least two other things wrong about that. First, 

it is not a $2.00 theft. Most likely, the movie on that disc was camcorded in a theater. Illegal camcords account for roughly ninety percent of all the illegal movies in 

the world, and China is becoming a haven for camcorders. In the first half of this 

year, our research indicates that 24 camcords occurred in China. A typical MPAA 

member company movie may cost as much as $100 million to make. So, the person 

who camcorded the movie, who stole it off the screen, committed a $100 million 

theft. 

Second, film piracy is not a victimless crime. According to a report the RAND Corporation produced in 2009, organized criminal syndicates around the world are frequently engaged in film piracy. It generates enormous profits at, unfortunately, 

38 

little risk of apprehension. For example, the study identified Chinese gangs with operations as far away as the UK engaged in the trafficking illegal DVDs. It is possible the $2.00 you spend for that souvenir may not be going to an organized crime, 

but there is a very high likelihood it is. 

WHAT TO DO?

The American film community, alone, and in cooperation with other industries 

and with the US government has engaged for years in a dialogue with the Chinese 

about amending and strengthening China’s intellectual property laws. 

As the market increasingly turn to the online environment, we need to make sure 

it is a safe market and market in which the investment of the US film community 

can be protected. That is the case all around the world, and including in China. 

Our priority with respect to China’s intellectual property laws today is urging 

China to address its Internet piracy problem. We believe China must provide adequate protection in the digital environment by criminalizing end-user piracy, adding 

reference to the exclusive rights provided in the law, criminalizing violations of the 

anti-circumvention provisions for technological protection measures (TPMs) and 

rights management information, criminalizing Internet offenses that are without 

profit motive but that have affect rights holders on a commercial scale, and eliminating distinctions between crimes of entities and individuals. 

To foster legitimate electronic commerce, it is imperative that China establish 

adequate liability for ISPs for piracy related offenses and satisfactory measures for 

notice-and-takedown of websites offering pirate materials. Such provision will foster 

a responsible partnership between the content industries and the delivery networks. 

The core of the problem, however, is whether the government has the will to protect the creative works American men and film produce. In your invitation to testify, 

you asked that I comment the various campaigns the authorities have undertaken 

over the years to enforce copyright violations. Some have been more successful than 

others. Many have simply been show campaigns, with little discernable results. 

Few, if any, however, have been enduring. 

Let me illustrate: Across the street from the Silk Markets was a store simply 

named ‘‘DVD CDs.’’ We prevailed upon the authorities to raid it not once, but three 

times in the course of years. I met with a senior Chinese official after the third of 

those and he bragged that the store had become a sporting goods and luggage retailer. After the meeting, we drove there and sure enough, through the windows I 

could see golf clubs and suitcases. When we entered, we were quickly ushered 

through a curtained passageway and into a back room with virtually any pirated 

DVD I could want. 

Commitment. The government has a legislative framework that, while it needs 

some improvement, is fairly good. In addition, it has shown it can clean up the 

streets and stop infringement—it was impossible, for example, to find any counterfeit Olympics’ goods two years ago. And, we have increasingly seen in recent months 

the government crack down on online content it finds objectionable—mostly pornography and political content. 

But, that some commitment, that same will, has too often fallen short with respect to US filmed entertainment, to the detriment of your constituents working to 

produce it. 

We believe we have to continue to press the Chinese for more and more effective 

copyright enforcement. The work you and your colleagues perform in continuing to 

raise this problem is invaluable. The work the Administration has performed, and 

continues to undertake, is as well. 

That said, I do think it is time we give serious consideration to the effectiveness 

of some of the bilateral engagements on intellectual property rights. We do need to 

make a serious appraisal of the accomplishments of the Joint Committee on Commerce and Trade and its intellectual property rights working group. I cannot say 

today what the course is to improve it, but I can say we would be remiss if we were 

simply to continue business as usual. 

I do know we have to improve access to the Chinese entertainment market. I will 

conclude where I began: The men and women in the American film community 

produce the most anticipated, most watched, most memorable movies in the world. 

In artistic and business terms, they can, and do, compete with anyone. However, 

they cannot stay on the job if they have to continue to compete with pirates stealing 

their works. We cannot compete with free. 

We need to work to remove the barriers to the Chinese market—not overnight nor 

all at once, but to set a process by which the playing field levels. We believe that 

the next six months represents a unique window in that process. Last December, 

the World Trade Organization (WTO) ruled in favor of the complaint the US governVerDate Mar 15 2010 11:50 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00042 Fmt 6601 Sfmt 6621 U:\DOCS\22SEP10.TXT DIEDRE
39 

1One useful review of the variety of views currently found in the international discourse on 

IP can be found in Scenarios for the Future, a 2008 report of the European Patent Office. 2 Bernice Lee, Ilian Iliev, and Felix Preston. Who Owns Our Low Carbon Future? Intellectual 

Property in Energy Technologies. London, Chatham House. 

ment brought against some of these key market barriers. And I want to thank, 

again, and commend the incredible effort the men and women of the Office of the 

US Trade Representative did in successfully pursuing this case. 

The Chinese government has committed itself to complying with this decision by 

next March. We applaud them for the commitment; we await the details. We believe 

it is critical—to grow US jobs and to protect the movies in China—that these barriers come down in a way that sets in place a dynamism in the Chinese market that 

enables the US film community to grow, and that sustains the growth in the Chinese industry. 

You and your colleagues meet with Chinese officials frequently. On this issue and 

on behalf of the Americans at work in the US film industry, if I could ask you one 

thing, it would be: Tell the Chinese officials how closely you are following their work 

to comply with the WTO ruling. Tell them how high a priority fulsome, good faith 

compliance is to improving the bilateral relationship. Tell them how important it is 

to China’s place in the world, to it earning the respect of the international community, that it complies with its international obligations. 

And one more thing, tell them to see a US movie, a legitimate one. 

Thank you. 

PREPARED STATEMENT OF RICHARD P. SUTTMEIER

SEPTEMBER 22, 2010

Mr. Chairman, Members of the Commission, 

It is a pleasure to be here with you today; thank you for inviting my participation. 

My comments will deal mainly with China’s evolving technology and industrial policies, and the role of intellectual property in them. Let me make the following points 

and then attempt to answer any questions you may have. 

