United States International Trade Commission

Investigation No. 332-519

USITC Publication 4226

May 2011

China: Effects of 

Intellectual Property 

Infringement and 

Indigenous Innovation 

Policies on the U.S. 

Economy
Address all communications to 

Secretary to the Commission 

United States International Trade Commission 

Washington, DC 20436

U.S. International Trade Commission

COMMISSIONERS 

 

Deanna Tanner Okun, Chairman 

Irving A. Williamson, Vice Chairman 

Charlotte R. Lane 

Daniel R. Pearson 

Shara L. Aranoff 

Dean A. Pinkert

Robert B. Koopman

Acting Director of Operations

Nannette Christ

Acting Director of Economics

Karen Laney

Director, Office of Industries
U.S. International Trade Commission

Washington, DC 20436 

www.usitc.gov

USITC Publication 4226 May 2011

China: Effects of 

Intellectual Property 

Infringement and 

Indigenous Innovation 

Policies on the U.S. 

Economy

Investigation No. 332-519
Project Leaders 

 Alexander Hammer Katherine Linton 

alexander.hammer@usitc.gov katherine.linton@usitc.gov 

Deputy Project Leader 

Jeremy Wise 

jeremy.wise@usitc.gov 

Office of Economics 

Eric Cardenas, Caitlyn Carrico, Dylan Carlson, Robert Feinberg, Michael Ferrantino, 

Tani Fukui, Nick Grossman, Joanne Guth, Kyle Hutzler, Kyle Johnson, Seidu Dauda, Nathanael Snow, 

James Stamps, Danielle Trachtenberg, Samantha Warrington, and Edward Wilson 

Office of Industries

Lisa Ferens Alejandro, Peder Andersen, Tamar Asadurian, Renee Berry, 

Laura Bloodgood, David Coffin, Cathy Jabara, Jeanette Leary, Kathryn Lundquist, 

David Lundy, Elizabeth Nesbitt, Samira Salem, and Donald Sussman 

Special Assistance with the Questionnaire

John Benedetto, Rebecca Brofft, Gail Burns, Cindy Cohen, Vincent DeSapio, Rebecca Esmaili, 

William Greene, Erland Herfindahl, Aaron Honsowetz, Jackie Jones, John Kitzmiller, 

Eric Land, Aimee Larsen, Lara Lowenstein, Dennis Luther, Erick Oh, Mary Messer, 

Angela Newell, Samantha Pham, Stefania Pozzi Porter, Amelia Preece, Mathew Reisman, 

Laura Rodriguez, George Serletis, Amy Sherman, Philip Stone, Karen Taylor, 

Stephen Wanser, Falan Yinug, and Charles Yost 

Questionnaire Administrative Support 

Janice Allen, Phyllis Boone, Judy Bryant, Brenda Carroll, Patricia Cooper, 

Sharon Greenfield, Lita David-Harris, Carolyn Holmes, Cynthia Payne, Monica Reed, 

Lemuel Shields, Darlene Smith, and Wanda Tolson 

Office of the General Counsel 

Sidney Rosenzweig 

Content Reviewers 

Walker Pollard and John Fry 

Editorial Review 

Peg Hausman 

Administrative Support 

Tabitha Scallan 

Under the Direction of 

Arona Butcher, Chief

Country and Regional Analysis Division 
i

ABSTRACT 

China’s rapid economic transformation over the past three decades has presented both 

opportunities and challenges to many U.S. businesses. Despite broad success in the China 

market, many U.S. companies have reported that two major factors—the infringement of 

their intellectual property rights (IPR) in China and China’s indigenous innovation 

policies—have undermined their competitive positions. In response to a U.S. 

International Trade Commission (Commission) survey, many U.S. firms reported losses 

associated with IPR infringement in China, including losses in sales, profits, and license 

and royalty fees, as well as damage to brand names and product reputation. U.S. firms 

have reported losses associated with China’s indigenous innovation policies as well, but 

have been mostly concerned about the future implications of these evolving policies in 

such areas as technical standards and preferential support to Chinese firms. In this second 

of two interconnected reports requested by the U.S. Senate Committee on Finance, the 

Commission was asked to estimate the effect of reported IPR infringement in China and 

China’s indigenous innovation policies on the U.S. economy and employment, to the 

extent feasible. This report provides such estimates, on both an economy-wide and 

sectoral basis, using a combination of analytic tools and qualitative information. 

iii 

CONTENTS 

Page

Abstract................................................................................................................................ i 

Acronyms........................................................................................................................... ix 

Executive Summary............................................................................................... xiii 

Chapter 1: Introduction .................................................................................. 1-1 

 Objective ................................................................................................................................. 1-2 

 Approach ................................................................................................................................. 1-4 

 Using the Questionnaire.................................................................................................... 1-4 

 Using Statistical and Simulation Analysis........................................................................ 1-4 

 Using Case Study Analysis............................................................................................... 1-5 

 Scope ....................................................................................................................................... 1-5 

 Information Sources ................................................................................................................ 1-6 

 Organization ............................................................................................................................ 1-7 

 Definitions............................................................................................................................... 1-9 

Chapter 2: Trends and Characteristics of Chinese IPR

 Infringement and Indigenous Innovation Policies: 

 External Sources................................................................................................. 2-1 

 IPR Seizure Statistics .............................................................................................................. 2-1 

 U.S. Seizures of Counterfeit Goods from China............................................................... 2-1 

 China’s Role in Counterfeit Goods Trade.................................................................. 2-2 

 Types of Counterfeits Seized in the United States ..................................................... 2-4 

 Other Countries’ Seizures of Counterfeits from China..................................................... 2-4 

 Factors Facilitating Counterfeiting ................................................................................... 2-6 

 Limitations of Seizure Data .............................................................................................. 2-8

 IPR Infringement in China and the Role of the Internet.......................................................... 2-9 

 Counterfeiting and Piracy on the Internet......................................................................... 2-10 

 Online Marketplaces for Counterfeits ........................................................................ 2-10 

 Digital Piracy Mechanisms ........................................................................................ 2-12 

 IPR Infringement and the Internet: Information Gaps ...................................................... 2-13 

 Approaches to Measuring IPR Infringement and Indigenous Innovation ............................... 2-16 

 The Costs of IPR Infringement......................................................................................... 2-16 

 Global Effects of Global Infringement....................................................................... 2-16 

 Effects on U.S. Economy of Global Infringement ..................................................... 2-17 

 Sector-Specific Studies of IPR Infringement ............................................................. 2-17 

 Studies on Other Countries......................................................................................... 2-18 

 Statistical Studies of Infringement’s Impact on U.S. Firms ....................................... 2-18 

 The Effect of IPR Infringement on Employment ............................................................. 2-20 

 Patent Protection and Employment Effects................................................................ 2-21 

 Indigenous Innovation ...................................................................................................... 2-21 
iv 

CONTENTS—Continued 

Page

Chapter 3: Reported Effects from IPR Infringement in 

 China on U.S. Economy (Survey Results)............................... 3-1 

 Key Findings ........................................................................................................................... 3-1 

 Survey Overview: Questionnaire and Methodology ............................................................... 3-2 

 Sector Selection ................................................................................................................ 3-2 

 Firms that Experienced IPR Infringement in China.......................................................... 3-4 

 Organization of this Chapter............................................................................................. 3-7

 Survey Results: IPR Infringement-Related Losses and Expenses........................................... 3-8 

 Estimated Losses Due to Chinese IPR infringement ........................................................ 3-9 

 IPR Infringement Expenses and Impact of Improved IPR Protection and Enforcement.. 3-12 

 IPR Infringement Expenses........................................................................................ 3-12 

 Potential Impact of Improved IP Protection and Enforcement................................... 3-13 

 Additional Losses Associated with IPR Infringement...................................................... 3-14 

 Survey Results: Scope of Chinese IPR Infringement.............................................................. 3-15 

 Types of IPR Infringement ............................................................................................... 3-15

 Chinese IPR Infringement by Economic Activity ............................................................ 3-17 

 Best and Worst Chinese Localities for IPR Protection as Reported by U.S. Firms.......... 3-18 

 Firm Size and IPR Infringement Practices in China......................................................... 3-19 

 SMEs and Chinese IPR Infringement ............................................................................... 3-20 

 Survey Results: Top IPR Infringement Concerns and Strategies............................................ 3-21 

 Top Concerns.................................................................................................................... 3-21 

 Chinese Entities Responsible for Infringement ................................................................ 3-21 

 Strategies for Addressing IPR Issues in China ................................................................. 3-23 

 Characteristics of the Infringing Products.................................................................. 3-23 

 Price Discounting Practices........................................................................................ 3-24 

 Survey Results: Type of IPR Infringement ............................................................................. 3-25 

 Copyright Infringement .................................................................................................... 3-25 

 Losses Due to Chinese Copyright Infringement ........................................................ 3-27 

 Scope of Copyright Infringement............................................................................... 3-28 

 Impact of Copyright Infringement.............................................................................. 3-29 

 Copyright Infringement and Enforcement Challenges............................................... 3-30 

 Digital Copyright Piracy ............................................................................................ 3-30 

 Trademark Infringement ................................................................................................... 3-31 

 Losses Due to Trademark Infringement ..................................................................... 3-31 

 Scope of Trademark Infringement.............................................................................. 3-32 

 Impact of Trademark Infringement ............................................................................ 3-34 

 Trademark Infringement and Enforcement Challenges.............................................. 3-35 

 Patent Infringement........................................................................................................... 3-37 

 Losses Due to Patent Infringement............................................................................. 3-38 

 Scope of Patent Infringement ..................................................................................... 3-40 

 Impact of Patent Infringement.................................................................................... 3-40 

 Patent Infringement and Enforcement Challenges ..................................................... 3-41 

 Trade Secrets Misappropriation........................................................................................ 3-41 

 Losses Due to Trade Secret Misappropriation ........................................................... 3-42 

 Scope of Trade Secrets Misappropriation .................................................................. 3-43 

 Impact of Trade Secret Misappropriation................................................................... 3-44 

 Trade Secret Infringement Enforcement Challenges.................................................. 3-44 
v 

CONTENTS—Continued 

Page

Chapter 4: Potential Effects of the Improvement of 

 IPR Protection in China on the U.S. Economy .......... 4-1 

 Overview ................................................................................................................................. 4-1 

 Key Findings..................................................................................................................... 4-2 

 Simulated Economy-wide Effects .............................................................................. 4-3 

 Simulated Sectoral Effects ......................................................................................... 4-5 

 Economic Analysis: Detailed Methodology and Scope .......................................................... 4-9 

 Methodology..................................................................................................................... 4-9 

 Analytical Scope ............................................................................................................... 4-11 

 Estimated Effects on U.S. Exports Using Statistical Analysis.......................................... 4-12 

 Estimated Goods Exports ........................................................................................... 4-13 

 Estimated Services Exports ........................................................................................ 4-14 

 Estimated Royalties and License Fees ....................................................................... 4-15 

 Estimated Effects on the Activities of U.S. Majority-Owned Affiliates in China............ 4-16 

 Effects of Reducing China’s Exports of Counterfeit Goods............................................. 4-17 

Chapter 5: The Effects of China’s Indigenous 

 Innovation Policies on the U.S. Economy................................ 5-1 

 Key Findings ........................................................................................................................... 5-1 

 Indigenous Innovation Policies......................................................................................... 5-4 

 Reported Effects of Indigenous Innovation Policies on the U.S. Economy: Questionnaire 

 Results............................................................................................................................... 5-6 

 Characteristics of Firms Concerned with Indigenous Innovation Policies ....................... 5-7 

 Types of Indigenous Innovation Policies that Raise Present and Future Problems.......... 5-8 

 Concerns about Indigenous Innovation Policies by Sector............................................... 5-10 

 Effects of Indigenous Innovation Policies on Firm Revenue and Employment ............... 5-11 

 Actual and Potential Effects of China’s Indigenous Innovation Policies on Selected U.S. 

 Industries........................................................................................................................... 5-12 

 Wind Energy ..................................................................................................................... 5-13 

 Overview .................................................................................................................... 5-13 

 U.S. Participation in China’s Wind Energy Market and Industry .............................. 5-13 

 Chinese Laws and Policies Related to Wind Energy ................................................. 5-14 

 Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. Economy ..... 5-18 

 Telecommunications Equipment ...................................................................................... 5-19 

 Overview .................................................................................................................... 5-19 

 U.S. Participation in China’s Wireless Handset Industry........................................... 5-20 

 Chinese Policies and Practices ................................................................................... 5-22 

 Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. Economy ..... 5-24 

 Software............................................................................................................................ 5-28 

 Overview .................................................................................................................... 5-28 

 U.S. Participation in China’s Software Industry ........................................................ 5-28 

 Chinese Laws and Policies ......................................................................................... 5-28 

 Effects of Indigenous Innovation Policies on U.S. Firms and U.S. Economy ........... 5-31 

 Automotive Industry ......................................................................................................... 5-33 

 Overview .................................................................................................................... 5-33 

 U.S. Participation in China’s Automotive Industry and Market ................................ 5-33 

 Chinese Laws and Policies Related to the Auto Industry........................................... 5-35 
vi 

CONTENTS—Continued 

Page

Chapter 5—Continued

 Effect of Indigenous Innovation Policies on U.S. Firms and the U.S. Economy....... 5-38 

 Civil Aircraft and Aircraft Parts ....................................................................................... 5-39

 Overview .................................................................................................................... 5-39 

 U.S. Participation in China’s Aircraft and Aircraft Parts Industry............................. 5-40 

 Chinese Laws and Policies ......................................................................................... 5-42 

 Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. Economy ..... 5-44 

Bibliography................................................................................................................... Biblio-1

Appendices

A. Request letter........................................................................................................................... A-1 

B. Federal Register notices.......................................................................................................... B-1 

C. Hearing participants ................................................................................................................ C-1 

D. Position of interested parties ................................................................................................... D-1 

E. Intellectual property rights questionnaire................................................................................ E-1 

F. Survey methods ....................................................................................................................... F-1 

G. Strategic changes as a result of IPR infringement or indigenous innovation policies............. G-1 

H. Econometric and simulation methods ..................................................................................... H-1 

Boxes

Box 1.1 Definitions of the four principal types of intellectual property and “indigenous .........

 innovation” ................................................................................................................. 1-10 

Box 2.1 The footwear industry and the rise of counterfeiting in China ...................................... 2-7 

Box 2.2 Reported problems with notice and takedown procedures in China.............................. 2-11 

Box 2.3 Online enforcement activities of one SME.................................................................... 2-12 

Box 2.4 Case study: Music piracy in China ................................................................................ 2-15 

Box 3.1 Statistical significance ................................................................................................... 3-8 

Box 3.2 Larger firms—firms with FDI in China and those with top global trademarks—are 

 more likely to be affected by IPR infringement in China........................................... 3-19 

Box 3.3 SMEs and Chinese IPR infringement ............................................................................ 3-20 

Box 3.4 Company comments regarding trademark registration in China ................................... 3-33 

Box 3.5 Company comments regarding enforcement proceedings in China .............................. 3-37 

Box 5.1 Policy areas relevant to indigenous innovation ............................................................. 5-5 

Box 5.2 Eliminating discriminatory innovation policies............................................................. 5-6 

Box 5.3 WTO dispute China’s alleged subsidies for wind power manufacturing ...................... 5-17 

Box 5.4 China’s shanzhai mobile phone market......................................................................... 5-21 

Box 5.5 Electric vehicles and indigenous innovation ................................................................. 5-37 

Figures 

ES.1 U.S. IP-intensive firms that reported IPR infringement in China accounted for 58.1 

 percent of the total sales of firms in the U.S. IP-intensive economy that were 

 conducting business in China, 2009 .............................................................................. xvi 

1.1 What is considered a U.S. firm?........................................................................................... 1-6 

1.2 EIU’s IPR protection score for China and the United States in comparative terms, 2010... 1-8 

2.1 U.S. IPR-related seizures have grown significantly; China is the most important source... 2-3 
vii 

CONTENTS—Continued 

Page

Figures—Continued

3.1 U.S. IP-intensive economy: Firms that reported IPR infringement in China versus firms 

 that did not report infringement..................................................................................... 3-5 

3.2 U.S. IP-intensive firms that reported IPR infringement in China accounted for 58.1 

 percent of the total sales of firms in the U.S. IP-intensive economy that were 

 conducting business in China, 2009 .............................................................................. 3-6 

3.3 U.S. firms experiencing IPR infringement in China: Sector composition ........................... 3-7 

3.4 U.S. firms experiencing IPR infringement in China: Shares of lost sales, royalties, license 

 fees, or other income as a result of IPR infringement in China during 2007-09, by type 

 of IPR infringement, by market..................................................................................... 3-11 

3.5 U.S. firms experiencing IPR infringement in China: Type of Chinese IPR infringement...

 experienced worldwide.................................................................................................. 3-17 

3.6 U.S. firms experiencing IPR infringement in China: leading economic activities 

 performed....................................................................................................................... 3-18 

4.1 Applied analytic approach to quantifying how IPR infringement in China affects U.S. 

 economy......................................................................................................................... 4-10 

5.1 U.S. IP-intensive firms that reported concerns about China’s indigenous innovation 

 policies account for 67.2 percent of the sales of firms in the IP-intensive economy 

 that were conducting business in China, 2009............................................................... 5-7 

5.2 Characteristics of firms reporting concerns with indigenous innovation policies ............... 5-8 

5.3 Share of firms reporting indigenous innovation policies as causing existing or future 

 Problems for U.S. IP firms doing business in China ..................................................... 5-9 

5.4 Indigenous innovation: Share of firms with concerns by sector .......................................... 5-11 

5.5 China: Passenger vehicle sales by unit, 2006-09 ................................................................. 5-34 

Tables 

ES.1 Summary of the reported losses of IPR infringement in China on the U.S. IP-intensive 

 economy (from questionnaire), 2009............................................................................. xv 

ES.2 Summary of potential U.S. gains from IPR improvement in China (from statistical and 

 simulation analysis) ....................................................................................................... xix 

1.1 The unique focus of this study compared with related studies............................................. 1-3 

2.1 Comparison of available IPR seizure statistics-United States, EU, and Japan .................... 2-5 

2.2 Examples of Chinese online marketplaces reportedly associated with infringing products 2-10 

2.3 Digital piracy mechanisms with Chinese examples............................................................. 2-13 

3.1 USITC questionnaire on IPR infringement in China: Factors considered in sector selection 3-3 

3.2 U.S. firms experiencing IPR infringement in China: Reported losses due to Chinese IPR 

 Infringement, 2009 ........................................................................................................ 3-10 

3.3 U.S. firms experiencing IPR infringement in China: Reported infringement expenses, 

 2009 ............................................................................................................................... 3-12 

3.4 U.S. firms experiencing IPR infringement in China: Leading Chinese entities reported 

 to be responsible for IPR infringement, 2007-09 .......................................................... 3-22 

3.5 Effects of Chinese IPR infringement on U.S. firms: Survey results .................................... 3-26 

3.6 U.S. firms experiencing IPR infringement in China: Copyright infringement, survey 

 results............................................................................................................................. 3-27 

3.7 U.S. firms experiencing IPR infringement in China: Trademark infringement, survey 

 results............................................................................................................................. 3-32 

3.8 U.S. firms experiencing IPR infringement in China: Patent infringement, survey results... 3-38 
viii 

CONTENTS—Continued 

Page

Tables—Continued

3.9 U.S. firms experiencing IPR infringement in China: Trade secret misappropriation, survey 

 results............................................................................................................................. 3-42 

4.1 Simulated and estimated changes in the U.S. economy resulting from improved IPR 

 protection in China ........................................................................................................ 4-4 

4.2 Highlighted sectors under combined exports and capital costs channels............................. 4-6 

4.3 Simulation model changes in U.S. exports, imports, output, and employment, by selected 

 sectors ............................................................................................................................ 4-7 

4.4 Estimated increases in U.S. goods exports to China as a result of improved IPR protection 4-14 

4.5 Estimated increases in U.S. exports to China as a result of improved IPR protection in ....

 China.............................................................................................................................. 4-15 

4.6 Estimated effects of improving IPR protection in China on activities of U.S. majority- 

 owned affiliates in China............................................................................................... 4-16 

5.1 Key findings: Effects of China’s indigenous innovation policies for selected U.S. 

 industries........................................................................................................................ 5-3 

5.2 Indigenous innovation: concerns by sector (percent of firms concerned)............................ 5-12 

5.3 Principal Chinese laws related to wind energy .................................................................... 5-15 

5.4 Selected Chinese policies and practices related to mobile communications and indigenous 

 innovations..................................................................................................................... 5-24 

5.5 Top five global mobile phone vendors in 2010.................................................................... 5-27 

5.6 Principal Chinese policies related to software ..................................................................... 5-29 

5.7 Auto industry policies related to indigenous innovation...................................................... 5-36 

5.8 Major U.S. companies supporting China’s aircraft industry................................................ 5-41 

5.9 Policies promoting civil aircraft development in China....................................................... 5-43 

G.1 Respondent’s strategic changes as a consequence of IPR infringement and discriminatory 

 experience, by sampling method, weighted data ........................................................... G-3 

H.1 Central estimates for goods.................................................................................................. H-6 

H.2 Estimated increases in U.S. goods exports to China as a result of improved IPR protection H-7 

H.3 Central estimates for services............................................................................................... H-9 

H.4 Estimated increases in U.S. exports to China as a result of improved IPR protection......... H-10 

H.5 Central estimates for affiliate data (log million dollars) ...................................................... H-12 

H.6 Central estimates for affiliate data ....................................................................................... H-13 

H.7 Estimated effects of improving IPR protection in China on activities of U.S. majority- 

 owned affiliates in China............................................................................................... H-13 

H.8 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, 

 including U.S. receipts of license fees and royalties, as a result of improved IPR 

 protection in China ........................................................................................................ H-19 

H.9 Simulated effects on U.S. sectors of increasing U.S. exports and capital costs, fixed vs. 

 flexible labor simulation................................................................................................ H-22 
ix

ACRONYMS 

 

3G Third generation 

4G Fourth generation 

AAFA American Apparel & Footwear Association 

ACAC AVIC-1 Commercial Aircraft Co., Ltd. 

ACAE AVIC Commercial Aircraft Engine Company 

AHRI Air-Conditioning, Heating, and Refrigeration Institute 

AM-CHAM American Chamber of Commerce in China 

AML Anti-Monopoly Law 

AMSC American Superconductor 

AVIC Aviation Industry Corporation of China 

BASCAP Business Action to Stop Counterfeiting and Piracy 

BEA 

BSA 

Bureau of Economic Analysis 

Business Software Alliance 

BYD Build Your Dreams Automobile Co., Ltd. 

CAAC Civil Aviation Administration of China 

CAFUC Civil Aviation Flying University of China 

CAS Civil Aviation Supplies Holding Company 

CBP U.S. Customs and Border Protection 

CCC China Compulsory Certification 

CDB China Development Bank 

CDC Centers for Disease Control 

CFM CFM International 

CGE computable general equilibrium 

COMAC Commercial Aviation Company of China 

Commerce U.S. Department of Commerce 

Commission U.S. International Trade Commission 

Committee U.S. Senate Committee on Finance 

EC European Commission 

ECAT Emergency Committee for American Trade 

EIU Economist Intelligence Unit 

EU European Union 

FDI foreign direct investment 

FTE full-time equivalent 

GAO U.S. Government Accountability Office 

GDP gross domestic product 

GE General Electric Aviation 

GM General Motors 

HNTE high and new technology enterprise 

HVACR heating, ventilation, air-conditioning, and refrigeration 

IACC International AntiCounterfeiting Coalition 

ICARHMA International Council of Air-Conditioning, Refrigeration, and Heating 

Manufacturers Associations 

ICC International Chamber of Commerce 

ICE U.S. Immigration and Customs Enforcement 

IDC International Data Corporation 

IFPI International Federation of the Phonographic Industry 

IFTA Independent Film and Television Alliance 

II indigenous innovation 

IIPA International Intellectual Property Alliance 

IIPI International Intellectual Property Institute 
x

ACRONYMS—Continued 

INTL ITC International Imaging Technology Council 

IP intellectual property 

IPI Institute for Policy Innovation 

IPO Intellectual Property Owners Association 

IPR intellectual property rights 

ISO International Organization for Standardization 

IT information technology 

ITIC Information Technology Industry Council 

JAC Jianghuai Automobile Co., Ltd. 

JCCT U.S.-China Joint Commission on Commerce and Trade 

JV joint venture 

LCA large civil aircraft 

LTE Long Term Evolution 

MIC Motorcycle Industry Council 

MIIT Ministry of Industry and Information Technology 

MLP Medium- to Long-Term Plan for the Development of Science and Technology 

MLPS Multi-Level Protection Scheme 

MNC multinational corporation 

MOE Ministry of Education 

MOF Ministry of Finance 

MOST Ministry of Science and Technology 

MOU memorandum of understanding 

MPA Motion Picture Association 

MPAA Motion Picture Association of America 

MW megawatts 

NAICS North American Industry Classification System 

NAM National Association of Manufacturers 

NDRC National Development and Reform Commission 

NEV new energy vehicle 

NIIP national indigenous innovation product 

OECD Organisation for Economic Co-operation and Development 

OEM original equipment manufacturer 

P2P peer-to-peer 

R&D research and development 

RIMSII Regional Input-Output Modeling System, U.S. Department of Commerce

SAC Standardization Administration of China 

SAIC Shanghai Automotive Industry Corporation 

SAR special administrative region 

SASAC State-owned Assets Supervision and Administration Commission of the State Council 

SIIA Software & Information Industry Association 

SME small and medium-sized enterprise 

SOE state-owned enterprise 

TD-SCDMA Time Division Synchronous Code Division Multiple Access 

TIA Telecommunications Industry Association 

TRAB Trademark Review and Adjudication Board 

TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights (WTO) 
xi

ACRONYMS—Continued

UK United Kingdom 

USCBC U.S.-China Business Council 

USCIB U.S. Council for International Business 

USDOC U.S. Department of Commerce 

USITC U.S. International Trade Commission 

USITO U.S. Information Technology Office 

USPTO U.S. Patent and Trademark Office 

USTR U.S. Trade Representative 

VAT Value-added tax 

WAPI WLAN Authentication and Privacy Infrastructure 

WCDMA Wideband Code Division Multiple Access 

WFE wholly owned foreign entities 

Wi-Fi Trademark of the Wi-Fi Alliance, referring to IEEE 802.11 wireless networking 

standards 

WLAN wireless local area network 

WTO World Trade Organization 

xiii 

Executive Summary 

China’s rapid economic transformation over the past three decades has presented both 

opportunities and challenges to many U.S. businesses. As of 2009, China’s economy 

accounted for 8.6 percent of world GDP, compared to 1.8 percent at the initiation of its 

market-oriented reform process in 1978. This increase was due to China’s robust 

economic growth, which averaged 10.0 percent in real terms over this period. 

International trade with the United States and other countries has substantially 

contributed to China’s economic growth. In 2010, China was the United States’ secondlargest single country trading partner and the largest source of U.S. imports. Moreover, 

China currently ranks as the United States’ third-largest export market, and is a principal 

source of growth for many U.S. companies with operations and sales in China. 

Despite their broad success in the China market, many U.S. companies have reported that 

the infringement of their intellectual property rights (IPR) in China, as well as China’s 

“indigenous innovation” policies, have undermined their competitive positions. IPR 

infringement—including violations of copyrights, trademarks, patents, and trade 

secrets—reduces market opportunities and profits for U.S. firms in China and other 

markets, since these firms’ products and technologies are forced to compete against sales 

of illegal, lower-cost imitations. Based on U.S. border seizure statistics, China has 

become the primary source of IPR-infringing imports entering the United States. As a 

result of IPR infringement in China, many U.S. firms have reported that their trade 

secrets have been stolen, sales and royalty/license fees have been diminished, and brand 

names and product reputations have been damaged. The rapid growth of China’s 

broadband and mobile infrastructure, and the fact that it has the largest number of 

Internet users in the world, make online infringement in China a significant concern for 

U.S. intellectual property (IP)-intensive firms. 

 

China’s indigenous innovation policies, which promote the development, 

commercialization, and procurement of Chinese products and technologies, are of recent 

origin. In some industries, they appear to have eroded the competitive positions of U.S. 

and other foreign firms in China while creating new barriers to foreign direct investment 

(FDI) and exports. More generally, U.S. firms are concerned about the future 

implications of China’s evolving policies in such areas as preferential support to Chinese 

firms and the implementation of China-specific technical standards. 

Intellectual property and innovation play a central role in driving productivity, 

employment, and overall growth in the U.S. economy. The U.S. Department of 

Commerce has reported that technological innovation has been associated with 

approximately three-quarters of the United States’ average annual economic growth since 

the mid-1940s. Intellectual property and innovation also support U.S. exports. For 

example, U.S. receipts from royalties and license fees, which represent payments for U.S. 

intellectual property and technology, yielded a $64.6 billion trade surplus in 2009. 

However, receipts from China represent a small share of this surplus. Industry and 

academic sources report that this is in large part due to weak IPR enforcement and market 

access problems in China. 

Despite the fact that IPR infringement in China and China’s indigenous innovation 

policies have been central themes in the recent U.S.-China trade policy dialogue, no 

studies to date appear to have focused on estimating their impact on the U.S. economy 
xiv 

and its individual sectors. This is explained, at least in part, by substantial data 

limitations. Some of the main unknown elements include (1) the size and scope of IPRinfringing production and trade that goes undetected by law enforcement and customs 

authorities in the United States, China, and other countries; (2) the untraceable locations 

of buyers and sellers of IPR-infringing goods over the Internet; and (3) the rates at which 

consumers substitute legal products for illegal ones. Substantial data limitations have also 

inhibited more comprehensive analysis of the effects of China’s indigenous innovation 

policies, particularly because of the new and evolving nature of those policies. Given 

these limitations, this study has employed a combination of analytic tools (e.g., 

questionnaire, statistical analysis, simulation analysis, and case study analyses) to better 

understand how IPR infringement in China, and China’s indigenous innovation policies, 

may affect the U.S. economy. 

Key Findings 

The following three sections summarize answers to the central elements of the request 

letter sent by the U.S. Senate Committee on Finance (Committee) to the U.S. 

International Trade Commission (USITC or Commission). These sections address (1) the 

estimated size and scope of IPR infringement in China, as reported by U.S. IP-intensive 

firms;1

 (2) the potential effects of a substantial improvement in IPR protection in China 

on the U.S. economy and employment, as a measurable proxy for the economic effects 

associated with IPR infringement in China on the U.S. economy and employment; and 

(3) the U.S. economic effects resulting from China’s indigenous innovation policies. 

Reported Size and Scope of IPR Infringement in China on U.S. 

Firms (Results from Questionnaire) 

The results below reflect responses to a USITC questionnaire sent to 5,051 U.S. firms in 

sectors that were considered to be IP-intensive. The Commission used statistical sampling 

techniques to extrapolate results to the U.S. IP-intensive economy, which was estimated 

to represent about 16.3 percent of the U.S. economy. 

Economic losses 

The Commission estimates that 

firms in the U.S. IP-intensive 

economy that conducted business 

in China in 2009 reported losses 

of approximately $48.2 billion in 

sales, royalties, or license fees due 

to IPR infringement in China 

(table ES.1). This estimate falls within a broad $14.2 billion to $90.5 billion range; the 

breadth of this range is explained by the fact that many firms were unable to calculate 

such losses. Of the $48.2 billion in total reported losses in 2009, approximately $36.6 

billion (75.9 percent) was attributable to lost sales, while the remaining $11.6 billion was 

attributable to a combination of lost royalty and license payments as well as other 

unspecified losses. 

 1

Consistent with the Committee’s request letter, the Commission has made no findings regarding the 

legal merits of any reported IPR infringement in its report.
xv 

TABLE ES.1 Summary of reported losses from IPR infringement in China on the U.S. IP-intensive economy 

(based on questionnaire), 2009

Economic indicator Rangea Point estimatea

Total reported global lossesb $14.2 billion–$90.5 billion $48.2 billion 

Losses by sectorb

Information and other services $11.8 billion–$48.9 billion $26.7 billion 

High-tech and heavy manufacturing $1.9 billion–$37.0 billion $18.5 billion 

Chemical manufacturing $0.4 billion–$3.6 billion $2.0 billion 

Consumer goods manufacturing $0.5 billion–$1.1 billion $0.8 billion 

Transportation manufacturing $35.3 million–$294.7 million $144.6 million 

Losses by type of IPR infringement 

Copyright infringement $10.2 billion–$37.3 billion $23.7 billion 

Trademark infringement $1.4 billion–$12.5 billion $6.1 billion 

 Patent infringementc

 $0.2 billion–$2.8 billion $1.3 billion 

 Misappropriation of trade secretsc

 $0.2 billion–$2.4 billion $1.1 billion 

 Unspecifiedd

 $2.2 billion–$35.5 billion $16.0 billion 

 

Infringement expensese

 $279.1 million–$9.4 billion $4.8 billion 

Source: Compiled and estimated by the USITC. 

 a

A point estimate (or "central" estimate) is the primary estimate resulting from a given statistical analysis. It 

represents the best fit to the data given assumptions about the underlying distribution of the data and about 

economic behavior. Ranges around these point estimates are provided to indicate the limitations of the underlying 

data. They reflect a 95 percent (unless otherwise indicated) probability that the actual reported losses fall between 

the lower and upper thresholds for the questionnaire and statistical analysis results—i.e., the results are significant 

at the 95 percent level. 

 bSignificant at the 80 percent level. 

 c

Significant at the 90 percent level. 

 d

Calculated as a residual (the difference between total reported global losses and losses by identified type of IPR 

infringement). 

 e

Significant at the 85 percent level. 

The Commission estimates that firms in the U.S. IP-intensive economy also spent 

approximately $4.8 billion in 2009 to address possible Chinese IPR infringement; most of 

this was spent by firms in the information and other services sector (which includes 

movies, music, and software). As a direct result of competition from lower-priced 

infringing goods, U.S. firms also reported lower revenues because they lowered their 

prices in the China market or reduced the number of products they sold in that market, 

thereby also possibly losing market share in China. 

U.S. IP-intensive firms that reported IPR infringement in China accounted for 58.1 

percent of the total sales of firms in the U.S. IP-intensive economy conducting business 

in China (figure ES.1). These firms also accounted for 16.7 percent of the number of U.S. 

IP-intensive firms conducting business in China in 2009. Top global trademark firms 

disproportionately (71.7 percent) reported losses associated with IPR infringement in 

China. 
xvi 

FIGURE ES.1 U.S. IP-intensive firms that reported IPR infringement in China accounted for 58.1 percent of the total 

sales of firms in the U.S. IP-intensive economy that were conducting business in China, 2009 

Sources: Weighted responses to the USITC questionnaire; U.S. Bureau of Economic Analysis; U.S. Census Bureau. 

 a

Represents approximately 16.3 percent of U.S. GDP, based on sectoral sales estimates by the U.S. Census 

Bureau and value added estimates by the U.S. Bureau of Economic Analysis. The share of GDP was based on the 

value added by the 24 sectors identified as potentially affected by intellectual property issues and the added value of 

firms in the special groups (top trademark firms and U.S. firms with FDI in China). This approach is not meant to 

imply that IP issues are confined only to this segment of the U.S. economy; IP issues are at least somewhat relevant 

in all sectors. Therefore, this calculation likely represents the lower bound for the IP-affected economy. 

Copyright infringement was the most damaging form of IPR infringement 

Copyright infringement accounted for approximately $23.7 billion in losses for U.S. IPintensive firms conducting business in China in 2009, a larger value than for any other 

type of reported IPR infringement. Firms in the information and other services sector 

reported the largest share of total IPR infringement losses in China as well as copyrightspecific losses in China. Copyright losses in this sector are due in part to the low cost of 

digital replication, the convenience of the Internet as a medium of exchange for these 

products, and market access limitations in China that may stimulate demand for 

infringing products (e.g., foreign firms can introduce no more than 20 new films in China 

each year). 

Trademark infringement was the most common form of IPR infringement 

Trademark infringement was the most frequently reported form of Chinese IPR 

infringement in 2009, with nearly one-third (31.5 percent) of U.S.-IP intensive firms 

doing business in China citing losses associated with this form of infringement. Almost 

all (91.6 percent) of firms in the consumer goods manufacturing sector, particularly those 

in the apparel manufacturing industries, reported material losses from Chinese trademark 

infringement. 
xvii 

U.S. employment would rise if IPR protection in China improved 

U.S. firms that operate in China and had concerns about IPR infringement reported that 

an improvement in IPR protection and enforcement in China to levels comparable to the 

United States’ would likely increase employment in their U.S. operations by 2 to 5 

percent. This increase translates into approximately 923,000 new jobs for U.S. IPintensive firms, some of which may represent the hiring of employees from other firms. 

The unrealized employment effects were largest in the following three sectors: 

information and other services, consumer goods manufacturing, and high-tech and heavy 

manufacturing. Questionnaire data on specific job losses in the United States that were 

attributable to IPR infringement in China were very limited; few firms reported such 

losses. 

While IPR infringement in China generally relates to large U.S. firms, 

smaller firms also report problems 

The majority of sales from U.S. businesses that reported IPR infringement in China in 

2009 were from large firms. Their averages for reported sales, royalties, research and 

development expenditures, and number of workers were each at least three times larger 

than those of U.S. firms that did not report experiencing IPR infringement in China. This 

is likely due to the fact that larger firms are more likely to export, have affiliates in China 

that are more exposed to IPR violations, and possess more widely recognized brands that 

are targeted by infringers. This does not mean that U.S. small and medium-sized 

enterprises (SMEs) are immune to IPR infringement concerns in China. Because SMEs 

experience proportionally higher losses (relative to revenue) and have fewer resources to 

protect themselves, they can be more vulnerable to IPR infringement than larger firms. 

Industry sources have suggested several approaches to help SMEs address such problems 

in China. For example, SMEs could pool their resources through trade associations to 

combat infringement, join in IPR protection efforts led by the U.S. Department of 

Commerce, or apply the same business acumen in China that has enabled them to 

succeed in the United States. 

The best and worst locations for IPR protection 

U.S. firms reported that Guangdong province, and the municipalities of Shanghai and 

Beijing, represented the best climates for IPR protection. Interestingly, these same 

locations were also ranked among the worst climates for IPR protection in China. This 

seeming contradiction is most likely attributable to several factors. First, the majority of 

foreign firms’ business operations are in these locations, so many have limited experience 

in other areas of China. Second, IPR protection is reported to vary significantly at the 

local levels. Finally, specific locations were ranked differently by firms from different 

economic sectors. Shanghai was generally rated as one of the best locations by firms in 

the information and other services and the transportation manufacturing sectors, and rated 

worst by firms in the high-tech and heavy manufacturing sector. In contrast, Beijing was 

rated highly by the high-tech and heavy manufacturing sector, and rated as worst by firms 

in the information and other services sector. Guangdong was ranked highly by firms in 

the consumer goods manufacturing sector, but received low rankings from most other 

sectors, especially the high-tech and heavy manufacturing sector. 
xviii 

Effects of Improved IPR Protection in China on the U.S. Economy 

and Jobs (Results from Statistical and Simulation Analysis) 

To complement the results provided in the questionnaire, a statistical and simulation 

analysis was used to assess the effects of a substantial improvement in IPR protection in 

China. This approach relied on publicly available data and widened the scope of the 

analysis by estimating economic gains using statistical analysis (e.g., analyzing 

relationships between IPR protection and changes in U.S. exports to China). The 

simulation analysis used these results (e.g., U.S. exports to China) and other factors to 

assess the U.S. economy-wide and intersectoral impact of such an improvement in IPR 

protection in China. 

Estimated economic gains 

As shown in table ES.2, an 

improvement in IPR protection 

in China to levels comparable to 

those in the United States could 

lead to an estimated $107.0 

billion gain in U.S. exports and 

sales to majority-owned 

affiliates in China (after 

adjusting for the double-counting 

of U.S. exports to affiliate firms in China). U.S. exports of goods and services (including 

the receipt of royalties and license fees) to China could increase by an estimated $21.4 

billion, and sales to U.S. majority-owned affiliates in China could increase by an 

estimated $87.8 billion. 

Simulated sectoral effects 

The effects of an improvement in IPR protection in China to levels comparable to those 

in the United States would vary across sectors. In the case of services sectors, as well as 

for the software, paper products, and publishing sector, the United States is almost 

exclusively a net exporter to China, as China has little export capacity in these categories. 

Thus, improved IPR protection would likely allow U.S. exports to expand, directly 

promoting increases in U.S. output and employment. In other sectors, the effects would 

likely be more nuanced. For sectors within globally integrated manufacturing chains, 

increased U.S. exports to China may in fact trigger increased U.S. imports from China. 

This is because the increased intermediate inputs into China that have been facilitated by 

an improved IPR environment would in turn be processed and re-exported to markets 

such as the United States. Also, for U.S. sectors that rely heavily on Chinese intermediate 

inputs that are highly software dependent, an improvement in IPR protection in China 

would lead to higher costs for required software and, therefore, higher costs for Chinese 

firms and U.S. importers. Such cost increases could be associated with decreases in the 

competitiveness of certain U.S. sectors and as a result, lower these sectors’ output. 
xix 

TABLE ES.2 Summary of potential U.S. gains from IPR improvement in China (based on statistical and simulation 

analysis) 

Amount (point estimatea

) 

Economic gains from statistical analysis 

 Exports of goods and services to China $21.4 billion 

 Goods $9.4 billion 

 Services $11.9 billion 

 Receipts of royalties and license fees from China $3.0 billion 

 Other services $8.9 billion 

 Sales of U.S. majority-owned affiliates in China $87.8 billion 

 U.S. exports to affiliate firms in China (subtracted)b

 -$2.1 billion 

Total increase in U.S. exports to China and sales to U.S. affiliates in Chinab

 $107.0 billion 

Net income of affiliates (profits)c $3.5 billion 

Economic gains from simulation analysis

 Fixed employment scenario:d

 U.S. economic welfare $6.7 billion

 U.S. profits (as reflected by returns to capital) c $12.3 billion 

 U.S. net employment effect (in full-time equivalents or FTEs) Unchanged (by definition) 

 

 Illustrations of potential labor reallocation to more IP-intensive sectors (FTEs): 

 Education and related services 26,000 

 Recreational and other services (e.g., motion picture production, recorded 

 music) 

17,000 

 Business services 11,000 

 Software, paper products, and publishing 6,000 

 Flexible employment scenario:e

 U.S. economic welfare $185.2 billion 

 U.S. profits (as reflected by returns to capital) c $62.1 billion 

 U.S. net employment effect (in FTEs) 2.1 million 

Source: Compiled and estimated by the Commission.

 a

A point estimate (or "central" estimate) is the primary estimate resulting from a given statistical analysis. It 

represents the best fit to the data given assumptions about the underlying distribution of the data and about 

economic behavior. Ranges around these point estimates are provided in chapter 4 and appendix H, and reflect the 

limitations of the underlying data. 

 bTotal increase in sales of U.S. firms includes the increase in exports of goods and services as well as increase in 

sales of U.S. majority-owned affiliates in China. Exports to affiliate firms appear in both exports and sales, and are 

therefore subtracted to avoid double-counting when aggregating these estimated increases. 

 c

From the statistical analysis, net income of affiliates is the estimated increase in profits of U.S. affiliates in China. 

From the simulation analysis, U.S. profits (as reflected by returns to capital) represent profits of firms located in the 

United States. 

 d

In this scenario, wages are flexible and overall employment does not change by assumption. 

 eIn this scenario, wages are fixed and the overall employment increases by assumption. 
xx 

Simulated employment effects 

A substantial improvement in IPR protection in China could have positive effects on 

employment in the United States. The simulation analysis suggests different employment 

effects, depending on the assumptions made about the labor market during the policy 

implementation period. Two alternate assumptions were implemented to simulate the 

employment effects—one related to a “fixed employment” assumption and another 

related to a “flexible employment” assumption. These assumptions, and their 

corresponding effects when applied to the simulation analysis, are described below. 

The fixed employment scenario has usually been employed in simulation analysis 

involving international trade. In this scenario, the overall U.S. levels of capital and labor 

are assumed to be fixed. This is done principally to permit a clearer focus on the model’s 

implications for the reallocation of resources between sectors, rather than the implications 

for overall macroeconomic factors, which are usually beyond the scope of the model’s 

application. This assumption is meant to represent the U.S. economy in a condition close 

to full employment and full capacity utilization. In this case, labor and capital are 

reallocated between sectors, and wages and interest rates may change. Under this 

assumption a policy change creates greater demand for labor and capital in certain IPintensive sectors but no total change in demand for U.S. labor. Notably, the fixed 

employment scenario yields employment increases in IP-intensive sectors, such as 

education and related services; recreational services, which includes motion picture 

production and recorded music; business services; and software, paper products, and 

publishing. 

Under the flexible employment scenario, increases in demand cause increases in 

employment and capacity utilization, while wages and returns to capital remain fixed. 

This assumption is meant to represent the U.S. economy under conditions of high 

unemployment. The current U.S. economic climate as of 2011 presents a situation of high 

unemployment, with similar features to that assumed in the flexible employment 

scenario. Under this scenario, if IPR protection in China improved substantially, U.S. 

employment could increase by 2.1 million FTEs (full-time equivalent workers). The 

change in IPR protection in China could thus result in higher employment and increased 

capacity utilization, drawing resources from currently unemployed labor and capital as 

well as resources from other sectors. However, it is unclear when China might implement 

the improvement in IPR protection envisioned in the analysis, and equally unclear 

whether the United States will face as much excess labor supply then as it does today. 

Also, while wages are assumed to be constant in the flexible labor and capital scenario, 

they could reasonably be expected to increase in an economic recovery. 
xxi 

Effects of China’s Indigenous Innovation Policies on the U.S. 

Economy (Results from Survey and Case Studies) 

China is implementing wide-ranging policies designed to boost the country’s level of 

“indigenous innovation,” but it is 

difficult to estimate the effects 

of such policies on the U.S. 

economy, particularly because 

many remain in draft form or are 

in the process of changing. U.S. 

firms reported concerns about a 

number of these policies, 

especially those involving 

preferential support to Chinese companies, technical standards, government procurement, 

and technology transfers that seek to absorb foreign technology and apply it to spur 

Chinese technological advances. Following the January 2011 U.S.-China summit 

meeting, China agreed to delink its innovation policies from government procurement 

preferences and made other changes to its indigenous innovation policies, but these 

changes postdate the Commission survey and are not reflected in it. The Commission 

used survey results and published data to assess the actual, reported, and potential effects 

of China’s indigenous innovation policies on the U.S. economy and employment. 

Questionnaire results 

Scope of concerns 

U.S. IP-intensive firms that reported concerns with China’s indigenous innovation 

policies accounted for 67.2 percent of the sales of firms in the U.S. IP-intensive economy 

that are conducting business in China, and 29.0 percent of the number of firms in that 

category. The firms that reported concern were relatively large; they have higher average 

sales, research and development (R&D) expenditures, royalty and license fees, and 

employment than firms that did not report such concerns. The largest share of firms 

reporting concerns about indigenous innovation policies were in the high-tech and heavy 

manufacturing and the chemical manufacturing sectors. 

Chief indigenous innovation concerns for U.S. firms 

Based on the questionnaire results, the top policy areas in which U.S. firms identified 

current problems are (1) preferential support for Chinese firms in the form of tax 

incentives, subsidies, and preferential lending; and (2) China-specific technical standards. 

Preferential support for Chinese firms was also identified as the greatest future concern of 

U.S. firms. 

Reported losses from indigenous innovation 

A small share of U.S. IP-intensive firms that conduct business in China reported that they 

experienced material losses due to indigenous innovation policies in 2009. Firms 

reporting that their U.S. employment had been affected by indigenous innovation 

generally indicated that employment had decreased. With respect to their future outlook, 

most firms were unsure how their revenues would be affected by indigenous innovation 

or anticipate that their revenues will fall. 
xxii 

Case studies 

Wind energy

Indigenous innovation policies have reduced U.S. and other foreign firms’ market 

share. Chinese policies related to indigenous innovation in the wind energy sector 

include government procurement preferences for domestic firms, high local-content 

requirements, and R&D incentives and support for Chinese-owned wind energy firms. 

The policies have dramatically reduced foreign firms’ market share in China. In 

particular, government procurement opportunities have been highly restricted. For 

example, no foreign firm has won a wind farm concession contract from China’s National 

Development and Reform Commission since 2005. Local-content requirements and R&D 

support have helped Chinese wind energy companies become global competitors. 

Telecommunications equipment (mobile handsets) 

Chinese preference for homegrown standards presents substantial challenges for 

U.S. firms. China’s development of the Time Division Synchronous Code Division 

Multiple Access (or TD-SCDMA) standard has reduced China’s reliance on foreign 

telecommunication technologies and associated royalty payments to foreign firms. In 

addition, preferential lending and generous lines of credit to Chinese companies have 

boosted their ability to compete with U.S. companies in third-country markets. U.S. and 

other foreign firms have experienced dramatic losses in market share in China in the last 

five years, due in part to the growing domestic success of Chinese firms, facilitated by 

indigenous innovation policies. U.S. firms must devote significant resources to support 

multiple product lines in order to accommodate China’s homegrown standards. They also 

face delays in entering China’s market while attempting to comply with regulatory 

requirements—delays that harm their competitive position in the Chinese market. 

Software 

Standards and government procurement policies limit U.S. market access and 

require disclosure of intellectual property. Indigenous innovation policies in the 

software sector include the introduction of the Multi-Level Protection Scheme and China 

Compulsory Certification software security standards, and government procurement 

preferences for domestic firms. Under the standards policies, U.S. firms are barred from 

competing for software contracts in certain industries deemed critical to China’s security; 

to compete in other industries, they must disclose encryption codes and other key 

intellectual property. Procurement preferences potentially restrict opportunities for U.S. 

firms at the central government level; restrictions on government procurement 

opportunities in software are already in place at the provincial level. 

Automotive 

Indigenous innovation and other policies limit U.S. market access. Chinese policies 

focused on the development of the auto industry have been in place since before the 

introduction of indigenous innovation policies in 2006; many of the goals advanced by 

these policies are related to indigenous innovation. Such policies include mandatory joint 

venture requirements, encouragement of technology transfer, R&D incentives and 

support available only to domestic firms, and government procurement preferences. Joint 

venture and technology transfer rules limit foreign companies’ flexibility and raise the 

possibility of loss of intellectual property. Government incentives restricted to domestic 
xxiii 

firms make it more difficult for foreign firms to compete in China. Government 

procurement preferences may also limit U.S. firms’ market for fleet sales. 

Civil aircraft and parts 

Indigenous innovation effects are limited as Chinese firms are far from the 

technology frontier. Chinese government efforts to promote the goals of indigenous 

innovation in the civil aircraft and parts industries include policies strongly favoring joint 

ventures and contracts with state-owned enterprises, and technology transfer 

requirements and incentives. The effects of these efforts have been limited so far, as 

China does not have the technology to rely on indigenous innovation to produce domestic 

large civil aircraft. The policies’ potential effects on the U.S. economy and U.S. firms 

depend on China’s eventual success in acquiring and using foreign civil aviation 

technology. 

1-1 

CHAPTER 1 

Introduction 

China’s rapid economic transformation over the past three decades has presented both 

opportunities and challenges to many U.S. businesses. Since the initiation of its marketoriented economic reforms in 1978, China has maintained an annual gross domestic 

product (GDP) growth rate of 10.0 percent in real terms. The pace of this growth has 

been faster and more sustained than that of any other country over the last 30 years, 

resulting in an expansion of China’s share of world GDP from 1.8 to 8.6 percent during 

this period. 1 International trade with the United States and other countries has 

substantially contributed to China’s economic growth.2

 In 2010, China was the United 

States’ second-largest single country trading partner and its largest source of imports. 

Moreover, China currently ranks as the United States’ third-largest export market, and is 

a principal source of growth for many U.S. companies that either manufacture in China or 

sell goods and services to Chinese companies and consumers. China’s 1.3 billion 

population and its expanding 157 million-member middle class—second in size only to 

that of the United States—represent a large and growing market for many U.S.-based 

multinational companies.3

 

Despite their broad success in the China market, many U.S. firms have reported that the 

infringement of their intellectual property rights (IPR) in China, as well as China’s 

indigenous innovation policies, have undermined their competitive positions. 4 With 

respect to reported IPR infringement in China, many firms have claimed that their trade 

secrets have been stolen, sales and royalty/license fees have been diminished, and brand 

names and product reputations have been damaged. Consistent with the U.S. Senate 

Committee on Finance’s (Committee) request letter, the U.S. International Trade 

Commission (Commission or USITC) has made no findings regarding the legal merits of 

any reported IPR infringement in its report. 5

 With respect to indigenous innovation 

policies, U.S. firms have reported that they have incurred losses as well, but are mostly 

concerned about the future implications of China’s evolving policies in such areas as 

technical standards and preferential support for Chinese firms. 

Reports of economic harm that U.S. firms have incurred, or expect to incur, as a result of 

China’s indigenous innovation policies are relatively new, given that these policies were 

only announced in January 2006. Concerns about IPR infringement, however, are of 

considerably longer standing. The surge of foreign direct investment (FDI) into China 

starting in the mid-1980s marked the beginning of China’s rise as both an internationally 

connected producer of manufactured goods and a growing global supplier of counterfeit 

products. While the regulatory environment for IPR protection in China notably 

improved following China’s 2001 accession to the World Trade Organization (WTO), 

 1

World Bank, World Development Indicators database (accessed February 20, 2011). 2

GTIS, Global Trade Atlas Database (accessed February 23, 2011); Morrison (CRS), “China’s 

Economic Conditions,” 2009; WTO, “Trade Policy Review: China,” April 2010. 3

USDOC, U.S. Foreign Commercial Service, China Business Handbook, 2009; Li, China’s Emerging 

Middle Class, 2010; OECD, The Emerging Middle Class in Developing Countries, 2010. 4

Findings from questionnaire results, interviews, and hearing for this study; USITC, China IPR and 

Indigenous Innovation 1, 2010. U.S. firms’ broad success in the China market is attested to by AmChamChina, American Business in China, 2010; USCBC, U.S. Companies’ China Outlook, 2010; USTR, “Fact 

Sheet: U.S.-China Commercial Relations,” January 19, 2011. 5

See appendix A and B for the request letter from the Committee and Federal Register notices 

associated with this investigation. 
1-2 

China’s relatively weak enforcement capacity has continued to negatively affect 

businesses. Over many years, therefore, IPR infringement in China has imposed costs on 

U.S. firms―costs that previous studies have not comprehensively analyzed at the 

economy-wide and sectoral levels. 

Intellectual property and innovation play a central role in driving productivity, 

employment, and overall growth in the U.S. economy. The U.S. Department of 

Commerce has reported that technological innovation has been associated with 

approximately three-quarters of the United States’ average annual economic growth since 

the mid-1940s. 6 Intellectual property and innovation also support U.S. exports. For 

example, U.S. receipts from royalties and license fee, which represent payments for U.S. 

intellectual property and technology, yielded a trade surplus of approximately $64.6 

billion in 2009.7

 However, receipts from China represent a small share of this surplus. 

Industry and academic sources report that this is in large part due to weak IPR 

enforcement and market access problems in China.8

Objective 

At the request of the Committee, this Commission report estimates, to the extent feasible, 

the effect of reported IPR infringement in China and China’s indigenous innovation 

policies on the U.S. economy and employment. It follows the November 2010 

publication of China: Intellectual Property Infringement, Indigenous Innovation Policies, 

and Frameworks for Measuring the Effects on the U.S. Economy (hereafter “China IPR 

and Indigenous Innovation 1” or “the first report”). The first report described the 

principal types of IPR infringement and indigenous innovation policies in China and 

provided an analytic framework for measuring the effects of both of these on the U.S. 

economy and employment. Building upon those findings, this report describes the size 

and scope of reported Chinese IPR infringement using available data, literature, 

interviews, and information obtained from a Commission questionnaire and public 

hearing.9

 It also provides a quantitative analysis to assess the effect of IPR infringement 

in China on the U.S. economy and its sectors, by calculating the potential effect of a 

substantial improvement in IPR protection in China. Finally, it describes the actual, 

potential, and reported effects that China’s indigenous innovation policies have had on 

the U.S. economy and employment, to the extent feasible. 

This report is particularly timely, given the importance of its central themes―IPR 

infringement in China and China’s indigenous innovation policies―in the current U.S.-

China trade policy dialogue. The strengthening of IPR protection in China and the 

elimination of China’s indigenous innovation policies considered to be discriminatory 

have been identified as important priorities in the trade relationship by many U.S. 

government agencies, including the Committee; the U.S. Commerce Department 

(Commerce or USDOC); and the White House, through the U.S. Trade Representative 

 6

USDOC, “Patent Reform: Unleashing Innovation,” April 2010. 

7

USDOC, BEA, “U.S. International Services, table 4,” (accessed April 25, 2011). 8

USITC, hearing transcript, June 15, 2010, 22–23 (testimony of Fritz Foley, Harvard Business School); 

and USITC, China IPR and Indigenous Innovation 1, 2010, chapters 2 and 3. From this study’s questionnaire, 

the vast majority of U.S. firms that experienced IPR infringement in China claimed that an improved IPR 

protection and enforcement in China would result in increased royalty and license payments, as described in 

chapter 3. 9

See appendix C and D for a list of hearing participants and a summary of the views expressed to the 

Commission via testimony, written submission, or both, reflecting the principal points made by a particular 

party. 
1-3 

(USTR).10 These issues were among the central themes of the December 2010 U.S.-China 

Joint Commission on Commerce and Trade (JCCT) meetings, one of the highest forums 

for U.S. and Chinese political leaders to address bilateral trade issues, as well as of the 

January 2011 U.S.-China summit.11 

This report’s two-country focus, which attempts to quantify economy-wide effects in one 

country (e.g., the United States) that have resulted from IPR infringement and indigenous 

innovation policies in another country (e.g., China), appears to be unique and has 

therefore necessitated new analytic approaches. No other published studies appear to 

have focused on estimating the impact of IPR infringement in China and China’s 

indigenous innovative policies on the U.S. economy and its various sectors. Some studies 

have assessed the economic effects of global IPR infringement on various dimensions of 

the global economy, as well as on the United States and other economies separately. 

Other studies have considered the impact of IPR infringement on particular industrial 

sectors, both from the perspective of global infringement and from infringement in China. 

The different focuses associated with other studies are summarized in table 1.1 and 

further described in chapter 2. With respect to China’s indigenous innovation policies, 

they are too recent for extensive analyses of their economic effects to have been 

undertaken. 

TABLE 1.1 The unique focus of this study compared with related studies

Organization 

Year of 

Publication Focus 

Global economy–wide economic effects of global IPR infringement 

Frontier Economics 2011 Counterfeit and piracy market 

OECD (2) 2008, 2009 Counterfeit and piracy trade, based on seizure statistics 

U.S. economy–wide economic effects of global IPR infringement 

Frontier Economics 2011 U.S. economy-wide production/consumption estimates from seizure statistics 

USITC 1988 Economy-wide effects in the United States 

U.S. economy–wide economic effects of IPR infringement in China 

USITC 2011 U.S. economy-wide effect of IPR infringement and indigenous innovation 

policies in China 

U.S. sector–specific economic effects of global IPR infringement 

MPAA 2005 Global losses (motion picture sector) 

IPI (3) 2005–07 Economy-wide losses due to sectoral infringement 

(sound recording, motion picture, software, and video game sectors) 

U.S. sector–specific economic effects of IPR Infringement in China 

BSA/IDC 2010 Counterfeit and piracy sales (software sector) 

IIPA 2010 Piracy (software and music sectors) 

Other economic effects of IPR infringement 

Frontier Economics 2009 Lost tax revenue and jobs, higher welfare spending (UK and Mexico) 

TERA Consultants 2010 Retail sales losses (EU) 

Source: Compiled by USITC staff. 

 10Senate Committee on Finance, “Baucus, Grassley Demand China Act,” December 13, 2010; USDOC, 

“Fact Sheet: 21st U.S.-China Joint Commission,” December 15, 2010; USTR, “Fact Sheet: U.S.-China 

Economic Issues,” December 15, 2010; White House, “Fact Sheet: U.S.-China Economic Issues,” January 

19, 2011. 11USDOC, “Fact Sheet: 21st U.S.-China Joint Commission,” December 15, 2010; USTR, “Fact Sheet: 

U.S.-China Economic Issues,” December 15, 2010; White House, “Fact Sheet: U.S.-China Economic Issues,” 

January 19, 2011. 
1-4 

Approach 

To assess the size and scope of potential economic effects on the U.S. economy of IPR 

infringement in China and China’s indigenous innovation policies, the Commission used 

a multi-dimensional analytic approach. In its most basic form, this approach was 

designed to use a questionnaire, economic modeling, and case study analysis to provide 

answers to the following questions: 

1. Using a questionnaire: What have been the reported effects of IPR infringement 

and indigenous innovation policies in China on U.S. firms and employment? 

2. Using statistical and simulation analysis: How would a substantial improvement 

in IPR protection in China affect the U.S. economy and employment (at the 

national and sectoral levels)? 

3. Using case study analysis: How have Chinese indigenous innovation policies 

affected U.S. firms and employment in selected sectors? 

Using the Questionnaire 

To attempt to answer the question of how IPR infringement and indigenous innovation 

policies in China are affecting U.S. firms, a questionnaire was sent to 5,051 U.S. 

companies in 24 sectors considered to be IP-intensive. 12 The Commission drew on a 

combination of sources to identify these sectors, including quantitative indicators such as 

U.S. IPR-related customs seizure statistics (described in chapter 2), research and 

development (R&D) expenditures, royalty and license fee data, and patent filings; other 

U.S. government reports such as USTR’s Special 301 reports; USITC staff expertise; and 

other sources. The Commission then defined these sectors using the North American 

Industry Classification System (NAICS). A number of firms did not fall into any of the 

chosen sectors but were believed to have been affected by IPR infringement in China, 

based on media accounts, legal cases, and public information from trade associations. To 

draw upon their experience, two additional sectors were created: one for firms that were 

in a top 100 global trademark category and one for U.S. firms with FDI in China. 

By defining these sectors in advance and creating a sampling plan, the Commission was 

able to use statistical sampling techniques and response rate predictions to choose the 

appropriate number of firms to send questionnaires to, in order to extrapolate their results 

across the spectrum of U.S. sectors affected by reported IPR infringement and indigenous 

innovation policies in China. The Commission broadly characterizes this spectrum as the 

U.S. “IP-intensive economy.” 13

Using Statistical and Simulation Analysis 

While the analysis of the reported effects on U.S. firms of IPR infringement in China 

provides much insight, this effort cannot fully assess the potential impact on the U.S. 

economy and jobs, as many firms could not quantify such losses and those that could 

used inconsistent methodologies to do so. Moreover, single-year extrapolated firm-level 

perspectives may not necessarily identify broader economic relationships, or intersectoral 

 12A copy of this questionnaire is presented in appendix E. 13Note that there is no consistent or accepted definition of “IP-intensive.” 
1-5 

developments within the U.S. economy that may occur given IPR infringement in China 

(such as transfers of resources within the U.S. economy that may be diverted from high 

IP-intensive sectors to other sectors given IPR infringement in China). The Commission 

therefore undertook a complementary approach, using economic modeling and a broader 

set of economic data to estimate how an improvement in IPR protection in China might 

affect the U.S. economy and employment. This represents a measurable proxy for the 

economic effects associated with IPR infringement in China on the U.S. economy. 

Specifically, statistical techniques (econometrics) were used to assess how better IPR 

protection in China could affect U.S. merchandise exports to China, U.S. receipts from 

royalty and license payments and other services exports to China, and sales by U.S. 

affiliates in China. Together with estimates of Chinese firms’ increased capital costs 

(from more software purchases) that could result from an improvement in IPR protection 

in China, the estimated changes in goods and services exports were incorporated into a 

simulation framework—a comparative static computable general equilibrium (CGE) 

model. The CGE model assessed the effect of these changes on U.S. output and 

employment, without regard to their timing or to intermediate effects such as changes in 

investment behavior. This CGE approach helps identify the intersectoral changes within 

the U.S. economy that could occur if better IPR protection in China were to stimulate 

U.S. exports to China, given the reallocation of resources that would likely accompany 

such changes.14 

Using Case Study Analysis 

In addition to using questionnaire results to assess the reported impact of China’s 

indigenous innovation policies on the U.S. economy and employment, selected case study 

analyses were also conducted. This approach relied upon qualitative information to assess 

actual and potential effects on the U.S. economy and employment in five prominent 

sectors of the U.S. economy that are actively engaged in business in China: software, 

telecommunication equipment, wind energy, automobiles, and civil aircraft. 

Scope 

The geographic scope of this report is concentrated on the two principal markets 

identified in the initiating request: the United States and China. 15 For purposes of this 

report, “China” refers to mainland China and does not include Hong Kong or Macau.16

Hong Kong and Macau are discussed in this report only to the extent they may play a role 

in the transshipment of IPR-infringing goods that originated from China. References have 

been made to other markets to the extent that they add perspective or are used in the 

analytic framework. 

This report focuses on developments in IPR infringement in China and China’s 

indigenous innovation policies that have occurred since 2006. The quantitative sections 

 14The degree of intersectoral changes that may occur are contingent upon assumptions made about the 

availability of scarce resources (e.g., labor and capital), and are identified in the description of the analysis 

and its results. 15Certain portions of this report do incorporate global effects of IPR protection in China: survey results 

include global losses, and the CGE exercise models the behavior and response of all countries to changes in 

IPR protection in China. While the results for other countries are not reported, such a global analysis permits 

a more accurate accounting of the ramifications of policy changes. 16Hong Kong and Macau are special administrative regions (SARs), which operate under autonomous 

systems of government and constitutions. U.S. State Department, “Background Note: Hong Kong,” August 3, 

2010; U.S. State Department, “Background Note: Macau,” July 26, 2010. 
1-6 

of this report, which include the questionnaire and the economic modeling, use the latest 

available data from the 2007–09 period. Questionnaire and economic modeling results do 

not address events in 2010. Thus, for example, the effects of China’s Special IPR 

Enforcement Campaign launched in October 2010 are not discussed in this report. 

Qualitative information, particularly that which relates to China’s indigenous innovation 

policies, focuses on developments unfolding after the January 2006 Medium- to LongTerm Plan for the Development of Science and Technology (MLP) announcement. It 

occasionally draws on information from before that period to assess whether there have 

been noteworthy changes since the announcement of the MLP policy. Occasional 

references have been made to other periods, if more current data were not available, or if 

the inclusion of that information would provide relevant insight. 

The scope of the economic analysis is constrained by the definition of a “U.S. firm,” as 

shown in figure 1.1. This definition includes firms that are in the United States that do not 

export, U.S.-based multinationals with foreign business operations, firms based in the 

United States that export, and U.S. affiliates of foreign-based multinational firms. Using 

this broad definition allows the analysis to consider all effects that may result from IPR 

infringement in China, including lost sales or diminished profits of a U.S. affiliate of a 

third-country multinational company. 

FIGURE 1.1 What is considered a U.S. firm? 

Source: USITC. 

Finally, this study does not quantify the effect of losses on intangible assets, such as a 

firm’s brand, that may have resulted from IPR infringement in China. Such an assessment 

would depend upon an appropriate valuation of a firm’s assets both before and after 

infringement had occurred and would not be feasible in an analysis of this kind. 

Information Sources 

The limited amount of publicly available data on IPR infringement in China and China’s 

indigenous innovation policies, as well as the lack of established analytic approaches 

used to estimate their effects on the U.S. economy and employment, have posed unique 

challenges to this report’s underlying analysis. This lack of information is 

understandable, because IPR infringement is an illegal activity whose actors are not 

subject to official accounting or regulatory oversight. There is also little information on 

China’s indigenous innovation policies, given how recent and evolving the policies are 
1-7 

and the opaque way in which such policies are implemented and enforced in China. To 

deal with these information deficiencies, the Commission supplemented existing 

information (government statistics, academic research, and industry reports) with new 

primary information from the questionnaire upon which this study and subsequent 

research could draw. 

 

This report draws on extensive qualitative information from a public USITC hearing, 

written submissions, individual interviews in the United States and China, and 

workshops. The Commission held a public hearing for both interrelated China IPR 

reports on June 15–16, 2010. Witnesses during the two-day hearing included 

representatives of companies and trade associations located in the United States and 

China, as well as individuals with relevant academic, government, and nonprofit sector 

experience. Written submissions were provided by a diverse group of trade associations, 

law firms, think tanks, and individual companies. The Commission conducted 

approximately 100 interviews in the United States and China with representatives of 

firms, government agencies, trade associations, think tanks, law firms, and academia. In 

addition, the USITC held several workshops with academics and industry representatives 

with knowledge about IPR infringement in China and China’s indigenous innovation 

policies. 

The Commission also collected a wide array of quantitative information for this report, 

ranging from primary data drawn from the questionnaire to various economic indicators 

such as seizure statistics and indices measuring the strength of countries’ IPR regimes. 

IPR-related seizure statistics from the U.S. Customs and Border Protection (CBP) 

provided insight into which sectors belonged in the “IP economy” sampled in the 

questionnaire. The USITC’s review of literature also helped provide analytic direction for 

this study. 

The Commission considered several indices to assess the relative strength of IPR 

protection in China for the underlying economic analysis described in chapter 4. Chief 

among these was an index created by the Economist Intelligence Unit (EIU) that 

measures the relative strength of IPR enforcement in many countries, including China. 

The index gauges IPR protection across countries according to the following criteria: (1) 

how strictly and well-enforced regulations have been; (2) how efficiently the courts deal 

with transgressors; (3) whether an injured party can gain an injunction; and (4) whether 

IPR protection extends to patents, trademarks, and service marks. 17 Its results are 

presented in figure 1.2. 

 17EIU “Data Tool” documentation (EIU representative, email message to USITC staff, January 19, 

2011). 
1-8 

FIGURE 1.2 EIU’s IPR protection score for China and the United States in comparative terms, 2010 

Source: Compiled by USITC staff; EIU, “IP Enforcement” database, accessed March 30, 2011. 

Organization 

In addition to introducing organizational aspects of this report and describing the report’s 

analytic approach, scope, and information sources, Chapter 1 provides key definitions 

that will be used throughout subsequent chapters. Chapter 2 builds on this introductory 

chapter by providing information from external sources, including seizure statistics and 

information on the growing role of the Internet in China IPR infringement. Chapter 2 also 

describes how some studies have used seizure statistics and other data to assess the 

economic effects of global IPR infringement on various dimensions of the global 

economy, or used such data to assess the effects of IPR infringement on other economic 

indicators, such as exports, FDI flows, and royalty and license fees. Information from 

these data sources and studies help provide analytic direction to the analysis described in 

subsequent chapters of this report. 

Chapter 3 describes the effects of IPR infringement in China on U.S. firms as reported in 

the questionnaire responses, using information collected from interviews and the USITC 

hearing to supplement the analysis and provide context. Specifically, it describes the size 

and scope of reported losses to U.S. companies due to IPR infringement, highlighting the 

effects across various IP-intensive sectors and across the different types of IPR 

infringement activity (e.g., infringement of copyrights, trademarks, patents, and trade 

secrets) in China. 

Chapter 4 provides and discusses estimates and potential economic effects of IPR 

infringement in China on the U.S. economy and employment. These estimates provide a 

complementary point of comparison with the reported effects described in chapter 3, and 

assess the likely effects if IPR protection in China were to rise to levels comparable to 

those found in the United States. The chapter subsequently describes how those results 

are used in a simulation model to assess the potential economy-wide impacts of improved 
1-9 

IPR protection in China on the U.S. economy, including impacts on sectoral employment 

within the United States. 

Finally, chapter 5 describes the actual, reported, and potential effects of China’s 

indigenous innovation policies on the U.S. economy and employment. It first summarizes 

the results of the indigenous innovation section of the questionnaire, which highlights 

reported effects on the U.S. economy and employment. It also draws on case studies to 

assess actual and potential effects in selected industries, including software, 

telecommunications equipment, wind energy, automobiles, and civil aircraft, as reported 

by U.S. firms. 

Definitions 

The definitions of particular types of intellectual property and indigenous innovation used 

in this report are the same as those identified in the first report (see box 1.1 for an 

abbreviated form).18 

 18For complete definitions, see USITC, China IPR and Indigenous Innovation 1, 2010, 1-4 to 1-8. 
1-10 

BOX 1.1 Definitions of the four principal types of intellectual property and “indigenous innovation” 

Copyrights encourage creative endeavors by prohibiting original works from being copied without the author’s 

permission. China’s copyright law protects a range of work including written, oral, photographic, and dramatic works, 

fine art and architectural works, movies, graphic designs, and computer software. The copyright owner holds a broad 

set of exclusive rights, including the right to reproduce, distribute, perform, and adapt the work for a period of up to 50 

years, for corporate authors, or for the life of the author plus 50 years for individual works. Copyright infringement, 

which may occur when any of the exclusive rights of the owner are violated, is generally referred to as copyright piracy. 

Copyrights do not have to be registered to be entitled to protection, although registration reportedly can facilitate 

enforcement. 

Trademarks are used to distinguish the goods or services of one manufacturer or seller from those of another. 

Trademark registration is available in China for words, designs, letters, numbers, three-dimensional signs, and color 

combinations, and for certification or collective marks that identify a quality, region, or specific feature of a good or 

service. Registration is required for effective protection of a trademark in China. China follows a first-to-file system for 

trademarks, with no requirement that the filing party demonstrate prior use or ownership of the mark. Thus, a foreign 

mark that is not immediately registered with the China Trademark Office can be usurped by someone who files first but 

does not have an existing commercial interest in the mark. The violation of trademarks is sometimes referred to as 

counterfeiting. A registered trademark generally is valid for 10 years. Unlike copyrights, however, trademarks may be 

renewed indefinitely. 

A patent is a set of exclusive rights granted to the inventor for a limited time period. Chinese law recognizes three 

kinds of patents: invention, utility model, and design. Invention patents refer to patents of new technical solutions 

relating to a product, process, or improvement thereof. Utility model patents refer to patents of new technical solutions 

related to the shape, the structure, or their combination, of a product which is fit for practical use. Design patents refer 

to patents of new design relating to the shape, pattern, color, or their combination, of a product which creates an 

aesthetic feeling and is fit for industrial application. Invention patents in China may be granted for any new technical 

solution relating to a product, process, or improvement. The patent has a term of 20 years from the application date. By 

contrast, utility model patents and design patents have a 10-year term. Applications for utility model and design patents 

are reviewed to ensure compliance with formalities but, unlike those for invention patents, those applications undergo 

no substantive review before the patent is issued. Virtually all utility model and design patents are held by domestic 

parties; foreign firms rarely seek such protection in China. The violation of patent rights is generally referred to as 

patent infringement. 

A trade secret is technical or business information that is unknown to the public and brings economic benefits to the 

owner, and for which the owner has adopted measures to maintain its confidentiality. Unlike other types of IP, trade 

secrets are not registered with administrative authorities but instead are protected through procedures and steps taken 

by the owner to maintain secrecy. Trade secret violations are generally referred to as misappropriation. 

The term indigenous innovation has been traced to China’s Medium- to Long-Term Plan for the Development of 

Science and Technology, released in January 2006, which calls on China to become an “innovation-oriented society” 

and a global leader in science and technology. Indigenous innovation policies encompass several policy goals of the 

Chinese government, including promoting innovation from domestic companies in the Chinese economy rather than 

relying on foreign technology; building domestic R&D capabilities; and generally increasing the share of overall value 

added that domestic Chinese companies contribute to China’s economy. U.S. and other foreign businesses have 

voiced concerns regarding indigenous innovation policies in a number of policy areas, including government 

procurement, technical standards, and technology transfer policies. 

 

Sources: Cao, Suttmeier, and Simon, “China’s 15-Year Science and Technology Plan,” December 2006, 38, 40; 

Maskus, Intellectual Property Rights, 2000, 45; SIPO, China IPR Annual Book 2009, 2010; U.S. Embassy, Beijing, 

“Intellectual Property Rights in China,” n.d. (accessed August 5, 2010). See USITC, China IPR and Indigenous 

Innovation 1, 2010, 1-4 to1-8. 
2-1 

CHAPTER 2 

Trends and Characteristics of Chinese IPR 

Infringement and Indigenous Innovation 

Policies: External Sources 

This chapter presents publicly available data and information that shed light on the trends 

and characteristics of Chinese IPR infringement. It begins with the presentation of seizure 

statistics that illustrate what is known about counterfeit trade intercepted at the U.S. 

border. These data, and comparable statistics from the European Union (EU) and Japan, 

show that China is the primary source of infringing goods seized by customs authorities. 

The chapter then describes the growing role of the Internet in the sale and distribution of 

IPR-infringing goods from China. The chapter next identifies approaches to measuring 

the effects of Chinese IPR infringement that provide direction for the analysis carried out 

in later chapters. The chapter ends with a targeted review of the literature on China’s new 

and evolving indigenous innovation policies. 

IPR Seizure Statistics 

Because infringing activity is illegal and cannot be comprehensively detected, it is 

impossible to fully assess the true magnitude of IPR-infringing trade originating from 

China or any other country. However, data on IPR-related seizures in the United States 

and other countries shed light on the growing problem, the types of products seized, and 

the role of China in this illicit trade. 

U.S. Seizures of Counterfeit Goods from China 

U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs 

Enforcement (ICE) are responsible for seizing goods in the United States that are 

counterfeited (trademark infringing) and pirated (copyright infringing).1

 According to 

CBP data, seizures of counterfeit and pirated products have risen by over 360 percent, 

from $40.6 million in calendar year 1995 to $187.3 million in calendar year 2010 (figure 

2.1.A).2

 The value of CBP seizures has increased at a much faster rate than the value of 

imports

 1

Most seizures are for trademark infringement, not copyright infringement. USITC, China IPR and 

Indigenous Innovation 1, 2010, 2-10. The statistics reflect seizures by both ICE and CBP that are aggregated 

and published by CBP. As noted later in this chapter, CBP statistics likely underrepresent the amount of IPRinfringing goods entering the United States, and seizures may be skewed toward types of goods that are easier 

to intercept. The data from 1995 to 2010 are subject to interyear variations, but provide perspective over time. 2

CBP staff, Intellectual Property Rights Seizure Statistics, e-mail message to USITC staff, January 25, 

2011. Value data are based on the domestic value of the goods as determined by adding the cost of 

manufacturing goods in a foreign country to the costs of shipping, insurance and customs duties to enter the 

United States. Unless specifically noted, CBP seizure statistics in this report are presented for calendar years. 
2-2 

imports in the product categories in which most seizures occurred.3

 However, since the 

underlying magnitude of illicit IPR-infringing trade is unknown, the implications of 

higher seizures remain unclear. Increased seizures could be a result of increased supply of 

IPR infringed goods, increased government resources to interdict these products, and/or 

efficiency gains that CBP and ICE may have made in detecting infringing products.4

China’s Role in Counterfeit Goods Trade 

China has grown to become the primary source of counterfeited products in the United 

States (figure 2.1.A). According to CBP data, Chinese-sourced products, which 

represented 12.5 percent of the value of total seizures in 1995, rose to 73.6 percent in 

2005 before falling to 59.3 percent in 2010 (figure 2.1.B); this decline is a recent 

phenomenon.5

 By contrast, the number of seizures involving IPR-infringing goods from 

China continued its rise, from 6.0 percent of the total in calendar year 1995 to 53 percent 

in 2010, while the number of seizures from other countries (excluding Hong Kong) fell 

from 90.7 percent in 1995 to 28.2 percent in 2010 (figure 2.1.C). 

