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24–934 PDF 2006

S. Hrg. 109–587

ENSURING PROTECTION OF AMERICAN

INTELLECTUAL PROPERTY RIGHTS FOR

AMERICAN INDUSTRIES IN CHINA

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

NOVEMBER 21, 2005

FIELD HEARING IN BEVERLY HILLS, CALIFORNIA

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey

KATY FRENCH, Staff Director 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

WITNESSES 

MONDAY, NOVEMBER 21, 2005

Hon. Dan Glickman, Chairman and CEO, Motion Picture Association of 

America, Inc. (MPAA) .......................................................................................... 20

Gary Burr, Nashville Songwriter, on behalf of himself and the Recording 

Industry Association of America (RIAA) ............................................................ 24

Jack Sabo, Vice President, Market Data Services, New York Board of Trade 

(NYBOT) ............................................................................................................... 26

Loren E. Hillberg, Executive Vice President, General Counsel, on behalf of 

the Macrovision Corporation ............................................................................... 28

Timothy Minor, Vice President of Government Relations, Cummins-allison 

Corporation ........................................................................................................... 30

Ted C. Fishman, Author, ‘‘China, Inc., and How the Rise of the Next Superpower Challenges America and the World’’ ....................................................... 33

Patrick A. Mulloy, Commissioner, U.S.-China Economic and Security Review 

Commission ........................................................................................................... 36

ALPHABETICAL LIST OF WITNESSES

Burr, Gary: 

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 61

Fishman, Ted C.: 

Testimony .......................................................................................................... 33

Prepared statement .......................................................................................... 93

Glickman, Hon. Dan: 

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 53

Hillberg, Loren E.: 

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 69

Minor, Timothy: 

Testimony .......................................................................................................... 30

Prepared statement by William J. Jones with attachments ......................... 80

Mulloy, Commissioner Patrick A.: 

Testimony .......................................................................................................... 36

Prepared statement with attachments ........................................................... 100

Sabo, Jack: 

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 67

APPENDIX 

Article from China Financial Times ....................................................................... 89

Article from The Korean Times .............................................................................. 92

Article from USA Today .......................................................................................... 111

Articles from The Wall Street Journal ................................................................... 113

(1)

ENSURING PROTECTION OF AMERICAN 

INTELLECTUAL PROPERTY RIGHTS FOR 

AMERICAN INDUSTRIES IN CHINA 

MONDAY, NOVEMBER 21, 2005

U.S. SENATE, 

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY, 

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:04 a.m., at the 

John H. Mitchell Theater, The Museum of Television and Radio, 

465 North Beverly Drive, Beverly Hills, California, Hon. Tom 

Coburn, Chairman of the Subcommittee, presiding. 

Present: Senator Coburn. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. The Subcommittee on Federal Financial Management, Government Information, and International Security will 

come to order. 

Thank you, each and every one of you, for being here. 

Today’s Subcommittee field hearing will focus on the massive piracy of American intellectual property that persists in China. 

This is an official act of the Subcommittee on Homeland Security, 

and as such, your testimony, both will be made a part of the 

record, as well as it being recorded. 

The important thing is the information—what you have to say is 

gathered and made available to Congress. And so the purpose of 

having this hearing at this time is because how large this issue is 

in terms of how it confronts us both in terms of intellectual property, but also in terms of security, also in terms of the future of 

our country, also in terms of job loss versus job creation that has 

come about because of it. 

This is a field hearing as a follow-up to a previous hearing held 

by this Subcommittee this past June where the Subcommittee took 

a snapshot of the direction of the World Trade Organization (WTO) 

where we asked the question about how U.S. economic interests 

were being served and sovereignty protected. 

One of the key findings at our hearing was the severity of the 

intellectual property vandalism occurring in China against American entrepreneurs, innovators, artists, and consumers. 

That is why we wanted to take the next logical step and zoom 

in on the issues specifically, and what better location than here in 

2

the great State of California where major industries affected by intellectual piracy are located. 

Today we will hear firsthand accounts of companies and representatives of various sectors who are experiencing intellectual 

property theft in China. 

One of the reasons why I like to hold hearings outside of Washington is that sometimes the hearings are filled with a lot of dry 

government language. When something is as close to the pocketbooks of every American as today’s topic is, it is important that we 

do not obfuscate that with inside-the-beltway jargon, and real language is used. 

Robbery from employers and industries, as represented here 

today, should resonate in the ears of American people because ultimately it is their money. Money spent on high prices for goods and 

services, jobs lost to foreign competitors, and lower profit margins 

for employers and everyday investors in these companies whose 

nest eggs do not grow as they should. 

The point cannot be emphasized enough that American jobs are 

at risk once China steals our American intellectual properties by 

copied American goods. The U.S. Congress estimates that counterfeit trade in China is worth from $19 billion to $80 billion a year 

in terms of loss for us. 

When you apply the general rule of thumb that $1 billion in economic activity equals 12,000 to 14,000 jobs, that means we are 

talking anywhere from 240,000 to a million jobs a year that are 

being impacted, opportunities for Americans to earn, opportunities 

for the income and taxes off of that earnings, opportunities to create a future. 

The dictionary defines intellectual property as product of the intellect that has commercial value, including copyrighted product 

and property such as literary or artistic works, ideation of property 

such as patents, applications, origins, business methods, and industrial processes. 

Taking the intellectual property of every American citizen is the 

cornerstone of America’s innovation and the success of our Nation’s 

economy. 

American citizens must know that when they invest and dedicate 

their energy, resources, and creativity providing the product that 

has the potential to better and benefit our quality of life, their intellectual property rights (IPR) will be protected by our Nation’s 

laws. 

And as our Nation engages with other nations in trade relations, 

it is the job of those of us in Washington to assure that our international commercial partners abide by and protect America’s wallet 

on intellectual and property rights. 

The founding fathers rightly identified property rights as one of 

the fundamental rights upon which economic and cultural life of a 

Nation must be based. 

As Madison stated, the rights of persons and the rights of properties are the objects for the protection of which the government 

was instituted. 

For some time now the U.S. Government and its citizens have 

engaged with the struggle to stop China from stealing the intellectual property of American citizens. 

3

As the U.S. Chamber of Commerce stated in Congressional testimony before the House Judiciary Committee in May of this year, 

intellectual property rights violations in China now severely affect 

virtually all industries, from consumer and industrial goods, including medicines, autos, auto parts, food, beverages, cosmetics, to 

copyright works. 

As a result, on April 29, 2005, U.S. Trade Representative Nance, 

said that he had placed China on a special 301 Priority Watch List 

because of its failure to significantly improve intellectual property 

rights protection. 

And last month the Administration took an even stronger step 

forward when U.S. Government filed, through the WTO, an official 

request, Article 63, to have China explain in writing what changes 

it is making in its legal system to fix the problem of intellectual 

property rights theft, and also to inform the United States of how 

many cases of IPR theft have been filed by U.S. companies in 

China. 

China has until January of this next year to provide this information which could be helpful to the United States in building a 

case against China and the WTO. 

I have some doubts whether the WTO is strong enough to carry 

out the enforcement mechanism necessary to protect American 

rights. 

Various American companies have recorded over and over the 

struggles they are facing to have the Chinese government to take 

proper legal action to protect their intellectual property rights. 

A great example is the manufacturing company Zippo that produces lighters. I do not know if you’ve heard of this, but it was reported by Assistant Secretary of Commerce William Lash in his 

press conference on April 14. 

It was discovered during the raid in China that 40,000 Zippo 

lighters had been counterfeited; however, because they valued 

these lighters at 0.5, 1.2 remedy or 1, 6 to 15 cents a piece, the 

case fell under the criminal threshold. 

Here’s a company that has guaranteed for life its product that is 

made here in the United States. It is a high-quality product. They 

will repair it for the life of the product, and all of a sudden they 

find themselves flooded with products that do not work, that do not 

meet the standards, that have that name embossed on the bottom, 

with the trademark, an absolute complete copy, but yet the fine 

and the value of it fell below the threshold, so there is no consequences to copying. 

So, therefore, the Administration is to be commended for taking 

a step forward at WTO on such actions, but we have to do more. 

This problem is not going to go away. The U.S. trade deficit with 

China has grown significantly in recent years due largely to a 

surge of U.S. imports to Chinese goods relative to U.S. exports of 

China. That deficit rose from $30 billion in 1994 to $162 billion in 

2004 and estimated to exceed $200 billion this year. 

As my good friend Ambassador Rob Portman, U.S. trade representative, stated in his confirmation testimony, part of that deficit is because the Chinese do not play by the rules. 

China is now the sixth largest market for U.S. exports and 

America’s third largest retail trading partner overall. The U.S. 

4

trade deficit with China is now larger than that of any other trading partner. 

U.S.T.R. testified before Congress this past May that U.S. companies report billions of dollars in lost revenue, irreparable harm 

to the brands of future sales, all of which will ultimately affect U.S. 

workers to design and produce legitimate products forced to compete against the Chinese fakes. 

In 2002 the value of Chinese counterfeits seized before entering 

the U.S. markets rose from $194 million to $234 million. 

And U.S. Customs and border protection estimates that counterfeit merchandise worldwide is responsible for the loss of at least 

750,000 American jobs. 

The bottom line is American leaders in Washington need to get 

serious about how to handle this problem and take the necessary 

steps to put an end to it. America’s jobs are at stake, and America’s 

economy is at stake and is very vulnerable. So what do we do? 

We talked about the WTO in terms of China joining it and their 

obligations associated with it. They agreed to fully comply with the 

related aspects of intellectual property rights, agreement obligations known as the TRIPS obligations, but China has not kept its 

word in doing that. 

The Administration has filed a request to require information 

back from China on what it is doing to fix the problem. It will be 

incumbent upon the Administration to make sure China meets that 

deadline in 90 days and provide the required information in January when it is due. 

There is a great question to ask. It is what do we do if China 

does not meet the deadline? What should be the Administration’s 

position? 

The Administration is going to have to make a decision based on 

the information it receives about whether or not to let the clock 

run. And the time has come for the United States to file against 

the Chinese government with the WTO. 

When we debated the decision to grant China permanent mostfavored Nation status, a prestigious designation, it means we trust 

you as a good faith trading partner. Some argued it was asking for 

trouble to get into a financial bed with a communist government 

that does not recognize individual rights. Individual rights are 

what property rights are based on. 

They also, of course, are what human rights are based on. And 

we all know China’s deplorable record on that front. 

To my mind, it should come as no surprise that the communist 

Chinese regime has violated Americans’ rights given that it does 

not even recognize its own citizens’ rights. 

[The prepared statement of Senator Coburn follows:]

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1The prepared statement of Mr. Glickman appears in the Appendix on page 53. 

Senator COBURN. I want to thank our distinguished guests and 

witnesses for being here. I know many of you took time out of a 

busy schedule to do this. This is an important topic that the Congress has to face. We serve a function to be both a sounding board, 

but also an accountability board, to the Administration in carrying 

out the laws and treaties of this country and making sure we are 

protecting the future of this country. 

I would like to introduce our witnesses and ask them to testify. 

Each of your full written testimony will be made a part of the 

record. And if you could summarize that in 5 to 7 minutes, and 

then we will spend some time with questions. 