1. Concerns about intellectual property rights in China are usefully seen against 

the background of growing international attention to intellectual property. On one 

hand, countries and companies around the world are coming to see intellectual property as a key component of competitiveness; a number of national governments, including China, have introduced national IP strategies. At the same time, there is 

also considerable international dissatisfaction with the norms and procedures by 

which international IP regimes operate.1 Growing interest in clean energy technologies in the face of worries over climate change reinforce the increasing importance of IP but also highlight some of the areas of international dissensus.2

2. We should recognize that there have been many changes in Chinese thinking 

about intellectual-property over the past two decades, including a variety of legal 

and institutional steps (e.g., new courts) taken to protect intellectual property. The 

growing number of Chinese innovators have acquired an interest in protecting IPR, 

and there is official recognition that China’s aspirations for indigenous innovation 

are unlikely to be met without a far more credible intellectual property protection 

regime. At the same time, the production of intellectual property has also acquired 

a central role in Chinese thinking about their technological future and in the aggressive national technology and industrial policies now in course to realize that future. For the international community engaged with China, these changes are both 

encouraging and troubling. The encouragement comes from the sense that Chinese 

companies and the Chinese state see it in their interest to promote a more robust 

intellectual property protection system. The concerns come from the fact that the 

implementation of China’s industrial policy sometimes puts the intellectual property 

rights of foreigners at risk. 

3. In 2006, China introduced its ‘‘Medium to Long-Term Plan For Scientific and 

Technological Development’’ (MLP). The plan is a very ambitious effort to make 

China an ‘‘innovative society’’ by 2020 by encouraging the development of ‘‘indigenous innovation.’’ The MLP puts a premium on the production of intellectual property; it expects that by the end of the plan period, the number citations to papers 

produced by Chinese scientists will have entered the world’s top 10 countries. It also 

hopes to become part of the top 15 countries in terms of patents granted. 

The term, ‘‘indigenous innovation’’ is a rather imperfect rendering of the Chinese ‘‘zizhu chuangxin,’’ a term which defies easy translation and, as a result, has given 

rise to some confusion among English speakers. While ‘‘indigenous’’ captures part 

of the meaning, so might ‘‘independent,’’ ‘‘homegrown,’’ ‘‘self-initiated,’’ ‘‘original’’ 

40 

and several other terms. In the face of confusion among foreigners and, indeed, 

among Chinese themselves, the Chinese Ministry of Science and Technology has 

suggested that zizhu chuangxin be understood as encompassing (1) genuinely ‘‘original innovation’’ (yuanshi chuangxin), (2) ‘‘integrated innovation’’ (jicheng chuangxin, 

or the fusing of existing technologies in new ways), and (3) ‘‘re-innovation’’ (yinjin 

xiaohua xishou zaichuangxin), which involves the assimilation and improvement of 

imported technologies. In desperation, some officials of the Ministry have suggested 

that zizhu chuangxin be translated simply as ‘‘innovation.’’ 

Confusion over translation, however, should not mask the deeper policy and cultural significance of the term. It grows out of China’s fear of dependency on foreign 

technology, and what that means for the development of national security capabilities and the relative gains that China’s manufacturers might realize in the global 

economy. In addition, the concern for ‘‘zizhu chuangxin’’ has roots in a deep cultural 

concern that as a great civilization, China should again become a leader in science 

and technology, as it once was. With these considerations in mind, the term might 

better be translated as ‘‘sovereign innovation.’’ 

The ambiguity surrounding the meaning of ‘‘zizhu chuangxin’’ has meant that it 

has been available as a symbol for the policy entrepreneurship of various groups in 

China’s technical community (membership in which is drawn from industrial, academic, and government circles). For some, it has justified the pursuit of techno-nationalist objectives intended to build up a China-focused national innovation system. 

For others, it supports a more techno-globalist vision in which growing Chinese capabilities in research and development are married with global technology flows and 

globalized R&D to produce and innovation system that is not bounded by narrow 

economic nationalism. The challenge for the international community is to identify 

and strengthen the hands of those with the latter orientation. 

The pursuit of ‘‘zizhu chuangxin’’ and the making of an ‘‘innovative society’’ in 

China by the year 2020 involves a significant expansion of R&D spending. But 

China has long suffered from a serious gap between R&D activities and an inability 

to realize commercial and other gains from turning new knowledge into practical innovations. China is attempting to overcome this gap by incentivizing Chinese industrial enterprises to take the challenges of innovation seriously. Therefore a major 

thrust of the MLP is to transform Chinese enterprises into centers of innovation and 

leaders of the national innovation system. A variety of ‘‘implementing policies’’ in 

support of the MLP are intended to privilege Chinese enterprises and support the 

development of Chinese intellectual property and Chinese technical standards. 

These policies in support of ‘‘indigenous innovation’’ have tended to push China in 

the techno-nationalist direction, in the view of many foreign observers, and have 

elicited widespread international concern. 

The MLP contains targets for the development of products containing Chinese 

intellectual property as well as technical standards based on Chinese IP. As these 

targets have been operationalized, they have resulted in an incentive structure for 

Chinese companies, universities, and research institutes that rewards the filing of 

patents as a measure of success. It is not surprising, therefore, that there has been 

a steady growth in patenting over the past five years—although the quality of many 

of these patents has been questioned. 

The elements of this incentive structure include, in the first instance, the use of 

IP production (measured in terms of papers and patents) for evaluating R&D 

projects and for awarding new R&D grants. But, in addition, IP criteria have been 

built into government procurement policies, and policies for technical standards. 

Thus, in ways that are rather unusual by international norms, China has proposed 

that products qualifying for government procurement should contain Chinese intellectual property. Apart from the ambiguity of what this policy might mean (what 

is ‘‘Chinese intellectual property’’?; how is it determined?), foreign companies have 

been concerned that they will be excluded from an increasingly lucrative Chinese 

government procurement market, depending on how the policy is implemented. Although the central government appears to be backing away from the more draconian 

interpretations, local governments have substantial discretion in interpreting it and 

have been slower in adjusting policy implementation in ways that are more consistent with international norms. 

While the promotion of the development of Chinese IP as part of the MLP illustrates the growing importance of strong intellectual property rights protection in 

Chinese thinking, new policy proposals in the area technical standards illustrate the 

persistence of sympathies for weaker IP. In this case, China has in recent years 

been troubled by what it considers to be excessive royalty fees charged for the use 

of certain technical standards. As a result, it has shown considerable interest in trying to forge new directions for the ‘‘patents in standards’’ problem, such that the 

41 

3http://www.abs-cbnnews.com/business/09/19/10/china-beacon-foreign-clean-tech-firms 

IP provisions of the Chinese standardization system would reflect what Chinese officials believe to be a ‘‘fairer’’ formula for royalty payments. 

4. There is no simple way to respond to China’s ‘‘indigenous innovation’’ initiatives, especially when they are understood in terms of ‘‘sovereign innovation.’’ Nevertheless, responses along several tracks are appropriate. First, China should be 

pushed to honor its commitment to join the Government Procurement Agreement 

sooner rather than later. Second, the United States should build on its extensive 

science and technology contacts with China via commercial, academic, and government channels to promote a vision of innovation that transcends a limited and narrow techno-nationalism. A case can be made that some of China’s policies in support 

of ‘‘indigenous innovation’’ actually work against the achievement of the ‘‘innovative 

society’’ goal, and this case should be made frequently and forcefully in contacts 

with Chinese policymakers and members of the technical community. 

