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S. HRG. 109–1105 

IMPACTS OF PIRACY AND COUNTERFEITING 

OF AMERICAN GOODS AND INTELLECTUAL 

PROPERTY IN CHINA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TRADE, TOURISM, AND 

ECONOMIC DEVELOPMENT 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

MARCH 8, 2006 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

KENNETH R. NAHIGIAN, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

SUBCOMMITTEE ON TRADE, TOURISM, AND ECONOMIC DEVELOPMENT 

GORDON H. SMITH, Oregon, Chairman 

TED STEVENS, Alaska 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

BYRON L. DORGAN, North Dakota, Ranking 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

BILL NELSON, Florida 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

(III) 

C O N T E N T S 

Page 

Hearing held on March 8, 2006 .............................................................................. 1 

Statement of Senator Dorgan ................................................................................. 2 

Statement of Senator DeMint ................................................................................. 20 

Statement of Senator Smith ................................................................................... 1 

WITNESSES

Alford, William P., Henry L. Stimson Professor of Law; Vice Dean for the 

Graduate Program and International Legal Studies; Director of East Asian 

Legal Studies, Harvard Law School ................................................................... 36 

Prepared statement .......................................................................................... 38 

Israel, Chris, Coordinator for International Intellectual Property Enforcement, Department of Commerce ......................................................................... 4 

Prepared statement .......................................................................................... 6 

Vargo, Franklin J., Vice President for International Economic Affairs, National Association of Manufacturers ................................................................... 23 

Prepared statement .......................................................................................... 26 

York, Andrew, Vice President, Leupold & Stevens, Inc. ...................................... 29 

Prepared statement .......................................................................................... 32 

APPENDIX

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared statement ........... 49 

Response to written questions submitted by Hon. Daniel K. Inouye to: 

William P. Alford .............................................................................................. 51 

Chris Israel ....................................................................................................... 49 

Franklin J. Vargo ............................................................................................. 50 

(1) 

IMPACTS OF PIRACY AND COUNTERFEITING 

OF AMERICAN GOODS AND INTELLECTUAL 

PROPERTY IN CHINA 

WEDNESDAY, MARCH 8, 2006 

U.S. SENATE, 

SUBCOMMITTEE ON TRADE, TOURISM, AND ECONOMIC

DEVELOPMENT, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:35 p.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Gordon H. Smith, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. GORDON H. SMITH, 

U.S. SENATOR FROM OREGON 

Senator SMITH. Senator Dorgan and I are jointly holding this 

hearing. We call it to order. This is the Subcommittee on Trade, 

Tourism, and Economic Development. I thank Senator Dorgan for 

suggesting today’s topic. We will examine the impact piracy and 

counterfeiting in China has on U.S. businesses. I appreciate all of 

our witnesses who are here today for re-arranging their schedules 

to be here, and I want to give a special welcome to Andy York from 

Oregon who is here to talk about problems his business has faced 

in China. 

U.S.-China economic ties have expanded greatly in the last sev- eral years. In 2005, total bilateral trade rose to an estimated $286 

billion up from only about $5 billion in 1980. Today, China is the 

United States’ third-largest trading partner and our fourth-largest 

export market. While U.S. exports to China have grown dramatically in recent years, so too have Chinese exports to the United 

States. Last year, the U.S. trade deficit, however, with China hit 

a record $203 billion. 

Experts will tell you that while staggering, this number also reflects goods produced by U.S. companies in China and then shipped 

to the United States and sold to American consumers. What is not 

reflected in this number is the billions of dollars that U.S. producers lose because of illegal reproduction of software, retail piracy 

and trademark counterfeiting in China. My staff, in fact, showed 

me some Zippo lighters that are ones genuine made there. And two 

others are counterfeit, but they make clear though made there, 

that they represent to be made in Bradford, Pennsylvania. Not 

honest, not good. The reality is that the Chinese are consuming 

U.S. goods, but they are not always paying for them. 

2 

According to the Congressional Research Service, counterfeit 

goods represent between 15 and 20 percent of all products made in 

China and account for about 8 percent of China’s GDP. The Business Software Alliance estimates that in 2004, the rate of software 

piracy in China was roughly 90 percent. And for motion pictures, 

the rate of piracy was approximately 93 percent. In 2003, more 

than 66 percent of imported counterfeit goods seized by the U.S. 

Customs Service all traced back to China. 

This December will mark the fifth anniversary of China’s accession to the WTO. When China acceded to it, it promised to bring 

its intellectual property laws into compliance with WTO rules. 

However, actual enforcement of China’s IPR laws remains a huge 

problem, and U.S. companies are still reporting large-scale counterfeiting and piracy of their products in China. 

Well, I look forward to hearing from today’s witnesses, and I’m 

pleased to turn the mike to Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Well, Mr. Chairman, thank you very much, and 

thank you for agreeing to call this hearing. This is a very important issue. You and I may have some differences of agreement on 

trade, but I think we would share a concern, and that is the concern about growing trade deficits, not just with China, but with 

other countries as well and increased piracy and counterfeiting of 

American goods. I want to run through a few charts if I might, Mr. 