I would love to have some bantering going back and forth between the panelists as well as some questions so that we could actually develop this up into what needs to be done, how it needs to 

be done, when it needs to be done, and what the consequences are. 

Our first witness is the Hon. Dan Glickman, who serves as chairman/CEO of the Motion Picture Association. 

As chairman and chief executive officer of the Motion Picture Association of America, Mr. Glickman represents the interests of the 

U.S. film and entertainment industry before the U.S. Government, 

as well as being the U.S. movie industry’s emissary to foreign capitals and foreign moviemakers. 

MPAA’s members are Metro-Goldwyn-Mayer Studios, NBC/Universal, Paramount, Sony, Walt Disney, Twentieth Century Fox, 

and Warner Entertainment. 

MPAA members all employ hundreds of thousands of U.S. workers, entertain millions across the globe, and unique among U.S. industries, generate a positive trade balance in virtually every country in the world. 

Dan Glickman came to the Motion Picture Association of America 

following a long career of public service. Before taking on leadership of MPAA, Congressman Glickman led the Institute of Politics 

at Harvard University’s J.F.K. School of Government. 

He served with distinguished distinction in President Clinton’s 

Cabinet as Secretary of the Department of Agriculture. And prior 

to this, he served 18 years in the U.S. House of Representatives. 

Mr. Glickman, we welcome you, and the floor is yours. 

TESTIMONY OF THE HON. DAN GLICKMAN,1 CHAIRMAN AND 

CEO, MOTION PICTURE ASSOCIATION OF AMERICA (MPAA) 

Mr. GLICKMAN. Thank you, Senator, very much. 

This is a very important hearing, I believe, to call attention to 

the Chinese authorities that you consider the theft of U.S. intellectual property to be a high priority. 

The President is just coming back from China where I believe he 

raised the issue. Governor Schwarzenegger is just coming back 

where he’s raised the issue. I think this hearing is extremely important. 

Unless the Chinese government exercises the political will to address the rampant theft of U.S. intellectual property rights (IPR), 

all the tools that we have—effective enforcement, private sector initiatives, adequate laws—do not mean very much. This hearing 

21

keeps IPR high on the U.S./China agenda, demonstrating in an important forum to the Chinese government the priority that you 

place on this. 

First of all, in some sense the movie industry is the poster boy 

for this problem. You see that almost everybody who goes to China 

holds up that DVD they have bought on the streets. 

The problem is shared by all the industries represented here and 

many others, in many respects, we are kind of the physical manifestation of this problem. 

The source of the problem is twofold: First, China imposes strict 

limits on the number of foreign films that can be exhibited in its 

theaters on a revenue-sharing basis and applies burdensome regulations and confiscatory taxes on foreign home video and television 

content. This creates a market vacuum that pirates are only too 

happy to fill. 

Second, China has not asserted the political will necessary to reduce the level of piracy. 

Yes, it has conducted some raids and even put a few pirates in 

jail, but it has not materially reduced the level of piracy and the 

ready availability of pirated products in the shops and in the 

streets. 

Regrettably, to coin a phrase, if you did not see a counterfeit 

DVD, you were not in China. Unfortunately, I fear our collective 

perception of China has become so ingrained with the notion that 

China is overflowing with pirate DVDs, we frequently fail to appreciate the magnitude of the problem. 

The problem is ubiquitous—on virtually every street corner, 

packed to the shelves in audiovisual shops in every neighborhood. 

We estimate the piracy rate exceeds 90 percent, that is, over 90 

percent of the DVDs sold in China are fake. More than nine of 

every ten DVDs in the Chinese market is a fake, stolen product. 

Too many see this as an American problem. Well, we do bear the 

disproportionate share of the burden, because of the scale and size 

of the American movie industry. But, movie piracy in China affects 

filmmakers all over the world, and it is beginning to affect Chinese 

filmmakers as well. 

It is clearly more than an American problem, and what we have 

to do is to convince the Chinese filmmakers, as well, that they have 

a stake in this issue. 

As we dig deeper into this problem, particularly the global 

spread of China-sourced pirated material, we are coming to a disturbing conclusion: There is a growing link between piracy of motion pictures and organized crime. 

Our Asia-Pacific Regional Office just completed a new study on 

these connections. 

With your permission, Mr. Chairman, I have included a copy of 

that study in my statement. I think it will be helpful for you as 

you build the record, but let me cite a couple of findings. 

Criminal theft of IPR dwarfs criminal revenues from narcotics 

trade: U.S. Government and international law enforcement records 

peg the illegal narcotics trade at $322 billion last year; criminal 

revenues from all IPR theft were significantly higher, $512 billion. 

Part of the allure for organized crime to move into DVD piracy 

is the incredible profit margins, much higher than they are for 

22

drugs. The markup of pirated DVDs made in Asia and sold in Europe, for example, averages an astounding 1150 percent, three 

times the markup of heroin that is sourced in Asia and sold on the 

same street corners. And the criminal risk, as you pointed out, is 

far lower. 

The report cites two recent cases linked back to China with tentacles around the world, including into the United States. 

In September of this year, a Federal grand jury in New York indicted 39 individuals tied to a syndicate based in New York, but 

funneled much of its $1 million per year in earnings back to China. 

And an American was arrested in this case for leading this particular syndicate. When he was arrested, the Chinese authorities 

seized more than 210,000 DVDs in his possession. 

I think it goes without saying that many of these revenues finance other illegal activities in which these criminal organizations 

are involved. This is not just an American problem. It is not just 

a motion picture problem. It is now underwriting activities that 

threaten all walks of life. 

Our industry employs about 1 million American men and women 

directly and indirectly at all job levels. There seems to be a view, 

a myth, that buying a stolen DVD only means that a movie star 

earns a few dollars less on that movie. 

Let me be clear. The notion is just a myth. Every dollar the pirate earns is one less dollar going to an American worker, a worker 

employed in an industry that is one of the few in this country 

bringing much more money back to the United States in export 

earnings than it sends overseas. 

Chinese piracy of U.S. pictures also hits some of us personally. 

I was in China last May. I strolled the neighborhood across from 

my hotel and looked in one of the audiovisual stores. I admit I was 

not surprised to see all the DVDs that were there. Most of them 

were pirated. But one caught my eye. It was called ‘‘The Hitchhiker’s Guide to the Galaxy.’’

At the time the movie was not available on DVD in the United 

States, so I knew it was a fake, taking the money out of a U.S. 

filmmaker’s pocket. And that filmmaker is my son. He is a producer, and that was his most recent film. 

I relayed the story to him, and he replied: ‘‘And what, Dad, Mr. 

Chairman of the MPAA, are you going to do about this as well?’’

MPAA invests millions of dollars each year in fighting piracy. As 

I previously indicated, piracy in China is indeed a China problem, 

but it is also a problem with a global reach. A pirated disk made 

in China can, in a day or two, be on the streets in Los Angeles. 

Someone can illegally camcord a movie in Moscow, send the file 

by way of the Internet to someone in Guangzhou, who then dubs 

and subtitles the Russian dialogue and then presses thousands of 

DVDs. 

We fully appreciate the global reach of this problem, and we have 

aggressively pursued a strategy to stop the illegal camcording of 

movies, which is still the largest source of pirated product. 

We are very appreciative of the action Congress took to make illegal camcording a federal crime, and that the President signed the 

bill earlier this year. 

23

We seek to track the production of optical disks to make sure the 

plants are not making illegal discs. We are on the ground in China. 

Our representatives survey the market for information about the 

incidence of piracy, and in some cases this helps the Chinese authorities formulate raids on these sellers and distributors. 

We are also participating in training sessions for Chinese authorities and jurists on IPR laws and enforcement, something that 

we hope can produce some benefit as well. 

My statement talks to some of the other things that we have 

done with respect to a memorandum of understanding recently, but 

I wanted to give you some results of that. 

On October 25, we met with Chinese officials to review the results of a memorandum of understanding with the MPAA and various Chinese departments regarding market piracy. 

For our part we surveyed a small selection of shops in four cities: 

Beijing, Shanghai, Guangzhou, and Shenzhen. The surveys were by 

no means intended to provide a comprehensive assessment of any 

piracy, but what they showed is the following: 

In Shanghai our survey showed that of the films covered under 

the agreement, under the MOU, no pirate versions were available 

at all, at the time the shops were surveyed. A positive trend. I do 

not know how long it will last, but at least at the time we surveyed, it was positive. 

In Guangzhou the availability of pirated versions of the identified titles was down quite sharply from September, when almost all 

titles were available. 

In Shenzhen, availability of pirated titles fell 50 percent from 

September. 

And in Beijing, in August, with the exception of one shop that 

carried only 50 percent of the protected titles, pirated versions of 

the films still ran from 70 to 90 percent. 

So this MOU is an attempt to try to get the Chinese to involve 

themselves on some enforcement. There have been a limited number of successes, but, by and large, we are very disappointed with 

the results. 

Senator COBURN. Can you summarize for us? 

Mr. GLICKMAN. OK. In any event, let me just mention a final 

thing in terms of how you can help. 

Having surveyed the scope of the problem, I would say the following: 

First, help make sure our government has the resources it needs. 

Not only do we need tough laws in the United States, such as the 

recent package from the Attorney General, we need people to enforce the laws, inspect imports, train foreign officials in IPR, and 

enforce international trade agreements. 

Some of this is going to take money, realizing the problems with 

the Federal budget deficit, but we’ve got to have enforcement authorities overseas. 

Second of all, why do we run a piracy problem at all? One of the 

reasons is because of these burdensome restrictions we have on 

doing business in China. 

We have a positive balance of payment surplus with every single 

country in the world that we sell movies to except one, and that 

one is China. 

24

1The prepared statement of Mr. Burr appears in the Appendix on page 61. 

The good news is that our movies made in China in 2004 doubled 

the amount they made in 2003. The sobering news is that the 

amount was only $10 million. One American movie on an opening 

weekend makes more, as we saw from this last weekend, where we 

had successful operations. 

In recent years, in fact, two Chinese movies, ‘‘Kung Fu Hustle’’ 

and ‘‘House of Flying Daggers,’’ made more in the United States 

than all the U.S. movies made in China for the years they were released, and, ironically, both were distributed in the United States 

by our member companies here at MPAA. 

So these market barriers are critically important, and they’re one 

of the reasons why we have so much piracy in China. 

At the same time, you can buy any movie in China that you 

want, including movies that were not allowed into the Chinese legally. 

So I would just finally say that what we need in this country is 

to continue our efforts to try to get the Chinese to enforce; the political will to move ahead if, in fact, they do not comply with the 

agreements; and to keep the pressure on. 

When the Chinese want to stop piracy, they can be enormously 

effective. They do not need 20 more years’ experience with IPR. 

They have the resources, they have the basic statutes, and they can 

make the changes needed to improve them. They need the political 

will to protect our goods as effectively as they are protecting the 

Olympic logo. 

Thank you very much, Mr. Chairman. 

Senator COBURN. Thank you. 

Next we will hear from Nashville songwriter Gary Burr, who represents the Recording Industry Association of America. 

No stranger to the Nashville scene, Mr. Burr has penned numerous hit songs for an impressive roster or country artists, including 

Wynonna, Collin Raye, Doug Stone, Patty Loveless, and The Oak 

Ridge Boys. 