Policies with regard to procurement and standards have led to the bureaucratization of IP issues, and the complexities of central government-local government relations in the implementation of policies have made things worse. As in other areas 

of Chinese public policy, policymaking and policy implementation are not as coherent as a ‘‘China Inc.’’ image might lead us to believe. It is unfortunate that the 

areas of incoherence can, and often do, impose costs on China’s foreign commercial 

partners. A positive interpretation of these problems is that China is in a phase of 

development that makes incoherence inescapable, but is trending in the direction 

of greater coherence and, hence, a future with fewer conflicts over IP matters. A 

more troubling interpretation, though, is that China is on a trajectory which will 

be characterized both by greater policy coherence and policy development in the 

areas of IP and standards which will be more difficult to harmonize with international norms. 

What is less subject to interpretation, though, is that China is seriously and understandably committed to its own scientific and technological development and innovative capacity, and there is little that the international community can do to 

change this. Instead, members of the international community have to devise ways 

of exploiting that development by encouraging its further internationalization, monitoring its progress, and preparing for strategic interventions to take advantage of 

the new opportunities it will offer. 

5. In joining WTO, China has pledged that technology transfer requirements 

would not be a condition for foreign investment. That we continue to hear complaints about coerced transfers indicates that China is either ignoring its WTO commitments or has found new policy tools to induce transfers. 

In many industries, though, including clean energy, the Chinese market is so attractive to international companies that the wresting of some degree of technology 

transfer from investments is unavoidable. In raising this point, we are reminded 

that technology transfer, more often than not, is a business decision. We should also 

be reminded that, except in rare cases, the business value of intellectual property 

depends not solely on the quality of the intellectual contribution embodied in the 

IP, but also on the ‘‘complementary assets’’ which make it possible to exploit the 

value of the intellectual property. 

In the area of clean energy technologies, we are increasingly seeing that China 

is providing those complementary assets at a rate, and on a scale, that makes it 

a magnet for owners of IP to conduct business there. There have been a number 

of recent reports to this effect; I would call your attention to a most recent one 

issued by Agence France Presse, entitled ‘‘China a Beacon for Foreign Clean Tech 

Firms.’’ 3 According to this account, China has surpassed United States this year as 

the most attractive market for investments in renewable energy technologies, in 

large part because it has become ‘‘. . .a very good market to commercialize technology at scale. . . .’’ Furthermore, China is providing the financial resources to facilitate the transformation of important technical ideas into commercial products. 

Quoting Nicholas Parker of the US-based Cleantech Group, ‘‘Things are tough for 

companies here (in the West). . . .we have a shortage of debt financing. The money 

for deployment, for building wind farms or for building a factory where you tend 

to use debt financing, has dried up due to the crisis on Wall Street. That shortage 

doesn’t exist in China.’’ Add to China’s advantages the fact that it is creating an 

increasingly competent R&D system with a growing number of capable scientists 

and engineers. In short, China offers markets, financing, R&D capabilities, and a 

supportive policy environment for clean energy; it is not surprising that owners of 

intellectual property will risk IPR infringements by taking their business there. 

6. The points made above are intended to suggest that US thinking about intellectual property rights in China needs a fairly major overhaul. That there are IPR 

42 

abuses in China is beyond doubt; they affect Chinese innovators as well as foreigners, and should be opposed. But it is also clear that the value of intellectual 

property is not solely intrinsic to the ideas themselves, but requires an environment 

rich in complementary assets for that value to be released. It is becoming increasingly clear that in the area of clean energy, policy failures resulting from what 

appears to be a broken political system in United States are leading to the squandering of the complementary assets we once had in abundance. 

The globalization of innovation puts a premium on both the ability to produce intellectual property, but also to exploit it. The global innovation system is usefully 

thought of as a complex network of interconnected nodes. The United States has 

been a ‘‘supernode’’ in this network for the last 60 years as the center of IP creation 

and IP exploitation and, importantly, a magnet for innovators from around the 

world. Many signs indicate that China is becoming a new ‘‘supernode’’ in spite of 

the difficulties of its IPR regime. While it is important for the United States to continue to work with China in moving that regime towards international norms, there 

clearly is a need for new thinking about intellectual property in China, and for a 

far more imaginative approach to engaging China on these issues. 

PREPARED STATEMENT OF HON. SANDER LEVIN, A U.S. REPRESENTATIVE FROM

MICHIGAN, COCHAIRMAN CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

SEPTEMBER 22, 2010

The topic of today’s hearing is of the utmost importance to American workers and 

American business. American workers and businesses lose billions of dollars each 

year to Chinese intellectual property rights infringement. 

The Chinese government has failed to comply with the commitments to protect 

intellectual property rights that it made as a member of the WTO, and it continues 

to undermine protections for intellectual property contained in its own laws and regulations. By shining a spotlight on how China’s flagrant abuse of international rules 

governing intellectual property rights undermines the rule of law, this Commission 

has an important role to play. 

The headline of a recent and detailed Wall Street Journal article says it all: 

‘‘China Spooks Auto Makers: Foreign Companies Fear New Rules on Electric Cars 

Will Erode Intellectual Property.’’ The article notes that ‘‘China’s government is considering plans that could force foreign automakers to hand over cutting-edge electric-vehicle technology to Chinese companies in exchange for access to the nation’s 

huge market.’’ The article goes on to say that China’s Ministry of Industry and Information Technology is preparing a 10-year plan ‘‘that could compel foreign automakers that want to produce electric vehicles in China to share critical technologies 

by requiring the companies to enter joint ventures in which they are limited to a 

minority stake.’’ The article notes how Beijing’s program of so-called ‘‘indigenous innovation’’ discriminates against foreign companies, and is said to be ‘‘aimed at gaining control of foreign intellectual property.’’ 

China’s industrial policies have a common thread: they have the purpose or the 

effect of tilting the playing field to favor Chinese companies and against U.S. companies and workers. That is not a sound or sustainable basis for a mutually beneficial U.S.-China relationship. Nor is it a viable foundation for the development of 

the rule of law in China. 

There is an ever widening chasm between what we hear from the Chinese government about the protection of intellectual property in China, and what we know to 

be true about the protection of intellectual property in China. 

We hear that the legal infrastructure supporting intellectual property rights has 

improved; we hear that courts are becoming more professionalized and skilled at 

handling complex issues related to intellectual property; we hear that Chinese 

rights holders are turning to Chinese courts to assert their rights more than in the 

past, and that there has been a measurable increase in the number of civil intellectual property cases in Chinese courts; we hear that foreign plaintiffs are winning 

intellectual property cases at increasing rates. 