Chairman, and talk a little about where we find ourselves. First, 

these are our trade deficits with China, but if I put up a chart that 

showed our trade deficit generally, it would look about like this. Almost a third of our trade deficit is with China, but as you can see, 

it’s growing and growing and growing and getting worse and worse 

and worse, and nothing ever changes. That’s a $202 billion trade 

deficit with the country of China last year. The second chart shows 

that China has not resolved critical deficiencies in IPR, Intellectual 

Property Protection Enforcement, and that comes from the U.S. 

Trade Ambassador’s Office. Actually, in April of 2004, China committed to us to achieving a significant reduction in Chinese piracy. 

That was April 2004. April 29, 2004, our U.S. Trade Representative 

said that it not only didn’t get better, it got worse. And so, what 

have we done? We said, well, then we’re going to put you on a 

watch list. I mean, that’s going to throw the fear of God into that 

country. All of a sudden, they’re going to be put on a watch list. 

Let me just have the next chart. You will see that despite the 

promises by the Chinese, Criminal Intellectual Property Rights investigations in China have plummeted, have gone down—way 

down. And finally, the next chart. This shows that the majority of 

fake products or counterfeit products coming into the United 

States, 67 percent are coming in from the country of China. Let me 

point out, however, that China is not without its ability to deal 

with these issues. The Government of China—the Communist Government of China owns this particular logo. China will be hosting 

the Olympics. And so, they own this logo. And of course, there is 

some value in owning that logo. The Government of China owns it. 

All of a sudden, when that logo was created, some people on the 

3 

streets of China began peddling cups and banners and things with 

that logo. They began pirating and counterfeiting something owned 

by the Chinese Government. They shut it down just like that. I 

mean immediately. They had people arrested and off the streets. 

They wouldn’t put up with piracy and counterfeiting on their 

streets when it came to pirating and counterfeiting something 

owned by the Chinese Government. Now finally, these two automobiles, a Chevy Spark and Chery QQ—as you will see, Chery is 

only one letter away from Chevy. This car—actually, the Chery QQ 

was a subject of a court action. General Motors filed an action 

against the Chinese saying that a Chinese automobile company 

had stolen the production designs from General Motors for this little Chery QQ car. This has been quietly settled out of court with 

no one understanding what the settlement is, but I show that for 

a reason. TIME Magazine says here come the really cheap cars. 

Chinese pirate companies have long been accused of illegally copying easy stuff like shoe polish and digital movies. Now, General 

Motors says the Chinese firm knocked off an entire vehicle, and 

Americans could soon start buying its cars. Since this new story, 

we’ve had two other new stories, significant ones, one following the 

auto show in Detroit, Mr. Chairman, recently saying that in 2007, 

Americans will begin buying Chinese cars shipped to this country. 

I want to make one point about that. In our last bilateral trade 

agreement, just to show that the issue is not exclusively pirating 

and counterfeiting, some of it is fundamental gross incompetence 

on the part of America’s trade negotiators, in the last bilateral 

trade agreement, our negotiators agreed to do this with China. 

With respect to bilateral automobile trade with China, we agreed 

that any U.S. automobiles we would sell into China could be assessed a 25 percent tariff. Any Chinese automobile sold in the 

United States would be assessed a two and a half percent tariff. 

In other words, with a country with whom we had a huge trade 

deficit already, a country of some 1.3 billion people who are going 

to want to drive cars, a country that will have an automobile industry and is fast developing an automobile export industry, we decided it would be just fine if they imposed a tariff on bilateral automobile trade that is ten times the tariff that we would impose on 

a Chinese car coming to the United States. That is fundamentally 

incompetent. I—let me just finally say, Mr. Israel, I’m glad you’re 

here. I’m going to have to be in and out a couple of times today, 

but I appreciated your statement. You do say, however, under the 

few positive developments in your statement, that President Hu 

publicly acknowledged the problem. Look, President Hu not only 

acknowledges it, he creates it. They understand it because they create the problem. It is a strategy. It is a Chinese strategy that this 

country doesn’t have the nerve, the backbone or the will to confront. At least let’s start on a baby step. Let’s start on the baby 

step of dealing with piracy and counterfeiting. It’s not a baby step 

in its impact. $200 billion is what it cost American firms as estimated by the U.S. Chamber of Commerce in the past year. So, let’s 

at least start there even if we have some other disagreements 

about the bilateral trade arrangement. As you can see, Mr. Chairman, having this hearing is very therapeutic for me, and I hope 

that we will have kind of an interesting time talking about the biVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
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lateral trade relationship between the U.S. and China and what 

counterfeiting and piracy does to injure American interests. Our Intellectual Property Rights are being systematically injured every 

single day, and nobody frankly seems to give a damn. We talk and 

talk and talk, and at the end of these hearings, we do nothing. 

Let’s hope perhaps, Mr. Chairman, with your leadership and with 

the Congress putting a spotlight on this, maybe times will be different. Thank you, Mr. Chairman. 

Senator SMITH. Well, after this therapy, I hope you’re feeling better. 

Senator DORGAN. I’m feeling much better, but I’m hoping I’m 

feeling better after the testimony as well. 

Senator SMITH. Well, thank you, Senator, and we have as our 

first witness, Chris Israel, who is the Coordinator for International 

Intellectual Property Enforcement, U.S. Department of Commerce. 