Gary Burr has been awarded ‘‘Songwriter of the Year’’ on three 

separate occasions by three separate organizations: Billboard, 

Nashville Songwriters Association International, and ASCAP. He 

has also received over 20 ASCAP recognition awards for radio play 

activity and CDs featuring his songs that have sold more than 50 

million units worldwide. 

We welcome your statement, Mr. Burr. Please summarize, if you 

would, and your full statement will be made part of the record. 

TESTIMONY OF GARY BURR,1 NASHVILLE SONGWRITER, 

RECORDING INDUSTRY ASSOCIATION OF AMERICA (RIAA) 

Mr. BURR. Thank you, Mr. Chairman. 

The last several years have been tough ones for my industry. The 

piracy of our music, physical, amd online—has been the major reason for this. 

In rough terms, the combination of growing global physical piracy, easy Internet piracy, illegal CD-burning—it has made us go 

down by 20 percent. There has been a 20 percent decline in our industry sales since 1999. 

25

The impact of the revenue crash has been profound in human 

and creative terms. There are hundreds of large and small record 

companies in the United States which contribute to America’s culture, cultural diversity, and our Nation’s economic welfare that 

have been severely affected. 

Successive rounds of job losses have occurred in the American 

record companies—the small and large ones. There have been additional losses with closing of thousands of retail stores. 

Yet the creative cost is even more troubling. Artist rosters have 

been slashed dramatically. Piracy robs the industry of the capital 

it needs to invest, and the result is fewer artists finding the financial support they need to put food on their table. 

American recordings are sold all over the world because—I’m biased, but American music is the best. 

And the sales of this benefit everyone in the industry, and they 

add significantly to our Nation’s trade balance and to our national 

welfare. And our Nation’s welfare is reduced and our composers, 

artists, and all the employees of record companies, small and large, 

suffer when foreign governments permit our recordings to be pirated in their countries. 

When it comes to ripping off American sound recordings, China 

is one of the worst. The magnitude of record piracy there eclipses 

any other country. This has been a point of conflict between our 

countries for years. 

I understand that China has taken steps to improve its laws 

against copyright piracy. But China runs a few raids and it seizes 

lots of products, yet the problem remains as bad as ever. 

Mass quantities of pirated Chinese CDs are found all over China, 

and all over the world, in large part because realistic, meaningful 

penalties are never imposed by the Chinese government on the pirate producers. 

The challenge for us as Americans is to get China to impose penalties on large-scale pirating and to truly discourage such piracy. 

Unless and until they do, not much is likely to change. 

Our own government is pressing China hard on this—that isn’t 

the problem—But China isn’t responding. I think we need to use 

all the tools available to get this problem solved. 

I have no idea—I’m a songwriter. I have no idea what those tools 

are, but if the tools are out there, we really need to use them. 

I also want to say a word about Russia, which is fast becoming 

the next China when it comes to the blatant piracy of our products. 

Sound recording pirates in Russia are producing far more sound 

recordings than are needed for legitimate demand and exploiting 

them all over the world, ruining our industry’s market inside and 

outside Russia. In addition, Russia is tolerating one of the world’s 

worst online music pirates, an entity named ‘‘allofmp3.com.’’ Nice 

name. 

But we have a unique opportunity with Russia. They hope to join 

the World Trade Organization. And the U.S. Government should 

not agree to this until Russia effectively addresses these problems. 

I urge Congress to insist on this. 

The U.S. Government must press China and Russia harder to 

strengthen their antipiracy enforcement regimes. The current systems in these countries do not work. Unless the United States uses 

26

1The prepared statement of Mr. Sabo appears in the Appendix on page 67. 

each and every option available to it, we will continue to face the 

same situation we do today for the foreseeable future: Overwhelmingly pirate markets and lost opportunities for legitimate U.S. companies. 

Thank you, Mr. Chairman. 

Senator COBURN. Thank you, Mr. Burr. 

Next I would like to introduce Jack Sabo. He serves as vice president of Market Data at the New York Board of Trade. As vice 

president of Market Data Services, he is responsible for Market 

Data revenue at the New York Board of Trade. The function entails 

technology, finance, education, antipiracy, and marketing. 

The New York Board of Trade is New York’s original futures exchange where the world trades futures in coffee, sugar, cocoa, orange juice, cotton, and certain financial products. 

He currently serves on the board of the Software and Information Industry Association, is on the executive council of that board, 

the Financial Information Services Division, where he’s cochairman 

of the Governance Advisory Committee and Chairman of the Redistribution Advisory Committee. 

We welcome your statement, Mr. Sabo. 

TESTIMONY OF JACK SABO,1 VICE PRESIDENT, MARKET DATA, 

NEW YORK BOARD OF TRADE 

Mr. SABO. Thank you, Chairman Coburn. Good morning, everybody. 

Chairman Coburn, I appreciate the opportunity to appear before 

you today to discuss the challenges faced by the U.S. financial community and, in particular, the New York Board of Trade. This problem is due to piracy of realtime market data in China. 

While the issue of piracy in China is often dominated by highprofile industries, such as motion pictures, recording, and software 

and publishing, Chinese piracy also affects the financial industry 

by robbing exchanges of fees from the sales of market data and by 

robbing customers from licensed market data vendors, such as 

Bloomberg, e-Signal, Reuters, and others. 

Revenue from market data can be as much as 25 percent of total 

exchange revenues. This market data that is provided by our derivative exchanges is vital information used by the global financial industry. 

It includes brokerage houses, banks, fund managers, farmers, 

brokers of cotton, coffee, sugar, cattle, corn, orange juice, and many 

more. 

As Senator Coburn mentioned, New York Board of Trade, commonly referred to as NYBOT, is an old part of the financial community. 

In its pits on the trading floor, traders scream, yell, wave their 

hands, and jostle one another all for one reason: To get the best 

possible price for their customers. 

Like many businesses, NYBOT has gone through some tough 

times. On September 11 its facility at 4 World Trade Center was 

destroyed and some of our people were killed. 

27

At the time it appeared that our entire business, our entire franchise was destroyed, but, fortunately, we are in the risk management business, and as a result of the 1993 bombing of the World 

Trade Center, we had built a backup trading facility. 

No one could have anticipated how much we would need it. We 

worked out of that limited facility for 2 years. 

Now we have returned to lower Manhattan in an expanded stateof-the-art facility with 13,000 square feet packed with screaming 

traders. 

I do not know if any of you have ever visited NYBOT’s trading 

floor, but if you have not, please call me sometime and come visit. 

It is a unique experience, and you will love it. 

More than 2 years ago, we discovered a Chinese firm very well 

known in Beijing that was offering realtime market data of the 

world’s derivative exchanges on their Web site. To test it, we subscribed. The subscription for all those exchanges should have cost 

somewhere around $10,000 per month. We paid $600 for an entire 

year. 

This firm is not a licensed vendor and, to my knowledge, does not 

remit any revenue to exchanges, certainly none to NYBOT. 

If something like this were to happen in the United States or 

even in Europe, we would know how to stop it immediately. However, we had no clue how to proceed in China. 

Now, we are members of the Software & Information Industry 

Association called SIIA, so we gave them a call and asked them to 

help. On our behalf, SIIA tried to contact the chairman of the offending firm and asked that the company cease and desist from 

their infringing activities. To date, there has been no response from 

the firm, and still any individual from anywhere in the world can 

today still subscribe at well below market rates. 

Even as we have pursued and continue to pursue our own efforts 

to stop this piracy, we have appreciated the willingness of the U.S. 

Government to hear our concerns and work with us to put this on 

their agenda. 

NYBOT is especially appreciative that Commissioner Sharon 

Brown-Hruska of the Commodity Futures Trading Commission has 

helped her government colleagues to understand the importance of 

the market data industry to our economy and explain some of the 

technical issues surrounding our operations. 

With SIIA we have had constructive meetings with the Office of 

the U.S. Trade Representative who understands the issues and is 

working with us to raise them with their Chinese counterparts. 

Right now the Web site is only in Chinese, but the company’s 

chairman and CEO, ironically, got his graduate degree here in the 

United States, and we are very concerned that the Web site will 

soon be translated into English. If that happens I believe it will 

cause us to lose even more revenue. 

Chairman Coburn, as you and your colleagues in the U.S. Government work to improve the environment for conducting business 

in China, we ask that the challenges facing the market data industry remain an important part of the agenda. 

It is our hope that with your help, sometime in the near future 

the Chinese government will take concrete steps to prevent entities 

28

1The prepared statement of Mr. Hillberg appears in the Appendix on page 69. 

from illegally obtaining and selling U.S. exchanges’ proprietary 

Market Data. 

I greatly appreciate this opportunity to appear before you today 

and would be glad to answer any questions you might have later. 

Senator COBURN. Thank you very much, Mr. Sabo. 

Next we will hear from Loren Hillberg, who serves as general 

counsel for the software company Macrovision. Mr. Hillberg handles all corporate legal matters for Macrovision. 

Prior to joining this company, Mr. Hillberg served as vice president and general counsel of Macromedia. And prior to that, Mr. 

Hillberg served as vice president and general counsel for Micro 

Focus Group U.K., a U.K.-based provider of enterprise software 

tools. 

Mr. Hillberg, thank you very much. Your entire statement has 

been made a part of the record, and if you would summarize that 

in 5 minutes, I appreciate that. 

TESTIMONY OF LOREN HILLBERG,1 GENERAL COUNSEL, 

MACROVISION CORPORATION 

Mr. HILLBERG. Thank you, Chairman, Mr. Coburn. 

I appreciate the opportunity to testify before you today on very 

significant piracy problems affecting the U.S. software and information technologies companies in China. 

Macrovision is the world’s leading supplier of digital distribution 

commerce and consumption solutions for software and entertainment content. Our media software and network-based solutions deliver protection and enablement capabilities to the home video, PC 

games, music, cable satellite, consumer software, and enterprise 

software industries. 

Macrovision has delivered, installed, and managed software on 

over 500 million desktops. It serves all 1,000 of the Fortune 1000 

companies and has enabled over 10 billion units of packaged 

media, 5 billion DVDs, a half billion CDs, and 300 million online 

games. 

Macrovision is also a member of the Software & Information Industry Association. 

Macrovision holds a total of 220 issued or pending United States 

patents and 1,200 issued or pending international patents and continues to increase its patent portfolio with new and innovative 

technologies in related fields. 

In addition, and perhaps more relevant to this hearing, in China, 

Macrovision has 35 issued patents and another 25 applications 

pending. We also have registered or pending registrations for 10 

trademarks and numerous copyrights. 

As a company, we have been active in our efforts to preserve our 

intellectual property rights in China. Unfortunately, while the Chinese government has established portions of an infrastructure for 

intellectual property protection, they have not so far provided a 

critical element of that infrastructure: A clear and reliable enforcement process. 

In order for the software industry to effectively protect and invest in China, this notable failure must be rectified. 

29

The proliferation of computers, internal computer networks, and 

the Internet has made illegal reproduction and distribution of protected material much easier to accomplish and more difficult for 

software companies to police. 