That is what we hear. But this is what we know: 

We know that the American Chamber of Commerce in China surveyed its members this year and found that 63 percent rated intellectual property rights enforcement in China as ‘‘ineffective.’’ We know that intellectual property infringement in 

China is more widespread than before, and that counterfeit exports have increased; 

we know that enforcement of intellectual property judgments is difficult in China, 

that damages are still inadequate by international standards, and that the Chinese 

government has not taken sufficient steps to address difficulties in the gathering of 

43 

evidence; we know that high value and volume thresholds must be met in order to 

initiate criminal prosecution of intellectual property infringement, that administrative fines are too low and civil damages too inadequate and imposed too infrequently 

to serve as deterrents, and that infringers view them merely as a cost of doing business. 

In sum, we know that the Chinese government could be doing far more to protect 

intellectual property rights, but it is not doing so. 

We know that in 2009, 79 percent of intellectual property-infringing product seizures at the U.S. border were of Chinese origin; we know that China’s State-Owned 

Assets Supervision and Administration Commission has the power to require Chinese state-owned enterprises to certify that all software they use is properly licensed, but that it has not required state-owned enterprises to provide such certification; we know that production of counterfeit auto parts experienced a period of 

significant growth in China in recent years, and that a significant portion of counterfeit auto parts in China are manufactured in areas the Chinese government has 

designated as auto parts export zones. 

We know that the Chinese government’s market access barriers lead consumers 

to the black market. We know, for example, that to enforce its policies of censorship, 

the Chinese government limits the number of foreign films, books, and other media 

that may be distributed legally in China. We know that these limits effectively create markets for pirates. It is bad enough that Chinese government censorship practices violate international human rights standards. But let me state this clearly: 

Chinese government censorship leads consumers to the black market, and that, in 

turn, incentivizes the violation of intellectual property rights. The Chinese government often denies the link between human rights and the commercial rule of law. 

But the link is clear, and the Chinese government itself creates this link. Chinese 

government censorship leads to the violation of intellectual property rights. 

There can be no doubt that China’s flagrant abuse of international rules undermines the rule of law. There is no doubt that widespread intellectual property rights 

infringement in China continues to affect products, brands, and technologies from 

a wide range of industries, and imperils the health and safety of both American and 

Chinese consumers, and imposes billions of dollars of losses yearly on American 

businesses and workers. 

Change is necessary—both in the Chinese government’s behavior, and in the action we take in response. I look forward to our witnesses’ testimony. 

PREPARED STATEMENT OF HON. CHRISTOPHER SMITH, A U.S. REPRESENTATIVE FROM

NEW JERSEY, RANKING MEMBER, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

SEPTEMBER 22, 2010

Thank you, Mr. Chairman, and welcome to everyone this afternoon. 

Mr. Chairman, the Global Intellectual Property Center estimates annual U.S. 

losses caused by intellectual property infringement of almost $125 billion in the 

automotive, recording, pharmaceutical, and software industry industries alone, and 

we know that the Chinese government is the cause of most of the problem. 

China tolerates—in some cases, probably, encourages—widespread infringement 

of American intellectual property rights, and then exports U.S.-property rights infringing products right back to us. According to the U.S. Trade Representative’s 

2010 ‘‘Special 301 Report,’’ 79 percent of infringing products seized at our border 

were of Chinese origin. I wonder how many jobs that translates into—how many 

American jobs would return if key foreign countries enforced the intellectual property agreements they signed? 

I hope our witnesses address this question, as well as discuss the tools the executive branch has to take truly decisive action to protect American intellectual property—our workers and our economy. In the Trade Act of 1974, Congress provided 

the executive with all the authority it needs to remedy many trade injustices—injustices to our own workers as well as to foreign workers exploited in sweatshops. The 

executive branch has rarely made use of these—in fact, in 2006 then-Congressman 

Ben Cardin and I joined the AFL–CIO in a Section 301 petition to President Bush, 

which was denied, and I recently urged AFL–CIO leaders to petition President 

Obama under Section 301 of the Trade Act. In that petition the issue was the denial 

of the basic worker rights in China, and its adverse effect on American workers, and 

Section 301 provided WTO-consistent remedies. So we have two very serious issues 

here—the harm done to U.S. workers, and the exploitation of Chinese workers. 

Mr. Chairman, our government has a responsibility to take action here. The unemployment rate was just reported as 9.6 percent in my state, New Jersey, and in 

44 

fact is 9.6 percent nationally—and this means millions of people struggling to make 

house payments, to feed their families. We need to ensure the President and the 

USTR are using all the tools they have to fix the problem. 

PREPARED STATEMENT OF HON. CARL LEVIN, A U.S. SENATOR FROM MICHIGAN, 

MEMBER, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA

SEPTEMBER 22, 2010

I commend the Chairman and Cochairman of the CECC for holding this important hearing. Despite nearly 10 years as a member of the WTO, China continues 

to engage in unfair trade practices. Two areas of concern I would like the Commission to look at are the actions China is taking to favor its domestic renewable energy technology sector and automotive parts counterfeiting. 

We should all be alarmed by China’s attempts to dominate the renewable energy 

industry through measures that discriminate against foreign manufacturers. China 

does this by requiring the use of domestic suppliers and production for green and 

renewable technology. This was validated in USTR’s 2009 Special 301 report on 

China which noted U.S. industry concerns about the possibility that Chinese laws 

or policies in a variety of fields might be used to unfairly favor domestic intellectual 

property over foreign intellectual property. The report stated the concerns are, ‘‘especially acute in light of Chinese Government policies that appear to establish a 

procurement preference for domestically innovated products.’’ China also requires a 

significant percentage of these products be exported, in order to guarantee that its 

domestic companies will dominate this important sector. 

China is trying to have it both ways: protecting its home market while exporting 

most of its production. The New York Times reported that China protects its domestic producers by requiring that 80 percent of the equipment used in Chinese solar 

power plants be made in China. At the same time, over 95 percent of China’s solar 

panel production is exported to the United States and Europe. 

China also has designs to dominate clean car technology. According to the Wall 

Street Journal, China is preparing a 10-year plan to turn China into the world’s 

leader in developing and producing battery-powered cars and hybrids. The draft 

plan suggests that China could compel foreign auto makers who want to produce 

electric vehicles in China to transfer critical technology by requiring those companies to enter into joint ventures where the foreign auto maker would be limited to 

a minority stake. I agree with the foreign auto executive that said it is, ‘‘tantamount 

to China strong-arming foreign auto makers to give up battery, electric-motor, and 

control technology in exchange for market access.’’ With such government mandated 

policies in place, once all of the technology is transferred the Chinese joint venture 

partner will become a competitor. 

At a time when American manufacturers are working hard to compete in the 

emerging field of green technologies, China must not be allowed to unfairly or illegally undermine those efforts. The United Steel Workers of America has filed a 

trade petition accusing China of violating the WTO by subsidizing exports of clean 

energy equipment. I have urged the administration to investigate these allegations. 

I am also concerned about the counterfeiting of auto parts, concerns that extend 

beyond monetary losses to U.S. firms and directly impact human health and safety. 