Chris, thank you for being here, and the mike is yours. 

STATEMENT OF CHRIS ISRAEL, COORDINATOR FOR 

INTERNATIONAL INTELLECTUAL PROPERTY ENFORCEMENT, 

DEPARTMENT OF COMMERCE 

Mr. ISRAEL. Thank you, Chairman Smith and Ranking Member 

Dorgan. I appreciate the opportunity to be here today to address 

the important issue of Intellectual Property Rights Enforcement 

and challenge, and I hope—I do frankly hope that my insight and 

assessment of some of the things the Administration is engaged in 

does provide an advancement in terms of the dialogue we’re having 

and a bit more therapy. We can all certainly use it on this issue 

because it is an incredibly frustrating one. 

I thank the Committee for its continued support and leadership 

on issues concerning the protection of American intellectual property. 

My office works to leverage the capabilities and resources of the 

U.S. Government to promote effective, global enforcement of intellectual property rights. We have built a coordinated enforcement 

model that includes Trade, Commerce, Law Enforcement and Customs agencies. We certainly know the rising tide of counterfeiting 

and piracy in China has created enormous challenges for U.S. businesses. According to the U.S. Chamber of Commerce, the statistic 

that was certainly discussed, worldwide IP theft cost U.S. businesses approximately $250 billion annually. In a 2005 survey of the 

U.S.-China Business Council, members listed IP enforcement as 

their greatest single concern. Our industry reports that infringement levels in China range from 85 to 95 percent for all copyright 

works, and in 2005, the value of copyrighted works that were pirated exceeded $2.3 billion. In 2005, U.S. Customs reported that 

China was by far the leading source of counterfeit products that 

were seized at our borders, accounting for 69 percent of all seizures. 

Today, I have brought a few examples of the counterfeit and pirated goods from China that were actually seized by U.S. Customs. 

These include pirated versions of well-known U.S. software, counterfeit pharmaceuticals and dangerously low-quality electrical 

equipment, which bears a counterfeit Underwriter’s Laboratory 

seal. Though we recognize China has expanded their efforts, there 

5 

are still critical deficiencies in IP protection and enforcement. We 

certainly appreciate the recent statements made by President Hu, 

by Vice-Premier Wu Yi and others on improving IP enforcement in 

China. These are steps in the right direction, but we need to see 

more than just statements. It is crucial that China deliver on their 

commitments. The U.S. Government is working on many fronts to 

engage China on IP enforcement, and under President Bush’s leadership, we have developed a proactive strategy being coordinated 

among a number of agencies. The Bush Administration’s China IP 

Strategy is built on four pillars: one, bilateral engagement; two, the 

effective use of all of our trade tools; three, the expansion of law 

enforcement cooperation; and finally, direct work with our private 

sector. We are utilizing all of our resources to effectively implement 

our approach. First, we are working through the U.S.-China Joint 

Commission on Commerce and Trade, the JCCT, to secure bilateral 

IP commitments. In 2005, we negotiated a comprehensive set of 

commitments with the Chinese Government to reduce counterfeiting and piracy. These include increasing criminal IP prosecutions in customs enforcement, using only legal software in government offices and enterprises, shutting down illegal consumer markets in China and joining the World Intellectual Property Organization Internet treaties. The next meeting of the JCCT will take 

place in Washington on April 11, prior to the visit of Chinese President Hu. Second, we are making effective use of all of our trade 

tools. U.S. Trade Representative Portman recently announced the 

China Top-to-Bottom Review, which assessed the benefits and challenges in U.S.-China trade following China’s first 4 years of membership in the WTO. Also, the placement of China on the Special 

301 Priority Watch List articulates our specific concerns and indicates the significance we place on them. We are using every trade 

tool at our disposal in the WTO, and we consider all options to be 

on the table. We are awaiting China’s final response to our TRIPS 

Article 63.3 request and are considering whether to file a complaint 

under the WTO dispute settlement process for inadequate protection of IPR. Third, we have begun to expand our law enforcement 

cooperation with the Chinese Government. Attorney General 

Gonzales has laid the groundwork, and our law enforcement agencies are working with their counterparts in China to share information, expertise and investigation techniques. And finally, we work 

actively with the Private Sector to address their concerns and learn 

from their experience. We are expanding the tools and remedies 

that we offer industry from recording their trademarks with U.S. 

Customs to educating small businesses and referring specific infringement cases to Chinese officials. In addition, they are critical 

advocates for progress in China as they are active participants in 

that market. 

Mr. Chairman, the Bush Administration is committed to stopping intellectual property theft in China and providing businesses 

the tools they need to flourish in a global economy. China must deliver on their commitments and achieve measurable results as they 

look to take their place among the world’s leading economies. As 

I work to coordinate the U.S. Government’s IP enforcement efforts, 

and with your continued support and the partnership of this comVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
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mittee, we will be able to do even more to provide American businesses and innovators with the protection they need. 

America’s intellectual property is certainly one of our most critical competitive advantages. It’s essential to our continued economic growth and to our technological leadership. We must take 

advantage of the opportunity to work together to better protect the 

knowledge industries of today so that we may continue to see the 

innovations of tomorrow. Thank you very much, and I welcome 

your questions. 