Macrovision, as a software provider that protects the copyrights 

of media companies, is uniquely negatively impacted by the lack of 

the Chinese enforcement efforts. Our ability to provide effective solutions to our customers depends both on our technology and the 

ability to police the misuse of our technology in the marketplace. 

The Chinese government is to be applauded for its efforts to join 

the world community respecting intellectual property over the past 

10 years. Unfortunately, they have fallen down with respect to the 

most important aspect of such protection, and that is enforcement. 

There have been initial efforts to address the piracy of intellectual property. Unfortunately, the appropriation of intellectual property in China has occurred on such a massive scale that these 

small initial steps are simply not sufficient to address the impacted 

international businesses. 

Core technologies across the array of the information and communications industries have been copied in China without impunity. 

Further, notwithstanding the commitment of China’s leaders to 

require all governmental branches and agencies to use legally licensed software, the lack of compliance even within the government sector continues to be significant. 

Closely related to these troubling intellectual property policies is 

the regulatory framework emerging around the development of tactical standards requiring the use of intellectual property in China 

standards and competition policies. These are commercial terms 

under which U.S. companies are unwilling to play. 

What needs to be done? 

The framework for success has a foundation. The outcomes of the 

Joint Commission on Commerce and Trade announced in July 2005 

offer real opportunities for improvement, but only if the Chinese 

government plays the important role that it must. 

A few of the important commitments intended to address U.S. 

concerns with respect to intellectual property include increasing 

criminal prosecution, reducing the exports of infringing goods, improving national police coordination, enhancing coordination across 

all law enforcement authorities, ensuring the use of legal software 

in the state-owned sector, and fighting software and end-user piracy. 

What further steps are required? 

The first and most important is a significant increase in enforcement resources. This year the Ministry of Public Security in China 

has increased somewhat its enforcement, but much more needs to 

be done to move intellectual property into the realm of law enforcement rather than leaving it solely within the purview of administrative agencies. 

Legal authorities are now better armed with guidance that enables them to prosecute more cases of intellectual property infringement. Now the cases need to be pursued. In a country where 

in a single year more than 150 million pirated DVDs are conVerDate 0ct 09 2002 13:27 Sep 22, 2006 Jkt 024934 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\DOCS\24934.TXT SAFFAIRS PsN: PAT
30

1The prepared statement of Mr. Jones submitted by Mr. Minor with attachments appears in 

the Appendix on page 80. 

fiscated, 52,000 trademark violations are prosecuted, an average of 

less than 600 arrests is simply inadequate. 

Another area of importance is anti-circumvention legislation. A 

critical element enabling the U.S. content profession are the circumvention provisions of the DMCA, the Digital Millennium Copyright Act. 

Through the TRIPS process, China has agreed to implement 

similar legislation in this area. Until these laws are fully in place 

and provide a meaningful enforcement avenue for rights holders, 

piracy will remain a rampant problem. 

In summary, China has made great strides over many years. 

Nonetheless, for an effective intellectual property protection system 

to exist, the most important aspects of the system are the need to 

allow the enablement to actually enforce the rights that are protected by the system. China needs to do much more to meet these 

obligations. 

Thank you, Senator. 

Senator COBURN. Thank you. 

Next we will hear from Timothy Minor, who serves as vice president of government relations for Cummins-Allison Corporation. 

Mr. Minor was gracious enough to fill in for the chief executive 

officer at Cummins-Allison, Bill Jones, who at the last minute had 

to cancel his plans here. 

Cummins-Allison Corporation is an office equipment and security 

products manufacturer and currency protector founded in Chicago 

in 1887. The founding families were prominent families from Iowa 

and Indiana respectively at the turn of the century. 

B.F. Cummins, the first president of Cummins-Allison, grew up 

in the State of Iowa. B.F. Cummins’ eldest brother, Albert Baird 

Cummins, served as governor of Iowa from 1902 to 1908, elected 

to the U.S. Senate, and served as Senator from 1908 to 1926. 

Senator Cummins served as president pro tem of the Senate during the 66th through the 69th Congress. Albert B. Cummins was 

a member of the progressive wing of the Republican Party and thus 

was closely aligned with Theodore Roosevelt regarding the legislation reform of the railroads and other powerful trusts and business 

interests. 

Mr. Minor, welcome. Thank you for filling in for Mr. Jones. And 

your entire statement—his entire statement has been made a part 

of the record. 

And if you would summarize. 

TESTIMONY OF TIMOTHY MINOR,1 VICE PRESIDENT OF 

GOVERNMENT RELATIONS, CUMMINS-ALLISON CORPORATION 

Mr. MINOR. Thank you, Mr. Chairman. Good morning, fellow 

members of the panel, other attendees here today. My name is Tim 

Minor. I’m vice president of government relations for the CumminsAllison Corporation, which is a privately held manufacturing company headquartered in the Chicago area. 

Originally William Jones, chairman and my boss at Cummins-Allison, was invited and was scheduled to participate in this hearing. 

31

It is quite ironic that a patent infringement suit against one of our 

Japanese competitors is finally coming to trial and forced him to 

remain in Chicago today. 

Mr. Chairman, Mr. Jones asked that I extend his apologies to 

you. He very much wanted to be here and participate in the hearing, commends you for addressing these critical issues associated 

with the theft of intellectual property. 

We thank you for the invitation to participate in this important 

hearing on the protection of intellectual property of American industries. Your work is crucial to the identification and implementation of meaningful—and I highlight ‘‘meaningful’’—solutions to the 

expensive and debilitating problems associated with intellectual 

property theft by foreign governments and businesses. 

Cummins-Allison was founded in 1887 by the Cummins and Allison families. Today Cummins-Allison is the last American-owned 

manufacturer of currency-processing equipment. 

Our products scan, sort, denominate, and authenticate U.S. currency as well as many foreign currencies. 

Cummins’ currency-processing products are utilized by banks, retailers, governments, armored carriers, and casinos. The high-speed 

processing and counterfeit detection capabilities of our products 

help to protect the integrity of the dollar as a world reserve currency. This is critical to our Nation’s economy and security. 

The theft and utilization of America’s intellectual property by foreign manufacturers and nations is only one component of an ineffective American trade policy. The U.S. trade deficit with China 

will likely top $200 billion this year, a clear indication that our 

policies are not working. 

Beijing manipulates its currency to gain commercial value without consequence. Its manufacturers dump products into the United 

States without retribution. 

The export of industrial and innovative capabilities to China, 

along with the theft of intellectual property, has done grievous 

damage to the U.S. economy. 

When U.S. companies lose business to Chinese rivals or need to 

cut costs to the bone as their margins shrink, jobs are displaced, 

wages fall, taxable income vanishes, vital public revenue streams 

decline, and resources for new investment in research and development diminishes. 

As far as Cummins is concerned, unlike our foreign counterparts, 

our American Government provides us with no industry support or 

protection. The Chinese government, on the other hand, has declared that currency and currency processing are matters of national security. 

Therefore, even after their entry into the WTO, tariffs of 38 percent to 40 percent continue to be assessed by the Chinese government on Cummins-Allison products exported to China. 

Compounding the problem, Cummins has no practical or effective 

means to protect our patents or intellectual property rights in 

China. As a result, China’s currency-processing industry can and 

does copy Cummins technology with impunity. 

Another trade barrier and threat to our intellectual property is 

a suit called the CCC safety certification, which was recently implemented by the Chinese government. China requires foreign 

32

1The article from the Korean Times appears in the Appendix on page 92. 

manufacturers to apply for and secure CCC certification for every 

imported electronic component or product. 

In order to receive a CCC certification, Cummins would have to 

agree to let the Chinese government officials annually tour and inspect our facilities here in the United States and pay for all of their 

travel expenses. 

In addition, they want full access to the engineering drawings 

and the design schematics for our products. They also require that 

we ship the finished product, intellectual property and all, to China 

for their evaluation. 

Clearly, it is not in the best interest of our national security to 

provide Chinese government officials with access to Cummins product design and production especially when these technologies protect the integrity of U.S. currency and help to identify sophisticated 

counterfeit money. 

As a result of trade barriers and potential loss of intellectual 

property, Cummins has chosen to withdraw from the Chinese market. Given the high tariffs, the government intervention, and the 

new so-called safety requirements, we have decided it is not practical or profitable for Cummins to export to China and risk compromising or losing our intellectual property. 

Of course, fewer Cummins product sales resulting from the abandoned Chinese market translates into fewer research and development resources and jobs here in the United States. 

Senator COBURN. Can you summarize for us? 

Mr. MINOR. Sure. 

For some time we have seen excellent counterfeits of American 

currency coming out of North Korea circulating around China and 

into South America and the Middle East. One of these pieces of 

currency that you’re looking at, Mr. Chairman, is counterfeit; one 

is not. 

Senator COBURN. I can’t tell the difference. 

r. MINOR. It is indeed a national security issue for the United 

States when foreign governments collaborate to produce and circulate excellent counterfeit U.S. currency. America, in fact, has a 

serious problem, as was confirmed in the recent story of ‘‘The 

Korea Times.’’1

Currency counterfeiting also creates potential security risk 

through the illicit financing of terrorist activities. As terrorist-funding resources have been eradicated, there is increased likelihood 

that terrorists will turn to counterfeiting as a means to purchase 

technologies and attain future objectives. 

In short, counterfeiting and theft of intellectual property are very 

serious problems which threaten our economy, quality of life, and 

national security. 

As a last remaining American-owned manufacturer of currencyprocessing equipment, Cummins-Allison believes that the United 

States lacks a complete, coordinated currency protection policy, 

which should be an important component of our national security. 

We encourage Congress and the Executive Branch to develop and 

coordinate a substantive U.S. currency protection program which, 

33

1The prepared statement of Mr. Fishman appears in the Appendix on page 93. 

in part, recognizes the importance of protecting America’s intellectual property in the currency-processing industry. 

Thank you, Mr. Chairman. 

Senator COBURN. Thank you. 

I can’t tell the difference. 

Our next witness is Dr. Ted Fishman. Ted C. Fishman’s best-selling book ‘‘China, Inc., and How the Rise of the Next Superpower 

Challenges America and the World,’’ has helped describe for the 

world the effects of China’s momentous change on the lives and 

businesses of people everywhere. 

In addition to its success in America, the book, translated and 

published in 21 languages, is an international bestseller. In 2006 

it will appear in Chinese editions in both The People’s Republic 

and Taiwan. 

Mr. Fishman has testified before Congressional committees and 

commissions, and consults on China with a wide range of government officials, including some of the Nation’s most influential officeholders. 

His essays and reports appear in many of the world’s most 

prominent journals, including The New York Times Magazine, 

Harper’s, Esquire, U.S.A. Today, GQ, The Times of London, and 

others. 

Mr. Fishman, welcome. I have read both of your books. I appreciate you being here. And please try to keep your comments to 5 

minutes. 

TESTIMONY OF TED FISHMAN,1 ARTHOR, ‘‘CHINA, INC., AND 

HOW THE RISE OF THE NEXT SUPERPOWER CHALLENGES 

AMERICA AND THE WORLD,’’

Mr. FISHMAN. Thank you very much. I’m glad to be here. I’m so 

frightened from Mr. Minor’s remarks, I do not know if I can speak. 

It was really chilling. 