A counterfeit auto part could be the wheel or the brakes on your car. Since counterfeit parts are often substandard and produced with inferior materials, they put lives 

at risk. The Motor & Equipment Manufacturers Association (MEMA) recently testified that most counterfeits appear to be made in China. 

The Gates Corporation, headquartered in Denver, CO, with operations in Michigan, is a major manufacturer of a range of belts used in motor vehicles and has 

faced a number of cases of counterfeit belts worldwide. When Gates tested pirated 

timing belts it found they were inferior to the genuine part with a significantly 

shorter lifespan. A counterfeit timing belt may wear and fail prematurely with serious cost, health, and safety consequences. A consumer advocacy group in China relying on Chinese media reports estimates that 70 percent of aftermarket auto parts 

in China are counterfeit and that approximately 13 percent of car accidents are due 

to fake auto parts. 

In addition to the safety issues, American companies’ investments in innovation 

and technology development are at risk. The auto parts industry’s losses due to 

counterfeiting are enormous. MEMA conservatively estimates that counterfeit goods 

cost motor vehicle suppliers up to $12 billion globally in lost sales every year. Market researchers Frost and Sullivan estimated in 2006 that the global losses to motor 

vehicle suppliers due to counterfeiting would be as high as $45 billion in 2011. In 

45 

2007 Ford Motor Co. stated that counterfeit auto parts cost it nearly $1 billion a 

year. We cannot continue to allow these types of American investments and innovations to be stolen by foreign competitors. 

For almost 20 years the United States has been aggressively pressing China 

through Section 301 trade cases to improve its intellectual property protection regime. Yet China continues to be the number one source country for counterfeit and 

pirated goods seized in fiscal year 2009, accounting for 79 percent or $204.7 million 

of the total value seized. The USTR’s 2010 Special 301 report continued to list 

China on the Priority Watch List and stated that China continued to be a major 

focus of U.S. concerns. Even though China made some progress in improving its enforcement regime, the USTR said piracy rates remained at ‘‘unacceptable levels.’’ 

The Chinese Government itself estimates that counterfeits constitute between 15 

percent and 20 percent of all products made in China and are equivalent to about 

8 percent of China’s annual gross domestic product. 

China’s trade distorting practices need to be aggressively investigated by the 

USTR as we work to hold China to its WTO commitments in international trade. 

46 

1The Business Software Alliance (www.bsa.org) is the world’s foremost advocate for the software industry, working in 80 countries to expand software markets and create conditions for 

innovation and growth. Governments and industry partners look to BSA for thoughtful approaches to key policy and legal issues, recognizing that software plays a critical role in driving 

economic and social progress in all nations. BSA’s member companies invest billions of dollars 

a year in local economies, good jobs, and next-generation solutions that will help people around 

the world be more productive, connected, and secure. BSA members include Adobe, Altium, 

Apple, Autodesk, AVEVA, AVG, Bentley Systems, CA Technologies, Cadence, Cisco Systems, 

CNC/Mastercam, Corel, Dassault Syste`mes SolidWorks Corporation, Dell, HP, IBM, Intel, Intuit, Kaspersky Lab, McAfee, Microsoft, Minitab, PTC, Progress Software, Quark, Quest Software, Rosetta Stone, Siemens, Sybase, Symantec, Synopsys, and The MathWorks. 

SUBMISSIONS FOR THE RECORD

PREPARED STATEMENT OF ROBERT W. HOLLEYMAN, II, PRESIDENT AND CEO, 

BUSINESS SOFTWARE ALLIANCE

SEPTEMBER 22, 2010

We applaud the Commission for holding this very important hearing on IP protection in China. This is a critical issue for BSA and our members. 

BSA is an association of the world’s leading software companies and their hardware partners around the world.1 BSA members create approximately 90 percent of 

the office productivity software in use in the United States and around the world. 

The software industry has proven to be a remarkable engine for jobs and economic 

growth. The software and related services sector employed almost 2 million people 

in the United States in 2007 in jobs that paid 195 percent of the national average 

wage. This sector contributed more than $261 billion to US GDP in 2007, making 

it the largest of the US copyright industries. 

The packaged software industry’s overseas earnings contributed a $37 billion surplus to our nation’s balance of trade in 2009. As much as 60 percent of revenues 

for the leading US software companies are generated from sales outside US borders. 

A few months ago the Chief Executive Officers of twelve BSA member companies 

came to Washington, DC to meet with Congressional leaders and the President’s 

senior economic team. Their message was simple—the US software industry is key 

to the US economy and China is a critical market for our future growth. 

Two Chinese practices stand in the way of American software companies’ ability 

to compete in China: massive illegal use of software (nearly 4 out of every 5 computer programs installed on personal computers (PCs) in China last year were being 

used illegally) and the development of ‘‘indigenous innovation’’ policies that limit our 

access to a broad swath of the Chinese market. 

The indigenous innovation issue has received high-level attention from the US 

government over the past year and BSA applauds this. Progress, however, has been 

slow in getting China to rethink and suspend its problematic indigenous innovation 

policies—from government procurement, to standard-setting, to certification requirements—that pose significant market access restrictions for US software and other 

technology companies. These policies are characterized by significant preferences for 

domestic firms and requirements seeking to compel transfers of technology as a precondition for market access. More action is needed. 

Given its broad-based impact on the US economy, we believe the pervasive use 

of illegal software in China needs intensified attention from the US government as 

well. 

It is now an established fact that software and computers have changed the world 

in which we live. Information technology has made us more efficient, more productive and more creative. Software and computers deliver results on national priorities 

such as health care, energy, infrastructure, education, and e-government. 

Software has been at the heart of this technology revolution. It is also a big part 

of the US industrial base, whether it is the software used by steel companies, the 

autos we drive, or the energy saving appliances we use in our daily lives. Software 

drives productivity and innovation in almost every economic sector, helping businesses of all sizes perform better in good times and bad. 

We believe our country’s ability to create jobs depends in large part on our ability 

to export. We support the President’s ambitious National Export Initiative (NEI) 

goal of doubling US exports of goods and services over five years. We stand ready 

to do our part, but cannot do so if a market as critical as China is out of reach because of high levels of software piracy. 

47 

Here are the facts. Our annual Global Software Piracy Study undertaken by market research firm IDC estimates that nearly 4 out of every 5 software programs 

installed on PCs in China widely used in the government, enterprises and by consumers in 2009 were unlicensed. The Study conservatively estimates that the commercial value of those programs is $7.6 billion. That is double what it was just 4 

years ago. In stark contrast, the estimated revenues from sales of PC software from 

US producers in China were around $1 billion. 

But these numbers, large as they are, understate the problem. 

Nearly as many PCs were sold to businesses in China in 2009 as to those in the 

United States. Our country’s total exports to China in 2009 were $70 billion. If Chinese enterprises were to actually pay for just the PC software they use, we conservatively estimate that total US exports to China could grow by at least 5 percent. 