[The prepared statement of Mr. Israel follows:] 

PREPARED STATEMENT OF CHRIS ISRAEL, COORDINATOR FOR INTERNATIONAL

INTELLECTUAL PROPERTY ENFORCEMENT, DEPARTMENT OF COMMERCE

Chairman Smith, Ranking Member Dorgan and members of the Committee, I am 

pleased to join you today to discuss the challenge of international intellectual property rights enforcement in China. 

I want to thank the Committee for its continued support and leadership on issues 

concerning the protection of intellectual property. I look forward to the opportunity 

to work together to ensure that the heart of America’s innovation economy, its intellectual property, is effectively protected around the world. 

Combating piracy and counterfeiting is a top priority for the Bush Administration. 

This prioritization is evident in the leadership shown by President Bush. He has 

consistently raised IP enforcement with foreign leaders, placed the issue on the 

agenda of the G8 and made it a key part of the recent U.S./EU summit. He has 

also discussed our ongoing concerns with leaders of critical markets such as China 

and Russia. He has directed his Administration to address this issue actively, aggressively and with a results-oriented approach. 

We are leveraging the capabilities and resources of the United States to promote 

effective, global enforcement of intellectual property rights. My office works to coordinate the international IP enforcement efforts of the Office of the U.S. Trade 

Representative, the Department of Commerce—which includes the U.S. Patent and 

Trademark Office and the International Trade Administration; the Department of 

Homeland Security—which includes Customs and Border Protection; the Department of Justice—including the FBI (Federal Bureau of Investigation); and the State 

Department, among others. Our combined efforts are extensive, and this allows us 

to bring even greater focus, energy and prioritization to our IPR efforts. 

I appreciate the opportunity to discuss this leadership, to address the growing 

problem of counterfeiting and piracy in China, and the Federal Government’s efforts 

to help protect American intellectual property and our industries. 

Leadership and Prioritization 

The reasons for the Administration’s leadership on IP enforcement and for its 

prioritization are clear. 

First, few issues are as important to the current and future economic strength of 

the United States as our ability to create and protect intellectual property. U.S. IP 

industries account for over half of all U.S. exports. They represent 40 percent of our 

economic growth and employ 18 million Americans, who earn 40 percent more than 

the average U.S. wage. The 2006 Economic Report to the President states that IP 

accounts for over 1⁄3 of the value of all U.S. corporations, an amount equal to almost 

half of our GDP. Quite simply, our ability to ensure a secure and reliable environment for intellectual property around the world is critical to the strength and continued expansion of the U.S. economy. 

The enforcement of intellectual property rights also carries great consequence for 

the health and safety of consumers around the world. The World Health Organization estimates that 10 percent of all pharmaceuticals available worldwide are counterfeit. The U.S. Federal Aviation Administration estimates that 2 percent of airline 

parts installed each year are fake—or about 520,000 parts. And we have seen counterfeit circuit breakers that overheat and explode, brake linings made of wood chips 

and cardboard, and fake power cords. In the world of today’s sophisticated criminal 

IP operations, if a product can be easily counterfeited, has an immediate demand 

and provides a good profit margin it will be copied. Consumer safety and product 

quality are concerns obviously not on the minds of global IP thieves. 

Finally, the theft of American intellectual property strikes at the heart of one of 

our greatest comparative advantages—our innovative capacity. Through the applied 

7 

talents of American inventors, researchers, entrepreneurs, artists and workers, we 

have developed the most dynamic and sophisticated economy the world has ever 

seen. And I truly believe the world is a much better place due to these efforts. We have 

delivered life-saving drugs and products that make people more productive. We have 

developed entirely new industries and set loose the imaginative power of entrepreneurs everywhere. And, we set trends and market best-of-class products to nearly every country in the world. 

A thriving, diversified and competitive economy must protect its intellectual property rights. In the recent State of the Union, President Bush outlined the American 

Competitiveness Initiative (ACI). ACI strengthens the President’s ongoing commitment to research and development. We are creating a business environment that encourages entrepreneurship and protection of intellectual property. And this Administration is doing everything that we can to open markets and level the playing 

field. 

We value our heritage of innovation and exploration—it is not only part of our 

history; it is the key to our future. 

And this future—a future of innovation, exploration and growth that benefits the 

entire world—rests on a basic, inherent respect for intellectual property rights and 

a system that protects them. 

Counterfeiting and Piracy in China 

The rising tide of counterfeiting and piracy in China has created enormous challenges for U.S. businesses. According to the U.S. Chamber of Commerce, worldwide 

IP theft costs U.S. industry approximately $250 billion annually. In a 2005 survey 

of the U.S.-China Business Council, members listed IPR enforcement as their greatest concern. Our industry reports that infringement levels in China range from 85 

to 95 percent for all copyright works, and in 2005 the value of copyrighted works 

that were pirated exceeded $2.3 billion. In 2004, U.S. Customs reported that China 

was the number one source of counterfeit products that were seized at our borders, 

accounting for 63 percent of all seizures. And though we recognize that China has 

expanded their efforts, there are still critical deficiencies in IPR protection and enforcement. 

As a result of China’s continuing problems with IP theft, we posted our first IP 

Attache ́ in Beijing in 2004, and we will be posting 2 additional IP Attache ́s in China 

in 2006. In addition, since 2001, the U.S. Government has conducted well over 50 

training and capacity building programs with Chinese Government officials. 