Seizures of counterfeits shipped from Hong Kong, the second-highest source of U.S. IPR 

seizures in 2010, grew during 2005–10 as well (figure 2.1.A). Due to the size and 

efficiency of its port operations, Hong Kong is a popular port for the transshipment of 

counterfeit goods. Hong Kong officials note that because Hong Kong manufactures few 

products, counterfeit goods seized from Hong Kong are likely manufactured in China and 

other countries and simply transshipped through Hong Kong.6

 Most recently, the official 

statistics from Hong Kong show that the number of transboundary seizures of IPRinfringing goods from China that were destined for the United States increased by over 

50 percent from January 2009 to November 2010.7

 3

Imports of consumer goods, computers and accessories, and electrical and telecommunications 

equipment grew by 150 percent during this same period. These categories include imported goods that are the 

most likely to be counterfeited, such as footwear, apparel, computer goods, pharmaceuticals, etc., according 

to CBP data. U.S. Census Bureau, FTD 900 U.S. International Trade in Goods and Services, June 20, 1996, 

exhibit 7; U.S. Census Bureau, FTD 900 U.S. International Trade in Goods and Services, February 11, 2011, 

exhibit 8. 4

GAO, “Intellectual Property,” 2010, 16. 

5

When calculated by fiscal year (FY), China accounted for about 79–81 percent of the value of seizures 

in FY 2006–09, before falling to 66 percent of the value of seizures in FY 2010. CBP, IPR National 

Targeting and Analysis Group, “Department of Homeland Security IPR Seizures,” January 2011; CBP, 

“CBP, ICE Release Report on 2010 Counterfeit Seizures,” March 16, 2011. Differences in fiscal year and 

calendar year data result from the number of seizures and their estimated values in the two different time 

periods. 6

Government officials, interviews by USITC staff, Hong Kong, January 3, 2011. 7

Official statistics of Hong Kong Customs and Excise, January 4, 2011. 
FIGURE 2.1 U.S. IPR-related seizures have grown significantly; China is the most important source

A D

B E

C F

Source: CBP, IPR Seizure Statistics, e-mail message to USITC staff, January 25, 2011.

2-3

0

5

10

15

20

25

30

35

40

1995 2000 2005 2010

Million $

Value of top IPR seizures, 

by product, 1995–2010

Footwear Consumer electronics

Wearing apparel Handbags/Wallets

Pharmaceuticals Media

0

20

40

60

80

100 percent

Shares of IPR seizures,

by product value and source, 2010

China Hong Kong Other countries

0

20

40

60

80

100

120

140

160

180

200

1995 2000 2005 2010

Million $

Value of IPR seizures, 

by source, 1995–2010

China Hong Kong

All others Total

0

20

40

60

80

100

1995 2000 2005 2010

Percent

Express consignment U.S. Postal Service

Commercial All other

Share of IPR seizures by mode of 

conveyance, by value, 1995–2010

0

20

40

60

80

100

1995 2000 2005 2010

Percent

Share of IPR seizures, by number 

and source,1995-2010

China Hong Kong All others

0

20

40

60

80

100

1995 2000 2005 2010

Percent

China Hong Kong All others

Share of IPR seizures, by value 

and source,1995–2010
2-4 

Types of Counterfeits Seized in the United States 

In 2010, counterfeit footwear from all sources was the top product seized by CBP/ICE in 

the United States, accounting for $38.8 million or 20.7 percent of the value of all seizures 

(figure 2.1.D). Seizures of both footwear and consumer electronics, the second-largest 

product category seized in 2010 ($34.8 million, or 18.6 percent of the value of seizures), 

have grown rapidly since 2005.8

 Seizures of these products supplanted wearing apparel 

(8.8 percent of the value of seizures) and handbags and wallets (7.5 percent of the value 

of seizures) as the top products seized in 2010. IPR seizures of media and 

pharmaceuticals are also growing in importance. Other major products seized in recent 

years include cigarettes, watches, computer hardware, jewelry, and toys and electronic 

games. 

China’s dominance as a source of IPR seizures is most pronounced in the top four 

product categories of seizures. In 2010, China’s share of the value of these U.S. IPR 

seizures was 61.6 percent for handbags and wallets, 63.8 percent for consumer 

electronics, 74.5 percent for wearing apparel, and 90.2 percent for footwear (figure 

2.1.E). One industry source estimates that 80 percent of the global counterfeits of its 

athletic shoes are made in China.9

 In contrast, the value of seizures of pharmaceutical and 

media products from China has been less than the value of these seizures from other 

countries. 

Other Countries’ Seizures of Counterfeits from China 

Customs seizure statistics from Japan and the EU also show that goods seized for IPR 

violations come predominantly from China, and that their number has been increasing in 

recent years. China is the major source of counterfeit imports of consumer goods into 

these regions, particularly of footwear, apparel, and handbags. However, seizures of 

goods such as consumer electronics and computers sourced from China play a smaller 

role in these countries than in the United States.10

The European Commission (EC) reports IPR seizures according to the number of seizures 

(cases) and the number and types of intercepted articles. The EC reported in 2010 that 

cases involving seized goods declined between 2008 and 2009 for the first time in recent 

years, but such cases still remained high, given the downturn in the global economy and 

in EU trade.11 In 2009, China accounted for 64.4 percent of the number of IPR-infringing 

articles seized in the EU.12 The top IPR-infringing products from China, in terms of 

number of articles, were tobacco products, clothing and accessories, footwear, and body 

care items.13

 8

CBP and ICE noted that a relatively large seizure ($2.3 million) of computer hardware occurred in FY 

2010. CBP and ICE, CBP, ICE, Intellectual Property Rights Fiscal 2010 Seizure Statistics—Final Report, 

January 2011, 6 (released March 16, 2011). 9

Industry representative, telephone interview by USITC staff, July 13, 2010. 10The types of products seized may also reflect the manner of reporting. For example, the EU reports 

the number of cases and articles, but no values. Japan reports the types of products seized from all sources 

but not for individual countries. However, in Japan, consumer electronics and computers are not among the 

top products seized. 11EC, Taxation and Customs Union, Report on EU Customs Enforcement, 2010, 2. 12Ibid. 

13Ibid., 26–27. 
2-5 

Japan reported that the number of its IPR cases grew by 189 percent during 2004–08; 

China accounted for 81.5 percent of IPR seizure cases and 53.9 percent of the value of 

seized goods in 2008.14 For Japan, the 540 percent rise in the number of cases involving 

seized articles from China far outpaced the increase in total seizure cases during this 

period.15 Japan does not report the type of products that come from a specific country. 

However, the top products from all countries that were seized for IPR infringement in 

Japan in 2008 included handbags, which accounted for 61 percent of IPR cases, followed 

by key cases, watches, apparel, belts, and shoes.16 Given the importance of China in the 

value and number of IPR seizures in Japan, many are likely to be sourced from China. A 

comparison of available data for the United States, the EU, and Japan is provided in table 

2.1. 

TABLE 2.1 Comparison of available IPR seizure statistics—United States, EU, and Japan 

United States 

(2010) EU (2009)a Japan (2008) 

Reporting agency 

Department of 

Homeland 

Security, Customs 

and Border 

Protection 

European 

Commission, 

Taxation and 

Customs Union 

Ministry of 

Finance, 

Customs & Tariff 

Bureau 

Total seizures 

 Value (million $) 187.3 (b) c199.2 

 Articles (number) (b) 117,959,258 944,000 

 Cases (number) 21,321 43,472 26,415 

 

Top source of seizures China China China 

 

Chinese-sourced seizures 

 Value (%) 59.3 (b

) 53.9 

 Articles (%) (b

) 64.4 74.1 

 Cases (%) 52.9 (

b

) 81.5 

Top products seized from China Footwear, 

consumer 

electronics, 

wearing apparel, 

handbags and 

wallets (by value) 

Tobacco products, 

clothing and 

accessories, 

footwear, and body 

care items (by 

number of articles) 

(

b

) 

Sources: EC, Taxation and Customs Union, Report on EU Customs Enforcement, 2010; 

Government of Japan, IPR Protection: The Role of Japan, 2009; CBP, IPR Seizure Statistics, email message to USITC staff, January 2011; Council of Economic Advisors (CEA), 2011 

Economic Report of the President, 2011, table B110. 

 aYears in parentheses denote latest year for which data were available. 

 b

Not available. 

 c

20.6 billion yen converted at a rate of 103.39 yen per dollar in 2008. 

 14Government of Japan, IPR Protection: The Role of Japan, 2009, 21, 24, and 27. Japan reported the 

amount of IPR-related seizures by value for 2008 only and did not report the valuation procedure, e.g., 

domestic value or manufacturer suggested retail price. 15Ibid., 24. 

16Government of Japan, IPR Protection: The Role of Japan, 2009, 22. 
2-6 

Factors Facilitating Counterfeiting 

An important factor facilitating the growth in IPR violations has been globalization and 

the spread of technology that enables simple and low-cost duplication of popular 

products, as well as packaging and labeling.17 As U.S. and other manufacturers moved 

their manufacturing operations abroad to Asia and other regions, opportunities for 

counterfeiting increased from the standpoint of both the production process and the 

import supply chain. The ability to duplicate products and packaging at low cost, coupled 

with opportunities to make high margins on both luxury goods and products consumed 

every day, makes counterfeiting an extremely attractive operation. 18 The footwear 

industry provides an example of how globalization and investments by multinational 

corporations abroad helped to expand counterfeit industries in China (box 2.1). 

 

Most recently, a growing share of the sales and distribution of counterfeits has reportedly 

originated from the Internet. 19 Counterfeits are purchased online and shipped to the 

United States and other markets by postal and express mail services, often in relatively 

small quantities that are difficult to detect.20 Seizure statistics from the United States 

show an increasing share of seizures from air express and postal shipments and a decline 

in the share of seizures from commercial cargo shipments (figure 2.1.F). 21 The EU 

likewise reports an increasing number of seizures from postal and air express mail 

shipments.22

 17Masters, “Counterfeit LAN Technology,” April 2010, 1. 18Industry representatives, interviews by USITC staff, Shanghai, January 12–14, 2011. 19IACC, written submission to the USTR, February 15, 2011, 13; industry representatives, interviews 

by USITC staff, Washington, DC, November 3, 2010, and March 1, 2011. 20Brener, “Enforcement of IPR: Targeting Counterfeit and Piratical Goods,” July 14, 2010; government 

representative, telephone interview by USITC staff, July 22, 2010; government representative, interview by 

USITC staff, Arlington, VA, December 8, 2010; industry representative, telephone interview by USITC staff, 

February 8, 2011. 21Commercial shipments include cargo shipments via air, truck, rail, and sea. The “all other” mode of 

conveyance includes seizures away from ports of entry, and these also grew from 2005 to 2010. Government 

official, e-mail to USITC staff, February 8, 2010. Despite this delineation, CPB and ICE note that the bulk of 

postal and air express shipments are commercial in nature. CBP and ICE, CBP, ICE, Intellectual Property 

Rights Fiscal 2010 Seizure Statistics, January 2011, 11. 22EC, Taxation and Customs Union, Report on EU Customs Enforcement, 2010, 27. 
2-7 

BOX 2.1 The footwear industry and the rise of counterfeiting in China 

The U.S. footwear industry provides an example of the growth in counterfeiting that has 

accompanied the shift of production from the United States to other countries. U.S. footwear 

companies began shifting production to countries with lower labor rates such as Mexico, the 

Caribbean, Central America, and Asia over 20 years ago. By 2009, imports supplied over 99 

percent of U.S. footwear sales by quantity and value ($17.4 billion), with over 75 percent of the 

footwear sold in the U.S. market that year coming from China. 

The expansion of counterfeiting and the effects on U.S. industry 

Clustered industrialization in China and significant capital investments in footwear by 

multinational corporations have served to concentrate expertise in manufacturing facilities in 

China. According to industry sources, this expanded manufacturing base has raised the quality 

of sport shoes made in China while simultaneously lowering production costs. Sources also 

report that counterfeit footwear production thrives under these conditions. 

Industry sources described the rise of “super fakes,” driven by highly specialized workers leaving 

legitimate factories and taking their skills to locations producing counterfeits. These workers 

have access to very specific details about footwear products, allowing them to make close 

copies of the originals. Sources report that imitations often are so convincing that only experts 

who cut open the shoes can determine conclusively whether or not they are legitimate. Industry 

sources reported that counterfeit footwear from China is of superior quality and offered at lower 

prices than counterfeit footwear from any other country in the world. 

According to industry sources, while the total value of counterfeit footwear is unknown, it is 

estimated to be in the billions of dollars. Industry sources report that lost revenue, coupled with 

substantial resources spent protecting IPR, have negatively affected U.S. footwear companies 

and products. Industry sources state that counterfeit products result in lost market share and 

brand tarnishment and also reduce resources that otherwise would be available for advertising, 

R&D, and employing U.S workers. 

Why footwear is a target 

Industry sources said that several traits make footwear especially attractive to counterfeiters. 

First, Chinese consumers are brand-conscious, buoying the demand for branded footwear. 

Athletic shoes in particular are popular in China and have a broad consumer base. Further, 

footwear is easy to copy and mass-produce, since the barriers to entry are relatively low. 

Moreover, trademark enforcement is uneven, allowing counterfeit footwear to be sold in many 

outlets. Finally, the Chinese government pays less attention to counterfeiting in this industry 

because, in contrast to counterfeit toys or food products, counterfeit footwear poses little threat 

to consumer health and safety. 

Enforcement challenges 

Industry sources report that the enforcement of trademarks in footwear production across China 

continues to be inconsistent, both legally and geographically. Sources characterized criminal 

penalties for counterfeiting as “serious,” but noted that the volume of criminal cases is very low 

compared to that of other enforcement activities. While it is illegal to sell counterfeit goods, 

sources report that local authorities look the other way, often after the counterfeiters pay a 

license fee to display their products in local markets. Reportedly, these license fees can be 

substantial enough to be considered important to the local economy. 

Industry sources state that counterfeiting footwear in China is a profitable business and one that 

is likely to exist until its costs increase substantially; for example, as a result of larger criminal 

fines and penalties and destruction of the equipment used to manufacture the products. 

 

Sources: Industry representatives, telephone interviews by USITC staff, July 6–13, 2010, and 

February 10, 2011; Schmidle, “Inside the Knockoff-Tennis-Shoe Factory,” August 22, 2010. 
2-8 

This pattern also holds true for counterfeit goods from China. In 2000, counterfeit goods 

delivered through air express and postal shipments accounted for less than 3 percent of all 

China seizures (by value); however, by 2010, they represented 17 percent of seizures.23 In 

Japan, 33 percent of the counterfeits seized in 2009 were delivered by international post, 

while in the first half of 2010 this figure increased to 79 percent, with 90 percent of such 

deliveries coming from China.24 

Reportedly, growth in IPR-infringing products also may be attributable to the activities of 

organized crime groups that smuggle and distribute counterfeit merchandise for profit. 

According to ICE, in many cases international organized crime groups use profits from 

selling counterfeit goods to bankroll other criminal activities, such as drug and weapons 

trafficking.25 While many of these organized crime groups do not appear to be located in 

China, they reportedly are utilizing the Internet and other supply chains to connect to 

Web sites and counterfeiting activity in China.26 

Limitations of Seizure Data 

In sum, CBP data show that IPR-infringing seizures from China have been increasing; 

however, more information is needed to quantify the overall extent of IPR infringement 

and its effects on the U.S. economy for a number of reasons. First, the CBP data most 

likely underrepresent the degree of IPR infringement, in part because trademarks 

generally must be recorded with CBP to be enforceable at the border, and most trademark 

owners do not take this step. 27 Only about 1 percent of active trademarks in the United 

States have been recorded with CBP. Moreover, most CBP seizures are of products that 

are readily identifiable, whereas many infringing products (e.g., semiconductors or other 

components) may be difficult to identify.28

Second, seizures are dependent on CBP and ICE enforcement practices, including tips 

about potential shipments, whether or not government agencies are targeting certain 

products, and the size of the shipments seized.29 For example, CBP targets IPR-infringing 

products that not only affect innovation but also pose threats to U.S. consumers, such as 

counterfeit personal care items and pharmaceuticals, exploding devices, and products that 

could pose a threat to infrastructure.30 Additionally, there is no information on the extent 

of IPR-infringing shipments that are not seized—thus knowledge of the extent of the 

 23CBP, IPR Seizure Statistics, e-mail message to USITC staff, January 25, 2011. IPR seizures of 

express consignments and postal service shipments from Hong Kong and other countries also increased from 

2000 to 2010. IPR seizures of goods shipped by these modes increased from 12 percent of seizures to 36 

percent of seizures (by value) for countries excluding China. 24IACC, written submission to the USTR, February 15, 2011, 15–16. 25CBP, “Over 4.4 Million Counterfeit Marlboro Cigarettes Seized,” January 14, 2011; ICE, “ICE 

Seizes $1.4 Million in Counterfeit DVDs,” October 20, 2009; Chen, “Smoking Dragon, Royal Charm,” 

October 20, 2008; government official, interview by USITC staff, Arlington, VA, December 8, 2010. 

Industry representatives have noted, for example, close ties between organized crime and smugglers of 

counterfeit cigarettes. Industry representative, interview by USITC staff, Washington, DC, March 16, 2011. 26Government official, interview by USITC staff, Arlington, VA, December 8, 2010. 

27USITC, China IPR and Indigenous Innovation 1, 2010, xvi. 28 Ibid.

29Government official, interview by USITC staff, Arlington, VA, December 8, 2010. Additionally, 

industry sources noted that seizures of counterfeit cigarettes were high in certain years owing to broader 

Federal Bureau of Investigations (FBI) operations involving guns, counterfeit currency, drugs, and 

counterfeit cigarettes smuggled from China. Industry representative, interview by USITC staff, March 16, 

2011. 30CBP, “Overview of IPR Enforcement,” n.d. (accessed March 17, 2011). 
2-9 

problem is incomplete.31 Although U.S. seizure statistics are generally considered more 

comprehensive than those for many countries, CBP and ICE, like comparable agencies in 

other countries, face resource constraints that limit the number of inspections and 

seizures they can carry out.32 However, the seizure data do suggest the growth of the 

problem as well as China’s increasing role in counterfeit trade. 

Third, data on IPR-infringing seizures in the United States do not provide information 

about the further problem of production and counterfeit sales in China itself, which may 

displace U.S. exports as well as sales by U.S. companies manufacturing in China for the 

Chinese and other markets.33

IPR Infringement in China and the Role of the Internet 

The growing popularity of online marketplaces presents significant opportunities and 

challenges for U.S. firms. With the global reach of the Internet, sellers can 

instantaneously reach customers around the world; however, customers also can be more 

easily induced to purchase counterfeit products. Unlike a street vendor who plainly 

operates outside of normal channels, online suppliers of counterfeits are often 

indistinguishable from legitimate sources. Price differences online between legitimate 

products and counterfeits may not be large enough to alert the consumer that the product 

is counterfeit rather than just a good deal. Moreover, Web sites offering infringing goods 

often mimic legitimate sites, from page layouts to the prominent display of brand 

names.34

Besides facilitating the movement of physical goods, the Internet also enables consumers 

to locate infringing digital content, such as movies and music for download and 

consumption. Government detection of infringing digital goods, which are delivered 

through decentralized computer networks and involve no physical movement of products, 

is enormously challenging. No U.S. government agency systematically collects or tracks 

data on the size or scope of digital piracy.35 

These problems are not limited to China. Currently, the majority of Web sites offering 

infringing goods and digital content are hosted in the United States and Europe; the 

availability of reliable high-speed infrastructure is an important factor in choosing host 

locations.36 The rapid growth of China’s Internet population and infrastructure thus raise 

concerns for IP-intensive firms. China has the largest population of Internet users in the 

world. As of December 2010, China had an estimated 457 million Internet users 

(compared to approximately 223 million in the United States). Moreover, approximately 

90 percent of Chinese users access the Internet through high-speed broadband 

 31USITC, China IPR and Indigenous Innovation 1, 2010, 2-11. The OECD also noted that customs 

agencies across countries have limited resources to screen all shipments for IPR-infringing goods. OECD, 

The Economic Impact of Counterfeiting and Piracy, 2008, 16. 32USITC, China IPR and Indigenous Innovation 1, 2010, 2-10. 33Industry representatives, interviews by USITC, Shanghai, January 12–14, 2011. 34Industry representative, interview by USITC staff, Washington, D.C., November 3, 2010; industry 

representative, telephone interview by USITC staff, February 9, 2011; GIPC, “Online Piracy and 

Counterfeiting Overview,” March 2010, 3–4. 35GAO, “Intellectual Property,” April 2010, 8. 

36MarkMonitor, “Traffic Report,” January 2011, 4. 
2-10 

interconnections, enabling them to rapidly download large files, such as movies, 

television shows, and video games.37

Counterfeiting and Piracy on the Internet 

A variety of mechanisms enable the online sale of infringing physical goods and the 

piracy of copyrighted digital content such as music and movies. Descriptions of these 

mechanisms appear below, along with examples, where available, of the size and scope 

of such activities associated with China. 

Online Marketplaces for Counterfeits 

Chinese counterfeits are offered in vast quantities on online marketplace sites. Online 

counterfeiters in China reportedly operate through thousands of separate platforms and 

domain names, auction sites, and trade portals, which offer a wide variety of infringing 

products and provide discounts for large purchases (table 2.2).38 Moreover, products from 

these Chinese marketplace sites frequently show up for sale on eBay, Amazon 

marketplace, Craigslist, and other sites, where unsuspecting customers may believe they 

have found a discounted legal product rather than a fake.39

TABLE 2.2 Examples of Chinese online marketplaces reportedly associated with infringing 

products 

Alibaba.com 

Aliexpress.com 

DHgate.com 

Diytrade.com 

Globalsources.com 

iOffer.com 

LinkChina.com 

Made-in-China.com 

Made-cigarettes.com 

Olymal.com 

Taobao.com 

Tradekey.com 

Trademe.com 

Tradetang.com 

Tradett.com 

Sources: USTR, “Notorious Markets Review,” Feb. 28, 2011; IACC, written submission to USTR, 

Feb. 15, 2011; Beachbody, written submission to USTR, Feb. 15, 2011; SIIA, “China Marketplace 

Summary,” 2010; industry representative, e-mail message to USITC staff, March 22, 2011; BSA, 

“Software Piracy on the Internet,” October 2009, 8; and IIPA, written submission to the USITC, 

July 9, 2010, 12. 

IPR owners use notice and takedown procedures in attempting to address online 

infringement in China. Under these procedures, the owner sends notice of the infringing 

product or content to the Internet Service Provider and requests that the listing be taken 

down. If the service provider does so immediately, it may have a “safe harbor” from an 

infringement claim under applicable Chinese regulations.40 However, when the process is 

not effectively structured—for example, when repeat offenders are able to simply repost 

 37International Intellectual Property Alliance (IIPA), Special 301: China, 2011, 60; IIPA, written 

submission to the USITC, June 3, 2010, 11. 38IACC, written submission to USTR, February 15, 2011, 19; SIIA, “China Marketplace Summary,” 

2010; BSA, “Software Piracy on the Internet,” October 2009, 8; IIPA, written submission to the USITC, July 

9, 2010, 12. As part of a Special Campaign to Combat IPR infringement begun in October of 2010 and 

continuing through June 2011, China reportedly has pursued increased enforcement activities against 

counterfeit and pirated materials offered online. Xinhua News, “China Cracks Down,” April 8, 2011. 39SIIA, “China Marketplace Summary,” 2010; industry representative, interview by USITC staff, 

November 3, 2010; Beachbody, written submission to USTR, Feb. 15, 2011; industry representative, 

telephone interview by USITC staff, February 9, 2011. 40Song, “A Comparative Copyright Analysis,” July 2010. 
2-11 

their infringing products immediately—it has been likened to a “whack-a-mole” game,41

where infringing listings are removed one day only to pop up the next (box 2.2). 

In one attempt to quantify a portion of this online activity, the Software & Information 

Industry Association (SIIA) reported that, in 2010, it obtained the removal of 

approximately 4.6 million units of infringing software offered for sale on the DHgate and 

Alibaba sites, using notice and takedown procedures. The SIIA valued the infringing 

software listed on the sites at approximately $1.2 billion, using the “buy it now” price 

advertised on the site. The SIIA focused its online monitoring and enforcement efforts on 

DHgate and Alibaba because these sites had the largest offerings of infringing products. 

Resource constraints reportedly precluded addressing counterfeits on other high-volume 

Chinese marketplaces that target international consumers. 42 Similarly, Nintendo of 

America reportedly sent 59,000 takedown notices in 2010 to online marketplaces based 

in China seeking to have listings of infringing products removed.43

Because of resource constraints, these takedown activities generally focus only on a few 

prominent Web sites selling large amounts of counterfeit products from China, and thus 

likely represent only the tip of the iceberg with regard to Internet-related infringement in 

 41Industry representative, interview by USITC staff, Washington, DC, November 3, 2010; industry 

representatives, telephone interviews by USITC staff, February 9, 11, 2011. 42SIIA, “China Marketplace Summary,” 2010. 

43Nintendo of America Inc., written submission to the USTR, February 15, 2011, 24. 

BOX 2.2 Reported problems with notice and takedown procedures in China 

Industry sources have reported the following problems with notice and takedown procedures in 

China: 

 The number of separate Web sites and listings of infringing material is so large that IPR 

owners can go after only a small fraction of the universe of infringing material online. 

 Sellers often have the ability to relist products instantly after they are removed—for 

example, with a new page title or contact name. 

 Repeat infringers list infringing products with impunity. 

 Some sites require extensive proof of infringement and/or do not respond to takedown 

requests. Small online sellers in particular often ignore notices. 

 Service providers do not take a proactive approach to identifying and removing IPRinfringing materials. 

 Some industry sources do not consider Chinese courts an effective avenue for relief if 

takedown procedures are ineffective or ignored. 

Technology-based solutions may provide some assistance. For example, according to public 

reports, Microsoft uses its own artificial intelligence system to scan the Web for suspicious, 

popular links offering counterfeit or pirated products and sends notice and takedown requests to 

service providers. However, counterfeiters also have automated systems that replace the links 

that Microsoft succeeds in taking down. Reportedly, Microsoft has significantly increased its 

reliance on its automated systems; instead of pursuing removal of 10,000 links a month, the 

total is now 800,000 links each month. 

 

Sources: SIIA, “China Marketplace Summary,” January 2011; Vance, “Chasing Pirates,” 

November 6, 2010; industry representative, interview by USITC staff, Washington, DC, 

November 3, 2010; industry representatives, telephone interviews by USITC staff, February 9, 

11, 2011. 
2-12 

China.44 The enforcement activities of just one SME provide an indication of the vast 

size and scope of the problem (box 2.3). 

Digital Piracy Mechanisms 

There are several distinct mechanisms by which copyright-infringing digital content 

(rather than physical goods) may be distributed online (table 2.3). Although each of these 

distribution methods may be used for legal file sharing, analyses of online traffic show 

that illegitimate uses of the mechanisms dwarf legitimate ones. A recent analysis of 

Internet traffic commissioned by NBC Universal, for example, found that approximately 

99 percent of BitTorrent traffic on peer-to-peer (P2P) networks and 91 percent of 

cyberlocker traffic on the Internet is copyrighted content being shared illegally.45

 44On a positive note, some IPR industries recently have reported higher levels of cooperation with some 

Chinese portal owners leading to prompter takedowns of infringing products. Thus, for example, the Motion 

Picture Association of America (MPAA) reports that in 2010, IPR-infringing listings on Alibaba were a 

fraction of what they have been in previous years, when USTR identified Alibaba as a “notorious online 

market.” Nintendo and MPAA also report improvement with Alibaba’s affiliate, Taobao, although SIIA 

reports that it has not had success removing infringing material from the site. On March 14, 2011, Taobao 

announced a major campaign to stop online counterfeiting and piracy. MPAA, “Public Comment on the 

2010 Special 301 Review,” November 5, 2010, 7; SIIA, “China Marketplace Summary,” 2010; Nintendo of 

America Inc., written submission to the USTR, February 15, 2011, 24; People’s Daily Online, “China ECommerce Giant,” March 15, 2011. 45These percentages exclude pornography exchanged through these mechanisms. Envisional Ltd., “An 

Estimate of Infringing Use of the Internet,” 2011, 2. P2P, BitTorrent, and cyberlocker are defined in table 2.3. 

BOX 2.3 Online enforcement activities of one SME 

In 2010, Beachbody, LLC, an SME that produces copyright and trademark-protected exercise 

videos, undertook the following online enforcement activities: 

 Removed more than 110,000 online marketplace listings for counterfeit products; 

 Took action against more than 3,500 Web sites selling counterfeit products; 

 Removed more than 5,700 sponsored links and organic listings of Web sites selling 

counterfeit products through search engines such as Google, Yahoo!, and Bing; 

 Sent out more than 23,000 takedown notices to online sellers of counterfeits; and 

 Removed more than 6,000,000 links to streaming or downloadable infringing copies of 

its exercise videos. 

Beachbody estimates that it loses well in excess of $50 million each year due to counterfeit and 

pirated products, and that at least 70 percent of the infringing activities described above 

involved Chinese infringers. 

 

Source: Jonathan Gelfand (senior vice president business development and general counsel, 

Beachbody, LLC), e-mail message to USITC staff, March 18, 2011. 
2-13 

TABLE 2.3 Digital piracy mechanisms with Chinese examples 

Mechanisms Definition and Chinese examples 

P2P networks P2P technology connects individual computer users to each other directly, without a central point 

of management or server-hosting content. Users download and install a P2P client application 

that enables them to search for and download files on other users’ computers. Popular P2P 

protocols include BitTorrent. 

Xunlei, BTPig, Kugou or Kugoo, and other Chinese-based services provide P2P client software 

and an indexed platform to assist in large-scale illegal file sharing. Their activities particularly 

affect music, audiovisual, business and entertainment software, and digitized books and journals. 

 

Cyberlockers These sites allow users to copy digital media, such as music, movies, and other content, onto a 

site operator’s server for the user to access at any time. The site generates a link to download the 

content, which users may stream or share with others in forums, blogs and Web sites. 

The movie and recording industries report that more than 100 major cyberlocker sites operate 

from China, including Rayfile, Namipan, and 91files. 

Streaming sites These sites enable visitors to access digital content online by streaming. Unlike cyberlockers, 

streaming sites do not transfer files to users. The site may also allow users to submit their own 

content (this is known as UGC—user-generated content). 

China-based TVAnts reportedly illegally streams live U.S. professional sports event, and profits 

from the stream by selling advertising on its media player. Packages of pay-TV channels, 

including the Cartoon Network, CNN, Discovery Channel, Disney Channel, ESPN, and HBO, 

reportedly are regularly available for streaming in China. 

Deep linking Deep linking occurs when a Web site displays a link to content other than the home page of 

another Web site. 

The music industry reports that Baidu, Sogou, Gougou, and many others offer deep links to 

thousands of infringing song files and obtain substantial advertising revenues from these services. 

Sources: BSA, “Software Piracy on the Internet,” October 2009, 8; IIPA, written submission to the USITC, July 9, 

2010, 12; IIPA, written submission to the USTR, February 15, 2011; Sports Coalition, written submission to the USTR, 

February 18, 2010; Cable and Satellite Broadcast Association of Asia, written submission to the USTR, February 18, 

2010. 

Monitoring of digital piracy activities provides a sense of the size and scope of online 

infringement. However, this monitoring generally requires sophisticated and costly 

techniques; those firms that can afford to do so often hire experts. The online monitoring 

agency DtecNet, for example, conducts global scanning of P2P infringements of video 

games, movies, and TV shows for firms in these copyright industries. In 2010, it ranked 

China the world’s second heaviest offender in terms of digital piracy (after Italy) with a 

total of 70.1 million downloads, of which about 66 percent were movies (46.2 million 

downloads), 24 percent were video games (16.8 million downloads), and 10 percent (7 

million downloads) were TV shows.46

IPR Infringement and the Internet: Information Gaps 

There are many information gaps with respect to online infringement that make it 

difficult to quantify the overall size and scope of the problem across industry sectors. 

First, countless times each day, files are exchanged and Web sites offering counterfeits 

are established. As a result, estimates of online activity tend to be small snapshots of the 

total, especially given that the activity being tracked is illegal and meant to avoid official 

 46DtecNet, “China P2P Infringements in 2010,” January 7, 2011, 2. 
2-14 

detection. Interviews with industry representatives confirm this challenge, as all stated 

that they only had the ability and/or resources to track a small fraction of the 

infringement of their products occurring online.47

Second, measuring the size and scope of the problem and its effect on the U.S. economy 

are two substantially different tasks. Inferences about the effect of infringement on the 

economy often rely on assumptions about the substitution rate—the rate at which 

consumers who access infringing material would have bought a legitimate copy had the 

pirated version not been available. This rate is difficult to calculate, since it depends on 

predicting consumer behavior. Rates also vary by country, by demographic factors such 

as age or income, and by product type. As further discussed below, the calculation of 

substitution rates introduces substantial uncertainty into the determination of the effects 

on the U.S. economy of IPR infringement. 

Third, the interaction between market access restrictions in China and infringement also 

makes it extremely difficult to identify the effects of IPR infringement on U.S. firms. 

Significant market access restrictions for movies, music, and other content in China 

directly limit the legitimate supply of these products and thereby increase the demand for 

pirated content, reportedly wreaking havoc on U.S. firms’ business models in China.48

The interaction between market access restrictions and piracy in the sound recording 

industry is explored in box 2.4. 

 47Industry representatives, telephone interviews by USITC staff, December 15, 2010–February 11, 

2011. 48Independent film producers report, for example, that they are unable to raise money to finance the 

production and distribution of films in China because market access restrictions and high piracy rates 

undermine virtually all legitimate market opportunities, and also make it difficult to quantify the value of the 

lost market. Industry representative, telephone interview by USITC staff, November 3, 2010; IFTA, written 

comments on ITA review of government programs, October 29, 2010. 
2-15 

BOX 2.4 Case study: Music piracy in China

China is the largest pirate marketplace in the world for music, with piracy rates of over 90 

percent in both the online and physical domains, according to the U.S. sound recording 

industry. Market access restrictions, including greater censorship requirements for foreign 

music and difficulties obtaining online distribution licenses from the Chinese government, also 

have severely limited the legal music business in China. 

Deep Linking, P2P Filesharing, and Baidu 

Online infringing music in China is accessed in many ways, but the practice of deep linking is 

currently of the most concern to the industry. As part of their music services, China’s popular 

search engine Baidu, and others such as Sogou/Sohu and Gougou, have specialized MP3 

search functions that provide links to infringing downloads and music streams. These features 

profit the search engines through advertising revenue, which also gives them incentives to 

promote their services with top new music charts and self-maintained song indexes. 

Baidu is considered particularly notorious, with estimates that half of infringing music 

downloads in China are accessed through its service. The results of a case brought against 

Baidu in January 2010 were disappointing for the recording industry when a Beijing court found 

that Baidu did not have reason to know the material it linked to was infringing. Contrary to this 

finding, some observers believe that Baidu is well aware of, and may participate in, copyrightinfringing music access. Arguably emboldened by the Baidu decision, there are reportedly 

thousands of Web sites that now offer specialized deep linking services in China. On a more 

positive note, Baidu reported in April 2011 that it would be launching a licensed music service 

soon and that a licensing agreement with Chinese rightsholders had been reached. Baidu has 

not yet announced any agreement with U.S. rightsholders. 

P2P filesharing of music files is also a substantial problem in China. However, recent steppedup enforcement activities by the Chinese government, as part of the Special Campaign on IPR 

Protection begun in October 2010, have had positive effects. One of the largest perpetrators, 

VeryCD, reportedly suspended all links to infringing music and movie content in January 2011. 

Two other online music portals, qishi.com and 5474.com, were shut down in November 2010, 

with the site operators subjected to criminal sentences and fines. 

Industry Loss Estimates 

Various methods have been used to quantify industry losses due to music piracy in China. One 

way has been to compare music sales in China with those of countries with similar per capita 

GDP and Internet characteristics. For example, according to IIPA, total revenues from 

legitimate music sales in China were $124 million in 2009. In Thailand—which has a population 

that is 5 percent the size of China’s and a roughly equivalent per capita GDP, but a lower 

piracy rate and a more open market—sales were $142 million. If China’s music sales were 

equivalent to those of Thailand on a per capita basis, they would be $2.8 billion larger. 

Surveys of consumer song valuation and acquisition behavior have also been used. In the 

Baidu case, the industry estimated losses of $17.6 million for the 127 songs at issue in the 

lawsuit based on an extrapolation of survey data for the average number of songs downloaded 

to all Baidu users, multiplied by an average price and profit per track, and taking into account 

market share data. Using this methodology, the industry has estimated $581 million in total 

losses in China related to Baidu from 2006–07. 

 

Sources: IIPA, written submission to the USITC, July 9, 2010, 7, 11, 13; industry 

representative, interview by USITC staff, Washington, DC, November 9, 2010; industry 

representative, interview by USITC staff, Hong Kong, January 3, 2011; industry representative, 

e-mail message to USITC staff, March 10, 2011; IFPI, Digital Music Report, 2010, 1; IFPI, 

“Recording Industry Key Concerns,” September 2010; IIPA, “Special 301 Report,” February 15, 

2011, 5, 60–61, 64; Liu, “The Tough Reality of Copyright Piracy,” 2010, 630; Lee, “Baidu to 

Launch Licensed Music Service,” April 6, 2011. 
2-16 

Approaches to Measuring IPR Infringement and Indigenous 

Innovation 

This review builds upon the findings reported in the first USITC report on the empirical 

literature studying the costs of IPR infringement to the United States and worldwide. This 

section focuses on a narrower set of studies that provide direction for the analysis in later 

chapters and situate the approach used in this report in the broader literature. This chapter 

also identifies links that have been made between IPR protection and employment, and 

describes the limited existing literature on China’s recent and rapidly evolving 

indigenous innovation policies. 

The Costs of IPR Infringement 

Studies have examined the costs of IPR infringement on various dimensions of the global 

economy, as well as on the United States and on other economies separately. However, 

no studies to date have comprehensively examined the impact of Chinese infringement on 

the U.S. economy, the focus of this report, nor have they used a computable general 

equilibrium (CGE) framework to assess the potential economic impact on one country 

(the United States) of better IPR protection in another (China). 

Global Effects of Global Infringement 

One of the most comprehensive studies of global effects from IPR infringement was 

published by the OECD in 2008.49 The OECD relied on global customs seizure data to 

estimate the worldwide value of infringing trade (up to $250 billion for 2007) and the 

share of counterfeit and pirated goods in world trade (1.9 percent for 2007). As noted in 

the first USITC report, assumptions underlying these estimates are problematic.50

Most recently, Frontier Economics, working on behalf of the International Chamber of 

Commerce (ICC)/Business Action to Stop Counterfeiting and Piracy (BASCAP), updated 

the OECD analysis to include seizure data for 2008.51 Based on this seizure data and 

additional analyses, the report estimates a range of $455–$650 billion in worldwide sales 

of counterfeit and pirated products, comprising $285–$360 billion in internationally 

traded infringing products; $140–$215 billion in domestically produced and consumed 

infringing products; and $30–$75 billion in digitally pirated products. 

A number of earlier studies of the global effects of IPR infringement have been criticized 

by the U.S. Government Accountability Office (GAO) and researchers in the field. GAO 

finds, for example, that various estimates sourced to government agencies could not be 

traced back to an original data source or methodology. 52 Researchers identify industry 

 49OECD, The Economic Impact of Counterfeiting and Piracy, 2008; OECD, Magnitude of 

Counterfeiting and Piracy, 2009. This study is identified in table 1.1. 50USITC, China IPR and Indigenous Innovation 1, 2010, 2-11. Despite the drawbacks, the Commission 

has used the seizure statistics here for three limited ends: providing insight into what types of goods are 

commonly seized, discerning trends, and identifying sectors that experience IPR infringement in order to 

select a representative sample of IP-intensive industries for our survey. 51Frontier Economics, “Estimating the Global Economic and Social Impacts of Counterfeiting and 

Piracy,” February 2011. This study is identified in table 1.1. 52GAO, Intellectual Property, 2010, 18–20. 
2-17 

studies that are not transparent in their sources or underlying assumptions.53 In addition, 

when they can be identified, many key assumptions that drive estimates involve 

substitution rates and the value assigned to the counterfeits, which can range from the 

very low price of a fake on the street to the much higher retail price of the legitimate 

good. 

Effects on U.S. Economy of Global Infringement 

The USITC’s 1988 study of foreign IPR protection examined impacts of IPR 

infringement (worldwide) on the entire U.S. economy. 54 Limitations of that study 

included a relatively small sample of respondents, the self-reported nature of the 

empirical loss estimates, and the difficulty in extrapolating beyond the respondents to the 

entire economy. For the current report, the Commission produced a larger and more 

representative sample of the U.S. economy, and built into the questionnaire a means of 

checking the validity of loss estimates reported by respondents. 

 

Sector-Specific Studies of IPR Infringement 

In examining losses in particular IPR-intensive sectors, a crucial issue is the extent to 

which sales of infringing products translate into lost sales of legal products. Counterfeit 

and pirated products are often not perceived as perfect substitutes for the legitimate 

versions, and even when they are, consumers would not necessarily replace cheaper 

infringing goods with legal items on a one-for-one basis. A 2009 study addresses the 

difficulties involved in estimating these parameters and discusses empirical research that 

has attempted to shed light on the substitutability and demand elasticity of IPR 

products.55

The literature related to the infringement of digital goods, for example, reveals a fairly 

wide range of substitution rates. Substitution rates generally are reported to be higher for 

movies than for music, with the research suggesting that infringing sales displace legal 

ones at rates between 45 and 67 percent.56 However, most studies focus on Western 

consumers; little is known about whether the rates are similar in China. One of the few 

exceptions is a 2010 study that found that each unpaid movie viewing displaced only 0.14 

paid viewings among the Chinese college students surveyed and approximately zero 

displacement among the general Internet users surveyed.57 The music industry has been 

studied more extensively, with some researchers finding music substitution rates for 

Western consumers that range between 15 and 20 percent.58

Studies are not always transparent in their analysis of substitution rates. One conducted 

on behalf of the Motion Picture Association (MPA) by LEK Consulting estimated global 

 53Chaudhry and Zimmerman, The Economics of Counterfeit Trade, 2009, 11–17. 54USITC, Foreign Protection of Intellectual Property Rights, 1988, appendix H. This study is identified 

in table 1.1. 55Watt, “An Empirical Analysis of the Economics of Copyright,” 2009, 65–99. 56Frontier Economics, “Estimating the Global Economic and Social Impacts of Counterfeiting and 

Piracy,” 32, February 2011; Rob and Waldfogel, “Piracy on the Silver Screen,” 2007. 57Bai and Waldfogel, “Movie Piracy and Sales Displacement,” 2010; see also Martikainen, “Does FileSharing Reduce DVD Sales?” 2010; Smith and Telang, “Competing with Free,” 2009. 58Frontier Economics, “Estimating the Global Economic and Social Impacts of Counterfeiting and 

Piracy,” 28-29, February 2011; Waldfogel, “Music File Sharing in the iTunes Era,” 2009, 8 (noting a range 

between 0 and 30 percent). 
2-18 

losses to MPA members due to Internet and hard-goods piracy were $6.1 billion in 2005, 

with piracy rates the highest in China (over a 90 percent potential market loss), resulting 

in an estimated $244 million in lost revenue there.59 However, because only a summary 

of the study has been publicly released, the substitution rates applied, survey 

methodology, and manner of calculating losses are not clear. 

The Business Software Alliance (BSA) and International Data Corporation (IDC) publish 

annual piracy estimates for business software based on country surveys. The most recent 

of these found that China had an estimated 79 percent piracy rate in 2009, with the 

commercial value of unlicensed software in China estimated at approximately $7.6 

billion.60 The report uses the term “commercial value of pirated software” in place of the 

previous term “losses,” recognizing that not all pirated software users would obtain a 

legal copy at the average market price if the pirated software were not available. 

Studies of Other Countries 

Two consulting firms (TERA Consultants and Frontier Economics), both working on 

behalf of ICC/BASCAP, published reports quantifying employment and other effects of 

piracy beyond the United States.61 TERA Consultants’ report estimated the effect of 

piracy on EU employment for the “most at risk” creative core industries and supporting 

noncore industries, based on Eurostat data and country-specific and industry-specific 

survey results.62 The study found a total of €9.9 billion ($12.6 billion) in retail losses for 

the creative industries in the EU, with 186,400 direct and indirect job losses. 63 Frontier 

Economics studied four at-risk industries: luxury goods, food and beverage products, 

pharmaceuticals, and software. The study estimated that the UK government lost €4.1 

billion ($5.2 billion) in taxes and higher welfare spending, while the Mexican 

government lost €1.4 billion ($1.8 billion), and that 380,000 and 480,000 jobs were lost 

due to piracy and counterfeiting in the United Kingdom and Mexico, respectively. 

Statistical Studies of Infringement’s Impact on U.S. Firms 

As noted earlier, chapter 4 of this report provides results of an econometric analysis 

conducted by the Commission using publicly available data to estimate the impact of IPR 

infringement in China on U.S. exports, FDI, and licensing receipts. In examining 

potential effects of stronger IPR protection on exports, previous studies have identified 

two possibly offsetting impacts: a market-expansion effect and a market-power effect.64

The market-expansion effect of stronger IPR protection suggests that exporters are 

concerned that their goods will be imitated or reverse-engineered in foreign markets with 

weak protection, limiting their market opportunities; therefore, if IPR protection were to 

increase in China, U.S. exports to China would increase. Conversely, improved IPR 

 59LEK, “The Cost of Movie Piracy,” 2005. This study is identified in table 1.1. 60BSA and IDC, “Seventh Annual BSA/IDC Global Software and Piracy Study,” 2010. This study is 

identified in table 1.1. 61TERA Consultants, “Building a Digital Economy,” 2010; Frontier Economics, “The Impact of 

Counterfeiting on Governments and Consumers,” 2009. These studies are identified in table 1.1. 62The four core industries analyzed are recorded music, film, TV series, and software. The noncore 

industries convey goods and services to consumers. TERA Consultants, “Building a Digital Economy,” 2010, 

5. 63Euros were evaluated at the exchange rate prevailing on August 27, 2010, which was $1.27 per euro. 64Smith, “Are Weak Patent Rights a Barrier to U.S. Exports?” 1999; Yang and Huang, “Do Intellectual 

Property Rights Matter to Taiwan’s Exports?” 2009. 
2-19 

protection may trigger the market-power effect if exporters use the monopoly power 

associated with IPR protection to reduce export sales and raise prices. These effects 

depend, in part, on the imitative capabilities of firms in the importing country.65

Studies have generally found that exports increase with improved destination-country 

IPR protection. 66 Moreover, the literature suggests that this effect is even more 

pronounced when the goods exported are high-technology or patent-intensive67 and when 

the importing country has strong imitative capacity, as measured by such indices as high 

levels of R&D or high employment of scientists and engineers in the importing country.68

However, some research has found increased IPR protection to be negatively associated 

with U.S. exports, consistent with the “market power” theory explained above. In other 

words, firms facing less competition abroad from counterfeits may raise prices and 

reduce the volume of export sales, possibly reducing their total dollar value.69

Turning to impacts on FDI, the empirical literature finds that stronger host-country IPR 

protection is associated with greater inbound FDI. This is particularly true in industries 

with high R&D or technology intensity,70 and for multinational corporations (MNC) that 

receive larger technology payments from their affiliates.71 Different types of FDI are 

affected differently: stronger IPR protection tends to attract more production-oriented 

FDI, while countries with weaker IPR are more likely to find that FDI by MNCs is 

limited to marketing operations. 72 As for licensing revenues, both U.S. firms 73 and 

Japanese firms74 have been shown to charge higher prices in countries with stronger IPR 

 65While conceptually these two effects exist, no previous studies have attempted to estimate their 

separate impacts; similarly, in the current study only their net impact will be estimated. 66Branstetter et al., “Intellectual Property Rights, Imitation, and Foreign Direct Investment,” 2007; 

Smith, “Are Weak Patent Rights a Barrier to U.S. Exports?” 1999; Falvey, Foster, and Greenaway, “Trade, 

Imitative Ability and Intellectual Property Rights,” 2009; Ivus, “Do Stronger Patent Rights Raise High-Tech 

Exports?” 2010; Maskus and Penubarti, “How Trade-Related Are Intellectual Property Rights?” 1995; 

Vichyanond, “Intellectual Property Protections and Patterns of Trade,” 2009; Yang and Huang, “Do 

Intellectual Property Rights Matter to Taiwan’s Exports?” 2009. The paper by Branstetter et al. uses the 

number of new goods exported to a country that has undergone patent reform as a measure of exports. 

Counting new goods avoids the problem that exists when using the value of exports, i.e., determining whether 

increases in values are due to increases in quantities exported (the market expansion effect) or increases in 

prices (the market power effect). 67Ivus, “Do Stronger Patent Rights Raise High-Tech Exports?” 2010; Vichyanond, “Intellectual 

Property Protections and Patterns of Trade,” 2009. However, Fink and Primo Braga, 2005, find the opposite 

result—that stronger patent protection reduces exports in high-technology sectors. 68Falvey, Foster, and Greenaway, “Trade, Imitative Ability and Intellectual Property Rights,” 2009; 

Ivus, “Do Stronger Patent Rights Raise High-Tech Exports?” 2010; Smith, “Are Weak Patent Rights a 

Barrier to U.S. Exports?” 1999. 69These include An, Maskus, and Puttitanun, “Duration of Rent Extraction and the Entry Mode 

Decision,” 2008; Nair-Reichert and Duncan, “Patent Regimes, Host-Country Policies, and the Nature of 

MNE Activities,” 2008 (for exports to unaffiliated parties). 70Nair-Reichert and Duncan, “Patent Regimes, Host-Country Policies, and the Nature of MNE 

Activities,” 2008; Smith, “How Do Foreign Patent Rights Affect U.S. Exports, Affiliate Sales, and 

Licenses?” 2001. 71Branstetter et al., “Intellectual Property Rights, Imitation, and Foreign Direct Investment,” 2007. 72Smarzynska Javorcik, “The Composition of Foreign Direct Investment,” 2004. 73An, Maskus, and Puttitanun, “Duration of Rent Extraction and the Entry Mode Decision,” 2008; 

Branstetter, Fisman, and Foley, “Do Stronger Intellectual Property Rights Increase International Technology 

Transfer?” 2006; Branstetter et al., “Intellectual Property Rights, Imitation, and Foreign Direct Investment,” 

2007; Nair-Reichert and Duncan, “Patent Regimes, Host-Country Policies, and the Nature of MNE 

Activities,” 2008. 74Wakasugi and Ito, “The Effect of Stronger Intellectual Property Rights on Technology Transfer,” 

2009. 
2-20 

protection. These effects, as with exports and FDI, vary across products and are stronger 

for MNCs that are more reliant on patents and/or royalty and license fees. 

It should be noted that an increase in FDI could substitute for exports from the United 

States, thereby reducing U.S. activity by the parent firm. This could happen if an MNC 

chooses to serve a foreign market by producing in that market rather than exporting to it. 

Conversely, an increase in U.S. outbound FDI could lead to more exports of the U.S. 

parent to its own affiliate, increasing production in the parent firm. This could happen, 

for example, if the production process is fragmented, so that parts or components are 

exported from the United States for final assembly in another country.75 On balance, 

however, studies suggest that production by U.S. parents and their foreign affiliates is 

likely to either grow or contract together. U.S. parents with expanded affiliate sales are 

likely to export more to their foreign affiliates, to receive greater license and royalty 

payments from their foreign affiliates, and to engage in more general headquarters 

activities to oversee and coordinate their foreign affiliates, than are U.S. companies with 

little or no foreign affiliate sales.76 This general complementarity between different kinds 

of MNC activity needs to be taken into account in assessing the effects of any potential 

change in IPR protection in China on the U.S. economy, and is discussed in chapter 4. 

The Effect of IPR Infringement on Employment 

The few empirical studies that have produced estimates of the U.S. employment effects 

of IPR infringement relate to individual economic sectors. These studies typically rely on 

surveys of consumer and/or commercial users from a sample of countries to estimate 

piracy. Associated job losses are calculated using various multipliers. While 

methodological concerns have been expressed about these studies, they do show 

considerable job losses associated with IPR infringement. For example, a BSA and IDC 

study of the business software sector estimates that lowering the piracy rate for PC 

software from 43 percent to 33 percent in the 42 countries covered by the study would 

result in an additional 500,000 jobs in those countries.77

A study commissioned by the Institute for Policy Innovation (IPI) examines economywide effects of piracy in the U.S. motion picture, sound recording, packaged software, 

and video games industries. 78 Using multipliers from the U.S. Department of 

Commerce’s Regional Input-Output Modeling System (RIMSII), the study estimates both 

direct and indirect job losses due to piracy. According to this study, global piracy results 

in a total of 373,375 jobs lost in the United States, with the bulk of job losses 

representing the indirect impact of global piracy on noncopyright U.S. industries. The 

GAO has criticized studies using multipliers, noting they only account for a one-time 

change in employment and they assume no re-employment in other industries.79

 75See also Branstetter, Fisman, and Foley, “Do Stronger Intellectual Property Rights Increase 

International Technology Transfer?” 2006. 76Examples of evidence of positive linkages between domestic activity and investment abroad include 

Desai, Foley, and Hines, “Foreign Direct Investment and Domestic Economic Activity,” 2005, and Hanson, 

Mataloni, and Slaughter, “Expansion Abroad and the Domestic Operations of U.S. Multinational Firms,” 

2003. Also, Koncz, “International R&D, Technological Capability, and Productivity,” 2010, finds that 

increased R&D in affiliates of U.S. MNCs enhances productivity in the parent company. 77BSA, “Piracy Impact Study,” 2010. 

78Siwek, “The True Cost of Copyright Piracy to the U.S. Economy,” 2007. 79GAO, Intellectual Property, 2010, 23. 
2-21 

Patent Protection and Employment Effects 

The sector-specific studies of IPR infringement mentioned above do not generally 

address patent infringement. However, two recent papers have explored how this might 

be done. One notes that uncertainty over the profitability of patents results in a loss to a 

firm in value and in its ability to finance future R&D activities.80 Conversely, an increase 

in the returns to patented activities results in an increase in company value, thereby 

raising expenditures on both R&D and employment, given that the stream of returns is 

associated with those activities. As an example, the paper estimates that a 2 percent 

increase in value for firms in high-technology industries would result in increased 

research and investment, generating returns that would add 25,000 jobs per year. A 

second paper suggests that reduced value in patents and patented technology could result 

in firms being less willing to add employees to produce new technology, as well as to 

supply new plant, equipment, components, and services.81

Indigenous Innovation 

Most observers see the January 2006 Medium- to Long-Term Plan for the Development 

of Science and Technology (MLP) as the founding document of China’s indigenous 

innovation policies. One goal of this wide-ranging plan is for China to reduce its 

economic dependence on foreign companies and foreign technology, a goal that makes 

the plan relevant both to U.S. firms and to the U.S. economy. However, little research has 

examined the effects of those policies outside of China, or on the United States in 

particular.82

A recent study evaluates the implementation, through mid-2010, of the policies set forth 

in the MLP. It concludes that foreign companies have reason for concern, but that the 

actual implementation of the policies has fallen far short of the government’s goals, for 

reasons including strong protests from foreign companies, foreign governments, and 

some voices within China.83 The study further points out that indigenous innovation 

policies have not thus far stopped foreign corporations from maintaining strong market 

share, trade, and profitability in China. However, it notes that this encouraging pattern 

may not hold true for certain industries, including telecommunications and renewable 

energy. 

Another recent report emphasizes that Chinese policies seeking to appropriate technology 

from foreign multinational corporations—such as local-content requirements, mandatory 

joint ventures, and forced technology transfer rules—are the central source of the impact 

of indigenous innovation policies on U.S. firms.84 It notes that such policies have been 

used by other countries in the past, but that China is more aggressive about how it applies 

these policies and has the additional leverage of conditional access to the world’s largest 

and fastest-growing market. A report prepared for the U.S. Chamber of Commerce 

similarly focuses on the global business community’s concerns regarding China’s 

 80Ehrlich, “Economic Benefits of Clarifying the Standard for Assessing ‘Reasonable Royalty’ Damages 

Under Patent Law,” 2009. 81Shane, “The Likely Adverse Effects of an Apportionment-Centric System of Patent Damages,” 

January 14, 2009. 82For additional information about China’s indigenous innovation policies and their effects on the 

United States, see USITC, China IPR and Indigenous Innovation 1, 2010, chapter 5. 83Kennedy, “Indigenous Innovation,” September 2010. 84Hout and Ghemawat, “China vs. the World,” December 2010. 
2-22 

indigenous innovation policies. 85 It describes U.S. and other foreign companies as 

trapped between their business need for access to China’s large, rapidly growing market 

and China’s insistence on significant transfers of technology as the price for such market 

access. 

By contrast, Ahrens addresses the question of how China can best encourage indigenous 

innovation while keeping markets open, and the role of government procurement in that 

process.86 He argues that China’s existing indigenous innovation policies decrease the 

level of competition in China, and are thus unlikely to be effective in promoting domestic 

innovation, since removing competition tends to reduce, not increase, firms’ incentives to 

innovate. 

This focused review of the literature shows the challenging nature of quantifying effects 

of indigenous innovation and IPR infringement in general and specifically on individual 

countries. The remainder of this report presents various approaches to the measurement 

of these issues, taking into account relevant methodologies employed by other 

researchers. 

 85McGregor, China’s Drive for “Indigenous Innovation,” July 2010. 86Ahrens, “Innovation and the Visible Hand,” July 2010. 
3-1

CHAPTER 3 

Reported Effects from IPR Infringement in 

China on U.S. Economy (Survey Results) 

Key Findings 

According to the responses to the Commission’s survey, U.S. firms that reported IPR 

infringement in China accounted for 58.1 percent of the sales by firms in the U.S. IPintensive economy (explained below) conducting business in China in 2009. Overall 

sales amounted to approximately $7.3 trillion, which corresponds to about 16.3 percent of 

U.S. GDP in 2009.1

 Based on the survey data, U.S. IP-intensive firms reported overall 

global losses of $48.2 billion (in a range of $14.2 billion to $90.5 billion) due to reported 

Chinese IPR infringement in 2009.2

 In addition, they spent an estimated $4.8 billion (in a 

range of $279.1 million to $9.4 billion) to protect themselves against Chinese IPR 

infringement in 2009.3

 While copyright infringement was reported to be the form of IPR 

infringement in China that had the most damaging economic impact on U.S. firms during 

2007–09, trademark infringement in China represented the most common form of 

reported IPR infringement. 

The top IP-related concerns for firms were stolen trade secrets; lost sales, royalties, or 

license fees; damage to brands or product reputation; and the costs of IPR enforcement. 

Firms ranked the province of Guangdong and the municipalities of Shanghai and Beijing 

as having both the best and the worst climates for protecting intellectual property in 

China, with results varying by industry sector. Firms that provided quantitative responses 

estimated that improved IPR protection and enforcement in China could result in as much 

as a 10–20 percent increase in sales, royalties, and license fees earned in China, and a 2–5 

percent increase in employment in their U.S. operations. These employment gains could 

translate into approximately 922,588 (in a range of 254,999 to 1,590,176 new jobs) new 

U.S. jobs among IP-intensive firms, although some of these jobs could be the result of 

workers shifting from other sectors of the U.S economy. 

 1

The Commission applied a weighting procedure to the questionnaire responses in order to extrapolate 

the results attained from individual respondents to the U.S. IP-intensive economy as a whole. See appendix E 

for a copy of the questionnaire and appendix F for a discussion of the survey methodology. 2

Significant at the 80 percent level. Value data show the central value estimate as well as the lower and 

upper bound ranges reflecting the statistical confidence levels identified. Losses include lost sales, royalties, 

and license fees, in all markets. Of the $48.2 billion in total reported losses in 2009, approximately $36.6 

billion (75.9 percent) was attributable to lost sales, while the remaining $11.6 billion was attributable to a 

combination of lost royalty and license payments as well as other unspecified losses (these components of 

global IPR losses were significant at the 85 percent level). Estimated losses are derived from weighted 

responses to the USITC questionnaire (for firms that responded in the affirmative to question 1.14) to 

question 2.8 and the sum of weighted responses to questions 4.5b, 5.5b, 6.6b, and 7.5b, when a firm did not 

respond to question 2.8. Estimated global losses are discussed in more detail below and in appendix F. 3

Significant at the 80 percent level. Infringement expenses include (1) firms’ expenses to protect 

against IPR infringement by Chinese entities, and (2) firms’ enforcement expenses incurred attributable to 

infringement by Chinese entities. This value is derived from weighted responses to the USITC questionnaire 

(for firms that responded in the affirmative to question 1.14) to question 2.11 and the sum of weighted 

responses to questions 4.6b, 5.6b, 6.7b, and 7.6b, when a firm did not report expenses in question 2.11. 

Estimated infringement expenses are discussed in more detail below. 
3-2

These findings complement the results presented in chapter 4 that use a publicly available 

data to assess broader economic linkages between IPR protection in China and U.S. 

economic activity, and analyze likely intersectoral developments in the U.S. economy if 

China were to improve its IPR protection and enforcement. 

Survey Overview: Questionnaire and Methodology 

The Commission’s questionnaire surveyed the U.S. IP-intensive economy affected by 

IPR infringement in China and certain sectors considered to be particularly susceptible to 

IPR infringement.4

 For the purpose of this chapter, this subset of the economy is defined 

as the “IP-intensive economy.” The U.S. IP-intensive economy represents U.S. sales of 

$7.3 trillion—approximately 16.3 percent of U.S. GDP in 2009.5

The questionnaire asked about the effects of IPR infringement in China on firms in the 

U.S. IP-intensive economy over a three year period, 2007–09, and, in some cases, for 

only the year 2009. Many firms that reported IPR infringement were not able to quantify 

these effects for the three year period. Therefore, some of the values and shares derived 

from these values presented in the chapter are for 2009 only, even though other data may 

refer to the broader three year period. As a result, data for different periods should not be 

compared. 

Sector Selection 

The Commission’s survey covered firms in 24 sectors of the U.S. economy that are 

considered to be particularly susceptible to IPR violations in China. These sectors, as 

defined by their North American Industry Classification System (NAICS) codes, were 

chosen using quantitative data that was supplemented by the judgment of analysts, as 

shown in table 3.1. A high incidence of quantitative indicators—such as research and 

development (R&D) expenditures, investments, royalties and licensing fees, and patent 

filings—suggests considerable investment in and reliance upon IPR. These indicators 

were used to select several sectors. Several other sectors were included because their 

products make up a large share of the goods seized by U.S. Customs and Border 

Protection (CBP) for trademark infringement.6

For each of the 24 selected sectors shown in table 3.1, individual firms were selected 

from the Orbis database,7

 which contains a significant share of all firms (privately as well 

as publicly held) in the United States. In addition to these randomly selected firms, the 

largest firms within each of the 24 sectors were targeted as potentially important 

contributors to the survey responses. Larger firms tend to export more and are more 

likely to have business in China, and are therefore likely to be more affected by IPR 

 4

Both the survey plan and the interpretation of the questionnaire results were conducted by the 

Commission, with advisory services provided by Summit Consulting. 5

Data are for 2007; based on estimates of sectoral sales by the U.S. Census Bureau and of value added 

by the U.S. Bureau of Economic Analysis. The share of GDP, which is in the range of 13.9–16.3 percent, was 

calculated based on the value added by the 24 sectors identified as potentially affected by IPR issues, as 

defined in this section. These contribute approximately 10 percent to U.S. GDP. In addition, the firms 

targeted in the special groups (top trademark firms and U.S. firms with FDI in China) contribute an additional 

4–6 percent of value added. The share of GDP thus calculated reflects the sectors and special groups thus 

defined. This calculation is not meant to imply that IPR issues are irrelevant to the rest of the U.S. economy, 

since such issues may be relevant in all sectors. 6

See CBP, Intellectual Property Rights Seizure Statistics: Fiscal Year 2009, October 2009. 7

Orbis is a database of company profile and financial information published by Bureau Van Dijk. 
3-3

infringement in China. In addition, they tend to have widely recognized brands that are 

targeted by infringers. Finally, the value of potential losses is greater for larger firms due 

to higher sales; the majority of dollar value losses were therefore expected to come from 

large firms. 

TABLE 3.1 USITC questionnaire on IPR infringement in China: Factors considered in sector selection

Sector NAICS category NAICS code 

Quantitative indicatorsa

Customs data Otherb

Breweries, wineries, distilleries 31212–31214 x x 

Tobacco manufacturing 3122 x 

Footwear manufacturing and other leather and allied product 

manufacturing 3162, 3169 x x 

Apparel manufacturing 315 x x x 

Watch, clock, and parts manufacturing 334518 x x 

Jewelry and silverware manufacturing 33991 x x 

Consumer goods 

manufacturing 

Game, toy, and children's vehicle manufacturing 33993 x x 

Pesticide, fertilizer, and other agricultural chemical 

manufacturing 3253 x x 

Pharmaceutical and medicine manufacturing 3254 x x x 

Chemical 

manufacturing 

Other chemical manufacturing 325 (except 

3253, 3254) x x 

Machinery manufacturing 333 x x 

Semiconductor and related devices manufacturing 334413 x x 

Other computer and electronic product manufacturing 334 (except 

334413, 334518) x x x 

Electrical equipment, appliance, and component 

manufacturing 335 x x 

High-tech and 

Medical equipment and supplies manufacturing 3391 x 

heavy 

manufacturing 

Research and development 5417 x x 

Motor vehicle equipment manufacturing 3361–3363 x x 

Transportation 

manufacturing 

Aerospace product and parts manufacturing 3364 x x 

Newspaper, periodical, book, and directory publishers 5111 x x 

Software publishers 5112 x x 

Motion picture and video industries 5121 x x 

Sound recording industries 5122 x x 

Internet publishing and broadcasting and Web search portals 51913 x 

Information 

and other 

services 

Computer systems design and related services 5415 x x 

Source: USDOC, Census, 2007 NAICS, and USITC staff calculations. 

 aQuantitative indicators include R&D expenditures, patent filings, and royalty and license fee data. 

 b

Includes information from other reports and assessments by USITC staff. 
3-4

Two other special groups were also targeted to be included in the survey: the U.S. firms 

holding the top trademarks in the world, and all U.S. firms that—according to the Orbis 

database—had foreign direct investment (FDI) in China. 8

 The Commission included 

these groups because they were considered likely to have a disproportionate exposure to 

potential IPR violations in China.9

 

The Commission mailed a total of 5,051 questionnaires to active firms, including firms in 

each of the 24 identified sectors and firms in the special groups.10 While the IP-intensive 

sectors and special groups selected for inclusion in the survey have a relatively high 

probability of being directly affected by Chinese IPR infringement, the Commission 

recognizes that IPR violations can affect firms outside these sectors; industries that may 

indirectly benefit from IPR protection include retailers, traders, and transportation 

businesses that support the distribution of IPR-reliant goods and services.11 However, 

those firms that face direct threats to the sales of their products as a result of IPR 

violations are considered the most likely to suffer significant losses. As a result of this 

decision to focus on IP-intensive firms, all results estimated from the survey are in fact 

reflections of only this more narrowly defined economy. In this sense, the results form a 

lower bound because the sample excluded firms from non-IP-intensive sectors that also 

may have experienced losses. 

In order to extrapolate the results obtained from individual respondents to the U.S. IPintensive economy as a whole, the Commission applied a weighting procedure to the 

questionnaire responses. That weighting procedure is described, along with the 

questionnaire methodology, in appendix F. 

Firms That Experienced IPR Infringement in China 

The Commission’s survey results showed that in general, the firms that reported 

experiencing IPR infringement in China are different from those firms that did not report 

experiencing infringement. Firms that reported infringement were at least three times 

larger, and were characterized as possessing significantly higher global average sales, 

royalties, R&D expenditures, and employment (figure 3.1). 

 8

There were just under 1,000 firms in the Orbis database that reported investment in China. 9

This is discussed in more detail in the section “Firm Size and IPR Infringement Practices in China.” 10Of the 5,670 questionnaires that were originally sent, 619 (10.9 percent) were returned by the Postal 

Service, due to business closings, changes of addresses, and name changes of businesses. 11Siwek, “Engines of Growth,” 2005, 2. 
3-5

FIGURE 3.1 U.S. IP-intensive economy: Firms that reported IPR infringement in China versus firms that did not 

report infringement 

Source: USITC staff calculations of weighted responses to the USITC questionnaire. 

The firms of most interest to this analysis were those in the U.S. IP-intensive economy 

that had business in China and reported actually experiencing IPR infringement in China. 

Firms that reported infringement accounted for 58.1 percent of the sales by U.S. IPintensive firms doing business in China in 2009, as shown in pink in figure 3.2. Unless 

otherwise noted, the subsequent analysis in this chapter is based on firms in U.S. the IPintensive economy that are conducting business in China and that reported IPR 

infringement in China. 

A high concentration (71.7 percent) of the U.S. firms holding the top trademarks in the 

world reported experiencing IPR infringement problems in China. The impact of IPR 

infringement in China on the firms in the top trademarks group versus firms in other 

groups covered by the Commission’s survey is discussed in more detail below in the 

section “Firm Size and IPR Infringement Practices in China.” 

14,200

154.2

137.7

4,860.1 878.2

8.6

50.5

4,470

(15,000) (13,000) (11,000) (9,000) (7,000) (5,000) (3,000) (1,000) 1,000 3,000 5,000

Firms that reported IPR infringement in China Firms that did not report IPR infringement in China 

Average sales

(Million $)

Average royalties

(Million $)

Average R&D

(Million $)

Average 

employment

(no. of workers)
3-6

FIGURE 3.2 U.S. IP-intensive firms that reported IPR infringement in China accounted for about 58.1 percent of the 

total sales of firms in the U.S. IP-intensive economy that were conducting business in China, 2009 

Sources: Weighted responses to the USITC questionnaire; U.S. Bureau of Economic Analysis; U.S. Census Bureau. 

 a

 Represents approximately 16.3 percent of U.S. GDP, based on sectoral sales estimates by the U.S. Census 

Bureau and value added estimates by the U.S. Bureau of Economic Analysis. The share of GDP was based on the 

value added by the 24 sectors identified as potentially affected by intellectual property issues and the added value of 

firms in the special groups (top trademark firms and U.S. firms with FDI in China). This approach is not meant to 

imply that IP issues are confined only to this segment of the U.S. economy; IP issues are at least somewhat relevant 

in all sectors. Therefore, this calculation likely represents the lower bound for the IP-affected economy. 

U.S. firms that reported IPR infringement in China engaged in numerous business 

activities and had a broad range of experiences operating in China.12 Some 36.9 percent 

of all such firms were in the high-tech and heavy manufacturing sector;13 about onefourth were in the information and other services sector (25.2 percent) 14 or in the 

consumer goods manufacturing sector (22.2 percent); 15 13.4 percent were in the chemical 

manufacturing sector;16 and 2.2 percent were in the transportation manufacturing sector17 

 12USITC questionnaire, weighted responses to question 1.14. 13The high-tech and heavy manufacturing sector includes computer and electronic product 

manufacturing; electrical equipment, appliance, and component manufacturing; R&D; machinery 

manufacturing; medical equipment and supplies manufacturing; miscellaneous manufacturing; and 

semiconductor and other electronic component manufacturing. 14The information and other services sector includes computer systems design and related services; 

Internet publishing and broadcasting and Web search portals; motion picture and video industries; newspaper, 

periodical, book, and directory publishers; other information services; professional, scientific, and technical 

services; software publishers; sound recording industries; and television broadcasting. 15The consumer goods manufacturing sector includes: apparel manufacturing; breweries, wineries, and 

distilleries; manufacturing of footwear and other leather and allied products; game, toy, and children’s 

vehicle manufacturing; jewelry and silverware manufacturing; tobacco manufacturing; and watch, clock, and 

parts manufacturing. 16The chemical manufacturing sector includes various segments of the chemical manufacturing 

industry, including pesticide, fertilizer, and other agricultural chemical manufacturing; and pharmaceutical 

and medicine manufacturing. 17The transportation manufacturing sector includes aerospace product and parts manufacturing; motor 

vehicle equipment manufacturing; and transportation equipment manufacturing. 
3-7

(figure 3.3). As shown in figure 3.3, the high-tech and heavy manufacturing sector 

accounted for the largest share of firms that reported IPR infringement in China by total 

sales, followed by the transportation manufacturing sector. The high-tech and heavy 

manufacturing sector also accounted for the largest share of R&D spending by these 

firms, and the transportation manufacturing sector accounted for the largest share of 

employment. 

FIGURE 3.3 U.S. firms that reported IPR infringement in China: Sector composition 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Share of firms Total sales R&D Employment

Consumer goods manufacturing Chemical manufacturing High-tech and heavy manufacturing

Transportation manufacturing Information and other services

Percent

Source: USITC staff calculations, weighted responses questions 1.5, 1.6, 1.7, and 1.9, for firms that responded in the 

affirmative to question 1.14. 

Organization of this Chapter 

The remainder of this chapter presents the Commission’s survey results under four main 

sections: (1) IPR infringement-related losses and expenses; (2) scope of Chinese IPR 

infringement; (3) top IPR infringement concerns and strategies; and (4) IPR infringement 

by type—copyright infringement, trademark infringement, patent infringement, and 

misappropriation of trade secrets. 

Throughout this report, all data cited from the Commission’s survey have been examined 

for statistical significance through the use of confidence intervals. Box 3.1 provides a 

brief discussion of confidence intervals and describes how confidence intervals are 

reported in this chapter. 
3-8

Survey Results: IPR Infringement-Related Losses and 

Expenses 

This section describes the Commission’s survey results for the losses reported by U.S. 

firms experiencing IPR infringement in China. It also describes the expenses firms 

reported they incurred to address IPR infringement in China. Some firms reported 

widespread Chinese IPR infringement of their products or services to be a costly and 

serious problem,18 some were not aware of the size or scope of the problem or had only 

become aware as they began selling directly in the Chinese market,19 while others did not 

consider any losses due to Chinese IPR infringement to be material to the firm as a 

whole.20

 18Stewart and Stewart, written submission to the USITC, July 8, 2010, 4. See also USITC, hearing 

transcript, June 15, 2010, 203–5 (testimony of Robert W. Holleyman, Business Software Alliance). For 

further information, see chapter 2 of this report. 19For example, one U.S. company reported that its product was sold only to Hong Kong prior to 2001, 

but that “it was only when we began selling . . . directly to China that we began to understand the scope and 

breadth of the counterfeiting of our products within that country.” USITC, hearing transcript, June 16, 2010, 

329–30 (testimony of James D’Addario, D’Addario and Co., Inc.). 20USITC questionnaire, survey respondents. 

BOX 3.1 Statistical significance 

Throughout this chapter, all data cited from the survey have been examined for statistical 

significance, that is, whether the data cited are statistically different from zero. To analyze 

statistical significance, confidence measures are used. These provide a measure of the degree 

of certainty surrounding an estimate by providing low and high “bounds” for an estimated value. 

The true value, unobserved by the researcher, lies within these bounds with some probability; 95 

percent probability is commonly used. When a confidence interval falls entirely within the 

positive range, the estimated data point is considered statistically significant. 

The width of the confidence interval depends on a variety of factors, including the number of 

responses, the dispersion of the underlying observations, and the type of question. Response 

rates vary by questionnaire section. The questionnaire was structured so that all firms, 

regardless of their exposure to IPR issues, were required to fill in the first section of the 

questionnaire that identified characteristics about the firm, such as their sales, employment, and 

principal business activities in 2007–09. The response rates to later sections that addressed the 

firm’s IPR and indigenous innovation issues in China varied according to each firm’s experience 

with such issues. As a result, the responses of the first section generally yielded results with 

greater statistical significance than the later sections. 

The type of question also had implications for the degree of confidence: for binary questions 

such as yes/no questions, the confidence intervals are generally relatively narrow (i.e., there 

was higher certainty for the estimate). On the other hand, questions in which a respondent may 

fill in a value (e.g., dollars or employees) permit a far greater range of responses, and as a result 

there is far less certainty surrounding the estimate. 

Unless otherwise noted, the threshold confidence level used for the confidence interval was 95 

percent. In select cases where the survey produces an estimate that is particularly relevant to 

the reader but has a slightly lower level of confidence, the estimate was included with a footnote 

citing the (lower) level of confidence. 
3-9

Estimated Losses Due to Chinese IPR Infringement 

U.S. firms experiencing IPR infringement in China reported total global losses of $48.2 

billion (in a range of $14.2 billion to $90.5 billion)21 in 2009 due to that infringement 

(table 3.2).22 Of the $48.2 billion in total reported losses in 2009, approximately $36.6 

billion (75.9 percent) was attributable to lost sales, while the remaining $11.6 billion was 

attributable to a combination of lost royalty and license payments as well as other 

unspecified losses.23

Losses by sector (2009). Firms experiencing IPR infringement in China in the 

information and other services sector reported the largest losses, estimated at $26.7 

billion (in a range of $11.8 billion to $48.9 billion) in 2009, followed by firms in the 

high-tech and heavy manufacturing sector, with reported 2009 losses of $18.5 billion (in 

a range of $1.9 billion to $37.0 billion).24

Losses by type of infringement (2009). Firms experiencing IPR infringement in China 

reported significantly higher losses from copyright infringement than from other types of 

Chinese IPR infringement during 2007–09. Firms reported quantifiable 2009 losses from 

copyright infringement of $23.7 billion (in a range of $10.2 billion to $37.3 billion), and 

quantifiable losses from trademark infringement of $6.1 billion (in a range of $1.4 billion 

to $12.5 billion). Firms reported quantifiable 2009 losses of $2.4 billion for patent 

infringement and trade secret misappropriation combined.25

 21Significant at the 80 percent level. Ranges indicate the lower and upper bounds reflecting the 

statistical confidence levels. 22Losses include lost sales, royalties, and license fees, in all markets. USITC questionnaire, weighted 

responses to question 2.8 plus weighted responses to questions 4.5b, 5.5b, 6.6b, and 7.5b when a firm did not 

report losses in question 2.8, for firms that responded in the affirmative to question 1.14. Significant at the 80 

percent level. 23Significant at the 85 percent level. 

24Because total worldwide losses were compiled from different questions in the Commission’s survey, 

losses by type of IPR infringement do not add to total reported worldwide losses. Significant at the 80 percent 

level. 25Significant at the 90 percent level. 
3-10

TABLE 3.2 U.S. firms experiencing IPR infringement in China: Reported losses due to Chinese IPR 

infringement, 2009 

Losses Survey findings 

 Point estimate Lower and upper boundsa

 Total reported global lossesb $48.2 billionc $14.2 billion–$90.5 billion 

 

 Losses by sectorb

 Information and other services $26.7 billion $11.8 billion–$48.9 billion 

 High-tech and heavy manufacturing $18.5 billion $1.9 billion–$37.0 billion 

 Chemical manufacturing $2.0 billion $0.4 billion–$3.6 billion 

 Consumer goods manufacturing $0.8 billion $0.5 billion–$1.1 billion 

 Transportation manufacturing $144.6 million $35.3 million–$294.7 million 

 

 Losses by type of IPR infringementd

 

 Copyright infringement $23.7 billion $10.2 billion–$37.3 billion 

 Trademark infringement $6.1 billion $1.4 billion–$12.5 billion 

 Patent infringemente

 $1.3 billion $0.2 billion–$2.8 billion 

 Misappropriation of trade secretse

 $1.1 billion $0.2 billion–$2.4 billion 

 Unspecifiedf

 $16.0 billion $2.2 billion–$35.5 billion 

Source: Staff calculations from USITC questionnaire. See appendix F for method and further details. 