The impact would be higher when the broader universe of packaged software is considered. This gives you a good picture of what is at stake. 

The economic harm due to the illegal use of software in China has broader consequences here at home for US jobs. Products made in China by enterprises that 

use illegal software hurt American competitiveness and in many cases displace US 

jobs. Our companies pay for their critical inputs of production, such as software, 

while many of their Chinese competitors do not. Chinese products made with illegal 

software enter our markets and undercut our goods and services. In practical terms 

this harms US jobs. 

We need to think of the problem of illegal use of software in a different way. The 

problem is more pervasive, more complex, and more pernicious than it was just a 

few years ago. Quite frankly, the term ‘‘piracy’’ is outdated. It does not even begin 

to capture the breadth of the problem. 

So what should we do? 

We believe the United States should develop a comprehensive results-based trade 

policy with China in place of the one-off, issue-by-issue approach that guides the 

current relationship. Our primary measure of success should be increased US exports of goods and services. 

At a recent Senate Finance Committee hearing, responding to a Senator’s comment that US-China economic policy was too focused on ‘‘soothing words,’’ Treasury 

Secretary Geithner said ‘‘[t]he test of these things is not what people say and it’s 

not how many meetings you have. The test is what actually happens to the terms 

and conditions that US companies compete on.’’ 

We agree wholeheartedly. 

For over 20 years, the United States has engaged China in round after round of 

discussions aimed at one-off issue resolution at periodic ministerial meetings, including improved protections for software and other forms of intellectual property. 

These efforts have resulted in some positive changes, but not enough. Meaningful 

results for our sector, as measured by increased exports of goods and services, have 

been lacking. 

As a key element of developing and implementing a result-based trade policy, we 

should hold China accountable for its commitments to combat software piracy. For 

example, in 2004, as part of the bilateral US-China Joint Commission on Commerce 

and Trade (JCCT) negotiations, China committed that government entities would 

only use legal software. The United States has an Executive Order that requires 

this. Soon after this commitment was made, the Chinese government self-declared 

that it had fulfilled this promise, though provided no means for verification. The 

Chinese government also committed in the JCCT that state-owned enterprises 

(SOEs) would use only legal software and later made assertions that this had generally been accomplished. 

Since these commitments were made, software sales by US-based companies have 

hardly budged while illegal use of PC software in China as a whole has doubled to 

$7.6 billion. At present, SOEs and other Chinese enterprises regularly use unlicensed software to operate their businesses, safe in the knowledge that there are 

no consequences. 

Our overall goal should be increased exports of goods and services, but there are 

some immediate steps that we think should be taken. 

The US government should press the Chinese government to: 

• Devote resources to enforcement against software piracy that are commensurate with the scope of the problem. 

• Cooperate with industry’s efforts to bring civil cases to enforce software license compliance, including cases against SOEs. 

• Implement verification and audit systems to measure performance in fulfilling commitments on government and enterprise legalization. 

• Make software piracy by enterprises subject to criminal penalties. 

48 

The United States should also undertake a full examination of available trade policy remedies to address these concerns. This would include assessing whether 

actions can be brought under the World Trade Organization (WTO) and whether 

China’s practices are a form of unfair competition that can be addressed by US 

trade laws. 

The challenges that we face due to software piracy are now being compounded by 

Chinese policies that restrict our access to the Chinese market. Over the past several years, the Chinese government has issued a series of ‘‘indigenous innovation’’ 

policies that erect barriers to US software and other products in a quest to promote 

domestic champions. These Chinese policies discriminate against foreign firms 

through a web of preferences for Chinese-developed technology and standards and 

compel American and other foreign companies to relocate their R&D to China or 

lose the ability to sell there. 

To counteract the harm caused by these policies, the US government must press 

the Chinese government to suspend current policies that create market access barriers and compel IP transfers, and engage in a meaningful dialogue on non-discriminatory approaches to promote innovation. 

We accept that we have to do our part to help ourselves. We are doing several 

things. Our members continue to invest on average more than 7 percent of revenues 

in R&D, with some investing close to 20 percent. We are determined to improve on 

our already world leading software products. This investment will enable us to innovate, compete and create jobs in the United States. In China, we have had a longstanding program to pursue enforcement actions against enterprises that illegally 

use our software and to educate users about the importance of using legal software. 

To date, these efforts have produced limited results. We are committed to retooling 

and upgrading those enforcement and education efforts and are now in the midst 

of implementing a new enforcement plan in China. 

SOFTWARE PIRACY IN THE CHINESE MARKET

The current rate of illegal software use in China is staggering. Recent estimates 

from the market research firm IDC indicate that nearly 4 out of every 5 copies (79 

percent) of PC software installed in China in 2009 were illegal, with a total commercial value of $7.6 billion. These are industry averages, and understate the dire situation that piracy creates for many of our companies. 

A leading source of these losses is what we describe as ‘‘end-user piracy’’—the unlicensed use of software by Chinese businesses and other enterprises. Chinese authorities do not view the unlicensed use of software by enterprises as a crime. As 

a result, US software companies must rely on China’s civil and administrative systems to pursue these infringers. The vast scale of the problem, the generally modest 

civil and administrative remedies available, and the time and expense of pursuing 

actions against individual companies mean that, in practice, the software industry 

is largely powerless to deter, let alone stop, the widespread illegal use of its products in China. 

End-user piracy is not limited to so-called private enterprises engaged in commercial activity in China. Far from it. Unauthorized use of software is also extremely 

widespread in government agencies and in China’s massive SOEs and the companies they own. China has repeatedly committed in the JCCT that all government 

agencies—including provincial and local government authorities—and SOEs would 

use only licensed software. US industry has seen little progress on these commitments. 

Other forms of illegal software use are also prevalent. For example, hard-disk 

loading of software—where PC manufacturers and resellers install unlicensed software onto PCs before their sale—is widespread. After years of effort by the software 

industry and considerable pressure from the US government, China issued a Decree 

in 2006 stating that all PCs produced in or imported into China must have legal 

operating system software pre-installed. While implementation of this Decree resulted in a modest increase in software sales in the first year, progress since that 

time has been minimal, hindered largely by the government’s unwillingness to 

verify that China’s PC makers are complying with the Decree. 

Physical goods piracy—including manufacture and sale of pirate CD–ROMs, each 

containing thousands of dollars worth of illegal business software, and counterfeiting of a virtually unlimited range of computer hardware and devices—also proceeds largely unhindered. And Internet piracy flourishes in China. China’s Internet 

population is now by far the largest in the world, estimated at 384 million users— 

a figure greater than the entire US population. The Chinese government has not 

effectively acted to stop Internet users and website operators from distributing unlicensed software within and outside the Chinese market. 