U.S. Trade Representative Portman recently stated, ‘‘as a mature trading partner, 

China should be held accountable for its actions and required to live up to its responsibilities, including enforcing intellectual property rights . . . We will use all 

options available to meet this challenge.’’ It can be said that, so far, China has not 

lived up to its responsibility to effectively enforce intellectual property rights. 

In China, effective enforcement efforts are undermined by: a lack of sufficient political will, corruption, local protectionism, misallocated resources and training, and 

a lack of effective public education regarding the economic and social impact of 

counterfeiting and piracy. 

Though the problems of IP theft are great in China, let me first mention a few 

positive developments. 

President Hu publicly acknowledged the problem when he met with President 

Bush last September and again in November. Also, the recent statements by Chinese Vice-Premier Wu Yi on improving IPR enforcement in China and encouraging 

Chinese businesses to take greater steps to protect IP is definitely a step in the 

right direction. We also appreciate the Vice-Premier’s comments on ensuring that 

the Chinese Government only uses legal software. The additional announcement, by 

the Vice-Premier, that the Chinese Government is setting up 50 reporting centers 

for IPR violations throughout China is good news, and we hope that these centers 

can be effective. 

In December 2005, a Beijing court ruled in favor of several luxury trademark 

brands in a suit to stop sales of knockoff handbags. In that case, the court ordered 

the owner of the Silk Street Market to pay damages and stop its vendors from selling the fake goods. This is an important ruling because the Chinese courts are finally holding landlords responsible for the illegal activities of their tenants. 

In January 2006, Starbucks won a lawsuit against a local company that had 

adopted its Chinese name and a similar logo. The Shanghai court fined the company 

and ordered it to stop using the Starbucks’ name and issue an apology in a local 

newspaper. 

In January 2006, the chocolate company Ferrero Rocher won a lawsuit against a 

Chinese company that was producing a copycat version of its well known goldVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
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wrapped chocolates. The Chinese court ordered the company to pay compensation 

and to stop producing the copycat product. 

Though these are good examples, the problems in China run deep, and we continue to work extensively with the Chinese Government on the issues of counterfeiting and piracy. 

U.S. Government China Strategy 

The U.S. Government is working on many fronts to engage China on IPR, and 

under President Bush’s leadership, we have developed an effective China IP strategy. The Bush Administration’s China IP Strategy is built on four pillars: bilateral 

engagement; effective use of our trade tools; expanding law enforcement cooperation; 

and working with the private sector. We are utilizing all of our resources to effectively implement our approach: 

1. Working through the U.S.-China Joint Commission on Commerce and Trade 

(JCCT) to secure IP commitments; 

2. Effective use of all of our trade tools: 

a. The Office of the U.S. Trade Representative’s China Top-to-Bottom Review, 

b. Special 301 Report, 

c. The World Trade Organization (WTO) TRIPS Article 63.3 request and consider filing a complaint under the WTO dispute settlement process; 

3. Expanding Law Enforcement Cooperation with the Chinese Government; 

4. Private Sector Cooperation. 

Joint Commission on Commerce and Trade (JCCT) 

Established in 1983, the U.S.-China Joint Commission on Commerce and Trade 

(JCCT) is a government-to-government consultative mechanism that provides a 

forum to resolve trade concerns and promote bilateral commercial opportunities. 

Led on the U.S. side by the U.S. Secretary of Commerce and the U.S. Trade Representative, and on the Chinese side by Vice Premier Wu Yi, the status of the JCCT 

was elevated following the December 2003 meeting of President Bush and Chinese 

Premier Wen to focus higher-level attention on outstanding trade disputes. Of particular importance to this committee is the work of the U.S.-China JCCT Intellectual Property Working Group. 

At the April 2005 JCCT session, the U.S. and China agreed to establish an IPR 

Working Group so that U.S. and Chinese officials, IP specialists, and law enforcement authorities could consult on specific problems and cooperate on a range of IPR 

issues. Through the IPR Working Group, we are working with the Chinese, helping 

them take concrete steps toward significantly improving IPR protection and enforcement. 

President Bush has discussed the issue personally with Chinese President Hu 

Jintao, and President Hu made further commitments during a September 2005 

United Nations speech. We need to see delivery on these commitments and achieve 

measurable results as China looks to take its place among the world’s leading economic powers. 

The next meeting of the JCCT will take place on April 11, prior to the visit of 

Chinese President Hu. As the JCCT meeting approaches, it is important to look at 

the status of the comprehensive set of commitments from the Chinese Government 

to reduce counterfeiting and piracy that were agreed to in the last meeting of the 

U.S.-China JCCT. These include: 

• Increasing criminal IP prosecutions and customs enforcement, 

• Expanding law enforcement cooperation, 

• Using only legal software in government offices and enterprises, and 

• Joining the World Intellectual Property Organization Internet Treaties. 

Out of the many commitments so far, only a few have been completed. 

The Chinese Ministry of Public Security established an IP unit responsible for 

overall research, planning and coordination of all IPR criminal enforcement. The 

unit serves under the auspices of both the Economic Crimes Investigation Division 

and the Social Order Division. 