Note: Data are significant at the 95 percent level unless otherwise indicated. Value data show the point 

estimate and the lower and upper bound ranges reflecting the confidence levels. Losses by sector and 

losses by type of IPR infringement are compiled from different questions in the USITC questionnaire and do 

not add to the same total values. 

 a

When the sum of unweighted values is greater than the lower bound of the confidence interval at which 

the estimate becomes positive, the sum of unweighted values is reported as the lower bound and the upper 

bound is shifted upward by the difference between the sum of unweighted values and the original lower 

bound. 

 b

Significant at the 80 percent level. Additional information on estimated global losses is provided in 

appendix F. 

 c

Of the $48.2 billion in total reported losses in 2009, approximately $36.6 billion (75.9 percent) was 

attributable to lost sales, while the remaining $11.6 billion was attributable to a combination of lost royalty 

and license payments as well as other unspecified losses. These components of global IPR losses were 

significant at the 85 percent level. 

 dCalculated using information from questions 2.8, 4.5b, 5.5b, 6.6b, and 7.5b, for firms that responded in 

the affirmative to question 1.14. Most firms were unable to apportion losses according to IPR infringement 

type. For additional information, see appendix F.

 eSignificant at the 90 percent level. 

 f

Calculated as a residual (the difference between total reported global losses and loses by identified type 

of IPR infringement). 

Losses by market (2007–09). Firms reported that 90.2 percent of their 2007–09 losses 

due to IPR infringement in China were the result of copyright infringement in the 

Chinese market (figure 3.4). As discussed in more detail in the section on “Copyright 

Infringement” below, firms in the information and other services sector accounted for 

half of the reported losses due to copyright infringement. The relatively higher losses due 

to copyright infringement in China may be due in part to the generally low cost of 

illegally replicating copyrighted works and the ease of both physical and digital 

distribution of infringed products.26

Losses by market and by type of infringement (2007–09). The locations where firms 

reported their greatest losses from Chinese IPR infringement varied by type of IPR. Firms 

reporting patent infringement stated that more than half (53.8 percent) of their losses 

 26See “Copyright Infringement” section for additional information. 
3-11

FIGURE 3.4 U.S. firms that reported IPR infringement in China: Shares of lost sales, royalties, license fees, or other 

income as a result of reported IPR infringement in China during 2007–09, by type of IPR infringement, by market

90.2

5.7

47.9

46.4

53.8

9.8

36.4

37.7

32.3

30.1

0.9

8.9

46.9

22.7

30.5

0 10 20 30 40 50 60 70 80 90 100

China

US

Other

China

US

Other

China

US

Other

China

US

Other

China

US

Other

Trade secrets Patents Trademarks Copyrights Total

Percent

Source: USITC staff calculations, weighted responses to questions 4.5b, 5.5b, 6.6b, and 7.5b, for firms that 

responded in the affirmative to question 1.14. 

Note: Figures may not add to 100 percent due to rounding. 

during 2007–09 arose in the Chinese market. By contrast, firms reporting the 

misappropriation of trade secrets stated that virtually all of their losses occurred outside 

of China—in the United States and in third-country markets. Losses from trademark 

infringement were reported to be spread relatively evenly among China, the United 

States, and third-country markets.27

How firms estimated losses. Firms that reported IPR infringement in China generally 

said that their estimated revenue losses were based on information provided by third 

parties, such as industry associations.28 Almost half of firms (48.7 percent) reported that 

their estimates for lost sales in the U.S. market were provided by third parties, while the 

remaining firms largely reported using estimates they calculated for themselves, for 

example, by multiplying the amount of infringement or confiscated products by 

wholesale prices or by the products’ retail value.29 Almost all firms (more than 90.0 

percent) reported that their estimates of lost royalties and license fees in the U.S., 

Chinese, and other markets were provided by third parties. Most (more than 60.0 percent) 

 27USITC questionnaire, weighted responses to questions 4.5b, 5.5b, 6.6b, and 7.5b, for firms that 

responded in the affirmative to question 1.14. 28USITC questionnaire, weighted responses to question 2.9, for firms that responded in the affirmative 

to question 1.14. 29Significant at the 90 percent level. USITC questionnaire, weighted responses to question 2.7, for 

firms that responded in the affirmative to question 1.14. 
3-12

firms reported that their estimates of lost sales in the Chinese and other markets, lost 

global profits, and losses due to Internet-based infringement were based on information 

from third parties. 30

IPR Infringement Expenses and Impact of Improved IPR Protection 

and Enforcement 

Efforts on the part of firms to counter Chinese IPR infringement could prove costly, 

especially to firms in the information and other services sector. Moreover, firms said 

improved IPR protection measures on the part of the Chinese government would have a 

beneficial impact on their sales, royalties, and license fees earned in China, as well as on 

U.S. employment. 

IPR Infringement Expenses 

U.S. firms that reported IPR infringement in China reported spending a total of $4.8 

billion (in a range of $279.1 million to $9.4 billion) 31 to protect themselves against 

Chinese IPR infringement in 2009.32 Firms in the information and other services sector 

reported spending the most, estimated at $2.0 billion (in a range of $36.2 million to $4.0 

billion), followed by firms in the high-tech and heavy manufacturing sector at $1.1 

billion (in a range of $0.1 billion to $2.1 billion) and those in the chemical manufacturing 

sector at $0.9 billion (in a range of $0.2 billion to $1.6 billion) (table 3.3). 

TABLE 3.3 U.S. firms experiencing IPR infringement in China: Reported infringement expenses, 2009 

Survey findings 

Expensesa Point estimate Lower and upper bounds 

Total reported infringement expensesb $4.8 billion $279.1 million–$9.4 billion 

 Expenses by sector 

 Information and other servicesb

 $2.0 billion $36.2 million–$4.0 billion 

 High-tech and heavy manufacturingb

 $1.1 billion $0.1 billion–$2.1 billion 

 Chemical manufacturingc

 $0.9 billion $0.2 billion–$1.6 billion 

 Transportation manufacturingd

 $0.6 billion $2.8 million–$1.3 billion 

 Consumer goods manufacturingd

 $0.1 billion $10.4 million–$0.3 billion 

Source: Staff calculations from USITC questionnaire. See appendix F for method and further details. 

 a

Infringement expenses include (1) firms’ expenses to protect against IPR infringement by Chinese entities, and (2) 

firms’ enforcement expenses incurred attributable to infringement by Chinese entities. USITC questionnaire, weighted 

responses to question 2.11 plus weighted responses to questions 4.6b, 5.6b, 6.7b, and 7.6b when a firm did not report 

expenses in question 2.11, for firms that responded in the affirmative to question 1.14. 

 b

Significant at the 85 percent level. 

 c

Significant at the 90 percent level. 

 d

Significant at the 75 percent level. 

Infringement expenses varied by the type of infringement firms faced. Nearly all firms 

that reported material losses from copyright infringement (94.0 percent of firms) or 

trademark infringement (92.1 percent) in China spent money to address that 

infringement. However, fewer firms that reported material losses from patent 

 30USITC questionnaire, weighted responses to question 2.7, for firms that responded in the affirmative 

to question 1.14. 31Significant at the 85 percent level. Ranges indicate the lower and upper bounds reflecting the 

statistical confidence levels. 32Infringement expenses include (1) firms’ expenses to protect against IPR infringement by Chinese 

entities, and (2) firms’ enforcement expenses incurred attributable to infringement by Chinese entities. 

USITC questionnaire, weighted responses to question 2.11 plus weighted responses to questions 4.6b, 5.6b, 

6.7b, and 7.6b when a firm did not report expenses in question 2.11, for firms that responded in the 

affirmative to question 1.14. 
3-13

infringement (22.5 percent) and trade secret misappropriation (14.4 percent) incurred 

expenses to address the infringement.33

Potential Impact of Improved IPR Protection and Enforcement 

Impact on sales 

U.S. firms that reported IPR infringement in China estimated that improved IPR 

protection and enforcement in China would result in a 10–20 percent increase in their 

sales in China,34 especially in the information and other services sector and the high-tech 

and heavy manufacturing sector. 

Sales in China: Most firms (75.1 percent) reported that improved IPR protection and 

enforcement in China would result in a 10–20 percent increase in their sales in China. 

This was true for nearly all firms in the information and other services sector (97.9 

percent) and for most firms in the high-tech and heavy manufacturing sector (71.1 

percent). 

Sales in the United States: Almost half of firms (47.5 percent) reported that improved 

IPR protection and enforcement in China would result in an increase of up to 5 percent in 

their sales in United States, although most firms in the consumer goods industry (85.3 

percent) reported a likely increase of 5–10 percent in their U.S. sales. 

Sales in other markets: More than one-third of firms (37.8 percent) reported that an 

increase of up to 5 percent in their sales in other markets was likely if IPR protection and 

enforcement in China were to improve. 

Impact on royalties and license fees 

Firms that reported IPR infringement in China estimated that improved IPR protection 

and enforcement in China would result in a 10–20 percent increase in the royalties and 

license fees they earned in China, especially in the information and other services sector 

and the chemical manufacturing sector. 35

Royalties and license fees earned in China: Most firms (94.6 percent) estimated that 

improved IPR protection and enforcement in China would result in a 10–20 percent 

increase in the royalties and license fees they earned in China. This was particularly true 

for firms in the information and other services sector (reported by 98.1 percent of firms in 

that sector) and in the chemical manufacturing sector (reported by 93.3 percent of firms 

in that sector). 

Royalties and license fees earned in the United States: Most firms (98.2 percent) 

reported that improved IPR protection and enforcement in China would result in an 

increase of up to 5 percent in the royalties and license fees they could earn in the United 

States. 

 33USITC questionnaire, weighted responses to questions 4.6a, 5.6a, 6.7b, and 7.6a, for firms that 

responded in the affirmative to question 1.14. 34Firms that reported IPR infringement in China who indicated in question 3.4a that global unit sales 

would likely increase. USITC questionnaire, weighted responses to questions 3.4a and 3.4b, for firms that 

responded in the affirmative to question 1.14. 35Firms that reported IPR infringement in China who indicated in question 3.5a that global receipts of 

royalties and license fees would likely increase. USITC questionnaire, weighted responses to questions 3.5a 

and 3.5b, for firms that responded in the affirmative to question 1.14. 
3-14

Royalties and license fees earned in other markets: Most firms (92.1 percent) reported 

a likely increase of up to 5 percent in the royalties and license fees they earned in other 

markets if IPR protection and enforcement in China were to improve. 

Impact on U.S. employment 

Improved IPR protection and enforcement in China may result in increased U.S. 

employment, according to the surveyed firms that reported IPR infringement. Firms 

estimated that improved IPR protection and enforcement in China could result in a 2–5 

percent increase in their U.S. employment, especially in the information and other 

services sector, the consumer goods manufacturing sector, and the high-tech and heavy 

manufacturing sector. These employment gains could translate into as many as 922,588 

(in a range of 254,999 to 1,590,176)36 new U.S. jobs among IP-intensive firms, although 

some of these jobs could be the result of workers shifting among sectors of the U.S 

economy.37 

Overall: Many firms (42.0 percent) reported that improved IPR protection and 

enforcement in China would result in an increase of 2 to 5 percent in their U.S. 

employment. 

By sector: Most firms (73.6 percent) in the information and other services sector and 

more than half of firms in the consumer goods manufacturing sector (56.8 percent) 

reported a likely increase of up to 5 percent in their U.S. employment if IPR protection 

and enforcement in China were to improve. Almost all (96.5 percent) firms in the 

transportation manufacturing sector reported a likely increase of less than 5 percent in 

their U.S. employment as a result of improved IPR protection in China. However more 

than one-third of firms in the high-tech and heavy manufacturing sector (37.1 percent38) 

reported a likely increase of greater than 10 percent in their U.S. employment. 

Outside the framework of the questionnaire, a number of individuals contacted during the 

course of this investigation stated that they did not see a clear link between Chinese IPR 

infringement and U.S. employment.39 However, some stated that U.S. employment would 

be more likely to increase for firms with production in the United States40 than for U.S. 

firms with production in China.41

Additional Losses Associated with IPR Infringement 

In addition to the lost sales, royalties, and license fees from infringing Chinese products 

and services, more than half (56.8 percent) of firms reported that they experienced other 

forms of revenue losses as a result of new competition from lower-priced Chinese goods 

 36Ranges indicate the lower and upper bounds reflecting the statistical confidence levels. 37Chapter 4 presents a framework for understanding how intersectoral changes may lead employment 

to shift from one sector of the U.S. economy to others, based on improved IPR protection in China. 38Significant at the 90 percent level. 

39Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–7, 

2011. 40USITC, hearing transcript, June 16, 2010, 331 (testimony of James D’Addario, D’Addario and Co., 

Inc.) 41Industry representatives, interviews by USITC staff Hong Kong and mainland China, January 3–7, 

2011. 
3-15

and services that are believed to be the result of IPR infringement.42 Firms in all sectors 

reported lower revenue due to infringement. More than half of firms in the high-tech and 

heavy manufacturing sector (60.7 percent), the information and other services sector 

(62.5 percent), and the chemical manufacturing sector (54.4 percent) reported lower 

revenues as a result of infringement. Between 45 and 50 percent of firms in the consumer 

goods manufacturing sector (47.6 percent)43 and the transportation manufacturing sector 

(46.9 percent) reported lower revenues as a result of infringement.44

Firms reported that IPR infringement in China resulted in lower revenues mostly because 

they either lowered their prices to compete with counterfeits (which some firms 

subsequently found to be an ineffective antipiracy strategy), sold fewer products, or some 

combination of the two. Of firms that identified reasons for the lower revenues, 17.4 

percent45 reported that they lowered the prices of their products or services to compete 

with infringing Chinese products,46 and 15.1 percent reported that they sold fewer units in 

the Chinese market. A smaller but still significant share (10.1 percent)47 of firms reported 

that their revenues were lower because they did not enter China’s market due to concerns 

about IPR infringement.48

Survey Results: Scope of Chinese IPR Infringement 

This section describes the types of IPR infringement that firms reported experiencing in 

China, and the leading economic activities performed by these firms. Trademark 

infringement was the most widely reported type of Chinese IPR violation worldwide, 

with firms involved in sales in China, exporting from China, and contract-based 

manufacturing in China the most likely to report instances of IPR infringement. Firms 

also identified the Chinese municipalities and provinces with the best and worst climates 

for IPR protection. 

Types of IPR Infringement 

Figure 3.5 shows the types of Chinese IPR infringement that firms reported experiencing 

worldwide during 2007–09. Nearly one-third (31.5 percent) of the firms reported 

experiencing lost sales, royalties, license fees, or other income worldwide due to 

trademark infringement, more than any other form of Chinese IPR infringement. 49

 42A total of 18.4 percent (significant at the 90 percent level) of firms that reported IPR infringement in 

China said their revenues were unaffected, and 15.0 percent said they did not know if their revenues had been 

affected by Chinese IPR infringement. The remainder of responses was accounted for by responses of 

“unknown” and nonresponses to the question. Respondents may have indicated more than one reason for the 

lower revenues associated with IPR infringement in China. USITC questionnaire, weighted responses to 

question 2.6, for firms that responded in the affirmative to question 1.14. 43Significant at the 80 percent level. 

44USITC questionnaire, weighted responses to question 2.6. 45Significant at the 90 percent level. 

46As discussed in the section “Strategies for Addressing IPR Issues,” some firms reported that they 

subsequently found price discounting to be an ineffective strategy to combat IPR piracy. 47Significant at the 90 percent level. 

48Percentages do not total to 100 percent because respondents may have indicated more than one reason 

for the losses due to infringement. USITC questionnaire, weighted responses to question 2.6, for firms that 

responded in the affirmative to question 1.14. 49Respondents may have indicated losses due to more than one type of infringement. USITC 

questionnaire, weighted responses to questions 4.1, 5.1, 6.1, and 7.1, for firms that responded in the 

affirmative to question 1.14. According to one source, “the trademark counterfeiting problem in China is 

probably the most serious in world history.” USITC, hearing transcript, June 15, 2010, 35 (testimony of 

Daniel Chow, Ohio State University). 
3-16

Almost all (91.6 percent) of the surveyed firms in the consumer goods manufacturing 

sector reported material losses from Chinese trademark infringement (especially the 

apparel manufacturing industries).50

A total of 15.5 percent of firms reported experiencing losses due to Chinese copyright 

infringement worldwide during 2009–07, with half (50.0 percent) of firms in the 

information and other services sector reporting such losses.51 Overall, more firms in all 

sectors reported that copyright protection was “extremely important” to their business 

during 2007–09 than any other form of IPR protection.52

A total of 15.3 percent of firms reported experiencing losses due to patent infringement 

during 2007–09, including 43.3 percent of firms in the chemical manufacturing sector. 53

Losses due to trade secret misappropriation during 2007–09 were reported by 7.2 percent 

of firms, including 30.9 percent 54 of firms in the chemical manufacturing sector. 55

Additional information about losses due to each type of reported IPR infringement is 

provided later in this chapter. 

 50See the section “Trademark Infringement” for additional information. USITC questionnaire, weighted 

responses to question 5.1, for firms that responded in the affirmative to question 1.14. 51Respondents may have indicated losses due to more than one type of infringement. USITC 

questionnaire, weighted responses to question 4.1, for firms that responded in the affirmative to question 

1.14. See the section on “Copyright Infringement” for additional information. 52USITC questionnaire, weighted responses to question 2.1, for firms that responded in the affirmative 

to question 1.14. According to IIPA the range of Chinese copyright infringement includes “a staggering 79% 

of all software installed in 2009 in China, to widespread infringement of music, films, entertainment 

software, books and other copyrighted materials through online and mobile networks, optical disc 

infringements (including the manufacture and export of high quality counterfeits and special boxed sets), 

wholesale and retail infringements, hard-disk loading of software onto computers, illegal camcording, 

unauthorized use of copyright materials in Internet cafés, unauthorized public performances, and 

infringements of books, journals, and other published materials.” IIPA, written submission to the USITC, 

June 15, 2010, 4. 53Respondents may have indicated losses due to more than one type of infringement. USITC 

questionnaire, weighted responses to question 6.1, for firms that responded in the affirmative to question 

1.14. See the section on “Patent Infringement” for additional information. 54Significant at the 85 percent level. 

55Respondents may have indicated losses due to more than one type of infringement. USITC 

questionnaire, weighted responses to questions 7.1, for firms that responded in the affirmative to question 

1.14. See the section on “Trade Secret Misappropriation” for additional information. 
3-17

FIGURE 3.5 U.S. firms experiencing IPR infringement in China: Type of Chinese IPR infringement experienced 

worldwide 

15.5

31.5

15.3

7.2

0

5

10

15

20

25

30

35

Copyright infringement Trademark infringement Patent infringement Trade secret

misappropriation

Percent

Source: USITC staff calculations of weighted responses to the USITC questionnaire. 

Note: Shares do not total 100 percent because respondents may have indicated losses due to more than one type of 

infringement. 

Chinese IPR Infringement by Economic Activity 

The leading economic activities performed by firms that reported IPR infringement in 

China were sales (reported by 43.4 percent of firms), exporting from China (34.6 

percent), contract-based manufacturing (29.0 percent), and importing into China (24.3 

percent) (figure 3.6). Firms in all sectors reported significant involvement in sales in 

China. Firms in the consumer goods manufacturing sector reported relatively greater 

involvement than other sectors in exporting from China and contract-based 

manufacturing in China. Firms in the transportation manufacturing sector also reported 

greater involvement in exporting from China, while firms in the high-tech and heavy 

manufacturing sector reported greater involvement in importing into China.56

 56Respondents may have indicated more than one type of economic activity. USITC questionnaire, 

weighted responses to question 1.13. 
3-18

FIGURE 3.6 U.S. firms experiencing IPR infringement in China: Leading economic activities performed 

43.4

34.6

29.0

24.3

0

5

10

15

20

25

30

35

40

45

50

Sales Exporting from China Manufacturing (contract) Importing into China

 Sales activities were reported by:

 • 48.3 percent of firms in the high-tech and heavy manufacturing sector

 • 47.6 percent of firms in the consumer goods manufacturing sectora

 • 38.3 percent of firms in the information and other services sectora

 • 35.0 percent of firms in the chemical manufacturing sectorb

 • 28.9 percent of firms in the transportation manufacturing sector

Importing was reported by: 

 • 50.4 percent of firms in the high-tech and heavy manufacturing sector

 • 33.2 percent of firms in the chemical manufacturing sectorb

 • 18.7 percent of firms in the transportation manufacturing sector

Contract manufacturing was reported by: 

 • 53.4 percent of firms in the consumer goods manufacturing sectorc

 • 32.3 percent of firms in the high-tech and heavy manufacturing sector

 • 14.2 percent of firms in the transportation manufacturing sector

 Exporting was reported by:

 • 53.3 percent of firms in the consumer goods manufacturing sectorc

 • 49.7 percent of firms in the transportation manufacturing sector

 • 40.4 percent of firms in the high-tech and heavy manufacturing sector

Percent

Source: USITC staff calculations of weighted responses to question 1.13. 

Note: Data are significant at the 95 percent level unless otherwise indicated. Shares do not total 100 percent because 

respondents may have indicated more than one type of economic activity. 

 a

Significant at the 80 percent level. 

 b

Significant at the 90 percent level. 

 c

Significant at the 85 percent level. 

Best and Worst Chinese Localities for IPR Protection as Reported 

by U.S. Firms 

U.S. firms reported that the province of Guangdong and the municipalities of Shanghai 

and Beijing had the best climates for IPR protection during 2007–09. Interestingly, these 

localities also ranked among the worst climates for IPR protection in China during 2007–

09. 57 This is most likely attributable to the fact that the majority of foreign firms’ 

business operations are in these localities. 58 Consequently, firms are likely to be more 

sensitive to favorable or unfavorable IPR protection environments, which are reported to 

vary significantly at the local levels. Also, specific localities were ranked differently by 

firms from different sectors. Shanghai was generally rated as one of the best provinces by 

firms in the information and other services and transportation manufacturing sectors, and 

rated worst by firms in the high-tech and heavy manufacturing sector. In contrast, Beijing 

was rated highly by the high-tech and heavy manufacturing sector, and rated as worst by 

 57USITC questionnaire, weighted responses to questions 2.12 and 2.13, for firms that responded in the 

affirmative to question 1.14. 58USITC questionnaire, weighted responses to questions 2.14, for firms that responded in the 

affirmative to question 1.14. 
3-19

firms in the information and other services sector. Guangdong was ranked highly by 

firms in the consumer goods manufacturing sector, but received low rankings from most 

other sectors, especially the high-tech and heavy manufacturing sector. 59

Firm Size and IPR Infringement Practices in China 

Larger firms tend to export more and, as a result of their size and market presence, tend 

to have widely recognized brands that are targeted by infringers. 60 Because of the 

differences between firms that reported IPR issues in China and firms that did not report 

IPR issues, the Commission conducted further analysis as described in box 3.2. 

 59 USITC questionnaire, weighted responses to questions 2.12 and 2.13, for firms that responded in the 

affirmative to question 1.14. 60For more information on the role of firm size in export trends, see USITC, Small and Medium-Sized 

Enterprises: Characteristics and Performance, November 2010. 

BOX 3.2 Larger firms—firms with FDI in China and those with top global trademarks—are more likely to be affected by IPR 

infringement in China 

As mentioned previously, in addition to randomly selected firms from sectors identified as sensitive to IPR issues, the 

Commission targeted for inclusion in the survey sample two special groups of firms: all U.S. firms with FDI in China and 

U.S. firms with the top trademarks worldwide. These two groups were thought to be larger and be more likely to have 

business in China, and therefore more likely to be affected by IPR infringement in China. 

The tabulation below showing characteristics of three aggregated groups of firms in the sample—the two specially selected 

groups and all randomly selected firms—confirms that firms with FDI in China and firms with top trademarks are larger, 

more likely to do business in China, and more affected by IPR infringement than the randomly selected firms. Firms with 

FDI in China and firms with top trademarks experienced higher average global sales in 2009 ($3.3 billion and $27.2 billion, 

respectively) than the randomly selected firms in the sample, whose average sales were $6.2 million. Firms with FDI in 

China and firms with top trademarks also had higher employment than the randomly selected firms. Average employment 

was in the tens of thousands for the two groups (10,324 and 69,796 for firms with FDI in China and firms with top 

trademarks, respectively), compared to average employment of just 58 employees for firms that were randomly selected. 

Characteristics of specially selected firms and randomly selected firms in the U.S. IP-intensive economy, 2009 

Firms with FDI in 

China 

Firms with top 

trademarks Randomly selected firms 

Average employment (no. workers) 10,324 69,796 a58 

Average sales (billion $) 3.3 27.2 0.01 

Share of firms experiencing IPR 

infringement (percent) 19.4 71.7 4.7 

Source: USITC questionnaire results. Data are significant at the 95 percent level unless otherwise indicated. 

 aSignificant at the 90 percent level. 

In addition to being larger, firms with FDI in China and firms with top trademarks are more likely to conduct business in 

China than are randomly selected firms. Firms with FDI in China and firms with top trademarks also reported a higher rate 

of IPR infringement in China than the randomly selected firms. Only a small share of the randomly selected firms (4.7 

percent) reported IPR infringement. In contrast, 19.4 percent of the firms with FDI in China, and 71.7 percent of the firms 

with top trademarks reported IPR infringement in China. The higher reported incidence of IPR infringement among the top 

trademarks group is explained by the fact that a widely recognized trademark is an asset that is particularly susceptible to 

IPR infringement. 
3-20

SMEs and Chinese IPR Infringement

SMEs face certain unique challenges in protecting their intellectual property in China. 

Based on information gathered from interviews with industry representatives as well as 

survey results, SMEs that reported Chinese IPR infringement tend to express more 

concern about IPR violations, experience proportionately higher losses, and have fewer 

resources to protect themselves against infringers than large firms. Some of the 

challenges facing SMEs are discussed in box 3.3. 

BOX 3.3 SMEs and Chinese IPR infringement 

As a group, SMEs in the U.S. IP-intensive economy reported that they were less affected by IPR infringement in 

China than large firms; however, of the firms affected, SMEs were more heavily affected than large firms. 

In the U.S. IP-intensive economy, a smaller share of SMEs relative to large firms is engaged directly with the 

Chinese economy. Moreover, among the SMEs in the IP-intensive economy, only 2.4 percent of SMEs reported 

losses due to IPR infringement in China, while 14.1 percent of large firms in the IP-intensive economy reported 

losses. However, the SMEs that claimed losses reported a dramatically higher loss-to-sales ratio than did large 

firms.a

 

Some SMEs have indicated that they believe that their intellectual property is more vulnerable in China than in 

other export markets. Many also are reported to lack information about how to defend their IP. There is anecdotal 

evidence of SMEs that fail to file for patents or trademarks in China, reducing their ability to obtain legal recourse 

in China. Survey results indicate that SMEs believed they were significantly more likely to experience IPR 

infringement even when they were not directly engaged with China. Several SMEs only became aware that their 

intellectual property was being infringed when customers alerted them. Finally, many SMEs reportedly delay their 

entry into the Chinese market due to China’s negative reputation for IPR protection. This delay can be costly for 

firms in terms of foregone revenue and market share, especially given the rapid growth in the Chinese economy. 

Their small size and lack of resources also make SMEs more vulnerable to IPR infringement and less able to 

defend their IP. Large firms have more financial and human resources, such as dedicated teams to monitor 

infringement, as well as more experience filing civil cases in China. 

Industry sources suggested several approaches to address these issues. Principal among them was for SMEs to 

pool their resources with other U.S. firms, such as through trade associations, to combat IPR infringement. There 

are also efforts, such as those led by the U.S. Department of Commerce,b

 to improve smaller firms’ ability to 

address IPR issues. Finally, some industry representatives believe that much of the business acumen these 

firms have used in the United States would apply far more readily in China than the SMEs perceive. 

 

Sources: USITC, Small and Medium-Sized Enterprises: U.S. and EU Export Activities, July 2010; industry 

representatives, interviews with USITC staff, Hong Kong and mainland China, January 3–7, 2010; industry 

representatives, interview with USITC staff, Washington, DC, November 3, 2010; industry representatives, 

interview with USITC staff, Hong Kong, September 21, 2010; industry representatives, interview with USITC 

staff, Washington, DC, June 21, 2010. 

 a

The loss-to-sales ratio reported in the survey was 98.5 percent for SMEs, or nearly one dollar of losses for 

every dollar in sales. The loss-to-sales ratio for large firms was 1.9 percent. 

 b

The Web site www.stopfakes.gov provides a central location for information regarding IPR, including areas 

specifically for SMEs and for China IPR issues. 
3-21

Survey Results: Top IPR Infringement Concerns and 

Strategies 

This section describes the top concerns U.S. firms reported in the Commission’s survey 

about IPR infringement in China. It also reports firms’ views about the Chinese entities 

responsible for IPR infringement, and firms’ strategies for addressing IPR issues in 

China. This section concludes with a discussion of the relationship between firm size and 

reported Chinese IPR infringement. 

Top Concerns 

Firms that reported IPR infringement in China said their top IP-related concerns during 

2007–09 were stolen trade secrets;61 lost sales, royalties, or license fees in all markets;62

damage to brands or product reputation;63 and the cost of IPR enforcement.64 Almost twothirds (64.6 percent) of firms with concerns about stolen trade secrets described 

themselves as “extremely concerned.” More than half of firms with concerns about 

damage to brand/product reputation (54.7 percent) and with the cost of IPR enforcement 

(56.4 percent) described themselves as “extremely concerned” about each of those issues. 

Between 40 to 50 percent of firms with concerns about lost sales, royalties, or license 

fees in all markets described themselves as “extremely concerned” about such losses. 

Increased warranty costs related to counterfeit products ranked among firms’ least 

pressing concerns, with one-fourth (25.5 percent) of firms providing a ranking in this 

category describing themselves as “not at all concerned.”65

Chinese Entities Responsible for Infringement 

The types of Chinese entities identified by the survey as responsible for IPR infringement 

during 2007–09 vary significantly depending on the type of IPR infringement. In many 

cases, firms that reported infringement also reported that “unknown entities” were a 

significant source of Chinese infringement.66 The growing use of the Internet to sell 

counterfeit goods could explain the inability of firms to identify sources of infringing 

 61The Commission’s China IPR and Indigenous Innovation 1 report discussed U.S. businesses’ 

concerns about trade secret misappropriation in China. Almost all foreign industries in China reportedly rely 

on trade secrets to protect their business information, but there are few published cases in China in which 

U.S. or other foreign firms have asserted trade secret misappropriation. Moreover, industry representatives 

report that it is difficult to protect and enforce trade secrets in China. USITC, China IPR and Indigenous 

Innovation 1, 2010, 4-10 and 4-13. For further information about the impact of trade secret misappropriation 

see USITC, hearing transcript, June 15, 2010, 318 (testimony of Christian Murck, American Chamber of 

Commerce, People’s Republic of China); 319 (testimony of Mark Bohannon, Software & Information 

Industry Association). 62The Commission’s China IPR and Indigenous Innovation 1 report discussed the effects of lost sales, 

royalties, or license fees in third-country markets. USITC, China IPR and Indigenous Innovation 1, 2010, 6-

11 to 6-12. 63For further information about the impact of damage to brand and product reputation, see USITC, 

hearing transcript, June 15, 2010, 196 (testimony of Shaun Donnelly, International Business Policy); 425–

526 (testimony of James D’Addario, D’Addario and Co., Inc.). 64USITC questionnaire, weighted responses to question 2.3, for firms that responded in the affirmative 

to question 1.14. 65For further information about the impact of warranty costs on small businesses, see USITC, hearing 

transcript, June 15, 2010, 198 (testimony of Shaun Donnelly, International Business Policy). 66Respondents may have indicated more than one type of infringing Chinese entity. USITC 

questionnaire, weighted responses to question 2.4, for firms that responded in the affirmative to question 

1.14. 
3-22

products, as the relative anonymity afforded by the Internet makes it an attractive 

distribution network for people dealing in counterfeit and pirated merchandise.67 Table 

3.4 shows the leading Chinese entities identified for each specific type of IPR 

infringement, as well as the sectors for which the entity ranked highest.68

TABLE 3.4 U.S. firms experiencing IPR infringement in China: Leading Chinese entities reported to be responsible for 

IPR infringement, 2007–09 

IPR infringement type 

Leading infringing entitiesa (share of firms 

identifying this type of entity, for given type of 

IPR infringement) Sectors for which entity ranked highest 

Copyright infringement Chinese private firms (18.5 percent)b • Chemical manufacturing 

• High-tech and heavy manufacturing 

• Information and other services 

 Individuals, including former employees (15.7 

percent)c • Consumer goods manufacturing 

 Unknown entities (44.0 percent)d • Information and other services 

• Consumer goods manufacturing

Trademark infringement Individuals, including former employees (17.3 

percent) 

• Consumer goods manufacturing 

• Chemical manufacturing 

 Unknown entities (46.4 percent) • Consumer goods manufacturinge

Patent infringement Chinese private firms (identified by 13.3 

percent)b • Chemical manufacturing 

• High-tech and heavy manufacturing 

• Transportation manufacturing 

 Unknown entities (18.6 percent)b • Chemical manufacturing 

• Information and other services 

Trade secret 

misappropriation 

Chinese state-owned enterprises (6.5 percent)f

 • High-tech and heavy manufacturing 

 Unknown entities (18.1 percent)b

 • Information and other services 

• Chemical manufacturing 

Source: USITC questionnaire, weighted responses to question 2.4, for firms that responded in the affirmative to 

question 1.14. 

Note: Data are significant at the 95 percent level unless otherwise indicated. 

 a

Respondents may have indicated more than one type of infringing entity. 

 b

Significant at the 90 percent level. 

 c

Significant at the 85 percent level. 

 d

According to one source, copyright infringement in China occurs in many sophisticated ways that can make it difficult 

to identify the infringing entities, such as use of unlicensed software by businesses, duplication and sale on physical 

media and through online and mobile networks, and infringement of published material. IIPA, written submission to the 

USITC, June 3, 2010, 4. 

 e

For example, one multinational company that manufactures and sells products in China stated that counterfeiters are 

small entrepreneurs operating at such a low volume with such inexpensive equipment that makes it difficult to identify 

the infringing entities. Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 7, 

2010. 

 f

Significant at the 70 percent level. 

 67For additional information on Internet-based infringement, see the section “IPR Infringement in 

China and the Role of the Internet” in chapter 2 of this report. See also Stewart and Stewart, written 

submission to the USITC, July 8, 2010, 6–7. 68For additional information on contributors to piracy and potential infringers of trade secrets in China, 

see USITC, China IPR and Indigenous Innovation 1, 2010, 3-6 to 3-8 and 4-10 to 4-13. 
3-23

Strategies for Addressing IPR Issues in China 

U.S. firms that reported IPR infringement in China generally also reported that price 

discounting proved to be an ineffective strategy for combating Chinese IPR 

infringement. 69 Consequently, firms reported that they typically did not offer price 

discounts geared to counter infringement in China even though IPR infringers’ products 

often were lower priced. 

Characteristics of the Infringing Products 

Firms that reported IPR infringement in China varied in their assessments of the ways 

infringing products differed from the originals. Firms most frequently characterized the 

allegedly infringing Chinese products as inferior in quality. Firms characterized 

infringing products as bait-and-switch products, exact replicas, and high-quality 

counterfeits much less frequently.70

Inferior-quality products: Nearly half of firms (49.6 percent) categorized the allegedly 

infringing products as moderate or low-quality products (i.e., clearly IP-infringed 

products, but selected consciously by consumers to save money or because such 

infringing products are “good enough”). Between 45–55 percent of firms in all sectors 

characterized the allegedly infringing Chinese products as inferior-quality products.71

Bait-and-switch products: Almost one-third of firms (32.2 percent) characterized the 

allegedly infringing products as bait-and-switch products (i.e., consumers realize the 

product is counterfeit only upon opening the packaging or using the product).72 Allegedly 

infringing bait-and-switch products ranked particularly high for firms in the consumer 

goods manufacturing sector and the high-tech and heavy manufacturing sector.73 One 

strategy that U.S. firms reported using to combat this type of infringement included the 

use of distinctive or hard-to-replicate packaging and/or the inclusion of serial numbers on 

the packaging along with a Web site address to allow the customer to verify that the 

product is legitimate.74 

Exact replicas: More than one-fourth of firms (25.7 percent) characterized the allegedly 

infringing products as exact replicas (i.e., no discernable difference between the U.S 

firm’s product/service and the infringed product/service). Infringing exact replicas ranked 

particularly high for firms in the chemical manufacturing sector. 75

 69See appendix G for additional information on firms’ strategic changes as a result of IPR infringement 

in China. 70Respondents may have indicated more than one characteristic of infringing products. USITC 

questionnaire, weighted responses to question 3.3, for firms that responded in the affirmative to question 

1.14. 71Respondents may have indicated more than one characteristic of infringing products. One private 

sector association representative described as indirect costs of IPR infringement the “cost of the damage, the 

loss of value of brands and reputations as unsafe pirated and counterfeit products come onto the market.” 

USITC, hearing transcript, June 15, 2010, 196 (testimony of Shaun Donnelly, International Business Policy). 72For example, the industry association that represents the U.S. toner and inkjet cartridge 

remanufacturing industry stated that “As the demand for these [remanufactured] printer cartridges has grown, 

so has the supply of illegal products. Counterfeit cartridges, poorly refilled cartridges bearing labels identical 

to the OEM [original equipment manufacturer] ones and packaged in identical OEM boxes, began appearing 

around the world.” International Imaging Technology Council, written submission to USITC, July 8, 2010. 73Respondents may have indicated more than one characteristic of infringing products. 74USITC, hearing transcript, June 16, 2010, 335 (testimony of James D’Addario, D’Addario & Co., 

Inc.). 75Respondents may have indicated more than one characteristic of infringing products. 
3-24

High-quality counterfeits: Less than 10 percent of firms characterized the allegedly 

infringing products as high-quality or high-price substitutes or counterfeits such that 

consumers may not realize they are buying illegal products. High-quality counterfeits 

ranked particularly high nevertheless for firms in the transportation manufacturing and 

the information and other services sectors.76

Price Discounting Practices 

Divergent views were expressed on price discounting practices. Only 27.6 percent of 

firms that reported IPR infringement reported that they generally discount their prices, 

relative to U.S. prices, for comparable products in China. 77 Almost three-quarters of 

those firms discounting (73.6 percent) stated that they offered discounts of 10 percent or 

greater in the Chinese market; however, the majority (59.3 percent) reported that the 

discount was not associated with competition from allegedly infringed products.78 These 

survey findings most likely indicate that firms were engaged in differential pricing—

offering lower prices in China to account for relatively lower Chinese incomes—rather 

than discounting prices to compete with counterfeit products.79

Although a number of firms that reported IPR infringement in China also reported that at 

some point they discounted prices, many also seemed to find that price discounting was 

not an effective strategy to combat piracy. One source stated, “I don't think that there is a 

business model in the world that can compete with a [pirated] price where the marginal 

cost of production [such as with digital copyright piracy] is almost nothing.”80 One U.S. 

firm reported that even lowering its Chinese distributors’ net prices by 30 percent81 was 

of limited effectiveness in the light of Chinese tariffs and China’s undervalued 

currency.82 Moreover, lowering prices on the genuine products meant that “the price 

disparity [between the genuine and the counterfeit articles] isn’t quite as much so it’s 

even more confusing for the [Chinese] consumer.”83

Most firms that reported IPR infringement in China also reported that Chinese IPR 

infringers did not discount the prices of infringing products relative to the prices of 

legitimate products in China. According to one source, Chinese infringers appear to be 

becoming increasingly sophisticated in their pricing strategies, often pricing their 

counterfeit products at near world price levels to deceive potential customers into 

thinking that they had merely received good deals on non-infringing products.84 Just onefifth of U.S. firms (21.2 percent) reported that Chinese IPR infringers discounted their 

 76Respondents may have indicated more than one characteristic of infringing products. 77USITC questionnaire, weighted responses to question 3.1, for firms that responded in the affirmative 

to question 1.14. The Commission notes that in response to question 2.6 (see the discussion “Reasons for 

Lower Revenues”), 17.4 percent of firms cited lowering prices to compete with infringing Chinese products 

as one reason for their lower revenues. As questions 2.6 and 3.1 were two fundamentally different questions, 

the resulting statistics are not contradictory. 78USITC questionnaire, weighted responses to question 3.1, for firms that responded in the affirmative 

to question 1.14. 79For example, one trade association representative representing firms in the information and other 

services sector reported that the members of that association generally practice differential pricing in selected 

markets. That source stated that differential pricing was more a strategy to take into account China’s 

significantly lower per capita income compared to that of the United States, rather than a strategy to counter 

IPR infringement. USITC, hearing transcript, June 15, 2010, 458 (testimony of Michael Schlesinger, IIPA). 80USITC, hearing transcript, June 15, 2010, 459 (testimony of Michael Schlesinger, IIPA). 81Ibid., 335 (testimony of James D’Addario, D’Addario and Co., Inc.). 82D’Addario, written submission to the USITC, May 24, 2010. 83USITC, hearing transcript, June 15, 2010, 368 (testimony of James D’Addario, D’Addario and Co., 

Inc.). 84Industry representative, interview by USITC staff, Washington, DC, November 3, 2010. 
3-25

prices.85 Among these firms, more than one-third of firms in the information and other 

services sector (37.5 percent) 86 and one-fourth of firms in the high-tech and heavy 

manufacturing sector (26.1 percent)87 reported that Chinese IPR infringers discounted the 

prices of their infringing products. Overall, U.S. firms reporting Chinese price discounts 

for infringing products estimated those discounts to average 67.3 percent of the price 

charged for legitimate products in China. Firms in the information and other services 

sector reported the steepest average price discount, 94.5 percent, and firms in the hightech and heavy manufacturing sector reported an average price discount of 46.3 percent.88

Survey Results: Type of IPR Infringement 

This section describes the Commission’s survey results for specific types of Chinese IPR 

infringement—copyright infringement, trademark infringement, patent infringement, and 

misappropriation of trade secrets. As stated above, the firms covered in this survey are 

those in the U.S. IP-intensive economy that have business in China and reported Chinese 

IPR infringement. Table 3.5 shows that more firms that had experienced IPR 

infringement in China (31.5 percent) reported material losses due to Chinese trademark 

infringement than any other type of IPR infringement.89

Copyright Infringement 

Copyrights generally encourage creative endeavors by prohibiting original works from 

being copied without the creator’s permission. Those works are varied and include 

literary and artistic works, as well as computer programs. 90 Costs associated with 

copyrighted works generally include a fixed cost to author the work and a variable cost to 

make copies.91 That fixed cost—whether to write a new software operating system, or to 

produce and film a major motion picture—can be high, and sales, transmissions, 

broadcasts, or licensing of copies are what firms usually rely upon to recoup those fixed 

costs. Copyright infringement, sometimes referred to as copyright piracy, inhibits a firm’s 

capacity to recoup those fixed costs. 

 85USITC questionnaire, weighted responses to question 3.2, for firms that responded in the affirmative 

to question 3.2. 86Data for information and other services sector significant at the 80 percent level. USITC 

questionnaire, weighted responses to question 3.2, for firms that responded in the affirmative to question 3.2. 87Data for information and other services sector significant at the 90 percent level. USITC 

questionnaire, weighted responses to question 3.2, for firms that responded in the affirmative to question 3.2. 88USITC questionnaire, weighted responses to question 3.2, for firms that responded in the affirmative 

to question 3.2. 89Losses include material sales or profit losses anywhere in the world. USITC questionnaire, weighted 

responses to questions 4.1, 5.1, 6.1, and 7.1, for firms that responded in the affirmative to question 1.14. 

Percentages do not add to 100 percent because respondents may have reported more than one kind of loss. 90Berne Convention for the Protection of Literary and Artistic Works, art. 2; TRIPS art. 10; 17 U.S.C. 

§§ 101–102. 91Landes and Posner, The Economic Structure of Intellectual Property Law, 2003, 37. 
3-26

TABLE 3.5 Effects of Chinese IPR infringement on U.S. firms: Survey results (percent) 

 Copyright 

infringement 

Trademark 

infringement 

Patent 

infringement 

Trade secrets 

misappropriation 

Financial impact of IPR infringement

Share of firms reporting 

 material losses, 2007–09 a

15.5 31.5 15.3 a7.2

Loss-to-sales ratio, 2009 6.4 0.8 0.6 0.4 

Leading sector reporting 

 losses, and share of 

 firms in that sector 

Information 

and other 

services, 

50.0 

Consumer goods 

manufacturing, 

91.6 

Chemical 

manufacturing, 

43.3 

Chemical 

manufacturing, b

30.9 

Share of firms that 

reported losses and could 

differentiate market where 

losses occurred 98.9 83.3 24.8 72.6 

Percent of 2007–09 losses 

in: 

 • Chinese market 

 • U.S. market 

 • Other markets 

90.2 

0.9 

8.9 

37.7 

32.3 

30.1 

53.8 

a

9.8 

36.4 

5.7 

47.9 

46.4 

Impact of IPR infringement on U.S. employment

Share of firms reporting 

 that infringement 

 caused: 

 

 • Employment increase a0.1 0.0 0.0 b0.0 

 • Employment decrease c

8.9 d8.6 c7.9 e12.9 

 • No change 91.0 91.3 92.1 87.1 

Expenses related to IPR infringement and IPR enforcement

Share of firms that 

 incurred IP-related 

 expenses 94.0 92.1 22.5 14.4 

Source: USITC questionnaire, weighted response data. 

Notes: Data are significant at the 95 percent level unless otherwise indicated. Percentages may not add to 

100 due to rounding. In addition, respondents may have made multiple selections or provided more than 

one response for certain questions. Data are for firms responding in the affirmative to question 1.14. 

 a

Significant at the 90 percent level. 

 b

Significant at the 85 percent level. 

 c

Significant at the 70 percent level. 

 d

Significant at the 80 percent level. 

 e

Significant at the 75 percent level. 

By one industry-financed estimate, in 2007, U.S. core copyright industries outperformed 

the rest of the U.S. economy in terms of their real annual growth rates, played a 

prominent role in exports, and employed millions of workers at wage levels that 

substantially exceeded those of U.S. workers as a whole.92 Technological advances have 

allowed many, if not most, copyrighted works to be stored and transmitted digitally, 

dramatically reducing the variable costs associated with providing copies.93 However, 

those variable costs have also fallen for infringers,94 facilitating rampant copyright piracy. 

It is reported that copyrighted works for digital and nondigital products tend to be widely 

infringed in China, accounting for substantial financial losses for U.S. and other 

multinational firms. 

 92Siwek, “Copyright Industries in the U.S. Economy,” 2009, 16. 

93Landes and Posner, The Economic Structure of Intellectual Property Law, 2003, 51. 94Landes and Posner, The Economic Structure of Intellectual Property Law, 2003, 46–47. 
3-27

Losses Due to Chinese Copyright Infringement

Firms estimated losses due to reported Chinese copyright infringement of $23.7 billion 

(in the range of $10.2 billion to $37.3 billion) during 2009 (table 3.2). Material sales or 

profit losses worldwide from Chinese copyright infringement during 2007–09 were 

reported by 15.5 percent95 of firms that reported IPR infringement in China (table 3.6).96

More firms reported losses in the Chinese market due to copyright infringement than to 

other forms of IPR infringement (table 3.5 and figure 3.4). Perhaps because of the 

generally low cost of illegally replicating copyrighted works and the ease of distribution 

(whether by physical or digital means), piracy of copyrighted works resulted in 

substantial losses during 2007–09, as noted earlier. Firms that experienced copyright 

infringement in China averaged a loss-to-sales ratio of 6.4 percent in 2009, the highest 

among all forms of IPR protection (table 3.6). 

TABLE 3.6 U.S. firms experiencing IPR infringement in China: Copyright infringement, survey results (percent) 

Description Survey results 

Loss-to-sales ratio (losses/sales), 2009 6.4 

Share of firms that experienced material sales or profit losses anywhere in the world due 

 to copyright infringement in China during 2007–09 a

15.5 

Share of firms that reported losses and could differentiate market where losses occurred 98.9 

Percent of 2007–09 losses in: 

• Chinese market 90.2 

• U.S. market 0.9 

• Other markets 8.9 

Share of firms that reported losses and could not differentiate market where losses 

 Occurred b

1.1 

Share of firms that incurred expenses to address the infringement of firms' copyrights in 

 China 94.0 

Share of firms that experienced the following U.S. employment effects as a result of 

 copyright infringement in China:c 

• U.S. employment decreased c

8.9 

• U.S. employment increased a

0.1 

• No change in U.S. employment 91.1 

Source: USITC questionnaire, weighted response data. 

Note: Significant at the 95 percent level unless otherwise indicated. Weighted responses to questions in section 4 of 

the questionnaire for firms responding in the affirmative to question 1.14, unless otherwise indicated. Percentages 

may not add to 100 due to rounding or because respondents may have made multiple selections or given more than 

one response for certain questions. 

 a

Significant at the 90 percent level. 

 b

Significant at the 70 percent level. 

 c

For firms responding in the affirmative to question 4.1. 

Firms in the information and other services sector were most commonly affected by 

copyright losses, with half (50.0 percent)97 of all such firms reporting material losses. A 

total of 7.6 percent 98 of firms in the high-tech and heavy manufacturing sector also 

 95Significant at the 90 percent level. 

96USITC questionnaire, weighted responses to question 4.1 for firms that responded in the affirmative 

to question 1.14. Respondents may have indicated losses due to more than one type of infringement. 97Significant at the 90 percent level. 

98Significant at the 75 percent level. 
3-28

reported such losses;99 these may be attributable to piracy of a variety of different types 

of works, including semiconductor maskworks 100 proprietary software used in 

manufacturing, software installed on consumer electronics such as smart phones, and 

Internet content used to support product sales.101

Half (49.5 percent) of all firms that reported experiencing violations of copyrights in 

China also reported they incurred sales or profit losses during 2007–09, at least in part as 

a result of copyright infringement. Again, this was most prevalent in the information and 

other services sector, where 79.2 percent of firms experienced losses. 102 Most firms 

reporting copyright infringement losses (98.9 percent) during 2007–09 were able to 

identify the markets where their losses occurred; 90.2 percent of those losses occurred in 

China (table 3.6).103 

Part of the problem for many of the copyright industries (such as music, movies, and 

book publishing) is the market access limitation that they face in China. For example, 

China severely limits the number of new foreign films that can be introduced in that 

market each year, making legitimate sales of products by foreign film companies nearly 

impossible.104 It is believed that the longer infringement remains pervasive in China, the 

harder it becomes for companies to sell legitimate products at profitable rates. According 

to one publisher, the prevalence of piracy establishes a price point for their product that 

prices the original out of the market, rendering Chinese retailers unwilling to purchase 

legitimate foreign-source products in meaningful quantities.105

Scope of Copyright Infringement

Copyright infringement has had a significant impact on firms in the information and other 

services sector. Half of the firms in this sector (50.0 percent)106 reported that they had 

reason to believe that one or more of their copyrighted works were infringed in China 

during 2007–09.107 Half of the firms in this sector (50.0 percent)108 also reported lost 

sales, royalties, license fees, or other income in China or in markets outside of China as a 

result of copyright infringement during 2007–09.109 In addition to the more common 

 99USITC questionnaire, weighted responses to question 4.1, for firms responding in the affirmative to 

question 1.14. 100Some survey respondents identified losses due to the infringement of their layout designs for 

integrated circuits in response to the survey questions on copyright infringement. 101USITC questionnaire, survey respondents. 102The high-tech and heavy manufacturing, chemical manufacturing, and transportation manufacturing 

industries also felt the effects, with 58.2, 19.7 and 13.3 percent, respectively, of firms reporting losses from 

copyright infringement. USITC questionnaire, weighted responses to question 4.1, for firms responding in the 

affirmative to question 1.14. 103USITC questionnaire, weighted responses to question 4.5b, for firms responding in the affirmative to 

question 1.14. 104Market restrictions affecting the motion picture industry include the maintenance of a quota of only 

20 films for which revenue sharing of the box office receipts between the producers and the importer and 

distributor is possible; the inability to import and distribute films except through the two main Chinese film 

companies; a screen-time quota; a restriction on market access for foreign satellite programming; television 

broadcast quotas; blackout periods for films; local print requirements; and import duties. All of these, 

according to the IIPA, close off the market for U.S.-produced films and programming. IIPA, written 

submission to the USITC, June 3, 2010, 12. 105USITC questionnaire, survey respondent. 106Significant at the 90 percent level. 107USITC questionnaire, weighted responses to question 4.3a, for firms that responded in the 

affirmative to question 1.14. 108Significant at the 85 percent level. 109USITC questionnaire, weighted responses to question 4.5a, for firms that responded in the 

affirmative to question 1.14. 
3-29

methods of copyright piracy—illegal downloads and physical reproduction of infringed 

material—firms reported substantial losses from under-licensing. In such cases a Chinese 

company may purchase a single-user license or subscription to a database or information 

service and then distribute it throughout the organization. This practice puts firms that 

pay for such services legitimately at a competitive disadvantage with their Chinese 

counterparts, as the subscriptions can be costly.110 More broadly, illegal downloads of 

business software by Chinese entities can put foreign firms that purchase software 

legally—which can represent significant investments for U.S. firms in their operations—

at a disadvantage relative to Chinese firms that did not make similar investments yet sell 

the same products or services in direct competition.111 These issues are addressed further 

in chapter 4. 

Firms that reported IPR infringement in China have registered thousands of copyrights, 

with almost all (98.6 percent) pending or in force in the United States. Of those registered 

copyrights in the United States, most (96.5 percent) are held by companies in the 

information and other services sector.112 By law, copyrights do not have to be registered 

in China in order to receive protection, but some companies choose to do so in an effort 

to secure enhanced protection or to facilitate the enforcement process. From the survey, it 

appears that many firms do not pursue enforcement actions.113 This is reportedly due to 

the associated costs and unsatisfactory outcomes in administrative and court 

proceedings.114

Impact of Copyright Infringement 

Firms that reported IPR infringement generally said that the pace of copyright 

infringement in China remained steady during 2007–09, and a minority of firms indicated 

that copyright infringement had increased. The reported effects of infringement went well 

beyond lost sales, in some cases affecting employment and innovation. The U.S. 

employment effects of copyright infringement are uncertain. When asked to provide data 

on employment changes resulting from infringement losses, most firms were unable to 

produce an estimate, and those that did largely reported no change.115 However, anecdotal 

reports suggest that the effects, while difficult to quantify, are likely more pervasive than 

data would suggest. According to one company, losses resulting from piracy in China 

affect not only them, but also their subsidiaries and distributors, who may experience 

slower growth and employment constraints.116

Firms that reported copyright infringement in China generally did not report scaling back 

on R&D expenses as a result of material losses during 2007–09.117 This may be related, 

in part, to the fact that copyrighted works may not be as R&D intensive as other IPRprotected works, though it is likely also because these firms do not tend to classify their 

activities—for example, money spent in promoting a new artist—as R&D in the sense of 

pursuing new knowledge through research. However, firms with copyright issues often 

expend considerable resources developing new products and material. Moreover, some 

 110Industry representative, telephone interview by USITC staff, December 2010. 111Business Software Alliance, written submission to USITC, June 3, 2010, 2. 112USITC questionnaire, weighted responses to question 4.2. 113USITC questionnaire, weighted responses to question 4.4a, for firms that responded in the 

affirmative to question 1.14. 114USITC questionnaire, survey respondents. 115USITC questionnaire, weighted responses to question 4.8. 116USITC questionnaire, survey respondent. 117USITC questionnaire, weighted responses to question 4.9. 
3-30

firms reported increased research spending to develop more sophisticated technological 

protection measures and other means of protecting their works from piracy.118

Copyright Infringement and Enforcement Challenges 

The majority of firms that reported copyright infringement in China said they did not 

pursue legal action because the penalties for parties found liable were reported to be too 

low to act as a deterrent or because the costs of doing so were thought to be too high 

given the minimal penalties.119 However, 94.0 percent of firms that reported material 

losses from copyright violations in 2007–09 incurred some expenses to address 

infringement,120 and 31.8 percent121 of these firms pursued enforcement proceedings.122

Ultimately, however, nearly all firms that pursued enforcement proceedings were 

dissatisfied with the outcome,123 and such experiences are likely to provide disincentives 

for firms to further engage in such proceedings. Some companies have attempted to 

pursue criminal proceedings against known offenders, but report that Chinese 

government officials are reluctant to initiate them and often refuse to transfer cases to the 

agency responsible for undertaking criminal proceedings.124

In the face of these challenges, many companies elect to fight piracy largely on their 

own—for example by monitoring Internet distribution channels of infringing material and 

sending cease and desist letters to violators. One company reported working with PayPal 

and other legitimate payment processors to cut off the ability of consumers to purchase 

pirated products from unauthorized Web sites. However, as noted earlier, this approach 

has been likened to a game of whack-a-mole, with distributors reemerging online under a 

different name—sometimes within hours of shutting down the original site (see box 

2.2).125

Digital Copyright Piracy 

While anecdotal information suggests that copyright infringement through illegal Internet 

downloads is on the rise, it remains difficult to quantify the effects of such reported 

activity. Based on the questionnaire responses, it appears that most companies are not 

able to accurately assess losses from digital infringement versus those from physical 

infringement. However, one industry representative reported that digital piracy overtook 

physical piracy in 2008 as the predominant method of copyright infringement in China.126

Further, there is a strong sentiment across many segments of the information industry that 

digital piracy is one of the most pressing issues that firms are facing, with P2P, 

deeplinking sites, and other illegal file-sharing sites having a significant negative effect 

on profitability. These issues are discussed in more detail in chapter 2 of this report. 

 118USITC questionnaire, survey respondent. 119Industry representative, interview by USITC staff, Hong Kong, China, January 3, 2011. 120USITC questionnaire, weighted responses to question 4.6a, for firms that responded in the 

affirmative to question 4.1. 121Significant at the 80 percent level. 122USITC questionnaire, weighted responses to question 4.4a, for firms that responded in the 

affirmative to question 1.14. 123USITC questionnaire, weighted responses to question 4.4d, for firms that responded in the 

affirmative to question 1.14. 124Survey response. Further, it is reported that firms with infringement issues often elect not to pursue 

action because their position in the market and the business climate may be such that making waves could 

cause them greater long-term damage. Industry representative, telephone interview with USITC staff, 

Washington, DC, December 17, 2010. 125Industry representative, interview by USITC staff, Washington, DC, November 3, 2010. 126Ibid. 
3-31

Trademark Infringement 

Trademarks generally protect the right to use a distinctive mark or name to identify and 

distinguish a product, service, or firm.127 Trademarks enable a consumer to purchase 

products or services from brands that the consumer believes to be reliable or desirable.128

Firms spend substantial sums on product quality, service, and advertising in order to 

establish the reputation of their brands.129 A trademark infringer can cause a trademark 

owner to lose sales when the infringer competes in the marketplace with the trademark 

owner, deceiving consumers as to the source of goods or services offered. Beyond lost 

sales, poor-quality counterfeits undermine the investments made by brand owners in the 

quality and reputation of their products and can give rise to health and safety concerns, as 

well as to wrongful product warranty and liability claims. Brands are no less important to 

small firms; there are more than 1.6 million active certificates of federal trademark 

registration in the United States.130

Counterfeiting in China is reported to be a significant problem affecting a wide crosssection of companies, as virtually any good or service with a trademark can be and is 

counterfeited there. 131 The majority of companies reported that counterfeiting continues 

to grow in China, and most companies experiencing material losses in sales or profits due 

to trademark infringement also pursued enforcement proceedings to address these losses. 

Losses Due to Trademark Infringement 

Firms estimated losses due to reported Chinese trademark infringement of $6.1 billion (in 

the range of $1.4 billion to $12.5 billion) during 2009 (table 3.2). Nearly one-third of 

firms that reported IPR infringement in China (31.5 percent) also reported material sales 

or profit losses worldwide from Chinese trademark infringement during 2007–09, 132

meaning that more firms reported worldwide losses due to trademark infringement than 

to other forms of Chinese IPR infringement (table 3.5).133 Most firms reporting trademark 

infringement losses (83.3 percent) were able to identify the markets where their losses 

occurred; the largest losses were reported in the Chinese market (37.7 percent), followed 

by the U.S. market (32.3 percent) and all other markets (30.1 percent).134 However, 

almost one-fifth of firms (16.7 percent) could not identify the markets where their losses 

occurred (table 3.7). The growing use of the Internet to sell counterfeit goods may 

contribute to the large share of losses that could not be attributed to specific markets.135

The sector with the largest share of firms that reported losses related to trademark 

infringement (90.8 percent) is the consumer goods manufacturing sector, while 

companies in the high-tech and heavy manufacturing sector registered the largest 

 127See TRIPS art. 15 ¶ 1. For more information on the definition of trademarks, see USITC, China: 

Intellectual Property Infringement, 2010, 1-5. 128Landes and Posner, The Economic Structure of Intellectual Property Law, 2003, 167–68. 129Ibid., 168. 130USITC, China IPR and Indigenous Innovation 1, 2010, 3-24. 131Ibid., 3-15, 3-16. 132USITC questionnaire, weighted responses to question 5.1, for firms that responded in the affirmative 

to question 1.14. Respondents may have indicated losses due to more than one type of infringement. 133As noted earlier, while more firms reported losses in the Chinese market due to copyright 

infringement than to other forms of IPR infringement, more firms reported worldwide losses due to trademark 

infringement than to other forms of Chinese IPR infringement. 134USITC questionnaire, weighted responses to question 5.5b, for firms that responded in the 

affirmative to question 1.14. 135For more information on IPR infringement and the Internet, see chapter 2. 
3-32

losses—nearly 70 percent of total reported losses. 136 Some industry representatives 

estimated that their sales have been one-third lower because of Chinese counterfeiting.137

Almost none of the firms experiencing trademark infringement could quantify the extent 

to which trademark infringement in China has damaged, diluted, or tarnished the value of 

their trademarks, but identified these costs as significant. 

TABLE 3.7 U.S. firms experiencing IPR infringement in China: Trademark infringement, survey results (percent) 

Description Survey results 

Loss-to-sales ratio (losses/sales), 2009 0.8 

Share of firms that experienced material sales or profit losses anywhere in the world due 

 to trademark infringement in China during 2007–09 31.5 

Share of firms that reported losses and could differentiate market where losses occurred 83.3 

Percent of 2007–09 losses in: 

• Chinese market 37.7 

• U.S. market 32.3 

• Other markets 30.1 

Share of firms that reported losses and could not differentiate market where losses occurred a

16.7 

Share of firms that incurred expenses to address the infringement of firms' trademarks in 

 Chinab 92.1 

Share of firms that experienced the following U.S. employment effects as a result of 

 trademark infringement in China: 

• U.S. employment decreased a

8.6 

• U.S. employment increased 0.1 

• No change in U.S. employment 91.3 

Source: USITC questionnaire, weighted response data. 

Note: Significant at the 95 percent level unless otherwise indicated. Weighted responses to questions in section 5 of 

the questionnaire for firms responding in the affirmative to question 1.14, unless otherwise indicated. Percentages 

may not add to 100 due to rounding or because respondents may have made multiple selections or given more than 

one response for certain questions. 

 a

Significant at the 80 percent level. 

 b

For firms responding in the affirmative to question 5.1. 

Scope of Trademark Infringement 

Trademark infringement was most pervasive among consumer goods manufacturers, as 

almost all of them (91.6 percent) reported such problems. Trademark infringement in 

China was also common among chemical manufacturers, as 33.0 percent of them 

identified trademark infringement losses in China.138 Box 3.4 reports industry comments 

and concerns about trademark infringement in China. 

 136Significant at the 75 percent level. USITC questionnaire, weighted responses to question 5.5, for 

firms that responded in the affirmative to question 1.14. Respondents may have indicated losses due to more 

than one type of infringement. 137Industry representative, interview by USITC staff, Hong Kong and mainland China, January 3–7, 

2011; iindustry representative, interview by USITC staff, Shanghai, January 10–14, 2011. 138Significant at the 90 percent level. USITC questionnaire, weighted responses to question 5.1, for 

firms that responded in the affirmative to question 1.14. 
3-33

BOX 3.4 Company comments regarding trademark registration in China 

Companies identified a variety of concerns about trademark registration in China during field interviews and in 

questionnaire responses. Some of those concerns are summarized below. 

Trademark registration backlog. According to one industry representative, a large backlog of trademark 

registrations in China prevents timely registration of all of a firm’s trademarks. One company official estimated 

that it takes on average 18 months to 2 years to register a Chinese trademark, which provides a significant 

amount of time for counterfeiting to take place. This is a particular problem for products with a short life cycle, 

such as toys. In addition, according to other industry representatives, Chinese trademark authorities grant 

virtually all applications to register a trademark, including those that violate existing trademarks. 

Trademarks with similar names. Many registered trademarks are very similar to those already registered, and 

may include misspellings, or a slightly different company name. According to one company official, foreign 

companies in China are particularly vulnerable to having their Chinese company name (which is often a Chinese 

translation or transliteration of the company’s English trademark) registered by Chinese companies or individuals 

as their own trademark. On the other hand, a Chinese provincial high court recently upheld a lower court 

decision in favor of French cosmetics brand L’Oreal in its case against a Chinese company using the trademark 

“L’Oiyir.” 

Trademarks registered in different product classes. Other company representatives noted that third parties 

register the identical trademark but apply it to their own goods by registering the mark in product classes or 

subclasses that are different from the company’s typical product classes. Industry representatives noted that it is 

extremely difficult to enforce rights vis-à-vis infringers in unrelated business categories (product classes) and 

even unrelated subclasses within the same class. To address these concerns, a number of companies reported 

increasing their “trademark scope” by registering their trademarks in more business categories and subclasses, 

regardless of the product. 

Trademark “squatting.” Other industry officials are concerned about trademark “squatting,” which refers to the 

act of registering another party’s brand name as your own. China has a “first-to-register” system that requires no 

evidence of prior use or ownership, leaving registration of popular foreign marks open to third parties. These 

third parties (squatters) may then bring an infringement action or seek payment from the true brand owner. 

 

Sources: Survey respondents; industry officials, interviews with USITC staff, Hong Kong and mainland China, 

January 3–7, 2011, and Shanghai, China, January 10–14, 2011; U.S. government official, telephone interview by 

USITC staff, February 1, 2011; “Desist Order on ‘L’Oreal’ Labeling for Local Firms,” China Daily, January 19, 

2011; “China’s IP Journey,” WIPO Magazine, December 2010. 

The large share of firms reporting material losses in the consumer goods manufacturing 

sector was accounted for by the apparel manufacturing subsector, in which nearly all 

firms (99.7 percent) reported material losses. This was followed by the breweries, 

wineries, and distilleries (50.7 percent) and footwear (44.0 percent) subsectors. Nearly all 

firms (96.7 percent) in the pesticide, fertilizer, and other agricultural chemical 

manufacturing subsector of the chemical manufacturing sector also reported losses. In the 

information and other services sector, nearly all firms (99.4 percent) in the motion picture 

and video industries subsector reported material losses, followed by the sound recording 

(64.0 percent) and software publishers (35.1 percent) subsectors. Finally, in the high-tech 

and heavy manufacturing sector, significant shares of firms in the following subsectors 

reported material losses: miscellaneous manufacturing (41.2 percent), medical equipment 

and supplies manufacturing (41.0 percent), and semiconductor and other electronic 

component manufacturing (32.7 percent).139

Firms that reported IPR infringement had many fewer trademarks registered in China 

than in the United States. The number of trademarks recorded with U.S. Customs and 

 139USITC questionnaire, weighted responses to question 5.1, for firms that responded in the affirmative 

to question 1.14. 
3-34

China Customs was significantly smaller than the number of trademarks registered.140

The smaller number of trademarks pending or in force in China than in the United States 

can be partly attributed to a lack of awareness among SMEs that a U.S. trademark does 

not offer full protection in China and other markets.141 

Impact of Trademark Infringement 

Although the majority of firms (51.0 percent) reported that they could not determine the 

trend in trademark infringement in China during 2007–09, 41.0 percent of firms indicated 

that trademark infringement increased during 2007–09;142 this was particularly true of 

firms in the chemical manufacturing and information services sectors. According to 

industry representatives, Chinese counterfeiting is growing each year as it spreads across 

China, affects a broader range of products, and involves a growing number of markets.143

For example, as enforcement improved in Guangzhou, a major coastal counterfeiting 

center in southeast China, counterfeiters reportedly moved inland.144 Similarly, as a brand 

owner “gets better at dealing with fakes,” the counterfeiters move on to new brands.145

Internet-based trade in counterfeits is also proliferating and remains particularly hard to 

police. 146 The growth of small-scale so-called “living room” counterfeiters, who can 

move quickly to avoid detection, and the lack of penalties against retailers who sell 

counterfeits, have also led to a spread in counterfeit activity.147

A much smaller share of firms (7.7 percent)148 reported that trademark infringement was 

stable during 2007–09, 149 including some in the pharmaceuticals and electrical 

equipment, appliance, and component manufacturing subsectors. One company 

representative mentioned that in sectors with potential food safety problems the trend 

may be stabilizing, as Chinese authorities assess more stringent penalties when health or 

safety issues are involved. 150 Very few companies said that trademark infringement 

decreased from 2007 to 2009 (0.2 percent),151 with most of those responses coming from 

firms in the high-tech and heavy manufacturing sector. One company that reported a 

decrease in trademark infringement between 2007 and 2009 reported it “decreased due to 

the global economy and not because of better enforcement by China.”152

The majority of companies (91.3 percent) reported that trademark infringement in China 

did not affect the number of U.S. employees they hired during 2007–09.153 A much 

 140USITC questionnaire, weighted responses to question 5.2. U.S. Customs can seize counterfeit 

imports. China Customs can seize both counterfeit imports and counterfeit exports. For further information, 

see USITC, China: Intellectual Property Infringement, 2010, 1-14. 141A 2005 U.S. Patent and Trademark Office study found that 85 percent of SMEs who export do not 

realize their U.S. trademarks and patents do not protect them overseas. Stopfakes.gov, “Do You Have a Plan 

to Protect Your Products from Intellectual Property Theft in China?” n.d. 142USITC questionnaire, weighted responses to question 5.8. 143USITC questionnaire, survey respondent; industry representative, interviews by USITC staff, 

Shanghai, China, January 10–14, 2011. 144Industry representative, interviews by USITC staff, Shanghai, China, January 10–14, 2011. 145Ibid. 146For more information, see chapter 2 of this report. 147Industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2011. For 

more information on the factors facilitating the growth of counterfeiting, see chapter 2 of this report. Chapter 

2 also includes an in-depth discussion of the rise of counterfeiting in the footwear industry (box 2.1) 148Significant at the 85 percent interval. 149USITC questionnaire, weighted responses to question 5.8. 150Industry representative, interview by USITC staff, Shanghai, China, January 10–14, 2011. 151Significant at the 85 percent level. 152USITC questionnaire, survey respondent. 153USITC questionnaire, weighted responses to question 5.9. 
3-35

smaller share of firms (8.6 percent)154 said that trademark infringement caused a decrease 

in the firm’s employment of U.S. workers. Only a few companies reported an increase in 

the number of U.S. workers during 2007–09 because of trademark infringement; 

generally, these were employees dedicated to enforcement efforts. The impact of any 

improvements in trademark protections in China on U.S. employees reportedly would 

depend on whether there was U.S. production. Firms with U.S. production indicated that 

U.S. employment would be higher if IPR protection improved.155 By contrast, according 

to several firms that manufacture in China, even if IPR protection improved in China, the 

number of U.S. employees at their companies would not change. Instead, firms stated that 

jobs in China could grow.156 These companies were of the opinion that production in 

China will not return to the United States, because China offers lower production costs 

and a faster-growing market. One company official estimated annual growth of 25–35 

percent in the Chinese market in his product line over the past few years.157 

Nearly all firms (86.1 percent) said that trademark infringement in China had no effect on 

U.S.-based R&D expenditures during 2007–09.158 Several company officials noted that 

their U.S. R&D is not growing because the U.S. market is not growing; instead they 

conduct R&D in China focused on developing products for the large and growing 

Chinese market.159 Among firms with trademark issues, R&D expenditures as a share of 

global sales were lower in China (0.1 percent) than in the United States (4.1 percent) or 

the world (6.5 percent). Although companies showed more willingness to invest in R&D 

in China for products intended for sale in China (the share of R&D expenditures in China 

to sales in China was 3.2 percent), this share was still lower than the share of U.S. R&D 

expenditures to U.S. sales (9.6 percent). 

Trademark Infringement and Enforcement Challenges 

Of the firms that reported material losses in sales or profits from trademark infringement 

in China during 2007–09, nearly all (92.1 percent) also incurred expenses to address the 

infringement.160 These expenses averaged $50,459 per firm and accounted for less than 

0.05 percent of their global sales. Total expenses were highest in the high-tech and heavy 

manufacturing sector, followed by the transportation manufacturing sector, particularly 

the motor vehicle equipment manufacturing subsector. Individual companies responding 

to the survey reported expenditures to address trademark infringement as high as $21 

million during 2007–09, and typically noted that their estimates were substantially 

underestimated because they could not quantify personnel costs and many other related 

expenses.161

To address reported infringement, 92.1 percent of firms with material trademark losses 

said they pursued enforcement proceedings during 2007–09. 162 Administrative 

 154Significant at the 80 percent level. 155USITC, hearing transcript, June 15–16, 2010, 331 (testimony of James D’Addario, D’Addario and 

Co., Inc.). 156Industry representative, interview by USITC staff, Hong Kong and mainland China, January 3–7, 

2011; industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2011. 157Industry representative, interview by USITC staff, Shanghai, China, January 10–14, 2011. 158USITC questionnaire, weighted responses to question 5.10. 159Industry representative, interviews by USITC staff, Shanghai, China, January 10–14, 2011. 160USITC questionnaire, weighted responses to question 5.6a, for firms that responded in the 

affirmative to question 5.1. 161USITC questionnaire, survey respondents. 162USITC questionnaire, weighted responses to question 5.4a, for firms that responded in the 

affirmative to question 1.14. 
3-36

proceedings were the type of proceeding most frequently pursued, accounting for 99.1 

percent of all reported proceedings, followed much further behind by civil and criminal 

cases. Dissatisfaction with the outcome of proceedings was reported by the vast majority 

of firms pursuing administrative, civil, and criminal cases, 90.4 percent, 97.8 percent, and 

98.4 percent, respectively. 

Administrative proceedings remain the most popular because they are generally faster 

and less expensive than the other options,163 but many industry representatives claimed 

that the remedies were too weak. For example, one U.S. firm that manufactures music 

strings and accessories stated that a Chinese factory was fined just $3,500 for 

counterfeiting 100,000 packages of guitar strings.164 The limited remedies likely dissuade 

this and other firms from pursuing legal recourse. (See box 3.5 for more company 

comments on Chinese enforcement proceedings.) Firms reported an aggregate $3.4 

million in monetary relief from legal proceedings related to trademark infringement in 

China during 2007–09, which represented less than 0.5 percent of total losses reported by 

firms from trademark infringement. 

 163USITC, China IPR and Indigenous Innovation 1, 2010, 1-8. 164USITC, hearing transcript, June 15–16, 2010, 371 (testimony of James D’Addario, D’Addario and 

Co., Inc.). According to the company, the average retail price for a set of counterfeit strings is 15–20 RMB 

($2.22–$2.95) while an authentic set of D’Addario strings sells for about 35 RMB ($5.17). 
3-37

BOX 3.5 Company comments regarding enforcement proceedings in China 

Although some companies responding to the survey reported satisfaction with China’s enforcement proceedings, 

many other companies reported that administrative, civil, and criminal enforcement proceedings related to 

trademark infringement were unsatisfactory. This dissatisfaction with the outcomes of legal proceedings 

discourages firms from seeking legal recourse. Reported problems including the following: 

 

 Administrative proceedings result in fines that are too low to deter infringers; instead, fines represent 

merely a “cost of doing business” for infringers. As a result, after paying a fine, a factory owner simply 

relocates equipment and reopens a factory producing the same counterfeit products as those that were 

previously seized. 

 In civil proceedings, monetary damages awarded are “disappointingly” low. 

 Criminal proceedings lack transparency, unlike administrative and civil proceedings. Also, criminal 

sentences are “very short” and limited in their deterrence. Most importantly, criminal prosecution 

requires that the value of the infringing product meet a high monetary threshold, which makes it difficult 

for a case to qualify for criminal proceedings.a

 According to one company official, because 

counterfeiters do not keep accurate records of their illegal activities, it is difficult for the rights holder to 

establish a criminal case. Another industry representative noted that establishing a criminal case is 

nearly impossible except for exact one-to-one copies. For example, even when an infringer makes only 

minor changes to another company’s trademark and the criminal motivation is obvious, a criminal 

prosecution is difficult. 

Industry representatives cited a number of other, more general concerns with trademark enforcement in China. For 

example, laws against counterfeiting are not adequately enforced in areas with local protectionism. To maintain 

economic growth, employment levels, and social stability, local authorities protect major taxpayers, for example, 

the owners, operators, and landlords of markets such as the Beijing Silk Street Market; large 

counterfeiters/syndicates; and factories making counterfeits. Other companies were concerned that the 

administrative bodies that conduct the majority of anti-counterfeiting raids have limited powers to investigate and 

punish. Luxury goods producers complained that counterfeit luxury goods are not as urgent a priority for 

enforcement as counterfeit/inferior drugs and food products. Finally, one industry official questioned the integrity of 

the China Trademark Office and the Trademark Review and Adjudication Board (TRAB) after his company lost its 

opposition and appeal against an application by a trademark squatter for a trademark identical to its own. The 

rights holder later learned that the applicant allegedly had “people” in the Trademark Office and TRAB. 

 

Sources: Survey respondents; USCBC, “Focus: Intellectual Property, Tackling Intellectual Property Infringement in 

China,” March-April 2009; industry officials, interviews with USITC staff, Shanghai, China, January 10–14, 2011; 

and USITC, China IPR and Indigenous Innovation 1, 2010, 3–25. 

 a

The thresholds are based on the value of the counterfeit products rather than the value such legitimate products 

would earn in the market. CRS, “China-U.S. Trade Issues,” January 7, 2011, 27. 

Patent Infringement 

Patents protect new, useful, and nonobvious inventions, such as manufacturing processes, 

machines, and chemical compositions, by preventing others from making, selling, using, 

or importing the patented invention.165 U.S. patent protection is in some ways powerful 

and in other ways limited. It is powerful in that, unlike copyrights, patents prevent any

subsequent practice of the patented invention, including when others later but 

independently (i.e., without copying from the patent) arrive at the same invention 

themselves.166 Patents are limited in that their term of exclusivity—typically 20 years—is 

short compared to terms for copyrights (50 years in China and longer elsewhere), 

trademarks (potentially forever so long as the mark is used in commerce), and trade 

secrets (potentially forever so long as secrecy is maintained). 