I’m going to speak off of my testimony. You have my testimony 

for the record, but I’m just going to speak based on what I’ve heard 

and some notes I made from reading a news article last night and 

today. 

As you know, Mr. Chairman, I have a strong conviction that this 

is the most important issue facing our trade with China. And it is 

one of the most important issues facing the vitality of the American 

economy, not only because we lose sales, but because we lose vitality out of our economy. 

And it affects everything up and down the architecture and contours of our economy, every decision from where a company invests 

to how a university student plans his future, whether he wants to 

be an engineer and produce world-leading knowledge products, or 

whether that kind of enterprise is threatened by China’s theft of 

our intellectual property. 

And it strikes me that California is a particularly important 

place for this hearing, not only because it is the home of the entertainment industry, but it is also the home of high-tech industries, 

biotech, software that serves the service industries, and also the 

34

home of the greatest entrepreneurial boom, one of the greatest entrepreneurial booms in American history. 

As you know, entrepreneurs begin their businesses because they 

have a new idea, and they aren’t just mom-and-pop ideas. Sometimes they’re world-class ideas. When those ideas are threatened, 

entrepreneurship, which is an engine of our economy, is also 

threatened. 

We have made a bargain in this country which is that we are 

willing to shed low-cost manufacturing to other countries, cut and 

sews, simple assembly manufacturings, if we can move up the economic feeding chain into higher-value knowledge goods, but when 

those knowledge goods are threatened and when the world’s fastest-growing economy provides no market for those goods because 

those goods are—simply migrate there at no cost, then this bargain 

that we have made with our own people is not working. 

Instead, we just lose the low-end jobs, and we threaten the highend jobs. 

It is one thing to talk about the consumer in China as the beneficiary of a regime that does not police intellectual piracy—intellectual property, the piracy of intellectual property. 

But I would encourage us all to think about what Mr. Minor said 

and maybe even broaden it to the shop floor in the United States 

and how China’s intellectual property regime threatens the shop 

floor of the United States. 

If you look at consumer software, consumer entertainment, they 

end up in the hands of an end user, but if you look at the means 

of production that are pirated inside China, they end up on shop 

floors and in factories. And one of the highest costs for American 

companies competing in the world market is the technology cost. 

Often we can compete with low-cost labor around the world, like 

automating our factories. And we do this by making better and better investments in better and better technology. And a technology 

cost for an American company is often among its highest cost that 

it pays, but for a Chinese company, it is among the lowest cost that 

it pays because it does not pay them. 

So when you go to an American factory, particularly the kinds 

of factories I’m familiar with and Mr. Minor must be familiar with 

in the Midwest, you go into a bread and butter manufacturing company, whether they are forging or injection-molding or creating any 

kind of product that goes into the 80 percent of American industry 

which provides parts for American industry, you are likely to see 

a row of CAD/CAM machines, all other kinds of sophisticated software, other machines on the shop floor. What you won’t see is a 

lot of people on the shop floor. 

But these machines, these CAD/CAM machines, can cost $60,000 

to $100,000 a year in license fees. It can cost millions of dollars for 

a company that is not that big, and yet these companies must compete with Chinese competitors who pay nothing for that. We can 

compete against the low-cost labor, but we can’t compete away the 

technology costs because American companies pay full bore for 

that. 

Another issue I wanted to stress in listening to the other panelists was how are Americans partnered in the piracy that goes on 

35

in China? And why our role as partner in the piracy also puts us 

in a unique role as a problem-solver for Chinese piracy. 

One thing we shouldn’t overlook is we benefit from the low cost 

of Chinese goods. I think it would be very hard to find a Chinese 

factory which was not running on pirated software, reverse-engineered machinery. 

Chinese research institutes exist, in essence, to reverse-engineer 

the world’s leading technology, and yet about one in six dollars of 

the Chinese GDP cycles through the United States. That is the size 

of our trade deficit with China. 

And we benefit from the low cost that comes out of these factories that use this pirated and reverse-engineered technology, and 

yet we do not police the factories. 

Often the legitimate goods that arrive on our shores look legitimate when they get here, but the environment they come out of is 

wholly illegitimate. 

There is an interesting case that is been covered by the papers 

lately about a Chinese-born American businessman who owes half 

a billion dollars to a Chinese television company presumably for 

not paying the license fees for DVD players. 

Well, those DVD players came at steeply cut prices into America’s big-box retailers for Thanksgiving specials, for Christmas specials. Nobody asked at those retailers, how are you selling DVD 

players for $30 when a license fee on a DVD chip costs about $14? 

In a way there is a wink and a nudge that comes from the American buyer into the Chinese marketplace who bring those products 

here, and we have to think about that. 

And with due respect to Mr. Glickman, while we complain about 

pirated DVDs, we might also raise a flag on the DVD player market also, which is part of the issue. 

It is interesting to look at when the United States tolerates and 

does not tolerate piracy. All poor countries are forced to pirate in 

some degree. They simply can’t afford the drugs, the entertainment, and the means of production that they need to bootstrap 

themselves up. And we have benefited from the growth of China’s 

economy. But now we are at an inflexion point where we have to 

think anew about it and say, how are we creating these massive 

competitors? 

And one thing I would propose is that we think deeply about creating an economic incentive about how—why China should stop piracy rather than a police incentive. And we might think about how 

American companies can reach back into the Chinese workplace, 

look to see whether the workplace itself is legitimate, and if it is 

not, do not allow those goods inside the country. 

Create the kind of certification regime that exists against child 

labor, that exists against rain forest lumber, that exists against environmental degradation. These are effective enforcement regimes 

that exist around the world, and it is something that we can benefit from. 

Thank you, Mr. Chairman. 

Senator COBURN. Thank you. 

Our next witness is Commissioner Patrick Mulloy. He was reappointed to the U.S.-China Economic and Security Review ComVerDate 0ct 09 2002 13:27 Sep 22, 2006 Jkt 024934 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\24934.TXT SAFFAIRS PsN: PAT
36

1The prepared statement of Mr. Mulloy with attachments appears in the Appendix on page 

100. 

mission on March 25, 2003, by Senate Democratic Leader Tom 

Daschle, to a 2-year term expiring on December 31, 2006. 

Commissioner Mulloy previously served as a member from April 

1, 2001, to January 7, 2003. 

United States-China Economic and Security Review Commission 

is a bipartisan commission established by Congress in the year 

2000 to investigate, analyze, and provide recommendations to Congress on the economic and national security implications of the 

U.S.-China relationship. 

And recently, just 2 weeks ago, it released its 2005 Annual Report to Congress. 

Prior to assuming his current responsibilities, Commissioner 

Mulloy was nominated by President Clinton and confirmed by the 

U.S. Senate as Assistant Secretary for Market Access and Compliance in the Department of Commerce’s International Trade Administration where he served from 1998 to 2001. 

In that position he directed a trade policy unit for over 200 international trade specialists which focused worldwide on removing foreign barriers to U.S. exports and on ensuring that foreign countries 

comply with trade agreements negotiated with the United States. 

Commissioner Mulloy, welcome. And if you would, limit your 

comments to 5 minutes. Your complete testimony will be made a 

part of the record. 

TESTIMONY OF COMMISSIONER PATRICK MULLOY,1 U.S.-

CHINA ECONOMIC AND SECURITY REVIEW COMMISSION 

Mr. MULLOY. Thank you, Mr. Chairman, for having this hearing 

on this most important issue. 

I want to just use my time to briefly highlight a few key points 

about China’s continued violations of the obligations it assumed 

when it joined the WTO. 

China is enjoying enormous economic benefits from being in the 

WTO. The United States permanently gives most-favored nations 

tariffs to China. If you do not have most-favored nations tariffs, 

goods coming from China would face about a 40 percent tariff coming into our market. 

Because they have M.F.N., which we have now locked in place 

through their WTO entry, their average tariff coming into the 

United States is about 2.5 percent. This does not mean that U.S. 

goods going to China have a 2.5 percent tariff. We bargained too. 

I think their average tariff on our goods going to China is about 

10.5 percent. So there is a discrepancy. But that is the agreement 

that was made when they joined the WTO and we are living up to 

it. 

But what we did, we wanted them to sign on to the WTO TRIPS 

agreement, the Trade Related Intellectual Property Rights Protection. That was one of the reasons we wanted them in the WTO. 

Prior to them coming into the WTO, we could have used Section 

301 of our trade laws to limit their exports of goods into our market if they continued to violate their copyrights and patents of our 

companies in China. 

37

We gave away that leverage when we got them in the WTO. We 

can no longer unilaterally use Section 301 to force them to live up 

to their obligations. 

Our only option now is to take them into WTO dispute settlement if we want to stay within the system that we have signed up 

to. 

So that is an enormous gift that we gave to the Chinese. 

Mr. Chairman, you talked about the enormous trade deficit that 

we have with China. Let us just look at this. 

Last year, 2004, our total trade with China was $231 billion, 

$197 billion of that was imports coming from China into this country. We had about $35 billion going off to China. That is an enormous discrepancy, and this year it is going to be much larger. Our 

trade deficit with China is going to be over $200 billion. 

Now, it is not just T-shirts and it is not just tennis shoes. We 

are running an increasingly large trade deficit in advanced technology products as defined by our own Commerce Department. Last 

year, 2004, our trade deficit with China in advanced technology 

products was $36 billion. This year it will be over $40 billion, I assure you. 

From 1990 to the end of 2005, our total trade deficit with China 

is over a trillion dollars. The Chinese now have about $700 billion 

of U.S. dollar assets which they can now directly invest in our 

Treasury bills as part of their scheme to keep their currency undervalued, but it also gives them enormous leverage over American interest rates. 

So that is something. If we do not turn this situation around, we 

will, as the old Tennessee Ernie Ford song goes, be another day 

older and deeper in debt. 

Now, what can we do? 

Oh, there are two things that you have to think about. 

We want to try and get them to enforce intellectual property protection for our companies doing business in China. We can’t enforce 

our laws in China. The TRIPS agreement requires them to put the 

laws on the books and to enforce them, including criminal penalties. That is what the TRIPS calls for. 

But what we can do, we can police our own borders and our own 

market and stop those counterfeit goods from coming into our market. 

Two-thirds of the counterfeit products in the world market are of 

Chinese origin. 

That means we will have counterfeit medicines coming into this 

country, counterfeit parts for automobiles, maybe even, God forbid, 

counterfeit parts for airlines. This is an enormous health and safety hazard to the American people, and this is an area that we really should beef up tremendously. 

Now, you heard the different industries, the entertainment industry, the software industry. It is not just them, though. It is our 

manufacturing firms whose patents is being ripped off as well. 

Now, can the Chinese really enforce these laws? Let me put into 

the record, Mr. Chairman, an article that appeared in The WashVerDate 0ct 09 2002 13:27 Sep 22, 2006 Jkt 024934 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\24934.TXT SAFFAIRS PsN: PAT
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1The article from The Wall Street Journal appears in the Appendix on page 112. 

ington Post on November 4.1 The Chinese have this Olympic logo 

that they make money from. They enforce those laws. There is not 

a lot of pirating of their Olympic logo. 

They can do it if they want to do it, but they do not want to do 

it. Why? Because there is no economic incentive. 