The Chinese Government recently put in place an IP Ombudsman, Yang Guohua, 

at the Chinese Embassy in Washington. I met with him a few weeks ago, and he 

has also begun meeting with U.S. rights holders. 

The Chinese Government confirmed that the criminal thresholds in the 2004 Judicial Interpretation (JI) are applicable to sound recordings and that the JI makes exVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
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porters subject to independent criminal liability. But there have not been any reported criminal cases using the new thresholds. 

We also have quite a few commitments that are still in progress and others where 

there has been little if any movement. 

By the end of 2005, China committed to use only legal software at all levels of 

government and to extend this commitment to large enterprises, including stateowned enterprises, this year. China claims to have completed its government legalization program, but U.S. industry says its sales data does not support this claim, 

and there is no other evidence to show that China has moved forward to purchase 

and use only legal software. In a recent interview, Commerce Secretary Gutierrez 

stated that the use of pirated software by China is ‘‘absolutely unacceptable’’ and 

that this requires more attention from the world community. 

Also, as part of our discussions with the Chinese, we continue to raise the issue 

of optical disc piracy. China needs to take steps to eliminate all illegal optical disc 

production. Action especially needs to be taken against those ‘‘government licensed’’ 

optical disc plants in China that engage in this type of criminal activity. We consider this an important issue for our copyright industry, and apart from the significant economic damages, this type of piracy harms our cultural and creative innovative capacity. 

China has also agreed to regularly instruct enforcement authorities throughout 

the country that copies of select films which are still in censorship, and not yet 

ready for distribution are deemed pirated and subject to enhanced enforcement. 

However, industry reports that progress on this initiative has been very uneven. 

This memorandum of understanding (MOU) between China and the Motion Picture Association (MPA) protects only the 15 theatrical films actually released in 

China. Industry reports that little progress has been made on this initiative. 

The Chinese legal system follows three routes: administrative, civil and criminal. 

U.S. rights holders place primary importance on criminal cases being filed against 

violators of IPR in China. In the last JCCT meeting, China committed to increasing 

the number of criminal prosecutions for IPR violations relative to the number of administrative cases. This is important because it would send a message to those who 

violate the law that they can not get away with just paying a fine—IP theft is a 

crime, and there will be criminal penalties. 

China has also agreed to improve IPR enforcement at trade shows and retail and 

wholesale markets. The United States is working with China to: establish IPR monitoring centers at major trade fairs, set up a training program, and host a trade fair 

IPR enforcement seminar to educate U.S. and Chinese small and medium-sized enterprises (SMEs) on how to enforce their IPR at an upcoming trade fair. China also 

agreed to ‘‘clean up’’ Beijing’s Silk Street Market and other well-known consumer 

markets. 

At the major consumer markets, it may appear at first glance that the Chinese 

have made some progress. In January, the Shanghai government announced its 

plans to shut down Xiangyang Market, that city’s biggest seller of fake goods. According to local reports, the Mayor of Shanghai stated that the market had damaged 

Shanghai’s reputation, because approximately 80 percent of the city’s counterfeiting 

and piracy originates in that market. But that market will not close until June 

2006, and at that point, most of the vendors will be moving to other markets, including one, southwest of the city, in Longhua. These illegal markets which exist 

all over China, continue to operate openly and notoriously. They must be shut down 

or permanently be rid of infringing goods. The Chinese Government’s ability to take 

active steps to stop the sale and production of counterfeit Olympic products demonstrates that they have this ability. 

Also, China is working toward accession to the World Intellectual Property Organization Internet Treaties. China recently sent a delegation to the United States to 

discuss the legislative steps necessary to accede to the WIPO Internet Treaties. We 

have problems with China’s draft legislative package and will continue to communicate our concerns to China. It is important China get this right, so that China’s 

protections move forward and meet the needs of the digital age. 

The proliferation of fake pharmaceuticals also creates serious issues of health and 

safety. In China, there are certain factories that are categorized as unregulated 

‘‘chemical factories’’ but they primarily manufacture the active ingredients for certain drugs. Our interest is to have these ‘‘factories’’ come under the supervision of 

China’s Food and Drug Administration (FDA), so that they can be monitored and 

regulated. 

Additional issues include protecting undisclosed test data against unfair commercial use for pharmaceutical products. We also need to see clarification and improved 

coordination between China’s patent office and the SFDA to prevent generic drug 

10 

companies from infringing on pharmaceutical patents and producing patent infringing drugs. 

Effectively Using All of Our Trade Tools 

We are making use of all the trade tools that we have at our disposal. As China 

takes its place as a player on the world economic stage, we expect that it will live 

up to its international obligations and uphold the rule of law. 

USTR Top-to-Bottom Review 

The Top-to-Bottom review assesses the benefits and challenges in U.S.-China 

trade following China’s first 4 years of membership in the World Trade Organization. The Top-to-Bottom review announced several actions that will be implemented 

by USTR and other U.S. Government agencies; and I will mention a few of them 

here. First, USTR is expanding their trade enforcement capacity to help ensure that 

China complies with its trade obligations. USTR is establishing a China Enforcement Task Force to be headed by a Chief Counsel for China Trade Enforcement. 