 165See 35 U.S.C. § 101; TRIPS art. 27 ¶ 1; Chisum, Chisum on Patents, volume 1, 2009, “Overview,” 

and 35 U.S.C. § 271(a); TRIPS art. 28 ¶ 1. 166See, e.g., Landes and Posner, The Economic Structure of Intellectual Property Law, 2003, 294. 
3-38

Patents are of special importance to industries with significant R&D expenditures, 

including pharmaceuticals, agricultural chemicals, and biotechnology.167 For example, the 

pharmaceutical sector reportedly expended over $65 billion in R&D in 2009, reinvesting 

about 16 percent of global sales in R&D.168 Reportedly only 1 of about 5,000 products 

researched is approved for marketing each year and, as of 2005, the cost of bringing a 

pharmaceutical to market was estimated to be as high as $1 billion.169 Patents, which can 

make it possible for firms to recoup some of this substantial investment, thus have been 

characterized as a pharmaceutical company’s “main asset.” 170 Similarly, some small 

firms, including startups, find patent holdings to be necessary to attract venture and other 

capital.171

Losses Due to Patent Infringement

Firms estimated losses due to reported Chinese patent infringement of $1.3 billion (in the 

range of $0.2 billion to $2.8 billion) during 2009 (table 3.2). Material sales or profit 

losses worldwide from Chinese patent infringement were reported by 15.3 percent of 

firms (table 3.8). The chemical manufacturing sector was the sector with the largest share 

(43.3 percent) of firms that reported losses related to patent infringement.172

TABLE 3.8 U.S. firms experiencing IPR infringement in China: Patent infringement, survey results (percent) 

Description Survey results 

Loss-to-sales ratio (losses/sales), 2009 0.6 

Share of firms that experienced material sales or profit losses anywhere in the world 

 due to patent infringement in China during 2007–09 15.3 

Share of firms that reported losses and could differentiate market where losses occurred 24.8 

Percent of 2007–09 losses in: 

• Chinese market 53.8 

• U.S. market 9.8 

• Other markets 36.4 

Share of firms that reported losses and could not differentiate market where losses occurred a

75.2 

Share of firms that incurred expenses to address the infringement of firms' patents in 

 Chinab 22.5 

Share of firms that experienced the following U.S. employment effects as a result of 

 patent infringement in China: 

• U.S. employment decreased a

7.9 

• U.S. employment increased c

0.0 

• No change in U.S. employment 92.1 

Source: USITC questionnaire, weighted response data. 

Note: Significant at the 95 percent level unless otherwise indicated. Weighted responses to questions in section 

6 of the questionnaire for firms responding in the affirmative to question 1.14, unless otherwise indicated. 

Percentages may not add to 100 due to rounding or because respondents may have made multiple selections 

or given more than one response for certain questions. 

 a

Significant at the 70 percent level. 

 b

For firms responding in the affirmative to question 6.1. 

 c

Significant at the 90 percent level. 

 167See, e.g., Maskus, Intellectual Property Rights in the Global Economy 200, 52; Landes and Posner, 

The Economic Structure of Intellectual Property Law, 2003, 316; USITC questionnaire responses; industry 

representative, telephone interviews by USITC staff, October–November 2010 and January 2011. 168PhRMA, “Pharmaceutical Industry Profile 2010: Key Facts.” 169DiMasi and Grabowski, “The Cost of Biopharmaceutical R&D: Is Biotech Different?” 2007. 170Industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2011. 171Graham, et al., High Technology Entrepreneurs, 2010, 1255, 1288–89. 172USITC questionnaire, weighted responses to question 6.1, for firms that responded in the affirmative 

to question 1.14 . Respondents may have indicated losses due to more than one type of infringement. 
3-39

Of the firms reporting losses due to Chinese patent infringement in 2007–09, most (75.2 

percent) were not able to identify the markets where their losses occurred. Firms that 

could differentiate their losses by market (24.8 percent) estimated that the Chinese 

market accounted for 53.8 percent of the losses, and the U.S. market accounted for 9.8 

percent of the losses. Third-country markets accounted for 36.4 percent of the losses.173

As an example of the importance of losses resulting from the reported Chinese patent 

infringement in third-country markets, a U.S. chemical company reported that it lost 50 

percent of the Malaysian market for one of its brand-name products because of Chinese 

shipments of a similar product to Malaysia. The brand-name product and process were 

patented in China; the potentially-infringing Chinese product was said to be produced by 

a state-owned entity in China.174

The share of firms reporting patent infringement (15.3 percent) was significantly lower 

than the share reporting trademark infringement (30.5 percent) during 2007–09. 175

Industry sources attributed the lower reporting of patent infringement to several factors: 

(1) some U.S. companies focus on pursuing proceedings against trademark violations in 

China rather than known cases of patent infringement because trademark proceedings 

cost less and are considered easier to present; (2) it is likely that many patent-intensive 

U.S. firms, such as those in the chemical manufacturing sector, maintain trade secrets 

rather than patents in China to avoid disclosure of proprietary data when the patent is 

published; (3) trademark infringement may be more common because infringers compete 

with the original products largely on the basis of price differences, and the high costs 

involved with replicating patented processes or products can reduce infringers’ pricecompetitiveness; and (4) the relative ease of detecting trademark infringement because a 

trademark is evident on the face of the infringing product or its packaging, whereas 

detailed study of the alleged infringing product or its manufacturing process may be 

required to detect patent infringement.176

Firms that reported losses related to patent infringement in China estimated an average 

share of losses to sales of less than 1.0 percent.177 These losses were concentrated among 

large, U.S.-based companies with global sales of over $400,000 per employee. 178 In 

general, firms citing losses from Chinese patent infringement maintained a significantly 

higher ratio of R&D expenditures to global sales in 2009 (7.1 percent) than those who did 

not have such losses (about 2.6 percent). 

 173USITC questionnaire, weighted responses to question 6.6b for firms that responded in the affirmative 

to question 1.14. 174Industry representative, interview by USITC staff, Washington, DC, February 16, 2011. 175USITC questionnaire, weighted responses to questions 5.1 and 6.1, for firms that responded in the 

affirmative to question 1.14. Respondents may have indicated losses due to more than one type of 

infringement. 176Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–7, 

2010. See also USITC, China: Intellectual Property Infringement, 2010, 4-6. 177The share of losses to sales for companies citing Chinese patent infringement was much lower than 

the share reported by firms affected by copyright piracy. 178For many U.S. affiliates of foreign firms, their parent companies hold the patent rights, maintain 

sales in China, and/or enforce IPR protection, thereby potentially reducing the direct impact of Chinese 

patent infringement of the U.S. affiliates’ products on the U.S. economy and jobs. Questionnaire responses; 

industry officials, telephone interviews by USITC staff, October–November 2010 and January 2011. 
3-40

Scope of Patent Infringement

Firms citing patent infringement losses in China reported many more patents pending or 

in force in the United States than in China.179 Sources stated that foreign companies tend 

to file fewer Chinese patents, mainly because of concern about the lack of 

enforcement.180

Firms in the high-tech and heavy manufacturing sector accounted for the majority of 

reported U.S. and Chinese patents, 72.8 percent and 53.7 percent, respectively. 

U.S. industry representatives stated that they were increasingly changing their strategies 

and patenting as many products and processes as possible, with many expanding their 

patent portfolio to include filing utility patents in China. 181 They also noted that 

companies increasingly are filing utility and invention patents simultaneously; the utility 

patent, which is likely to be approved fairly quickly, then can act as a preliminary level of 

protection until the invention patent is granted.182

Impact of Patent Infringement 

Although the majority of firms (57.9 percent) reported that they could not determine the 

trend in patent infringement in China during 2007–09, substantially more reported that 

infringement increased (24.0 percent)183 than decreased (less than 1 percent).184

Almost all firms (92.1 percent) reported that patent infringement in China did not affect 

the number of U.S. employees they hired during 2007–09.185 

Firms were more likely to feel that Chinese patent infringement had caused changes in 

their U.S.-based R&D expenditures. While more than half (55.8 percent) of firms with 

R&D activities in the United States reported no effect in this regard, almost one-third 

(31.9 percent) stated that Chinese patent infringement had caused a reduction in U.S.-

based R&D expenditures. No firms reported an increase in U.S.-based R&D.186 Several 

companies stated that the amounts they spent on patent enforcement could otherwise have 

been spent on R&D.187

 179USITC questionnaire, weighted responses to question 6.2, for patents pending or in force as of 

December 31, 2009. In addition, respondents reported very few patents recorded with Chinese customs 

authorities. Unlike in the United States, China customs permits the recordation of patents, which customs 

authorities may consult in connection with their detection of infringing goods at the border. USITC, China 

IPR and Indigenous Innovation 1, 2010, 2010, 1-5. 180Industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2011. 181Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–14, 

2011. As discussed in the first report, utility patents (also called “petty patents”) are not substantively 

examined before being granted and are largely held by Chinese entities. The United States does not offer 

utility patents. USITC, China IPR and Indigenous Innovation 1, 2010, 1-6. 182Industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2011. See also 

USITC, China IPR and Indigenous Innovation 1, 2010, 4-2. 183Significant at the 90 percent level. 184USITC questionnaire, weighted responses to question 6.8. 185USITC questionnaire, weighted responses to question 6.9a. 186USITC questionnaire, weighted responses to question 6.10a. 187Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–7, 

2011. 
3-41

Patent Infringement and Enforcement Challenges

Almost one-fourth (22.5 percent) of firms reported incurring expenditures to address 

Chinese patent infringement.188Although the chemical sector accounted for the largest 

number of firms reporting such expenses (73.4 percent), companies in the high-tech and 

heavy manufacturing sector reported the largest expenditures—over three quarters of the 

total (77.7 percent). The average enforcement expenditures for the other sectors were 

significantly lower. 

Anecdotal statements about patent infringement cases in China cite issues such as 

evidentiary and administrative hurdles, smaller awards than expected, protectionism, and 

a perception of bias against foreign firms, as reasons for not pursuing cases. 189

Companies stated that it is hard to get cases to court for several reasons, including 

evidentiary challenges. 190 However, some industry representatives reported that the 

Chinese patent enforcement and litigation systems are improving.191 

Trade Secret Misappropriation 

A trade secret is technical or business information that is generally unknown to anyone 

outside the firm and brings economic advantage to the owner over competitors, and for 

which the owner has adopted measures to maintain its confidentiality. Almost all 

industries reportedly rely on trade secrets as one way to protect their valuable business 

information in China.192 Some companies maintain trade secrets in place of patents to 

limit the disclosure of proprietary data.193 Although all sectors are susceptible to trade 

secret misappropriation, the sectors from the IP-intensive economy that reported being 

the most affected were the chemical manufacturing sector, the consumer goods 

manufacturing sector, and the high-tech and heavy manufacturing sector. 

Firms experiencing IPR infringement that reported trade secret misappropriation in China 

during 2007–09 had notably larger operations than those that did not mention trade secret 

misappropriation as a problem. Firms reporting trade secret misappropriation had an 

average sales-to-employee ratio three times higher than that of firms that did not report 

trade secret misappropriation. 

 188USITC questionnaire, weighted responses to question 6.7, for firms that responded in the affirmative 

to question 6.1. 189Industry representative, interviews by USITC staff, Hong Kong and mainland China, January 3–14, 

2011. Also, USITC, China IPR and Indigenous Innovation 1, 2010, 4-6. 190Industry representatives, interviews by USITC staff, Hong Kong and Mainland China, January 3–7, 

2011. According to testimony before the Commission, the number of Chinese IPR litigation cases filed in 

2009 increased by 25 percent to 30,626 cases. Most involved Chinese enterprises suing other Chinese 

enterprises. Only 4,400 of these cases, however, addressed patents. USITC, hearing transcript, June 15, 2010, 

12 (testimony of Lee Branstetter, Carnegie Mellon University). 191Industry representatives, interviews by USITC staff, Shanghai, China, January 10–14, 2010. 192Industry representative, telephone interview by USITC staff, July 22, 2010; industry representatives, 

interviews by USITC staff, Beijing, China, September 8, 2010. The OECD notes that food and beverage 

companies may particularly rely on trade secrets to protect their proprietary recipes. OECD, The Economic 

Impact of Counterfeiting and Piracy, 2008, 328. 193USITC, hearing transcript, June 16, 2010, 385 (testimony of James D’Addario, D’Addario and Co., 

Inc.); industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–7, 

2011. 
3-42

Losses Due to Trade Secret Misappropriation 

Firms estimated losses due to reported Chinese trade secret misappropriation of $1.1 

billion (in the range of $0.2 billion to $2.4 billion) during 2009 (table 3.2). Material sales 

or profit losses worldwide from Chinese misappropriation of trade secrets during 2007–

09 were reported by 7.2 percent194 of firms experiencing IPR infringement in China (table 

3.9).195 This was most prevalent in the chemical manufacturing sector, in which 30.9 

percent196 of firms reported losses due to trade secret misappropriation. The high-tech and 

heavy manufacturing sector and the transportation sector also reported losses as a result 

of Chinese trade secret misappropriation.197

TABLE 3.9 U.S. firms experiencing IPR infringement in China: Trade secret misappropriation, survey results (percent) 

Description Survey response 

Loss-to-sales ratio (losses/sales),a 2009 0.4 

Share of firms that experienced material sales or profit losses anywhere in the world due 

 to trade secret misappropriation in China during 2007–09a b

7.2 

Share of firms that reported losses and could differentiate market where losses occurred 72.6 

Percent of 2007–09 losses in: 

• Chinese market 5.7 

• U.S. market 47.9 

• Other markets 46.4 

Share of firms that reported losses and could not differentiate market where losses occurred c

7.4 

Share of firms that incurred expenses to address the misappropriation of firms' trade 

 secrets in China d

14.4 

Share of firms that experienced the following U.S. employment effects as a result of 

 trade secret misappropriation in China: 

• U.S. employment decreased d

12.9 

• U.S. employment increased e

0.0 

• No change in U.S. employment 87.1 

Source: USITC questionnaire, weighted response data. 

Note: Significant at the 95 percent level unless otherwise indicated. Weighted responses to questions in section 7 of the 

questionnaire for firms responding in the affirmative to question 7.1, unless otherwise indicated. Percentages may not 

add to 100 due to rounding or because respondents may have made multiple selections or given more than one 

response for certain questions. 

 a

For firms responding in the affirmative to question 1.14. 

 b

Significant at the 85 percent level. 

 c

Significant at the 70 percent level. dSignificant at the 75 percent level. 

 e

Significant at the 85 percent level. 

As mentioned earlier, some chemical manufacturing companies reported that they 

maintained trade secrets in place of patents to limit disclosure of proprietary data; this 

strategy makes them more susceptible to trade secret misappropriation.198 Firms in the 

 194Significant at the 85 percent level. 195USITC questionnaire, weighted responses to question 7.1, for firms that responded in the affirmative 

to question 1.14. Respondents may have indicated losses due to more than one type of infringement. 196Significant at the 85 percent level. 197USITC questionnaire, weighted responses to question 7.1, for firms that responded in the affirmative 

to question 1.14. Respondents may have indicated losses due to more than one type of infringement. 198Industry representatives, interviews by USITC staff, Hong Kong and mainland China, January 3–7, 

2011; industry representative, telephone interview by USITC staff, February 18, 2011; USITC, hearing 

transcript, June 16, 2010, 385 (testimony of James D’Addario, D’Addario and Co., Inc.). 
3-43

pharmaceutical subsector (part of the chemical manufacturing sector) and in other 

chemical manufacturing subsectors reported the largest losses in sales, royalties, license 

fees, or other income from Chinese trade secret misappropriation during 2007–09. Within 

the high-tech and heavy manufacturing sector, firms in two subsectors—machinery 

manufacturing and semiconductor and other electronic component manufacturing—

reported the largest losses. 

The majority of firms that reported IPR infringement in China said that most of their 

losses from trade secret misappropriation occurred outside the Chinese market, with a 

large portion of the losses occurring in the U.S. market (47.9 percent) and third-country 

markets (46.4 percent).199 It is also possible that the ease of rapid dissemination of trade 

secrets via mobile telecommunications devices also may contribute to trade secret losses 

occurring outside of China.200

Scope of Trade Secret Misappropriation 

A total of 17.2 percent of firms experiencing IPR infringement in China, and almost all 

(98.0 percent) firms that experienced trade secret misappropriation in China, reported 

taking steps to maintain proprietary trade secrets as part of their Chinese operations 

during 2007–09, 201 including using nondisclosure agreements and tightening internal 

control over operations. 202 The chemical manufacturing sector—particularly the 

pharmaceutical and medicine manufacturing subsector—had the highest number of firms 

that reported taking measures to maintain proprietary trade secrets in China. Numerous 

companies in the consumer goods manufacturing sector also reported taking steps to 

preserve proprietary trade secrets in China. However, more than 85.0 percent of the firms 

that took steps to maintain proprietary trade secrets as part of their operations in China 

reported that the steps were not effective.203 Protecting trade secrets was characterized by 

firms as being difficult.204 The chemical manufacturing sector and the high-tech and 

heavy manufacturing sector reported experiencing the most problems when trying to 

maintain proprietary trade secrets in China. 

The majority of firms that reported trade secret misappropriation in China also reported 

that the most common avenue of misappropriation in China is current or former 

employees; these employees may take the information to new employers or use it to start 

a new rival company, sometimes even despite nondisclosure agreements.205 Most of the 

firms experiencing IPR infringement in China who reported having to disclose 

confidential data stated that to their knowledge, their confidential data had not been 

disclosed to persons outside the regulatory agency.206

 199USITC questionnaire, weighted response to question 7.5b. 200Industry representative, interview by USITC staff, Washington, DC, November 3, 2010. 201USITC questionnaire, weighted response to question 7.2a, for firms that responded in the affirmative 

to question 7.1. 202Industry representatives, interviews by USITC staff in Hong Kong and mainland China, January 3–7, 

2011; USITC. 203USITC questionnaire, weighted response to question 7.2b. 204Industry representatives, interviews by USITC staff in Hong Kong and mainland China, January 3–7, 

2011. 205Industry representatives, interview by USITC staff, Washington, DC, July 15, 2010; industry 

representatives, interviews by USITC staff, Shanghai, China, September 15, 2010; Pagnattarro, “The Google 

Challenge,” 2007, 625–32. 206USITC questionnaire, weighted response to question 7.10, for firms that responded in the affirmative 

to question 7.1. 
3-44

Impact of Trade Secret Misappropriation 

About half (52.7 percent) of firms that reported experiencing trade secret 

misappropriation in China also reported that misappropriation became a bigger problem 

during 2007–09. More firms in the chemical manufacturing sector and the information 

and other services sector reported that trade secret misappropriation became a bigger 

problem during the period. Very few firms reported that trade secret misappropriation 

became a smaller problem.207

Most (87.1 percent) of firms reported no change in employment in the United States from 

2007-09 as a result of trade secret misappropriation. A smaller share (12.9 percent) 

reported that employment decreased, particularly firms in the chemical manufacturing 

sector. Some firms in the high-tech and heavy manufacturing sector also reported a 

decrease in U.S. employment. Very few firms reported an increase in U.S. employment 

as a result of trade secret misappropriation in China, presumably dedicated to IPR 

enforcement.208 On the other hand, most firms (85.4 percent) reported no changes in 

R&D expenditures in the United States as a result of trade secret infringement in China 

during 2007–09.209

Trade Secret Infringement and Enforcement Challenges 

A large portion of firms experiencing trade secret misappropriation in China (60.0 

percent) reported not having incurred expenses to address the misappropriation.210 Some 

firms reported that not only are the procedural requirements for bringing suit significant, 

but that it is challenging to come up with the written evidence that Chinese law requires 

to prove that the misappropriation occurred.211 Nevertheless, a few firms in the high-tech 

and heavy manufacturing sector reported having incurred enforcement expenses. 

Only 0.6 percent 212 of those firms that reported material losses due to trade secret 

misappropriation during 2007–09 stated that they had pursued any trade secret 

misappropriation proceedings in China.213 Trade secret cases are still relatively rare in 

Chinese courts; not only is trade secret misappropriation difficult to prove in China, but 

also it may be that trade secret owners are taking proceedings outside of China to obtain 

more effective relief for trade secret misappropriation.214

 207USITC questionnaire, weighted response to question 7.7, for firms that responded in the affirmative 

to question 7.1. 208USITC questionnaire, weighted response to question 7.8., for firms that responded in the affirmative 

to question 7.1 209USITC questionnaire, weighted response to question 7.9., for firms that responded in the affirmative 

to question 7.1 210USITC questionnaire, weighted response to question 7.6, for firms that responded in the affirmative 

to question 7.1. 211Industry representative, telephone interview by USITC staff, July 9, 2010; industry representatives, 

interview by USITC staff, Washington, DC, November 3, 2010. 212Significant at the 90 percent level. 213USITC questionnaire, weighted response to question 7.4, for firms that responded in the affirmative 

to question 7.1. 214USITC, China IPR and Indigenous Innovation 1, 2010, 4-5. 
4-1 

CHAPTER 4 

Potential Effects of the Improvement of IPR 

Protection in China on the U.S. Economy 

Overview 

The questionnaire results presented in chapter 3 helped the Commission assess the effects 

of IPR infringement in China as reported by U.S. IP-intensive firms. These results permit 

the evaluation of firms’ perspectives and provide a detailed look at those sectors the 

Commission considered to be IP-intensive. The results outlined in this chapter 

complement the findings discussed in chapter 3. The results here are derived from the use 

of two types of quantitative analysis that trace the effects of better IPR protection in 

China on the U.S. economy, and serve as a measurable proxy for the economic effects 

associated with IPR infringement in China on the U.S. economy. 

The first stage of the analysis builds on data showing that U.S. exports are higher to 

countries that protect IP-intensive goods. Applying econometric techniques1

 to publicly 

available data, this chapter shows how a substantial improvement in IPR protection in 

China is likely to be associated with increased U.S. exports to China. Export data are 

examined for all traded sectors in the U.S. economy, and the effects of different levels of 

IPR protection across countries that trade with the United States are analyzed. Because 

the data show that U.S. IP-intensive exports are higher to those countries with high levels 

of IPR protection, the United States would, by extension, export more to China if China 

matched the level of IPR protection provided by other countries. Estimates of the size of 

these potential increases in U.S. exports to China are derived from the econometric 

model. 

Based on these data, as well as other results concerning increases in capital costs in 

China, the second stage of this analysis employs a general equilibrium analysis to 

simulate the potential effects of those higher exports on both the U.S. economy generally 

and on specific industry sectors. Unlike the more narrow scope of the questionnaire or the 

econometric analysis, the use of general equilibrium analysis helps evaluate the 

interconnected effects of an improvement in IPR protection in China on all parts of the 

U.S. economy. In particular, this form of analysis permits the evaluation not only of the 

improvements and benefits to the U.S. economy resulting from changes in IPR protection 

in China, but also of potential tradeoffs across sectors, and between producers and 

consumers. Such tradeoffs might include the increased price of labor and capital, as IPintensive businesses expand and compete for available resources with other sectors of the 

economy. 

The results of this simulation analysis illustrate possible consequences of certain changes 

to IPR protection in China, but they are not forecasts or predictions. They do not account 

fully for all components of IPR protection measures, such as anti-counterfeiting 

enforcement. Nor do they account for possible changes in technology, in consumer 

 1

An econometric analysis uses mathematical and statistical methods to derive economic implications 

from observed data. 
4-2 

preferences, or the overall macroeconomic environment. The simulations are best viewed 

as an attempt to illustrate certain effects on the U.S. economy of IP-related changes in 

U.S. exports to China, and of changes in the cost of IP-related capital (specifically, 

software and computers) in China, under the alternative assumptions of fixed and flexible 

supplies of labor and capital. Under the assumption of fixed supplies of these factors, if 

changes in IPR protection lead to the demand for more output, and hence more labor and 

capital, the prices of these factors will have to rise to allow reallocation across sectors of 

the fixed resources. Under the alternative, prices of labor and capital will not change, but 

additional resources will be drawn into the economy, allowing it to expand. 

Most of the results presented in this chapter are taken from simulations assuming a fixed 

supply of capital and labor, but certain results (primarily those concerning employment 

effects) that assume a fully flexible supply of capital and labor are also presented. More 

complete results for both are provided in appendix H. Following an initial presentation of 

the results is a description of the methodology and scope of the underlying analysis. To 

the Commission’s knowledge, the combination of statistical and simulation methods 

employed here has not been used before to explore the effects of changes in IPR 

protection in China on the U.S. economy. In key places throughout this chapter, 

important assumptions and caveats are identified to assist the reader’s interpretation of 

the results. It should be noted that the analysis does not address the speed with which 

changes to IPR protection in China may be implemented, nor the speed with which the 

effects of those changes may be felt by the U.S. economy. 

Key Findings 

The Commission’s economic analysis suggests that an improvement in IPR protection in 

China would likely lead to an improvement in several key U.S. macroeconomic 

indicators, including an overall increase in U.S. output, wages paid to workers, and 

profits. Gains would likely vary by sector, with several IP-intensive sectors expanding at 

the expense of other sectors. Transactions between the United States and China could 

likely increase in three areas: U.S. exports of goods; U.S. exports of services, including 

the payment of license and royalty fees to U.S. firms; and sales by affiliates of U.S. 

multinational companies (MNCs) in China. The economy-wide increases in U.S. exports 

of goods and services could be associated with increases in both U.S. and Chinese 

economic welfare. Sector-level results indicate a potential shift in U.S. economic activity 

toward sectors that rely on robust IPR protection. Increases in U.S. goods and services 

exports would likely be associated with increases in U.S. employment and output in 

several services sectors and in the IP-intensive publishing and software goods sector. 

Recreational services, which include motion picture production and sound recording, 

business services, and education and related services, as well as the manufacturing sector 

that includes software, paper products, and publishing, would each be expected to 

benefit.2

 These sectors include several of the sectors identified as part of the IP economy 

for the survey. The electronics equipment industry could face counteracting forces that on 

balance could yield small positive gains in output and employment. By contrast, some 

less IP-intensive manufacturing sectors may see a decline in output as a result of 

improved IPR protection in China, as more resources are allocated towards more IPintensive sectors within the United States. 

 2

These calculations are based on an improvement in IPR protection in China and do not take into 

account the potential effect of improved market access for U.S. firms in the recreational services sector. 

Market access restrictions in China significantly reduce the baseline of U.S. exports in this sector. See 

USITC, China IPR and Indigenous Innovation 1, 2010, and chapter 2 of this report. 
4-3 

Simulated Economy-Wide Effects 

The Commission identified and examined two channels through which improvements in 

IPR protection in China could lead to economy-wide effects in the United States. First, 

increased exports of technology-intensive products to China could affect U.S. economic 

activity both directly, by increasing output of U.S. exporting sectors, and indirectly, 

through their effects on the economies of China and third countries. Second, under 

stronger IPR protection, firms in China could face higher capital costs, since they would 

pay higher prices for legitimate software and, to a lesser extent, for legitimate 

computers.3

 The simulations presented in table 4.1 below are based on the interactions of 

these two channels. 

The main findings are summarized in table 4.1.4

 The simulation analysis was based on 

the assumption that China’s level of IPR protection would rise to that of the United 

States. The simulation indicates that the positive effects on U.S. welfare could be 

approximately $6.7 billion.5

 A large share of these gains in U.S. welfare arise from 

changes in prices: U.S. exporters to China could receive higher prices for their goods, 

while prices of some U.S. imports from China, such as electronics equipment, could fall 

due to the expanded supply of exports from China that follows from China’s increased 

production. As discussed below, the economic effects of terminating counterfeit 

production in China have not been modeled, due to the unavailability of reliable data. The 

presumed effect would be to contract the supply of counterfeit production in China. 

China’s welfare would expand greatly, mainly because of the large productivity gains in 

China associated with that country’s increased ability to absorb imports from the United 

States and other countries. Such productivity gains may be expected to result from more 

securely protected IPR. 

 3

The possibility of such an effect was raised during the Commission’s public hearing for this study. 

USITC, hearing transcript, June 15, 2010, 206 (testimony of Robert Holleyman, Business Software Alliance). 

Both software and computers make up a significant portion of capital stock in many sectors. 4

Table 4.1 provides both low-end and high-end estimates, in addition to the central estimate. The 

estimates in the text refer to central estimates. The ranges have been included to provide some indication of 

the degree of uncertainty involved with respect to the strength of the relationship between IPR protection and 

trade behavior. Further discussion of the ranges is found in a subsequent part of the chapter. 5

“Welfare” is a measure of the overall effect of a change in policy or in the economic environment, the 

amount by which the economy is better (or worse) off as a result of the change. The increase in U.S. welfare 

is a result of increases in exports and the cost of capital in China, and does not take into account the effect on 

the U.S. economy of the considerable increase in sales by U.S. affiliates in China. More generally, the 

estimates and simulations presented throughout this chapter are subject to a number of caveats which are 

described in a subsequent section of the chapter. 
4-4 

TABLE 4.1 Simulated and estimated changes in the U.S. economy resulting from improved IPR protection in China 

 Change 

 2009 

Initial 

value Central estimate 

Lower-bound 

estimatee Upper-bound estimatee

 Million $ Million $ Percent Million $ Percent Million $ Percent 

Simulated Effects: 

U.S. economic welfarea

11,849,428 6,709 0.1 1,874 0.0 11,167 0.1 

U.S. labor compensation 8,004,200 33,117 0.4 33,689 0.4 42,119 1.0 

U.S. profits (as reflected by 

returns to capital)b

 3,034,266 12,253 0.4 12,588 0.4 15,667 0.5 

China’s economic welfare a

2,334,789 86,401 3.7 25,556 1.1 155,059 6.6 

Estimated Effects: 

Net income of affiliatesc

8,515 3,509 41.2 3,296 38.7 3,721 43.7 

U.S. exports of goods to China 65,121 9,444 14.5 781 1.2 18,106 27.8 

U.S. exports of services to China, 

other than royalties and license 

fees 13,480 8,947 66.4 2,507 18.6 15,387 114.2 

U.S. receipts of royalties and 

license fees from China 2,179 2,960 135.9 1,821 83.6 4,099 188.1 

Sales of affiliates of U.S. MNCs in 

China 171,733d

 87,756 51.1 86,552 50.4 88,959 51.8 

Source: USITC staff calculations. 

Note: See appendix H for methods. 

 a

Percentage changes in welfare are expressed as percentages of GDP, which is given as the initial value. 

 b

Domestic profits. 

 c

Profits of U.S. firms in China. 

 d

Initial value is for 2008, the most recent year for which data are available. 

 e

Lower-bound and upper-bound refer to the confidence interval bounds, obtained using statistical methods. 

See appendix H .

Simulated total labor compensation in the United States would rise by about $33 billion. 

This labor compensation simulation is produced under an assumption that the economy is 

at a constant level of employment and capital utilization, which could be seen as a 

reflection of tight markets for labor and capital. Thus, expansions in one sector would 

require that labor and other resources be drawn from other sectors, but the overall amount 

of employment (or unemployment) would not change. Wages would adjust to market 

conditions, increasing in the case of higher labor demand. 

However, at the time of this writing, the United States is emerging from the recession of 

2008–09 and still faces relatively high levels of unemployment. Reflecting such a 

situation, an alternative version of the analysis operates under the assumption that 

adjustments to the demand for labor and capital are manifested through increases in the 

supply of these resources without increasing their cost (i.e., wages and interest rates). A 

simulation under this alternative assumption, of a flexible labor supply, indicates an 

increase in total labor compensation of $166 billion. This translates into an additional 2.1 

million jobs, or a 1.6 percent increase.6

 In this case, all adjustments to changing labor 

market conditions would take place via the increased supply of labor while wages would 

remain fixed for all sectors. Under a flexible labor supply assumption, U.S. welfare could 

increase by $185.2 billion and U.S. profits could increase by $62.1 billion. 

 6

As a share of total nonfarm employment, 2009. Census data. 
4-5 

The simulation analysis currently used by the Commission, which both explicitly 

represents China and the rest of the world, assumes that adjustments in the labor market 

will be made either through wages (the fixed labor supply assumption, reflecting tight 

labor markets) or through employment levels (the flexible labor supply assumption, 

reflecting a labor market with some excess supply), but not both. The actual effect is 

expected to lie between the two cases, with a combination of both wage and employment 

adjustment, and would depend upon the overall tightness of the labor market at the time 

of full policy implementation.7

Domestic profits earned by U.S. firms in the United States would increase under the 

simulation by an estimated $12.2 billion as a result of improved IPR protection in China. 

Profits of U.S. affiliates operating in China (denoted as net income by the U.S. Bureau of 

Economic Analysis) would increase by approximately $3.5 billion as a result of expanded 

operation of such affiliates. 

U.S. transactions with China would respond to changes in IPR enforcement in a manner 

broadly consistent with the economics of IPR protection as it applies to the decisions of 

MNCs.8

 U.S. receipts of royalties and license fees would likely be most responsive (in 

percentage terms) to improvements in IPR protection in China, followed by foreign direct 

investment (FDI) (as measured by U.S. affiliate sales); U.S. exports of goods would be 

the least responsive. Since many license and royalty fees represent payments for 

technology, they are likely to be strongly affected by improved IPR protection as this 

would enhance the enforceability of contracts underlying the payment of licenses and 

royalties. Similarly, since FDI is driven by the efforts of MNCs to profit from their 

ownership of firm-specific assets, such as technologies, patents, trademarks, copyrights, 

trade secrets, and business methods, improved IPR protection is an important part of the 

business environment underlying MNCs’ decision to invest. 

 

The results concerning merchandise exports are nuanced. Exports of many goods may be 

enhanced by stronger IPR protection, particularly intra-firm goods exports associated 

with FDI. Exporters may likewise be more likely to ship technology-intensive goods to 

markets with improved IPR protection, since better practices may mitigate concerns 

about reverse engineering. However, exports are also subject to potentially countervailing 

influences. For example, exporters may take advantage of the monopoly power 

potentially associated with strong IPR protection to reduce the quantity of exports to a 

market in which they hold IPR in order to charge higher prices in those markets.9

Simulated Sectoral Effects 

Table 4.2 presents simulated effects of stronger IPR protection in China on the U.S. 

economy for key IP-intensive sectors, including both goods and services sectors.10 As 

noted, the effects vary considerably among sectors. Moreover, the interactions of the two 

channels mentioned earlier—increased exports to China and the increase in capital costs 

 7

In addition, the “tightness” of labor markets is likely to vary by sector, perhaps with less flexible labor 

supplies among high-skilled workers or those in high-IP intensive industries. 8

See USITC, China IPR and Indigenous Innovation 1, 6-8 to 6-11; Smith, “How Do Foreign Patent 

Rights Affect U.S. Exports, Affiliate Sales, and Licenses?” 2001, 414–18; and the literature review in chapter 

2. 9

See USITC, China IPR and Indigenous Innovation 1, 6-9 to 6-11, and the literature review in chapter 

2. 10The results are presented for the combined effects of increased exports and higher software costs. For 

a decomposition of the effects of increased U.S. exports and increased Chinese capital costs for selected U.S. 

manufacturing sectors, see appendix H. 
4-6 

arising from higher prices for software and computers—are in some cases complex; the 

effects of one channel counteract those of the other. 

Sectors can be sorted into two groups, according to their response to the policy change. 

These groups are the services sectors and general manufacturing sectors. Manufacturing 

sectors include those, such as electronincs, engaged in what is often termed “processing 

trade.” The effects of the policy change under the fixed employment (tight labor market) 

assumption are presented first in order to demonstrate the effects of reallocation of 

resources across sectors. This is followed by a section on employment effects under a 

scenario reflecting an excess labor supply (higher unemployment). In table 4.2, reported 

changes in exports to China are derived from the econometric analysis and used as inputs 

to the simulation model, to generate effects at the economy and sector levels. 

As shown in table 4.2, services sectors as well as the publishing and software sector 

experience an increase in imports from China in response to an increase in U.S. exports 

to that country. This is largely due to the effect that the increase in U.S. exports to China 

has on productivity there; China becomes more productive, and able to increase its own 

exports. Furthermore, increased production in the United States helps to increase demand 

for imports. For many manufacturing sectors, the increase in capital costs imposed on 

China’s manufacturing as a result of the higher prices for software and computers 

imposes limits on China’s ability to export. 

TABLE 4.2 Highlighted sectors under combined exports and capital cost channels 

Change in U.S. 

exports to Chinaa Change in U.S. 

imports from China 

Change in U.S. 

employment 

 Million $ Percentb Million $ Percentb Thousand employees Percentb

Services, software, and publishing 

 Software, paper products, and 

 publishing 1,641 75.8 624 39.5 6 0.4 

 Business services 1,757 129.0 164 31.9 11 0.1 

 Recreational services, etc. 1,503 129.0 92 25.1 17 0.2 

 Education and public services 2,754 126.0 144 26.5 26 0.1 

Manufacturing 

 Electronic equipment 2,405 36.5 –257 –0.3 (c

) 0.0 

 Motor vehicles and parts 171 22.6 846 13.1 (b

) –0.1 

Source: USITC staff calculations. 

Note: See appendix H for method. 

 a

U.S. exports include both exports of goods and services, including some license fees and royalties attributed 

to manufacturing sectors. In this simulation, U.S. exports to China for most sectors are imposed as an 

exogenous policy shock. 

 b

Percent change is relative to the baseline scenario of no policy change. 

 c

Less than 500 employees. 

Table 4.3 details the results for the two channels, providing estimates of potential effects 

using only the increased export channel (“exports only”) and estimates of potential 

effects using both the increased export channel and increased prices of software and 

computers channel (“exports and capital cost”). 
4-7 

TABLE 4.3 Simulation model changes in U.S. exports, imports, output, and employment, by selected sectors 

 Percentage changea

 U.S exports U.S. imports 

to 

 China 

to 

 World 

from 

 China 

from 

World 

U.S. 

Output 

U.S. 

Employment 

Software, publishing, etc. 

 Exports only scenario 75.8 7.7 32.1 0.8 0.4 0.4 

 Exports and capital cost scenario 75.8 7.4 39.5 1.4 0.4 0.4 

Electronic equipment 

 Exports only scenario 36.5 –1.8 12.2 1.0 –2.1 –2.1 

 Exports and capital cost scenario 36.5 1.3 –0.3 0.8 0.0 0.0 

Motor vehicles and parts 

 Exports only scenario 22.6 0.1 12.2 0.1 0.0 0.0 

 Exports and capital cost scenario 22.6 –0.1 13.1 0.5 –0.1 –0.1 

Source: USITC staff calculations. In this simulation, U.S. exports to China for most sectors are imposed as an exogenous 

policy shock based on the econometric analysis described in this chapter. They are the same whether or not capital costs 

are modeled. 

 a

Percent change is relative to the baseline scenario of no policy change. 

 

Services sectors and software, paper products, and publishing sector 

In the case of services sectors, as well as the goods sector that includes software, paper 

products, and publishing, the United States is almost exclusively a net exporter to China, 

since China has little export capacity in these categories. Thus, improved IPR protection 

would allow U.S. exports to expand, directly promoting increases in U.S. output and 

employment. As an illustrative example, the software, paper products, and publishing 

sector would experience a 0.4 percent gain in output and a similar gain in employment. 

This result would be driven by the improved global competitiveness of U.S. firms, as 

demonstrated by the increase in U.S. exports to the world, which would grow by 7.4 

percent. China is not a major exporter in this sector, so despite some increases in 

efficiency, China’s contribution in this sector to global supply would not be expected to 

grow dramatically. 

Chinese processing trade and other manufactured goods 

For certain manufacturing sectors, such as the electronics equipment sector, China’s 

current pattern of trade entails importing intermediate inputs from a wide variety of 

sources in order to export downstream products. In these sectors, given higher U.S. 

exports to China, Chinese producers would use U.S. intermediate goods exports as inputs 

in their production processes and then export the finished goods back to the United States 

and to the rest of the world.11 The effect of the higher exports only channel, taken alone, 

would thus be to strengthen China’s competitiveness in these sectors, leading to a 

reduction in output in these sectors in the United States (table 4.3). The increase in the 

prices of software and computers resulting from improved practices has the potential to 

improve the competitiveness of U.S. firms by raising costs for firms in China, thereby 

raising output and employment in the United States. The electronics equipment sector, as 

presented in table 4.3, illustrates these counterbalancing effects. Although the net effect 

 11The improvement in IPR protection in China is expected to lead to an increase in productivity 

throughout the Chinese economy. This would enable China to absorb the increased imports implied by the 

econometric analysis, in line with the productivity and trade patterns of countries with high levels of IPR 

protections. The simulation analysis allows increased absorption of IP-intensive goods and services into 

China through a productivity increase by China’s economy. See appendix H for details. 
4-8 

on employment and output of the two channels is close to zero, this result masks the 

opposing effects of the two channels. 

Although exports to China in the electronic equipment sector, as affected by the higher 

exports channel, could increase considerably (36.5 percent), electronics equipment 

imports from China could increase as well, by 12.2 percent. The reason, as mentioned 

above, is that China would make use of the increased imports to produce other electronic 

goods more efficiently and then re-export them. As a result, the trade deficit in the 

electronics equipment sector could expand.12 At the same time, U.S. exports to the rest of 

the world could decline by 1.8 percent, indicating a shrinking of demand from the rest of 

the world as China’s exports are substituted for U.S. exports. 

However, under the influence of increased capital costs for software and computers, U.S. 

output could expand over time back to its original level, so that the net effect of the two 

channels is close to zero under the scenario presented.13 Higher capital costs in China 

result in a gain in U.S. price-competitiveness. Because electronics equipment goods are 

software intensive, their cost of production in China could rise substantially.14 Electronics 

produced in the United States would be purchased as a substitute for the now more costly 

goods made in China. As a result of the combined scenario, imports from China could 

decline from the original baseline by 0.3 percent. In addition, the United States would 

gain market share, as its exports to the rest of the world could increase by 1.3 percent 

over the baseline. 

In the case of many manufacturing sectors with high concentrations of intermediate 

inputs from China, the effect of the combined scenario is to reduce U.S. output and 

employment. One source of this effect is the increase in costs imposed on the production 

of intermediate goods in China. The increased cost of software and computers in China’s 

capital stock due to improved IPR protection would, as noted above, result in fewer pricecompetitive goods exported by China. To the extent that a U.S. firm relies on low-cost 

goods from China, this reduces the U.S. firm’s competitiveness on the world market, and 

in some cases it may lose market share to firms in the rest of the world, as well as 

domestically. Chinese firms, by contrast, experience productivity gains associated with 

importing more high-technology intermediate inputs, which enhance those firms’ 

competitiveness, as well as higher capital costs, which reduce their competitiveness. Both 

the importance of intermediate goods as inputs into Chinese production and the 

importance of software in the Chinese capital stock vary from sector to sector. Thus, the 

way in which these effects affect the pattern of trade and output in the United States, 

China, and third markets would vary from sector to sector in complex ways. 

 12Since the baseline total for U.S. electronics exports to China is much smaller than the baseline total 

for U.S. electronics imports from China, the dollar value of the increased imports would be much higher than 

the dollar value of the increased exports. 13Although the net effect under the two channels assumed by these simulations is close to zero, the 

underlying counterbalancing mechanisms of the two channels means that a small change in assumptions may 

yield either a positive or negative effect on output of electronics. If laws against software piracy are enforced 

more rigorously than general IPR protection measures, a positive effect on output would be expected. 14See appendix H for a description of the determination of the software intensity of industry sectors. 
4-9 

Sectoral effects under flexible labor supply conditions 

As noted, the simulated contractions in IP-intensive U.S. manufacturing may be mitigated 

if the labor market is not facing tight conditions. For example, U.S. sectors modeled as 

showing decreases in output and employment under tight labor conditions would show 

either less of a decrease in output and employment, or small expansions under conditions 

of excess labor.15

Each of the illustrative sectors discussed above could experience an increase in 

employment if the labor market is not facing tight conditions. For example, the motor 

vehicles and parts sector could see employment increase by 1.8 percent (equivalent to 

12,000 full-time equivalent workers or FTEs) rather than decreasing by 0.1 percent. The 

electronics equipment sector could see employment increase by 0.9 percent (4,000 FTEs) 

rather than a zero net effect. The software, paper products, and publishing sector could 

see a 2.0 percent (33,000 FTEs) increase in employment, rather than a 0.4 percent 

increase under the assumption that reflects tight labor markets.16 

Economic Analysis: Detailed Methodology and Scope 

This section discusses the methodology used to generate the results just described, along 

with the methodology’s scope and limitations. The section that follows presents the 

econometric results in fuller form and also gives more details about the simulation 

modeling framework. 

Methodology 

Using the analytical framework presented in the Commission’s first report, the 

Commission has generated estimates of the effects of improved IPR protection in China 

on the U.S. economy and U.S. jobs, including on a sectoral basis, as well as potential 

effects on sales, profits, royalties, and license fees of U.S. firms globally. A schematic 

presentation of the analytical framework is presented in figure 4.1. As a first step, two 

sets of econometric estimates were generated. One set examines the effects of improved 

IPR protection on U.S. exports of goods and services, including U.S. receipts of license 

fees and royalty payments. This set of results is presented in a subsequent section of this 

chapter, and is also used in a subsequent analytical step as discussed below. A second set 

of econometric estimates examines the effect of improved IPR protection on the 

operations of U.S. MNCs, including effects on sales, net income, employment, exports 

and imports, and R&D. This latter set of estimates is presented as a stand-alone result and 

not used in the subsequent analysis.17

 15The model used in the economic analysis is geared toward the analysis of sectoral effects, including 

the reallocation of labor and capital as a result of policy changes. 16The full sectoral comparisons are in appendix tables H.8–H.9. 

17These results were not used as inputs into the subsequent analysis, because the model used is not 

equipped to deal directly with MNCs and their dual presence in the U.S. and foreign markets. 
4-10 

Figure 4.1 Applied analytic approach to quantifying how IPR infringement in China affects U.S. 

economy 

Source: USITC staff. 

In a second step, the estimates of export changes were used as inputs for a computable 

general equilibrium model (CGE), to simulate more detailed effects on sectoral output 

and employment and economy-wide effects on returns to labor and capital and on 

economic welfare.18 The economy-wide effects have been generated using a CGE model 

known as the Global Trade Analysis Project, or GTAP, which has been used widely for 

trade policy analysis at the Commission and other institutions.19 These simulations were 

generated relative to a base year of 2009. They reflect a counterfactual experiment, which 

can be understood to represent what the U.S. economy of 2009 would have looked like if 

stronger IPR protection in China had been in place at that time. A simulation of this type 

is known as a comparative statics analysis. It is not dynamic, in the sense that it does not 

trace a future path of the U.S. economy over time, nor does it track capital accumulation. 

Some of the potential effects of IPR reforms on productivity were captured indirectly in 

the estimates of the effects of improved IPR protection by China on U.S. exports and 

used as an input into the simulations. The simulations themselves generated further 

information on increases in China’s productivity in those sectors for which U.S. exports 

 18The model is from the Global Trade Analysis Project or GTAP, which is described in appendix H. 19See appendix H for further details. 
4-11 

(and China’s imports) would likely expand as a result of improved IPR protection in 

China. 

As discussed, the change in IPR protection in China was assumed to affect the world 

economy along two channels. One channel was via estimated increases in U.S. exports to 

China. The second channel was via the effect of improved IPR protection on the cost of 

computer software. Under improved IPR protection in China, piracy rates for software in 

China would presumably decrease. As shown in figure 4.1, other information related to 

capital costs (specifically the costs of software and computer hardware, which could rise 

in the Chinese economy with stronger IPR protection) are used as additional inputs into 

the CGE model in order to assess the effects of changes in these costs on the economy. 

The CGE model is generally applied with an assumption that levels of capital and labor 

are fixed. This is done principally to permit a clearer focus on the model’s implications 

for the reallocation of resources, rather than the implications for overall macroeconomic 

factors, which are usually beyond the scope of the model’s application. The “fixed 

factor” assumption resembles the economy in a condition close to U.S. full employment 

and full capacity utilization. Under this assumption a policy change creates greater 

demand for labor and capital in certain sectors, such that these factors must then be 

reallocated from other sectors. The simulated results therefore reflect no significant 

change in the level of total U.S. employment. 

The current U.S. economic climate, however, presents a situation of less than full 

employment. This environment resembles a flexible labor supply scenario, in which the 

quantities of labor and capital are allowed to adjust while real wages and the cost of 

capital are held fixed. The change in IPR protection in China could thus result in higher 

employment and increased capacity utilization, drawing resources from currently 

unemployed labor and capital as well as from other sectors. There are, however, caveats 

to consider under this scenario. While the flexible labor assumption may seem more 

descriptive of the current environment, it is unclear when China might implement the 

improvement in IPR protection envisioned in the analysis and equally unclear whether 

the United States will face as much excess labor supply at that point in time as it does 

today. Second, wages are assumed to be constant in the flexible labor and capital 

scenario; if wages were to increase, as could reasonably be expected, the employment 

increase would be lessened. 

Analytical Scope 

Several approaches have been used to illustrate the effects that improved IPR protection 

in China may have on the U.S. economy and jobs. However, the results reported in this 

chapter are not exhaustive. Two reasons for this have already been discussed: 

 The CGE model that is used in the analysis is a static model—that is, it does not 

take into account effects over time. The static nature of the simulation is an 

important limitation, since, as recognized in the Commission’s first China IPR 

study,20 improved IPR protection in China could potentially lead to dynamic 

effects, especially productivity effects. 

 20USITC, China IPR and Indigenous Innovation 1, 6-2 to 6-3. 
4-12 

 The employment level is assumed to be fully adjusted at the time of the policy 

implementation. Actual policy changes made during episodes of relatively higher 

unemployment could lead to greater labor demand than simulated in this report. 

 Estimates were made regarding the effect of changes in IPR protection on the 

operations of MNCs. These were not integrated into the broader CGE framework 

because the current model does not distinguish investments by ownership type 

within a country. 

 The analysis throughout the chapter assumes an improvement of IPR protection 

in China to the level of U.S. practices, an assumption that is reflected in the 

magnitude of the results. However, a smaller improvement in IPR protection 

would have a smaller effect in about the same proportion, so that an improvement 

in IPR protection by China to a point midway between the current policies of 

China and the United States would yield results approximately half the 

magnitude of the reported estimates. 

 Counterfeiting is a grave concern to many in industry. Improved IPR protection 

in China could also lead to a reduction in the production of counterfeit goods in 

China, and their export from China. The Commission has not generated estimates 

of the effects of reduced Chinese production and exports of counterfeit goods, 

because there is no accurate method to generate baseline estimates of the current 

amount of counterfeit trade. 21 Thus, firms in sectors that report significant 

amounts of counterfeiting, for example, wearing apparel and leather products, 

would be expected to be positively impacted by an improvement in IPR 

protection in China in ways not accounted for in the Commission’s approach. 

Although the potential effects were not quantified, some of the possible 

qualitative implications of a reduction in counterfeit trade for the U.S. economy 

are discussed at the end of this chapter. 

A final caveat: all estimates in this chapter are presented using the point estimates 

generated by statistical methods. The statistical methods, however, also produce a range 

of results based on the degree of uncertainty surrounding the results concerning the 

strength of the relationships measured. The ranges are presented for the main results in 

table 4.1 in order to provide an indication of the degree of uncertainty. The sectoral 

ranges are not listed in the tables for space considerations but are presented in appendix 

H. The width of these ranges varies for different estimates, depending on the 

characteristics of the underlying data and the methods used.22

Estimated Effects on U.S. Exports Using Statistical Analysis 

Improved IPR protection in China could lead to increased exports to China, both from the 

United States and from other technologically advanced countries. These increases could 

occur through a number of channels. First, such improved protection could raise 

innovation, productivity, and research intensity in China, leading to an increase in the 

demand for technology-intensive imports. Second, improved IPR protection in China 

could enhance the attractiveness of China as a location for FDI, including investment by 

 21See USITC, China: Intellectual Property Infringement, 2010, 6-13, as well as the literature review in 

the current study. 22See appendix H for further details. 
4-13 

multinationals from various countries.23 These foreign investments would generate a 

significant portion of the demand for technology-intensive imports described above, as 

well as a significant share of the associated impacts on innovation and productivity in 

China’s economy. Third, IP-intensive firms in the United States and elsewhere may be 

withholding certain technology-intensive exports from China due to concerns about 

imitation through reverse engineering or trade secret theft. These concerns would 

presumably be reduced if China improved its IPR protection.24

The estimates described in this section are based on a gravity model. Gravity models are 

frequently used to estimate effects on exports.25 The method is based on a set of trade 

flow determinants such as market size, economic distance, and the degree of trade 

liberalization in U.S. partner countries. The effect of the change in IPR protection is 

based on an index of comparative IPR protection in different countries provided by the 

Economist Intelligence Unit (EIU).26 They further take into account the possibility that 

the effects of improvements in IPR protection on U.S. exports could be stronger for more 

R&D-intensive sectors. The estimates were generated by calculating the change in 

estimated trade flows associated with an improvement in IPR protection in China to the 

U.S. level. 

The Commission’s estimate of increases in U.S. services exports to China, U.S. receipts 

of license and royalty fees from China, and sales of affiliates of U.S. MNCs in China has 

a higher level of statistical confidence than its estimates that U.S. goods exports to China 

would increase.27 The relatively wide range of estimates for goods exports reflects the 

statistical difficulties inherent in separating the effects of IPR protection from other 

unobserved characteristics of partner countries. 

Estimated Goods Exports 

Table 4.4 reports the estimates of the effects of improved IPR protection in China on U.S. 

merchandise exports. The total estimated increase in these exports is approximately $9.4 

billion, as compared to a 2009 baseline. The largest estimated sectoral increases in the 

exports, classified on a NAICS 4-digit basis, are for semiconductors and other electronic 

 23 The annual U.S. share of non-financial FDI inflows has declined from 10.8 percent in 2000 to 3.2 

percent in 2008. In 2009, the U.S-China Business Council estimated that U.S. non-financial FDI in China 

inflows, at $3.6 billion, amounted to 4.0 percent of total utilized non-financial FDI inflows of $90.0 billion. 

U.S. non-financial FDI inflows in China in 2009 ranked fifth, after Hong Kong (60.0 percent), Taiwan (7.3 

percent), Japan (4.6 percent), and Singapore (4.3 percent). The figures for 2009 include investments sourced 

in these countries but made through Barbados, the British Virgin Islands, the Cayman Islands, Mauritius, and 

Western Samoa. U.S.-China Business Council, “Foreign Direct Investment in China,” downloaded from 

http://www.uschina.org/statistics/fdi_cumulative.html on February 25, 2011, and USITC staff calculations. 24See USITC, China IPR and Indigenous Innovation 1, 6-9 to 6-11, and the literature review in the 

present study. 25These econometric methods adapt many of the techniques reviewed in USITC, China: Intellectual 

Property Infringement, 2010, and the literature review in the present study, in order to focus in particular on 

appropriate measurement of effects related to China and to take into account recent developments in the 

econometric analysis of trade flows. See Baier and Bergstrand, “Bonus vetus OLS: A simple method for 

approximating international trade-cost effects using the gravity equation.” See appendix H. 26Alternate indices were examined, including one produced by Walter Park and colleagues at American 

University, and an index based on software piracy rates as estimated by the Business Software Alliance. The 

EIU index was preferred on a number of grounds. It reflects the quality of IPR protection as opposed to 

relying purely on IPR laws as written, and reflects different types of IPR protection including patents and 

trademarks. See appendix H for details. 27Specifically, in table 4.1 estimates with respect to services exports, license and royalty fees, and 

activities of U.S. affiliates of MNCs are presented as 95 percent confidence intervals, while estimates with 

respect to goods exports are presented as 80 percent confidence intervals. 
4-14 

components ($1.9 billion, or an increase of 39.9 percent); aerospace products and parts 

($1.0 billion, or 19.3 percent); resin, synthetic rubber, and artificial and synthetic fibers 

and filament ($685 million, or 17.3 percent); basic chemicals ($586 million, or 17.3 

percent); and navigational, measuring, electro-medical, and control instruments ($594 

million, or 22.0 percent). In general, when IPR protection improves, goods sectors with 

high R&D investment are estimated to increase their exports more than sectors with 

relatively low R&D investment. Because the estimate of the impact of IPR protection on 

trade takes into account the possibility that more R&D-intensive industries may have a 

greater responsiveness of exports to improvements in IPR protection, increases in trade 

have been estimated for manufacturing only, since the available sectoral R&D data for 

sectors that export goods pertain almost exclusively to manufacturing.28 

TABLE 4.4 Estimated increases in U.S. goods exports to China as a result of improved IPR protection 

2009 

Initial value Estimated increase 

Sector Million $ Million $ Percent 

Semiconductors and other electronic components 4,870 1,940 39.9 

Aerospace products and parts 5,313 1,024 19.3 

Resin, synthetic rubber, artificial, synthetic fibers, and filaments 3,960 685 17.3 

Basic chemicals 3,389 586 17.3 

Navigational, measuring, electro-medical, and control instruments 2,699 594 22.0 

Other general purpose machinery 1,861 356 19.1 

Meat products and meat packaging products 1,424 233 16.4 

Agriculture and construction machinery 1,298 249 19.1 

Pulp, paper, and paperboard mill products 1,351 227 16.8 

Nonferrous metal (except aluminum) and processing 1,356 213 15.8 

Computer equipment 1,034 221 21.4 

Engines, turbines, and power transmission equipment 1,025 196 19.1 

Motor vehicles and parts 995 198 19.9 

Pharmaceuticals and medicines 645 236 36.5 

Communications equipment 632 211 33.4 

Industrial machinery 795 152 19.1 

Other fabricated metal products 809 139 17.2 

Motor vehicle parts 747 148 19.9 

Other chemical products and preparations 775 134 17.3 

Iron and steel and ferroalloy 720 114 15.8 

All other sectorsa

29,425 1,591 5.4 

Total 65,121 9,444 14.5 

Source: USITC staff calculations. 

Note: See appendix H for methodology. 

 a“All other sectors” includes agricultural and other nonmanufactured goods for which intellectual property effects 

were not estimated. 

Estimated Services Exports 

The effect of improvements in IPR protection in China was also estimated for services 

trade. The approach was similar to that used for goods trade, with slight modifications 

reflecting the availability of data. Notably, information about R&D by sector was not 

available for the sectors being analyzed. As before, the estimates assume an improvement 

in IPR protection in China to the level of IPR protection in the United States. 

 28See appendix H for details. 
4-15 

Table 4.5 reports effects on services exports. The overall increase, excluding royalties 

and licensing fees, is estimated to be $8.9 billion, an increase of 66.4 percent over the 

baseline for services exports of $13.5 billion in 2009. 

TABLE 4.5 Estimated increases in U.S. exports to China as a result of improved IPR protection in China 

2009 

 Initial value Estimated increase 

Sector Million $ Million $ Percent 

Services 13,480 8,947 66.4 

 Business, professional, and technical services 3,714 4,327 116.5 

 Travel, passenger fares, and other transportation 5,407 1,760 32.6 

 Other services 4,359 2,861 65.6 

 

Royalties and license fees 2,179 2,960 135.9a

 Food 49 67 135.9a

 Chemicals 439 597 135.9a

 Primary and fabricated metals 12 17 135.9a

 Machinery 44 59 135.9a

 Computers and electrical products 194 263 135.9a

 Electrical equipment, appliances and components 29 39 135.9a

 Transport equipment 69 93 135.9a

 Other manufacturing 104 141 135.9a

 Books, records, and tapes 2 3 135.9a

 Software 737 1,001 135.9a

 Broadcasting 23 31 135.9a

 Wholesale trade 249 339 135.9a

 Finance insurance and real estate 3 4 135.9a

 Professional services 27 36 135.9a

 Other industries 200 272 135.9a

Source: USITC staff calculations. Initial values are calibrated within the model. 

Note: See appendix H for methodology. 

 aFor royalties and license fees, the total percentage change has also been applied to individual sectors.

Royalties and licensing fees are most affected in percentage terms by changes in IPR 

protection; this is to be expected, as they are derived directly from the protection of IPR. 

Estimated increases were $3.0 billion. Business, professional, and technical services are 

also affected, with exports estimated to increase by $4.3 billion. Transportation and other 

services are least affected.29 These results accord well with a reasonable understanding 

of the relative importance of IPR protection in each of these areas. 

Estimated Royalties and License Fees 

Royalties and licensing fees are unique in that they pertain to a variety of sectors rather 

than representing a single sector. Their estimated effects can be identified with the 

affected sectors according to the level of royalties and licensing fees received by each of 

these sectors. The lower half of table 4.5 reports the estimated allocation of U.S. receipts 

of licensing and royalty fees across sectors under the assumption that royalties and 

licensing fees will respond similarly to changes in IPR protection regardless of the 

industry. Significantly, software makes up the largest share—nearly one-third—of the 

total, with estimated increases in exports of $1.0 billion. Other strongly affected sectors 

 29“Other services” includes finance, insurance, telecommunications services, and educational services. 
4-16 

include chemicals ($0.6 billion), wholesale trade ($0.3 billion), and computers and 

electrical products ($0.3 billion). 

The estimates of increased U.S. goods, services, and royalties and licensing fees exports 

to China presented in tables 4.4 and 4.5 are incorporated as inputs into the simulation 

exercise, to generate U.S. welfare effects, effects on the returns to labor and capital, and 

other sectoral effects. 

Estimated Effects on the Activities of U.S. Majority-Owned Affiliates 

in China 

Estimates of the effects of improved IPR protection by China on sales and other activities 

of U.S. majority-owned affiliates (“affiliates”) in China appear in table 4.6. Sales of 

affiliates30 of U.S. MNCs in China would increase by an estimated $88 billion (or by 51 

percent) as a result of improved IPR protection in China. Most of these sales would likely 

be sales to China’s domestic market, consistent with the historical pattern of U.S. FDI in 

China.31 These estimates are relatively large compared to the estimates of increased U.S. 

goods exports presented above, since sales of U.S. affiliates in China are approximately 

three times as large as U.S. goods exports to China. U.S. exports to affiliates in China 

would increase by an estimated $2.1 billion (or by 61.7 percent). These estimates are 

small relative to the estimates of increases in total U.S. exports to China just presented; 

U.S. exports to U.S. affiliates in China accounted for only 5.5 percent of total U.S. 

exports to China in 2008.32 The estimates were generated by methods comparable to 

those used for U.S. exports, as described above. 

TABLE 4.6 Estimated effects of improving IPR protection in China on activities of U.S. majority-owned affiliates in 

China 

 2008 

 Initial value Estimated increase 

Variable Million $ Million $ Percent 

 

Affiliate sales 171,733 87,756 51.1 

 

U.S. exports to affiliates 3,452 2,127 61.7 

 

U.S. imports from affiliates 5,241 4,805 91.7 

 

Net income of affiliates 8,515 3,509 41.2 

 

R&D performed by affiliates 663 149 22.5 

 

 Thousand Thousand 

 employees employees Percent 

Employment in U.S affiliates in China 774 38 4.9 

Source: USITC staff calculations. 

Note: See appendix H for methodology. 

 30Sales of U.S. majority-owned affiliates in China accounted for 76.5 percent of all sales of U.S. 

nonbank affiliates in China in 2008 (Commerce/BEA data and USITC staff calculations). Data for majorityowned affiliates are used in this report because these data are substantially more detailed than data for all 

U.S. nonbank affiliates. 31In 2008, the most recent year for which data are available, sales by U.S. majority-owned affiliates in 

China were distributed as follows: 75.3 percent to the local Chinese market, 8.6 percent to the United States, 

and 16.0 percent to third countries. Commerce/BEA, table III.F.2 , USITC staff estimates. 32Commerce/BEA and Census data; USITC staff calculations. 
4-17 

U.S. imports from U.S. affiliates in China would increase by an estimated $4.8 billion, or 

92 percent over the baseline. Net income for U.S. affiliates in China would increase by an 

estimated $3.5 billion (41 percent). These increases in net income would be the primary 

source of increased profits for U.S. firms globally. R&D in affiliates is estimated to 

increase by $149 million (23 percent). Employment in Chinese affiliates of U.S. firms is 

estimated to increase by 38,000 employees (5 percent). 

 

The estimates with respect to U.S. affiliate activity in table 4.6 are presented as standalone estimates: they are not incorporated in the simulation of economy-wide effects 

presented below. This is because the simulation modeling techniques used to calculate 

economy-wide effects do not currently include a role for MNCs. However, two published 

analyses of the relationship between U.S. parent activity and U.S. affiliate activity 

suggest that employment in U.S. parents is likely to increase with increases in U.S. 

affiliate activity. According to one of these analyses, an increase in U.S. affiliate 

employment of 1 percent is associated with an increase in parent employment of about 

0.2 percent.33 According to the other, a 1.0 percent increase in U.S. affiliate sales is 

associated with an increase in U.S. parent employment of about 0.02 percent.34 In other 

words, U.S. affiliate activity abroad is often a complement to, rather than a substitute for, 

the activity of parent companies in the United States. 

These estimates, together with the estimates presented above of the response of U.S. 

affiliate employment and U.S. affiliate sales in China to improvements in IPR protection 

in China, suggest that the expansion of U.S. affiliates in China would be associated with 

an increase in employment in U.S. parent companies of MNCs of 8,200 – 9,400 jobs.35

This estimate is not directly comparable with the employment effects presented in the 

economy-wide simulation analysis above, which assumes fixed aggregate employment 

and is designed to simulate shifts in U.S. employment across sectors. It does, however, 

suggest that an analysis fully incorporating the effects of IPR improvement on foreign 

affiliates of U.S. MNCs would show additional increases in U.S. output and incomes 

above those presented in the simulation modeling below. 

Effects of Reducing China’s Exports of Counterfeit Goods 

Improved IPR protection in China would also lead to a reduction in the production and 

export of counterfeit goods in China. The effects on the U.S. economy of a reduction in 

Chinese counterfeiting may be substantial. Again, the Commission has not undertaken 

estimates or simulations of the indirect effects of Chinese production and exports of 

counterfeit goods, because of the speculative nature of existing estimates of current levels 

of counterfeit production and trade associated with China. 

To estimate the impact of reducing China’s production and export of counterfeit goods, it 

would be necessary to have—at a minimum—an estimate of China’s current exports of 

such goods. The OECD has produced a widely cited estimate that the total value of trade 

in counterfeit products in the world was as much as $250 billion for 2007, of which a 

substantial share is believed to be Chinese exports.36 This figure is inferred from data on 

 33Desai, Foley, and Hines, “Foreign Direct Investment and Domestic Economic Activity,” 2005, table 

2, equation 4. 34Hanson, Mataloni, and Slaughter, “Expansion Abroad and the Domestic Operations of U.S. 

Multinational Firms,” 2003, table 4. 35See appendix H for details. The higher estimate is associated with Hanson, Mataloni, and Slaughter 

(2005), and the lower one, with Desai, Foley, and Hines (2003). 36OECD, “The Economic Impact of Counterfeiting and Piracy,” 2008. See also the literature review in 

the present study. 
4-18 

seizures of IPR-infringing goods by customs officials in various countries. Customs 

seizure data only represent infringing goods actually intercepted. The rate of interception 

of goods is subject to a number of factors, such as the active involvement of rights 

holders, which vary by country and sector, and the enforcement priorities of customs 

authorities. Most importantly, to infer the unknown value of goods not seized, and thus 

entering into commerce, from the observed value of goods seized requires multiplying 

the seizure data by a very large factor, which is inherently unverifiable and subject to 

substantial error. 37 It would be even more speculative to use such an estimate of global 

infringing exports to derive specific values for bilateral and sectoral China trade, such as 

would be required for the type of analysis performed above. 

Some observations can nonetheless be made on the potential effects of reducing China’s 

counterfeit production and exports, based on general economic principles. Since 

counterfeit goods compete with noncounterfeit ones, they normally exert downward 

pressure on the prices of genuine goods. The prices of genuine goods would likely rise 

under a scenario of improved Chinese IPR protection, which would benefit producers of 

such goods but impose a price penalty on consumers purchasing the goods. On the other 

hand, since counterfeits are often of inferior quality to genuine goods, a reduction in 

counterfeiting would be expected to lead to improvements in the average quality of 

products in frequently counterfeited sectors. This potential improvement in product 

quality could offset the increase in prices paid by consumers, although comparisons 

between price and quality effects on consumers are inherently difficult to make. 

Many of the legitimate versions of the most frequently counterfeited types of goods are 

often imported into the U.S. market rather than produced in the United States—for 

example, handbags and shoes from Italy and watches from Switzerland. For such goods, 

the benefits of a reduction in counterfeiting might be experienced more by producers in 

these countries than by producers in the United States. 

 37USITC, China IPR and Indigenous Innovation 1, 6-13. 
5-1 

CHAPTER 5 

The Effects of China’s Indigenous Innovation 

Policies on the U.S. Economy 

In 2006, China introduced a number of indigenous innovation policies aimed at 

increasing the level of scientific and technological innovation originating within the 

country and expanding the Chinese share of the added value embodied in the goods 

produced in China’s factories. Such policies may make it more difficult for U.S. firms to 

compete in China’s fast-growing market, either through exports or through local 

production in China, thus adversely affecting the U.S. economy and U.S. employment. 

Indigenous innovation policies may also help Chinese companies to compete in global 

markets outside of China, including in the United States, raising concerns that Chinese 

policies may reduce U.S. firms’ access to a level playing field worldwide. This chapter 

identifies to the extent feasible the reported, actual, and potential effects of China’s 

indigenous innovation policies on the U.S. economy and U.S. employment. To describe 

the size and scope of reported effects on the U.S. economy, the chapter relies upon U.S. 

firms’ responses to the Commission’s questionnaire. In addition, industry case studies 

have been used to examine actual and potential effects resulting from those policies. 

Key Findings 

The Commission’s questionnaire sought data and information from U.S. firms on the 

reported effects of indigenous innovation policies. Questionnaire results show the 

following: 

Firms that have reported concerns with indigenous innovation in China account for 67.2 

percent of the sales and 29.0 percent of the total number of firms in the U.S. IP-intensive 

economy conducting business in China in 2009. The firms that have reported concerns 

are relatively large; they have higher average sales, research and development (R&D) 

expenditures, royalty and license fee income, and employment than firms that have not 

reported concerns with indigenous innovation.1

 The largest shares of firms reporting 

concerns related to indigenous innovation policies were in the high-tech and heavy 

manufacturing sector and the chemical manufacturing sector.2

 

The top policy areas in which firms identified existing problems are (1) preferential 

support provided to Chinese firms in the form of tax incentives, subsidies, and 

preferential lending; and (2) Chinese-specific technical standards. Preferential support for 

Chinese firms was identified as the greatest future problem for U.S. respondent firms.3

 1

The Commission applied a weighting procedure to the questionnaire responses in order to extrapolate 

the results attained from individual respondents to the U.S. IP-intensive economy as a whole. See appendix E 

for a copy of the questionnaire and appendix F for a discussion of the survey methodology. 2

As discussed in chapter 3, the Commission has defined five sectors into which 24 subsectors have 

been grouped: consumer goods manufacturing; high-tech and heavy manufacturing; chemical manufacturing; 

transportation manufacturing; and information industries and miscellaneous services. 3

Government procurement is another policy area of concern identified by industry representatives with 

respect to indigenous innovation. See Ferrantino, Wang, and Yinug, “Chinese Imports of Indigenous 

Innovation Products,” USITC working paper, forthcoming, for a discussion of one attempt to assess the 

effects of indigenous innovation policies related to government procurement on Chinese high-tech imports 

from the United States and the world. 
5-2 

These policy areas were also identified in the case studies presented below. In particular, 

the subsidies and incentives provided Chinese firms are significant concerns for foreign 

wind power and automotive companies in China, and telecommunications equipment 

firms have raised concerns about preferential lending to Chinese firms and Chinesespecific technical standards. 

Indigenous innovation policies are relatively new and evolving; only a small percentage 

of U.S. IP-intensive firms that conduct business in China reported that they had already 

experienced material losses due to such policies in 2009. Going forward, most firms 

either are unsure how their revenues will be affected by indigenous innovation or 

anticipate that their revenues will fall. 

The case studies examine the effects of indigenous innovation policies on U.S. firms in 

five specific industries: wind energy, telecommunications equipment, software, 

automobiles, and civil aircraft and parts. The first three industries were specifically 

targeted by China as focus areas for its indigenous innovation product accreditation 

policies and associated government procurement preferences. The auto and aircraft and 

parts industries are R&D- and capital-intensive, and thus were considered likely to be 

affected by indigenous innovation policies. Most of the industries selected are important 

to U.S. exports and the U.S. economy more generally. The case studies identify the 

indigenous innovation-related policies of most concern to U.S. firms in each sector and 

the actual and potential economic effects of these policies. Major findings are highlighted 

in table 5.1. 
5-3 

TABLE 5.1 Key findings: Effects of China’s indigenous innovation policies for selected U.S. industries 

Industry 

Key indigenous innovation and industrial 

policies identified Actual and potential effects of such policies 

Wind energy 

equipment 

Government procurement preferences 

Local-content requirements 

R&D incentives and support 

There has been a significant decline in foreign 

firms’ participation in the Chinese market in the 

last five years 

Government procurement opportunities are 

highly restricted; no foreign firm has won a 

National Development and Reform Commission 

tender since 2005 

Competition from heavily supported Chinese 

firms has increased in third-country markets 

Telecommunications 

equipment (mobile 

handsets) 

Development of Time Division Synchronous 

Code Division Multiple Access (TDSCDMA) standard to reduce reliance on 

foreign technologies and royalty payments 

Preferential lending and generous lines of 

credit to promote Chinese companies in 

third-country markets 

There has been a significant decline in foreign 

firms’ market share in China in the last five 

years 

Significant firm resources are devoted to 

supporting multiple product lines to 

accommodate China’s indigenous standards 

Foreign firms attempting to comply with 

regulatory requirements must often delay 

market entry 

Creation of “national champion” Chinese firms 

alters the competitive landscape 

Software Introduction of Multi-Level Protection 

Scheme (MLPS) and China Compulsory 

Certification (CCC) software security 

standards 

Government procurement preferences 

Foreign firms are prohibited from competing for 

software contracts in industries deemed critical 

to Chinese security 

Foreign firms are required to disclose 

encryption codes and other key intellectual 

property to compete 

Government procurement is potentially 

restricted at the central government level; it is 

already restricted at the provincial level in many 

provinces 

Automotive industry Mandatory joint-venture requirements 

Encouragement of technology transfer 

R&D incentives and support for R&D limited 

to Chinese firms 

Local-content requirements 

Government procurement preferences 

Government incentives are available only to 

domestic firms, making it more difficult for 

foreign firms to compete in the Chinese market 

Joint-venture and technology transfer rules limit 

company flexibility and raise the possibility of 

loss of intellectual property 

Government procurement preferences may 

limit market for fleet sales 

Civil aircraft and parts Possible mandatory joint-venture 

requirements 

Technology transfer requirements and 

incentives 

Potential effects depend on China’s success in 

acquiring and using foreign civil aviation 

technology 

Source: Summarizes the case studies presented later in this chapter. 

Note: The case studies discuss firms producing goods, not services, in each industry. 
5-4 

Indigenous Innovation Policies 

Most analysts date the start of China’s emphasis on indigenous innovation to the January 

2006 Medium- to Long-Term Plan for the Development of Science and Technology 

(MLP).4 The MLP defines three components of indigenous innovation: (1) genuinely 

original innovation, (2) integrated innovation, defined as fusing together existing 

technologies in new ways, and (3) reinnovation, or assimilating and improving upon 

imported technologies. 5

 The third component can be seen as a form of technology 

transfer policy, a particularly important issue for foreign firms in China’s automotive and 

aviation sectors. The MLP also identified several specific innovation targets for China to 

achieve by 2020, including increasing investment in R&D, limiting dependence on 

imported technology, increasing patents granted to Chinese citizens, and ensuring that 

Chinese-authored scientific papers are extensively cited around the world.6

Observers have sharp differences as to the appropriate definition of indigenous 

innovation, a question that is addressed in the Commission’s survey. Some define 

indigenous innovation narrowly, as policies directly related to the draft National 

Indigenous Innovation Product (NIIP) catalog and associated government procurement 

decisions.7

 Others use a more expansive definition that encompasses aspects of Chinese 

industrial policies beyond government procurement, including issues related to technical 

standards, technology transfer policies, preferential lending, and others. 8 The 

Commission’s first report relied on a more expansive definition (box 5.1). Consequently, 

this report’s analysis of the effects of indigenous innovation policies will encompass 

government procurement, technical standards, technology transfer, and other policies as 

identified by respondents to the Commission’s questionnaire and in the case studies as 

pertinent to China’s indigenous innovation strategy. 

 4

Indigenous innovation policies are outlined in more detail in the Commission’s first report. USITC, 

China IPR and Indigenous Innovation 1, 2010, chapter 5. 5

Cao, Suttmeier, and Simon, “China’s 15-year Science and Technology Plan,” December 2006, 40. 6

Ibid., 38; McGregor, China’s Drive for “Indigenous Innovation,” July 2010, 14–15. 7

Industry representatives, interviews with USITC staff, Shanghai, January 11–12, 2011. 8

McGregor, China’s Drive for “Indigenous innovation,” July 2010; USITC, hearing transcript, 

Washington, DC, June 15, 2010, 168–69 (testimony of Jeremie Waterman, U.S. Chamber of Commerce); 

Hearing transcript, Washington, DC, June 15, 2010, 213–14 (testimony of Mark Bohannon, Software & 

Information Industry Association); industry representative, interview by USITC staff, Shanghai, January 10, 

2011; industry representatives, interviews by USITC staff, Beijing, September 8, 2010. 
5-5 

China’s policies have been evolving quickly; many relevant policies remain in draft form, 

and implementing regulations for major laws are not yet in place. Chinese government 

ministries and agencies at all levels are working to implement the central ideas of the 

MLP through a wide variety of more specific policies under their separate jurisdictions.9

In fact, China announced a major shift in its approach to indigenous innovation in 

December 2010 when it committed to not discriminate in government procurement based 

on the location in which a product’s intellectual property was developed. Prior to this 

commitment, one of the principal indigenous innovation concerns for U.S. firms related 

to China’s government procurement policies, as draft policies explicitly favored products 

with Chinese-developed intellectual property. China made additional changes to its 

 9

The National Development and Reform Commission (NDRC) is responsible for the largest number of 

these supporting policies (29), followed by the Ministry of Finance (MOF) with 21 policies, the Ministry of 

Science and Technology (MOST) with 17 policies, and the Ministry of Education (MOE) with 9 policies. 

Serger and Breidne, “China’s Fifteen-Year Plan for Science and Technology,” July 2007, 151–56. 

BOX 5.1 Policy areas relevant to indigenous innovation

According to Chinese government policy statements and outside observers, China’s indigenous innovation policies 

comprise various policies intended to advance the overall goal of increasing the country’s level of innovation. 

These include: 

 Government procurement: At both the central and the provincial levels, China reportedly is using 

government procurement as an early market to encourage the purchase of new high-technology products 

produced by Chinese firms. Current drafts of central government policies anticipate a catalog identifying 

indigenous innovation products in six specific industries. Products included in the catalog would then receive 

preferences in government procurement over other products not included. No national catalog had been 

released as of March 2011; China made commitments to the United States in January 2011 to delink such 

catalogs from government procurement rules. However, at least 60 such catalogs were in use at the provincial 

level as of February 2011, and it remains unclear whether these provincial catalogs will also be delinked from 

government procurement. 

 Technical standards: China has introduced a number of technical standards that differ from accepted global 

standards for similar products, and has required the use of such Chinese standards for sale of relevant 

products in China. These standards favor Chinese-made products, force foreign companies to develop new 

versions of existing products for the China market, and seek to reduce royalty payments to foreign patent 

holders whose intellectual property is integrated into existing global standards. 

 Anti-Monopoly Law (AML): Observers have raised concerns about whether China will enforce the recently 

enacted Anti-Monopoly Law in a manner that disadvantages foreign firms. 

 High and New Technology Enterprise (HNTE) tax status: Chinese firms may qualify for this tax status on 

the basis of R&D conducted in China and locally owned intellectual property. HNTE tax status makes the firm 

eligible for a lower corporate income tax rate (15 percent vs. 25 percent). 