We should give them an economic incentive by, one, keeping 

those goods out of our market and, two, bringing a WTO case and 

getting the right to put tariffs on selected products from China. If 

we win a case, we would then show how much damage their violations caused, and then we would have a right to put tariffs on that 

amount of goods coming from China into our market. 

And we would select which goods we could put the tariff on to 

get the most leverage on them. I think it is a no-brainer that we 

have to go ahead and bring a WTO case against them. 

Now, let me tell you one of the problems with that. USTR and 

others, they love this WTO so much that they’re afraid that if they 

bring a case and do not win it, it will show that the WTO does not 

work. 

Well, for me, my view is bring the case. If it does not work, then 

we have to do something else because we cannot let this situation 

continue. 

I would just note that today there was a report on President 

Bush’s and Secretary Rice’s visit to China. We have been after this 

issue for 15 years negotiating with the Chinese on WIPR violations. 

Here’s what the U.S.A. Today quotes: 

‘‘Secretary Rice, Mr. Hu promised to do more to end piracy of 

U.S. movies, music, and other products. Secretary Rice said the discussion on intellectual property rights was, ‘much more detailed, 

much more specific than previous talks.’ ’’

I guarantee you, if we do not bring a case and we do not get 

some leverage on these guys, people will go over there another year 

from now and they will have the same discussion. 

Finally, Mr. Chairman, when Mr. Portman, your former colleague, finally began to use the WTO mechanism and filed that Article 63 request for information about what their enforcement activities are, here is the way The Wall Street Journal reported that, 

and this is what really makes you wonder. 

‘‘In a move expected to ratchet up tensions with China . . .’’

Why should that ratchet up tensions with China? We are asking 

China to live up to agreements that it assumed as part of its WTO 

commitment. This is an organization that gives them enormous 

benefits, as we just went through, in terms of their access to our 

market. We should not let our media and people who want to keep 

this situation—many of our companies are making enormous 

amounts of money—beginning to make money in China by making 

things in China and shipping them back here. 

But we can not let them run our policy toward China. Because 

if you look at the size of these deficits, you know what it is doing 

to our overall economy. Ted Fishman went through that, what that 

does, and some of these other folks as well. 

So we have to get very tough and focused on this issue, Mr. 

Chairman. And it is not just IPR. It is exchange rates. It is subVerDate 0ct 09 2002 13:27 Sep 22, 2006 Jkt 024934 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\24934.TXT SAFFAIRS PsN: PAT
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sidies. We tried to go into this, Mr. Chairman, in the report that 

we recently sent up to the Congress. 

I appreciate very much the opportunity to be here with you, Mr. 

Chairman. As I said in the report, in my additional views, we have 

to rely on the elected representatives of our people to be more active in our China policy. 

In my view, for too long we have subcontracted our China policy 

to corporate interest. And they are not necessarily working in the 

national interest. They will work for the interest of that corporation. They are not charged to look out for the national interest. 

They are charged to make money for their shareholders. It is the 

elected representatives of the people who have to get into this. 

And I worked in an administration, and I know what goes on in 

these meetings in the Executive Branch. 

You need to have the Congress very active and pushing on these 

issues or nothing will get done. Thank you. 

Senator COBURN. That is why you are here, Commissioner 

Mulloy. 

Mr. MULLOY. Thank you. 

Senator COBURN. Thanks to each of you. 

A couple of thoughts. The situation with intellectual property is 

pretty grim. And I heard Mr. Fishman say that—I think his comment was that the Chinese are forced to pirate. 

I take a little bit of issue with that in terms of nobody is forced 

to steal. Nobody—that is not the only option that they have. 

As a matter of fact, by their own signatories through the WTO, 

they say that they will not steal. And so I do not want to give them 

that out. They are not forced to pirate. They can be good actors. 

What I am concerned about more than anything is a couple of 

things Mr. Glickman said, is that organized crime seems to be getting into the intellectual property duplication. 

And if anybody has any comments on that, I would love to hear 

that, because that portends a much greater problem and a much 

more difficult solution if, in fact, that is the driving force behind 

it, other than economic advance for a country is that individual economic advance in terms of organized crime. 

The other thing that I am concerned about and I would love to 

have the input is what is the response to the Chinese government, 

when you all have interacted with them in terms of you say, well, 

you are going to do this and you are going to do this and then you 

go around the streets and they are better and then you send somebody a month later and they are right back where they were. 

What’s the answer to that? And what is the response? 

Are we dealing with somebody that we can deal with, or are we 

dealing with somebody that is not—we can not deal with? 

The decision for the Congress to make, is if you lie to me once, 

that is my problem. If you lie to me twice, then it is our country’s 

problem, and we can not trust you anymore. 

And the TRIPS agreement, the WTO, the most-favored nation 

status, we are down that road, but we went down that road on the 

basis of knowing that there is a participation by everybody on both 

sides of this agreement. And what we have heard today would 

seem that there is much less of a participation on the part of China 

and others in Asia than there is this country. 

40

And the real concern is the long term. As Commissioner Mulloy 

said—if the WTO does not work and as we lose over the next 10 

years our ability to compete worldwide, as we lose our manufacturing base, and as our intellectual property is whittled away because we can not protect it, then the creation of intellectual property is going to go where it can be most cheaply created. 

And all you have to do is look at several U.S. businesses today—

3M is one and many others—where they are moving their intellectual property development there so that you can develop it there. 

And so you start from that basis. 

So we undermine our economy both not at the workplace and 

small-piece job, but we also undermine our economy intellectually. 

And then the other thing that is concerning me is the short-term 

philosophy of many American businesses and our government, 

which means we make hay in the short term, but in the long-term 

our country is depleted and undermined, and our ability to protect 

ourselves, which is really the only true function of government, is 

to protect our national security. The ultimate No. 1 is undermined 

because we do not have a manufacturing base with which to defend 

ourselves. 

So anybody that wants to comment, I am going to let you go back 

and forth a little bit and just comment as you would, and then we 

will get into some specific questions. 

Mr. FISHMAN. If you do not mind, I would like to start with a 

thought. I do not want to overstate the forced to steal. Of course, 

no one is forced to steal. It is just the how—what makes you go 

to rationalize the theft. 

Governments are charged with certain functions. They have to 

provide for the health of their people, the economic well-being of 

their people, the entertainment of their people, and the education 

of their people. 

If you are the leader of 1.3 to 1.6 billion people, most of whom 

are desperately poor, and you could save millions of lives by having 

them spend pennies on the dollar for drugs, you could give them 

a presence in the global economy by having them spend pennies on 

the dollars for software, you can make your students smarter by 

taking textbooks for pennies on the dollar and expect to pay no consequence for that behavior, all of us might make the same decision. 

Senator COBURN. That is the question, whether or not there is 

a consequence, and that is what this hearing is all about. 

Can China continue to ignore the TRIPS agreement? Can China 

continue to ignore the world norm in terms of intellectual property? 

Can China continue to ignore the fact that you do not have free 

trade when you do not have a free-forming currency? Can we allow 

China to continue to do that as the U.S. Congress? And, therefore, 

if we do, then, I would say, yes, we can rationalize that it is OK 

for them to steal that because we have not said there is a consequence. 

Mr. FISHMAN. Yes. Here, here. I agree. All that more important 

that the solution come from us. 

When Mr. Glickman was in China—I think you should just live 

in China, because when you were there, there were no pirated 

DVDs on the street, and it was very hard to find even the shops. 

41

But they used that little brief time to make their shops that much 

nicer so when you left, they all looked like Blockbuster. 

Mr. GLICKMAN. I have no desire to live there, but I do appreciate 

the suggestion. Maybe I can go there more often. 

Mr. FISHMAN. You seem to be somebody capable of keeping them 

in line. 

But that is why I think the enforcement we should expect should 

not necessarily be from Chinese police, but we have to create a culture of compliance. So if you want to sell $200 billion worth of goods to the United 

States, you have to do it out of a factory that is I.P.-compliant. And 

then those factories, those tens of thousands, hundreds of thousands of factories will not want to compete in an economy where 

their competitors are stealing I.P. 

And you would get pressure internally inside of China to comply. 

And we have to have a strategy that creates that. And one way to 

do that is to put conditions on the goods that we buy from China, 

which is a huge amount of their GDP. 

Mr. GLICKMAN. Can I just comment on that? 

Senator COBURN. Sure. 

Mr. GLICKMAN. I used to be chairman of the Fair Labor Association, and one of the things we did was to—we were—it was a private sector group composed of apparel companies. And what they 

would do is they would certify companies and investigate their 

human rights violations to determine if mostly apparel that was 

coming in met those specifications. 

I think that is what you are talking about here, is some sort of 

internal certification process. And that is an interesting idea. 

And the other thing I think you mentioned, which I think is important, is the whole issue of consumer electronics coming in in 

this country and maybe we are taking advantage of those. 

There is this big annual consumer electronics show in January. 

I do not know to what extent antipiracy—we raise it there, but I 

do not know to what extent it is embedded in the entire subject of 

billions and billions of dollars in consumer electronics that are sold 

in this country. I think that is an interesting point. 

I also think this issue of the Beijing Olympics logo—and I would 

be interested to know what Mr. Fishman might think about the 

Olympics as being——

Senator COBURN. A leverage. 

Mr. GLICKMAN [continuing]. A leverage point to maybe work the 

Chinese, if you think there is any realistic possibility there. 

Mr. FISHMAN. Yes. It reminds me of a story of a book author in 

the audience of one of my talks, and he says my book has been pirated into China. What do I do about it? 

And I said, you should insert references to Tibetan independence. 

Because the Chinese do clamp down when they see a political need 

to, and they have the ability to do it. 

And I think as you get closer to the Olympics, they will be embarrassed by cameras going everywhere finding these pirated DVD 

shops, and they will disappear from Beijing. 

Now, what happens in the west of China, I have no idea, because 

it seems like it is only the glare of the cameras in any given place 

that makes it stop temporarily. 

42

But we can hope that the Olympics will be kind of a coming-out 

party for more responsibility. 

Senator COBURN. But the point is, is that the Chinese government does have the ability, should they so desire, to enforce intellectual property in China. 

Would the panel agree with that? 

Mr. MINOR. I am not sure they have the legal infrastructure. 

Senator COBURN. Well, where they want to enforce it, they can. 

So they obviously have the legal infrastructure when they selectively enforce if it goes against either what they do not want in 

terms of political, like Guangdong and several of the others. 

Mr. HILLBERG. I think the key is that the government can enforce certain intellectual property rights. I think the regime does 

not necessarily permit companies or other participants in the marketplace to be successful. 

Senator COBURN. The government does have the power to do it. 

It may not run as smooth as it does here, but they—if they choose 

to do it, they could do it. 

Would anybody disagree with that? 

Mr. FISHMAN. I would disagree with that on this, that there is 

a lot of jurisdiction shopping in China. And there is a lot of different kinds of enforcement from jurisdiction to jurisdiction. Andrew Mertha at Washington University in St. Louis has written at 

length about it. 

When you clamp down in one area, activities move to another. 

There is also the difficulty of driving an economic wedge between 

conflicts of interest. In pharmaceuticals, for example, the government is the No. 1 producer of drugs and the No. 1 buyer of drugs. 