Second, USTR is expanding its ability to obtain comprehensive forward-looking information regarding China’s trade regime and U.S. trade policy practices by adding 

additional USTR personnel and establishing an Advisory Committee for Trade Policy and Negotiation (ACTPN) China Task Force. Third, USTR and the State Department are discussing expanding U.S. trade policy and negotiating capacity in Beijing 

to augment our current efforts and more effectively pursue top priority issues, such 

as protecting IPR. Having a trade negotiator on the ground is key. This individual 

will be in constant contact with American businesses and Chinese officials, working 

to help remove trade barriers, improve market access and improve IP enforcement. 

Through USTR, my office and our inter-agency team, the Administration is improving coordination across the U.S. Government. We are regularly reviewing our 

strategies and assessing the progress that we have made so that we can continue 

to take the appropriate next steps. 

Special 301 Report 

China’s placement last year on the Priority Watch List (PWL) reflects the significant level of concern that we have concerning China’s problems with IPR protection, 

enforcement and market access. This ranking sends a global signal to our trading 

partners and to companies seeking to do business in China. It also sends a strong 

message to China that these concerns must be addressed. 

World Trade Organization Mechanisms 

In the fight against counterfeiting and piracy, we are using every trade tool at 

our disposal, and we consider all options to be on the table. As announced in its 

Special 301 Report last year, USTR filed a formal request under Article 63.3 of the 

TRIPS agreement (Agreement on the Trade-Related Aspects of Intellectual Property 

Rights), asking China to detail the specific efforts it has taken to enforce IPR, which 

includes China’s application of criminal, administrative, and civil remedies for infringement cases that affect U.S. rights holders. We were joined in our Article 63.3 

request by Japan and Switzerland, who also submitted similar requests at the same 

time. Though China’s official response was less than forthcoming, we are working, 

alongside our trading partners and with the Chinese Government, to fulfill this request. 

China’s response will demonstrate whether it is serious about enforcing its IPR 

protections in a transparent open manner. 

The United States is the only country that has brought a case against China in 

the WTO. And the U.S. Government is again left with no choice but to consider filing another complaint against China this time for inadequate enforcement of IPR. 

In this regard, USTR is working with industry to evaluate facts and develop the 

necessary information on this potential case. 

Law Enforcement Cooperation 

Another major priority is to expand law enforcement cooperation between the U.S. 

and China. Progress is being made, and Attorney General Gonzales laid the groundwork for expanded law enforcement cooperation on IP cases during his trip to China 

in late 2005. 

Our law enforcement agencies are already working with their counterparts in 

China to share information, expertise and investigation techniques. 

The Department of Justice is looking to build on these existing efforts and develop 

even stronger bilateral IPR law enforcement cooperation. 

The existing U.S.-China Joint Liaison Group (JLG) works to facilitate criminal 

justice cooperation and has already discussed criminal IPR enforcement on the plenary level. 

11 

The U.S. has requested that the Chinese agree to establish an IP law enforcement 

experts group through the JLG. Expanding our IPR law enforcement cooperation efforts would enable us to focus on developing joint IPR enforcement operations and 

improve cooperation on criminal investigations. In addition, our efforts, led by the 

Department of Justice, would focus on the operational aspects and training linked 

to China’s criminal law enforcement efforts to address online piracy. Though a nationwide crackdown on Internet piracy has not begun, as China has committed to 

do, China has worked out a plan to focus on copyright violations involving audiovideo and software products, including unauthorized using and sharing at Internet 

cafes and the illegal operation of websites. 

Building on the joint U.S.-China law enforcement effort called Operation Spring, 

the U.S. and Chinese law enforcement authorities recently joined forces in Operation Ocean Crossing, successfully disrupting an organization engaged in the largescale trafficking of counterfeit pharmaceuticals. The action resulted in numerous arrests in China and the United States and the capture of hundreds of thousands of 

fake pharmaceuticals. 

As I stated earlier, China was the number one source of counterfeit products that 

were seized at the United States border last year. The Chinese Government needs 

to better equip its Customs Authorities to control the exports of counterfeit and pirated goods from China. An important step that China agreed to take at the 2005 

JCCT is to adopt regulations that allow Customs to refer serious cases for criminal 

prosecution. China should also reinstate provisions in its Customs regulations to 

allow for fines up to 100 percent of the value of the seized goods. To take forward 

China’s JCCT commitments on better customs enforcement, U.S. and Chinese Customs officials, subject to confidentiality concerns, will be cooperating on the exchange of infringement data and information on significant seizures. There will also 

be technical exchanges on risk assessment and regulatory improvements. 

Private Sector Cooperation 

Companies need to be aggressive advocates of their own IP. We are working actively with the business community for assistance as we go forward. They are our 

eyes and ears on the ground and know better than anyone how inadequate IPR enforcement affects their businesses. My office conducts active outreach with industry, 

and we want to hear their stories and find ways to use the data that they have collected in China. We will continue to work together to find solutions and lead enforcement efforts. 

We are working with U.S. and international trade associations such as the American Bar Association, American Chamber of Commerce in China, Business Software 

Alliance, Entertainment Software Association, International Chamber of Commerce, 

International Intellectual Property Alliance, International Federation of 

Phonographic Industries, Motion Picture Association, National Association of Manufacturers, The Pharmaceutical Research and Manufacturers of America, Quality 

Brands Protection Committee, Recording Industry Association of American, U.S. 