 Technology transfer policies and joint-venture requirements: In a number of high-technology industries, 

including aviation and automotive, foreign firms’ access to China’s market has often been contingent on a 

contract that includes the transfer of specified technology to a Chinese firm, generally a joint-venture partner. 

Frequently, the foreign firm has little choice about its joint-venture partner, which is most often an SOE. Once 

the contract begins, foreign firms often expend considerable resources guarding technology that was not 

designated for transfer from theft through “unplanned technology transfer.” 

 

Sources: Industry representatives, interviews with USITC staff, Shanghai, January 10–14, 2011; Singham, 

statement to the U.S. House Judiciary Subcommittee on Competition and the Courts, July 13, 2010; U.S.-China 

Business Council, “Issue Brief: China’s Domestic Innovation and Procurement Policies,” May 2010, and “Provincial 

and Local indigenous innovation Product Catalogues,” February 2011; USITC, hearing transcript, June 15, 2010, 

208–10 (testimony of John Neuffer, Information Technology Industry Council) and 232 (testimony of Christian 

Murck, American Chamber of Commerce in China). 
5-6 

policies in January 2011, as described in box 5.2. Ultimately, the way in which China 

implements these new commitments, and other aspects of its indigenous innovation 

policies, will determine their effect on U.S. firms and the U.S. economy. For example, 

indigenous innovation product catalogs are currently in use in a number of Chinese 

provinces; it remains to be seen whether the link between the provincial indigenous 

innovation product catalogs and provincial level government procurement will be severed 

in the wake of the recent national announcements. 10 Given this dynamic policy 

environment, it is difficult to accurately predict the effects of such policies on the U.S. 

economy. 

Reported Effects of Indigenous Innovation Policies on the 

U.S. Economy: Questionnaire Results 

The Commission’s questionnaire for this study asked responding firms whether they were 

concerned about indigenous innovation policies; which policy areas they saw as problems 

both now and in the future; and whether firms had experienced any material losses related 

to the policies, including effects on firm revenues and employment. 

 10Industry representatives, interviews with USITC staff, Shanghai, January 10, 2011, and Washington, 

DC, February 9, 2011; USCBC, “Provincial and Local Indigenous Innovation Product Catalogues,” February 

2011. 

BOX 5.2 Eliminating discriminatory innovation policies 

According to a fact sheet published by the White House, China made the following commitments in connection with the 

January 2011 U.S.-China summit meeting: 

 The United States and China committed to the following principles: (1) government procurement decisions will not 

be made based on where the goods’ or services’ intellectual property is developed or maintained; (2) there will be 

no discrimination against innovative products made by foreign suppliers operating in China; and (3) China will 

delink its innovation policies from its government procurement preferences. 

 

 China agreed to eliminate discriminatory “indigenous innovation” criteria used to select industrial equipment for an 

important government catalog prepared by the Ministry of Industry and Information Technology. China also agreed 

to ensure that the catalog will not be used for import substitution, the provision of export subsidies, or 

discrimination against American equipment manufacturers in Chinese government programs targeting these 

products. 

 China committed to letting its “3G” (third generation) and future technologies develop free of discriminatory 

technology or standards preferences. China’s 3G infrastructure investment is expected to reach $10 to $12 billion 

in 2011. 

 China committed to allowing foreign companies equal opportunities to participate in the development of the 

country’s “smart” electric power grid. China committed that purchases of smart grid products and technologies will 

be made solely on commercial grounds with no discrimination against foreign companies. China also will ensure 

that foreign stakeholders have full opportunities to participate in an open, transparent process for establishing 

smart grid standards. China also committed to making purchases based solely on commercial considerations. 

China plans to spend $10 billion annually on smart grid investments. 

 

Source: The White House, Office of the Press Secretary, Fact Sheet: U.S.-China Economic Issues, January 19, 2011. 
5-7 

Characteristics of Firms Concerned with Indigenous Innovation 

Policies 

Firms that reported concerns with indigenous innovation in China account for 67.2 

percent of the sales and 29.0 percent of the total number of firms in the U.S. IP-intensive 

economy conducting business in China in 2009 (figure 5.1).11 Overall sales from this 

segment of the economy amounted to approximately $5.9 trillion, which corresponds to 

approximately 13.3 percent of U.S. GDP in 2009.12 Moreover, it appears that indigenous 

innovation is a greater concern for large firms. The minority (29.0 percent) of IPintensive firms conducting business in China and reporting concerns about China’s 

indigenous innovation policies generated the majority (67.2 percent) of sales. 

FIGURE 5.1 U.S. IP-intensive firms that reported concerns about China’s indigenous innovation policies account for 

67.2 percent of the sales of firms in the IP-intensive economy that were conducting business in China, 2009

Sources: Weighted responses to the USITC questionnaire; U.S. Bureau of Economic Analysis; U.S. Census Bureau. 

 a

Represents approximately 16 percent of U.S. GDP, based on sectoral sales estimates by the U.S. Census 

Bureau and value added estimates by the U.S. Bureau of Economic Analysis. The share of GDP was based on the 

value added by the 24 sectors identified as potentially affected by intellectual property issues and the added value of 

firms in the special groups (top trademark firms and U.S. firms with FDI in China). This calculation is not meant to 

imply that intellectual property issues are confined to this segment of the U.S. economy; intellectual property issues 

are at least somewhat relevant in all sectors. As such, this calculation is likely to represent the lower bound for the IPaffected economy. 

Firms reporting concerns about indigenous innovation policies in China have higher 

average sales, R&D expenditures, royalty and license fee income, and employment 

 11 Thirty-one percent of sales of firms in the U.S. IP-intensive economy conducting business in China is 

accounted for by firms not reporting concerns about China’s indigenous innovation policies. There is no 

response for the remaining 1 percent of sales. Figures do not add up to 100 percent due to rounding. 12The sales by U.S. IP-intensive firms doing business in China represent approximately 13 percent of 

U.S. GDP once sales in this sector (data from the U.S. Census Bureau) are converted into a value-added 

equivalent (data from the U.S. Bureau of Economic Analysis). 
5-8 

compared to firms that did not report concerns about indigenous innovation (figure 5.2).13

For example, average R&D spending for firms reporting concerns about indigenous 

innovation in 2009 was $258.2 million, compared to $34.7 million for those firms that 

did not report concerns with indigenous innovation.14

FIGURE 5.2 Characteristics of firms reporting concerns with indigenous innovation policies 

110.4

4,665.0

258.2

11,100

34.7

12.5

1,074.3

6,650

-12000 -10000 -8000 -6000 -4000 -2000 0 2000 4000 6000 8000

Firms with concerns that China's indigenous innovation policies are affecting them

Firms without concerns that China's indigenous innovation policies are affecting them

Avg. sales

($ millions)

Avg. royalties

($ million)

Avg. R&D

($ million)

Avg. employment

(no. of workers)

Source: Compiled from Commission questionnaire responses. 

Types of Indigenous Innovation Policies That Raise Present and 

Future Problems 

Questionnaire respondents interpreted indigenous innovation in different ways. For 

example, some firms reported a broad definition, e.g., any policy that favors Chinese 

firms relative to foreign firms. Other firms singled out more specific policies, for 

example, technical standards and tax incentives, as areas of concern.

 15

 13Though most firms reporting indigenous innovation concerns were “large” in terms of the metrics 

described above, smaller firms also reported that they were concerned about the policies. 14Average sales for firms with concerns regarding indigenous innovation were $4.7 billion in 2009 

versus $1.1 billion for firms without concerns regarding indigenous innovation; average royalty and license 

fees for firms with concerns regarding indigenous innovation were $110.4 million in 2009 versus $12.5 

million for firms without concerns regarding indigenous innovation; and average employment for firms with 

concerns regarding indigenous innovation was 11,100 in 2009 versus 6,650 for firms without concerns 

regarding indigenous innovation. 15For information on the way Chinese technical standards and other policies affect the U.S. software 

and telecommunications industries, see the respective sections on each topic later in this chapter. 
5-9 

Overall, firms identified tax incentives, subsidies, preferential lending, and Chinesespecific technical standards as existing problems with indigenous innovation policies 

(figure 5.3). For example, one questionnaire response identified a tax provision that 

makes firms with locally owned intellectual property eligible for the lower tax rates 

0 1 2 3 4 5 6 7 8 9 10

Other

R&D requirements

Technology transfer requirements

Closure of sector to foreign participation

Compulsory licensing

Incentives to register patents or other IP

Unequal enforcement of China's AML

Unequal treatment

Government procurement policy

Chinese-specific technical standards

Preferential lending

Subsidies

Tax incentives

Percent

Existing problem Future problem

Source: Compiled from Commission questionnaire responses.

Note: The percentages shown in this picture represent the firms that expressed concern about a particular 

indigenous innovation policy area, taken as a share of all firms expressing concern about one or more 

indigenous innovation poliy areas.

The following estimates are significant at the 90 percent level: government procurement policy (future), 

unequal treatment (existing), incentives to register patents or other IP (future), and closure of sector to foreign 

participation (future).

The following estimates are significant at the 85 percent level: preferential lending (future), government 

procurement policy (existing), unequal treatment (future), technology transfer requirements (future) and other 

(existing).

The following estimates are significant at the 80 percent level: unequal enforcement of China's AML (future), 

incentives to register patents or other IP (existing), and compulsory licensing (existing and future). 

The following estimates are significant at the 75 percent level: Chinese specific technical standards (future), 

unequal enforcement of China's AML (existing), closure of sector to foreign participation (existing), technology

transfer requirements (existing), R&D requirements (existing and future), and other (future).

FIGURE 5.3 Share of firms reporting indigenous innovation policies as causing existing or future problems for U.S.

IP firms doing business in China

accorded to high and new technology enterprises (HNTE). According to the respondent, 

foreign companies are more likely to license intellectual property to their Chinese 

affiliates rather than transfer ownership to them, for reasons including China’s weak IPR 

protection and corporate governance preferences. Because the U.S.-owned Chinese 

affiliate would not own the intellectual property, it would not be eligible for the lower tax 
5-10 

rate, notwithstanding its “high-tech” status. Preferential lending policies—for example, 

low-cost financing provided by the Chinese government to Chinese firms—also 

reportedly place U.S. firms at a comparative disadvantage with Chinese firms competing 

in the same industry.16

The questionnaire asked firms more detailed questions about Chinese-specific technical 

standards. Of firms that reported their products or services encounter Chinese-specific 

technical standards that conflict with widely accepted global standards, most said that 

they were not given the opportunity to take part in the standard-setting process or were 

only allowed to participate with observer status.17 In addition, most of those firms said 

that they expect Chinese-specific standards to damage their competiveness in the Chinese 

market, and a relatively high share also expect negative effects on their competiveness in 

third-country markets.18

The top policy areas in which firms identified future problems are subsidies and tax 

incentives. Subsidies and tax incentives overlap as policy areas that are current and future 

concerns. Going forward, firms may be focused on such policies that lend preferential 

support to Chinese companies because of the resulting difficulty for U.S. firms to 

compete with the prices of Chinese goods.19

Concerns about Indigenous Innovation Policies by Sector 

The share of firms reporting concerns related to indigenous innovation policies was 

highest in high-tech and heavy manufacturing and chemical manufacturing sectors, as 

shown in figure 5.4; both these sectors are R&D- and patent-intensive. Firms in the 

chemical manufacturing sector, in particular those reporting losses due to indigenous 

innovation, consistently indicated problems with the tax incentives available to their 

Chinese competitors. By contrast, firms with reported losses due to indigenous 

innovation in the high-tech and heavy manufacturing sector identified problems ranging 

from preferential support to Chinese companies to the development of national technical 

standards. Table 5.2 illustrates the reported level of concern regarding indigenous 

innovation policies, by sector and NAICS category. 

 16Industry representative, interviews with USITC staff, Washington, DC, July 2 and 15, 2010. 17Specifically, of firms answering the question regarding the standard-setting process, 0.2 percent 

reported being offered the opportunity to participate in the process; 53.3 percent were offered the 

opportunity, but only with observer status; and 46.5 percent (significant at the 90 percent level) of firms were 

not offered the opportunity. 18Of firms answering the question regarding competitive effects, while 63.3 percent of firms indicate 

they expect such standards to damage competiveness in China, 36.7 percent (significant at the 90 percent 

level) of firms indicated they don’t expect those effects (USITC questionnaire, weighted response to question 

8.6a, for those firms that responded in the affirmative to question 8.2). Further, 44.7 percent (significant at 

the 90 percent level) of firms expect such standards to also damage competiveness in markets outside of 

China, while 55.3 percent of firms do not expect those effects (USITC questionnaire, weighted response to 

question 8.6b). 19USITC questionnaire, survey respondent. 
5-11 

12.4

10.5

9.6

8.0

6.1

- 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Information and other services

Transportation manufacturing

Consumer goods manufacturing

Chemical manufacturing

High-tech, electrical, and heavy

manufacturing

Percent

FIGURE 5.4 Indigenous innovation: Share of firms with concerns by sector

Source: Compiled from Commission questionnaire responses.

Effects of Indigenous Innovation Policies on Firm Revenue and 

Employment 

A small share (3.5 percent) of IP-intensive firms with business in China indicated they 

experienced material losses in sales or profits due to indigenous innovation policies 

during 2007–09. Of firms reporting such losses, only 34.8 percent estimated their realized 

or potential losses. Based on this small number of responses, the average reported loss 

due to indigenous innovation was $634,538, with a 0.8 percent loss-to-sales ratio.20 In 

addition, a sizable portion of firms expect indigenous innovation policies to decrease 

revenue in the future, albeit with a high degree of uncertainty. When asked about the 

impact of indigenous innovation on future revenues, 60.0 percent of responding firms 

indicated that future effects were unknown, while 35.7 percent expected their revenues to 

decrease by 2015. 

Although indigenous innovation polices are relatively recent and continue to evolve, 

some firms reported experiencing effects on employment. Of firms that answered a 

question regarding employment effects, 35.9 percent reported that indigenous innovation 

policies had influenced their full-time equivalent (FTE) U.S. employees, while 64.1 

percent said the policies had not had an effect during 2007–09. 21

 20The loss-to-sales ratio is the average share of losses to sales (per firm) for those firms experiencing 

losses. 21The share of firms indicating that indigenous innovation policies have impacted their FTE U.S. 

employees increases to 64.7 percent if the response is calculated as a share of firms indicating they have 

experienced material losses rather than as all affected firms. In addition, of firms responding to more detailed 

questions about how indigenous innovation policies have influenced their FTE U.S. employees, most (66.0 

percent) indicated their employment levels decreased, followed by firms that were not sure about such effects 

(31.7 percent, significant at the 90 percent level). 
5-12 

TABLE 5.2 Indigenous innovation: concerns by sector (percent of firms concerned)

Sector NAICS categorya

 NAICS code Percent 

Breweries, wineries, and distilleriese 31212–31214 3.2 

Tobacco manufacturingf 3122 4.4 

Footwear manufacturing & other leather & allied product 

manufacturingc 3162, 3169 11.3 

Apparel manufacturingc 315 14.3 

Watch, clock, and part manufacturingc 334518 14.2 

Jewelry and silverware manufacturing 33991 0.0 

Consumer 

goods 

manufacturing 

Game, toy, and children's vehicle manufacturingc

 33993 9.2 

Pesticide, fertilizer, and other agricultural chemical 

manufacturing 

3253 14.5 

Pharmaceutical and medicine manufacturing 3254 9.8 Chemical 

manufacturing Other chemical manufacturingd

 325 (ex 3253, 

3254) 

3.1 

Machinery manufacturing 333 16.1 

Semiconductor and other electronic component 

manufacturinge 334413 10.6 

Other computer and electronic product manufacturing 

334 (ex 

334413, 

334518) 

10.0 

Electrical equipment, appliance, and component 

manufacturing 

335 16.7 

Medical equipment and supplies manufacturing 3391 18.3 

High-tech and 

heavy 

manufacturing 

Research and developmentc

 5417 4.8 

Transportation Motor vehicle equipment manufacturing 3361–3363 7.6 

manufacturing Aerospace product and parts manufacturingb 3364 8.3 

Newspaper, periodical, book, and directory publishersf 5111 3.2 

Software publishers 5112 40.1 

Motion picture and video industries 5121 7.8 

Sound recording industries 5122 (g)

Internet publishing and broadcasting and web search 

portals 

51913 57.9 

Information 

and other 

services 

Computer systems design and related services 5415 6.5 

Sources: Compiled from Commission questionnaire responses. 

 

 a

North American Industry Classification System (NAICS). http://www.census.gov/eos/www/naics/. 

 b

Significant at the 90 percent level. 

 cSignificant at the 85 percent level. 

 d

Significant at the 75 percent level. 

 e

Significant at the 70 percent level. 

 f

Not statistically different than zero. 

 g

Too few responses in subsector to estimate a share of firms. 

Actual and Potential Effects of China’s Indigenous 

Innovation Policies on Selected U.S. Industries 

The case studies presented below provide information on the actual and potential effects 

of China’s indigenous innovation policies for five selected industries: wind energy, 

telecommunications equipment, software, automotive, and civil aircraft and parts. 
5-13 

Wind Energy 

Overview 

The Chinese government has used indigenous innovation and other policies to develop its 

wind energy industry in recent years. These policies have included local-content 

requirements, support for R&D by Chinese firms, and government procurement rules that 

favor domestic firms. This case study focuses on China’s policies toward utility-scale 

wind power, the renewable energy segment with the largest current market in China. 

Although broad Chinese government support for development of the wind power industry 

could potentially create market opportunities for U.S. firms, China’s market has become 

increasingly dominated by Chinese-owned firms, and opportunities for U.S. and other 

foreign firms have contracted. Moreover, while the effects of these policies on the U.S. 

economy and U.S. jobs may be relatively small, since U.S. and other foreign-based firms 

conduct much of their manufacturing in China, the effects on business opportunities for 

U.S. wind turbine manufacturers may be significant. Similarly, although U.S. companies 

that supply component parts to Chinese wind turbine manufacturers could potentially 

benefit as Chinese companies expand, as of early 2011 most Chinese manufacturers 

appear to source the vast majority of their components from other Chinese companies. 

U.S. Participation in China’s Wind Energy Market and Industry 

China has been rapidly building wind farms in recent years, and in 2010 became the 

world leader in installed wind power capacity, ahead of the United States, with 44,733 

megawatts (MW) installed, of which 18,923 MW were installed during 2010 alone.22 In 

2009, at least 14,000 MW of new wind projects were built in China, a 130 percent 

increase over 2008 and a tenfold increase in installed wind power over four years.23 Most 

of this demand for wind turbines has been met by Chinese domestic manufacturers, 

particularly Sinovel, Goldwind, and Dongfang.24 

China’s wind power market is split into national concession contracts larger than 50 MW 

and small provincial concessions, with foreign firms completely excluded from 

competing for all national concession contracts. National contracts make up the bulk of 

the market and are awarded through the government procurement process by the National 

Development and Reform Commission (NDRC).25 No foreign firm has won an NDRC 

concession tender since 2005. 26 U.S. and other foreign companies that are active in 

China’s wind power industry, including world leaders Gamesa (Spain), Vestas 

(Denmark), and GE (United States), primarily participate in the much smaller market for 

wind power concessions awarded by provincial governments (contracts that are generally 

less than 50 MW). Even for wind turbine projects developed by those companies, 

however, most components are being supplied by Chinese companies or manufactured in 

 22Global Wind Energy Council, “China Adds 18.9 GW of New Wind Power Capacity in 2010,” News 

release, April 6, 2011. By contrast, U.S. wind installations increased from 2,462 MW in 2006 to 10,010 MW 

in 2009, then declined to 5,116 MS in 2010. American Wind Energy Association (AWEA), U.S. Wind 

Industry Annual Market Report, Year Ending 2009, 2010, 5; AWEA, “U.S. Wind Industry Continues 

Growth,” News Release, April 7, 2011. 23Zindler, Statement to the U.S.-China Economic and Security Review Commission, July 14, 2010, 7. 24Ibid. 

25Industry representatives, interviews with USITC staff, Washington, DC, July 15, 2010, and Beijing, 

September 8, 2010; Dewey & LeBoeuf, March 2010, 53. 26The NDRC tenders comprise China’s entire wind power market for projects larger than 50 MW. 

Industry representatives, interviews with USITC staff, Washington, DC, July 15, 2010, and Beijing, 

September 8, 2010; Dewey & LeBoeuf, March 2010, 53. 
5-14 

China, due to local-content requirements that were in place from 2005 through 2009.27 In 

addition to investing in production facilities in China, wind energy companies based in 

the United States and elsewhere are increasingly locating their R&D activities in China to 

take advantage of the manufacturing infrastructure and to be close to the ultimate demand 

location for their products; reportedly it makes economic and business sense to conduct 

R&D close to other parts of the value chain.28 

U.S. wind energy firms are also participating in the Chinese market by licensing key 

technologies and selling wind turbine components to Chinese companies. For example, 

American Superconductor (AMSC), based in Massachusetts, recently announced that it 

has licensed its patented wind turbine technology for 2MW, 3MW, and 5MW turbines to 

six Chinese companies, and expects to continue to grow its licensed market share in 

China.29 In July 2010, Timken Co. won a $26 million contract to supply wind turbine 

parts and services to China’s Goldwind. The contract calls for Timken to supply 

engineering support, advanced bearings, and services for Goldwind’s 1.5 MW and 2.5 

MW turbines. The two companies also will collaborate on future wind turbine 

developments.30

Chinese Laws and Policies Related to Wind Energy 

China has established policies over a number of years that aim to increase domestic 

production of wind energy equipment and overall use of wind power in China (table 5.3). 

In the renewable energy arena, the Chinese government has imposed local-content 

requirements; provided R&D funding, tax incentives, and other benefits available only to 

domestic manufacturers; set ambitious clean energy deployment targets; and established 

procurement policies to develop its domestic market and related infrastructure. In 

addition, local and provincial governments in China offer clean energy companies free 

land, tax breaks, and other incentives to facilitate regional networks of investors, 

manufacturers, suppliers, universities, and other actors that can work together to scale up 

renewable energy projects in a given region.31Government procurement is an important 

factor in China’s wind power market, as most wind farms are funded through government 

contracts. Government procurement preferences for indigenous renewable energy 

products, if enforced according to draft policies circulated for comment in 2010, are 

viewed as likely to significantly undermine market opportunities for U.S. firms.32

 27Industry representatives, interviews with USITC staff, Washington, DC, July 15, 2010, and Beijing, 

September 8, 2010; Dewey & LeBoeuf, March 2010, 53. 28Wong, Statement to the U.S.-China Economic and Security Review Commission, July 14, 2010, 19. 29AMSC technology powers approximately 10 percent of wind turbines worldwide. American 

Semiconductor, “AMSC Licenses Multiple Wind Turbine Designs,” January 11, 2011. 30Timken Co., “Timken Wins US$26 Million Wind Energy Contract Supplying Goldwind,” July 28, 

2010. 31Swezey, statement to the U.S.-China Economic and Security Review Commission, July 14, 2010. 32Dewey & LeBoeuf, “China's Promotion of the Renewable Electric Power Equipment Industry,” 

March 2010, 17. 
5-15 

TABLE 5.3 Principal Chinese laws related to wind energy 

Law Date Description 

Ride the Wind Program 1997 Encouraged SOEs to establish joint ventures with foreign companies to 

manufacture wind turbines in China. Joint-venture partners were chosen on 

the condition of technology transfer, and received Chinese government 

support. The program started with a 20 percent local-content requirement 

that was scheduled to rise to 80 percent. This program has been 

terminated. 

NDRC Notice of 

Requirements for the 

Administration of Wind 

Power Construction (Notice 

1204) 

2005 Established a 70 percent local-content requirement for wind turbines. The 

level of local-content above the minimum standard was a key criterion in 

awarding the winning bid. As of July 2005, wind power stations that did not 

meet the 70 percent local-content requirement would not be allowed to be 

built in China (even for non-NDRC concession projects). Local-content 

requirements were removed in November 2009. 

Renewable Energy Law 2005 Includes dates by which utilities’ share of total electric power from 

renewables must meet certain targets, requires utilities to pay reasonable 

on-grid prices to renewable power producers; and ensures that higher 

prices paid to producers of renewable energy are shared by all electricity 

customers. 

MLP Guidelines, including 

“low cost, mass 

development, and 

utilization of renewable 

energy” 

2006 Gives priority to R&D related to large-scale wind power generation 

equipment and technologies, among other renewable technologies. The 

guidelines promote several policy tools, including fiscal and tax policies to 

promote R&D and enhance innovation capabilities, government 

procurement focused on promoting indigenous innovation products, and 

absorption of imported technologies. 

Several Opinions of the 

State Council on 

Expediting the 

Rejuvenation of the 

Equipment Manufacturing 

Industry 

July 2006 Among other classes of equipment, “high-power wind power generation 

units” are designated as “key.” One strategy for the government would be to 

support indigenous innovation projects. In approving construction projects, 

the state should consider domestic production of key technological 

equipment. Import tax exemptions for complete sets of foreign-made 

equipment would be cancelled, but domestic firms could continue to enjoy 

import tax exemptions for key foreign-made parts. In May 2009, a further 

State Council plan on equipment manufacturing again identified wind power 

equipment such as frequency conversion control systems, bearings, and 

carboform blades as targets of financial support for indigenous innovation 

equipment. 

Medium- and Long-Term 

Development Plan for 

Renewable Energy in 

China 

September 

2007 

One objective in the plan is that by 2020, local manufacturing of renewable 

energy equipment should be based primarily on indigenous innovation, 

meaning that the relevant intellectual property should be wholly-owned by 

enterprises organized under the laws of China. The Plan does not give 

further detail about how to achieve this goal. 

Special Fund for Wind 

Power Manufacturing 

August 2008 Provides funding to promote wind power-focused R&D activities by 

Chinese-owned wind power manufacturing companies. Applicants for 

funding must have Chinese-owned IPR, provide complete technical 

specifications to the Chinese government, and manufacture wind power 

equipment in China. As of February 2011, the fund is the subject of WTO 

consultations between the United States and China. 

Chinese Government 

stimulus package 

November 

2008 

Boosted renewable energy spending and required that domestic products 

be given preference in the distribution of $7 billion in stimulus money for 

new wind power concessions. 

Interim Measures for 

Offshore Wind Power 

Development and 

Construction 

January 

2010 

Requires that companies undertaking offshore wind farm investment 

projects must have foreign ownership of no more than 49 percent. 

Sources: Government of China, Ministry of Finance, “Announcement on Issuing the Management Regulations on 

Special Fund for Wind Power Manufacturing Sector in China,” August 11, 2008; Lewis, “A Review of the Potential 

International Trade Implications,” n.d.; USTR, “United States Requests WTO Dispute Settlement Consultations,” 

December 22, 2010; USTR, “China,” April 2011; ACORE and Chinese Renewable Energy Industries Association 

(CREIA), “US-China Quarterly Market Review,” October, 2010; Dewey & LeBoeuf, “China's Promotion of the Renewable 

Electric Power Equipment Industry,” March 2010; NDRC, “Medium- and Long-Term Development Plan for Renewable 

Energy,” September 2007; Windpowermonthly.com, Article 3.2(3), “Relaxing the Rules of Supply,” October 2010. 
5-16 

One particular concern identified by foreign companies in China’s wind energy sector has 

been the high (70 percent) local-content requirement (NDRC Notice 1204, 2005) that 

China has imposed on contracts for wind energy equipment (see table 5.3). 33 This 

requirement effectively forced foreign companies to set up manufacturing centers in 

China, bringing many of their component suppliers with them and likely reducing U.S. 

exports of components. However, wind turbine manufacturers usually prefer to establish 

manufacturing facilities close to the site of greatest demand, as transport costs for 

finished wind turbines are high, so local-content requirements may not be the 

determining factor for the manufacturing location for the turbine. Some of these foreignowned manufacturing facilities were structured as joint ventures, which also brought 

benefits to China in the form of technology transfer.34

China removed local-content requirements on wind turbines in November 2009 and 

confirmed that wind power equipment produced by foreign companies operating in China 

would be treated as domestic content. By that point, local-content requirements were 

arguably no longer needed, since low-priced Chinese suppliers were plentiful in the 

market. 35 However, U.S. industry and labor representatives contend that many localcontent requirements are still in place, implicitly or explicitly, or that China still offers 

significant incentives, including grants, loans, and tax subsidies, that are contingent on 

use of local products.36 In December 2010, the United States filed a complaint against 

China under the WTO Dispute Settlement Understanding, alleging improper subsidies to 

China’s wind power industry in violation of China’s WTO obligations (box 5.3).37

By 2010, wind turbine manufacturers were able to source their complete supply chains in 

China, and most wind turbines sold in China, whether by Chinese or foreign firms, easily 

exceed the 70 percent local-content threshold. Manufacturers report significant pressure 

to source from China, both to win government contracts and to reduce costs as much as 

possible in a time of excess supply, which is partly due to the entry of new Chinese 

manufacturers into the market.38 Increased Chinese production also has led to oversupply 

of turbines in the market, bringing down prices in China.39

 33The high local-content requirement is one factor leading to China’s development of a complete 

domestic wind power industrial chain, but other factors, such as government funding of R&D and 

demonstration projects, may have been equally important. Windpowermonthly.com, “Relaxing the Rules of 

Supply,” October 2010, 9; Dewey & LeBoeuf, March 2010, 52. 34Bloomberg New Energy Finance, “Joined at the Hip,” May 17, 2010, 9. 35Dewey & LeBoeuf, March 2010, 58; USTR, “21st U.S.-China Joint Commission on Commerce and 

Trade,” December 15, 2010; Bradsher, “To Conquer Wind Power, China Writes the Rules,” December 14, 

2010. 36United Steelworkers, “United Steelworkers’ Section 301 Petition Demonstrates China’s Green 

Technology Practices Violate WTO Rules,” par. 2 and 3; industry representative, telephone interview by 

USITC staff, February 4, 2011. 37The United States requested consultations with China in the matter, and the EU and Japan 

subsequently requested to join the consultations. WTO, Dispute DS419, China—Measures Concerning Wind 

Power Equipment, Summary of Dispute. 38Wind Power Monthly, “Relaxing the Rules of Supply,” October 2010, 9–11; industry representative, 

telephone interview by USITC staff, February 4, 2011. 39When leading Chinese wind turbine manufacturers began mass production and sales in 2006, turbines 

were typically priced between 15 and 20 percent below equipment from non-Chinese companies. The price 

gap between Chinese and foreign turbines had widened to over 27 percent as of early 2010. Bloomberg New 

Energy Finance, “Joined at the Hip: The US-China Clean Energy Relationship,” May 17, 2010, 9. 
5-17 

Other observers view the removal of the local-content requirement as a strategic step in 

support of China’s efforts to produce larger (more than 2 MW) and offshore wind 

turbines, since some of the technology for this newer equipment is not yet available from 

domestic producers in China.40 In January 2010, China issued a new rule limiting foreign 

investment in offshore wind projects to no more than 49 percent..41 As China seeks to 

develop more advanced, larger turbines, it is likely that technology transfer agreements 

focused on newer technology will be encouraged.42 

Chinese policymakers also have encouraged increased R&D investments by domestic 

companies and required newly tendered projects to use larger turbines. In addition, in 

March 2010, China drafted a policy that moves to eliminate many smaller, less 

competitive Chinese turbine manufacturers. In April 2010, China removed the valueadded tax (VAT) for imports of large wind turbine components. Together, these policy 

changes are expected to allow Chinese manufacturers easier access to components from 

foreign suppliers as they seek to design larger turbines, which are eventually intended for 

export as well as domestic sales.43

Other specific policies that have been cited as preventing foreign wind power companies 

from effectively competing in China include the following: 

 The significant R&D support from China’s 2008 stimulus package to university 

and research institutions for research into turbines larger than 2.5 MW required 

 40Wind Power Monthly, “Relaxing the Rules of Supply,” October 2010, 11. 41USTR, “China,” April 2011, 85. 

42Lewis, “A Review of the Potential International Trade Implications,” October 2007, 4; industry 

representative, interview by USITC staff, Beijing, September 8, 2010. 43Bloomberg New Energy Finance, “Joined at the Hip: The US-China Clean Energy Relationship,” 

May 17, 2010, 9. 

BOX 5.3 WTO dispute: China’s alleged subsidies for wind power manufacturing 

In September 2010, the United Steelworkers filed a petition under section 301 of the Trade Act of 

1974, as amended, alleging that China was pursuing WTO-inconsistent policies and practices 

affecting trade in green technology products and investment in green technology, including 

export restraints on rare earth minerals, tungsten, and antimony; prohibited export and import 

substitution subsidies; discrimination against foreign companies and imported goods; technology 

transfer requirements; and domestic subsidies causing serious prejudice to U.S. interests. 

The following month, USTR initiated an investigation into these allegations. In December 2010, 

USTR announced that it had decided to initiate a WTO case alleging that prohibited import 

substitution subsidies were being provided by the Chinese government to support the production 

of wind turbine systems in China. Specifically, the United States is challenging subsidies being 

provided by the Chinese government to manufacturers of wind turbine systems that appear to be 

contingent on the use of domestic components and parts. 

WTO consultations between the United States and China on the issue took place in February 

2011. In the wind energy sector, USTR is targeting only China's special fund for wind power 

manufacturing, which supports the development of turbines larger than 1.5 MW and requires that 

these turbines must use at least 51 percent Chinese parts. According to USTR, the fund has 

disbursed up to several hundred million dollars since 2008. 

 

Sources: USTR, 2010 Report to Congress on China’s WTO Compliance, December 2010, 20; 

USTR, “United States Requests WTO Dispute Settlement Consultations,” December 22, 2010; 

USTR, “China,” February 2011; Davidson, “WTO Complaint Casts Shadow over China’s State 

Visit to US,” Windpower Monthly Magazine, February 1, 2011. 
5-18 

preferences to be given to domestic products, as did the stimulus funding 

allocated to renewable energy.44

 Renewable energy project owners that are not wholly Chinese owned are 

excluded from applying for carbon credits under the Kyoto Protocol Clean 

Development Mechanism, giving a cost advantage to Chinese firms.45

 Foreign and joint-venture companies are required to have registered capital of 33 

percent, compared to only 10 percent for domestic companies. This difference 

was originally justified as a way to compensate for VAT taxes that did not apply 

to foreign companies, but even after the VAT refund policy was rescinded in 

January 2009, this policy was continued.46

Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. 

Economy 

Indigenous innovation policies related to wind energy appear to have had an impact on 

U.S. firms’ market participation in China. According to a number of sources, the price 

difference between foreign and Chinese-made wind turbines, coupled with implicit 

government encouragement to buy domestic products, has caused market shares of 

domestic manufacturers to expand dramatically at the cost of their foreign competitors. 

Foreign companies’ share of China’s newly installed wind power capacity declined from 

75 percent in 2004 to 13 percent in 2009,47 even though foreign companies have made 

extensive investments in China or contracted out significant shares of their manufacturing 

processes to meet the 70 percent local-content requirements.48 

Chinese wind energy companies are rapidly gaining market share outside of China as 

well. In 2009, Chinese companies accounted for 33 percent of the global wind turbine 

market, up from 15 percent in 2008. 49 In 2009 there were 3 Chinese companies in the 

top 10 in global market share (Sinovel, Goldwind, and Dongfang) and 5 in the top 15 (the 

3 mentioned plus United Power and Mingyang); in 2008, there were only 2 Chinese 

companies in the top 10 and 3 in the top 15. Chinese companies have increased their 

share of the global market almost entirely through installations in China, but several are 

now seeking to enter foreign markets, and a number have recently signed agreements to 

supply wind turbines outside of China. Meanwhile, although Chinese companies have 

accounted for less than 1 percent of U.S. wind turbine installations in the last three years, 

Chinese firms are pursuing the U.S. market. In the first significant project using Chinese 

turbines in the United States, Goldwind was selected as a wind power provider by the 

Illinois Power Agency for a 20-year power purchase agreement in December 2010. The 

 44Industry representative, interview with USITC staff, Beijing, September 8, 2010; Dewey & LeBoeuf, 

March 2010, 57. 45United Steelworkers, “United Steelworkers’ Section 301 Petition,” par. 2 and 3. 46Dewey & LeBoeuf, March 2010, 70–72. 

47Li, Shi, and Hu, 2010 China Wind Power Outlook, October 2010, 37. 48Li, Shi, and Hu, 2010 China Wind Power Outlook, October 2010, 37; Dewey & LeBoeuf, March 

2010, 67–68. 49Market share of Chinese manufacturers reflects wind turbines supplied by Chinese companies as a 

share of all wind turbines supplied. Similar data for earlier years are not available, but Chinese wind 

companies accounted for less than 10 percent of all wind turbines supplied globally before 2008. Market 

share is based on a calculation by USITC staff using BTM Consult data. BTM Consult ApS, International 

Wind Energy Development: World Market Update 2009, March 2010, 28, 93; BTM Consult ApS, 

International Wind Energy Development: World Market Update 2008, March 2009, 24, 109. 
5-19 

106.5 MW project is expected to cost between $150 million and $200 million, and the 

project is expected to use approximately 60 percent U.S. content.50

It appears that the Chinese industry’s growing capacity and market share are due in large 

part to indigenous innovation-related policies. Foreign firms have limited access to the 

government procurement market, which accounts for all of the largest wind farm projects 

in China. This situation sharply limits the prospects for U.S.-based wind energy 

companies in China.51 Chinese joint-venture companies that are majority foreign-owned 

reportedly are not considered to be domestic companies in the concession process, largely 

excluding foreign firms that have invested in local production in China. 52 However, 

concessions for wind power projects below 50 MW are controlled by local or provincial 

governments, not the NDRC. These projects are reportedly more open to bidding by nonChinese firms, which have been competitive in this smaller market.53 

In a step forward for foreign firms, the 2010 JCCT Agreement included a provision that 

China will permit foreign wind power companies to use their experience from outside of 

China to demonstrate competence when bidding on projects within China. Previously, 

this was not the case; foreign enterprises were judged only on their prior experience in 

China in qualifying for large-scale wind power projects. 54 China further agreed that 

foreign firms will be able to submit documentation based on existing installed wind 

power projects outside China in order to demonstrate technical requirements for 

eligibility to supply large-scale wind power projects in China.55

Aside from indigenous innovation policies, other aspects of Chinese renewable energy 

policies, including feed-in tariffs and aggressive targets for installed capacity, have 

encouraged the wind energy industry’s development in China. 56 China’s long-term 

policy commitment to renewable energy permits investors to better predict market 

conditions over 10 years or more, thus facilitating investment from both foreign and 

domestic firms. 

Telecommunications Equipment 

Overview 

One of the most visible manifestations of Chinese indigenous innovation aspirations in 

the telecommunications equipment industry has been the development of a homegrown 

 50Goldwind estimates that the project, its second in the United States, will create more than 100 

construction and permanent jobs in the United States. North American Wind Power, “Goldwind to Sell Power 

from Shady Oaks to ComEd,” December 21, 2010; Bloomberg New Energy Finance, “Xinjiang Goldwind 

Science & Technology Co.,” December 21, 2010. 51Industry representatives, interviews with USITC staff, Washington, DC, July 15, 2010, and Beijing, 

September 8, 2010; Dewey & LeBoeuf, March 2010, 53. 52Moreover, information provided by firms based outside of China indicates that the bidding process 

favors Chinese products that are allegedly less efficient, and that the process relies exclusively on initial 

turbine prices, excluding consideration of factors such as long-term performance or maintenance costs. 

Industry representative, telephone interview with USITC staff, July 15, 2010. 53Industry representatives, interviews with USITC staff, Washington, DC, July 15, 2010, and Beijing, 

September 8, 2010; Dewey & Le Boeuf, March 2010, 52–56. 54U.S. Trade Representative, “21st U.S.-China Joint Commission on Commerce and Trade,” December 

15, 2010; USTR, 2010 Report to Congress on China’s WTO Compliance, December 2010, 7, 20. 55USTR, 2010 Report to Congress on China’s WTO Compliance, December 2010, 41–42. 56Also, as of 2010, the income and value-added tax rates for wind farms were half of the rates 

applicable to other power projects, at 15 percent and 8.5 percent, respectively. Bloomberg New Energy 

Finance, “Joined at the Hip: The US-China Clean Energy Relationship,” May 17, 2010, 5–7. 
5-20 

standard for third generation (3G) mobile technology, which affects the global players in 

both the networking infrastructure and wireless handset components of the industry. This 

case study focuses on handset makers, as this is where U.S. involvement in the Chinese 

industry is concentrated. 57 Chinese indigenous innovation policies, including the setting 

of 3G standards, have enhanced the technological expertise of Chinese companies 

involved in the mobile telecommunications industry and facilitated their global 

expansion. These policies have also acted as roadblocks to U.S. wireless handset makers’ 

access to the Chinese market, affecting product development costs and time to market. 

Although it is difficult to quantify a direct impact on U.S. jobs, Chinese wireless handset 

makers have altered the global competitive landscape and become rivals of their U.S. 

counterparts in markets around the world. 

U.S. Participation in China’s Wireless Handset Industry 

China is critical for U.S. handset makers as both a market and a production base. China 

had 850 million mobile phone subscribers in 2010, up from 393 million in 2005, making 

it the largest market in the world and one of the fastest growing.58 A decade ago, foreign 

multinationals dominated the Chinese handset market, accounting for nearly 90 percent 

of China’s handset industry sales.59 As of 2010, the market share in China held by foreign 

handset makers, including U.S.-based Motorola and Apple, had fallen to approximately 

50 percent.60 U.S. companies’ market share in China has declined dramatically over the 

last five years, reflecting both a global trend for U.S. handset makers as they compete 

with leading multinationals like Nokia, Samsung, and LG, and the rise of domestic 

manufacturers in China.61 The dominant Chinese handset firms are ZTE and Huawei, 

joined by dozens of small manufacturers of lower-tier phones, some of whom are 

engaged in the illegitimate activities popularly referred to as “shanzhai” (box 5.4).62 

 57Another important part of the U.S. telecommunications equipment industry consists of wired network 

infrastructure companies that produce Internet switches, routers, and optical transport equipment. These 

companies, which include Cisco, Juniper, and Ciena, are also affected by China’s indigenous innovation 

policies and face competition from some of the same Chinese companies (Huawei and ZTE in particular) that 

are dominant in the wireless handset industry segment. 58TIA, ICT Market Review, 2011, 5–124. 59Wuzhou, “China’s Burgeoning Mobile Phone Industry,” September 2003. 60Other U.S.-based producers of wireless handsets include HP, which acquired Palm in 2010, and Dell. 

Both companies are smaller players than Motorola and Apple. 61The U.S. leader in China, Motorola, saw its mobile phone market share decline from 23 percent in 

2006 to 2 percent in 2010. This can be contrasted with growing sales of smartphones, the fastest growing 

segment of the mobile phone market in China—an area of strength for U.S. companies like Apple, with 

offerings such as the iPhone. Chao, “Motorola Makes China Push,” August 31, 2010. 62USITC, “Wireless Handsets,” March 2010, 22. 
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Box 5.4 China’s shanzhai mobile phone market 

Shanzhai phones are believed to be an important force in China’s mobile handset market, reportedly 

taking market share from global brands as well as Chinese mobile phone producers. According to 

industry reports, shanzhai phones may include blatant counterfeiting and production of knockoffs, as 

well as phones of varying quality that are sold at a substantial discount because taxes, regulatory fees, 

and safety inspections are avoided. Gray market phones, which are legitimate phones sold through 

unauthorized channels, are also sometimes associated with the market for shanzhai phones. 

Shanzhai phones can be difficult to distinguish from legitimate low-cost handset production and are 

sometimes conflated with unbranded, “white box” cellular phones, which may be legally manufactured 

by contract and then branded by the carrier. This was an early development strategy of Huawei and 

ZTE, which produced unbranded phones, often exporting them to developing countries and 

establishing relationships with carriers. Though estimates vary and statistics often lump together black 

market shanzhai phones with unbranded white box phones, industry analysts estimate they account for 

20 to 38 percent of mobile phone sales in China in 2009. 

The availability of total chipset solutions from Taiwanese chipmaker MediaTek and software available 

from several sources has lowered the barriers to entry for manufacturers, who can now buy the “brains” 

of the cell phone and create simple designs around the chipset. These small local manufacturers have 

benefited from the delays in the launch of 3G networks and of specific branded phones, such as the 

iPhone. The delays give small manufacturers a chance to develop their own products that can serve as 

substitutes for brand-name mobile phones at a fraction of the cost. 

 

Sources: Barboza, “In China, Knockoff Cellphones Are a Hit,” New York Times, April 28, 2009; 

Economist, “Silent Mode,” October 16, 2008; Sandstrom, “Sales of Unbranded Chinese Phones 

Surge,” Wall Street Journal, November 10, 2010; Richburg, “’Gray Market’ Is Red Hot in China,” 

Washington Post, August 8, 2010; AmCham South China, “Business Environment in China,” March 

2010. 

U.S. wireless handset companies participate in China primarily through FDI and 

contracting production to Chinese manufacturing firms, with negligible U.S. exports of 

handsets to China.63 These manufacturing operations serve as a base for U.S. companies 

to meet global demand, with a good portion of the handsets produced in China destined 

for the U.S. and other markets.64 Some U.S. companies involved in the wireless handset 

industry, along with other major multinational mobile handset producers, have also 

invested in R&D in China.65

The United States is also a major supplier of technology for essential components to 

handset makers in China, including domestic Chinese companies.66 U.S. companies like 

Qualcomm are the global leaders in the license and manufacture of semiconductor 

chipsets that form the highest value component in mobile handsets and constitute the 

integral technology enabling wireless connectivity in accordance with a particular 

wireless standard. These companies typically license patents to manufacturers of wireless 

equipment and collect royalties on wireless handsets containing their technology.67 

 63U.S. exports of handsets to China were $16 million in 2009, compared to $13 billion in U.S. imports 

of handsets from China. Compiled from official statistics of the U.S. Department of Commerce. 64China has grown as a manufacturing base, from producing 245.9 million mobile phone handsets in 

2003 to producing more than 700 million in 2010, representing around 60 percent of global production. 

IBISWorld, “Mobile Communications and Terminal Equipment Manufacturing in China,” September 8, 

2010. 65IBISWorld, “Mobile Communications and Terminal Equipment Manufacturing in China,” September 

8, 2010, 29; USITC questionnaire, survey respondents. 66U.S. firms like Qualcomm, Broadcom, Interdigital, Texas Instruments, Infineon (owned by Intel), 

Marvell, and Icera are global leaders in the development of wireless technology. 67Datamonitor, “Qualcomm Incorporated,” May 7, 2010, 4. 
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Chinese Policies and Practices 

Telecommunications has been identified as a sector of strategic importance in China’s 

MLP, and the 11th Five-Year Plan for High-Technology Industries (2006–10) targeted 

“new generation broadband wireless mobile communications networks” as one of its 16 

megaprojects. Next-generation mobile technology is again targeted in available drafts of 

the forthcoming 12th Five-Year Plan (2010–15).68 

An important objective of China’s indigenous innovation aspirations is the development 

of products incorporating Chinese intellectual property and Chinese-developed 

standards.69 China’s work in the targeted telecommunications sector, particularly through 

its development of a homegrown 3G standard for wireless communications networks, is 

helping it to achieve these indigenous innovation goals. It is also moving China toward 

the specific targets laid out in the MLP of limiting dependence on imported foreign 

technology, increasing investment in R&D, and increasing the number of patents granted 

to Chinese citizens. 

The Chinese government spearheaded the development of the TD-SCDMA 3G wireless 

standard in an effort to reduce reliance on foreign technologies and the corresponding 

costs to Chinese manufacturers in the form of royalties and license fees. 70 In addition to 

reducing dependence on foreign technology in a sector important for economic 

development and national security, it has been suggested that development of the Chinese 

standard would improve China’s bargaining position in future licensing arrangements, as 

China would be armed with its own patents.71 The work that went into developing TDSCDMA may have increased awareness of the importance of patenting core technologies 

and helped Chinese firms to develop expertise in the standards-setting process. The 

experience also likely upgraded Chinese companies’ technical knowledge of wireless 

networks, setting the stage for them to take a more prominent role in developing Long 

Term Evolution (LTE), the fourth generation of mobile technology.72 

Although China’s Ministry of Industry and Information Technology (MIIT) invested 

heavily in TD-SCDMA and asked Datang, an SOE, to lead the project, reports indicate 

that the majority of essential patents underlying TD-SCDMA are foreign owned. 73

Nevertheless, the standard was prioritized as the unique Chinese homegrown standard, 

resulting in delayed access for Chinese mobile phone users to the most modern, 

internationally available technology for several years, while work continued on TDSCDMA. When 3G mobile phone networks in China were launched in 2009, the license 

 68APCO Worldwide, “China’s 12th Five-Year Plan,” December 10, 2010. 69Suttmeier, Yao, and Tan, “Standards of Power,” June 2006, 12. 70Time Division Synchronous Code Division Multiple Access (TD-SCDMA) was approved as an 

international 3G standard by the International Telecommunications Union in 1999. The other two 

international 3G standards are CDMA2000, the standard based on U.S. intellectual property, and WCDMA, 

the standard backed by the EU. Both were relatively mature when they were accepted by the ITU and had 

industry backing, whereas much of the work on TD-SCDMA began after its acceptance as an international 

standard. The policy of promoting indigenous innovation has been credited as a dominant factor in the 

ultimate adoption of the TD-SCDMA standard in China. Gao, “Understanding Key Features of the TDSCDMA Adoption Process,” October 14, 2009. For discussion of China’s promotion of domestic standards 

as a tool to promote indigenous innovation, see USITC, China Intellectual Property Infringement, 2010, 

chapter 5. 71Ernst, “Indigenous Innovation and Globalization,” November 15, 2010. 

72China Mobile has been working on the time division version of LTE and has plans to launch seven 

commercial trial networks by mid-2012. Jingting, “Trials planned for TD-LTE,” China Daily, March 8, 2011. 73Ernst, “ Indigenous Innovation and Globalization,” November 15, 2010; Yan, “3G Standard Setting 

Policy,” 2007. 
5-23 

for the Chinese TD-SCDMA technology was assigned to the largest of China’s three 

carriers, China Mobile, which accounts for more than two-thirds of the country’s wireless 

subscribers, 74 despite the company’s reported reluctance to exclusively deploy the 

Chinese technology. 75 The directed way in which spectrum has been allocated and 

network licenses assigned has raised questions of technology neutrality, with China 

apparently “picking winners” rather than allowing telecom carriers to choose technology 

based on the best interests of their company and customers. U.S. handset makers and 

chipset providers wishing to tap into China Mobile’s vast pool of wireless customers 

must therefore develop technology compatible with the TD-SCDMA standard. 

The Chinese government continued to support TD-SCDMA by prioritizing the standard 

in China’s stimulus plan, designating its eligibility for government procurement 

preferences, and increasing its spectrum allocation.76 China Mobile reportedly signed 

strategic cooperation agreements with 31 local governments in 2009 who pledged to 

support TD-SCDMA development on land use, frequency resources, and construction of 

wireless cities. 77 China Mobile invested $100 million in an R&D fund and set up 

cooperative agreements with handset makers and integrated circuit designers to help 

facilitate development of wireless handsets to be used on TD-SCDMA networks. In 

addition, according to sources, the wireless provider has been subsidizing the cost of TDSCDMA wireless handsets to lower the cost for their customers and compete against 3G 

services offered by the two other Chinese carriers operating on the rival international 3G 

standards.78

Preferential lending and generous lines of credit reportedly also provide critical support 

for the global expansion of China’s telecom industry.79 This credit may have played a 

role in enabling Chinese firms to offer generous financing terms and low prices in thirdcountry markets.80 For example, Huawei’s line of credit from the China Development 

Bank (CDB) was extended to $30 billion in 2009; ZTE received $15 billion from the 

CDB and another $10 billion from the Chinese Export-Import Bank the same year. 81

These financing packages reportedly are offered on highly favorable, nonmarket terms.82

Table 5.4 identifies significant policies and practices that uniquely impact the 

telecommunications industry in China as well as broader policies related to indigenous 

innovation that may also affect U.S. companies involved in the Chinese mobile phone 

manufacturing industry. 

 74Ramsay, “China’s Mobile Subs Reach 842M,” January 20, 2011. 

75Ernst, “ Indigenous Innovation and Globalization,” November 15, 2010, 72; Gao, “Understanding 

Key Features of the TD-SCDMA Adoption Process,” 2009, 8–9. 76USTR, “China,” April 2011, 78. 

77China Mobile Limited, 2009 Annual Report, n.d. (accessed March 30, 2011), 28. 78C114, “China Mobile to Subsidize TD-SCDMA Terminal Users,” June 23, 2010; Clark, “China 

Mobile to triple handset subsidies,” October 15, 2009. 79Dalton, “EU Finds China Gives Aid to Huawei, ZTE,” February 3, 2011; Waterman, written 

testimony to the USITC, June 15, 2010, 25. 80For example, ZTE has deployed a commercial TD-SCDMA network in Ghana, and commercial trial 

TD-SCDMA networks have been built in South Korea, Hong Kong, Italy, Canada, and Romania. China 

Mobile owns Pakistani telecom operator CMPak, making it a likely candidate for TD-SCDMA as well. 

Lennighan, “Global Markets to Embrace China’s TD-SCDMA,” March 31, 2009. 81Le Maistre, “Huawei, ZTE Strike New Funding Deals,” June 11, 2009. 82A recent European Commission investigation points to the enormous size of these lines of credit 

compared to annual sales. For example, ZTE received access to $25 billion, compared with its $8 billion 

annual revenue in 2009. Dalton, “EU Finds China Gives Aid to Huawei, ZTE,” February 3, 2011. 
5-24 

TABLE 5.4 Selected Chinese policies and practices related to mobile communications and indigenous innovation

Policies Date Description 

TD-SCDMA 3G wireless standard 2009 International standard developed and promoted by the Chinese. 

Phones operating on China’s largest network with China Mobile 

must comport with this unique standard. 

WAPI WLAN security standard 2009 China’s Ministry of Industry and Information Technology (MIIT) 

requires that mobile phones sold in China that support the 

internationally prevalent Wi-Fi must also be enabled with the 

Chinese standard WLAN Authentication and Privacy 

Infrastructure (WAPI). 

Subsidies for TD-SCDMA handset 

users 

2009 China Mobile provided approximately $1.8 billion in subsidies to 

its 3.4 million TD-SCDMA users in 2009, with plans to provide up 

to $4.6 billion in 2010, dependent on the number of new 

subscribers. China Mobile also invested a total of $200 million in 

an R&D fund in 2009 and 2010 to encourage handset makers to 

design around China’s unique standard. 

Proposed Regulations for the 

Administration of the Formulation 

and Revision of the Patent-Involving 

National Standards 

2009 These rules could obligate a patent holder whose patent is part of 

a national standard to grant a royalty-free license for its use, or 

be subject to compulsory licensing that would force the patent 

holder to license its technology with royalties substantially below 

the market rate. 

China’s stimulus package 2008 Of the $56 billion of stimulus funding reserved for domestic 

innovation, $15 billion was allocated to the development of the 

TD-SCDMA standard, demonstrating the standard’s relative 

importance in achieving China’s innovation goals. 

Sources: USTR, 2011 Technical Barriers Report, March 2011; C114, “China Mobile to Subsidize TD-SCDMA 

Terminal Users,” June 23, 2010; Wang, “Subsidies to Boost China’s 3G Handset Market,” 2010; China Mobile 

Limited, 2009 Annual Report, n.d. (accessed March 30, 2011); USITC, China: Effects of Intellectual Property 

Infringement, 2010, chap. 5; Freshfields Bruckhaus Deringer, “Patents and Standards-setting in China,” 2010; Ernst, 

“Indigenous innovation and Globalization,” 2010. 

Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. 

Economy 

Understanding the effects of indigenous innovation policies on U.S. telecommunication 

firms and the U.S. economy is complicated by the sheer size and potential of the Chinese 

market. While participation in the Chinese telecommunications equipment industry 

presents unequaled opportunities for growth, indigenous innovation policies effectively 

require foreign companies to participate in the market on Chinese terms, or not at all. 

While U.S. firms are actively negotiating agreements to license their intellectual property 

to Chinese firms, developing new technology to meet Chinese standards, and waiting to 

be granted licenses to operate on the networks, indigenous innovation policies provide 

domestic Chinese enterprises with safe havens from competition while they develop their 

own expertise and market share. 

Effects on U.S. firms 

China’s promotion of Chinese-specific technical standards was the most common 

existing and future problem cited in questionnaire responses among telecommunications 

equipment companies reporting material losses due to China’s indigenous innovation 

policies.83 A particular concern that arises over China’s deployment of a third wireless 

 83USITC questionnaire, telecommunications equipment companies’ responses to question 8.3. 
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standard (TD-SCDMA) in the face of two existing international standards 84 is that 

companies will have to expend resources altering existing technology or creating new 

technology to support bifurcated product lines. For example, Motorola has released a new 

3G smartphone in three versions, one for each of the distinct standards used by China’s 

mobile carriers.85 This affects planning for R&D, design for new products, and time to 

market for companies wanting to participate in the Chinese market.86 Yet due to the sheer 

size of China’s market, there is a significant opportunity cost for not participating.87 In 

order to continue its growth in China, Apple may need to consider similar actions. The 

iPhone currently operates only on the WCDMA network operated by China Unicom. To 

reach the larger base of China Mobile customers, Apple would have to create a new 

model that can operate on China’s TD-SCDMA standard. 88 Domestic Chinese 

competitors are expected to continue to develop their own smartphone products, 

including Chinese-specific online “app” stores that may further entrench domestic 

technology. 89

U.S. companies also face delays in trying to meet China’s regulatory and licensing 

requirements needed to sell their products in the Chinese market. The iPhone’s official 

release in China was reportedly delayed by more than two years because of negotiations 

with the telecommunications carriers and the Chinese government, which requested the 

phone be manufactured without a Wi-Fi receiver.90 The long delay helped to jumpstart 

both a gray market for iPhones brought into the country91 and the production of highly 

sophisticated counterfeits, which were often Wi-Fi enabled or incorporated other 

novelties, such as the ability to accommodate dual SIM cards.92 The latter is characteristic 

of the shanzhai phenomenon in China (box 5.4).93

China also has been criticized for approaching standards setting with the aim of 

advantaging domestic firms and circumventing royalties and license fees otherwise owed 

to non-Chinese companies. 94 In the case of TD-SCDMA, despite being labeled the 

home-grown Chinese national standard, it is unclear exactly what percentage of the core 

intellectual property is owned by Chinese companies. Consequently, it is difficult to 

assess the extent to which this reduces Chinese dependence on foreign technologies and 

their royalty and licensing obligations. In terms of the impact on U.S. IP-holding firms, 

 84The two existing 3G standards are WCDMA, developed and widely used in Europe, Asia, and 

throughout the world; and CDMA2000, the standard developed in the United States where it is one of the 

leading 3G technologies, as well as in Canada, Japan, and South Korea. 85Chao, “Motorola Makes China Push,” August 31, 2010. 

86The imposition of unique standards requires companies to alter design and functionality for a 

particular market at great expense, both monetarily and with respect to the pace of innovation, according to a 

USITC questionnaire respondent. 87Industry representatives, interviews by USITC staff, Beijing, September 8, 2010, and July 30, 2010; 

USITC, Hearing transcript, June 15, 2010, 241 (testimony of John Neuffer, Information Technology Industry 

Council). 88Creating phones to operate on different 3G standards is something Apple has been reluctant to do 

even in the U.S. domestic market. C114, “Is China the iPhone’s Next Growth Engine?” November 29, 2010. 89Bourdreau, “Apple’s Familiar Domination Elusive in China,” November 25, 2010; Lifei, “China 

Mobile Ophone Hopes,” September 1, 2009; Business Week, “China Unicom to Sell Its Own Smartphone by 

Year-End,” November 18, 2010. 90At the time, Chinese regulators required handsets to use the domestically developed WAPI security 

protocol, an alternative to the internationally accepted Wi-Fi standard. 91Estimates report that as many as 1.5 million iPhones were in use in China prior to its official launch. 

In the first six months after the launch, official sales numbered 800,000 compared with 2.5 million handsets 

sold through the gray market. Chao, Luk, and Back, “Sales of iPhones in China Set Under 3-Year Accord,” 

August 31, 2009; Richburg, “’Gray Market’ Is Red Hot,” August 8, 2009. 92Chao, Luk, and Back, “Sales of iPhones in China Set under 3-Year Accord,” August 31, 2009. 93Zhu and Shi, “Shanzhai Manufacturing,” 2010. 

94Industry representatives, interviews by USITC staff, Washington, DC, July 30, 2010. 
5-26 

the Chinese government’s decision to mandate the adoption of TD-SCDMA effectively 

reduced the royalties that could have accrued from other internationally accepted 3G 

standards. However, the patents involved in the three 3G standards often build upon one 

another, meaning some of the core intellectual property is overlapping. If the proposed 

regulation by the Standardization Administration of China (SAC) on patents in national 

standards (see table 5.4) were to be enforced, it could have a significant impact on U.S. 

IP holders, who would have to grant licenses royalty-free or at substantially reduced 

rates.95

In keeping with the MLP, the two major Chinese mobile phone makers have increased 

their patent applications and involvement in standards-setting activities, and both have 

been heavily involved in developing the technology for fourth generation mobile 

networks. Some industry analysts claim that the emergence of fourth generation mobile 

technology, LTE, is causing “a major reshuffle in the distribution of IPR wealth.”96

Chinese and other Asian firms may hold a much larger share of the global LTE patents 

than they did of earlier technologies, which have been largely dominated by Western 

firms. 97 ZTE for instance, claims to hold 7 percent of the essential LTE patents and 

expects to extend that to 10 percent by 2012.98

The effects of China’s proposed government procurement rules on U.S.-based handset 

manufacturers, as embodied in the expected NIIP catalog, will not be known until final 

regulations are released. U.S. mobile phone manufacturers conduct a relatively small 

portion of their business with official Chinese government ministries, so the direct effects 

are not expected to be significant. U.S. companies report higher sales to SOEs, as the 

three mobile carriers in China are majority state-owned.99 While some observers are 

concerned that SOEs will follow the government procurement rules that apply to 

government ministries, it is too early to tell whether that will be the case.100 

Effects on the U.S. economy 

Chinese indigenous innovation policies have helped to introduce a new competitive force 

in the global mobile phone industry. While this change has had indirect impacts on the 

U.S. economy as U.S. firms manage increased competition, the direct impact on jobs and 

exports is unclear. Some industry representatives point to China’s indigenous innovation 

policies as contributing to the success of “national champion” companies like Huawei 

and ZTE, which have altered the competitive landscape of the global telecommunications 

equipment industry. With the help of billions of dollars in government funding and loans, 

and the reprieve from competition afforded by national standards, these homegrown 

companies have not only risen to the top of the Chinese market, but have aggressively 

expanded abroad, with handset sales overseas generating upwards of 70 percent of their 

total handset revenues in 2010.101 ZTE broke into the top five global handset producers 

for the first time in 2010 (table 5.5).102 Chinese companies have also been making forays 

 95Freshfields Bruckhaus Deringer, “Patents and Standards-Setting in China,” March 2010; USTR, 2010 

Technical Barriers Report, 2010, 75. 96Mansfield, “LTE Is Changing the Landscape of IPR Wealth,” May 18, 2010. 97Ibid. 

98ZTE Corporate Website, “ZTE Holds 235 Essential LTE Patents,” January 11, 2011. 99Industry representatives, interviews by USITC staff, Beijing, September 8, 2010. 100These concerns extend to industries beyond telecommunications. USITC, Hearing transcript, June 

15, 2010, 58 (testimony of Calman Cohen, Emergency Committee for American Trade). 101Fletcher, “Huawei 2010 Handset Contract Sales,” January 7, 2011; Fletcher, “ZTE Shifts Focus,” 

September 22, 2010; Le Maistre, “Huawei, ZTE Strike New Funding Deals,” June 11, 2009. 102Data on shipments from IDC, reported by Samson, “China’s ZTE Outselling Apple,” January 28, 

2011. 
5-27 

into the U.S. market, starting with lower-valued, pay-as-you-go phones and moving up 

the value chain by offering more sophisticated phones and teaming with larger 

operators.103 Chinese mobile handset companies now compete with U.S. companies at 

home and globally. 

TABLE 5.5 Top five global mobile phone vendors in 2010

 Vendor 2009 unit 

shipments 

(millions) 

2010 unit 

shipments 

(millions) 

2009–10 

percent 

change 

2010 

market share 

(percent) 

1. Nokia 431.8 453.0 4.9 32.6 

2. Samsung 227.2 280.2 23.3 20.2 

3. LG Electronics 117.9 116.7 -1.0 8.4 

4. ZTE 26.7 51.8 94.0 3.7 

5. Apple 25.1 47.5 89.2 3.4 

 Others (Including RIM, Sony 

Ericsson, and Motorola) 

342.9 439.4 28.1 31.6 

Source: IDC, as reported in Fierce Wireless, “The Global Handset and Smartphone Market in the 

Fourth Quarter of 2010,” January 28, 2011. 

However, it is impossible to attribute U.S. telecommunications trade and employment 

trends directly to Chinese indigenous innovation policies. U.S. imports of 

telecommunications equipment from China have been growing for over a decade, 

outstripping exports every year since 1999. Since then, the U.S. trade deficit in 

telecommunications equipment has grown from $2.4 billion in 1999 to $60.5 billion in 

2010.104 Chinese mobile phone firms have also invested in the U.S. market, primarily by 

setting up R&D and sales centers. Huawei currently employs over 1,000 U.S. workers 

and plans to create several hundred more jobs, while ZTE has announced plans to add 

more than 2,000 U.S. jobs to an undisclosed base over the next several years.105

Some industry representatives have expressed concern that China’s mandating of 

domestic standards discourages the procurement of imported products, causing U.S. 

companies to reduce investment and manufacturing in the United States, and thus 

affecting U.S. jobs.106 However, most manufacturing of mobile handsets is already taking 

place outside the United States, primarily in China; manufacturing employment in the 

U.S. telecommunications equipment industry has been declining for the last decade.107 

Another potential concern is that indigenous innovation policies might encourage U.S. 

mobile handset makers to increasingly shift R&D activities to China, which could result 

in U.S. job losses. 

 103Kharif, “China’s ZTE Expands in U.S.,” August 20, 2010. 104Compiled from official statistics of the U.S. Department of Commerce. 105Pomfret, “History of Telecom Company,” October 8, 2010; Huawei Corporate Web site, “Huawei 

Expands North American Headquarters in Plano, Texas,” October 1, 2010; Kharif, “China’s ZTE Expands in 

U.S.,” August 20, 2010. 106TIA, written testimony to the USITC, July 7, 2010. 107U.S. domestic employment in the communications equipment industry (NAICS 3342, a category that 

includes additional, related industries) stood at 119,500 in 2009, a 50 percent decline from 236,900 jobs in 

2001. 
5-28 

Software 

Overview 

Software companies provide goods and services that enable users to perform tasks using 

hardware (such as computers or mobile phones).108 Industry representatives have stated 

that certain implemented technical standards are having negative effects on U.S. firms’ 

ability to fully participate in the Chinese software market. Draft Chinese government 

procurement rules have potentially significant negative commercial implications for U.S. 

software firms, if implemented. Quantifying the overall effect of Chinese software 

indigenous innovation policies on the broader U.S. economy and on U.S. jobs is currently 

not feasible, given that these policies are either relatively new or in the process of being 

developed. 

U.S. Participation in China’s Software Industry 

Many U.S. software companies are active in the Chinese market and are seeking to 

increase their market share as Chinese enterprises increase their consumption of business 

software.109 The three largest software companies in the world—Microsoft, Oracle, and 

IBM—are headquartered in the United States, and all three have made substantial 

investments in China. U.S. software companies often choose to form strategic 

partnerships110 with Chinese software firms in order to jointly develop products for the 

local market and better serve Chinese customers.111

Chinese Laws and Policies 

Two components of China’s indigenous innovation policies—technical standards and 

government procurement—explicitly target software (see table 5.6).112 Software has also 

been singled out in some broader policy directives.113

 108Although the industry includes both business and entertainment software, this section will focus on 

the U.S. business software sector, which has expressed substantial concern over the potential negative effects 

of Chinese indigenous innovation policies. 109Gregory, Nollen, and Tenev, New Industries from New Places, 2009; IBISWorld, “Software Services 

in China,” June 14, 2010, 8. 110Strategic partnerships may refer to joint ventures, but may also include other types of strategic 

alliances between software companies, due to the nature of the software industry. 111IBISWorld, “Software Services in China,” June 14, 2010, 8. See, for example, Microsoft’s 

partnership with state-owned CS&S, among other partnerships. See also Gregory, Nollen, and Tenev, New 

Industries from New Places, 2009, 107. 112Questionnaire responses from U.S. firms with operations in this sector also reported concerns in 

these areas. 113The January 2006 MLP, which some consider the beginning of China’s indigenous innovation 

policies, includes software as one of the 13 engineering priority “megaprojects” that are singled out for 

special attention and funding. See Cao, Suttmeier, and Simon, “China’s 15-year Science and Technology 

Plan,” December 2006, 40–43. The 11th Five-Year Plan for High-Technology Industries (2006–10) further 

describes all 16 megaprojects. For details on the software megaproject, see McGregor, China’s Drive for 

“Indigenous Innovation,” 2010, 40. According to some industry representatives, it is difficult to link 

software’s inclusion in the megaprojects list to any concrete activities on the ground, though there may be an 

effect on a broader level. Industry representatives, telephone interview by USITC staff, January 31, 2011. 
5-29 

TABLE 5.6 Principal Chinese policies related to software 

Policy Date Description 

China Compulsory 

Certification (CCC) rules 

affecting 13 IT security 

products 

2002, revised 

2009 

Certification process requiring testing and certification for certain 

IT products (including antispam software and operating systems) 

that are imported to and marketed in China. Requires covered 

goods be submitted to designated certification bodies affiliated 

with the Chinese government for certification. The principal 

concern of foreign firms is the risk that proprietary intellectual 

property could be stolen. The CCC also increases the costs and 

time needed to bring new products to market. 

Multi-Level Protection 

Scheme (MLPS) 

June 2007 Only recently being enforced, this set of rules governs security 

technology designed to protect sensitive information. The MLPS 

is a security framework that categorizes software information 

systems into five levels of increasing sensitivity. Products from 

the top three levels may be supplied only by Chinese-owned 

firms with core technology and key components based on 

Chinese intellectual property. The principal concern of foreign 

software firms is the risk of being shut out of certain Chinese 

markets in levels three and above, which include software for the 

banking, energy, telecommunications, education, and 

transportation industries. 

Government 

Procurement Law 

2002; revised 

draft issued in 

2010 

Provides preferences for domestic companies in government 

procurement. The revised draft implementing regulations, 

released in April 2010, target software as one of six hightechnology sectors of focus. The principal concern of foreign 

firms is the risk of being shut out of the Chinese government 

procurement market for software. 

Sources: U.S. Information Technology Office, “China’s Multi-Level Protection Scheme,” September 2010, 3; 

TIA, written submission to the USTR and the USDOC, June 12, 2009; USCIB, written submission to USDOC, 

National Institute of Standards and Technology (NIST), September 22, 2010, 5; Stewart and Stewart, written 

submission to the USITC, July 8, 2010, 27–28. 

Technical standards 

New rules under the CCC program require that foreign firms seeking to import and 

market 13 categories of information security IT products in China, including anti-spam 

software and operating systems, have designated certification bodies affiliated with the 

Chinese government inspect and certify their products.114 The rules are based on Chinese 

security standards and not on an international standard such as ISO or the Common 

Criteria (a recognized international standard for computer security certification).115 The 

principal concern of foreign software firms regarding the rules is the risk that proprietary 

intellectual property could be compromised. The rules also increase the costs and the time 

to bring new products to market. China implemented the rules in May 2009 despite the 

concerns raised by the United States, other countries, and U.S. industry representatives.116

Due to international pressure, the Chinese government revised the rules later in 2009 to 

apply only to products sold to government agencies, but did not eliminate them 

entirely.117 

In 2007, the Chinese government issued a measure known as the MLPS, which also 

raises industry concerns. The MLPS applies mandatory security requirements to the 

 114USCIB, written submission to USDOC, National Institute of Standards and Technology (NIST), 

September 22, 2010, 5; U.S. Information Technology Office (USITO), “China’s Multi-Level Protection 

Scheme,” September 2010, 3. 115USCIB, written submission to USDOC, NIST, September 22, 2010, 5. 116USTR, “TBT Report,” March, 2011, 65; USTR, “Statement from U.S. Trade Representative Ron 

Kirk,” May 4, 2009; USCIB, written submission to USDOC, NIST, September 22, 2010, 5. 117USTR, “TBT Report,” March, 2011, 65; USTR, “Fact Sheet: U.S.-China Joint Commission,” 

October 29, 2009. 
5-30 

development, administration, and use of information technology products. A cornerstone 

of the MLPS is a security framework that categorizes software information systems into 

five levels of increasing sensitivity.118 For systems rated in level three and above, several 

requirements apply, including that the product developer and manufacturer must be a 

Chinese company owned by Chinese citizens, and that core technology and key 

components of products must be based on Chinese IP.119 These requirements apply to 

systems used in several broad sectors, including banking, energy, telecommunications, 

education, and transportation, which in effect would eliminate foreign participation in 

these markets. The MLPS also requires that encryption products obtain government 

approval for use and cannot be imported without authorization.120

Government procurement 

Government procurement is an important market121 for U.S. software companies, and is 

likely to become more important as China implements its new commitments requiring all 

government agencies to purchase legal software.122 As indicated above, China’s 2002 

Government Procurement Law and subsequent implementing policies give priority to 

“local” goods and services, with software explicitly mentioned.123 China’s 2006 policy on 

national accreditation for indigenous innovation products provided that accredited 

indigenous innovation products would be given preferential treatment in government 

procurement, and draft policies released in a 2009 circular (Circular 618) identified 

software as one of the focus areas of the forthcoming NIIP catalog.124 The revision to the 

circular released in April 2010 softens some key requirements, but still targets software 

as one of six high-technology sectors of focus for preferential government procurement 

policies. 

In addition to national procurement policies, a number of provincial governments have 

released indigenous innovation product catalogs that list preferred products for 

government agency and SOE procurement. According to the U.S.-China Business 

Council (USCBC), as of February 2011, provincial and municipal governments had 

released at least 61 indigenous innovation product catalogs.125 A review of the publicly 

 118TIA, written submission to the USTR and the USDOC, June 12, 2009. 119USITO, “China’s Multi-Level Protection Scheme,” September 2010, 4; USCIB, written submission 

to USDOC, NIST, September 22, 2010, 5. 120USITO, “China’s Multi-Level Protection Scheme,” September 2010, 5; USCIB, written submission 

to USDOC, NIST, September 22, 2010, 5–6. 121The Chinese government procurement market for software was estimated to be 16 percent of the 

total Chinese software market in 2010 based on revenue. IBISWorld, “Software Services in China,” June 14, 

2010, 8. 122According to a fact sheet published by the White House, China made the following commitment 

regarding software in connection with the January 2011 U.S.-China summit meeting: “to assess and ensure its 

government’s use of legal software, by, among other measures, 1) allocating government budget funding for 

legal software purchases, 2) auditing the use of legal software and publishing the results of those audits, and 

3) promoting the use of licensed software in private companies and in SOEs through software asset 

management programs.” White House, “Fact Sheet: U.S.-China Economic Issues,” January 19, 2011. 123For a summary of the central government’s laws and policies regarding government procurement, 

see USITC, China: IPR Infringement and Indigenous Innovation 1, 2010, table 5.1. 124Stewart and Stewart, written testimony to the USITC, July 8, 2010, 27–28. 125USCBC, “Provincial and Local Indigenous Innovation Product Catalogues,” February 2011, 1. 
5-31 

released catalogs listed by USCBC confirms that product catalogs from the following 

provinces contain software products: Beijing, Fujian, Hubei, Jiangsu, Jiangxi, and 

Sichuan.126

Effects of Indigenous Innovation Policies on U.S. Firms and U.S. Economy 

According to U.S. industry representatives, the Chinese policies of most concern to U.S. 

software firms are the new CCC rules and the MLPS, because they are currently in effect. 

The government procurement policies were in draft form as of January 2011 and 

implementing regulations were not yet in place yet, and therefore are a more long-term or 

potential concern.127 Though the effects of the CCC rules and MLPS on U.S. software 

firms cannot yet be systematically measured, some industry representatives believe that 

these policies are already having negative effects on U.S. firms’ ability to fully 

participate in the Chinese software market.128

The CCC rules and the MLPS raise several concerns among U.S. software industry firms. 

The prime concern regarding the CCC rules is that the process of obtaining CCC 

certification requires software firms to disclose encryption secrets and other propriety 

information to the Chinese government through the designated certification bodies, 

thereby potentially imperiling their proprietary IP. 129 U.S. software firms are also 

concerned that these regulations increase the cost of participating in the Chinese market 

by requiring them to develop one set of products for the Chinese market and another for 

non-Chinese markets, motivating firms to consider withdrawing from or refraining from 

entering the Chinese market altogether.130 The added cost to U.S. firms to develop a 

distinct product for the Chinese market places them at a disadvantage vis-à-vis Chinese 

firms, which are currently not participating in foreign markets (including the U.S. 

market) to the same degree as U.S. firms and therefore do not incur this equivalent 

cost.131

U.S. industry groups have also voiced several concerns about the MLPS. Of prime 

concern is the requirement that information security products used for systems 

categorized in level three and above contain no foreign IP. This requirement, industry 

representatives assert, puts market access restrictions on foreign firms while shielding 

Chinese domestic firms from foreign competition.132 In addition, some point out that 

several sectors that are classified in level three, such as banking, energy, 

telecommunications, transportation, and education, are not overtly national security in 

 126Based on a review of product catalogs available at Chinese provincial government Web sites found 

in USCBC, “Issues Brief: China’s Domestic Innovation and Procurement Policies,” May 2010, 9–10. 

Indications are that most, if not all, products listed in the reviewed catalogs are produced by domestic 

Chinese firms. 127Industry representative, interview by USITC staff, Washington, DC, January 31, 2011; industry 

representatives, telephone interview by USITC staff, January 31, 2011. 128Industry representatives, telephone interview by USITC staff, January 31, 2011; USITO, “China’s 

Multi-Level Protection Scheme,” September 2010, 3. 129Industry representative, interview by USITC staff, Washington, DC, January 31, 2011; industry 

representatives, telephone interview by USITC staff, January 31, 2011; Owen, “Standards in China,” 

January–February 2010. 130USTR, “China,” 2010, 51; USITC, Hearing transcript, June 15, 2010 (testimony of John Neuffer, 

Information Technology Industry Council). 131Industry representatives, telephone interview by USITC staff, January 31, 2011. 132USITO, “China’s Multi-Level Protection Scheme,” September 2010, 6–7; industry representatives, 

telephone interview by USITC staff, January 31, 2011; McGregor, China’s Drive for “Indigenous 

Innovation,” 2010, 31; McDonald, “China Sets up New Battle over Computer Security,” August 25, 2010. 
5-32 

nature, but because of their MLPS classification must nevertheless refrain from using 

information security systems that contain foreign IP.133

Besides concerns over market access, some have expressed concern that MLPS rules also 

allow for potential disclosure of proprietary information, which can compromise the 

security of the cryptographic technology disclosed.134 MLPS rules, which are outside the 

Common Criteria, give the Chinese government significant authority in encryption issues. 