49 

THE IMPACT ON US JOBS

While this illegal software use takes place thousands of miles from US shores, its 

impact is felt right here at home, in cities and towns across America. 

By refusing to pay for the software they use, Chinese businesses artificially reduce their expenses and gain a competitive advantage over US firms. This enables 

Chinese companies to develop and manufacture products more cheaply than their 

US competitors. 

In short, the illegal use of software by Chinese companies not only deprives US 

software firms of sales and revenues, but allows these Chinese companies to undercut the sales of goods and services by their US competitors, reducing the revenues 

of US companies, and depriving US workers of good jobs. 

The US International Trade Commission is currently undertaking an investigation to better understand the scope of intellectual property infringement and China’s 

indigenous innovation policies and the implications for US competitiveness and jobs. 

We are taking advantage of the opportunity to participate in this investigation and 

believe that the results, particularly the new economic models that may result from 

this work, should provide valuable information for policymakers. 

A RESULTS-BASED TRADE POLICY

US industry, with the strong support of the US government, has long pressed 

China to protect intellectual property rights. In response, China has taken steps to 

improve its IP regime, such as modifications to its copyright and trademark laws, 

and the adoption of a regulation aimed at Internet piracy. More generally, as part 

of its WTO accession, China committed to following the rules-based trading system 

and providing adequate intellectual property protection. 

But gaps remain, and enforcement of the laws is inadequate. The result is that 

US industry losses due to software piracy continue to grow. 

Indeed, the list of needed actions by the Chinese government identified in the US 

Trade Representative’s ‘‘Special 301’’ process earlier this year is extensive. The list 

includes enforcement-related improvements, legislative changes and market access 

issues. Specifically, increases in the number of criminal prosecutions and administrative actions against copyright infringers, greater resources for, and training of, 

IP enforcement authorities, the assignment of judges with IP expertise to hear 

criminal cases, and amendments to a number of laws including the copyright law, 

the criminal law, and the regulations that govern Internet enforcement. 

Historically, industry and the US government have measured China’s progress towards improved intellectual property protection based on whether China adopted 

these or other specific legislative and enforcement-related measures and on commitments made by the Chinese government as part of the Strategic & Economic Dialogue (S&ED), JCCT and other bilateral negotiations. It is abundantly clear, however, 

that this approach is not working as all of us had expected. The Chinese government has not fulfilled many key commitments and has clearly not undertaken the 

more sweeping steps necessary to meaningfully reduce intellectual property theft. 

In the next 12–18 months, the market for PCs sold to businesses in China is expected to become the largest in the world, and yet the outlook for software sales 

is dismal. On this, the past does not offer grounds for optimism. The rate of PC software piracy in China has declined only 7 percentage points since 2005—from 86 to 

79 percent in five years. At this rate, it will take over 40 years for China’s piracy 

rate to come anywhere close to the level in the United States (20 percent). 

We urge the US government to consider moving away from measuring progress 

based on whether or not China amends a specific law or undertakes a discrete commitment. Instead, we need to move to a system that measures the actual results 

of China’s actions in terms of increased exports of US software and reductions in 

software piracy in the Chinese market. 

Such a results-based trade policy would align well with President Obama’s National Export Initiative. The President set a goal of doubling US exports in the next 

five years, an increase that the Administration projects will create over two million 

new US jobs. Increased exports of goods and services will also help to drive US economic growth more broadly; growing US exports contributed nearly 2 percentage 

points to US economic expansion in the last six months of 2009 alone. 

This same results-based approach should be applied to China. The immediate goal 

should be to increase US software exports to China by 50 percent over the next two 

years. Given the extremely high levels of software piracy in China, this benchmark 

would be reasonable to achieve through a decrease in the software piracy rate. Utilizing clearly defined, concrete and measurable benchmarks to assess progress 

would help the United States evaluate the US-China trade relationship more accuVerDate Mar 15 2010 11:50 Jan 06, 2012 Jkt 000000 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 U:\DOCS\22SEP10.TXT DIEDRE
50 

1Siwek, Stephen. (8/21/07). The True Cost of Sound Recording Piracy to the U.S. Economy. 

Retrieved from: http://www.ipi.org/IPI/IPIPublications.nsf/PublicationLookupFullText/ 

5C2EE3D2107 A4C228625733E0053A1F4 

rately and encourage China to take meaningful steps to reduce illegal software use 

across the Chinese economy. 

CHINA MUST ABIDE BY ITS TRADE OBLIGATIONS

In parallel with the use of increased exports as the measure for progress, it is 

necessary to ensure that China takes seriously its international obligations and 

other commitments. 

The Chinese government appears to have taken the view that it can turn a blind 

eye to widespread illegal software use with no fear of violating its obligations as a 

member of the WTO—and with no fear of sanctions for its actions. 

The US government needs trade tools to challenge Chinese practices that have the 

effect of depriving the United States of benefits that it legitimately expects from 

China’s membership in the WTO. Chief among these, in our view, is China’s need 

to make meaningful progress in reducing illegal software use and increasing market 

opportunities for US software suppliers. 

A WTO remedy that merits consideration is that of a non-violation ‘‘nullification 

or impairment’’ claim, under Article XXIII of the General Agreement on Tariffs and 

Trade. Such actions are appropriate where a WTO member’s conduct, while not violating the letter of the agreement, nonetheless denies or impairs a benefit accruing 

to another party under the WTO. 

Moreover, as discussed above, the high-levels of software piracy in China also provide an unfair competitive disadvantage for Chinese firms that use unlicensed software to produce goods and run their operations in competition with US firms. We 

would suggest that this practice may be a form of unfair competition subject to action under US trade laws. 

CONCLUSION

My testimony here demonstrates the stark reality that BSA members are facing 

in China. 

As US Trade Representative Kirk recently remarked, ‘‘[i]ntellectual property theft 

in overseas markets is an export killer for American businesses and a job killer for 

American workers here at home.’’ While we believe that the United States must 

continue to pursue a strong economic relationship with China, China’s persistent 

failure to protect the intellectual property of US products and innovations and its 

discriminatory ‘‘indigenous innovation’’ policies seriously undermine this relationship. More importantly, China’s actions are costing US jobs. 

We urge the members of the Commission to explore new solutions to address this 

challenge—including results-based trade policies and application of new trade remedies—in order to better protect US innovators, US industry and US workers. We 

stand ready to assist the Commission in this endeavor. Thank you. 

PIRACY IS A DANGER TO ENTERTAINMENT PROFESSIONALS

Submitted by the Department for Professional Employees, AFL–CIO (DPE) for the 

Arts, Entertainment and Media Industries Unions Affiliated with DPE 

AFL–CIO EXECUTIVE COUNCIL STATEMENT, ORLANDO, FLORIDA MARCH 2, 2010

Motion pictures, television, sound recordings and other entertainment are a vibrant part of the U.S. economy. They yield one of its few remaining trade surpluses. 