As a buyer, it has the huge incentive to get the lowest price possible. As a producer it has incentive to take drug technology as its 

own and sell it for pennies on the dollar. And it is very hard to 

drive a wedge in between those conflicts of interest. 

Mr. MULLOY. Mr. Chairman, in my view, you need to give them 

the economic incentive to enforce their laws. If you are able to 

bring some WTO cases and win them and then you target key exports and put quite high tariffs, as you will be permitted to do, 

then you have economic leverage on them, and they will then pay 

more attention and begin to find ways to enforce those laws. 

Remember how much talk there was that the Internet was really 

going to free up that society? 

They are putting an enormous amount of money into controlling 

the Internet in that country. They have an interest in controlling 

the Internet, and they do it. If they had an interest in getting after 

this issue, they will do it. But they are not going to do it if we continue to talk rather than see if this mechanism in the WTO will 

work. 

We strongly recommended that we work with both the E.U. and 

Japan to bring these WTO cases because then there will even be 

more leverage. 

It is very interesting on that request filed by Mr. Portman, the 

Japanese joined us, the Swiss joined us, but the E.U. did not. I 

think we need to work on the E.U. and get them into this ball 

game a little bit more. And that is what we strongly recommended. 

43

Senator COBURN. This also does not just play in terms of trade. 

One of the great proprietors of Iran’s progression in terms of the 

uranium enrichment happens to be the Chinese. 

And so if we do not take a stand on our economic intellectual 

property, then we are perceived as weak in every other area of our 

foreign policy as well. And so it is important that we take that 

stand so that we hold them accountable. 

Mr. MULLOY. I would think that they must wonder that we have 

the President of the United States over there saying, pretty please, 

do this for us, and this has been going on for 15 years with no results. I mean, they must not take us seriously about these things. 

Senator COBURN. So it is not a Republican or Democratic thing? 

It is this policy stinks in terms of enforcement of the things we do? 

Mr. MULLOY. Absolutely. There was a requirement in the law 

that the Banking Committee wrote in 1988 requiring Treasury to 

identify currency manipulators. Early on the Bush Administration, 

Bush 1, actually identified Korea, Taiwan, and China as currency 

manipulators. 

Beginning in 1992 that passed under both Clinton and now Bush 

2. Nobody’s identified China as a currency manipulator, although 

everybody knows they are a currency manipulator. 

When Tim Adams, our undersecretary of the Treasury, complained to the IMF and said, why aren’t you working to stop China’s currency manipulation, the IMF came back and said, you have 

not even named them a currency manipulator in your reports to 

Congress. 

Because we have not been truthful, then we get bitten. We have 

to be truthful, and then you can deal with the reality or you find 

policies that deal with the reality. If you pretend it is not happening and you put your head in the sand, it is just going to get 

worse. 

And one last thing, on Ted Fishman, he talked about the big-box 

retailers. They are bringing in this stuff—maybe some of it is pirated or counterfeit goods. We ought to have a law that says if American companies are going to be part of this process and they know 

or have reason to know that the goods they are bringing in are 

counterfeit goods and can be threatening to our people, that they 

should be faced with punishment for doing that. 

That is what we did on bribery. When our companies were out 

bribing people, we put a law on the books and forbade them to do 

so. Now, they may find ways around it, but at least it is out there 

and I think it is a real deterrent on that behavior and we could 

do the same thing here. 

Senator COBURN. Mr. Sabo. 

Mr. SABO. Senator, all I can say, based on everything I have 

heard today, is that this is something we better address right now 

because if it continues like this for 5 more years without addressing it and addressing it strongly, our economy is really going to be 

hit hard. 

Mr. MINOR. It is not only our economy; it is our national security 

that is at risk. As we transfer technologies to China, as we transfer 

the ability to manufacture key military mechanisms to protect ourselves, we become weaker and weaker each day. 

44

So far the policy with the Chinese has been to ask politely and 

hope for the best and that just can not continue. 

I was wondering if we could share those pieces of currency, 

Michelle, with the other members of the panel. 

Senator COBURN. I thought I was going to get to keep them. 

Mr. MINOR. Well, one of those you do not want to keep, Senator. 

We have known as a company for some time through our customers of our products that the very good counterfeits are coming 

out of North Korea and likely manufactured by the North Korean 

government. Only recently a major Chinese bank was charged in 

the United States for funneling and laundering these counterfeits. 

But we are finding them all over the world: Central America, 

South America. And if our currency and our military are compromised through intellectual property theft, there is no turning 

around. Five years might be too long. 

Mr. FISHMAN. Here is a scenario you might think of, which is 

imagine we do get some sort of redress on intellectual property, 

possibly through this compliance regime that I have talked about. 

You get a double advantage. One, you chip away at China’s lowcost manufacturing advantage because factories have to buy technology. Two, is you inject some vitality into our tech sector because 

you create a market for technology where a market didn’t exist before. And it is not just any market; it is the fastest growing market 

in the economic history of the world. And right now we do not sell 

into it. 

Senator COBURN. And three, is if we had a free-floating currency, 

the price of our technology would go down to the Chinese, and the 

price of their products would come up. 

Mr. FISHMAN. Absolutely. Exactly. 

Mr. GLICKMAN. One thing that is interesting. My whole life being 

involved in agriculture, we often had disputes with Chinese on certain sanitary issues. But by and large—this is one area that the 

Chinese, need us to feed their population, particularly to increase 

as their standard of living goes up, their protein consumption goes 

up, and, therefore, they’ve got to have feed and meal to feed those 

animals over there. It is an interesting dichotomy here. 

Because where they need us, they will take advantage of what 

we have to give them. I do not know if anybody’s ever really explored the relationship between agriculture and the peasants on 

the revolution side of the picture with the manufacturing-industrial 

side of the picture that we have here, and I think we should. 

The other point I would make is it goes back to something Mr. 

Fishman said. I went to the Fortune Conference in Beijing in the 

spring, and it is a tricky situation because everybody wants to be 

polite when they are there. 

But what I saw, by and large, is not a very confrontational atmosphere between the American private sector and the Chinese authorities. 

Now, I was not looking for people to pick a gratuitous fight with 

them, but it is an interesting juxtaposition when you look at 

globalization in this world. The internationalization of a lot of 

American companies have made them a lot, I think, less likely to 

want to pick a fight. 

45

And I do not think the government can do this by itself. I think 

you have got to have the people who are employed Americans involved in this fight as well. 

Mr. MULLOY. Can I speak on that? 

Senator COBURN. Yes. Let me just put something in. One of the 

real disappointments for me was that you do not see a Microsoft 

here today, the leader who has lost more in China than all the 

other software firms combined. And I am set to presume that they 

do not want to offend the Chinese because it might hurt their 

short-term business interest. 

That is where we are in terms of the government. How do you 

not offend the Chinese, but yet hold them accountable? 

And if the short-term price of your stock is more important than 

the long-term future and security of our country, then that is a terrible scenario for American business. 

And I can tell you it does not just apply there. It applies in asbestos litigation and in all these other things that we are trying to 

solve. 

What we are seeing is a change in perspective by American business, that they have chosen to go the short run instead of the long 

run. And they have chosen to make profits in the short term instead of secure the future of their firm and their country and their 

employees by doing what is in the best long-term interest of their 

firm. 

And so it is very concerning to me that people want to duck this 

discussion because it might have a negative reverberation in China 

on their business. 

And if it does, then what it says is, who are we dealing with? 

And what is the long-term quality prospects for fair trade with 

China if, in fact, you can not be critical of somebody who is supposed to be doing something who is not and because you happen 

to be critical it hurts your business? You are not dealing with 

somebody that you really want to deal with or—unless you are 

going to hold their feet to the fire, you never win on that. 

And so it is concerning to me that we have seen that philosophy 

take over in terms of our international business company—the 

companies that do international business, that the short term is 

more important than the long term. 

Mr. MULLOY. Senator, the American companies can try and use 

the Chinese legal system like GM went after Chaney. I saw in the 

Los Angeles Times today that they settled that case. 

It was a big article about how Chinese automobile production has 

expanded. They are going to be the third largest auto producers in 

the world next year. So they are coming on pretty fast in autos, 

and we expect them here. 

But the thing we have to understand is we can go after them to 

live up to their international agreements both on IMF currency, 

WTO, IPR, or other issues. Our companies are in a system where 

they have to make profits, and they are going to make profits if 

they want to survive. 

The Chinese have figured out how to incentivize our companies 

and other foreign companies to build their industrial base. 

Sixty percent of China’s exports are from foreign-invested companies. We were over there in August. We went through these sciVerDate 0ct 09 2002 13:27 Sep 22, 2006 Jkt 024934 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\DOCS\24934.TXT SAFFAIRS PsN: PAT
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entific and industrial parks. It is amazing. You had it exactly, that 

the R and D is beginning to flow over there now as well. 

So they figured out how to incentivize them. We have to do some 

going back to understanding our own system. How do we 

incentivize our guys to serve our interests rather than the Chinese 

interests? 

I heard on NPR, somebody talking the other night. It was not 

Ted—you were on NPR, but another show coming from China, was 

saying that the American corporations in China are almost like 

spokesmen for the Chinese government. They are like an echo 

chamber. You will hear the government say things, and then before 

long the American companies were saying the same things. 

Mr. FISHMAN. That was me. 

Mr. MULLOY. That was you? OK. 

I found the same thing when I am over there traveling around, 

meeting with these people. 

Mr. BURR. Mr. Chairman. 

Senator COBURN. Yes, Mr. Burr. 

Mr. BURR. A few years ago when music lovers started to discover 

that they could use the Internet and basically just take songs off 

it for free and not have to pay for them, that was the beginning 

of a huge decline of our industry and everyone was really scared 

about it and it started this—retail stores and the mom-and-pop 

record stores were all closing. And we all had a very doomsday scenario in our heads. 

And the organization—the RIAA and NARIS and organizations 

like that, they all got together and they started suing 14-year-old 

kids. And it got ugly, but it worked. 

Everyone said, Oh, how can they do this? It is just these kids. 

But I tell you what, you throw a lawsuit where the father has to 

pull out $20,000 to settle a lawsuit for the 15-year-old stealing 

Oasis songs, pretty soon that kid finds his computer unplugged. 

And I think that we are going to have to—with China, I think 

we are going to have to sometimes maybe treat them like a 14-

year-old and it is going to get ugly and we can not be afraid to have 

it get ugly for a while. Because on the other side after it gets ugly, 

they will get the message. 

Senator COBURN. I think that is good input. Anybody else? 

Mr. FISHMAN. Yes. 

I would say something to that point, which is it is essential on 

this issue to get a public consensus on it. And it is very hard to 

get the public consensus around it on the consumer issues because 

consumers also steal when they can. 

But if we talk about it more and more in terms of the shop floor, 

in terms of the jobs lost—I know Mr. Minor brought an article from 

the Chicago Tribune which talked about the $6,000 drop in the average paycheck in Illinois because of the loss of manufacturing. 

Michigan actually lost more. And there have been 3 million manufacturing jobs lost from the United States since 2000. 

This is even a higher cost to pay than what you pay for your 14-

year-old. 

Senator COBURN. Sure. 