For example, MLPS rules allow the agency in charge of enforcing encryption standards 

to exercise full control over any cryptographic technology used in MLPS systems, 

conduct unannounced cryptographic inspections on any system level, and require that a 

significant share of cryptographic source code be handed over to Chinese authorities.135

In addition, MLPS requirements stipulate that Chinese labs must conduct encryption 

testing and post-market factory inspections and that encryption testing requires the 

sharing of source code encryption keys.136

Though considered less of an immediate concern than such technical standards issues, 

China’s government procurement laws also pose significant potential problems to the 

U.S. software industry, according to U.S. industry representatives.137 In general, U.S. 

software firms’ main concern, which is similar to that voiced by representatives of other 

sectors and industries, is that these laws would further perpetuate a policy of import 

substitution by creating preferences for Chinese domestic firms in the government 

procurement market, thereby effectively denying U.S. software firms access to this 

segment of the market.138

Finally, U.S. software firms expressed concern that these policies appear to operate in 

concert to boost the Chinese industry at the expense of foreign firms. Often described by 

U.S. industry representatives as a “web” of indigenous innovation policies, 139 this 

structure might entail technical standards such as the new CCC rules and MLPS working 

to force technology transfer (as well as adding costs to foreign firms operating in China), 

which would accelerate Chinese software firms’ development, while government 

procurement laws create an exclusive market for these firms to sell their products without 

foreign competition.140 As with concerns over some individual indigenous innovation 

 133Industry representatives, interview by USITC staff, Beijing, September 8, 2010. It has been pointed 

out that this seeming contradiction may stem from the fact that MLPS rules broadly define national security 

to include “national competitiveness and the strength of the economy, science and technology.” See Ernst and 

Martin, The Common Criteria for Information Technology Security Evaluation, January 2010, 10. 134USITO, “China’s Multi-Level Protection Scheme,” September 2010, 6–7; McMillan, “China Policy 

Could Force Foreign Security Firms Out,” August 26, 2010. 135Ernst and Martin, “The Common Criteria for Information Technology Security Evaluation,” January 

2010, 10. 136Ibid., 8. 137BSA, written submission to the USITC, June 3, 2010, 5–6; IIPA, written submission to the USITC, 

July 9, 2010, 32–33; TIA, written submission to the USTR and the USDOC, June 12, 2009; USITO, 

comments to MOST, May 10, 2010, 1–5. Some U.S. software industry representatives point to the Chinese 

government’s development of these procurement laws as particularly worrisome, while also acknowledging 

that their biggest concern is not current harm but rather the potential negative effects. Industry 

representatives, interview by USITC staff, Washington, DC, June 2, 2010. 138USITO, comments to MOST, May 10, 2010, 1–5; USITC, Hearing transcript, June 15, 2010 

(testimony of Robert W. Holleyman, Business Software Alliance). 139USITC, Hearing transcript, June 15, 2010 (testimony of Jeremy Waterman, U.S. Chamber of 

Commerce; Robert W. Holleyman, Business Software Alliance; and Mark Bohannon, Software Information 

Industry Association). For further discussion of this point, see USITC, China: IPR Infringement and 

Indigenous Innovation 1, 2010. 140Industry representatives, telephone interview by USITC staff, January 31, 2011. 
5-33 

software policies, however, concern over the interaction of these policies is based mainly 

on their potential effects rather than on actual or reported effects as of early 2011. 

Automotive Industry 

Overview 

The Chinese government’s focus on developing the automotive industry predates the 

2006 emphasis on indigenous innovation. Since 2004, the Chinese government’s plan for 

the automotive industry has focused on increasing the level of Chinese intellectual 

property in vehicles manufactured in China. More recently, Chinese auto policy has 

particularly targeted “new energy vehicles” (NEVs) such as electric or hybrid cars, 

investing billions of RMB in R&D and incentives to increase production and sales of 

NEVs. The evolving nature of indigenous innovation policies, uncertainty as to whether 

state and local governments or even SOEs will adopt indigenous innovation rules, and the 

difficulty in differentiating the effects of indigenous innovation from previously existing 

Chinese automotive industry policies all make it difficult to assess the current and 

potential impact of indigenous innovation policies on the U.S. economy and U.S. jobs in 

this sector. In general, though, U.S. companies appear to have continued to expand 

production of vehicles in China.141 Chinese government policies related to innovation, 

combined with manufacturers’ interests in producing vehicles in their fastest-growing 

market, create incentives for U.S. auto firms to increase production of vehicles through 

their Chinese joint ventures. Indigenous innovation policies could, however, undermine 

U.S. firms’ competitiveness or sales if their products do not qualify to be included in 

government procurement catalogs or to receive other government incentives. 

U.S. Participation in China’s Automotive Industry and Market142

The Chinese automotive market is the biggest in the world, with over 17 million units 

sold in 2009 and over 18 million units in 2010.143 In 2010, U.S. automotive market sales 

totaled 11.5 million.144 With the world’s largest population, a growing middle class, and a 

relatively low ratio of cars to people, automotive market sales in China are likely to rise 

even further.145 U.S.-based manufacturers participate in the Chinese automotive market 

through both exports and FDI. Generally, they export small numbers of large SUVs and 

expensive cars from North America, and produce large numbers of smaller, less 

expensive vehicles in China.146 From 2005 to 2009, the United States exported an average 

of over 44,000 cars per year to China.147 These exports included vehicles from Ford, 

General Motors (GM), and Chrysler, as well as units from Mercedes and BMW plants in 

the southeastern United States. 

The Chinese government requires investment by foreign auto companies in domestic 

production via joint ventures because it hopes to exchange domestic market access for 

 141ISI Emerging Markets, CEIC database (accessed November 5, 2010). 142This discussion focuses on cars and light trucks. 143China Association of Automobile Manufacturers, “China Automobile Production Increase,” January 

21, 2011. 144Ward’s Automotive Reports, “Light Vehicle Sales Segmentation: 4th Quarter 2010,” January 17, 

2010. 145Reuters, “Chinese Auto Sales Growth Seen Near 2010 Rate,” March 11, 2011. 146These less expensive vehicles are often manufactured at the joint venture’s assembly plant (or 

plants). IBISWorld, “Automobile Manufacturing in China,” February 25, 2010, 15. 147GTIS, Global Trade Atlas Database (accessed November 3, 2010). 
5-34 

“foreign technology and managerial skills.”148 GM and Ford each operate a joint venture 

that produces passenger vehicles in China.149 The Ford and GM joint ventures together 

manufactured and sold over 500,000 cars per year in China from 2005 to 2009.150 In 

2009, Shanghai GM vehicles accounted for 5.6 percent of China’s new car sales, while 

Changan Ford vehicles represented 1.7 percent. 151 Japanese, European, and Korean 

producers have also entered into joint ventures with Chinese auto manufacturers to 

manufacture vehicles in China, and together accounted for nearly 35 percent of passenger 

vehicle sales in 2009 (figure 5.5).152 

FIGURE 5.5 China: Passenger vehicle sales by unit, 2006–09

25% 58%

13%

3% 1%

Domestic company

sales 

Non-U.S. joint venture

sales 

U.S. joint venture sales

Imports from other

countries

Imports from United

States

Market size: RMB 7.2 trillion 

Source: Chinese Association of Automobile Manufacturers’ data. 

In the second half of 2010, several foreign automakers announced plans to create unique 

domestic brands for the Chinese market.153 These new brands will target the Chinese 

market for affordable and efficient vehicles. They will also feature significant levels of 

intellectual property developed in China, so they respond to the Chinese government’s 

goal of increasing indigenous innovation as well. One representative of a foreign auto 

firm stated that even though he did not expect indigenous innovation policies to cause 

problems for his firm, because it was doing the design work for its new China-specific 

brand in China, meeting indigenous innovation requirements to qualify as a domestic 

brand was an additional “side benefit.”154

 148Thun, Changing Lanes in China, 2006, 7–8. 149GM formed Shanghai GM with the Shanghai Automotive Industry Corporation (SAIC) in 1997, and 

Ford formed Changan Ford with Changan Motors in 2001. GM has eight other joint ventures and two wholly 

foreign-owned enterprises in China, including Shanghai GM-Wuling, which sells small vans and has the 

largest sales in China. Sims Gallagher, China Shifts Gears, 2006, 6. 150Wernle, “Daimler or Chrysler? Execs Make Their Choices,” September 3, 2007. In January 2011, 

GM announced that it had sold more units in China in 2010 than in the United States. This announcement 

included commercial vehicles and small rural transport vans that are not included in this analysis. Total GM 

sales in China were over 2.3 million, while over 2.2 million were sold in the United States. General Motors 

Company, “General Motors 2010 Calendar Year Sales Up 21 Percent,” January 4, 2011. 151Through both joint ventures and U.S.-produced vehicles, U.S.-owned companies had a 7.3 percent 

market share in 2009. China Automotive Review, “Statistics,” March 2010. 152Ibid. Note that Chrysler participated in a joint venture called Beijing Benz-Daimler Chrysler 

Automotive Co. Ltd., but pulled out in 2009, when it sold less than 4,000 units. Chrysler does continue to 

export to China. Wernle, “Daimler or Chrysler? Execs Make Their Choices,” September 3, 2007; ISI 

Emerging Markets, CEIC database (accessed November 5, 2010). 153General Motors Company, “SGMW’s Baojun Brand to Sell Passenger Cars in China,” July 19, 2010; 

Honda Motor Company, “Honda Announces ‘Li Nian S1,’” December 20, 2010; Nissan, “Dongfeng Nissan 

Unveils a New Brand for China,” September 8, 2010. 154Industry representatives, interview by USITC staff, mainland China, January 6, 2011. 
5-35 

Chinese Laws and Policies Related to the Auto Industry 

China’s automotive policy since the 1980s has been focused on developing its domestic 

auto industry. The explicit policy goal of developing automotive products with domestic 

Chinese intellectual property was first announced in the 2004 Policy on Development of 

the Automotive Industry (table 5.7). China’s previous auto sector policies did not directly 

address IP, but emphasized the development of domestic capabilities in China’s 

automotive sector through a variety of policies including local-content requirements, 

incentives to perform R&D in China, and strong encouragement for Western firms to 

agree to transfer technology in exchange for access to an effective joint-venture partner. 

In 2004, the Chinese government released its Policy on Development of the Automotive 

Industry, which included the goal of creating indigenous intellectual property several 

years before the MLP was introduced. The policy encourages manufacturers to improve 

R&D and technical innovation and “actively develop products with China’s own IP.” It 

also supports the establishment of new R&D facilities through tax incentives, encourages 

international cooperation, and affirms that foreign automakers are restricted to minority 

ownership in no more than two passenger vehicle assembly joint ventures.155 The 2009 

Automotive Adjustment and Revitalization Plan encourages mergers and reorganizations 

of large-scale automobile enterprises, as well as the creation of independent brands, both 

for export and for domestic sales.156 The plan also announced further government support 

for NEVs.157 NEVs are also an important part of the 12th Five-Year Plan (box 5.5). 

 155Government of China, SDRC, Automobile Industry Development Policy No. 8, 2006. 156Government of China, SDRC, Automobile and Steel Industries Adjustment and Revitalization Plan, 

September 2009; People’s Daily Online, “China May Curb Overcapacity of Automotive Industry,” 

September 6, 2010. 157Government of China, SDRC, Automobile and Steel Industries Adjustment and Revitalization Plan, 

September 2009. 
5-36 

TABLE 5.7 Auto industry policies related to indigenous innovation 

Law Date Description 

Informal auto development 

policy 

1980s The central government used high tariffs and import quotas to protect 

the domestic market, and limited foreign firms’ involvement in joint 

ventures. 

Formal Policy on 

Development of the 

Automotive Industry 

1994 The policy encouraged production increases for automakers and 

introduced the goal of reducing the number of Chinese car companies 

to six. On joint ventures, the policy formalized ownership limits on 

foreign firms, but also required specific types and quality of investment 

from the foreign firms (e.g., creation of an R&D center and transfer of 

technology of at least the 1990 level). 

Policy on Development of 

the Automotive Industry 

(2004) 

2004 Under the policy, the government supported establishment of R&D 

facilities through preferential tax policies and added the goal of creating 

indigenous IP. The policy continued a focus on restructuring the 

industry and maintained restrictions on foreign ownership of joint 

ventures. 

11th Five-Year Plan 2006–10 Under the plan, the government’s two principal goals for the auto 

industry were to increase domestic quality and production and to 

strengthen independent brands. 

Automotive Readjustment 

and Revitalization Plan 

2009 The plan contained several policies related to indigenous innovation. 

First, it continued support for independent Chinese innovation in the 

auto industry, making available RMB 10 billion in special funds for 

NEVs and technological innovation. It also announced plans to 

subsidize NEVs. The government additionally announced support for 

vehicle manufacturers to create their own brands and a base for 

exports of vehicles. 

12th Five-Year Plan 2011–15 Includes a goal of consolidating the Chinese automotive industry, and 

another goal of selling 1 million NEVs in China by 2015. 

Sources: Sims Gallagher, China Shifts Gears, 2006; Government of China, “Formal Policy on Development of 

Automotive Industry,” 1994; Government of China, State Development and Reform Commission, “Automobile 

Industry Development Policy No. 8,” 2006; Government of China, “Automobile and Steel Industries Adjustment 

and Revitalization Plan,” September 2009; APCO Worldwide, “China’s 12th Five Year Plan,” December 10, 2010, 

4, 8. 
5-37 

Technology transfer and minimum R&D investment requirements are staple features of 

China’s automotive joint ventures. In China, foreign companies are encouraged to 

transfer technology, and it is reportedly difficult to gain the required government 

approval of a joint venture without a technology transfer agreement.158 U.S. Companies 

may agree to such requirements as the only way to gain access to China’s large and 

growing market.159 For example, GM agreed to extensive transfer of technology in 1997 

in order to gain approval for a joint venture with SAIC, which allowed GM to access the 

Chinese market ahead of many of its competitors. 160 More recently, GM signed an 

extensive memorandum of understanding with SAIC in 2010 that includes plans to train 

 158Stewart et al., “China’s Laws, Regulations and Practices in the Area of Tech Transfer,” 2007, 2. 159USDOC, BIS, “Tech Transfer to China,” n.d. (accessed November 18, 2010). 160Thun, Changing Lanes in China, 2006, 68. 

BOX 5.5 Electric vehicles and indigenous innovation 

China’s indigenous innovation policies have the potential for a strong impact on the development of NEVs, including 

hybrids, electric vehicles, hydrogen fuel-cell vehicles, and vehicles comprising other alternative technologies. This 

sector relies on relatively new technology, and sources indicate that the Chinese government views this as an 

opportunity for Chinese companies to compete with foreign auto companies on more equal footing, as well as a way 

to decrease China’s dependence on foreign energy sources. 

A goal of China’s 12th Five-Year Plan is to have one million NEVs on the road by 2015. To promote Chinese 

innovation in this new industry, in August 2010 the government created a coalition of 16 central government-owned 

car battery and charging-station firms, which will collectively receive $15 billion in government funding to 

collaborate on Chinese electric vehicle R&D and standards. In addition, private Chinese companies such as Chery, 

JAC, and BYD are developing their own electric vehicles; BYD and JAC have actually sold a limited number to the 

public. 

Internationally, most major automakers are working on electric vehicle designs, including Ford, General Motors, and 

Chrysler. The only U.S. firm currently working on an NEV in China is General Motors, which is working with its joint 

venture partner, SAIC, to electrify a vehicle. (SAIC was excluded from the Chinese government’s electric vehicle 

coalition because it is owned by the Shanghai municipal government rather than the central Chinese government.) 

GM also plans to export its new plug-in hybrid, the Chevrolet Volt, to China beginning in late 2011. 

China’s indigenous innovation policies related to NEVs could affect U.S. firms in three ways. 

 Through unique standards and regulations, the government could make foreign firms’ entry into the 

Chinese NEV market difficult and expensive. However, in November 2009, President Obama and 

President Hu launched the U.S.-China Electric Vehicles Initiative, aimed at harmonizing the two countries’ 

electric vehicle standards and testing procedures. This would allow firms from both countries to avoid the 

extra costs associated with different standards in the two countries. Chinese regulations may still be an 

issue, as regulations currently under development may require that production of key parts take place in 

China, which may also involve the transfer of NEV technology to the Chinese JV partner. 

 The Chinese government could support domestic NEVs through preferential policies that provide an 

advantage to domestic firms. As an example, China’s Ministry of Finance announced in June 2010 that it 

would begin a pilot subsidy program for the manufacture of electric vehicles in five cities. 

 The Chinese government may actively encourage U.S. companies already operating joint ventures in 

China to conduct NEV-related R&D in China rather than the United States, offering incentives in exchange 

for technology transfer. Such policies could help Chinese joint venture partners to gain the know-how to 

effectively compete with U.S. firms in the NEV market. However, such policies have not yet been 

implemented. It is thus too early to tell the effect of indigenous innovation policies in the NEV sector on 

U.S. firms. 

 

Sources: Sun Lin, “China’s Development and Policies of New Energy Auto Industry,” March, 2010; Li, “New Energy 

Auto China’s Top Priority,” October 29, 2010; Luo, “EVAlliance,” China Automotive Review, September 2010, 3; 

Reuters, “China to Subsidize Hybrid, Electric Car Purchases,” June 1, 2010; General Motors Company, “SAIC and 

GM Sign Memorandum of Understanding For Long-Term Strategic Cooperation,” November 3, 2010; General 

Motors Company, “General Motors Celebrates Arrival of Chevrolet Volt in China,” August 31, 2010; USTR, “China,” 

2011, 62; Waldmeir, “Beijing Presses Carmakers to Share Technology,” February 18, 2011.
5-38 

SAIC engineers in technology and systems development, jointly develop NEVs, permit 

SAIC participation in GM’s global vehicle development process, and allow SAIC to 

share access to additional GM technology related to vehicle and powertrain 

application.161 

Other companies reportedly have refused to transfer their best technology in exchange for 

market access. One reason cited has been the relatively low royalty rates offered by 

Chinese companies for access to new technology. 162 China’s 2004 fuel efficiency 

standard was reportedly introduced in response to some foreign companies’ refusal to 

transfer new efficiency technology, with the goal of giving Chinese joint-venture partners 

the leverage to negotiate with their foreign counterparts for the use of the most advanced 

new technology on vehicles assembled in China.163 

Chinese government fleet purchases make up 6 percent of passenger vehicle sales, so 

government procurement may be an important market for foreign firms.164 Currently, 

transportation is not a focus area identified for the NIIP catalog.165 However, NEVs are 

considered green technology, which is a focus of indigenous innovation. Among the local 

and provisional government product catalogs, only Shanghai’s includes transportation 

products.166 

Effect of Indigenous Innovation Policies on U.S. Firms and the U.S. Economy 

The effects of Chinese indigenous innovation policies on U.S. firms and the U.S. 

economy are difficult to isolate, due in part to other Chinese auto industry policies.167 

The status of joint-venture products that incorporate Chinese intellectual property is also 

uncertain with regard to government procurement catalogs or other types of incentives. 

Currently, the impact of China’s indigenous innovation policies on foreign-invested joint 

ventures is unknown, though the creation of China-specific brands by these joint ventures 

is reportedly a response to indigenous innovation requirements.168 Indigenous innovation 

policies could also affect U.S. automotive industry revenue in China through decreased 

sales or loss of competitiveness if U.S. firms are unable to qualify for incentives offered 

to domestic firms. Similarly, the impact of indigenous innovation policies on the U.S. 

economy or U.S. jobs in this sector is unclear, as most foreign firms selling large 

numbers of vehicles in China already produce vehicles and conduct R&D there. 169

However, according to a recent Chamber of Commerce survey, U.S. companies in the 

automotive sector (in a tie with the energy industry) were the group most concerned that 

indigenous innovation policies could have a negative impact on their business.170 On the 

 161General Motors Company, “Amendment No. 8 to SEC Form S-1,” November 16, 2010, 66. 162Reportedly, the Chinese government typically offers a maximum royalty rate of 4.5–6.0 percent for 

autos and auto parts. Moga, “Tech Transfer Turning Point?” China Business Review, September–October 

2010, 31. 163Oliver et al., “China’s Fuel Economy Standards for Passenger Vehicles,” March 2009, 7. 164IBISWorld, “Automobile Manufacturing in China,” February 25, 2010, 9. 165USCBC, “The US-China Business Council Comments,” May 10, 2010, 19. 166The Shanghai catalog lists the Roewe 550 and 750 as NIIPs. Roewe is an SAIC brand that is separate 

from its joint ventures with GM. Government of Shanghai, Shanghai indigenous innovation Product Catalog 

1, August 21, 2009. 167Thun, Changing Lanes in China, 2006, 55. 168Creating China-specific brands may also be based on marketing efforts not related to indigenous 

innovation policies. Waldmeir, “Beijing Presses Carmakers to Share Technology,” February 18, 2011. 169Neither Chinese nor foreign-invested companies in China currently manufacture vehicles in China 

for export to the United States, though a number have stated plans to do so in the future. Wang, “BYD’s 

Electric Car Dream in the U.S. Sparks Concerns,” January 12, 2011. 170American Chamber of Commerce in Shanghai, China Business Report 2010–2011, January 2011, 

21. 
5-39 

other hand, in response to the Commission’s questionnaire, firms from the motor vehicles 

and parts sector were not as concerned about indigenous innovation as firms from a 

number of other sectors (table 5.2). 

Industry experts hold differing views on the development and implementation of 

indigenous innovation policies in the near term and how these policies will affect foreigninvested joint ventures in China. Chinese government officials have stated that foreign 

invested enterprises (such as joint ventures) will receive national treatment under these 

indigenous innovation policies.171 If they are eligible for NIIP status, foreign-invested 

joint ventures may choose to create unique vehicle designs in China in order to qualify.172

As of January 2011, government policies use NIIP status only for government 

procurement catalogs. 

Some U.S. business groups in China have expressed concerns that the government will 

use policies such as R&D incentives, local-content requirements, or technology transfer 

requirements to encourage foreign companies to incorporate more Chinese intellectual 

property in their products.173 Lack of access to incentives would make foreign-invested 

joint ventures less competitive in the Chinese market. Sales to government agencies may 

also be affected.174 A sizeable portion of sales (16 percent) come from businesses, many 

of which are SOEs. 175 It remains unclear whether SOEs will adhere to government 

procurement regulations once they are implemented, even if they are not explicitly 

required to do so. 176 If government procurement catalogs were to include passenger 

vehicles, it would likely affect more than the 6 percent of the market that is officially 

classified as government fleet purchases. Although precise data are not available, 

government and business fleet purchases likely include at least some vehicles designed 

outside of China that would not meet the criteria for government purchase under the 

NIIP.177

Civil Aircraft and Aircraft Parts 

Overview 

China’s aircraft and parts industries have been targeted for development by the central 

government’s two most recent five-year plans, both of which predate the introduction of 

indigenous innovation policies under the 2006 MLP. However, the government’s longstanding focus on developing the industries through technology, facilitated by joint 

ventures, is in line with the MLP’s indigenous innovation goals. Compared with the wind 

power and automotive industries, Chinese aircraft companies have been less successful in 

acquiring significant market share, either in China or abroad. This is primarily because of 

the high level of technological expertise needed to compete in the civil aircraft industry, 

especially given the requirements for meeting international aviation standards. 178 It 

remains to be seen whether China will be able to successfully compete in the global 

 171Xinhua News, “China’s Investment Environment Improving amid ‘Growing Pains,’” September 9, 

2010; Xinhua News, “Full Text of Chinese Premier Wen Jiabao’s Speech,” September 13, 2010. 172USCBC, Issues Brief: China’s Domestic Innovation and Procurement Policies, May 2010, 5. 173Hout and Ghemawat, “China vs. the World,” December 2010, 97. 174IBISWorld, “Automobile Manufacturing in China,” February 25, 2010, 9. 175Ibid. Information on the share of motor vehicles purchased by SOEs is not available. 176USITC, Hearing transcript, Washington, DC, June 15, 2010, 53 (testimony of Calman Cohen, 

Emergency Committee for American Trade). 177Tong Hao, “Audi Speeds Past Rivals,” June 25, 2009. 178Airbus (France), Boeing (U.S.), Canadair (Canada), and Embraer (Brazil) have acquired the 

necessary skills to manufacture and market passenger transport aircraft successfully throughout the world. 
5-40 

aviation market in the future. For now, China’s plan to develop the C919, an indigenous 

large civil aircraft (LCA), and a regional jet, the ARJ21, rely heavily on aircraft systems 

provided by U.S. and other foreign companies through joint ventures in China. 

U.S. Participation in China’s Aircraft and Aircraft Parts Industry 

The U.S. aerospace industry is the largest manufactured goods exporter in the United 

States. It produces aircraft, spacecraft, and associated parts to supply the majority of the 

world’s aerospace needs. During 2000–09, China became an increasingly important 

market, with dramatic increases in imports of U.S. aircraft (337.8 percent) and engines 

(1,350.8 percent) and a more modest increase in aircraft parts (45.4 percent).179 China 

does not currently produce LCA. Its civil aircraft programs under development rely on 

foreign inputs, including engines, avionics, and aircraft systems. U.S. suppliers account 

for about 40 percent of the parts and systems on China’s ARJ21 regional aircraft,180 and 

could see a significant increase in market share if the aforementioned civil aircraft 

programs are successful. The C919’s entry into service is scheduled for 2016; the 

ARJ21’s for year-end 2011.181

To enhance its ability to meet domestic needs, China has restructured its aerospace 

industry, segregating the civil portion from other branches, and invited global 

participation in its civil industry. Major international aerospace suppliers, including some 

from the United States, have sought out joint ventures in China to participate in this 

developing industry (table 5.8). Chinese firms in the industry, most of them state-owned, 

see technology transfer as one important goal of such joint ventures. U.S. firms 

reportedly carefully negotiate technology transfer agreements, aware of the possibilities 

for additional “unplanned technology transfer” (through theft of IP). Foreign companies 

aim to manage such transfers within their joint ventures while maintaining control of 

their core technologies.182 

The market for aircraft in China is driven by growing air transport demand, and the parts 

market is driven by both replacement needs and China’s two new civil aircraft programs. 

China has opted to purchase major systems, such as the avionics, engines, and flight 

 179GTIS, Global Trade Atlas, December 2, 2010, data for HS 8802, HS 8411, and HS 8803. 180Chadha, “China Lays Plans for ARJ21-900,” February 19, 2008. 181GE Aviation, “LEAP-X1C Launched on New C919 Aircraft,” November 16, 2010; Aviation Week,

“ARJ21 Wing Problems Drive Program,” November 15, 2010. 182Industry representative, interview with USITC staff, Shanghai, January 13, 2011. 
5-41 

TABLE 5.8 Major U.S. companies supporting China’s aircraft industry 

U.S. Companies Product Chinese customer/partner/relationship 

General Electric Co., through its 

joint venture with Snecma (Safran 

Group), i.e., CFM International 

Aircraft engines Commercial Aviation Company of China 

(COMAC): engine customer 

Final engine assembly and test facility 

established in China with AVIC 

Commercial Aircraft Engine Company 

(ACAE) 

General Electric Co. China Training School Joint venture with the Civil Aviation 

Administration of China (CAAC), Civil 

Aviation Supplies Holding Company (CAS), 

Civil Aviation Flying University of China 

(CAFUC), CFM International (CFM), GE 

Aviation (GE), and Snecma (Safran group): 

partner in training engine mechanics 

General Electric Co. Aircraft avionics AVIC Systems of China (joint venture) 

Goodrich Hella Aerospace Lighting 

Systems 

Major portion of the lighting 

system on its new ARJ21 

COMAC: Purchase systems 

Hamilton Sundstrand, div. United 

Technologies, Inc. 

Electrical power generation and 

distribution systems 

COMAC: Purchase systems 

Honeywell, Inc. Auxiliary power unit, model 131-

9[C9C] 

AVIC Harbin Dongan Engine (Group) Corp. 

Nexcelle, div. of Safran-GE Engine nacelle & thrust 

reversers 

COMAC, AVIC Aircraft Corp: engine 

customer 

Parker Aerospace, div. Parker 

Hannifin Corp. 

Provides primary fly-by-wire 

flight control actuation system, 

and fuel, inserting, and hydraulic 

systems for the C919 

China Aviation Industry Systems Co.: 

Customer for C919 program 

 Joint development and incountry support of Parker’s 

hydraulic and fuel systems 

AVIC Systems 

Rockwell-Collins, Inc. Avionics AVIC 1 Commercial Aircraft Company 

Source: Corporate Web sites. 

control systems, from foreign suppliers, rather than using domestically designed 

components for these two programs; there are no globally recognized and supported 

domestic producers of such systems.183 Such initial reliance on imports may also allow 

Chinese companies to direct their R&D funds to developing their domestic capabilities in 

new areas such as aero- and fluid dynamics and materials research while China’s 

aerospace industry assimilates existing foreign technologies to become more selfsufficient. 

Major U.S.-based aircraft parts firms with a presence in China include several large 

manufacturing companies (table 5.8). These firms typically form joint ventures with 

Chinese counterparts in order to obtain business in China; in at least one case, a foreign 

company was instructed that in order to bid on certain projects, a joint venture with a 

 183China may opt to export its civil aircraft. Incorporating Western technologies into their aircraft 

allows Chinese aircraft to be more readily serviced worldwide by existing mechanics and service 

organizations. 
5-42 

Chinese partner was required. 184 Reportedly, COMAC, China’s aviation original 

equipment manufacturer (OEM), “has made it explicitly clear that foreign bidders on the 

C919 program are expected to form joint ventures with Chinese partners, especially in 

high-technology areas such as advanced materials and flight control systems, where 

Chinese technology is lagging.”185 

The commercial incentives to enter into such ventures may be significant. The ARJ21 

regional jet program and the C919 LCA program are among the few new aircraft 

programs in development worldwide. In China and elsewhere, winning a position on a 

new program almost ensures a revenue stream for several decades for the supplier. Firms 

therefore may be willing to accept joint ventures or technology transfer agreements that 

would not reflect their first preferences. 

If Chinese firms successfully build engines and aircraft systems to foreign standards, and 

implement international standards for systems interrelatedness and certification, they may 

begin manufacturing indigenously designed components and engines for domestic and 

international OEMs.186 This may take 10–20 years, but according to one source, it is not 

an impossible outcome of Chinese companies’ joint ventures, technology transfer 

agreements, and generally close working relationships with foreign firms.187

Chinese Laws and Policies 

China has implemented a variety of policies to develop its civil aircraft industry (table 

5.9). The most important ones are the direct guidance given by the central government 

through China’s recent five-year plans. China’s 10th Five-Year Plan (2001–05) called for 

the promotion of science and technology, specifically emphasized high-technology 

research, and specified that efforts should be concentrated on making breakthroughs in 

key fields, including aerospace and aviation.188 This plan classified civil aircraft as one of 

the five newly emerging industries to be developed. As a result, the AVIC-1 Commercial 

Aircraft Co., Ltd. (ACAC) was formed in 2002 with the express goal of producing a 

regional jet aircraft.189 The 11th Five-Year Plan (2006–10) sought to build on earlier 

government direction and China’s lessons learned in design, management, and support of 

its ARJ21 regional jet. This plan specifically stated the central government’s goal of 

producing LCA, helicopters, and general aviation aircraft, with the aim of improving 

China’s knowledge and skill base. 

 184Industry representative, interview with USITC staff, Shanghai, January 13, 2011. 185Cliff, Ohlandt, and Yang, Ready for Takeoff, 43, 2011. 186Erickson, “Seizing the Highest Ground: China’s Aerospace Development and Its Larger 

Implications,” 2004. 187According to industry sources, China hopes to parlay technology transferred through licensed 

manufacturing into development and production of an indigenous domestic jetliner. In the aircraft production 

field, as in other areas, China will attempt first to manufacture under license through joint ventures, but then 

to take advantage of the resulting technology transfer to reverse engineer aircraft and ultimately—through 

investment in R&D—to produce its own. Industry representative, interview with USITC staff, Shanghai, 

January 13, 2011. See also Cliff, Ohlandt, and Yang, Ready for Takeoff, 116, 2011 (noting rapid progress in 

China’s ability to supply civilian aircraft components but substantial remaining capability gaps). 188Government of China, MOST, National Hightech R&D Program (863 Program), undated Web site. 189AVIC-1 Commercial Aircraft Company, “About ACAC,” n.d. (accessed December 2, 2010). 
5-43 

TABLE 5.9 Policies promoting civil aircraft development in China 

Policy Date enacted Relation to civil aircraft development 

China’s 10th Five-Year Plan (2001–05): civil 

aircraft classified as one of the five newly 

emerging industries 

2001 Specified planned breakthroughs in hightech fields, including aircraft 

Guiding Opinion on Promoting the Adjustment of 

State-Owned Capital and the Reorganization of 

State-Owned Enterprises 

December 2006 Civil aviation was considered a strategic 

industry, one in which the Chinese 

government should own at least a 50 

percent interest 

China’s 11th Five Year Plan (2006–10): aircraft 

one of China’s 16 major development plans 

2006 Directed Chinese companies to produce 

large civil and general aviation aircraft, 

and helicopters 

The Guiding Principles of Program for Mid-toLong Term Scientific and Technological 

Development (2006–20) [MLP] 

February 2006 Identified large aircraft production as a 

megaproject 

Catalog of Encouraged Foreign Investment 

Industries, Decree of the State Development and 

Reform Commission, No. 57 

November 2007 Encouraged foreign direct investment in 

China’s aerospace industry 

2008 National Intellectual Property Strategy 2008 Key industry sectors where China should 

concentrate on obtaining strategic 

patents are given in paragraph 16, 

including aeronautics and astronautics 

China’s 12th Five Year Plan (2011–15): New 

materials development 

2011 Reportedly will encourage development 

of new composite materials for 

aerospace 

Sources: www.interlinkChina.com, “Implementation of the 10th Five-Year Plan 2001–2005,” n.d.; China Economic 

Net, “China’s Aviation Industry Aims High,” November 6, 2006; Naughton, “China’s State Sector,” May 24, 2007; 

GlobalSecurity.org, “Civil Aircraft Programs,” n.d.; Cao, Suttmeier, and Simon, “China’s 15-Year Science and 

Technology Plan,” December 2006; Friedmann, “China: China ́s National IP Strategy 2008,” September 15, 2008; 

Ministry of Commerce, Catalog of Encouraged Foreign Investment Industries, May 2010; Zeebiz.com, “China’s 12th 

Five Year Plan: Prospects on Major Industries,” December 11, 2010. 

The MLP has also been an important policy promoting China’s aircraft sector; LCA is 

noted as a particular area for development.190 According to a December 2006 directive 

issued by the State-owned Assets Supervision and Administration Commission of the 

State Council (SASAC),191 civil aviation is considered to be a strategic industry, and thus 

each Chinese company is subject to substantial (at least 50 percent) government 

control. 192 Nevertheless, the central government has offered a minority share of 

corporatized SOEs for private sector ownership (foreign or domestic) through the sale of 

public stock, acknowledging the benefit of attracting a diversity of skills to Chinese 

aircraft companies.193

 190Levin Institute, “Industrial Innovation in China,” July 2006, Appendix, 113. 191USITC, China: Description of Selected Government Practices and Policies, December 2007. 192One exception to this rule is the Airbus final assembly line opened in 2008 in Tianjin, a joint venture 

with Tianjin Free Trade Zone (TJFTZ) and China Aviation Industry Corporation (AVIC). Airbus has a 51 

percent stake in this venture. Airbus Industries, SAS, “Airbus Final Assembly Line China Achieves 2009 

Target,” Press release, December 17, 2009. 193China.org, “Premier on 10th Five Year Plan for National Economic and Social Development 

(indigenous innovation),” n.d. (accessed February 14, 2011). 
5-44 

Effects of Indigenous Innovation Policies on U.S. Firms and the U.S. 

Economy 

China has been attempting to build an LCA since the 1980s, but has not been successful. 

Chinese policies have largely shaped the current manufacturing landscape, defined in part 

by joint ventures with foreign companies. In the auto and wind power industries, such 

policies have led to increasing market share for Chinese firms. In aviation, however, 

Chinese firms have found the technological hurdles more difficult to surmount. 

As of February 2011, it does not appear that China’s announced indigenous innovation 

policies have directly impacted U.S.-based firms in the aircraft and aircraft parts 

manufacturing industries in China. For example, there is no government procurement or 

technical standards policy favoring indigenous Chinese aerospace products, likely 

because of the dearth of such products. The policies do, however, complement the goal of 

existing aircraft industry policies, which are designed to advance China’s domestic 

aircraft industry. It is possible that indigenous innovation policies will have a greater 

impact on China’s aerospace industry in the future. Such potential impact depends on 

whether China is able to acquire or develop the necessary technology for OEM aircraft 

production, either through technology transfer from Western companies or through 

aerospace R&D conducted in China. Further, China’s ability to profit from technology 

transfer depends on Chinese firms’ ability to transform lessons learned from joint 

ventures with foreign aerospace entities into concrete products and services. 

U.S. companies participating in joint ventures with Chinese aerospace companies are 

aware of the inherent risks of such ventures, primarily the risk of losing control of their 

proprietary intellectual property and technology. However, they consider this risk as the 

price of participating in China’s market.194 How each foreign company manages its risk 

depends on the company involved, but all attempt to limit their exposure to unintended 

technology transfer. 

 194Industry representative, interview with USITC staff, Shanghai, January 13, 2011. 
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APPENDIX A 

REQUEST LETTER

MAX. BAUCUS, MONtANA, CHA!RMAN 

JOHN D. ROCKEfELLER IV, WEST VIRGiNIA CHUCK GR,A,SSLEY, IOWA 

KENT CONRAD, NORTH DAKOTA ORRlN UTAH 

JEFF BINGAMAN, NEW MEXICO OLYMPJAJ. MAINE 

JOHN F. KERRY, MASSACHUSETTS JON KYL, ARJZONA 

BLANCHE i.. LlNCOl.N. ARKANSAS JIM BUNNING, KENTUCKY 

RON WYDEN, OREGON M!KE CRAPO, IDAHO 

CHARLES E. SCHUMER, NEW YORK PAr ROBEATS, KANSAS 

DEBBiE STABENOW, M1CHIGAN JOHN ENSIGN, NEVADA 

MARIA CANTWELL, WASHINGTON MICHAEL B. ENZI, WYOMING 

BflL NELSON, FLORiDA .JOHN CORNYN, TEXAS 

AOBE:RT Mr:N£ND2Z, NEW Jf.RSEY 

THOMAS R. CARPER. DELAWARE 

RUSSELL SULUV,A.N, STAfF DIRECTOR 

KOLAN OAVIS, REPUBLICAN STAFF OIRECTOR ANO CHlEiF COUNSEL 

The Honorable Shara L. Aranoff 

Chairman 

U.S. International Trade Commission 

500 E Street, S.W. 

Washington, DC 20436 

Dear Chairman Aranoff, 

'lanitrd ~tatcs ~rnatr COMMITfEE ON FINANCE 

WASHINGTON, DC 20510-6200 

April 19, 2010 DOCKET 

NUMBER 

t.lf- 2.otv 

--_ .... ----- oiti~~ -~f -th ;--_. --------

SeCfE~tary . 

Int'l Trade Commission 

We are writing to request that the U.S. International Trade Commission (Commission) conduct 

an investigation under section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g» regarding the 

effect on the U.S. economy and U.S. jobs of intellectual property rights (IPR) infringement in 

China. 

Intellectual property plays a key role in driving innovation, productivity, employment, and 

growth in the U.S. economy. The U.S. Department of Commerce reports that intellectual 

property accounts for more than half of all U.S. exports, and helps drive 40 percent of our 

economic growth. In 2008, for example, U.S. receipts of royalties and license fees from other 

countries yielded a $75 billion trade surplus. 

Infringement of U.S. IPR around the globe threatens American jobs. IPR infringement, both in 

the physical world and online, is estimated to cost U.S. compatlies billions of dollars per year in 

lost revenues in China alone. More than 80 percent ofIPR-infringing goods seized at the U.S. 

border are of Chinese origin. And troubling recent developments in China, including China's 

"indigenous innovation" procurement policies, may exacerbate these losses by limiting the, 

ability of U.S. innovative companies to participate in the Chinese market. 

Despite widespread evidence of the harm to U.S. industries, authors, and artists resulting from 

IPR infringeme~t in ~hin~ the U.S. Government has not conducted a comprehensive economic 

analysis of the effect of China's ineffective IPl~ protection and enforcement on the U.S. economy 

and U.S. jobs. To assist us in better understandiilg these effects, we req~est the Commission to 

provide two reports, as described below. . 

1 

A-3
Report 1: Based on a review of the literature and other available information, we 

request the Commission to provide a report that: 

• Describes the principal types of reported IPR infringement in China; 

• Describes China's indigenous innovation policies; and 

• Outlines analytical frameworks for determining the quantitative effects of the 

infringement and indigenous innovation policies on the U.S. economy as a whole and 

on sectors of the U.S. economy, including lost U.S. jobs. 

This first report should be delivered by November 19,2010. 

Report 2: Based on an analysis of data and other information from available sources, 

including a survey of U.S. firms, and the application of the analytical frameworks outlined in the 

first report, we request the Commission to provide a second report that: 

• Describes the size and scope of reported IPR infringement in China; 

• Provides a quantitative analysis of the effect of reported IPR infringement in China 

on the U.S. economy and U.S. jobs, including on a sectoral basis, as well as potential 

effects on sales, profits, royalties, and license fees of U.S. firms globally, to the extent 

primary data can be collected; and 

• Discusses actual, potential, and reported effects of China's indigenous innovation 

policies on the U.S. economy and U.S. jobs, and quantifies these effects, to the extent 

feasible. 

This report should be delivered by May 2,2011. 

In preparing its reports, we do not expect the Commission to make findings in either report 

regarding the legal merits of any reported IPR infringement. 

As we intend to make the reports available to the public, we request that the Commission not 

include confidential business information in its reports. 

Sincerely, 

2 

Charles 

U,.J.~~ E. Grassley 

Ranking Member 

A-4
APPENDIX B 

FEDERAL REGISTER NOTICE

30060 Federal Register / Vol. 75, No. 103 / Friday, May 28, 2010 / Notices 

DEPARTMENT OF THE INTERIOR 

Bureau of Land Management 

[LLMT922200–10–L13100000–FI0000–P; 

MTM 97526 and MTM 97527] 

Notice of Proposed Reinstatement of 

Terminated Oil and Gas Leases MTM 

97526 and MTM 97527, Montana 

AGENCY: Bureau of Land Management, 

Interior. 

ACTION: Notice. 

INTERNATIONAL TRADE 

COMMISSION 

[Investigation No. 332–519] 

China: Effects of Intellectual Property 

Infringement and Indigenous 

Innovation Policies on the U.S. 

Economy 

AGENCY: United States International 

Trade Commission. 

ACTION: Institution of investigation and 

scheduling of hearing. 

SUMMARY: Following receipt of a request 

from the United States Senate 

Committee on Finance (Committee) 

dated April 19, 2010, the U.S. 

International Trade Commission 

(Commission) instituted investigation 

No. 332–519, China: Effects of 

Intellectual Property Infringement and 

Indigenous Innovation Policies on the 

U.S. Economy, for the purpose of 

preparing the second of two reports 

requested by the Committee, and has 

scheduled a public hearing in 

connection with investigations relating 

to both reports for June 15–16, 2010. 

DATES: June 1, 2010: Deadline for filing 

requests to appear at the public hearing. 

June 3, 2010: Deadline for filing prehearing briefs and statements. 

June 15, 2010: Public hearing 

(continued on June 16 if needed). 

June 22, 2010: Deadline for filing 

post-hearing briefs and statements. 

November 16, 2010: Deadline for 

filing all other written submissions. 

May 2, 2011: Transmittal of report to 

the Senate Committee on Finance. 

ADDRESSES: All Commission offices, 

including the Commission’s hearing 

rooms, are located in the United States 

International Trade Commission 

Building, 500 E Street, SW., 

Washington, DC. All written 

submissions should be addressed to the 

Secretary, United States International 

Trade Commission, 500 E Street, SW., 

Washington, DC 20436. The public 

record for this investigation may be 

viewed on the Commission’s electronic 

docket (EDIS) at http://www.usitc.gov/ 

secretary/edis.htm. 

FOR FURTHER INFORMATION CONTACT: 

Project Leaders Alexander Hammer 

(alexander.hammer@usitc.gov, 202– 

205–3271) or Katherine Linton 

(katherine.linton@usitc.gov, 202–205– 

3393) or Deputy Project Leader Jeremy 

Wise (jeremy.wise@usitc.gov, 202–205– 

3190) for information specific to this 

investigation. For information on the 

legal aspects of these investigations, 

contact William Gearhart of the 

Commission’s Office of the General 

Counsel (202–205–3091 or 

william.gearhart@usitc.gov). The media 

should contact Margaret O’Laughlin, 

Office of External Relations (202–205– 

1819 or margaret.olaughlin@usitc.gov). 

Hearing-impaired individuals may 

obtain information on this matter by 

contacting the Commission’s TDD 

terminal at 202–205–1810. General 

information concerning the Commission 

may also be obtained by accessing its 

Internet server (http://www.usitc.gov). 

Persons with mobility impairments who 

will need special assistance in gaining 

access to the Commission should 

contact the Office of the Secretary at 

202–205–2000. 

Background: The Commission has 

instituted this investigation for the 

purpose of preparing the second report 

requested by the Committee. Based on 

an analysis of data and other 

information from available sources, 

including a survey of U.S. firms, and the 

application of the analytical frameworks 

outlined in the first report, in the 

second report, the Commission will: 

• Describe the size and scope of 

reported IPR infringement in China; 

• Provide a quantitative analysis of 

the effect of reported IPR infringement 

in China on the U.S. economy and U.S. 

jobs, including on a sectoral basis, as 

well as potential effects on sales, profits, 

royalties, and license fees of U.S. firms 

globally, to the extent primary data can 

be collected; and 

• Discuss actual, potential, and 

reported effects of China’s indigenous 

innovation policies on the U.S. 

economy and U.S. jobs, and quantify 

these effects, to the extent feasible. 

As requested by the Committee, the 

Commission will deliver this second 

report by May 2, 2011. The Commission 

will deliver its first report by November 

19, 2010. The report on the first 

investigation, No. 332–514, China: 

Intellectual Property Infringement, 

Indigenous Innovation Policies, and 

Frameworks for Measuring the Effects 

on the U.S. Economy, will describe the 

principal types of reported IPR 

infringement in China, describe China’s 

indigenous innovation policies, and 

outline analytical frameworks for 

determining the quantitative effects of 

the infringement and indigenous 

innovation policies on the U.S. 

economy as a whole and on sectors of 

the U.S. economy, including lost U.S. 

jobs. The Commission published its 

notice of institution of that investigation 

in the Federal Register of May 10, 2010 

(75 FR 25883); a copy may be viewed on 

the Commission’s Web site at http:// 

www.usitc.gov/secretary/ 

fed_reg_notices/332/ 

332_514_institution05052010.pdf. 

Public Hearing: The Commission will 

hold a public hearing in connection 

with both investigations at the U.S. 

International Trade Commission 

Building, 500 E Street, SW., 

Washington, DC, beginning at 9:30 a.m. 

on June 15, 2010 (continuing on June 

16, 2010, if needed). Requests to appear 

at the public hearing should be filed 

with the Secretary, no later than 5:15 

p.m., June 1, 2010, in accordance with 

the requirements in the ‘‘Submissions’’ 

section below. All pre-hearing briefs 

and statements should be filed not later 

than 5:15 p.m., June 3, 2010; and all 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 103 / Friday, May 28, 2010 / Notices 30061 

post-hearing briefs and statements 

should be filed not later than 5:15 p.m., 

June 22, 2010. Briefs and statements 

should identify the investigation to 

which the brief or statement pertains, 

including both if that is the case. In the 

event that, as of the close of business on 

June 1, 2010, no witnesses are 

scheduled to appear at the hearing, the 

hearing will be canceled. Any person 

interested in attending the hearing as an 

observer or nonparticipant may call the 

Secretary to the Commission (202–205– 

2000) after June 4, 2010, for information 

concerning whether the hearing will be 

held. 

Written Submissions: In lieu of or in 

addition to participating at the hearing, 

interested parties are invited to submit 

written statements concerning this 

investigation. All written submissions 

concerning this investigation should be 

addressed to the Secretary, and should 

be received not later than 5:15 p.m., 

November 16, 2010. All written 

submissions must conform with the 

provisions of section 201.8 of the 

Commission’s Rules of Practice and 

Procedure (19 CFR 201.8). Section 201.8 

requires that a signed original (or a copy 

so designated) and fourteen (14) copies 

of each document be filed. In the event 

that confidential treatment of a 

document is requested, at least four (4) 

additional copies must be filed, in 

which the confidential information 

must be deleted (see the following 

paragraph for further information 

regarding confidential business 

information). The Commission’s rules 

authorize filing submissions with the 

Secretary by facsimile or electronic 

means only to the extent permitted by 

section 201.8 of the rules (see Handbook 

for Electronic Filing Procedures, http:// 

www.usitc.gov/secretary/ 

fed_reg_notices/rules/documents/ 

handbook_on_electronic_filing.pdf). 

Persons with questions regarding 

electronic filing should contact the 

Secretary (202–205–2000). 

Any submissions that contain 

confidential business information must 

also conform with the requirements of 

section 201.6 of the Commission’s Rules 

of Practice and Procedure (19 CFR 

201.6). Section 201.6 of the rules 

requires that the cover of the document 

and the individual pages be clearly 

marked as to whether they are the 

‘‘confidential’’ or ‘‘non-confidential’’ 

version, and that the confidential 

business information be clearly 

identified by means of brackets. All 

written submissions, except for 

confidential business information, will 

be made available for inspection by 

interested parties. 

In its request letter, the Committee 

stated that it intends to make the 

Commission’s reports available to the 

public in their entirety, and asked that 

the Commission not include any 

confidential business information or 

national security classified information 

in the reports that the Commission 

sends to the Committee. Any 

confidential business information 

received by the Commission in this 

investigation and used in preparing this 

report will not be published in a manner 

that would reveal the operations of the 

firm supplying the information. 

By order of the Commission. 

Issued: May 25, 2010. 

William R. Bishop, 

Acting Secretary to the Commission. 

[FR Doc. 2010–12947 Filed 5–27–10; 8:45 am] 

BILLING CODE P 
APPENDIX C 

HEARING PARTICIPANTS

C-3 

CALENDAR OF PUBLIC HEARING 

Those listed below appeared as witnesses at the United States International Trade Commission’s 

hearing: 

 Subject: China: Intellectual Property Infringement, Indigenous Innovation 

Policies, and Frameworks for Measuring the Effects on the U.S. 

Economy 

 and

 China: Effects of Intellectual Property Infringement and 

 Indigenous Innovation Policies on the U.S. Economy 

 

 Inv. Nos.: 332-514 and 332-519 (respectively) 

 Date and Time: June 15 and 16, 2010 - 9:30 a.m. 

 

 Sessions were in connection with these investigations in the Main Hearing Room (room 101), 

500 E Street, S.W., Washington, D.C. 

Day 1: Tuesday, June 15, 2010

Panel 1:

ORGANIZATION AND WITNESS:

Carnegie Mellon University 

Pittsburgh, PA 

 Professor Lee G. Branstetter, Associate Professor 

 of Economics and Public Policy 

Harvard Business School 

Boston, MA 

 

 Professor C. Fritz Foley, Associate Professor 

International Intellectual Property Institute 

Washington, D.C. 

 Bruce A. Lehman, Chairman and President 

The Ohio State University 

Moritz College of Law 

Columbus, OH 

 Professor Daniel C.K. Chow, Joseph S. Platt-Porter 

 Wright Morris & Arthur Professor of Law
C-4 

Panel 1 (continued):

ORGANIZATION AND WITNESS:

Drake University Law School 

Intellectual Property Law Center 

Des Moines, IA 

 Professor Peter K. Yu, Kern Family Chair in 

 Intellectual Property Law 

Emergency Committee for American Trade 

Washington, D.C. 

 Calman Cohen, President 

Panel 2:

ORGANIZATION AND WITNESS:

U.S. Chamber of Commerce 

Washington, D.C. 

 Jeremie Waterman, Senior Director, Greater China 

American Chamber of Commerce 

People’s Republic of China 

Beijing, China 

 Christian Murck, President 

National Association of Manufacturers 

Washington, D.C. 

 Shaun Donnelly, Senior Director, International 

 Business Policy 

Business Software Alliance 

Washington, D.C. 

 Robert W. Holleyman, II, President and CEO 

IDC 

Framingham, MA 

 John Gantz, Chief Research Officer 
C-5 

Panel 2 (continued):

ORGANIZATION AND WITNESS:

Information Technology Industry Council 

Washington, D.C. 

 and

Software & Information Industry Association 

Washington, D.C. 

 John Neuffer, Vice President for Global Policy, 

 Information Technology Industry Council 

 Mark Bohannon, General Counsel and Senior Vice 

 President, Public Policy, Software & Information 

 Industry Association 

Day 2: Wednesday, June 16, 2010

Panel 3

ORGANIZATION AND WITNESS:

D’Addario & Company, Inc. 

Farmingdale, NY 

 James D’Addario, Chairman and CEO 

PCT Government Relations 

Washington, D.C. 

 

 Chris Israel, Managing Partner 

International Intellectual Property Alliance 

Washington, D.C. 

 Michael Schlesinger, Co-Founder 

U.S. Council of International Business 

Washington, D.C. 

 Stephen Canner, Vice President 

-END-

APPENDIX D 

POSITIONS OF INTERESTED PARTIES 

D-3

Summary of Views of Interested Parties

The Commission held a public hearing in relation to its investigations on intellectual 

property rights (IPR) infringement and indigenous innovation policies in China on June 

15–16, 2010, in Washington, DC. Interested persons were also invited to file written 

submissions for the investigation. This appendix, also published in the first report of this 

series, contains a summary of the views expressed to the Commission via testimony, 

written submission, or both, and reflects the principal points made by the particular party. 

The views expressed in the summarized materials should be considered to be those of the 

submitting parties and not the Commission. In preparing this summary, Commission staff 

did not undertake to confirm the accuracy of, or otherwise correct, the information 

summarized. For the full text of hearing testimony, written submissions, and exhibits, see 

entries associated with investigation nos. 332-514 and 332-519 at the Commission’s 

Electronic Docket Information System (https://edis.usitc.gov/edis3-internal/app).1

 

Air-Conditioning, Heating, and Refrigeration Institute 

(AHRI)2

In a written submission on behalf of its 300 member companies, AHRI said that it 

supports efforts to increase international compliance with IPR treaties and that China is 

not the only country where violations appear. AHRI explained that it has taken an active 

role to support overall IPR protection, especially at industry trade shows, where, it notes, 

infringement is particularly visible. For example, AHRI noted that after one of its 

members found replicas of his equipment displayed by Chinese distributors at an expo in 

Chicago, AHRI signed a memorandum of understanding (MOU) with five other Chinese 

and American heating, ventilation, air-conditioning, and refrigeration (HVACR) 

associations and exhibition centers to protect IPR. The MOU called for a zero tolerance 

policy for counterfeit products at exhibitions, open communication among all parts of the 

HVACR industry, and U.S.-Chinese industry collaboration for IPR protection. 

As part of its submission, AHRI also included a model letter developed by The 

International Council of Air-Conditioning, Refrigeration, and Heating Manufacturers 

Associations (ICARHMA) for its seven members, including AHRI, to forward to 

expositions and trade shows regarding good practices for IPR protection at these events. 

The recommendations included IPR protection language in exhibitor contracts, a 

no-tolerance policy for infringing items, a response procedure for when infringement is 

alleged, distribution of IPR information at events, and working with HVACR 

associations to share information and address counterfeiting. 

American Apparel & Footwear Association (AAFA)3

In a written submission to the Commission, Kevin M. Burke, president and CEO of 

AAFA, cited statistics from the U.S. Customs and Border Protection estimating that 

48 percent of IPR-infringing footwear entering the United States is from China. The IPR-

 1

 Note that page numbers for exhibits are not precise because the exhibits volume is not paginated 

sequentially, the page numbers are those given by the Adobe PDF software. 2

 AHRI, written submission to the USITC, June 22, 2010. 3

 AAFA, written submission to the USITC, July 8, 2010. For more information about AAFA and its 

representation, please see www.apparelandfootwear.org. 
D-4

infringing footwear, he added, was worth about $98 million in 2009. Mr. Burke wrote 

that infringements mainly appear as trademark violations, explaining that AAFA believes 

it is easier to illegally reproduce trademarks than to recreate complicated patented 

production. Mr. Burke also noted that AAFA members have reported uneven law 

enforcement against these IP violators across China, as well as ineffective Chinese 

government prevention measures. Direct sales of IPR-infringing footwear to consumers 

via the Internet are a major problem for the industry, according to Mr. Burke, and can be 

seen as reducing employment at legitimate sales sites, reducing company revenue and 

government tax collection, and hurting brand reputations. Mr. Burke concluded by noting 

that AAFA member companies have not seen any direct impact from China’s indigenous 

innovation policies but they will continue to monitor the situation. 

American Chamber of Commerce in China (AmCham–

China)4

Mr. Christian Murck, president of AmCham-China, said that the organization has a 

membership of over 1,200 U.S. companies operating in China. In his testimony, he 

summarized member companies’ concerns about the ongoing problems that 

counterfeiting and IPR infringement have posed for U.S. business in China. He said that 

continued pressure on China to improve IPR protection has had results, as evidenced by 

the comprehensive Chinese IPR legislation that now exists. However, he said that 

AmCham-China’s most recent Business Climate Survey indicates that businesses still 

consider IPR enforcement in China to be weak and ineffective. In its prehearing 

submission, AmCham-China said that the Chinese government occasionally appears to 

purposely pursue policies that weaken IPR. 

Mr. Murck stated that the appearance of indigenous innovation policies has concerned 

AmCham-China even more. He said that although the Chinese government has since 

modified some of its original indigenous innovation proposals regarding IPR nationality 

requirements, its continued intent to develop a catalogue of certified indigenous 

innovation products is worrisome. Besides indigenous innovation, he listed several other 

policies he considered aimed at protecting domestic Chinese companies, including 

Chinese government procurement measures, the backing of Chinese “famous brands,” the 

development of unique Chinese technology standards incompatible with world standards, 

potentially larger compulsory licensing requirements for patent holders, and patent 

infringement exemptions. 

Lee Branstetter, Associate Professor of Public Policy and 

Economics, Carnegie Mellon University5

In hearing testimony presented to the Commission, Professor Branstetter expressed the 

view that China’s poor record of enforcing its own domestic IP legislation has resulted in 

possibly billions of dollars in losses to U.S. firms, including lower profits and licensing 

revenues. Based on his joint IPR research with Fritz Foley, Ray Fisman, and Kamal 

Saggi, Professor Branstetter also stated that the export of IPR-sensitive U.S. products to 

 4

 USITC, Hearing transcript, June 15-16, 2010, 177–184; AmCham-China, written testimony to the 

USITC, June 15, 2010; AmCham-China, written submission to the USITC, June 3, 2010. For more 

information about AmCham-China, please see http://www.amchamchina.org/. 5

 USITC, Hearing transcript and exhibits, June 15-16, 2010, 8–18 and 8-12, respectively. 
D-5

China has been lower than if China’s IPR enforcement were better. Professor Branstetter 

said that not only has this harmed U.S. firms, but he is convinced that China has been 

injured as well. 

Professor Branstetter said that China has begun to improve in some areas of IPR 

enforcement, particularly for patents. He cited a large increase in Chinese domestic utility 

model patents, more international patents filed by Chinese companies, and a national 

increase in Chinese IPR litigation. 

Professor Branstetter stated that the U.S. government’s ability to influence Chinese 

institutions is limited and that China’s World Trade Organization (WTO) membership 

prevents the use of consequential economic sanctions to influence Chinese policy. He 

added that attempts by the United States to use the WTO dispute settlement process to 

bring cases against China have had mixed results: the United States was mostly 

unsuccessful in its copyright case due to insufficient evidence, but successful in its case 

regarding Chinese national policies inequitably favoring Chinese semiconductor and auto 

parts manufacturers. 

Professor Branstetter said that the scope and number of China’s indigenous innovation 

policies are so large that measurement of their potential effects on U.S. firms in a study 

will be difficult, especially since many of the policies do not break any international trade 

laws and may possibly benefit U.S. companies. Finally, he said that although China’s 

indigenous innovation policies may exclude foreign firms from qualifying for Chinese 

government procurement contracts, more recent Chinese guidelines and his own contacts 

indicate that the final legislation will not be as discriminatory. 

Business Software Alliance (BSA)6

Mr. Robert W. Holleyman, II, president and CEO of the software company association 

BSA, said that BSA represents the global software industry and its hardware partners. In 

his testimony before the Commission, he described the software industry’s particular 

difficulties attributed to China’s lax IPR enforcement. According to Mr. Holleyman, the 

PC software industry is dependent upon trade; recent estimates put the legitimate 

market’s worth at $76 billion, 60 percent of which is U.S. receipts. However, he noted 

that estimates indicate that illegal copying, including the use of unlicensed software by 

state-owned enterprises, has greatly reduced software sales to China. He cited findings by 

the market research firm International Data Corporation that 79 percent of software 

installed in China during 2009 was unlicensed, representing a total value of $7.6 billion, 

$3.4 billion of which was U.S.-developed software. Mr. Holleyman also expressed 

concern that the adoption of indigenous innovation policies may completely exclude U.S. 

software firms from the Chinese market. 

In terms of the broader U.S. economy, Mr. Holleyman noted there were a number of 

negative consequences of this illegal software use. First, considering these numbers as 

losses to the industry, he said they can also be viewed as lost employment opportunities 

and harmful to future innovation, as firms have fewer investment resources. Further, he 

said, illegal software use can also be seen as subsidizing the Chinese industry because lax 

IPR enforcement allows them to obtain software at lower cost than U.S. and other 

competitors who must purchase legal software. Mr. Holleyman said that the latter effect 

 6

 USITC, Hearing transcript, June 15-16, 2010, 193–99; BSA, written testimony to the USITC, June 

15, 2010. For more information about BSA and its membership, please see www.bsa.org. 
D-6

is of particular concern since IP-intensive industries are typically high-tech industries in 

which the United States has a comparative advantage. 

With respect to China’s indigenous innovation policies, Mr. Holleyman expressed 

concern that the Chinese government would continue trying to develop policies that 

exclude foreign software from the market and force transfers of technology to Chinese 

entities. As it stands, he said, the indigenous innovation catalogue already includes 

software requirements that could exclude U.S. software from Chinese government 

procurement. 

Daniel C.K. Chow, Professor, Ohio State University College 

of Law7

In hearing testimony to the Commission, Professor Chow gave his view of China’s 

counterfeit trade and estimated that trade at $19–24 billion annually. Professor Chow 

described the counterfeit industry as consisting of two parts: the first is manufacturing, 

located in the southern Guangdong and Fujian provinces and often having criminal 

connections to Hong Kong and Taiwan, respectively; the second is distribution, located in 

cities along the coast and in Wulumqi on the northwestern border. 

He said that millions of Chinese people make their livelihoods from counterfeiting, and 

cited in particular activities in Yiwu city, in Zhejiang Province. He said that Yiwu’s 

economy is largely based on trade in counterfeit goods and that the activity results in 24-

hour-a-day road congestion as goods are shipped to and from the city. He also said the 

counterfeit industry is endorsed by the local Yiwu government, which receives tax 

revenue both from the wholesalers and infrastructure businesses associated with the 

market, such as restaurant and hotel owners. He said that, given the importance of the 

counterfeiting industry to the area and other comparable locations, the Chinese 

government may be concerned that abrupt counterfeiting suppression could result in 

social disruption. 

Professor Chow also expressed the opinion that multinational companies located in China 

have been too focused on administrative enforcement as a means to deal with the 

counterfeit industry. He said that although the number of lawsuits and raids against 

counterfeiters has increased dramatically, they have been ineffective, largely because 

court and administrative rulings are unpredictable, the fines imposed are inconsequential, 

and the raids may actually increase output, as counterfeiters factor seizures into their 

production planning. Finally, he expressed the view that the estimation methods used by 

companies to approximate losses from counterfeiting are flawed. In his opinion, the idea 

that a recovered counterfeit item is equivalent to a recovered sale is not always correct, 

especially since the item is often destined for markets where the authentic product is not 

available.8

 7

 USITC, Hearing transcript and exhibits, June 15-16, 2010, 32–41; USITC, Hearing transcripts, 126; 

exhibits, 54–68. 8

 USITC, Hearing transcript, June 15-16, 2010, 112. 
D-7

D’Addario & Company (D’Addario)9

In written and oral testimony to the Commission, Mr. James D’Addario, chairman and 

CEO of D’Addario & Company, described how his musical instrument string 

manufacturing business has been impacted by Chinese counterfeiting. He noted that the 

company began operations in New York State in 1905 and still maintains 90 percent of 

its manufacturing in the United States. 

Mr. D’Addario recounted the company’s recent history selling in China, beginning with 

indirect shipments to China through Hong Kong and followed by direct exports after 

2001. He stated that, in 2004, D’Addario’s trademark was not properly registered in 

China because of a filing error, and a counterfeiting competitor registered the D’Addario 

trademark as his own to package an inferior product. He said that D’Addario has recently 

recovered its brand name after a protracted legal battle, winning the case based on prior 

use10 as well as the competitor’s labeling of packages with “Made and Printed in the 

USA.”11

Mr. D’Addario said that this was not the only counterfeiting problem D’Addario has had 

in China. He said that based on his company’s research, 70 percent of the strings labeled 

as D’Addario in China are counterfeit. He stated that an even greater concern is that these 

counterfeit products are now making their way onto international markets, particularly 

through online auction sites, which has damaged their brand reputation. 

To combat this problem, Mr. D’Addario said that two raids in China on Kim Byeng 

Sam’s firm and another counterfeiter, Bright Strings, have been conducted on 

D’Addario’s behalf. However, he expressed concern about the high cost of these raids, 

their limited results, and the insignificant penalties imposed on IP violators by Chinese 

law. He also stated that D’Addario has spent more than $200,000 on an ongoing program 

called “Play Real” that embeds unique serial numbers on each set of strings to allow 

consumers to verify whether their product is genuine or not. He added that the company 

has implemented a new Chinese pricing program to make its strings more competitive 

against counterfeit products and to curb counterfeit sales within China. He said that 

unfortunately this has made it more difficult for Chinese consumers to determine which 

string set is the real product because salespersons used to know, and offer, the genuine 

item based on the price difference. 

Emergency Committee for American Trade (ECAT)12

In hearing testimony presented to the Commission, Mr. Calman J. Cohen, president of 

ECAT, said that his organization is a U.S. business association with global operations 

representing members from all major U.S. sectors. He said that the general business 

opinion is that China represents a huge potential market that has been working towards 

 9

 USITC, Hearing transcript and exhibits, June 15-16, 2010; hearing transcript, 328–37; exhibits, 120–

49, also, written submissions to the USITC, May 24, 2010; June 16, 2010; June 21, 2010. Also of note, 

Congressman Steve Israel, 2nd district, New York, wrote to the Commission on behalf of D’Addario for the 

company’s inclusion in the June 15th hearing. For more information about D’Addario, please see 

http://www.daddario.com/DaddarioHome.Page?ActiveID=1740. 10 USITC, Hearing transcript, June 15-16, 2010, 374. 11 USITC, Hearing transcript, June15-16, 2010, 450. 12 USITC, Hearing transcript, June 15-16, 2010, 51–59; ECAT, written submission to the USITC, June 

22, 2010. For more information about ECAT, please see http://www.ecattrade.com/. 
D-8

liberalization, but said that some Chinese policies, such as indigenous innovation, have 

countered this progress towards opening the nation’s economy. He expressed concern 

that certain of the policies may be especially challenging for U.S.-Chinese trade relations 

because of the never-before-used government procurement condition that the intellectual 

property (IP) of a government purchase must be owned by a domestic entity. Although 

the Chinese, he said, have made modifications to the original indigenous innovation 

policies, he said in his post-hearing submission that it is still unclear if products already 

licensed for use in China by foreign-owned firms would qualify and that trademark 

ownership requirements have not been clarified. 

According to Mr. Cohen, indigenous innovation policies pose additional concerns, as 

they may be implicitly followed by both the private and public sector, whether 

implemented into law or not. Mr. Cohen also said that U.S. access to Chinese government 

procurement is already limited due to China’s ongoing delay in joining the WTO 

Government Procurement Agreement, in spite of their 2001 accession commitment. 

According to Mr. Cohen, had China joined this agreement, nondiscriminatory treatment 

of foreign suppliers would already be required in Chinese government procurement. 

Mr. Cohen also noted problems with China’s IPR protection, and said that part of the IPR 

problem results from China’s market restrictions. These restrictions, he said, limit the 

importation of legitimate products, and that this incentivizes counterfeit products. He 

cited as examples the annual limit (20) on foreign films and the restriction on printing 

and distribution by foreign publishers. From his perspective, this has negative 

consequences for the entire U.S. economy, from lower U.S. industry revenue and U.S. tax 

payments to unfair Chinese cost advantages gained from using free, unlicensed products. 

C. Fritz Foley, Associate Professor, Harvard Business School 

and Faculty Research Fellow, National Bureau of Economic 

Research13

In testimony at the Commission’s hearing, Professor Foley outlined the three principal 

ways IPR violations in China, in his view, affect the U.S. economy: (1) through 

international trade flows; (2) via cross-border royalty flows; and (3) in foreign direct 

investment (FDI). 

For international trade, Professor Foley stated there is evidence that U.S. exports are 

lower to nations with poor IPR enforcement, but only when those nations have the 

capacity to imitate products. Professor Foley also cited a study that shows large export 

increases to countries reforming their IPR legislation. He said that these effects are the 

result of U.S. companies’ reluctance to sell original products in a nation with no IPR 

protection. Another way Professor Foley noted that international trade could be affected 

by IP violations was if Chinese imitations entered the U.S. market on a large scale. He 

said that in his view, actual occurrences of this are relatively insignificant, compared to 

the import value of genuine articles. 

With regard to cross-border royalty flows, Professor Foley said that although U.S. 

licensing fee receipts from IP are relatively small compared to total exports, they 

 13 USITC, Hearing transcript, June 15-16, 2010, 18–26; Foley, written testimony to the USITC, June 

15, 2010. 
D-9

represent high profit margins for businesses. Professor Foley also cited the possibility of 

lower inter- and intra-company technology transfers to foreign firms or branches based in 

countries with weak IPR protection. In the case of inter-company technology transfers, he 

said, firms are concerned that once a licensee receives their technology, they will no 

longer have any incentive to continue to pay a user fee because IPR are not enforced. For 

intra-company transfers of information he noted the possibility that an employee will 

transfer “sensitive business information” to a competitor if there is no penalty for doing 

so. Professor Foley expressed the view that this second possibility was particularly 

relevant for U.S.-Chinese business relations, and predicted that stronger IPR protection in 

China would likely increase the amount U.S. firms earn from technology transfers. 

Professor Foley concluded with some observations on the effects of IPR on FDI. He 

noted that past analyses have been concerned that stricter IPR enforcement could increase 

production in more developed countries with better IPR protection, thereby lowering 

global welfare. However, Professor Foley said that this analysis does not take into 

account the possibility that a firm headquartered in a developed nation might choose to 

take advantage of lower costs in a developing nation for manufacturing only if the 

nation’s IPR protection was sufficient. He said that FDI in low-labor-cost nations could 

free resources for innovation in developed nations, and said that he has found some 

evidence to support this theory. Finally, Professor Foley asserted that FDI does not 

necessarily increase investment in foreign firms at the expense of U.S. firms. He said that 

this is particularly true when considering China and the United States, where businesses 

are more often counterparts than rivals. 

Harkins Cunningham LLP14

In written testimony to the Commission, Mr. Ehrenhaft, senior counsel at the law firm 

Harkins Cunningham, LLP, provided his views relating to the role of lawyers in 

protecting IPR within, and coming from, China. According to Mr. Ehrenhaft, U.S. laws 

limiting how foreign nationals may appear before the U.S. Patent and Trademark Office 

(USPTO) have led to similar policies by other nations, thereby disadvantaging U.S. 

patentees. Based on indications by other countries, Mr. Ehrenhaft wrote that he believes 

this situation could be alleviated if the United States were to move first and change 

legislation to allow “non-immigrant” foreign lawyers to represent clients before the 

USPTO. If China were then to do the same, U.S. companies could obtain more assistance 

in the Chinese patent application process. 

Mr. Ehrenhaft stated that U.S. lawyers face other problems in China, such as Chinese 

laws restricting U.S. firms from opening more than one office and also requiring U.S. 

lawyers to forfeit their local bar admission in order to work in China. In his view, the 

latter is especially discriminatory, considering that Chinese lawyers admitted to the bar in 

the United States often return to China and advertise themselves as U.S. lawyers. Finally, 

Mr. Ehrenhaft expressed concern that Chinese practice inhibits the use of standard 

arbitration clauses in international transactions. 

 14 Harkins Cunningham, written submission to the USITC, June 14, 2010. For information on Harkins 

Cunningham LLP, please see http://www.harkinscunningham.com/. 
D-10

Information Technology Industry Council (ITI)15

In hearing testimony, Mr. John Neuffer stated that he is ITI’s vice president for global 

policy and a representative of the information and communications technology industry. 

He said that China is a particularly important export destination for ITI’s member 

companies and the United States as a whole.16 He said that if the United States is to 

achieve President Obama’s goal of doubling exports in five years, a fair and open trading 

system will have to be developed in China. 

Mr. Neuffer said that ITI is not against China’s desire to pursue innovation, but is 

concerned that China’s indigenous innovation policies will create market access 

problems, especially in regard to the development of a product catalogue for Chinese 

government procurement. According to Mr. Neuffer, considering that China’s Ministry of 

Finance reported 2008 government spending at $88 billion, this is a significant market in 

which, in his view, a product catalogue might exclude U.S. businesses. 

Besides the catalogue, Mr. Neuffer also mentioned his concern with China’s push to 

create country-specific standards which, he said, especially discriminate against foreign 

firms developing products based on international standards. He stated that China has 

already developed a unique wireless standard, WLAN Authentication and Privacy 

Infrastructure (WAPI), which, although technically optional, has become the Chinese 

norm; the standard forces international firms to reconfigure products made to 

internationally recognized standards in order to be compatible. According to Mr. Neuffer, 

China may be moving in a similar direction with PCs and servers. 

Mr. Neuffer remarked that in addition to the above-mentioned problems, foreign 

companies also often face “unnecessary,” and sometimes overlapping, regulations. These 

regulations include burdensome testing and certifications, and sometimes even require 

the disclosure of sensitive business information. 

Intellectual Property Owners Association (IPO)17

In a written submission, IPO said that its membership consists of over 200 companies and 

11,000 individuals who own technology-related IP. IPO expressed concern that China’s 

indigenous innovation policy may limit the rights of IP holders based on their nationality, 

particularly for Chinese government procurement. IPO stated that it is concerned about 

the proposed indigenous innovation product catalogue for Chinese government 

procurement, covering six important technology areas: computer devices, 

telecommunications, office appliances, software, alternative-energy products, and 

energy-efficient products. Although IPO noted that the original Chinese product 

accreditation standards for qualification have been relaxed, a company still must meet the 

following six criteria: (1) products must meet Chinese regulations; (2) the applicant must 

 15 USITC, Hearing transcript and exhibits, June 15-16, 2010, 205–11, 24–34, respectively; ITI, written 

testimony to the USITC, June 15, 2010. For more information about ITI, please see 

http://www.itic.org/index.php?submenu=who&submenu=who&src=gendocs&ref=WHOWEARE&category=

Main. 

16 During the hearing, Mr. John Neuffer shared his allocated time with ITI’s fellow member of the 

United States Information Technology Office (USITO) in Beijing, the Software and Information Industry 

Association. A summary of the testimony of the Software and Information Industry Association appears later 

in this appendix (arranged alphabetically). 17 IPO, written submission to the USITC, July 9, 2010. For more information about IPO, please see 

http://www.ipo.org//AM/Template.cfm?Section=Home. 
D-11

have full IP rights with no dispute; (3) the applicant must have exclusive trademark 

rights; (4) the products must be technologically advanced; (5) the product must be of 

reliable quality; and (6) the product should have profit potential. IPO said that it is 

apprehensive about the vagueness of criteria 1, 2, 4, and 6 because no precise regulations 

are specified for the first criterion and key terms such as “dispute,” “advanced,” and 

“profit potential,” are undefined in the second, fourth and sixth criteria. 

International Data Corporation (IDC)18

In hearing testimony, Mr. John Gantz, the chief research officer of IDC, said that IDC is 

an international computer industry research firm with analysts around the world. He said 

that IDC’s clients range from large private computer companies and U.S. government 

agencies to small end users of technology. He said that IDC was very involved in the 

work done for BSA in 2003 to investigate worldwide PC software piracy. The IDC study 

examined the difference between shipped and sold legitimate software and the amount of 

software that would have needed to be installed in 110 countries based on PC sales. The 

study found that in 2009, 79 percent of the software in China, the second largest PC 

market in the world, was illegal, while only 20 percent of software installed in the United 

States was illegal. Mr. Gantz noted that IDC’s most recent study valued all pirated 

software at $7.6 billion, a value that IDC has argued in the past can be considered direct 

industry loss. 

Besides software vendor losses, Mr. Gantz described how losses from pirated software 

are not limited to the legitimate industry but accrue throughout the economy. According 

to Mr. Gantz, although the software services sector is the most directly affected, piracy 

ultimately leads to lost tax revenue and reductions in job creation and employment. Mr. 

Gantz cited projected gains in tax revenue and job creation identified in another recent 

IDC study analyzing the effect of a 10 percent reduction in piracy rates in China and 

Russia. Mr. Gantz added that, the IDC projection underestimated the actual gains in the 

two countries.19

The International Imaging Technology Council (Int’l ITC)20

Tricia Judge, Executive Director of the Int’l ITC, provided a written submission that 

includes a report addressing how its members have been affected by Chinese IPR 

infringement. The report states that the Int’l ITC is a non-profit association representing 

approximately 2,500 North American ink jet and toner cartridge remanufacturers. The 

report states that Chinese companies are infringing on legitimate remanufacturing 

business by producing new cartridges in violation of original manufacturer IPR and then 

marketing them as both new and remanufactured products. The report says that these 

sales, facilitated by the Internet, have undercut the North American industry. 

The report also states that when the infringing cartridges are imported into the United 

States and then returned empty to remanufacturers, the remanufacturers are open to 

potential lawsuits by original manufacturers. The report states that the Int’l ITC is 

 18 USITC, Hearing transcript, June 15-16, 2010, 199–205. For more information about IDC, please see 

http://www.idc.com. 19 USITC, Hearing transcript, June 15-16, 2010, 219. 20 Int’l ITC, written submission to the USITC, July 7, 2010. For more information about the Int’l ITC, 

please see http://www.i-itc.org. 
D-12

increasingly concerned that its environmentally-friendly, labor-intensive recycling 

business is threatened by the growing number of illegal Chinese products. 

International Intellectual Property Alliance (IIPA)21

In testimony at the Commission’s hearing, Mr. Michael Schlesinger, co-founder of 

IIPA,22 expressed the view that some proposed Chinese domestic innovation policies will 

not only be ineffective, but will also obstruct market access for U.S. businesses. He stated 

that a more effective method of enhancing national innovative efforts would be for China 

to effectively enforce its IPR legislation and implement international market access 

obligations. 