The online theft of copyrighted works and the sale of illegal CDs and DVDs threaten 

the vitality of U.S. entertainment and thus its working people. 

The equation is simple and ominous. Piracy costs the U.S. entertainment industry 

billions of dollars in revenue each year. That loss of revenue hits directly at bottomline profits. When profits are diminished, the incentive to invest in new films, 

television programs, sound recordings and other entertainment drops. With less investment in future works comes less industry activity that directly benefits workers: 

fewer jobs, less compensation for entertainment professionals and a reduction in 

health and pension benefits. 

Combating online theft and the sale of illegal CDs and DVDs is nothing short of 

defending U.S. jobs and benefits. In the case of music, experts estimate that the digital theft of sound recordings costs the U.S. economy $12.5 billion in total output 

and costs U.S. workers 71,060 jobs.1 In the motion picture industry, piracy results 

51 

2Siwek, Stephen. (9/20/06). The True Cost of Sound Recording Piracy to the U.S. Economy. 

Retrieved from: http://www.ipi.org/IPI/IPIPublications.nsf/PublicationLookupFullText/E274F77 

ADF58BD08862571F8001BA6BF 

in an estimated $5.5 billion in lost wages annually, and the loss of an estimated 

141,030 jobs that would otherwise have been created.2

Illegal CDs and DVDs have afflicted even live theatre. Websites sell illegal DVDs 

of Broadway shows, which reduces sales of tickets and authorized CDs and DVDs. 

Selling illegal CDs or DVDs of plays, musicals and other shows not only steals the 

work of the entertainment professionals, but makes quality control impossible. 

Most of the revenue that supports entertainment professionals’ jobs and benefits 

comes from the sale of entertainment works including sales in secondary markets— 

that is, DVD and CD sales, legitimate downloads, royalties and, in the case of TV 

shows or films, repeated airings on free cable or premium pay television. Roughly 

75 percent of a motion picture’s revenues comes after the initial theatrical release, 

and more than 50 percent of scripted television production revenues are generated 

after the first run. 

In most work arrangements, a worker receives payment for his or her effort at 

the completion of a project or at set intervals. The entertainment industry, however, 

operates on a longstanding unique business model in which compensation to workers—pay and benefit contributions—comes in two stages. Film, television and recording artists, as well as film and television writers, receive an initial payment for 

their work and then residuals or royalties for its subsequent use. Those payments 

also generate funds for their health and pension plans. The below-the-line workers, 

the craft and technical people who manage equipment, props, costumes, makeup, 

special effects and other elements of a production, also receive compensation for 

their work, while payment for subsequent use goes directly into their health and 

pension plans. 

Motion picture production is a prime example. The professionals involved with the 

initial production of a film—the actors who perform, the craftspeople behind the 

scenes, the musicians who create the soundtrack and the writers who craft the 

story—each receive an initial payment for their work. When that work is resold in 

the form of DVDs or CDs, or to cable networks or to airlines or in foreign sales, 

a portion of these ‘‘downstream revenues’’ are direct compensation to the film talent 

or recording artists who were involved in those productions or recordings. 

These residuals help keep entertainment professionals afloat between projects. 

Entertainment professionals may work for multiple employers on multiple projects 

and face gaps in their employment. Payment for the work they have completed 

helps sustain them and their families through underemployment and unemployment. For AFTRA recording artists in 2008, 90 percent of income derived from 

sound recordings was directly linked to royalties from physical CD sales and paid 

digital downloads. SAG members working under the feature film and TV contract 

that same year derived 43 percent of their total compensation from residuals. Residuals derived from sales to secondary markets funded 65 percent of the IATSE 

MPI Health Plan and 36 percent of the SAG Health and Pension Plan. WGAE-represented writers often depend on residual checks to pay their bills between jobs; in 

some cases, the residual amounts can be as much as initial compensation. Online 

theft robs hard-earned income and benefits from the professionals who created the 

works. 

There are tools that can be used to fight digital piracy. Internet service providers 

(ISPs) have the ability to find illegal content and remove or limit access to it. To 

be truly effective, these sanctions must depart from the costly and ineffective legal 

remedies traditionally employed to counter theft of copyrighted material. The European Union is developing and implementing model policies for which the trade 

union movement is providing strong and critical support. These policies illustrate 

that there are answers that make sense in a digital age. 

At the core of any effort to combat digital theft is reasonable network management, which should allow ISPs to use available tools to detect and prevent the illegal downloading of copyrighted works. With respect to lawfully distributed content, 

ISPs should not be allowed to block or degrade service so that both consumers and 

copyright would be protected. 

The unions of the AFL–CIO that represent professionals in the Arts, Entertainment and Media Industries (AEMI) include Actors’ Equity Association (AEA), the 

American Federation of Musicians (AFM), the American Federation of Television 

and Radio Artists (AFTRA), the American Guild of Musical Artists (AGMA), the 

International Alliance of Theatrical Stage Employees, Moving Picture Technicians, 

Artists and Allied Crafts (IATSE), the International Brotherhood of Electrical Workers (IBEW), the Office and Professional Employees International Union (OPEIU), 

52 

the Screen Actors Guild (SAG) and the Writers Guild of America, East (WGAE). The 

AEMI unions are wholly in support of the widest possible access to content on the 

Internet and the principles of net neutrality, so long as intellectual property 

rights—and the hundreds of thousands of jobs that are at stake—are respected. 

Some would like to portray the debate over Internet theft as one in which a few 

wealthy artists, creators and powerful corporations are concerned about ‘‘giving 

away’’ their ‘‘product’’ because they are greedy and cannot change with the times 

to create new business models. The hundreds of thousands of people represented by 

the AEMI unions of the AFL–CIO are a testament to the falsity of that proposition. 

Online theft and the sale of illegal CDs and DVDs are not ‘‘victimless crimes.’’ 

Digital theft costs jobs and benefits. It is critical, at this important moment in the 

evolution of the Internet and potential Internet policy, for union members and leaders 

to publicly and visibly engage in a sustained effort to protect members’ livelihoods, 

the creation and innovation that are the hallmark of their work and the economic 

health and viability of the creative industries in this country. The AEMI unions and 

other unions in U.S. entertainment stress that pirated content is devastating to the 

entertainment professionals who create the underlying works. 

The AFL–CIO strongly supports the efforts of the AEMI unions and the Department for Professional Employees, AFL–CIO, to combat piracy. It commends their 

work with government and industry to develop workable solutions to protect the interests of their members. The AFL–CIO urges its affiliate unions to educate their 

members about the adverse impact of piracy; to support efforts to ensure that government officials and lawmakers are aware of, and support the protection of, entertainment industry jobs that will be lost to online theft; to encourage their members 

to respect copyright law; and to urge their members, as a matter of union solidarity, 

to never illegally download or stream pirated content or purchase illegal CDs and 

DVDs. 

Æ