47

Mr. FISHMAN. And this is one place where I think we can get national consensus on it by really stressing that the workplace is in 

danger, not just the home theater. 

Senator COBURN. Right. Middle income America is at risk. 

I thought it was interesting to note that we have talked about 

movies, recording, financial, software, core technologies, patents, 

manufacturing, currencies, macroeconomic, and advanced technology. Every aspect of our economy is under attack——

Mr. FISHMAN. Agriculture. 

Senator COBURN [continuing]. In terms of intellectual property 

rights being ignored. It is not just recording a movie. It is every 

aspect of our economy. 

The same thing is happening—we see it more visible because it 

is easier to see the results of it in terms of the recording industry 

or the movie industry because it is out there and it is also shipped 

back here. 

But the subtleties of the other is there is not an area of our economy that is not under attack. 

Mr. FISHMAN. Well, there is a kind of war in industry in this 

country, and it is between large corporations and this 80 percent 

of American industry, which is medium and small businesses. 

Large corporations have the resources to go into China to fight 

their intellectual property battles. Small industry, which sees the 

rug being pulled out from under them as their large clients move 

to China and find suppliers in China and benefit from pirated technology in the Chinese workplace are really at risk here, and they 

do not have the resources to fight their own battles inside China. 

It is impossible as a company that is 50 million and under to 

have played a Chinese legal system for years. 

Senator COBURN. Let me put the question out to you. So let us 

say we are going to do the TRIPS, we are going to enforce, we are 

going to file through the WTO. What happens when we lose? What 

happens if we lose, knowing the truth, knowing the facts? What 

happens when we lose? 

I do not have a lot of confidence in some of the WTO rulings, as 

we have seen from the past. What happens when we lose? What 

do we do? 

Mr. MINOR. Hopefully we would reassess our membership in the 

WTO. 

Senator COBURN. But what do we do? 

Mr. SABO. Is not that our only choice? 

Mr. MULLOY. Secretary Glickman. 

Mr. GLICKMAN. Well, you have to fight the battles. We fought 

them for years on the agriculture front, and we certainly have not 

won every battle there. And we fought them on consumer issues 

and international financial issues. 

We also have to have a good case too. It does not mean we do 

not file the case, but we have to have the data there. We have to 

have the facts there. That is what the Administration has finally 

done. Now we have to keep pushing them to make sure that they 

follow through on that kind of thing. 

China has wanted for years to get in the WTO. They are now in 

this organization. It means a lot to them. And, I do not think that 

48

they want to ignore the WTO. They kind of do that at their peril 

if they really become—if they want to play roles around the world. 

That is one of the reasons I thought that when Mr. Burr talked 

about Russia was so important. 

Russia is not in the WTO, and the Russians are actually in a 

much more lawless situation even than the Chinese are. So we 

have an opportunity with Russia maybe to advance the situation. 

But, I am not going to presuppose whether we should file the 

case or not, but my belief is we are probably not going to get the 

attention of China without filing the case. And we just have to 

have the best case we can possibly do. 

Senator COBURN. Is there a function that the Congress can do 

outside of the WTO in terms of carrying forward—both sending signals to China, but also in terms of setting meaty legislation that 

will have an impact on them, and what is that? 

Mr. MINOR. The currency bill would send a message, I think. 

Senator COBURN. You mean in terms of floating of the currency? 

Mr. MINOR. Right. 

Mr. MULLOY. Revaluing—upward revaluation of their currency is 

enormously important. 

We can put laws on our books to control what comes into our 

country in terms of counterfeit goods. 

Senator COBURN. Yes. 

Mr. MULLOY. There is no right to bring counterfeit goods into 

this country, and we can pass good, tough legislation so that does 

not happen. 

Then the next step is only the government. USTR is the only 

place that can authorize bringing a case to the WTO. Private companies can not do it. It has to be the government. So we have to 

go ahead and see if it works. It will take 2 years to bring one of 

these WTO cases before you are even in a position to put the tariffs 

even if you win it. So get started. 

Now, what Senators Schumer and Graham, in their currency bill, 

have done—do you remember how they said, we will put immediate 

tariffs on you if you do not stop manipulating the currency? They 

went to Article 21 of the WTO agreement, which provides that you 

can protect your national security as an exemption to everything 

else that is going on. 

So your obligation—you always have the national security out. 

Sweeney at one time used Article 21 to protect its footwear industry. In the GATT it was always held self-judging, a country can 

make its own judgment as to its national security. 

Now, that is an enormous step to go. I would prefer to get the 

case in the WTO to find out what happens first. 

Senator COBURN. Let me question you on that for a minute. 

Going to be a quarter of a billion dollars—quarter of a trillion dollars that flow out of this country this year in China. We are going 

to lose another 200,000 or 300,000 manufacturing jobs because of 

intellectual property that is not protected in terms of small businesses. We are going to lose the ability to fund and grow our own 

economy and fund our own intellectual property for the future, and 

development of R and D. 

Why is that not a national security and national emergency issue 

for us right now? Not 2 years from now, right now. 

49

Mr. MULLOY. Do you want me to comment? 

Senator COBURN. Sure. I want anybody to comment on that. 

Mr. MULLOY. Well, I think it is, and that is why I was very 

happy with—we endorsed the concept of the Schumer-Graham bill 

on currency because we think it is a national security issue. 

One more thing I want to tell you, Senator. 

In our report we do not blame everything on China. There is 

much that we have to do here at home with our emphasis on 

science and technology, getting our economic house in order. That 

also has to be a part of this. 

Just getting our economic house in order is not going to do this 

because we can not get it in order unless we deal with this other 

issue. The two have to be done at the same time. 

So our commission endorsed using Article 21 on the currency 

issue. 

Senator COBURN. Anyone else? 

Mr. FISHMAN. I have a comment. One is—what can you do at 

home? One is to shed daylight on some of the practices that keep 

China’s regime going. China’s had this enormous benefit from the 

way it has done business. 

Senator COBURN. That is what we are having this hearing for. 

Mr. FISHMAN. And one thing that the Subcommittee can do is—

and I do not know the legal structure of the Subcommittee. But if 

you have subpoena power, you can go into some agreements and 

look at what is the dynamic. 

There is this great case where Huawei, which is a Chinese 

telecom firm, basically built itself into a multi-billion-dollar company by copying virtually everything in the Cisco catalog, including 

the catalog. 

And then it entered the United States market and Cisco sued it, 

filed suit. Well, that suit was settled. We do not know the terms 

of the settlement. And, it will be very interesting to know whether 

part of the terms of that settlement was access to the Chinese market by Cisco, but there was no redress on the piracy itself. 

Instead, Whawei, which is now a global player in telecom, competing against our best companies, went out and bought the 

Qualcomm patent portfolio, which gives it 30,000 legitimate patents. 

So these intellectual piracy regimes in a way become like the 

Mafia buying the liquor store. They can legitimate themselves once 

they grow to scale. That is quite a threat. So if you have the investigative power to look at that, I would encourage it. 

Also, it would be interesting to look at the pricing demands that 

big-box retailers put on their suppliers. 

Factories that supply big-box retailers are asked every year to 

cut their prices sometimes 15 percent a year. Do you think with 

those demands for the price cuts there is also a demand that you 

pay full bore for technology? You are forcing your suppliers to cut 

your costs somewhere. It would be interesting to know what is the 

chain of events that leads to that piracy. 

Mr. MULLOY. Well, we did a hearing on that, Senator, in New 

York to look at the role of the big-box retailers. There is tremendous pressure on the smaller manufacturers if they want to stay 

50

in the supply chain of the larger manufacturers who are in China. 

In order to meet the China price to stay in, they are forced also. 

So there is a tremendous incentive from the big guys and WalMarts and others, those big-box guys, to force the smaller guys who 

want to stay in their supply chains to move their operations to 

China. That is the situation we are now in. 

Mr. GLICKMAN. I think this whole idea—I do not know what the 

criminal laws are, but knowingly importing counterfeit material, in 

the same way that—knowingly importing material that is done 

with human rights violations or improper labor violations, it is, I 

think, something the Subcommittee could explore looking at the 

laws. 

I would like to mention, however, part of the issue is they do not 

buy anything that we—or very little we produce. It is the reverse. 

I want to go back to the situation because here we are in Los Angeles, the entertainment business. 

The WTO provided that the Chinese would allow into their market—we saw it as a minimum of 20 foreign movies a year for domestic distribution. They saw it as a maximum. 

Out of that 20 movies, the United States gets in roughly about 

14 movies a year, and they—the Chinese determine, based on a lot 

of different formulas, what those 14 movies a year are. 

On the streets of Beijing, Shanghai, Guangzhou, and all the 

other cities, on the average there are probably 2,000 to 3,000 of titles a year on the streets. So all these movies we are trying to get 

in, legally we can not, and there they are. 

Senator COBURN. Now they are creating the demand. 

Mr. GLICKMAN. They create the demand for this kind of stuff. 

So in addition to them selling us stuff that may be counterfeit—

there is a tremendous need for market opening stuff on our part 

as well. 

Senator COBURN. All right. 

Senator Carper could not be here. He had made a commitment. 

And we work in a bipartisan fashion. He’s a partner—he’s the 

Ranking Member, Senator Carper from Delaware, and he will look 

at this material as well. 

Any other final closing comments? 

Mr. MULLOY. I just want to let you know, Senator, that we are 

a Commission created by the Congress, bipartisan. And our last report came out 11 to 1. All six Republicans and six Democrats were 

on that report. 

We are here to be of assistance to you and your staff in any way 

we can in dealing with this larger phenomenon of how we are going 

to deal with the U.S.-China economic relationship. 

Because when you transfer the amount of resources we are 

transferring to China now, it enables them to have a much stronger power projection militarily as well. 

Senator COBURN. Right. 

Mr. MULLOY. You can not decouple these things. And I am not 

saying that we want to demonize those people, but we better start 

getting our act together and enforce what we bargained for. 

Mr. FISHMAN. If I could add one more thing, it is about the culture of compliance at home. 

51

We have Fortune 50 companies in the United States that have 

paid hundreds of millions of dollars to settle patent and copyright 

infringement cases because these drag through our courts just as 

long as any cases drag through the Chinese courts. 

If we could take this more seriously at home, then we would certainly be taken more seriously abroad. 

Senator COBURN. I agree. 

Mr. MINOR. Congressman Glickman suggested that China needed 

to develop political will to address some of these issues, and I 

would add to that, that both within the Executive Branch and the 

Legislative Branch we need to develop the political will to get 

tough on trade and fix these problems. 

Large multinationals, Fortune 50, Fortune 500, 750 companies 

have the resources to fight patents and litigate. When you are a 

smaller manufacturer, medium-size manufacturer, you do not have 

the resources, and you certainly do not have the time. We need the 

help from our government. 

Senator COBURN. All right. Thank you all very much. 

Mr. MULLOY. Mr. Commissioner, can I ask permission to put the 

three articles that I referred to in my testimony to be made a part 

of the record? 

Senator COBURN. They will be made part of the record if you will 

submit it. 

Mr. MULLOY. Thank you, Mr. Chairman. 

Senator COBURN. And the hearing is adjourned. 

(Whereupon, at 11:50 a.m., the Subcommittee was adjourned.) 

(53)

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