Mr. Schlesinger estimated the cost to U.S. companies of copyright infringement in China 

at $18–20 billion per year. He stated that IIPA’s 2009 study, “Copyright Industries in the 

U.S. Economy: The 2003–2007 Report,” included in IIPA’s post-hearing submission, 

shows that core U.S. copyright industries accounted for a significant percentage of both 

U.S. gross domestic product and total economic growth. 

Mr. Schlesinger said that technology, particularly the Internet and mobile phones, is 

aiding the distribution of copyright-infringing products, and estimated that 99 percent of 

the music downloaded in China is illegal. He said that enforcement has been mixed, and 

noted by way of example that whereas in August 2009 the operators of the Tomato 

Garden Web site, tomatolei.com, were criminally convicted in China for providing free 

downloads of Windows XP, no charges have been made against Kangjian Shixun, a wellknown paid subscription-based site that provides unlicensed electronic copies of 

scientific journal articles. Mr. Schlesinger also listed other types of general copyright 

infringement prevalent in China, including end-user piracy of business software, optical 

disc infringement, hard-disk loading infringement, published material infringement, and 

illegal camcording of movies. He also described problems that contribute to 

infringement, including Chinese Internet cafés that do not prevent access to copyrightinfringing online content, and cited insufficient compensation for the use of copyrighted 

music on television. Mr. Schlesinger stated that IIPA is also concerned about the market 

access problems generated by foreign film and television broadcast quotas, the Chinese 

censorship system, and now, possibly, by indigenous innovation policies. 

Finally, he suggested the Commission consider all forms of infringement in the study, 

especially infringement via the Internet; the effects of infringement on the entire U.S. 

economy and not just the copyright holder; and the impact of market access restrictions in 

China. For supplemental detail, IIPA included in its written submission its 2010 Special 

301 Report, with recommendations to the USTR on China. 

 21 USITC, Hearing transcript, June 15-16, 2010, 345–54; written testimony to the USITC, June 3, 2010; 

IIPA, written submission to the USITC, July 9, 2010. 22 IIPA is a coalition of seven trade associations representing the U.S. copyright industries. These 

associations are: the Association of American Publishers, the Business Software Alliance, the Entertainment 

Software Association, the Independent Film & Television Alliance, the Motion Picture Association of 

America, the National Music Publishers’ Association, and the Recording Industry Association of America. 

According to IIPA, their members represent over 1,900 companies producing and distributing copyrightprotected materials. For more information about IIPA, please see http://www.iipa.com. 
D-13

International Intellectual Property Institute (IIPI)23

In testimony at the Commission’s hearing, Mr. Bruce A. Lehman said that he is the 

founder of the nonprofit think tank IIPI, which is devoted to helping developing countries 

understand and use IPR to their advantage. Mr. Lehman provided views regarding current 

U.S.-China trade relations and also recounted his experiences during the 1990s as 

Assistant Secretary of Commerce and Commissioner of Patents and Trademarks under 

the Clinton Administration. 

Mr. Lehman said that the U.S.-China trade relationship has not fulfilled the expectations 

developed in the course of negotiating the 1999 bilateral agreement. He said it was hoped 

at the time that, by facilitating trade with China, the United States would benefit from 

exporting its technology, while China would profit from its relatively low labor costs. 

According to Mr. Lehman, the lack of protection and recognition for the value of 

intangible U.S. IP exports has contributed to a growing trade imbalance between the two 

nations as American firms receive less than full value for their exports. Mr. Lehman said 

that this same level of imbalance is not seen in the trading relationship between the 

United States and other advanced economies with strong IPR protection that fully 

recognizes U.S. export value.24

Mr. Lehman said that although China has improved some aspects of its domestic IPR 

protection, copyright piracy is still rampant. He also expressed concern that China has 

restricted market access for U.S. technology and information exports through 

internationally incompatible technology standards, government procurement 

requirements, and Internet censorship. In addition, he cited the increased use of utility 

model patents that do not require examination of prior art, saying that this practice has 

been found to occasionally exclude original developers of a product from obtaining full 

patent protection in China. He concluded by saying that although China will likely have a 

strong IPR protection regime in the future, it may not be soon enough for U.S. companies 

to benefit. 

The Law Offices of Stewart and Stewart25

In a written submission, the law firm of Stewart and Stewart described the types of IPR 

violations in China and the extensive problems they pose for businesses and consumers 

throughout the world. The firm said that, although no country has perfect IPR protection, 

in recent years China has been the largest problem country, with complicating factors 

such as Chinese provincial governments’ disregard of central government efforts to 

improve enforcement. 

The firm said that counterfeit products are infiltrating all industry sectors and global 

regions, boosted by less-regulated Internet sales. The firm said that the costs to 

U.S. businesses from counterfeiting go beyond lost business revenue because counterfeit 

goods typically use inferior materials and production methods. These costs include 

warranty costs for servicing illegitimate products, recall costs to remove dangerous 

counterfeit products and preserve brand reputations, and national security threats as fake 

 23 USITC, Hearing transcript, June 15-16, 2010, 26–32; IIPI, written testimony to the USITC, June 15, 

2010. For more information about IIPI, please see http://iipi.org. 24 USITC, Hearing transcript, June 15-16, 2010, 79. 

25 Stewart and Stewart, written submission to the USITC, July 8, 2010. For information on The Law 

Offices of Stewart and Stewart, please see http://www.stewartlaw.com/stewartandstewart. 
D-14

and inferior items are even accidentally purchased by the U.S. military. Stewart and 

Stewart noted that some of these costs are not quantifiable, but in the interest of the study 

they believe it could be useful to survey industries to gather information on warranty cost 

increases, spending for brand protection, and product recall costs. 

The firm also described China’s indigenous innovation policies, particularly those 

relating to government procurement, and said that although these policies are not 

prohibited by China’s current WTO obligations, they would be if China fulfilled its 2001 

accession commitment to become a member of the Government Procurement Agreement. 

The firm added that while changes in April 2010 to the indigenous innovation policies 

have eased some worries, it remains concerned about how the policy will be applied 

across all three levels (national, provincial, and local) of the Chinese government. 

Philip I. Levy, Resident Scholar, American Enterprise 

Institute26

In a written submission to the Commission, Dr. Philip Levy expressed the view that it 

might prove useful for the study to take a comparative statics approach, i.e., comparing 

economic outcomes under various Chinese IPR scenarios. He also suggested separating 

the problem of U.S. IP appropriation in China into two categories: unauthorized and 

authorized. He said that under his analysis, unauthorized IP appropriation, such as street 

vendor sales of knockoff items or illegally copied DVDs, is a question of demand 

elasticity—in other words, that certain consumers value genuine products, while others 

are price-dependent. He said that it is unrealistic in his view to quantify IPR violations 

based on total demand and the legitimate item’s current price, because a business with 

market power is likely to set a lower price to capture more sales when they perceive 

demand elasticity. He also said that there are questions surrounding the appropriate level 

of enforcement against unauthorized IP violations. Citing the WTO TRIPS annex, Dr. 

Levy stated that there are acknowledged differences in enforcement levels dependent on 

country development and resource limitations, increasing the options for the scenario to 

use in analyzing Chinese IPR enforcement. Options he proposed were complete 

enforcement, which he felt was idealistic; enforcement on a par with best-practice 

countries or comparably developed countries, which he noted is an ongoing debate; or 

enforcement on a par with the best-protected Chinese goods. 

According to Dr. Levy, authorized IP violations are Chinese government requirements 

that foreign firms reveal certain information to do business in China, which is a matter 

that is at issue in China’s indigenous innovation policies. He said that he views the 

problem as one of rent sharing, where foreign businesses and the Chinese government 

must come to an agreement on how firm revenue will be divided. For purposes of the 

Commission’s study, Dr. Levy said that damage to U.S. businesses could be quantified as 

the difference in profit between a scenario with and without these government 

requirements. 

 26 Levy, written submission to the USITC, July 8, 2010. 
D-15

Motorcycle Industry Council (MIC)27

In a written submission, the Motorcycle Industry Council (MIC) said that it is a not-forprofit national industry association with more than 250 members from all segments of the 

motorcycle and all-terrain vehicle industry. MIC presented the results of an industry 

survey it conducted regarding experienced and perceived IPR violations. MIC said the 

survey was issued after receiving notice of the Commission’s investigation and was based 

on the responses of 53 member companies. MIC said that 94 percent indicated that 

powersports industry members’ IPR had been infringed in China and 96 percent said that 

infringement was significant or modestly important to the industry. The MIC submission 

stated that of the 53 respondents, 40 said they had been personally affected by China IPR 

infringement in all parts of the motorcycle industry, including actual vehicles, their parts, 

outerwear and accessories, and handbooks or training material. MIC said that patent 

violations were the most reported type of infringement, but indicated that everything 

from trade secrets to service marks was mentioned. According to MIC, reported Chinese 

methods for creating the infringing products are diverse, including reverse engineering, 

exact copying of entire products, reproduction with inferior materials, and 

misrepresentation of brands. MIC also reported that members discovered IPR 

infringement in multiple ways, from trade shows to stores to online auction sites. 

Finally, MIC stated that although some members reported that they try to combat IPR 

infringement, such as with “cease-and-desist letters” and faster new product development 

to outpace counterfeits, other members reported doing nothing because of lack of 

knowledge, doubts as to any action’s effectiveness, and cost concerns. MIC suggested 

that, based on this information, education programs, an industry forum, IPR enforcement 

at ports, and better tracking of illegitimate product manufacturers would be helpful to the 

industry. 

National Association of Manufacturers (NAM)28

In testimony at the Commission’s hearing, Mr. Shaun Donnelly, NAM’s senior director 

of international business policy, said that NAM is the largest industrial trade association 

in the United States. Mr. Donnelly stated that NAM has long had a subcommittee on IPR, 

but that, with China in mind, NAM appointed an additional task force to investigate 

international IPR problems and their U.S. domestic effects. Mr. Donnelly said that IPR is 

an issue for U.S. manufacturers of every size and in every sector, even for small and 

medium-sized manufacturers that have never exported but find counterfeit versions of 

their product sold internationally. 

With respect to counterfeit goods, Mr. Donnelly identified areas of concern for U.S. 

manufacturers, including lost sales and jobs, investigation and litigation costs in pursuing 

legal action in China, translation and travel expenses, injury to brand reputation by lesser 

quality counterfeit items, and consumer health and safety risks. Additionally, Mr. 

Donnelly noted that prosecution in China is difficult and that rather than facing criminal 

convictions, most offending parties are only assessed an administrative fine. Mr. 

 27 MIC, written submission to the USITC, July 9, 2010. For more on MIC, please see 

http://www.mic.org. 28 USITC, Hearing transcript and exhibits, June 15-16, 2010, 184–93 and 12–22, respectively; NAM, 

written testimony to the USITC, June 15, 2010. For more information about NAM, please see 

http://www.nam.org. 
D-16

Donnelly expressed the view that more and better coordinated U.S. government 

assistance could alleviate some of these burdens. 

Finally, Mr. Donnelly noted NAM’s concern about China’s indigenous innovation 

policies, as well as its desire for China to fulfill its WTO accession commitments by 

signing the Government Procurement Agreement. 

PCT Government Relations, LLC29

In hearing testimony, Mr. Chris Israel, managing partner of PCT Government Relations 

LLC, described damage done and the increasing danger posed by weak and unpredictable 

IPR enforcement in China. Mr. Israel said that he recognized and expressed appreciation 

for unilateral actions taken by U.S. officials working to prevent counterfeit imports, and 

noted bilateral U.S.-Chinese efforts, such as U.S. and Chinese officials working together 

for joint criminal prosecution and the recently signed memorandum of understanding on 

patent cooperation. 

He said that other effective measures taken by the U.S. government include meetings of 

the U.S.-China Joint Commission on Commerce and Trade and the U.S.-China Strategic 

and Economic Dialogue. Mr. Israel also said that U.S. trade tools, such as USTR’s 

Special 301 Report and a 2006 WTO dispute settlement case against China, have also 

been relatively effective. For the future, he suggested that the United States continue to 

pressure China to sign the WTO Government Procurement Agreement and emphasize the 

importance of Chinese law enforcement and of U.S. customs cooperation with China. 

On the whole, he said, the United States is “treading water” as opposed to moving 

forward with regard to changes in Chinese policy. Mr. Israel also expressed the view that 

better coordination within the U.S. Government is necessary to truly combat this 

problem, particularly since policies, such as China’s indigenous innovation policies, are 

only one tool in China’s ongoing experiment to promote domestic innovation. 

Software and Information Industry Association30

In testimony at the Commission’s hearing, Mr. Mark Bohannon, general counsel and 

senior vice president of the Software and Information Industry Association (SIIA), 

described the group as the oldest and largest software and digital content association, 

whose members are mainly small and medium-sized software publishers. 31 Mr. 

Bohannon stated that beyond lost employment and industry revenues, there are important 

“social” considerations to be taken into account by the Commission in considering IP 

issues, especially when analyzing pirated software. He said that, in his experience, pirated 

software is much more susceptible to Internet security threats, and that frequently the 

same individuals selling the illegal product are involved in other illegal activity, such as 

identity theft. 

 29 USITC, Hearing transcript, June 15-16, 2010, 337–45; PCT Government Relations, written 

testimony, June 16, 2010. For more information about PCT Government Relations, please see 

http://www.pctgr.com. 30 USITC, Hearing transcript, June 15-16, 2010, 211–14. For more information about SIIA, please see 

http://www.siia.net. 31 During the hearing, Mr. John Neuffer of ITI shared his allocated time with the Software and 

Information Industry Association, ITI’s fellow member of the United States Information Technology Office 

(USITO) in Beijing. A summary of ITI’s testimony appears earlier in this appendix. 
D-17

Mr. Bohannon also said that it was important to keep in mind that the IPR discussion has 

changed from its previous enforcement focus to broader concerns about a “web” of 

Chinese policies tied to indigenous innovation goals aimed at promoting domestic 

interests. Mr. Bohannon said these policies have reached the point where they are now a 

structural issue in the U.S.-China economic relationship, one that is recognized by both 

sides as requiring further discussion. 

Telecommunications Industry Association (TIA)32

In a written submission, TIA, which describes itself as an association of the global 

information and communications technology industry with 600 members, said that 

China’s indigenous innovation goal has increasingly become a structural issue. TIA said 

that this strategy, which encompasses many policies even beyond the proposed 

indigenous innovation catalogue, will limit the ability of U.S. firms to directly compete 

within China. TIA said that China must fulfill its international commitments and 

recognize that innovation is global and requires cross-border collaboration. TIA also 

noted its concern about mandated Chinese domestic standards and technologies that 

differ from international norms and that lack transparency in terms of both development 

and implementation. TIA said that this problem partially stems from a narrow 

interpretation of international standards which, while in compliance with China’s WTO 

commitments, means China will only implement standards developed in an international 

forum and not unofficial technology norms. 

In addition, TIA noted that China continues to unfairly favor domestic companies or 

technologies, which they believe is especially true of the Chinese telecommunications 

industry. TIA noted that China recently had developed its own third-generation mobile 

phone standard aided by government subsidization and other forms of public support, and 

expressed concerns that China’s mobile phone standard and its promotion of other 

domestic technologies will disadvantage foreign firms in the Chinese marketplace. 

Tessera Technologies, Inc. (Tessera)33

In a written submission Tessera presented its views relating to the value of IPR in its 

industry as well as the need for its protection. In its submission, Tessera, headquartered in 

California, stated that it mainly performs research and development in miniaturization 

technologies, primarily semiconductors. It said that after significant research investments, 

which amounted to $71 million in 2009 alone, the company is dependent on licensing 

fees to recoup research and development expenditures and finance its next innovations. 

Tessera said that licensing fees have become increasingly important to the U.S. economy 

and represented one of the few areas in which the U.S. has a trade surplus. Tessera said 

that “non-practicing,” or non-manufacturing, innovators are an important component of 

the American segmented supply chain business model. Additionally, Tessera noted the 

importance of the Commission’s ability to restrict the import of patent-infringing 

components into the United States. Tessera claimed this is a benefit to companies such as 

theirs which would not be able to identify, or have the resources to sue, all infringing 

foreign firms. 

 32 TIA, written submission to the USITC, July 7, 2010. For more information about TIA, please see 

http://www.tiaonline.org. 33 Mark A. Kressel and Benjamin W. Hattenbach of Irell & Manella LLP, counsel for Tessera 

Technologies, Inc., written submission to the USITC, July 9, 2010. For more information about Tessera, 

please see http://www.tessera.com/Pages/tessera.aspx. 
D-18

Tessera expressed the view that the Commission must continue its work to protect U.S. 

IPR. Additionally, Tessera stated that it felt the Commission should clarify a recent 

Federal Circuit court decision in Kyocera Wireless Corporation v. International Trade 

Commission that may restrict the Commission’s ability to ban downstream products 

based on a patent-infringing component. Tessera also recommended that the Commission 

focus on Chinese IPR infringement and its negative effects on non-practicing U.S. 

innovators; the decrease in competitiveness for firms with valid IP licenses versus those 

without; and widespread IPR infringement for difficult-to-detect components within a 

finished product. 

U.S. Chamber of Commerce34

In testimony at the Commission’s hearing, Mr. Jeremie Waterman, senior director in 

Greater China for the U.S. Chamber of Commerce, said that the U.S. Chamber of 

Commerce represents the interests of more than 3 million businesses, and is the largest 

such federation in the world. Noting the importance of the U.S.-China trade relationship, 

Mr. Waterman said that weak Chinese IPR protection, combined with the development of 

discriminatory Chinese indigenous innovation policies, is undermining the relationship’s 

benefits for U.S. businesses. Mr. Waterman also expressed concern that the entire 

U.S. economy may be harmed by continued IPR violations, and referenced a recent 

U.S. Chamber of Commerce paper that reported that U.S. IP-intensive industries create 

high-paying jobs, invest heavily in research that drives innovation and future 

competitiveness, lead in exports, and have a positive trade balance. 

Mr. Waterman said that Chinese counterfeits are a continuing concern, particularly since 

such items are being exported from China to the world, aided by the Internet. He said that 

these violations result in lost U.S. sales and lower current and future U.S. 

competitiveness. He expressed the view that although China has laws in place to protect 

IPR and patent infringement lawsuits have increased, Chinese court rulings are 

unpredictable and may implicitly recognize indigenous innovation goals for political 

reasons. As an example, he cited two advisory rulings by China’s Supreme People’s 

Court, in which the court seemed to find that holders of patents on technology crucial to a 

Chinese national standard should be entitled to a less-than-normal royalty to compensate 

for their technology’s use. 

Mr. Waterman also described the origins of China’s indigenous innovation policies, and 

said they are part of the nation’s search for sustainable development, national security, 

and greater international competitiveness. Indigenous innovation, he said, was first 

explicitly introduced in China’s National Medium- and Long-Term Plan for the 

Development of Science and Technology (2006–20). Mr. Waterman pointed to the 16 

megaprojects and government procurement policies as particularly important. He said 

that two laws that took effect in 2008 are also troubling: the antimonopoly law and the 

Third Amendment to China’s patent law. The first, he said, has the potential to be used 

against foreign firms through enforced limits on IPR charges and licensing fees, while the 

second expands the grounds for compulsory licensing. 

Finally, Mr. Waterman recommended that the Commission assess three markets—the 

Chinese, the American, and the world—separately, giving particular attention to 

 34 USITC, Hearing transcript and exhibits, June 15-16, 2010, 167–77, and 70–98, respectively; U.S. 

Chamber of Commerce, written testimony to the USITC, June 15, 2010. For more information about the 

U.S. Chamber of Commerce, please see http://www.uschamber.com. 
D-19

emerging industries and possible services sector goals, which he believed China may 

target to expand domestic capacity. 

U.S. Council for International Business (USCIB)35

In testimony at the Commission’s hearing, Mr. Steve Canner, vice president of USCIB, 

described USCIB as the American affiliate of three global business groups: the 

International Chamber of Commerce, the International Organization of Employers, and 

the Business and Industry Advisory Committee to the OECD. He said the USCIB 

represents over 300 U.S. corporations, professional firms, and business associations, and 

that many of its members have substantial trade and investment interests in China. 

Mr. Canner described USCIB’s concerns regarding IPR enforcement in China and 

China’s development of indigenous innovation policies. He also referred to a study by 

Professor Matt Slaughter regarding the benefits of international engagement by 

U.S. firms and supporting the need for better Chinese market conditions. Finally, he 

suggested that the Commission staff use the Bureau of Economic Analysis database as an 

information source. 

In a post-hearing submission, USCIB discussed the U.S. economic costs of Chinese IPR 

infringement, noting that a 2007 OECD study estimated the cost of international trade in 

counterfeit goods at $250 billion. USCIB acknowledged the work China has done so far 

to combat copyright violations, but said more work is needed. USCIB said that these 

activities should be supported by better information sharing between Chinese and 

international enforcement agencies as well as between the public and private sectors. 

USCIB also noted that U.S. companies have reported that, with the exceptions of 

Shanghai and Beijing, IPR enforcement is hindered by the insignificant penalties for 

violating firms, the failure to destroy equipment involved in the illegal copying of 

products, and the administrative cost of bringing a criminal case. Finally, USCIB noted 

the importance of bilateral dialogue between the United States and China to correct and 

prevent these problems. 

Peter K. Yu, Professor, Drake University Law School36

In testimony at the Commission’s hearing, Professor Yu described four challenges that, in 

his opinion, faced the Commission’s study: (1) analyzing how weak IPR may support 

democracy in China; (2) determining true economic gains and losses for the entire U.S. 

economy; (3) assessing Chinese indigenous innovation policies; and (4) predicting how 

stronger Chinese IPR might impact the U.S. economy. 

With regard to the first point, Professor Yu said that there are many recognized problems 

with IPR violations in general. However, he noted there may be one positive outcome—

namely, the freer movement of information in China, which is otherwise heavily 

controlled. In his view, the freer movement of information, even from movies and 

television programs, can assist Chinese democracy. 

 35 USITC,Hearing transcript, June 15-16, 2010, 354–63; USCIB, written submission to the USITC, July 

20, 2010. For more information about USCIB, please see http://www.uscib.org. 36 USITC, Hearing transcript, June 15-16, 2010, 42–50. 
D-20

Addressing the second challenge, Professor Yu expressed the view that determining gains 

and losses to the entire American economy from IPR infringement is extremely difficult. 

He said that firms whose IPR have been violated are undeniably hurt, but other U.S. 

sectors may see benefits. By way of example, he said that Chinese tourists and students 

have been inspired by illegally reproduced movies to come to the United States, that 

industry standards favoring some U.S. products have been set in response to the wide 

availability of certain pirated U.S. items, and that counterfeit products may benefit 

consumers who can buy similar items at a lower price. 

For the third challenge, Professor Yu said that China’s overall indigenous innovation goal 

includes both good and bad policies. On the one hand, Professor Yu pointed to the longstanding idea that increasing the number of Chinese innovators would also increase the 

number of domestic stakeholders in favor of improved IPR protection and reform. On the 

other hand, he noted that some policies, such as those discriminating against foreign 

companies, could violate China’s WTO obligations. 

In conclusion, Professor Yu suggested that the United States may have a comparative 

advantage in its superior IPR protection for retaining research and development firms, 

one that could potentially be undermined if China were to better enforce its legislation 

but retain its low labor costs. Finally, he expressed concern that more Chinese IPR 

enforcement could work against American firms that might eventually face a barrier to 

entry in the form of Chinese lawsuits against them. 
APPENDIX E 

INTELLECTUAL PROPERTY RIGHTS 

QUESTIONNAIRE

OMB No. 3117-0221; Expiration Date: 03/31/2011 

No response is required if currently valid OMB control number is not displayed 

INTELLECTUAL PROPERTY RIGHTS QUESTIONNAIRE 

UNITED STATES INTERNATIONAL TRADE COMMISSION 

Attention: IPR Project Team 

Office of Industries, Room 511 

500 E Street, SW, Washington, DC 20436 

FAX: 202-205-2217 

The U.S. International Trade Commission (USITC) has been asked, by the United States Senate 

Committee on Finance (SFC), to estimate the size and scope of intellectual property right (IPR) 

infringement in China and the effects of Chinese indigenous innovation policies as they relate to the U.S. 

economy and jobs. This questionnaire has been designed to collect information to fulfill this request. 

More information about this report and the investigation under which it is being prepared (No. 332-519) 

can be found on the following Web site: 

 

http://www.usitc.gov/research_and_analysis/What_We_Are_Working_On.htm

 

PURPOSE AND CONFIDENTIALITY 

According to the letter from the Senate Committee on Finance requesting the report in this matter, “the 

U.S. government has not conducted a comprehensive economic analysis of the effects of China’s 

ineffective IPR protection and enforcement on the U.S. economy and U.S. jobs.” By completing this 

questionnaire, your firm will provide valuable information that will help the Commission estimate the 

effects of Chinese IPR infringement (and indigenous innovation policies) on the U.S. economy and 

employment. 

The Commission has designated as “confidential business information” the information you provide in 

response to this questionnaire to the extent that such information would reveal the operations of your 

firm and is not otherwise available to the public. The Commission will not disclose such confidential 

business information unless required by law. Information received in response to this questionnaire 

will be aggregated with information from other questionnaire responses and will not be published in a 

manner that would reveal the operations of your firm. The Senate Committee on Finance has asked 

the Commission to provide a non-confidential (public) report to the Committee. 

The USITC will report its findings to the SFC on May 2, 2011, and the SFC has indicated it intends to 

make this report available to the public. 

YOU ARE REQUIRED BY LAW TO RESPOND TO THIS QUESTIONNAIRE. 

MANY RESPONDENTS WILL NOT NEED TO COMPLETE ALL SECTIONS. 

PLEASE READ ALL INSTRUCTIONS AND RETURN COMPLETED QUESTIONNAIRE 

TO THE USITC NO LATER THAN NOVEMBER 1, 2010. 

The information is requested under the authority of section 332(g) of the Tariff Act of 1930 (19 U.S.C. § 

1332(g)). Completing the questionnaire is mandatory, and failure to reply as directed can result in a 

subpoena or other order to compel the submission of records or information in your possession (19 U.S.C. 

§ 1333(a)). Further information on this questionnaire can be obtained from: 

Alexander Hammer (202-205-3271; alexander.hammer@usitc.gov) 

Jeremy Wise (202-205-3190; jeremy.wise@usitc.gov)
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 2 of 46 

FIRM INFORMATION 

Firm name 

Address 

City State Zip code 

Web site address 

Is your firm headquartered in the United States, or is it an U.S. affiliate of a firm headquartered 

outside the United States? If either of these conditions apply, please select “yes” below and read the 

associated instructions and definitions. 

 YES

Complete all parts of the questionnaire that apply to your firm. Then, sign the 

certification, and return the entire questionnaire to the USITC (see submission 

instructions on page 5) no later than November 1, 2010. 

 NO Sign the certificate below, and promptly return this page and the cover page to 

the USITC at the address or fax number on the cover page. 

CERTIFICATION 

The undersigned certifies that the information supplied herein in response to this questionnaire is 

complete and correct to the best of his/her knowledge and belief and understands that the information 

submitted is subject to audit and verification by the USITC. 

Section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g)) provides that the Commission may not 

release information which it considers to be confidential business information unless the party submitting 

such information had notice, at the time of submission, that such information would be released by the 

Commission, or such party subsequently consents to the release of the information. The undersigned 

acknowledges that information submitted in this questionnaire response and throughout this investigation 

may be used by the USITC, its employees, and contract personnel who are acting in the capacity of 

USITC employees, for the purposes of developing or maintaining the records of this investigation or 

related proceedings for which this information is submitted, or in internal audits and in investigations 

relating to the programs and operations of the USITC pursuant to 5 U.S.C. Appendix 3. The undersigned 

understands that all contract personnel will sign nondisclosure agreements. 

 

Name and title of authorized official Date (MM/DD/YY) 

 

Signature of authorized official* Telephone (xxx-xxx-xxxx) Fax (xxx-xxx-xxxx) 

*If submitting an electronic version of this certificate to the USITC, check this box in lieu of a written 

signature to indicate that the authorized official listed has certified the information provided. 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 3 of 46 

INSTRUCTIONS 

1. Type of firm that should complete this. This questionnaire is intended for firms that have any type 

of operations or activities in the United States. This includes both firms that are headquartered in the 

United States and those that are U.S. affiliates of companies that are headquartered outside the United 

States. Firms that fit this profile but have not experienced any IPR infringement from Chinese entities 

or who do not have concerns about China’s indigenous innovation policies (see definition, page 6) 

will only have to complete sections 1 and 10. 

2. Coordinated response. If responsibility for completing this questionnaire is shared among separate 

persons or departments within your firm, please ensure that the response has been coordinated so that 

the information provided is internally consistent. In the USITC’s experience with past questionnaires, 

this will minimize the need for call backs. 

3. Relationship to corporate structure. Independent individual business units, wholly-owned 

affiliates, majority-owned affiliates, and joint ventures associated with your firm should all provide 

separate questionnaire responses, but there should be no double counting. 

If this is not possible, or unreasonably burdensome, then your firm may provide a consolidated 

response. 

4. Questionnaire structure. This questionnaire is composed of 10 sections, as shown below. 

Table of Contents 

 

Introduction Page

Confidentiality 1 

Firm Information 2 

Certification 2 

Instructions 3 

Completing and Submitting questionnaire 5 

Definitions 6 

 

Questionnaire 

1. General Questions 10 

2. General IPR Questions 15 

3. Strategies for addressing IPR issues 23 

4. Copyrights 26 

5. Trademarks 30 

6. Patents 33 

7. Trade Secrets 36 

8. Indigenous Innovation Policies in China 39 

9. Overall Assessment of IPR and Indigenous 

Innovation 44 

10. Other Information 46 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 4 of 46 

5. What sections and questions to complete. Each section of the questionnaire consolidates a group of 

related questions. All sections may not apply to your firm’s activities. Consequently, firms may not 

need to fill out all sections. For example, firms that do not have concerns regarding IPR infringement 

of their products from Chinese entities should only fill out sections 1 and 10. Also, firms may have 

IPR infringement concerns from China that are limited to only one or two types of infringement (e.g., 

copyright and patents). In that case, firms must complete the section that corresponds to the type of 

IPR infringement concern that they have. Please also note that not all questions in a section apply to 

every firm. Unless otherwise instructed, leave these response areas blank. 

6. Making reasonable estimates and allocations. If the information requested is not readily available 

from your records, reasonable estimates are acceptable. Many questions ask for separate information 

on all of your firm’s activities, as well as your IPR-related activities. If your records do not separate 

information for these IPR types, then please provide reasonable estimates to make your allocations, 

but do not double count. If infringing products or services cover more than one type of IP (e.g. 

trademarks and copyrights), please allocate your firm’s losses appropriately without double-counting. 

7. The format of U.S. dollar estimates. All dollar figures refer to U.S. dollars and should be provided 

in units of actual dollars (not in units of thousands, millions, billions, etc.) unless otherwise specified. 

Moreover, they should reflect current year dollars, not those corrected for inflation. 

8. The format of employment estimates. All employee figures should refer to full-time equivalents 

(FTEs). See definition section. 

9. Annual data basis. All annual data should be provided on a calendar year basis. If conversion from a 

fiscal year basis is necessary, reasonable estimates are acceptable. 

10. Comments. Space has been provided at the end of the questionnaire (section 10) for additional 

information and/or comments. Include any other information you feel is relevant to the USITC’s 

investigation in this section.

11. Keep a copy of your submission for your records. 

Note on Burden to Your Firm 

The USITC has designed this questionnaire to minimize response burden. Your firm may not have to 

answer all the sections and/or questions if they do not apply. This questionnaire was reviewed by 

industry participants to ensure that data requests are sufficient, meaningful, and as limited as possible. 

Public reporting burden for this questionnaire is estimated to average 40 hours per response. Send 

comments regarding the accuracy of this burden estimate or any other aspect of this questionnaire, 

including suggestions for reducing the burden, to the address on the cover page.
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 5 of 46 

COMPLETING AND SUBMITING QUESTIONAIRE 

1. Retrieving questionnaire. Go to the following address using your web browser. Press the enter key 

and a dialogue box will appear. Use the “Save File” selection to place the questionnaire file on your 

computer. 

http://www.usitc.gov/documents/usitc.ipr.doc 

2. Access File. Open the questionnaire file. This file is a Microsoft Word 2003 form-fillable file. It may 

be opened and completed with later versions of MS Word. Contact a project leader if this file is 

incompatible with your firm’s computer operating system or version of MS Word. 

Note: The form-fillable file was designed to ease completion of the questionnaire and 

minimize the need for the project team to contact firms for clarifications. But printing the 

questionnaire and preparing a handwritten response is acceptable. 

3. Enter Information. Enter requested information in the gray boxes for each question that applies to 

your firm. Boxes will expand to accommodate responses. You will not be able to alter the 

questionnaire or enter information outside the boxes. Certain boxes that require numeric information 

only will delete any text that is inputted into them. (Gray boxes do not appear on printed versions.) 

4. Submitting the questionnaire. After completing the questionnaire, there are three submission 

options, as shown below. If submitting electronically, please keep the file as a Word document and do 

not convert it to another file format. 

Option 1: Transfer File to Secure Server. Use the USITC’s secure file upload Web site, found at: 

https://dropbox.usitc.gov/

 Complete the requested information in the form that appears. 

 For the PIN entry box, type: IPR

Click on the “Next” button. On the second page, click on the “Browse” button, navigate to 

completed questionnaire file on your computer, click “Open” (file path and name will appear). 

Click “Submit.” 

Option 2: E-mail. Attach the electronic version to an e-mail message and send it to 

jeremy.wise@usitc.gov. Note that submitting the questionnaire response by e-mail will subject your 

firm’s confidential business information (CBI) to transmission over an unsecured environment and to 

possible disclosure to third parties. Any risk of disclosure of CBI during transmission is assumed by your 

firm and not the USITC. However, once the e-mail is received, the questionnaire response will be stored 

in the USITC’s secured environment and will receive safeguards detailed in the certification on page 2. 

Option 3: Mail. Copy the questionnaire file to removable media such as a CD, and mail to the address 

below. Or print the questionnaire and mail to the address below. 

UNITED STATES INTERNATIONAL TRADE COMMISSION 

Attention: China IPR Project Team 

Office of Industries, Room 511 

500 E Street, SW, Washington, DC 20436 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 6 of 46 

DEFINITIONS 

1. China and Chinese entities. For the purposes of this study, China is what is commonly referred to as 

“mainland China,” and excludes Hong Kong, Macao, and Taiwan. Chinese entities will refer to both 

Chinese firms (e.g. private, state-owned, collective, joint-ventures, affiliates) and government 

agencies. 

2. Confidential Business Information. In section 201.6(a) of its Rules of Practice and Procedure (19 

CFR 201.6(a)), the Commission defines “confidential business information” to mean: “Information 

which concerns or relates to the trade secrets, processes, operations, style of works, or apparatus, or to 

the production, sales, shipments, purchases, transfers, identification of customers, inventories, or 

amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, 

corporation, or other organization, or other information of commercial value, the disclosure of which 

is likely to have the effect of either impairing the Commission's ability to obtain such information as 

is necessary to perform its statutory functions, or causing substantial harm to the competitive position 

of the person, firm, partnership, corporation, or other organization from which the information was 

obtained, unless the Commission is required by law to disclose such information.” 

3. Full-time equivalent (FTE) employment. Refers to actual levels of employment, calculated by 

taking the ratio of the total number of paid hours during a period (by part time, full time, and 

contracted workers) to the number of working hours in that period. Employment estimates should 

include those in any affiliated joint-venture operation where your firm maintains majority equity 

status. 

4. Indigenous innovation policies (China). For the purposes of this survey, indigenous innovation 

policies include Chinese policies aimed at promoting innovation and domestic development of 

intellectual property by Chinese companies, through such channels as government procurement 

practices, technical standards setting, subsidies to China’s domestic firms, tax incentives to China’s 

domestic firms, incentives for China’s domestic firms to register patents or other types of intellectual 

property, unequal treatment in enforcing IPR relative to Chinese firms, preferential lending to 

domestic firms, technology transfer requirements, compulsory licensing at below market rates, and 

unequal enforcement of China’s Anti-Monopoly Law. 

5. Intellectual property. Refers to creations of the mind including, but not limited to, inventions, 

literary and artistic works, and symbols, names, and designs. International property rights are national 

in scope. For example, to be protected in China, patents and trademarks must be registered in China. 

Violation of IPR is often referred to as “infringement.” Major types of IPR include: 

A. Trademarks: Any name, word, device, letter, number, three-dimensional shape, packaging, color, 

or any combination thereof, adopted and used by manufacturers or merchants to identify their 

goods or services and distinguish them from those manufactured or sold by others. 

Violations of trademarks include: 

i. to use a trademark that is identical with, or similar to, a registered or well-known trademark 

in respect of the identical or similar goods without the authorization from the trademark 

registrant; 

ii. to sell goods with the knowledge that those goods bear a counterfeited registered trademark; 

iii. to counterfeit, or to make or sell, without authorization, representations of a registered 

trademark of another person; or 
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USITC Intellectual Property Rights Questionnaire 7 of 46 

iv. to use a trademark that imitates or translates the well-known mark of another person that has 

been registered in China, misleads the public, and is likely to create prejudice to the interests 

of the well-known mark registrant. 

A well-known trademark is one that is widely known to the relevant sectors of the public and 

enjoys a highly regarded reputation in China. 

Specifically excluded from this definition of violations is: 

offering goods or services bearing a genuine mark which are imported or sold in the market 

country, but are in contravention of a commercial arrangement regarding the sale or 

distribution of such goods or services in the market country (“gray market goods”). 

Trademark violations may also be referred to as “counterfeiting.” 

B. Copyrights: A form of protection provided to original works of authorship broadly including 

written works; oral works; musical, dramatic, choreographic, and acrobatic works (including 

sound recordings); works of fine art and architecture; photographic works; cinematographic 

works and works created by virtue of an analogous method of film production; drawings of 

engineering designs and product designs; maps, sketches, and other graphic works and model 

works; and computer software. 

 

Copyright infringement includes violation of the following exclusive rights: 

 

i. to reproduce the copyrighted work by any means; 

ii. to prepare derivative works (including translations and compilations) based upon the 

copyrighted work; 

iii. to distribute the original or reproductions of a work to the public by sale or other transfer of 

ownership, or by rental, lease, or lending; 

iv. to perform the copyrighted work publicly (including by audio, video, or other broadcast); 

v. to communicate to the public a work by wire or wireless means on communication networks; 

vi. in the case of fine art, photography, and cinematography (or any other work created by 

analogous methods of film production), to show the work publicly, and, in the case of fine art 

and photography, to exhibit the work publicly; 

vii. to fixate a work on a carrier by way of film production (or an analogous method) in order to 

make a cinematographic work; and 

viii. to claim authorship of the work and to object to any distortion, mutilation, or other alteration 

of the work. 

A copyright need not be registered with a government in order to be protectable. Copyright 

violations may also be referred to as “piracy.” 

C. Patents: A grant giving the patent owner the right to exclude others from making, using, or 

selling his patented product or process within the national territory. In China, patents may be 

granted for inventions, utility models, and designs. 

i. Invention patents are granted for any new technical solution relating to a product, 

process, or improvement, and are protected for 20 years from the filing date. Such 

patents are analogous to U.S. utility patents. 
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USITC Intellectual Property Rights Questionnaire 8 of 46 

ii. Utility model patents are granted for any new technical solution relating to the shape, 

structure, or their combination, of a product which is fit for practical use, and are 

protected for 10 years. There is no U.S. counterpart for this type of patent. 

iii. Design patents are provided for any new design relating to a product’s shape, pattern, 

color, or their combination, which creates an aesthetic feeling and is fit for industrial 

application, and are also protected for 10 years. 

Patent infringement refers to patent exploitation without the authorization of the patent owner 

including: 

i. Manufacturing patented products; 

ii. Using patented processes; 

iii. Offering to sell or selling patented products; 

iv. Using products directly acquired by the patented processes for production or business 

purposes; or 

v. Importing or exporting patented products or products directly acquired through patented 

processes. 

D. Trade secrets: Technical or business information that is nonpublic, can bring economic benefits 

to the rightholder, and is practical, and for which the rightholder has adopted measures to 

maintain its confidentiality. 

Trade secret violations include: 

i. Obtaining trade secrets from the owner by stealing, promising gain, using coercion, or 

other improper means; 

ii. Disclosing, using, or allowing others to use trade secrets obtained by stealing, promising 

gain, using coercion, or other improper means; 

iii. Disclosing, using, or allowing others to use trade secrets that a party has obtained by 

breaking an agreement or by disregarding the requirements of the trade secret owner to 

maintain the trade secret in confidence; and 

iv. Acquisition, use, or disclosure by a third party of someone else’s trade secret when this 

third party had, or should have had, awareness that the secret is available owing to the 

illegal acts mentioned above. 

Trade secret violations may also be referred to as “misappropriation.” 

E. Other IPR: May include plant variety rights, semiconductor mask works/layout design, 

proprietary technical data submitted to a government agency in connection with the regulatory 

review of a product, or other IPR recognized in China. 

6. Profits (Gross). A company’s total earnings, calculated according to generally accepted accounting 

principles (GAAP). It is usually calculated by taking the difference between sales (or revenue) and 

the cost of goods sold. Overhead, payroll taxes, and interest payments are not used in this calculation. 

7. Research and development (R&D): The systematic pursuit of new knowledge of a general nature, 

the use of knowledge to meet a specific need, or the application of knowledge to the production or 

improvement of a product, service, process, or method. 

More specifically, R&D covers three activities: basic research, applied research, and experimental 

development. Basic research is experimental or theoretical work undertaken primarily to acquire new 
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knowledge of the underlying foundation of phenomena and observable facts, without any particular 

application or use in view. Applied research is also original investigation undertaken in order to 

acquire new knowledge. It is, however, directed primarily towards a specific practical aim or 

objective. Experimental development is systematic work, drawing on existing knowledge gained from 

research and/or practical experience, which is directed to producing new materials, products, or 

devices, to installing new processes, systems, and services, or to improving substantially those 

already produced or installed. 

8. Royalty and License Fees: Payments received for the use of IPR, including but not limited to 

patents, trademarks, franchises, copyrights, and industrial processes. 

9. Sales (Total): Total sales, net of returns, discounts, and allowances. Includes internal consumption 

and transfers to related firms, as applicable, at fair market value. Total sales include income derived 

from royalty and license fees. 

10. Material sales or profit losses: Losses which are consequential or important. 
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SECTION 1. GENERAL QUESTIONS 

1.1 Who is the person at your firm who should be contacted about this questionnaire? 

 

 Name Title 

 

 Telephone (xxx-xxx-xxxx) E-mail address 

1.2 Report below the actual number of hours required and the cost to your firm or establishment(s) 

of completing this questionnaire, including all preparatory activities. 

 Hours Dollars 

1.3 Is your firm owned, in whole or in part, by another firm(s)? 

 Yes 

 No 

If you answered “yes” above, provide the following information about the firms (top four maximum, 

based on equity share): 

Owner (firm name) Address 

Approximate 

equity share (%) 

 

1.4 What best describes your current firm type (check only one box)? 

 Headquartered in United States without any foreign affiliates 

 Headquartered in United States with foreign affiliates 

 Affiliate of multinational headquartered in a country other than United States 

 Other –– Specify: 
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1.5 Please provide estimates for your firm’s sales in the markets identified below. DO NOT include 

royalty and license income. Careful estimates are acceptable. If a value is zero, enter 0. If a value 

is unknown, leave entry blank. 

# Market 2007 2008 2009

Sales (in actual dollars)

1 Global 

2 U.S. market 

3 Chinese market 

1.6 Please provide estimates of your firm’s revenue from royalties and licenses in the markets 

identified below. Careful estimates are acceptable. If a value is zero, enter 0. If a value is 

unknown, leave entry blank. 

# Market 2007 2008 2009

Royalty and license revenue (in actual dollars)

1 Global 

2 U.S. market 

3 Chinese market 

1.7 Please provide estimates of your firm’s employees in the locations identified below. Include 

production and related workers, and management, administrative, and marketing staff. Careful 

estimates are acceptable. If a value is zero, enter 0. If a value is unknown, leave entry blank. 

# Location of employees 2007 2008 2009

Number of full-time equivalent 

employees (in actual whole numbers)

1 Global 

2 United States 

3 China 

1.8 In 2009, approximately what share of your firm’s employees worldwide were U.S. nationals 

(those that possess U.S. citizenship or lawful permanent residence residing both inside and 

outside the United States)? 

 Approximate share, percent (round to nearest whole number) 

1.9 Please provide estimates for your firm’s research and development (R&D) expenditures. Careful 

estimates are acceptable. If a value is zero, enter 0. If a value is unknown, leave entry blank. 

# Location of R&D activity 2007 2008 2009

R&D expenditures (in actual dollars)

1 Global 

2 United States 

3 China 
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1.10 For your firm’s GLOBAL sales, please select the North American Industry Classification 

System (NAICS) classification code(s)/industry(ies) that correspond to your firm’s principal 

products and/or services in 2009. If one industry applies, enter “1” in the last column for that 

industry. If more than one industry applies, rank up to the top three (in descending order of 

global sales) by entering “1”, “2”, and, if appropriate, “3” in the last column. (Note that in 

defining the industries below, some NAICS codes have been collapsed or combined.) 

Line 

no. 

NAICS 

code(s) Industry 

Enter “1”, “2”, “3”, 

as appropriate, to 

indicate your firm’s 

industry(ies) 

1 31212, 31213, 

31214 

Breweries, wineries, and distilleries 

 

2 3122 Tobacco manufacturing 

3 3162, 3169 Footwear and leather products manufacturing 

4 315 Apparel manufacturing 

5 3253 Pesticide, fertilizer, and other agricultural chemical 

manufacturing 

6 3254 Pharmaceuticals 

7 325, except 

3253 and 3254 

Other chemical manufacturing 

 

8 333 Machinery manufacturing 

9 334413 Semiconductor and related devices manufacturing 

10 334518 Watch, clock, and part manufacturing 

11 334, except 

334413 and 

334518 

Other computer and electronic product manufacturing 

12 335 Electrical equipment, appliance, and component 

manufacturing 

13 3361, 3362, 

3363 

Motor vehicle and parts manufacturing 

 

14 3364 Aerospace product and parts manufacturing 

15 3391 Medical equipment and supplies manufacturing 

16 33991 Jewelry and silverware manufacturing 

17 33993 Game, toy, and children’s vehicle manufacturing 

18 5111 Newspaper, periodical, book, and directory publishers 

19 5112 Software publishers 

20 5121 Motion picture and video industries 

21 5122 Sound recording industries 

22 51913 Internet publishing and broadcasting and web search 

portals 

23 5415 Computer systems design and related services 

24 5417 Scientific research and development services 

If an appropriate NAICS code(s) or industry(ies) does not appear above, please indicate below the 

NAICS 4-digit codes(s) and industry(ies) that apply to your firm. 

25 

26 

27 

Note: A list and definition of NAICS codes can be found at: 

 www.census.gov/cgi-bin/sssd/naics/naicsrch?chart=2007 
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1.11 For your firm’s sales in CHINA, please select the North American Industry Classification 

System (NAICS) classification code(s)/industry(ies) that correspond to your firm’s principal 

products and/or services in 2009. If one industry applies, enter “1” in the last column for that 

industry. If more than one industry applies, rank up to the top three (in descending order of 

global sales) by entering “1”, “2”, and, if appropriate, “3” in the last column. (Note that in 

defining the industries below, some NAICS codes have been collapsed or combined.) 

Line 

no. 

NAICS 

code(s) Industry 

Enter “1”, “2”, “3”, 

as appropriate, to 

indicate your firm’s 

industry(ies) 

1 31212, 31213, 

31214 

Breweries, wineries, and distilleries 

 

2 3122 Tobacco manufacturing 

3 3162, 3169 Footwear and leather products manufacturing 

4 315 Apparel manufacturing 

5 3253 Pesticide, fertilizer, and other agricultural chemical 

manufacturing 

 

6 3254 Pharmaceuticals 

7 325, except 

3253 and 3254 

Other chemical manufacturing 

 

8 333 Machinery manufacturing 

9 334413 Semiconductor and related devices manufacturing 

10 334518 Watch, clock, and part manufacturing 

11 334, except 

334413 and 

334518 

Other computer and electronic product manufacturing 

12 335 Electrical equipment, appliance, and component 

manufacturing 

13 3361, 3362, 

3363 

Motor vehicle and parts manufacturing 

 

14 3364 Aerospace product and parts manufacturing 

15 3391 Medical equipment and supplies manufacturing 

16 33991 Jewelry and silverware manufacturing 

17 33993 Game, toy, and children’s vehicle manufacturing 

18 5111 Newspaper, periodical, book, and directory publishers 

19 5112 Software publishers 

20 5121 Motion picture and video industries 

21 5122 Sound recording industries 

22 51913 Internet publishing and broadcasting and web search 

portals 

23 5415 Computer systems design and related services 

24 5417 Scientific research and development services 

If an appropriate NAICS code(s) or industry(ies) does not appear above, please indicate below the 

NAICS 4-digit codes(s) and industry(ies) that apply to your firm. 

25 

26 

27 

Note: A list and definition of NAICS codes can be found at: 

 www.census.gov/cgi-bin/sssd/naics/naicsrch?chart=2007 
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1.12 Has your firm ever exported end-use or intermediary products to China, sent material for testing 

or research, established an affiliate operation in China, or otherwise derived revenue from 

business in China (aside from importing from China)? 

 Yes, currently 

 Yes in the past, but not now 

 No, but are considering doing so 

 No, and have no plans to do so 

1.13 Which of the following activities does your firm perform in China (check all that apply)? 

 Sales 

 Research and development 

 Manufacturing (by your firm) 

 Manufacturing (contracted to another firm) 

 Exporting from China 

 Importing into China 

 Licensing of technology to any entity 

 No activities 

 Other activities –– Specify: 

1.14 Does your company experience IPR infringement of your products or services by Chinese 

entities or individuals? 

 Yes  Skip to section 2

 No  Proceed to question 1.15

1.15 Does your firm have concerns that China’s indigenous innovation policies are affecting, or will 

likely affect, your firm’s revenues or business operations? (See definition section for “indigenous 

innovation policies.”) 

 Yes  Skip to section 8

 No  Skip to section 10
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SECTION 2. GENERAL IPR INFORMATION 

2.1 Please indicate the importance of IPR protection to your firm’s business(es) during 2007-09. 

Rank importance from 1 (not at all important) 

 to 5 (extremely important) 

Item 

Not at all 

important 

Extremely 

important 

Copyrights 1 2 3 4 5 

Trademarks 1 2 3 4 5 

Patents 1 2 3 4 5 

Trade secrets 1 2 3 4 5 

Other IPR 1 2 3 4 5 

 If other, specify here: 

2.2 Did your firm experience any IPR violations attributable to Chinese entities or individuals during 

2007-09? 

 Yes If you answered “yes” to 2.2, check all types of IPR infringement that apply: 

 Copyrights 

 Trademarks 

 Patents 

 Trade secrets 

 Other IPR –– Specify: 

 No 
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2.3 Please indicate the level of your firm’s general concerns regarding the effects of IPR violations 

by Chinese entities or individuals that you have had during 2007-09. 

 Rank your firm’s level of concern from 1 (not at all concerned) 

 to 5 (extremely concerned) 

Issue 

Not at all 

concerned

Extremely 

concerned 

Lost sales or royalties and 

license fees in China 1 2 3 4 5 

Lost sales or royalties and 

license fees in U.S. 1 2 3 4 5 

Lost sales or royalties and 

license fees in all other 

markets 

1 2 3 4 5 

Damage to brands or 

product reputation 1 2 3 4 5 

Reduced return to R&D 

expenditures 1 2 3 4 5 

Reduced return on 

investment 1 2 3 4 5 

Cost of IPR enforcement 1 2 3 4 5 

Increased warranty costs 

related to counterfeit 

products 

1 2 3 4 5 

Lost employment in U.S. 1 2 3 4 5 

Stolen trade secrets 1 2 3 4 5 

Other 1 2 3 4 5 

 If other, specify here: 

2.4 For your firm’s products/services, which of the listed Chinese entities were infringers of the 

types of IPR identified below during 2007-09? Check all that apply. 

Type of IPR Infringement 

Type of Chinese entity Copyrights Trademarks Patents 

Trade 

secrets 

Other 

IPR 

Chinese state-owned enterprises 

Chinese government agencies 

Chinese private firms 

Your firm’s joint venture partners 

Individuals, including former 

employees 

Foreign-owned enterprises 

Unknown entities 

Other type of entity 

 Specify other entity: 
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2.5 Did your firm license technology to any entities or individuals in China during 2007-09? 

 Yes If you answered “yes” to 2.5, was such licensing required to gain or maintain 

access to the Chinese market? 

 Yes 

 No 

 Unknown 

 

 No If you answered “no,” what were the reasons? Check all that apply. 

 No demand for your firm’s technology 

 Your firm does not license technology 

 Barriers to obtaining IPR protection in China 

 Barriers to enforcing IPR in China 

 Other –– Specify: 

2.6 Please indicate whether or not your firm’s revenues were lower as a result of IPR infringement in 

China during 2007-09 than they would have been in the absence of such infringement. 

 Yes If you answered “yes” to 2.6, what are the reasons for the lower revenues 

associated with IPR infringement in China? Check all that apply. 

 Lowered price of products/services to compete with infringing 

products 

 Fewer units sold in the Chinese market 

 Moved manufacturing facilities from China or did not expand existing 

facilities 

 Moved R&D facilities from China or did not expand existing facilities 

 Did not enter China’s market 

 Other –– Specify: 

 

 Not affected 

 Unknown 

2.7 Has your firm estimated revenue losses resulting from IPR infringement in China? 

 Yes 

 No 
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2.8 If you answered “yes” to 2.7, select the amounts of those losses in 2009 from the ranges provided. 

If 2009 data are unavailable, use latest year available and specify this year in last column below. 

 Range of lost 2009 revenue 

Type of loss 

attributable to 

IPR 

infringement by 

Chinese entities 

$0 

to 

$1,000,000 

$1,000,001 

to 

$2,000,000 

$2,000,001 

to 

$3,000,000 

$3,000,001 

to 

$4,000,000 

If more 

than 

$4,000,000, 

estimate to 

nearest million 

Latest 

available 

year 

 if not 2009

(4-digit)

Lost sales, not including lost royalty and license fees: 

In Chinese 

market 

 In U.S. market 

In all other 

markets 

Lost royalty and license fees: 

 From China 

 From U.S. 

From all other 

countries 

Lost global 

profits 

Loss specifically 

attributable to 

internet-based 

infringement 

 
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2.9 If you answered “yes” to 2.7, please identify how your firm estimated losses associated with IPR 

infringement in China. 

Your firm based revenue losses on: 

Type of loss 

(Estimated 

amount of 

infringement or 

confiscated 

product) 

multiplied by 

(retail value)

(Estimated 

amount of 

infringement or 

confiscated 

product) 

multiplied by 

(wholesale price)

Estimates 

of market in 

China based on 

China’s relative 

economic and/or 

demographic 

profile 

Third party 

estimates of 

infringement 

(e.g., industry 

associations) Other 

Lost sales, not including royalty and license fees: 

In 

Chinese 

market 

. In U.S. 

market 

In all 

other 

markets 

Lost royalty and license fees: 

From 

China 

. From U.S. 

From all 

other 

countries 

Lost global 

profits 

Loss 

specifically 

attributable to 

internet-based 

infringement 

Not applicable Not applicable 
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2.10 If you answered “other” to 2.9, please briefly describe your firm’s method for measuring the 

effects of IPR infringement of your firm’s products and services in China in 2007-09. Please 

don’t use the “enter” key in your responses. 

Type of loss attributable to IPR 

infringement by Chinese entities Description of method for measuring effects 

Lost sales, not including royalty and license fees: 

 In Chinese market 

 In U.S. market 

 In all other markets 

Lost royalty and license fees: 

 From China 

 From U.S. 

 From all other countries 

Lost global profits 

Loss specifically attributable to 

internet-based infringement 

 
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2.11 Indicate the amounts of enforcement expenses incurred by your firm that were attributable to 

infringement by Chinese entities in 2009, and expenses attributable to protection against IPR 

infringement by Chinese entities in 2009 from the ranges provided. If 2009 data are unavailable, 

use latest year available and specify this year in last column below. 

Range of enforcement expenses in 2009 

Item 

$0 

to 

$1,000,000 

$1,000,001 

to 

$2,000,000 

$2,000,001 

to 

$3,000,000 

$3,000,001 

to 

$4,000,000 

If more 

than 

$4,000,000, 

estimate to 

nearest million 

Latest 

available 

year 

 if not 2009

(4-digit)

Enforcement 

expenses 

attributable to 

infringement by 

Chinese entities 

and expenses 

attributable to 

protection against 

IPR infringement 

by Chinese 

entities 

 

2.12 If your firm operates in China, please rank the top three Chinese provinces which your firm 

estimates had the best climate for protecting your firm’s intellectual property in 2007-09. 

 Not applicable 

 Applicable, but province unknown 

Applicable. Please rank top three from list below (1 being best, 3 being third best). 

Place the number in the space to the left of the province name. 

 Anhui Guizhou Inner Mongolia Shaanxi Xinjiang 

 Beijing Hainan Jiangsu Shandong Yunnan 

 Chongqing Hebei Jiangxi Shanghai Zhejiang 

 Fujian Heilongjiang Jilin Shanxi 

 Gansu Henan Liaoning Sichuan 

 Guangdong Hubei Ningxia Tianjin 

 Guanxi Hunan Qinghai Tibet 
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2.13a If your firm operates in China, please rank the top three Chinese provinces which your firm 

estimates had the worst climate for protecting your firm’s intellectual property in 2007-09. 

 Not applicable 

 Applicable, but province unknown 

Applicable. Please rank top three from below list (1 being worst, 3 being third worst). 

Place the number in the space to the left of the province name. 

 Anhui Guizhou Inner Mongolia Shaanxi Xinjiang 

 Beijing Hainan Jiangsu Shandong Yunnan 

 Chongqing Hebei Jiangxi Shanghai Zhejiang 

 Fujian Heilongjiang Jilin Shanxi 

 Gansu Henan Liaoning Sichuan 

 Guangdong Hubei Ningxia Tianjin 

 Guanxi Hunan Qinghai Tibet 

2.13b Which forms of IPR infringement are prevalent in the provinces identified in 2.12a? 

Type of IPR infringement 

(Check all that apply) 

Rank 

Three provinces 

with worst to third 

worst IPR climates 

(enter names from 

list above) Copyrights Trademarks Patents 

Trade 

secrets Other IPR 

Worst 

 If checked “Other IPR”, specify type: 

Second 

worst 

 If checked “Other IPR”, specify type: 

Third 

worst 

 If checked “Other IPR”, specify type: 

2.14 If your firm conducts business in China, please rank the three Chinese provinces from which your 

firm derived the most revenue in 2007-09 based on your estimates. 

 Not applicable 

 Applicable, but province unknown 

Applicable. Please rank top three from list below (1 being the most revenue, 3 being 

third most revenue). Place the number in the space to the left of the province name. 

 Anhui Guizhou Inner Mongolia Shaanxi Xinjiang 

 Beijing Hainan Jiangsu Shandong Yunnan 

 Chongqing Hebei Jiangxi Shanghai Zhejiang 

 Fujian Heilongjiang Jilin Shanxi 

 Gansu Henan Liaoning Sichuan 

 Guangdong Hubei Ningxia Tianjin 

 Guanxi Hunan Qinghai Tibet 
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SECTION 3. STRATEGIES FOR ADDRESSING IPR ISSUES 

3.1a Does your firm generally discount its prices, relative to U.S. prices, for comparable products sold 

in China? 

 Yes 

 No 

3.1b If you answered “yes” to 3.1a, what is the average discount at which your firm sells its 

products in China, relative to U.S. prices? 

 Less than 5 percent 

 5 percent to less than 10 percent 

 10 percent or greater 

 If 10 percent or greater, specify approximate percentage: 

3.1c If you answered “yes” to 3.1a, how much of this discount is due to the need to compete 

with IPR infringing versions of your products? 

 Less than half the discount 

 More than half the discount 

 Discount not associated with competition from IPR-infringed products. 

3.2 Do IPR infringers in China discount their products relative to the price you charge in China? 

 Yes If you answered “yes” to 3.2, specify average 

percent discount: 

 No 

 Unknown 

3.3 How would your firm best characterize the infringing product (check all that apply)? 

Exact replica: No difference exists between your firm’s product/service and the infringed 

product/service, but the knowledge/expression has been stolen or replicated (or production 

facilities have been used without authorization) 

High-quality/high-price substitutes/counterfeits: Consumer may not realize they are 

buying illegal products 

Bait and switch: Consumers may realize the product is infringed only upon opening or 

use (e.g., high quality packaging, low quality products). 

Moderate/low quality: Clearly an IPR-infringed product, consumers are most likely 

consciously selecting IPR-infringed counterfeit product (to save money or because it’s 

“good enough”). 

Other –– Specify: 
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3.4a If IPR protection and enforcement in China were brought to levels comparable to those in the 

United States, would your global unit sales (i.e., sales volume not value) likely increase as a 

result of such improved protection and enforcement? 

 Yes, global unit sales would likely increase

 No, global unit sales would NOT likely increase

 Unknown 

3.4b If you answered “yes” to 3.4a, by approximately how much do you assume your unit sales 

would increase in the following markets? 

Unit sales would increase (check one per market): 

Market 

Less than 5 

percent 5 to 10 percent 10 to 20 percent 

If more than 20 percent, 

estimate to nearest 10 

percent (e.g. 30 percent, 

40 percent) 

China 

United States 

All other 

3.5a If IPR protection and enforcement in China were brought to levels comparable to levels in the 

United States, would your firm’s global receipt of royalties and license fees likely increase as a 

result of such improved protection and enforcement? 

 Yes, global receipt of royalties and license fees would likely increase

 No, global receipt of royalties and license fees would NOT likely increase

 Unknown 

3.5b If you answered “yes” to 3.5a, by approximately how much do you assume your receipt of 

royalties and license fees would increase? 

Royalty and license fee income would increase (check one per market): 

Market 

Less than 5 

percent 5 to 10 percent 10 to 20 percent 

If more than 20 percent, 

estimate to nearest 10 

percent (e.g. 30 percent, 

40 percent) 

China 

United States 

All other 
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3.6a If IPR protection and enforcement in China were at levels comparable to levels in the United 

States, would you likely hire more employees worldwide? 

 Yes 

 No 

3.6b If you answered “yes” to 3.6a, where would these workers likely be hired? 

 In China, local Chinese employees 

 In China, U.S. expatriates 

 In the United States 

 U.S. expatriates in other countries 

 Nationals of other countries (neither the United States nor China) 

3.6c If you answered “yes” to 3.6a, by how much would your firm’s full-time equivalent 

employment of U.S. workers likely rise? 

 Less than 2 percent 

 Between 2 and 5 percent 

 Between 5 and 10 percent 

 More than 10 percent 

 Unknown 
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SECTION 4. COPYRIGHTS 

4.1 Has your firm experienced material sales or profit losses anywhere in the world due to copyright 

infringement in China during 2007-09? 

 Yes, the firm has experienced associated material losses 

 No, the firm has NOT experienced associated material losses 

 INSTRUCTIONS 

If you answered “No” to 4.1, proceed to section 5 

4.2 Please indicate the number of copyright registrations owned by your firm that, as of December 

31, 2009, were: 

Pending or in force in the United States 

Pending or in force in China 

Recorded with U.S. Customs 

Recorded with China Customs 

4.3a Does your firm have reason to believe that one or more of its copyrights (whether registered, 

recorded, or not) has been infringed in China during 2007-09? 

 Yes 

 No 

4.3b If you answered “yes” to 4.3a, how many specific copyrights does 

your firm believe to be infringed? 
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USITC Intellectual Property Rights Questionnaire 27 of 46 

4.4a During 2007-09, has your firm pursued any copyright enforcement proceedings in China? 

 Yes 

 No 

4.4b If you answered “yes” to 4.4a, estimate the number of proceedings your firm has pursued in 

China during 2007-09. 

 Administrative action: 

 Civil proceedings: 

 Criminal proceedings: 

4.4c If you answered “yes” to 4.4a, estimate the total amount of monetary relief your firm 

received from legal proceedings related to copyright infringement of your products in China 

during 2007-09 (in actual dollars). 

 Total estimated amount: Check here if unknown 

4.4d If you answered “yes” to 4.4a, how satisfied has your firm been with these proceedings? 

Check one box for each proceeding as applicable. 

Proceeding Not satisfied Satisfied Very satisfied 

 Administrative action 

 Civil proceedings 

 Criminal proceedings 

If you responded “not satisfied,” provide brief explanation in supplementary information question 10.1 

4.5a Has your firm lost sales, royalties, license fees, or other income in China, or in markets outside of 

China, as a result of copyright infringement in China during 2007-09? 

 Yes 

 No 

4.5b If you answered “yes” to 4.5a, please estimate the total of such losses during 2007-09 (in 

actual dollars). 

 Chinese market 

 U.S. market 

 All other markets 

 If you cannot differentiate by market, don’t enter estimates above 

and enter total of such losses during 2007-09 (in actual dollars). 

4.6a Has your firm incurred expenses to address the infringement of your firm’s copyrights in China? 

 Yes 

 No 

4.6b If you answered “yes” to 4.6a, please estimate the total associated 

expenses for 2007-09, which should include legal, investigative, 

personnel, technical solutions, marketing, R&D, and other related 

expenses (in actual dollars). 
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4.7 Compared to 2007, how would you characterize copyright infringement in China as it relates to 

your firm’s products/services in 2009? 

 Increased over this period 

 Remained about the same 

 Decreased over this period 

 Too short a period to notice any changes 

 Unknown or not applicable 

4.8a Did copyright infringement in China affect the number of employees your firm hired in the United 

States during 2007-09? 

 Caused a decrease in your firm’s employment of U.S. workers 

 Caused an increase in your firm’s employment of U.S. workers 

 No change 

4.8b If it caused a decrease in employment of your firm’s U.S. workers, 

please estimate the number of full-time equivalent jobs lost. 

4.8c If it caused an increase in employment of your firm’s U.S. workers, 

please estimate the number of full-time equivalent jobs gained. 

4.9a Did copyright infringement in China affect your firm’s research and development expenditures in 

the United States during 2007-09? 

 Yes, caused a reduction in U.S.-based R&D expenditures 

 Yes, caused an increase in U.S.-based R&D expenditures 

 No, firm has R&D activities in the United States, but there has been no change in 

U.S.-based R&D expenditures 

 No, firm does not have R&D activities in the United States 

4.9b If it caused a reduction in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 

4.9c If it caused an increase in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 
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4.10a Are infringing digital versions of your copyrighted products available for download from internet 

Web sites hosted in China? 

 Yes 

 No 

 Unsure 

 Does not apply 

4.10b If you answered “yes” to 4.10a, how would you best characterize the growth of this type of 

infringement between 2007-09? 

 Gradual increase in internet based infringement 

 Rapid increase in internet based infringement 

 No change 

 Gradual slowdown of internet based infringement 

 Rapid slowdown of internet based infringement 

4.10c If you answered “yes” to 4.10a, were digital files or physical goods a more predominant 

source of Chinese infringement of your firm’s products/services during 2007-09? 

 Digital files on the internet (e.g., MP3 file) 

 Physical goods/services sold on the streets or on the internet 

 Unsure 
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SECTION 5. TRADEMARKS 

5.1 Did your firm experience material losses in sales or profits anywhere in the world due to 

trademark infringement in China during 2007-09? 

 Yes, the firm has experienced associated material losses 

 No, the firm has NOT experienced associated material losses 

 INSTRUCTIONS 

If you answered “No” to 5.1, proceed to section 6 

5.2 Please indicate the number of trademark registrations owned by your firm that, as of December 

31, 2009, were: 

Pending or in force in the United States 

Pending or in force in China 

Recorded with U.S. Customs 

Recorded with China Customs 

5.3a Does your firm have reason to believe that one or more of its Chinese trademarks was infringed 

in China in 2007-09? 

 Yes 

 No 

5.3b If you answered “yes” to 5.3a, how many of such 

trademarks does your firm believe to be infringed? 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 31 of 46 

5.4a During 2007-09, did your firm pursue any trademark enforcement proceedings in China? 

 Yes 

 No 

5.4b If you answered “yes” to 5.4a, estimate the number of proceedings your firm has pursued 

in China during 2007-09. 

 Administrative action: 

 Civil proceedings: 

 Criminal proceedings: 

5.4c If you answered “yes” to 5.4a, estimate the total amount of monetary relief your firm 

received from legal proceedings related to trademark infringement of your products in 

China during 2007-09 (in actual dollars). 

 Total estimated amount: Check here if unknown 

5.4d If you answered “yes” to 5.4a, how satisfied has your firm been with these proceedings? 

Check one box for each proceeding as applicable. 

Proceeding Not satisfied Satisfied Very satisfied 

 Administrative action 

 Civil proceedings 

 Criminal proceedings 

If you responded “not satisfied,” provide brief explanation in supplementary information question 10.1 

5.5a Has your firm lost sales, royalties, license fees, or other income in China, or in markets outside of 

China, as a result of trademark infringement in China during 2007-09? 

 Yes 

 No 

5.5b If you answered “yes” to 5.5a, please estimate the total of such losses during 2007-09 (in 

actual dollars). 

 Chinese market 

 U.S. market 

 All other markets 

 If you cannot differentiate by market, don’t enter estimates above 

and enter total of such losses during 2007-09 (in actual dollars). 

5.6a Has your firm incurred expenses to address the infringement of your firm’s trademarks in China? 

 Yes 

 No 

5.6b If you answered “yes” to 5.6a, please estimate total 

associated expenses for 2007-09, which should include 

legal, investigative, personnel, and other related expenses 

(in actual dollars). 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 32 of 46 

5.7a Does your firm have a method for quantifying the extent to which trademark infringement in 

China has damaged, diluted, or tarnished the value of your firm’s trademarks? 

 Yes 

 No 

5.7b If you answered “yes” to 5.7a, please provide the 

estimated value of such harm (in actual dollars). 

5.8 Compared to 2007, how would you best characterize trademark infringement in China as it 

relates to your firm’s products/services in 2009? 

 Increased over this period 

 Remained about the same 

 Decreased over this period 

 Too short a period to notice any changes 

 Unknown or not applicable 

5.9a Did trademark infringement in China affect the number of employees your firm hired in the 

United States during 2007-09? 

 Caused a decrease in your firm’s employment of U.S. workers 

 Caused an increase in your firm’s employment of U.S. workers 

 No change 

5.9b If it caused a decrease in employment in your firm’s U.S workers, 

please estimate the number of those full-time equivalent jobs lost. 

5.9c If it caused an increase in employment in your firm’s U.S. workers, 

please estimate the number of those full-time equivalent jobs gained. 

5.10a Did trademark infringement in China affect your firm’s research and development expenditures in 

the United States during 2007-09? 

 Yes, caused a reduction in U.S.-based R&D expenditures 

 Yes, caused an increase in U.S.-based R&D expenditures 

 No, firm has R&D activities in the United States, but there has been no change in 

U.S.-based R&D expenditures 

 No, firm does not have R&D activities in the United States 

5.10b If it caused a reduction in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 

5.10c If it caused an increase in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 33 of 46 

SECTION 6. PATENTS 

6.1 Has your firm experienced material losses in sales or profits anywhere in the world due to patent 

infringement in China during 2007-09? 

 Yes, the firm has experienced associated material losses 

 No, the firm has NOT experienced associated material losses 

 INSTRUCTIONS 

If you answered “No” to 6.1, proceed to section 7 

6.2 Please indicate the number of patents owned by your firm that, as of December 31, 2009, were: 

Pending or in force in the United States 

Pending or in force in China 

Recorded with China customs 

6.3a Does your firm have reason to believe that one or more of its Chinese patents was infringed in 

China in 2007-09? 

 Yes 

 No 

6.3b If you answered “yes” to 6.3a, how many of such patents 

does your firm believe were infringed in China? 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 34 of 46 

6.4a During 2007-09, did your firm pursue any patent enforcement proceedings in China? 

 Yes 

 No 

6.4b If you answered “yes” to 6.4a, estimate the number of proceedings your firm has pursued in 

China during 2007-09. 

 Administrative action: 

 Civil proceedings: 

 Criminal proceedings: 

6.4c If you answered “yes” to 6.4a, estimate the total amount of monetary relief your firm 

received from legal proceedings related to patent infringement of your products in China 

during 2007-09 (in actual dollars). 

 Total estimated amount: Check here if unknown 

6.4d If you answered “yes” to 6.4a, how satisfied has your firm been with these proceedings? 

Check one box for each proceeding as applicable. 

Proceeding Not satisfied Satisfied Very satisfied 

 Administrative action 

 Civil proceedings 

 Criminal proceedings 

If you responded “not satisfied,” briefly explain in supplementary information question 10.1. 

6.5 Estimate the total number of criminal defendants that were arrested for patent infringement of 

your products in China during 2007-09? 

 Total estimated number: Check here if unknown 

6.6a Has your firm lost sales, royalties, license fees, or other income in China, or in markets outside of 

China, as a result of patent infringement in China during 2007-09? 

 Yes 

 No 

6.6b If you answered “yes” to 6.6a, please estimate the total of such losses during 2007-09 (in 

actual dollars) 

 Chinese market 

 U.S. market 

 All other markets 

 If you cannot differentiate by market, don’t enter estimates above 

and enter total of such losses during 2007-09 (in actual dollars). 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 35 of 46 

6.7a Has your firm incurred expenses to address the infringement of your firm’s patents in China? 

 Yes 

 No 

6.7b If you answered “yes” to 6.7a, please estimate total associated 

expenses for 2007-09, which should include legal, investigative, 

personnel, and other related expenses (in actual dollars). 

6.8 Compared to 2007, how would you characterize patent infringement in China as it related to 

your firm’s products/services in 2009? 

 Increased over this period 

 Remained about the same 

 Decreased over this period 

 Too short a period to notice any changes 

 Unknown or not applicable 

6.9a Did patent infringement in China affect the number of employees your firm hired in the United 

States during 2007-09? 

 Caused a decrease in your firm’s employment of U.S. workers 

 Caused an increase in your firm’s employment of U.S. workers 

 No change 

6.9b If it caused a decrease in your firm’s employment of U.S. workers, 

please estimate the number of those full-time equivalent jobs lost. 

6.9c If it caused an increase in your firm’s employment of U.S. workers, 

please estimate the number of those full-time equivalent jobs gained. 

6.10a Did patent infringement in China affect your firm’s R&D expenditures in the United States during 

2007-09? 

 Yes, caused a reduction in U.S.-based R&D expenditures 

 Yes, caused an increase in U.S.-based R&D expenditures 

 No, firm has R&D activities in the United States, but there has been no change in 

U.S.-based R&D expenditures 

 No, firm does not have R&D activities in the United States 

6.10b If it caused a reduction in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 

6.10c If it caused an increase in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 36 of 46 

SECTION 7. TRADE SECRETS 

7.1 Did your firm experience material losses in sales or profits anywhere in the world due to trade 

secret misappropriation in China during 2007-09? 

 Yes, the firm has experienced associated material losses 

 No, the firm has NOT experienced associated material losses 

 INSTRUCTIONS 

If you answered “No” to 7.1, proceed to section 8 

7.2a Does your firm take steps to maintain proprietary trade secrets as part of its operations in China? 

 Yes 

 No 

 

7.2b If you answered “yes” to 7.2a, have these steps been effective? 

 Yes 

 No 

7.3a During 2007-09, was any of your firm’s trade secret information misappropriated in China, or in 

other location by Chinese entities, to compete against you? 

 Yes 

 No 

 

7.3b If you answered “yes” to 7.3a, through what avenue(s) were your firm’s trade secrets 

misappropriated in China? Check all that apply. 

 Employee use or disclosure 

 Employee theft of information and establishment of rival firm 

 Joint venture partner use or disclosure 

 Information provided to regulatory agency 

 Computer hacking 

 Corporate espionage 

 Unknown 

 Other –– Specify: 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 37 of 46 

7.4a During 2007-09, did your firm pursue any trade secret misappropriation proceedings in China? 

 Yes 

 No 

7.4b If you answered “yes” to 7.4a, estimate the number of proceedings your firm has pursued in 

China during 2007-09. 

 Administrative action: 

 Civil proceedings: 

 Criminal proceedings: 

7.4c If you answered “yes” to 7.4a, estimate the total amount of monetary relief your firm 

received from legal proceedings related to trade secret misappropriation of your products in 

China during 2007-09 (in actual dollars). 

 Total estimated amount: Check here if unknown 

7.4d If you answered “yes” to 7.4a, how satisfied has your firm been with the misappropriation 

proceedings? 

Proceeding Not satisfied Satisfied Very satisfied 

 Administrative action 

 Civil proceedings 

 Criminal proceedings 

If you responded “not satisfied,” briefly explain in supplementary information question 10.1. 

7.5a Has your firm lost sales, royalties, license fees, or other income in China, or in markets outside of 

China, as a result of trade secret misappropriation in China during 2007-09? 

 Yes 

 No 

7.5b If you answered “yes” to 7.5a, please estimate the total of such losses during 2007-09 (in 

actual dollars). 

 Chinese market 

 U.S. market 

 All other markets 

 If you cannot differentiate by market, don’t enter estimates above 

and enter total of such losses during 2007-09 (in actual dollars). 

7.6a Has your firm incurred expenses to address the misappropriation of trade secrets in China? 

 Yes 

 No 

7.6b If you answered “yes” to 7.6a, please estimate total associated 

expenses for 2007-09, which should include legal, investigative, 

personnel, and other related expenses (in actual dollars). 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 38 of 46 

7.7 Compared to 2007, how would you characterize trade secret misappropriation in China as it 

related to your firm’s products/services in 2009? 

 Become a bigger problem 

 Remained about the same 

 Become a smaller problem 

 Too short a period to notice any changes 

 Unknown or not applicable 

7.8a Did trade secret misappropriation in China affect the number of employees your firm hired in the 

United States during 2007-09? 

 Caused a decrease in your firm’s employment of U.S. workers 

 Caused an increase in your firm’s your employment of U.S. workers 

 No 

7.8b If it caused a decrease in your firm’s employment of U.S. workers, please 

estimate the number of those full-time equivalent jobs lost. 

7.8c If it caused an increase in your firm’s employment of U.S. workers, please 

estimate the number of those full-time equivalent jobs gained. 

7.9a Did trade secret misappropriation in China affect your firm’s research and development 

expenditures in the United States during 2007-09? 

 Yes, caused a reduction in U.S.-based R&D expenditures 

 Yes, caused an increase in U.S.-based R&D expenditures 

 No, firm has R&D activities in the United States, but there has been no change in 

U.S.-based R&D expenditures 

 No, firm does not have R&D activities in the United States 

7.9b If it caused a reduction in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 

7.9c If it caused an increase in your U.S.-based R&D expenditures, 

please estimate the amount (in actual dollars). 

7.10a Does your firm face requirements to disclose confidential data to Chinese regulatory agencies? 

 Yes 

 No 

7.10b If you answered “yes” to 7.10a, to your firm’s knowledge, has the data been disclosed to 

persons outside the regulatory agency? 

 Yes 

 No 

7.10c If you answered “yes” to 7.10a, are you more concerned about data leakage in China than in 

other countries? 

 Yes 

 No 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 39 of 46 

SECTION 8. INDIGENOUS INNOVATION POLICIES IN CHINA 

8.1 Are you aware of China’s indigenous innovation policies? 

 Yes 

 No 

8.2 Did your firm experience material losses in sales or profits anywhere in the world due to China’s 

indigenous innovation policies during 2007-09? 

 Yes, the firm has experienced associated material losses 

 No, the firm has NOT experienced associated material losses 

 INSTRUCTIONS 

If you answered “No” to 8.2, proceed to section 9 

8.3 Please indicate which of the following policy areas are an existing problem for your firm in 

China. Also indicate whether your firm anticipates the problem to continue. Check all that apply. 

In future (check one): 

Item Existing problem

Not expected 

to be a 

problem 

Expected 

to be a 

problem 

Government procurement policy 

Chinese-specific technical standards 

Subsidies to Chinese competitors not available to 

your firm 

Tax incentives to Chinese competitors not available 

to your firm 

Incentives to Chinese competitors to register patents 

or other intellectual property, or government 

payment for filing fees 

Unequal treatment in enforcing IPR relative to 

Chinese firms 

Preferential lending 

Technology transfer requirements 

R&D requirements in China of your firm or affiliate 

Closure of sector to foreign participation 

Compulsory licensing 

Unequal enforcement of China’s anti-monopoly law 

Other –– Specify: 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 40 of 46 

8.4a Has your firm estimated the amount of lost revenue (realized or potential) that has been, or is 

anticipated to result from, China’s indigenous innovation policies? 

 Yes 

 No 

8.4b If you answered “yes” to 8.4a, estimate the total lost 

revenues during 2007-09 (in actual dollars): 

8.5 How do you anticipate that China’s indigenous innovation policies will affect your firm’s 

revenue in China by 2015? 

 Increase revenue by more than 25 percent 

 Increase revenue between 10 and 25 percent 

 Increase revenue by less than 10 percent 

 No material revenue change 

 Decrease revenue by less than 10 percent 

 Decrease revenue between 10 and 25 percent 

 Decrease revenue by more than 25 percent 

 Unknown 

8.6a Have China’s indigenous innovation policies influenced the number of full-time equivalent U.S. 

workers employed by your firm during 2007-09? 

 Yes 

 No 

8.6b If you answered “yes” to 8.6a, indicate the effect on your firm’s number of full-time 

equivalent employees. 

 Increased by more than 25 percent 

 Increased by 10-25 percent 

 Increased by less than 10 percent 

 No change 

 Decreased by less than 10 percent 

 Decreased by 10-25 percent 

 Decreased by more than 25 percent. 

 Pleased provide estimate to the nearest 5 percentage 

 points here: 

 Unknown 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 41 of 46 

8.7a Does your firm conduct R&D in China? 

 Yes 

 No 

8.7b If you answered “yes” to 8.7a, what are the intended markets for the products developed by 

this R&D? Check all that apply. 

 China 

 United States 

 All other markets 

8.7c If you answered “yes” to 8.7a, what type of R&D facility did you have in China as of the end 

of 2009? Check all that apply. 

 Wholly owned affiliate 

 Joint venture 

 University partnership 

 Contracting arrangement with local Chinese firm 

 Other –– Specify: 

8.8a Has your firm attempted to sell goods or services to Chinese government ministries or agencies 

(excluding state-owned enterprises)? 

 Yes 

 No 

8.8b If you answered “yes” to 8.8a, indicate whether your firm has made these sales 

 Yes 

 No 

8.8c If you answered “yes” to 8.8b, how would you characterize the ease of making sales to 

Chinese government agencies in 2009 as compared to 2004? 

 Much easier 

 Easier 

 The same 

 Getting worse 

 Much worse 

 Unknown or not applicable 

8.8d If you answered “yes” to 8.8b, do the products and/or services you have sold to Chinese 

government ministries or agencies rely on intellectual property developed and registered in 

China? 

 All of the relevant IP was developed and registered in China 

 Some of the relevant IP was developed and registered in China 

 None of the relevant IP was developed and registered in China 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 42 of 46 

8.9a Has your firm attempted to sell goods or services to Chinese state-owned enterprises? 

 Yes 

 No 

8.9b If you answered “yes” to 8.9a, indicate whether your firm has made these sales. 

 Yes 

 No 

8.9c If you answered “yes” to 8.9b, how would you characterize the ease of making sales to 

Chinese state-owned enterprises in 2009 as compared to 2004? 

 Much easier 

 Easier 

 The same 

 Getting worse 

 Much worse 

 Unknown or not applicable 

8.9d If you answered “yes” to 8.9b, do the products and/or services you have sold to Chinese 

state-owned enterprises rely on IP developed and registered in China? 

 All of the relevant IP was developed and registered in China. 

 Some of the relevant IP was developed and registered in China. 

 None of the relevant IP was developed and registered in China. 

8.10a Do you anticipate that your firm will be materially affected by changing Chinese government 

procurement policies? 

 Yes 

 No 

8.10b If you responded “yes” to 8.10a, in what way do you anticipate responding? Check all that 

apply. 

 Changing organizational/ownership structure 

 Entering into new partnerships with Chinese firms 

 Changing sourcing of components 

 Withdrawing from the Chinese market 

 Changing pricing structure 

 Applying for status as Chinese high-tech firm 

 Registering patents or other IP in China that were not previously registered 

 No actions 

 Other –– Specify: 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 43 of 46 

8.11a Have there been any proposed or adopted Chinese technical standards that apply to your firm’s 

products or services and that are incompatible with or redundant of widely adopted global 

standards that your products or services already complies with? 

 Yes 

 No 

8.11b If you answered “yes” to 8.11a, how many of these are mandatory standards that require 

your firm to modify its products for sale in China? 

 Estimated number of mandatory 

standards affecting products: Check here if unknown 

8.11c If you answered “yes” to 8.11a, was your firm offered the opportunity to participate in the 

standard-setting process? 

 Yes 

 Yes, but with observer status only 

 No 

8.11d If you answered “yes” to 8.11a, has your firm taken part in the standard-setting process? 

 Yes 

 Yes, but participated as an observer only 

 No 

8.11e If you answered “yes” to 8.11a, does your firm expect those standards to damage your 

firm’s competitiveness in the Chinese market? 

 

 Yes 

 No 

8.11f If you answered “yes” to 8.11a, does your firm expect those standards to damage your 

firm’s competitiveness in markets outside of China? 

 Yes 

 No 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 44 of 46 

SECTION 9. OVERALL ASSESSMENT OF IPR AND INDIGENOUS INNOVATION IN CHINA 

9.1a Has your firm made any significant strategic changes as a consequence of IPR infringement by 

Chinese entities or individuals, or as a consequence of China’s indigenous innovation policies? 

 Yes 

 No 

9.1b If you answered “yes” to 9.1a, then which of the following strategic changes has your firm 

made as a consequence of IPR infringement by Chinese entities or individuals? Check all that 

apply. 

 Production: 

 Relocated away from China 

 Changed product lines in China 

 Other –– Specify: 

 Chinese joint venture partners: 

 Changed partners 

 Decreased number of partners 

 Reduced interaction with partners 

 Enforced greater separation between partners 

 Other –– Specify: 

 R&D and innovation: 

 Relocated away from China 

 Changed type of R&D performed in China 

 Increased R&D to take advantage of indigenous innovation policies 

 Increased R&D to stay ahead of infringers 

 Other _ Specify: 

 IPR enforcement: 

More likely to report IPR infringement to China’s administrative 

authorities 

 More likely to address IPR infringement in China through its courts 

 More likely to seek criminal prosecutions 

 Increased efforts on internal control of information 

 Increased efforts to get U.S. government to pressure China 

 Reduced number of patents and rely on trade secrets instead 

 Other –– Specify: 

 Adaptation: 

 Strategic price discrimination 

 Shifted sales focus away from China 

 Reduced product price 

Reduced sales efforts in, or abandoned completely, third country markets 

where infringing Chinese products are prevalent 

 Leveraged brand familiarity generated by IPR infringers to gain customers 

 Other –– Specify: 

 Indigenous innovation: 

 Less aggressive about selling in China 

 Less frequent bidding for government contracts 

 Other –– Specify: 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 45 of 46 

9.2a Have you experienced discriminatory treatment in connection with obtaining, commercializing, 

or enforcing IPR in China? 

 Yes 

 No 

9.2b If you answered “yes” to 9.2a, please explain briefly. Please don’t use the “enter” key in your 

responses. 
Confidential Business Information 

USITC Intellectual Property Rights Questionnaire 46 of 46 

SECTION 10. OTHER INFORMATION 

10.1 If you would like to describe any other IPR concerns related to infringement associated with 

Chinese entities or China’s indigenous innovation policies, use the space below. This description 

may include more information on the effects of infringement in "other IPR" categories (e.g., 

plant variety protection, semi-conductor mask works/layout design, or proprietary data 

protection) by Chinese entities that may have an impact on your firms' sales and enforcement 

costs. Also, if you would like to elaborate on any of your other responses, or provide any 

additional pertinent information, use the space below. Please indicate if the additional 

information applies to a specific question number. If the information is general in nature, leave 

“Question no.” column blank. Please don’t use the “enter” key in your responses. 

Question no. Additional information 

 

 

 

 
APPENDIX F 

SURVEY METHODS 

F-3 

Description of USITC Questionnaire Methodology 

The Commission’s questionnaire on China IPR issues was sent to 5,670 firms in October 

2010. The number of sampled firms per sector was chosen to approximately reflect the 

number of firms—and their heterogeneity—in each sector. Commission staff then 

identified firms meeting the criteria for the special sectors—the top trademark firms and 

firms with FDI in China. Staff next used a modified Neyman allocation method to 

distribute the remaining questionnaires.1

 Because the sectors vary greatly in terms of 

number of firms, firm size, and variation of revenues, a pure Neyman allocation would 

have allocated a widely divergent number of questionnaires to different sectors, ranging 

from 1 for watch, clock and parts manufacturing to 646 for motion picture and video 

industries. To draw more survey participants from the smaller sectors, the Neyman 

allocation was modified so that the minimum number of surveyed firms from each sector 

was 100, with the remaining questionnaires allocated among the other sectors.2

Responses 

The Commission mailed 5,670 mailed surveys, 619 of which were returned as 

undeliverable by the Postal Service. Excluding the number of undeliverable surveys from 

the sample, the overall response rate was 44.7 percent. Response rates varied across 

sectors: particularly high levels of response were found among the special sectors—firms 

with top trademarks and FDI in China—and particularly low response rates were found 

among randomly selected firms. This divergence in response rates is consistent with the 

expectation that firms with top trademarks and/or FDI in China are especially affected by 

IPR issues in China. 

In order to extrapolate the results attained from individual respondents to the IP intensive 

economy as a whole, a weighting procedure was applied to the questionnaire responses. 

Weights vary by sector and depend on the number of responses received relative to the 

size of the sector. Weights were calculated at a sector level: 

where 

 Nk is the number of firms in sector k, and 

 nk is the number of respondents in sector k. 

 1

 The Neyman allocation distributes the random sample across sectors proportional to the weighted 

number of observations in each sector. The weighting is based on the standard deviation of revenues in that 

sector. Therefore a sector that has a weighted number of observations that equals 10 percent of the total 

number of observations will receive 10 percent of the remaining questionnaires to be allocated across each 

sector. Sectors with a large number of firms, as well as sectors with a high revenue dispersion, will be 

sampled relatively more. 2

 For sectors in which fewer than 100 firms were identified by the database, all identified firms were 

sampled.

k

k

k

n

N W 
F-4 

The weights correct for under- and over-sampling of sectors within the targeted 

population and enable the survey results to be interpreted as representative of the entire 

IP economy. All results from the survey are reported using these weights. 

Because of the Commission’s use of a modified Neyman allocation, sectors with a large 

number of firms tend to be underrepresented—this was true even for sectors with a 

relatively high per-capita response rate, as with for machinery manufacturing. As a 

result, responses from firms in such sectors were more heavily weighted. On the other 

hand, very small and narrowly defined sectors—such as watch, clock and parts 

manufacturing—receive lower weights, even when there was a relatively low response 

rate, because a larger share of the firms in the sector had been sampled. 

Between 65 and 519 firms were randomly sampled in each sector. The number of firms 

sampled depended partly on sector size; however, the Commission took additional 

considerations into account. There were significant differences in sector populations; as a 

result, large sectors were somewhat under-sampled and small sectors were oversampled. 

In addition, response rates varied across sectors, creating additional over- and undersampling problems. Weights correct for both of these effects. 

Each firm that responded to a questionnaire is speaking, in effect, for several other firms 

in its industry. Therefore a firm that is assigned a high weight because it is in an 

underrepresented sector will have a proportionally bigger voice than a firm in a better 

represented sector. If a firm in a high-weight sector is truly representative of its sector, 

this poses no problem; on the other hand, a response from a highly idiosyncratic firm may 

distort the results. As a precaution, the Commission made an effort to ensure that the 

number of firms representing each sector exceeded a minimum threshold. 

Intuitively, a weight can be interpreted as using the actual received response as a proxy 

for other similar firms that were not sampled or did not respond. Therefore a response 

with a weight of 50 implies that this response will represent 50 other (non-sampled) firms 

in the same sector. Low weights mean that many responses were received relative to the 

number of firms in the sector—each questionnaire response represents fewer other 

firms—while high weights result from a low number of responses relative to the sectoral 

population. 

Firms that were part of the special groups—top trademark and FDI in China—were 

targeted specifically, and therefore sampled with certainty. Because each firm in these 

groups was sampled, the weight of each of the firms in the special groups would be one, 

the lowest possible weight, if every firm responded. Not every firm responded; as a result 

the weights for these special groups are slightly greater than one. That is, every 

responding firm in those groups spoke both for itself and for the other firms in that group 

that did not respond. 

This yields the result that many large firms with well-known brands received relatively 

low weights. These firms are—as top brands and as investors in China—somewhat 

idiosyncratic relative to the rest of the firm population, and are not representative of the 

firm population at large. 
F-5 

Values 

The sum of weighted sales reported by firms were calculated to be significantly higher 

than the sum of sales reported by the U.S. Census Bureau (Census) for the 24 sectors that 

this study targeted as part of the IP-intensive economy. This indicates an overweighting 

of the aggregate economy; as a result reported dollar values had to be corrected to 

account for this. Since percentage figures were not inflated they were not adjusted. The 

corrections to dollar values were made in a three-step process that made use of ratios 

estimated from the survey data and Census sales figures. Standard errors are calculated 

according to standard statistical formulae and used to derive confidence intervals for the 

resulting value. 

1. In a first step, adjusted sales numbers were calculated. Because summing the 

weighted sales for a particular group of firms would result in an inflated sales 

number, adjusted sales figures based on the Census data were calculated. 

Adjusted sales for a particular group were calculated by allocating Census sales 

for each of the 24 sectors to a group of interest (e.g. firms with IPR infringement 

issues or firms without IPR infringement issues) based on the ratio of surveyweighted reported sales of that group to survey-weighted total sales.3

 Adjusted 

sales for all groups at the sector level were summed to come up with an adjusted 

sales number for the entire group. Adjusted sales by group and sector are 

calculated as follows: 





g G

k

g k

g k k S

S

S C ,

,

~

where: 

 Sectors are denoted by subscript k

 The subscript g denotes the subset of firms belonging to the group of 

interest, with G the set of all firms in the study. For example, firms were 

grouped according to their response to infringement, so that one subset g

would be firms that experienced infringement. 

 Ck is Census-reported sales for sector k

 Sg,k is the weighted sum of reported sales by sector and by group 

 Sg,k

~ is the resulting adjusted sales value for group g in sector k. 

2. Second, for each value to be calculated, a ratio of that value to sales is calculated 

using survey-weighted data. The value of interest, e.g. R&D expenditure, is 

converted to a ratio, e.g. R&D to sales ratio, at the sectoral level. 

 3

 About 225 respondent firms from our special groups do not belong to the NAICS codes comprising 

our sectors 1-24 in our defined U.S. IP-intensive economy. Because these firms are distributed throughout 

various NAICS codes in the rest of the U.S. economy, it was not possible to obtain Census data on sales for 

this small share of respondents. The survey-weighted sum of U.S. sales reported in the survey by these firms 

was used in place of Census data when necessary. 
F-6 

3. Third, each ratio is multiplied by adjusted sales in order to obtain a value for each 

variable. This results in an adjusted value estimate combining survey reported 

data and sales data from Census. 

g k

g k

g k g k S

X

X S

,

,

, ,

~ ~ 

where: 

 X g,k is the weighted sum of value X for group g in sector k. Value X

could be employment, losses, etc. 

 Sg,k

~ is the adjusted sales value for group g in sector k. 

 Xg,k

~ is the resulting adjusted value of X for group g in sector k. 

Details on Reported Losses 

Total reported losses from lost sales and lost royalty and license fees (reported in Table 

3.2) relies primarily on firms’ responses to question 2.8. When a firm did not provide a 

response on lost sales or lost royalty and license fees, losses reported elsewhere in the 

questionnaire were used as a proxy. Lost global profits and losses from Internet-based 

infringement, if reported in question 2.8, were used when a firm did not provide a 

response to lost sales or lost royalty and license fees. If a firm did not provide a response 

to any type of loss in question 2.8, but did provide a response to losses by infringement 

type in any of questions 4.5b (losses from copyright infringement), 5.5b (losses from 

trademark infringement), 6.6b (losses from patent infringement), or 7.5b (losses from 

trade secret infringement), the sum of losses reported by infringement type was used as a 

proxy. 

Due to the varied response rates across all parts of questions 2.8, 4.5, 5.5, 6.6, and 7.5, 

the sum of reported losses in question 2.8 does not equal the sum of reported losses by 

infringement type reported in question 4.5, 5.5, 6.6 and 7.5. For example, a firm may 

have provided a response to losses from lost sales in question 2.8, but then not provided 

any indication in questions 4.5, 5.5, 6.6 or 7.5 of how those lost sales are disaggregated 

by type of infringement. Similarly, a firm may have provided a response for losses due to 

copyright infringement, but not have provided a response for lost sales. Thus, total 

reported losses in Table 3.2 aggregates responses from various questions in order to 

provide as complete a picture as possible of losses from IPR infringement in a manner 

that avoids double counting losses reported by the same firm. Questions 4.5, 5.5, 6.6, and 

7.5 requested estimates for three years (2007-2009); these values were divided by three to 

estimate 2009 reported loss. 

Because not every firm gave responses to all parts of questions to 2.8., 4.5, 5.5, 6.6 and 

7.5, losses by infringement type were calculated in a different manner than total reported 

losses. The survey-weighted total reported losses was allocated among the different 

infringement types based on each infringement type’s survey-weighted share of reported 

losses in questions 4.5, 5.5, 6.6 and 7.5. This left a residual of $16.0 billion, which can be 

interpreted as losses due to the IPR infringement for which firms are unable to specify the 

type of infringement. 
APPENDIX G 

STRATEGIC CHANGES AS A RESULT 

OF REPORTED IPR INFRINGEMENT 

OR INDIGENOUS INNOVATION 

POLICIES 

TABLE G.1 Respondent’s strategic changes as a consequence of IPR infringement and discriminatory experience, 

by sampling method, weighted data 

▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬ Sampling method 

Item 

▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬ Certainty Random 

G-3 

Undergone strategic change due to IPR infringement or indigenous innovation policies 

 Yesa

 20.9 4.9 

 Noa

 75.6 5.4 

 

Production: 

 Relocated away from China 2.2 1.6 

 Changed product lines in China 6.6 3.9 

Chinese joint venture partners: 

 Changed partners 1.5 1.3 

 Decrease number of partners 1.4 1.3 

 Reduced interaction with partners 2.9 2.9 

 Enforced greater separation between partners 0.1 0.0 

Research and development: 

 Relocated away from China 2.2 1.6 

 Changed type of R&D performed in China 2.0 1.9 

 Increased R&D to take advantage of indigenous innovation policies 0.1 0.0 

 Increased R&D to stay ahead of infringers 1.0 0.9 

IPR enforcement: 

 More likely to report IPR infringement to China’s administrative authorities 4.3 2.3 

 More likely to address IPR infringement in China through the 

 country’s court system 0.6 0.2 

 More likely to seek criminal prosecution 0.3 0.1 

 Increased efforts on internal control of information 8.8 5.7 

 Increased efforts to get U.S. government to pressure China 5.3 3.4 

 Reduced number of patents and rely on trade secrets instead 4.6 3.1 

Adaptation: 

 Strategic price discrimination 0.1 0.0 

 Shifted sales focus away from China 6.1 2.9 

 Reduced product price 15.8 8.9 

 Reduced sales effort in, or abandoned completely, third country markets 

 where infringing Chinese products are prevalent 7.7 4.0 

 Leveraged brand familiarity generated by IPR infringers to gain customers 0.0 0.0 

Indigenous innovation: 

 Less aggressive about selling in Chinab

 4.6 2.2 

 Less frequent bidding for government contractsb

 0.8 0.6 

Experienced discriminatory treatment with obtaining, commercializing, 

 or enforcing IPR in China 0.5 0.1 

▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬

Source: Compiled from data submitted in response to U.S. International Trade Commission questionnaire. 

 a

Share of firms experiencing IPR infringement or concerned with indigenous innovation. 

 b

Share of firms concerned with indigenous innovation. 

APPENDIX H 

ECONOMETRIC AND SIMULATION 

METHODS 

H-3 

Introduction 

This appendix describes technical details of both econometric and simulation methods 

used in chapter 4. 

Econometric Methods 

Three sets of econometric analyses are discussed in this appendix. The first is an 

estimation of the effect of an improvement in China’s level of IPR protection on goods 

exports, the second is a parallel estimation on services exports, and the final is a set of 

estimates on affiliate sales. A key decision in making each of these estimates was 

selecting the measure of IPR protection to be used. The possible choices are discussed in 

the following section, along with the reasons for and implication of the final selection. 

Measures of IPR 

Three measures of countries’ IPR regimes were considered for this analysis. These were 

an index constructed by the Economist Intelligence Unit (EIU), an index constructed by 

Walter Park, 1 and a measure of piracy rates constructed by the Business Software 

Alliance (BSA). Each of these measures is slightly different and provides an alternative 

perspective on the IPR problem, particularly with respect to China. Ultimately, the EIU 

measure was selected because of its focus on IPR protection and because of its accuracy 

in capturing the timing of IPR reforms. The EIU measure is thus incorporated in the main 

body of the text and in the simulation results (see subsequent sections of this appendix for 

details). However, results using the Park index are also reported in this Appendix. 

The EIU index attempts to examine protection of IPR by scrutinizing the actual 

implementation of laws rather than “on the books” measures. It is an annual survey, 

produced by EIU’s network of regional experts. Partly out of the desire to capture actual 

levels of protection (de facto) rather than simply laws on the books (de jure), this measure 

relies primarily on the opinion of experts on the ground rather than on strictly objective 

measures (i.e., it relies more on qualitative than quantitative methods). 

The Park index is based on a detailed examination of the IPR laws in place in many 

countries. The index examines a large number of variables such as degree of coverage, 

duration of coverage, and enforcement mechanisms. This granularity yields a finely tuned 

index that permits the observation of small differences and changes of policies across 

time and across countries. The index has been computed over a very long time (covering 

the entire period from 1960 to 2005), which is useful for data with a long time series. The 

main difficulty with this index is that it is primarily a de jure measure of IPR laws; it does 

not reflect actual enforcement. In the case of China, this distinction may be particularly 

significant: a frequent charge is that China’s IPR laws have progressed dramatically in 

recent years but that actual enforcement lags behind. In addition, the index is only 

calculated every five years so that annual data require interpolation for the intervening 

years. For years more recent than 2005, it is also necessary to assume that the index has 

not changed since 2005. 

 1

 Park, “International Patent Protection: 1960–2005,” 2008. 
H-4 

Commission staff also tried the BSA index as a potential indicator of IPR infringement. 

This index measures the software piracy rates of a number of countries. It is 

fundamentally a narrower measure of IPR, as it focuses on software copyright piracy. In 

addition, only a relatively short time series (beginning in 2005) has been computed. For 

these reasons, and because using this variable frequently yielded extreme results (very 

large positive or negative effects), they are not reported in this appendix. 

The overall scores for China and the United States illustrate the results disparity, 

particularly for BSA. The EIU index produces a score of 3 (out of a possible 5) for China, 

and a score of 5 for the United States. The Park index produces a score of 4.08 for China 

(out of a possible 5.00) and a score of 4.88 for the United States. The BSA produces a 

score of 0.21 (one minus the piracy rate) for China whereas the United States receives a 

score of 0.80. All scores are for 2009 except for the Park index which, as noted above, 

was most recently updated in 2005. The exercise of shifting China’s level of IPR 

protection toward that of the United States means that the BSA index would yield the 

largest percent shift, and the Park index the smallest percent shift, with the EIU index in 

between. 

Although the Park index had several advantages, such as a more detailed approach with 

finer distinctions between countries and over time, the Commission used the EIU index 

as its primary index due to its stated emphasis on de facto rather than de jure assessments 

of IPR protection. This concept was more in line with the overall analysis which aimed to 

examine actual violations. In addition, the EIU had the advantage of being an annual 

index, rather than requiring an interpolation for the intervening years as was done with 

Park; this was particularly valuable, given the relatively short time series at the 

Commission’s disposal. The EIU estimates are thus reported alone in the main text, while 

those of EIU and Park are reported side by side in the appendix. Since the EIU and Park 

variables have a similar range (1 representing the weakest IPR policies and 5 representing 

the strongest), the estimated coefficients for these variables in tables H.1–H.4 are 

approximately comparable. 

Trade in Goods 

Data 

In addition to one of the measures of IPR protection discussed above, the econometric 

specification requires so-called gravity variables and a variable measuring trade freedom, 

as well as controls for year, country, and industry effects. The gravity variables—GDP 

per capita and population—were obtained from the World Bank’s World Development 

Indicators database. The trade freedom variable is the Heritage Foundation’s index of 

economic freedom, which is an assessment of the importing country’s level of trade 

openness. 

Two additional variables were used. Rather than using the North American Industry 

Classification (NAICS) categories as independent variables, figures for annual payroll by 

NAICS category were used to better identify the extent to which the size of the domestic 

sector is associated with a higher level of exports. These annual payroll data were for 
H-5 

2006 and were obtained from the Census Bureau. Sector-level estimates of R&D were 

obtained from a survey conducted by the National Science Foundation.2

The dependent variable is U.S. exports to each partner country in the data set. Exports 

were available at the 4-digit NAICS level by partner country, and by total exports, as well 

as by related-party trade, and therefore (by inference) by arm’s-length trade as well. 

Throughout, we use total exports as the dependent variable—results for arm’s length and 

related party trade are qualitatively similar. 

Specification 

The Poisson Pseudo-Maximum Likelihood (PPML) method was used to estimate the 

effects of IPR on goods and services exports. The PPML is indicated when 

heteroskedasticity is present and when there are many zero values.3

 In each of the data 

sets (for goods exports and for services exports), a not-insignificant percent of export 

values (partner-specific and sector-specific) are zero.4

 

Independent variables included three gravity variables—the logs of GDP per capita and 

population and the trade freedom measure—as well as a set of year dummy variables and 

a set of country fixed effects. Each of the NAICS categories was controlled for using the 

log of annual payroll data. The IPR variable was introduced both as a stand-alone 

variable and as an interaction with R&D to sales ratios by sector. 

Primary Results, Calculation of Ranges, and Robustness 

The results appear in table H.1. The main specification—using the EIU index as the 

measure of IPR—is placed alongside an alternate specification using the Park index. The 

specifications produce qualitatively similar estimates for each of the independent 

variables. The EIU coefficients are slightly lower, both for the IPR variable itself and for 

the interaction with R&D to sales ratio, although the order of magnitude, sign, and 

significance are the same throughout. The sign and magnitude of the coefficient for the 

interaction between IPR and R&D of the U.S. sector indicates that the effects of IPR on 

U.S. exports are substantially stronger for the most R&D-intensive sectors. When the 

exercise of raising China’s IPR score to the level of the U.S. score is performed and the 

changes are applied to export values, the overall effect is higher for the Park index than 

for EIU. The central estimate for the EIU estimator is that goods exports are predicted to 

increase by 14.5 percent or $9.4 billion; by contrast, the Park index predicts an increase 

of 29.0 percent or $18.9 billion. 

 2

 The data appear in SRS InfoBrief NSF 10-322, May 2010 available at http://www.nsf.gov/statistics/ 3

 Comparisons with other estimators are found in Santos Silva and Tenreyro, “The Log of Gravity,” 

2006, and in Santos Silva and Tenreyro, “Further Simulation Evidence on the Performance of the Poisson 

Pseudo-Maximum Likelihood Estimator,” 2009. 4

 For goods, the share of zero value observations is 6.4 percent; for services the share of zero value 

observations is 6.7 percent. 
H-6 

TABLE H.1 Central estimates for goods 

 Dependent Variables 

Independent Variables EIU Park 

Ln(GDP per capita).................. 618.1*** 626.8*** 

 (-4.1) (-4.3) 

 

Ln(Population)...................... -688.5 -882.2 

 (-0.7) (-0.9) 

 

Trade Freedom .................... 5.9 4.5 

 (-1.3) (-1.1) 

 

Ln(Annual Payroll) .................. 91.6*** 886.3*** 

 (-37.5) (-37.0) 

 

IPR...................................... 0.07 0.4 

 (-1.0) (-1.7) 

 

IPR x R&D/Sales................... 0.7*** 0.7*** 

 (-4.9) (-5.7) 

 

Number of Observations......... 38,480 67,447 

Pseudo Log Likelihood............ -3.9*109

 4.1*109

Source: USITC staff calculations; see text for method. 

Note: The t-statistics are in parentheses. The note *** indicates significant at 0.001, 

** indicates significant at 0.01, * indicates significant at 0.05. Independent variable is 

exports (in thousands of dollars). A full set of year and country dummies was applied 

(not shown). 

The central estimates for the effects of improved IPR protection on trade in goods were 

presented in table 4.4 of chapter 4. Table H.2, below, presents the upper- and lowerbound estimates. 
H-7 

TABLE H.2 Estimated increases in U.S. goods exports to China as a result of improved IPR protection

2009 Changes 

Initial value Lower bound Upper bound 

Sector Million $ Million $ Percent Million $ Percent 

Semiconductors and other electronic 

components 4,870 979 20.1 2,901 59.6 

Aerospace products and parts 5,313 –2 –0.0 2,049 38.6 

Resin, synthetic rubber, & artificial & synthetic 

fibers & filaments 3,960 –81 –2.0 1,450 36.6 

Basic chemicals 3,389 –69 –2.0 1,241 36.6 

Navigational, Measuring, Electro-medical, And 

Control Instruments 2,699 73 2.7 1,115 41.3 

Other general purpose machinery 1,861 –4 –0.2 715 38.4 

Meat products and meat packaging products 1,424 –42 –3.0 508 35.7 

Agriculture and construction machinery 1,298 –2 –0.2 499 38.4 

Pulp, paper, and paperboard mill products 1,351 –34 –2.5 488 36.1 

Nonferrous metal (except aluminum) and 

processing 1,356 –49 –3.6 475 35.1 

Computer equipment 1,034 21 2.1 420 40.7 

Engines, turbines, and power transmission 

equipment 1,025 –2 –0.2 394 38.4 

Motor vehicles 995 6 0.6 390 39.1 

Pharmaceuticals and medicines 645 109 16.9 362 56.1 

Communications equipment 632 88 13.9 334 52.8 

Industrial machinery 795 –2 –0.2 305 38.4 

Other fabricated metal products 809 –17 –2.1 295 36.5 

Motor vehicle parts 747 4 0.6 292 39.1 

Other chemical products and preparations 775 –16 –2.0 284 36.6 

Iron and steel and ferroalloy 720 –26 –3.6 253 35.1 

All other sectors 29,425 –154 –0.5 3,336 11.3 

Total 65,121 781 1.2 18,106 27.8 

Source: USITC staff calculations. 

Note: “All other sectors” includes agricultural and other non-manufactured goods for which IPR effects were not 

estimated.

Trade in Services 

Data 

The services estimates used much of the same data for explanatory variables as the goods 

estimates. Data on services trade are from the Bureau of Economic Analysis (BEA). The 

BEA’s services trade data are sorted at two levels of aggregation; the higher level of 

aggregation is the one used in this report. There are four groupings at this level: royalties 

and licensing fees; transportation; business, professional, and technical; and other private 

services. The lower level of aggregation consists of 31 subcategories that are ordered 

under the four groupings listed above. The data are 2006–09 for each of the non-
H-8 

transportation industries, and 1999–2009 for the transportation series. In the analysis 

presented in this report, the more aggregated version of the data was used. 

Specification 

The methodology used to estimate services trade is similar, with a few exceptions. R&D 

data were not available for services. Further, dummy variables were used rather than 

sales by sector; sectoral sales data did not exist at the relevant level of aggregation and 

were particularly problematic for royalties and licensing fees, which do not correspond to 

sectoral categories. Finally, services were treated at a considerably more aggregated level 

than were goods. The services data at the most disaggregated level available produced 

extreme and counterintuitive results that were likely due to the underlying uncertainty of 

services trade data—generally acknowledged to rely significantly on estimates and 

assumptions. 5 The gravity variables and country and year dummy variables were 

implemented as for the goods estimation equations. 

Primary Results, Calculation of Ranges, and Robustness 

Results are reported in table H.3. The baseline services type is assumed to be business, 

professional, and technical services, for which the IPR variable displays a positive result. 

This result is significant for EIU, but not for Park, although the coefficient values were 

similar. Slight deviations also existed for the coefficients for the other services types; in 

particular, the EIU index predicted a much lower coefficient for royalties than did the 

Park. In this case, unlike for the goods exports, EIU predicted a larger increase in exports 

than does Park. An improvement in the EIU index to the level of the United States was 

associated with a 76.0 percent ($11.9 billion) increase in services exports, while an 

improvement in Park is associated with a more modest 52.2 percent ($8.2 billion) 

increase. 

 5

 Feenstra et al., “Report on the State of Available Data for the Study of International Trade and 

Foreign Direct Investment,”August 2010. 
H-9 

TABLE H.3 Central estimates for services 

 Dependent Variables 

Independent Variables EIU Park 

Ln(GDP per capita)................................ 0.6* 0.6* 

 (–2.0) (–2.2) 

 

Ln(Population).................................. 1.2 1.1 

 (–0.8) (–0.6) 

 

Trade freedom.................................. 5.1 7.2 

 (–0.6) (–0.7) 

 

IPR................................................. 0.4** 0.4 

 (–3.1) (–1.3) 

 

Other private..................................... 1.4*** 2.5*** 

 (–4.1) (–3.9) 

 

Royalties.......................................... 0.2 –1.4 

 (–0.5) (–1.8) 

 

Transportation................................... 2.0*** 2.3*** 

 (–7.5) (–3.7) 

 

IPR x other private............................. –0.1 –0.4* 

 (–1.6) (–2.6) 

 

IPR x royalties.................................. 0.04 0.4* 

 (-0.6) (–2.2) 

 

IPR x transportation........................... –0.3*** –0.3* 

 (-3.9) (–2.2) 

 

Number of observations...................... 5,313 5,313 

Pseudo log likelihood ........................ –1.7*106

 –1.7*106

Source: USITC staff calculations; see text for method. 

Notes: The t-statistics are in parentheses. The symbol *** indicates significant 

at 0.001, ** indicates significant at 0.01, * indicates significant at .05. 

Independent variable is exports in millions of dollars. Omitted dummy variable 

is for business, professional and technical services sector. A full set of year and 

country dummies was applied (not shown). 

The central estimates for the effects of improved IPR protection on trade in services were 

presented in table 4.5 of chapter 4. Table H.4, below, presents the upper- and lowerbound estimates. 
H-10 

TABLE H.4 Estimated increases in U.S. exports to China as a result of improved IPR protection

2009 Changes 

Initial value Lower bound Upper bound 

Sector Million $ Million $ Percent Million $ Percent 

Services 13,480 2,507 18.6 15,387 114.2 

Business, professional, and 

technical services 3,714 2,497 67.2 6,156 165.7 

Travel, passenger fares, and 

other transportation 5,407 –558 –10.3 4,078 75.4 

Other services 4,359 567 13.0 5,154 118.2 

 

Royalties and license fees 2,179 1,821 83.6a

 4,099 188.1a

Food 49 41 83.6a

 92 188.1a

Chemicals 439 367 83.6a

 826 188.1a

Primary and fabricated metals 12 10 83.6a

 23 188.1a

Machinery 44 36 83.6a

 82 188.1a

Computers and electrical products 194 162 83.6a

 364 188.1a

Electrical equipment, appliances, 

and components 29 24 83.6a

 54 188.1a

Transport equipment 69 57 83.6a

 129 188.1a

Other manufacturing 104 87 83.6a

 195 188.1a

Books, records, and tapes 2 2 83.6a

 4 188.1a

Software 737 616 83.6a

 1,386 188.1a

Broadcasting 23 19 83.6a

 43 188.1a

Wholesale trade 249 208 83.6a

 469 188.1a

Finance insurance and real estate 3 2 83.6a

 5 188.1a

Professional services 27 22 83.6a

 50 188.1a

   Other industries 200 167 83.6a

 376 188.1a

Source: USITC staff calculations. 

 a

For royalties and license fees, the total percentage change has also been applied to individual sectors.
H-11 

Activities of Majority-Owned Affiliates of U.S. Multinational 

Companies 

Data 

The analysis of the activities of majority-owned foreign affiliates (MOFAs) of U.S. 

multinational companies parallels in many respects the analysis of goods trade and 

services trade. The dependent variables for this analysis were drawn from data on U.S. 

direct investment abroad as compiled by the BEA’s International Investment Division.6

The data are annual, from 1999 to 2008, and cover 15 broad industrial categories and 

over 50 countries. The dependent variables used were affiliate sales, U.S. exports to 

affiliates, U.S. imports from affiliates, net income, employment, and R&D performed by 

affiliates. Observations for which the dependent variable is not reported by BEA for 

confidentiality reasons were dropped. 

Independent variables, including per capita GDP, population, and the trade freedom score 

reported by the Heritage Foundation, were similar to the analyses for goods and services 

trade. Also, as discussed earlier, three different measures of the strength of IPR protection 

were employed—the Park measure, the EIU index, and the BSA software piracy index. 

As was true for exports, the Park and EIU indices were often in the same range, while the 

BSA estimates were often unrealistically very high or negative. Since results for specific 

industries and sectors are not reported, no variable for sectoral R&D intensity was 

employed. 

Specification 

As it does for goods trade, the dependent variable frequently takes on zero values—for 

example, between 5 and 10 percent for affiliate sales, and more for some of the other 

variables. Thus, it was appropriate to use an estimator that can take account of zero 

values. The zero-inflation Poisson (ZIP) estimator was used, since it permits relaxation of 

the assumption that the zeros and the positive values are drawn from the same 

distribution.7

 A ZIP regression estimates two Poisson distributions: the first, to model 

whether the dependent variable is zero or positive, and the second, to determine the levels 

of the dependent variable if it is positive. The regressors used in the first stage are the 

same as in the second stage, except that the variable for IPR protection (either Park or 

EIU) is omitted. The results reported here are for the second stage only. Fixed effects for 

years, countries, and industries are employed in all specifications. 

Primary Results, Calculation of Ranges, and Robustness 

Full results are presented in tables H.5 and H.6, comparing the Park specification with the 

EIU specification. The results obtained using Park and EIU were reasonably similar for 

affiliate sales and net income. For employment and R&D, both measures yielded a 

positive effect of IPR improvement on the dependent variables, but the effect measured 

 6

 The underlying data can be obtained at 

http://www.bea.gov/scb/account_articles/international/iidguide.htm#page3, and are listed under the heading 

“Comprehensive financial and operating data.” 7

 See Xiong and Beghin, “Aflatoxin Redux,” 2010, for a discussion of specification issues in gravity 

models in the presence of zeroes in the dependent variable. 
H-12 

by Park was stronger. For U.S. exports to affiliates and U.S. imports from affiliates, 

estimates of the effect of IPR improvement using the EIU variable were positive, while 

estimates using the Park variable were negative. 

Calculation of the effects of raising IPR protection in China to the U.S. level were 

performed as out-of-sample projections, calculating the percentage change associated 

with raising the IPR protection variable (either Park or EIU) by an amount equal to the 

difference between the most recent reported value for China and that for the United 

States. Since this difference is greater for the EIU variable, similar estimated coefficients 

using EIU and Park led to higher estimates of U.S. bilateral transactions with China when 

the EIU variable is used.8

 Results of these calculations are given in table H.7. 

TABLE H.5 Central estimates for affiliate data (log million dollars) 

 Dependent variables 

Independent Variables Affiliate sales U.S. exports to affiliates 

U.S. imports from 

affiliates 

Constant –37.3*** –40.5*** 7.9*** 6.6*** 115.5*** 113.1*** 

 (157.0) (171.5) (6.9) (5.8) (115.6) (114.5) 

Ln(GDP per capita) 0.4*** 0.4*** 0.1*** 0.08*** 0.7*** 0.7*** 

 (131.8) (125.1) (7.7) (6.7) (56.1) (55.9) 

Ln(population) 2.3*** 2.5*** –0.1** –0.2** –6.6*** –6.6*** 

 (164.7) (182.5) (2. 1) (2.3) (111.8) (114.1) 

Trade freedom 0.01*** 0.01*** 0.003*** 0.001*** –0.01*** –0.01** 

 (99.9) (97.1) (8.2) (3.4) (33.9) (41.1) 

Intellectual property (Park) 0.3*** NI –0.2*** NI –0.2*** NI 

 (72.7) NI (10.9) NI (19.9) NI 

Intellectual property (EIU) NI 0.2*** NI 0.3*** NI 0.5*** 

 NI (142.9) NI (38.3) NI (55.5) 

Number of observations 3,053 3,053 3,053 3,053 3,053 3,053 

 -2 Log likelihood 8.4*106 8.4*106 7.0*105 7.0*105 1.3*106 1.3*106

Source: USITC staff calculations; see text for method. 

Note: The t-statistics are in parentheses. The symbol *** indicates significant at 0.01, ** indicates significant at 0.05, * 

indicates significant at 0.1. (two-tailed test). NI = not included in this specification. These are results from ZeroInflation Poisson (ZIP) regressions. A ZIP regression estimates two Poisson distributions—the first to model whether 

the dependent variable is zero or positive, and the second to determine the levels of the dependent variable if it is 

positive. The regressors used in the first stage are the same as in the second stage, except that the variable for IPR 

protection (either Park or EIU) is omitted. The results reported here are for the second stage only. 

 8

 The EIU scores for China and the United States are 3 and 5, so the improvement in the score 

associated with moving China’s policies to the U.S. level is 2. The Park scores for China and the United 

States are 4.08 and 4.88, so the improvement in the score associated with moving China’s policies to the U.S. 

level is 0.8. 
H-13 

TABLE H.6 Central estimates for affiliate data 

 Dependent variables 

Independent variables Net income 

Employment in 

U.S. affiliates 

Research and development 

performed by affiliates 

log million $ thousand employees log million $ 

Constant –53.6*** –55.6*** 4.1 2.4 46.0*** 42.2*** 

(63.3) (66.1) (0.4) (0.5) (17.2) (15.9) 

Ln(GDP per capita) 1.1*** 1.1*** 0.4*** 0.4*** 0.9*** 0.9*** 

(105.2) (104.4) (8.9) (9.1) (26.8) (26.1) 

Ln(population) 2.8*** 2.9*** –0.3 –0.2 –3.2*** –2.9*** 

(54.9) (58.8) (1.2) (0.7) (20.1) (18.4) 

Trade freedom –0.006** –0.006*** 0.007*** 0.009*** 0.009 0.01*** 

(15.9) (15.3) (4.8) (6.9) (6.4) (1.0) 

Intellectual property (Park) 0.3*** NI 0.3*** NI 0.5*** NI 

(23.7) NI (6.9) NI (11.9) NI 

Intellectual property (EIU) NI 0.2*** NI 0.02 NI 0.1*** 

NI (32.4) NI (1.2) NI (5.1) 

Number of observations 3,053 3,053 3,053 3,053 3,053 3,053 

 -2 Log likelihood 1.1*106

 1.1*106 3.9*104 3.9*104 1.3*105 1.3*1065

Source: USITC staff calculations; see text for method. 

Note: The t-statistics are in parentheses. The symbol *** indicates significant at 0.01, ** indicates significant at 0.05, * 

indicates significant at 0.1. (two-tailed test). NI = not included in this specification. These are results from ZeroInflation Poisson (ZIP) regressions. A ZIP regression estimates two Poisson distributions—the first to model whether 

the dependent variable is zero or positive, and the second to determine the levels of the dependent variable if it is 

positive. The regressors used in the first stage are the same as in the second stage, except that the variable for IPR 

protection (either Park or EIU) is omitted. The results reported here are for the second stage only. 

TABLE H.7 Estimated effects of improving IPR protection in China on activities of U.S. majority-owned affiliates in 

China

2008 Changes 

Initial value Lower bound Upper bound 

Variable Million $ Million $ Percent Million $ Percent 

 

Affiliate sales 171,733 86,552 50.4 88,959 51.8 

 

U.S. exports to affiliates 3,452 2,018 58.5 2,236 64.8 

U.S. imports from affiliates 5,241 4,636 88.5 4,974 94.9 

Net income of affiliates 8,515 3,296 38.7 3,721 43.7 

R&D performed by affiliates 663 92 13.8 206 31.1 

 

Thousand 

employees 

Thousand 

employees Percent 

Thousand 

employees Percent 

Employment 774 –25 –3.3 101 13.1 

Source: USITC staff calculations.
H-14 

The estimates presented in Chapter 4 associating increased sales and employment in U.S. 

affiliates in China with increases of employment in U.S. parent companies of MNCs of 

8,200–9,400 jobs were generated as follows. The estimate of Desai, Foley, and Hines 

(2005) implies that a 1.0 percent increase in employment of foreign affiliates is 

associated with an increase of 0.2 percent in U.S. domestic employment of parents of 

MNCs. This estimate was applied directly to the estimated increase in employment in 

U.S. affiliates in China as reported in Table 4.6 to yield the estimate of 9,400 jobs. The 

estimate of Hanson, Mataloni and Slaughter (2003) implies that U.S. domestic parent 

employment in MNCs increases by 0.02 percent for every 1.0 percent increase in affiliate 

sales. The estimate of increased affiliate sales presented in Table 4.6 was compared to 

total global affiliate majority-owned affiliate sales of U.S. MNCs, implying a 1.3 percent 

increase in total global affiliate sales. Using the estimate of Hanson, Mataloni and 

Slaughter together with this 1.3 percent increase and baseline data on parent employment 

in U.S. multinationals yields the estimate of 8,200 jobs. 

Simulation Methods 

Description of the GTAP Framework 

The quantitative simulations described in chapter 4 were constructed using the Global 

Trade Analysis Project (GTAP) modeling framework. The project consists of a 

documented global database on international trade and national income accounts (the 

GTAP database), along with a standard modeling framework to organize and analyze the 

data (the GTAP model). It allows comparisons of the global economy in two 

environments: one in which the base values of policy or environmental variables are 

unchanged, and one in which some values are changed or “shocked” to represent 

different circumstances. A change in these variables makes itself felt throughout the 

model, helping to yield insights into ways in which a policy change, for example, might 

influence economic phenomena less evidently related to the change. The version of the 

GTAP framework used here is static, meaning that it does not produce information on the 

speed with which changes propagate through the economy, or on how the economy 

adjusts in the intermediate term. 

The current release of the GTAP database is constructed with data based on the year 

2004. For purposes of the present study some of the data were updated to reflect 2009 

conditions. In addition, data available from BEA on international payments for 

intellectual property (royalties and licenses) were incorporated into the model’s values 

for the international trade flows of many goods and services. 

Implementing a Scenario with Increased Exports of Goods and 

Services 

Changing the level of IPR protection involves changing many different kinds of 

economic activity, including the enforcement of laws against counterfeiting of 

trademarks and the unfair and uncompensated use of intellectual capital. Many of these 

activities have been described in this report; as a rule, they are difficult to quantify in 

terms of the data and variables found in a simulation model such as GTAP. The model 

framework does not include explicit data on license and royalty remittances, or on trade 

in counterfeit or patent-infringing goods. The simulations presented here attempt to apply 
H-15 

to the model certain insights derived from the empirical econometrics described in 

chapter 4, in order to discover how some of the effects discerned in the empirical work 

may have further effects throughout the economy. 

Calibrating Inputs into the Model and Specifying the Experiment 

Among the findings of the Commission’s econometric analysis was that higher levels of 

IPR protection are associated with higher levels of trade among nations. The econometric 

analysis estimated the extent to which trade in various goods and services may increase in 

an environment of improved IPR protection. Those estimates were introduced into the 

GTAP model as shocks to China’s imports of goods and services from the United States 

and other countries with high levels of IPR protection. As a result of the introduction of 

these imports into the model, effects on U.S. trade, output, and employment were derived 

as presented in chapter 4. Note that these implied effects derive solely from an assumed 

increase in Chinese imports, without specific underlying changes in the way in which 

China uses the imports or improves IPR protection. 

In order to impose a shock to the level of China’s imports, it is necessary to relax 

assumptions about other components of the representation of China’s economy in the 

model. In particular, assumptions about the ability of China’s economy to make efficient 

use of more imports were relaxed (i.e., made endogenous in the model). Allowing more 

efficient use of inputs allows the Chinese economy to absorb the additional imports. It is 

to be expected that the efficiency of China’s economy will increase with enhanced IPR 

protection in China. 

The econometric analysis estimated the trade increases associated with improved IPR 

protection for many goods and services identified at the NAICS level of nomenclature. 

These products were then associated with the 57 product categories described in the 

GTAP model using concordances developed at the Commission. Most GTAP sectors 

contain several NAICS commodities; in turn, certain NAICS commodities are shared 

among more than one GTAP sector. The NAICS estimates were assigned to GTAP 

sectors with weights determined by trade shares. The econometric analysis described 

above determined central estimates as well as lower- and upper-bound estimates of 

expected export changes associated with increased IPR protection. The central estimates, 

as well as the lower- and upper-bound estimates, were implemented as assumed export 

changes in the GTAP model, along with the increased capital costs described in the next 

section. 

Certain sectors in the GTAP model are renamed in the reporting of the results in this 

report in order to highlight the roles of the IP-intensive parts of those sectors which are 

estimated to experience increased U.S. exports to China as a result of improved IPR 

protection. Thus, the GTAP sector “Paper products, publishing” is referred to as 

“Software, paper products, and publishing” in this report to make clear that software is 

included in the sector. The GTAP sector “Public Administration, Defense, Education, 

Health” is referred to as “Education and related services” to highlight the fact that the 

estimated increases in U.S. service exports to China pertain to education services. 
H-16 

Implementing a Scenario with Increased Capital Costs in China 

Calibrating Inputs into the Model 

One way to simulate a decline in computer software piracy is to effectively raise the price 

that Chinese firms must pay for computer software. This can be done by increasing the 

asset price of the computer software within the Chinese firms’ capital stock, which 

requires knowledge of the computer software share of the capital stock by sector. 

The Commission used 2010 BEA data on investment in private nonresidential fixed 

assets in the United States. The computer software share of the capital stock was 

calculated at the NAICS sector level as follows. First, the investment vector V is defined 

as the value of capital investment in private nonresidential fixed assets in National 

Income and Product Account (NIPA) asset type i (Ii) divided by the depreciation rate δ

for asset type i. 

Vk,i = Ii/δi 

Capital growth is assumed to be zero such that investment is made simply to replace 

depreciation. This simplifying assumption is helpful in the absence of data on growth 

rates of industry-specific capital stocks and on the change in structure of capital stocks. 

The share of investment in asset type i is then 

SHk,i = Vk,i/Σ iVk,i 

These shares are calculated across all sectors, with the focus being on the computer 

software share of the capital stock of each sector. The asset price shocks are then 

weighted with these shares. 

The increase in capital costs for China was calculated by applying separate price 

increases to the shares of software and computer hardware in each sector. The estimated 

price increase for software was calibrated based on the BSA’s estimated piracy rates for 

2010 for China (79 percent) and the United States (20 percent). Under the assumption 

that the Chinese piracy rate falls to the U.S. level, and that Chinese firms pay full price 

for nonpirated software and zero for pirated software, this amounts to a price increase for 

software of 281 percent.9

 

The picture for computer hardware is somewhat different. Data from the Commission’s 

questionnaire imply that the discount for counterfeit electronics is 30 percent, so the price 

increase from removing counterfeiting is 1/(1-0.3) – 1 = approximately 42.9 percent. 

However, neither imported computers nor computers produced in China by foreigninvested enterprises are likely to be counterfeited and sold at a price reduction; on the 

other hand, computers produced in China by Chinese domestically-owned firms might 

be. Supplementary calculations using inputs from China Data Online for the share of 

domestic computer enterprises in domestic-firm output, from the GTAP database on the 

share of Chinese electronics output that is exported, and from Ferrantino, Koopman, 

 9

 The BSA piracy rates imply that 21 percent of software in China is paid for, while 80 percent of 

software in the United States is paid for. Thus, 80/21 = 3.81, or an approximate quadrupling of price, while 

3.81 – 1 = 2.81, implying a 281 percent price increase. 
H-17 

Wang, and Yinug (2010) for the approximate share of China’s advanced-technology 

exports produced by FIEs. These calculations yielded an estimate for the share of 

computers absorbed in China produced by Chinese-owned firms in China of 3.9 percent. 

Even if these were all counterfeited at a 30 percent discount, the price increase arising 

from removing this discount would be only 0.429 x 0.039 = 1.7 percent. 

Thus, the increase in capital costs in each Chinese sector as a result for paying more for 

software and computers is calculated as 

(Share of software in total equipment and software) x 281 percent + (share of 

computers in total equipment and software) x 1.7 percent. 

The share of software in firms’ total equipment and software is greater than that of 

computers in a majority of sectors. Thus, the estimated increase in China’s capital costs 

associated with strengthening IPR protection comes almost entirely from increased 

payments for software. 

Specifying the Experiment 

The increases in capital costs calculated as described above were concorded to GTAP 

sectors and implemented directly as an increase in the price of capital in China. These 

increases were imposed simultaneously with the export changes discussed above, using 

the central, upper- and lower-bound estimates of the export changes. 

Detailed Sector-Specific Results from the Simulations 

The estimated effects of increased U.S. and third-country exports of goods and services 

on particular U.S. sectors are reported in appendix table H.8. These estimates include 

ranges of sectoral results for output, employment, U.S. exports to the world and China, 

and U.S. imports from the world and China. Results are reported for particular 

manufacturing and services sectors, and for all other sectors summed together. These 

results assume a fixed labor force, as discussed in the following section. Table H.9 

reports the results using the central estimates of the export changes under this same labor 

force assumption, as well as under the assumption that the labor force can be changed, 

also described in the following section. The results for many important sectors are 

discussed in further detail in chapter 4 

Fixed and Flexible Labor Market Assumptions 

The principle simulations presented in chapter 4 are based on the assumption that the 

supply of labor and capital in the economy is fixed, and that the changes in the economic 

environment, as modeled, serve to reallocate the supply of these factors among sectors 

without changing their total amounts. This assumption was made because the GTAP 

model does not include an adequate treatment of the mechanisms determining overall use 

of labor and capital, and because the fixed labor force assumption allows a more focused 

interpretation of the reallocation of resources among sectors. However, as mentioned in 

the chapter, it is possible to modify the fixed labor force assumption to illustrate some of 

the changes in the labor force that may occur in an environment in which there is a 

relatively high level of unemployment. In the principal results described in chapter 4, 

where labor is fixed, the increased demand for labor in some sectors is manifested by an 
H-18 

increase in real wages. In the alternative assumption, real wages are assumed to be held 

constant so that the effects of increased demand for labor are felt as an increase in the 

labor force. Table H.9 below shows sectoral effects for a simulation in which the central 

estimate for export increases is applied, along with the estimated increase in capital costs 

associated with increased IPR protection as described above, in a scenario in which the 

labor force is allowed to change in this manner. In addition to the evident differences in 

the employment of labor under the two different assumptions, the assumption of fixed 

labor and capital imposes tighter limits on the growth of output and trade. 
H-19 

TABLE H.8 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, including U.S. receipts of 

license fees and royalties, as a result of improved IPR protection in China

Change in sectoral output Change in sectoral employment 

Lower bound Upper bound Lower bound Upper bound 

Sector Million $ Percent Million $ Percent 

Thousand 

employees Percent 

Thousand 

employees Percent 

Bovine meat products –31 –0.0 –66 –0.1 (a) –0.0 (a) –0.1 

Meat products nec –21 –0.0 –39 –0.1 (a) –0.0 (a) –0.1 

Vegetable oils and fats –39 –0.3 –113 –0.8 (a

) –0.3 (a) –0.8 

Dairy products 10 0.0 61 0.1 (a

) 0.0 (a) 0.1 

Processed rice –4 –0.2 –16 –0.9 (a

) –0.2 (a) –0.9 

Sugar –5 –0.0 –12 –0.1 (a

) –0.0 (a) –0.1 

Food products nec –78 –0.0 160 0.1 (a

) –0.0 (a) 0.1 

Beverages and tobacco 

products 27 0.0 123 0.1 (a

) 0.0 (a) 0.1 

Textiles –903 –0.8 –3,229 –2.9 –2 –0.8 –9 –2.9 

Wearing apparel –562 –0.7 –2,285 –3.0 –2 –0.7 –8 –3.0 

Leather products –125 –1.3 –576 –5.8 –1 –1.3 –3 –5.8 

Wood products –676 –0.3 –1,259 –0.6 –3 –0.3 –5 –0.6 

Software, paper products, 

publishing 503 0.1 2,286 0.6 2 0.1 10 0.6 

Petroleum, coal products 37 0.0 668 0.3 (a

) 0.0 (a) 0.3 

Chemical, rubber, plastic 

products –855 –0.1 –302 –0.1 –2 –0.1 –1 –0.1 

Mineral products nec –253 –0.2 –440 –0.4 –1 –0.2 –2 –0.4 

Ferrous metals –472 –0.4 –1,240 –1.1 –1 –0.4 –4 –1.1 

Metals nec –622 –0.7 –1,821 –2.1 –1 –0.7 –4 –2.1 

Metal products –669 –0.3 –2,348 –0.9 –2 –0.3 –9 –0.9 

Motor vehicles and parts –471 –0.1 –549 –0.1 –1 –0.1 –1 –0.1 

Transport equipment nec –494 –0.3 –791 –0.4 –2 –0.3 –4 –0.4 

Electronic equipment 6,177 1.5 –7,107 –1.8 8 1.5 –9 –1.8 

Machinery and equipment 

nec –733 –0.1 –2,175 –0.3 –4 –0.1 –12 –0.3 

Manufactures nec –752 –0.9 –1,785 –2.2 –3 –0.9 –7 –2.2 

Electricity –20 –0.0 –116 –0.0 (

a

) –0.0 (a) –0.1 

Gas manufacture, 

distribution –29 –0.0 –72 –0.1 (a

) –0.0 (a) –0.1 

Water –2 0.0 –1 0.0 (a

) 0.0 (a) 0.0 

Construction –110 –0.0 2,922 0.2 –1 -0.0 19 0.2 

Trade 711 0.0 –114 0.0 7 0.0 –1 0.0 

Transport nec –644 –0.1 86 0.0 –6 –0.1 1 0.0 

Water transport –37 –0.1 96 0.2 (a

) –0.1 (a) 0.2 

Air transport –143 –0.1 299 0.2 –1 –0.1 1 0.2 

Communication 33 0.0 344 0.1 (

a

) 0.0 1 0.1 

Financial services nec 101 0.0 562 0.0 (a

) 0.0 3 0.0 

Insurance –25 –0.0 1,105 0.2 (a

) –0.0 6 0.2 

Business services nec 919 0.1 1,398 0.1 7 0.1 11 0.1 

Recreational and other 

services 1,099 0.1 2,871 0.3 9 0.1 24 0.3 

Education and related 

services 1,434 0.0 3,633 0.1 12 0.0 30 0.1 

All other sectors –477 0.0 –1,032 –0.3 –3 –0.1 –7 –0.3 

 Total 1,802 0.0 –10,875 –0.1 8 0.0 23 0.0 

Source: USITC staff calculations. Note: nec = not elsewhere classified. 

 a

Less than 500 employees. 
H-20 

TABLE H.8 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, including U.S. receipts of 

license fees and royalties, as a result of improved IPR policies in China—Continued

Change in U.S. exports to China Change in U.S. imports from China 

Lower bound Upper bound Lower bound Upper bound 

Sector Million $ Percent Million $ Percent Million $ Percent Million $ Percent 

Bovine meat products –2 –2.3 32 37.6 (a

) 4.6 (a) 36.9 

Meat products nec –2 –2.3 35 37.6 –1 –2.9 (a

) 1.2 

Vegetable oils and fats (

a

) –2.3 5 37.6 1 7.2 5 30.9 

Dairy products –1 –2.3 16 37.6 1 5.5 3 20.0 

Processed rice (

a

) –2.3 (a) 37.6 –1 –1.8 (a) –1.2 

Sugar (

a

) –0.6 (a) 16.6 (a) –1.3 (a) –5.0 

Food products nec –13 –2.3 212 37.6 55 2.3 137 5.8 

Beverages and tobacco 

products –1 –2.7 16 36.7 1 1.7 3 5.1 

Textiles 17 4.1 216 53.0 297 4.2 1,320 18.6 

Wearing apparel 1 4.0 17 52.7 351 6.0 1,678 28.6 

Leather products 9 4.0 114 52.7 256 1.6 1,654 10.3 

Wood products 10 4.0 131 52.9 691 7.2 1,792 18.8 

Software, paper products, 

publishing 619 28.6 2,312 106.8 193 12.3 286 18.1 

Petroleum, coal products 22 4.8 223 49.9 38 3.5 66 6.0 

Chemical, rubber, plastic 

products 275 3.6 3,803 49.4 168 1.1 1,868 12.7 

Mineral products nec –3 –1.1 86 38.5 173 7.1 372 15.2 

Ferrous metals –6 –1.1 104 17.3 150 8.4 314 17.5 

Metals nec –8 –1.0 129 16.7 204 16.8 455 37.4 

Metal products 17 4.9 191 54.6 693 6.6 1,893 17.9 

Motor vehicles and parts 15 2.0 325 42.9 133 2.1 2,052 31.9 

Transport equipment nec 41 1.5 1,145 41.9 60 2.0 807 27.5 

Electronic equipment 1,077 16.3 3,786 57.5 –6,587 –8.7 7,242 9.6 

Machinery and equipment 

nec 191 2.3 3,594 43.4 –840 –2.3 2,800 7.7 

Manufactures nec 6 5.0 61 47.3 1,231 10.3 2,827 23.6 

Electricity –1 –13.8 –2 –18.7 8 33.1 11 49.5 

Gas manufacture, 

distribution (

a

) -6.0 (a) –12.0 5 13.2 9 23.2 

Water –2 –13.3 –3 –17.7 2 36.2 3 51.7 

Construction -5 -4.9 138 142.5 6 14.0 12 27.4 

Trade 18 3.8 485 100.1 65 20.1 149 45.7 

Transport nec –165 –15.4 865 80.5 354 23.4 656 43.4 

Water transport –5 –15.4 28 80.5 36 21.9 56 34.2 

Air transport –80 –15.4 421 80.5 115 26.6 288 66.4 

Communication 25 18.3 215 159.5 24 31.4 38 49.9 

Financial services nec 14 5.5 321 126.6 19 36.0 30 57.9 

Insurance 41 5.5 942 126.6 45 34.1 156 117.8 

Business services nec 994 73.0 2,365 173.6 121 23.5 245 47.6 

Recreational and other 

services 850 73.0 2,022 173.6 69 18.7 135 36.8 

Education and related 

services 1,519 69.5 2,777 127.1 107 19.7 225 41.5 

All other sectors 45 0.8 306 5.5 16 1.4 –1 –0.1 

 Total 5,511 11.9 27,434 59.5 –1,741 –0.8 29,587 13.9 

Source: USITC staff calculations. Note that the change in U.S. exports to China for most sectors was applied as an exogenous 

shock in the model, as described in the text. 

 a

Less than $500,000. 
H-21 

TABLE H.8 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, including U.S. receipts of 

license fees and royalties, as a result of improved IPR protection in China—Continued

Change in U.S. exports to the world Change in U.S. imports from the world 

Lower bound Upper bound Lower bound Upper bound 

Sector Million $ Percent Million $ Percent Million $ Percent Million $ Percent 

Bovine meat products –19 –1.3 –31 -2.1 33 0.8 70 1.6 

Meat products nec –34 –0.8 –87 –1.9 13 0.6 23 1.1 

Vegetable oils and fats –27 –1.1 –92 –3.6 12 0.5 21 0.9 

Dairy products –12 –1.0 –20 –1.6 15 0.6 24 1.0 

Processed rice –3 –0.4 –13 –2.0 2 0.6 3 1.1 

Sugar –1 –0.8 –3 –2.7 7 0.7 15 1.4 

Food products nec –75 –0.5 40 0.3 167 0.6 292 1.0 

Beverages and tobacco 

products –8 –0.2 2 0.1 57 0.4 76 0.6 

Textiles –230 –2.0 –737 –6.4 308 0.7 760 1.8 

Wearing apparel –86 –2.9 –336 –11.2 590 0.9 1,658 2.6 

Leather products –24 –1.2 –44 –2.2 140 0.5 272 1.0 

Wood products –82 –1.2 –113 –1.6 481 0.9 1,038 2.0 

Software, paper products, 

and publishing 516 2.7 2,064 10.6 204 0.8 314 1.3 

Petroleum, coal products –26 –0.2 112 0.8 34 0.1 6 0.0 

Chemical, rubber, plastic 

products –305 –0.3 1,771 1.5 724 0.5 1,392 1.0 

Mineral products nec –60 –1.1 –51 –0.9 172 0.9 299 1.5 

Ferrous metals –102 –1.3 –148 –1.9 146 0.6 224 1.0 

Metals nec –277 –2.2 –599 –4.8 182 0.7 146 0.6 

Metal products –178 –1.3 –363 –2.7 503 1.5 1,179 3.5 

Motor vehicles and parts –190 –0.3 –111 –0.2 897 0.4 1,560 0.8 

Transport equipment nec –326 –0.7 –325 –0.7 196 0.5 552 1.5 

Electronic equipment 2,619 2.8 –546 –0.6 278 0.1 3,142 1.6 

Machinery and equipment 

nec –266 –0.2 792 0.6 1,122 0.5 3,313 1.5 

Manufactures nec –238 –1.7 –530 –3.7 595 1.1 1,216 2.2 

Electricity –8 –0.8 –15 –1.4 10 0.6 11 0.8 

Gas manufacture, distribution –5 –1.9 –12 –5.0 5 1.3 12 2.9 

Water –6 –1.8 –11 –3.6 2 1.0 4 1.8 

Construction –25 –0.8 96 3.2 11 0.6 22 1.2 

Trade –110 –1.0 177 1.6 121 0.6 186 0.9 

Transport nec –350 –1.4 464 1.9 206 0.6 363 1.0 

Water transport –21 –1.2 –4 –0.2 18 0.7 30 1.2 

Air transport –148 –0.8 242 1.3 115 0.5 168 0.7 

Communication –8 –0.1 142 2.4 43 0.6 69 1.0 

Financial services nec –45 –0.2 218 1.2 57 0.6 83 0.8 

Insurance –6 –0.1 816 8.3 113 0.5 164 0.8 

Business services nec 729 1.2 1,827 2.9 318 0.6 430 0.8 

Recreational and other 

services 713 2.6 1,702 6.3 67 0.7 98 1.1 

Education and related 

services 1,214 2.5 1,963 4.1 214 0.6 194 0.5 

All other sectors –99 –0.2 –218 –0.5 217 0.1 253 0.2 

 Total 2,391 0.3 8,021 0.9 8,393 0.5 19,681 1.2 

Source: USITC staff calculations. 
H-22 

TABLE H.9 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, fixed vs. flexible labor simulation

Change in sectoral output Change in sectoral employment 

Fixed labor Flexible labor Fixed labor Flexible labor 

Sector Million $ Percent Million $ Percent 

Thousand 

employeesa Percent 

Thousand 

employeesa Percent 

Bovine meat products –63 –0.1 1,080 1.4 (b

) –0.1 2 1.4 

Meat products nec –28 –0.0 989 1.5 (

b

) –0.0 4 1.5 

Vegetable oils and fats –78 –0.5 182 1.2 (

b

) –0.5 (b

) 1.2 

Dairy products 39 0.1 1,189 1.5 (

b

) 0.1 2 1.5 

Processed rice –12 –0.6 23 1.2 (

b

) –0.6 (

b

) 1.2 

Sugar –9 –0.1 223 1.5 (

b

) –0.1 (

b

) 1.5 

Food products nec –12 0.0 4,551 1.6 (

b

) –0.0 13 1.6 

Beverages and tobacco 

products 79 0.1 1,805 1.6 

(

b

)

0.1 4 1.6 

Textiles –1,932 –1.7 –638 –0.6 –5 –1.7 –2 –0.6 

Wearing apparel –1,339 –1.8 –575 –0.8 –5 –1.8 –2 –0.8 

Leather products –327 –3.3 –256 –2.6 –1 –3.3 –1 –2.6 

Wood products –999 –0.5 2,608 1.2 –4 –0.5 10 1.2 

Software, paper products, and 

publishing 1,365 0.4 7,202 2.0 6 0.4 33 2.0 

Petroleum, coal products 347 0.1 3,031 1.2 (b

) 0.1 2 1.2 

Chemical, rubber, plastic 

products –952 –0.2 8,816 1.4 –3 –0.2 23 1.4 

Mineral products nec –377 –0.4 1,513 1.4 –2 –0.4 7 1.4 

Ferrous metals –912 –0.8 863 0.8 –3 –0.8 2 0.8 

Metals nec –1,199 –1.4 446 0.5 –3 –1.4 1 0.5 

Metal products –1,601 –0.6 1,640 0.6 –6 –0.6 6 0.6 

Motor vehicles and parts –309 –0.1 7,947 1.8 0 –0.1 12 1.8 

Transport equipment nec –753 –0.4 1,992 1.1 –4 –0.4 10 1.1 

Electronic equipment 16 0.0 3,549 0.9 (b

) 0.0 4 0.9 

Machinery and equipment nec –2,858 –0.4 6,346 0.9 –15 –0.4 34 1.0 

Manufactures nec –1,283 –1.6 –129 –0.2 –5 –1.6 –1 –0.2 

Electricity –71 –0.0 4,252 1.5 (

b

) –0.0 12 1.5 

Gas manufacture, distribution –52 –0.1 1,260 1.5 (

b

) –0.1 1 1.5 

Water 1 0.0 1,687 1.6 (

b

) 0.0 10 1.6 

Construction 1,402 0.1 29,626 2.1 9 0.1 197 2.1 

Trade 368 0.0 40,970 1.7 4 0.0 414 1.7 

Transport nec –215 –0.0 7,366 1.5 –2 –0.0 68 1.5 

Water transport 64 0.1 1,052 2.0 (b

) 0.1 5 2.0 

Air transport 126 0.1 2,869 1.6 1 0.1 12 1.6 

Communication 207 0.1 7,340 1.7 1 0.0 29 1.7 

Financial services nec 364 0.0 22,057 1.8 2 0.0 137 1.8 

Insurance 565 0.1 7,987 1.8 3 0.1 43 1.8 

Business services nec 1,337 0.1 29,243 1.8 11 0.1 241 1.8 

Recreational and other services 2,076 0.2 18,761 1.8 17 0.2 159 1.8 

Education and related services 3,219 0.1 68,727 1.8 26 0.1 579 1.8 

All other sectors –739 –0.2 169,173 1.6 –5 –0.2 32 1.3 

 Total –4,545 –0.0 466,767 1.6 0c

 0.0 2,103 1.7 

Source: USITC staff calculations. 

 a

Full-time equivalents. 

 b

Less than 500 employees. 

 c

The difference between 0 and the sum of the column is due to rounding error associated with sectoral disaggregation. 
H-23 

TABLE H.9 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, fixed vs. flexible labor 

simulation—Continued

 Change in U.S. exports to China Change in U.S. imports from China 

Fixed labor Flexible labor Fixed labor Flexible labor 

Sector Million $ Percent Million $ Percent Million $ Percent Million $ Percent 

Bovine meat products –2 –2.3 -2 -2.3 (a

) 13.0 (a) 2.2 

Meat products nec 16 17.5 16 17.5 (a

) -0.6 –12 –33.8 

Vegetable oils and fats 2 17.5 2 17.5 3 19.2 –1 –3.9 

Dairy products 7 17.5 7 17.5 2 13.6 (a

) 2.1 

Processed rice (

a

) 17.5 (a) 17.5 (a) 0.7 –4 –12.6 

Sugar (

a

) 9.1 (a) 9.1 (a) -0.8 (a) 2.7 

Food products nec 45 7.9 45 7.9 105 4.4 –107 –4.5 

Beverages and tobacco 

products 8 17.1 8 17.1 3 4.9 5 8.3 

Textiles 116 28.6 116 28.6 704 9.9 1,785 25.1 

Wearing apparel 9 28.5 9 28.5 903 15.4 2,221 37.8 

Leather products 61 28.5 61 28.5 887 5.5 1,633 10.2 

Wood products 70 28.4 70 28.4 1,311 13.8 3,336 35.0 

Software, paper products, 

and publishing 1,641 75.8 1,641 75.8 624 39.5 834 52.9 

Petroleum, coal products 122 27.3 122 27.3 48 4.3 45 4.1 

Chemical, rubber, plastic 

products 2,019 26.2 2,019 26.2 1,509 10.3 3,432 23.4 

Mineral products nec 42 18.6 42 18.6 315 12.8 774 31.6 

Ferrous metals 49 8.1 49 8.1 212 11.9 550 30.7 

Metals nec 61 7.8 61 7.8 291 24.0 559 46.0 

Metal products 103 29.3 103 29.3 1,382 13.1 3,661 34.7 

Motor vehicles and parts 171 22.6 171 22.6 846 13.1 2,052 31.9 

Transport equipment nec 574 21.0 574 21.0 514 17.5 1,476 50.3 

Electronic equipment 2,405 36.5 2,405 36.5 –257 –0.3 8,394 11.1 

Machinery and equipment 

nec 1,903 23.0 1,903 23.0 2,861 7.9 12,475 34.4 

Manufactures nec 33 25.3 33 25.3 2,076 17.3 4,429 39.0 

Electricity –1 –14.1 (a

) –0.6 8 34.2 10 44.9 

Gas manufacture, distribution (

a

) –7.8 (a) 15.6 6 15.5 3 6.8 

Water –2 –13.5 –2 –10.7 2 36.5 5 84.8 

Construction –7 –7.3 6 6.1 8 18.1 16 35.7 

Trade 259 53.5 259 53.5 92 28.2 144 44.1 

Transport nec 355 33.0 355 33.0 394 26.1 819 54.2 

Water transport 11 33.0 11 33.0 37 22.9 76 46.3 

Air transport 173 33.0 173 33.0 175 40.2 252 58.1 

Communication 120 89.2 120 89.2 24 32.5 42 55.7 

Financial services nec 169 66.4 169 66.4 20 39.0 34 66.2 

Insurance 494 66.4 494 66.4 84 63.7 106 80.1 

Business services nec 1,757 129.0 1,757 129.0 164 31.9 277 53.8 

Recreational and other 

services 1,503 129.0 1,503 129.0 92 25.1 188 51.1 

Education and related 

services 2,754 126.0 2,754 126.0 144 26.5 325 59.9 

All other sectors 175 3.2 175 3.2 1 0.1 –140 –12.2 

 Total 17,212 37.4 17,227 37.4 15,591 7.3 46,694 23.4 

Source: USITC staff calculations. Note that the change in U.S. exports to China for most sectors was applied as an exogenous 

shock in the model, as described in the text. 

 a

Less than $500,000. 
H-24 

TABLE H.9 Simulated effects on U.S. sectors of increasing U.S. exports and China’s capital costs, fixed vs. flexible labor 

simulation—Continued

 Change in U.S. exports to the world Change in U.S. imports from the world 

Fixed labor Flexible labor Fixed labor Flexible labor 

Sector Million $ Percent Million $ Percent Million $ Percent Million $ Percent 

Bovine meat products –42 –2.9 –8 –0.6 48 1.1 92 2.1 

Meat products nec –61 –1.3 93 2.1 16 0.8 38 1.8 

Vegetable oils and fats –61 –2.4 2 0.1 14 0.6 55 2.4 

Dairy products –16 –1.3 7 0.6 18 0.7 53 2.1 

Processed rice –9 –1.4 11 1.8 2 0.8 1 0.4 

Sugar –2 –1.8 (a

) 0.3 10 1.0 24 2.2 

Food products nec –73 –0.5 246 1.7 214 0.8 530 1.9 

Beverages and tobacco 

products –3 –0.1 51 1.2 59 0.4 278 2.0 

Textiles –445 –3.9 –564 –4.9 492 1.2 1,155 2.7 

Wearing apparel –198 –6.6 –290 –9.7 1,041 1.6 2,234 3.5 

Leather products –29 –1.5 –15 –0.8 188 0.7 659 2.3 

Wood products –101 –1.4 5 0.1 738 1.4 2,057 3.9 

Software, paper products, and 

publishing 1,435 7.4 1,715 8.8 353 1.4 764 3.1 

Petroleum, coal products 44 0.3 185 1.3 5 0.0 940 3.0 

Chemical, rubber, plastic 

products 592 0.5 2,119 1.8 1,068 0.7 3,557 2.5 

Mineral products nec –61 –1.1 16 0.3 231 1.2 613 3.2 

Ferrous metals –123 –1.6 –24 –0.3 152 0.7 432 1.9 

Metals nec –416 –3.3 –153 –1.2 128 0.5 398 1.5 

Metal products –287 –2.1 –274 –2.0 848 2.5 2,083 6.2 

Motor vehicles and parts –86 –0.1 1,033 1.5 1,066 0.5 4,822 2.4 

Transport equipment nec –404 –0.8 85 0.2 360 0.9 1,140 3.0 

Electronic equipment 1,208 1.3 1,191 1.3 1,521 0.8 5,427 2.8 

Machinery and equipment nec –289 –0.2 –212 –0.2 2,580 1.1 8,180 3.6 

Manufactures nec –386 –2.7 –206 –1.4 889 1.6 1,956 3.6 

Electricity –10 –1.0 7 0.7 9 0.6 37 2.4 

Gas manufacture, distribution –8 –3.3 3 1.1 8 1.9 8 1.9 

Water –8 –2.5 –1 –0.3 3 1.3 5 2.2 

Construction –36 –1.2 42 1.4 15 0.8 50 2.7 

Trade 60 0.5 189 1.7 136 0.6 460 2.2 

Transport nec 94 0.4 442 1.8 249 0.7 881 2.5 

Water transport –10 –0.6 31 1.8 22 0.8 65 2.5 

Air transport 59 0.3 177 1.0 128 0.5 673 2.8 

Communication 71 1.2 181 3.0 50 0.7 147 2.1 

Financial services nec 95 0.5 396 2.1 62 0.6 227 2.2 

Insurance 413 4.2 552 5.6 122 0.6 456 2.1 

Business services nec 1,380 2.2 2,384 3.8 337 0.6 1,146 2.1 

Recreational and other 

services 1,286 4.7 1,614 5.9 76 0.8 231 2.5 

Education and related 

services 2,212 4.6 2,908 6.0 186 0.5 745 2.1 

All other sectors –151 –0.3 –20 –0.0 161 0.1 4,731 3.1 

 Total 5,634 0.6 13,920 1.6 13,604 0.8 47,349 2.9 

Source: USITC staff calculations. 

 a

Less than $500,000.