Chamber of Commerce and the U.S.-China Business Council, to name just a few. 

An important tool that we use is the IPR Case Referral Mechanism (CRM) which 

was created by the U.S. Government to facilitate the submission of individual U.S. 

company IPR cases through MOFCOM (China’s Ministry of Commerce) to relevant 

Chinese agencies. Our inter-agency team reviews cases where the Chinese Government fails to provide adequate protection of IPR to U.S. businesses, and after an 

internal vetting process, sends approved cases to the Chinese Government to facilitate their resolution. Five cases have already been submitted to the Chinese 

through the Case Referral Mechanism. 

Ambassador Clark Randt at our Embassy in Beijing holds an annual IPR Roundtable which brings together senior Chinese officials and U.S. business representatives. The Roundtable gives U.S. rights holders the opportunity to discuss the problems they are facing and find the solutions that they need. 

Also, our Embassy and Consulate officers on the ground are a valuable asset for 

U.S. companies. They play a critical role as IPR ‘‘first responders,’’ helping U.S. 

businesses resolve cases when their rights are violated. 

We know that companies are conducting investigations into IPR theft and collecting data as they do business in China. But American companies should not have 

to be the sole investigators of IP crime in China. The Chinese Government needs 

to step up to the plate, conduct investigations and stop the crime of IP theft that 

is occurring in their country. 

The Bush Administration’s efforts to provide a secure and predictable global environment for intellectual property is driven by a commitment to foster U.S. economic 

growth, to secure the safety and health of consumers everywhere, and an abiding 

12 

respect for the great American innovative spirit that has driven our Nation since 

its founding and will determine our future. 

Strategy, Organization and Focus 

As this committee clearly understands, the problem of global piracy and counterfeiting confronts many industries, exists in many countries, apart from China, and 

demands continuous attention. With finite resources and seemingly infinite concerns, how we focus our efforts is crucial. I appreciate this opportunity to share with 

you the key areas which make up the Administration’s overall Strategy for Targeting Organized Piracy. Through President Bush’s leadership, we created a fivepoint plan. 

1. Empower American innovators to better protect their rights at home and 

abroad. 

2. Increase efforts to seize counterfeit goods at our borders. 

3. Pursue criminal enterprises involved in piracy and counterfeiting. 

4. Work closely and creatively with U.S. Industry. 

5. Aggressively engage our trading partners to join our efforts. 

By working more closely with other U.S. Government agencies, we implemented 

that plan, and we have made progress. I’d like to share with you some of the approaches that we are taking and the objectives that we have set to improve global 

IP enforcement. 

Last month, under the leadership of my office and the White House, the National 

Intellectual Property Law Enforcement Coordination Council (NIPLECC) held its 

first principals meeting this year. NIPLECC brings together the leaders of the key 

operational entities within the Federal Government that are responsible for IP enforcement. At the meeting, we looked at better ways to coordinate our domestic and 

international IP efforts in order to ensure the effective and efficient enforcement of 

IP both at home and abroad. By establishing priorities and objectives at a senior 

level, we are reinforcing our day-to-day activities and ensuring that all of the agencies critical to the Federal Government’s IP enforcement efforts are closely coordinated and committed to a common results-oriented agenda. 

The Council is comprised of the Department of Justice (Assistant Attorney General of the Criminal Division), the Commerce Department (Under Secretary for Intellectual Property and Director of the Patent and Trademark Office and Under Secretary for International Trade), the Office of the U.S. Trade Representative (Deputy 

USTR), the Department of Homeland Security (Commissioner of Customs and Border Protection) and the State Department (Under Secretary for Economic, Business 

and Agricultural Affairs). 

NIPLECC has made a number of valuable contributions since its creation in 1999, 

including the development of a comprehensive data base that includes all recent IP 

law enforcement training provided by the U.S. Government to developing and least 

developed nations as well as delivering legislative suggestions to improve national 

IP laws related to enforcement. However, there is unmet potential, and in my role 

as Director of NIPLECC, I look forward to working with this committee to ensure 

that we are maximizing the capabilities of NIPLECC. 

A critical element in our overall coordination is the Strategy Targeting Organized 

Piracy (STOP!) Initiative launched by the Bush Administration in October 2004. 

STOP! has built an expansive interagency process that provides the foundation and 

focus for all of our efforts. This is the strategy that NIPLECC is implementing. 

STOP! is led by the White House and brings together USTR, the Department of 

Commerce, the Department of Justice, the Department of Homeland Security and 

the State Department. 

STOP is the most comprehensive initiative ever advanced to fight global piracy 

where it starts, block bogus goods at America’s borders and help American businesses secure and enforce their rights around the world. STOP! has made significant progress in the past year, and we are planning to build on this success. STOP! 

is an attempt to play offense in the global fight against piracy and counterfeiting. 

Through all of these initiatives, we are achieving results, maintaining the commitment of senior Administration officials, institutionalizing an unprecedented level of 

coordination within the Federal Government and receiving attention around the 

world. The message that we are delivering is—that the United States takes the 

issue of IP enforcement very seriously, we are leveraging all of our resources to address it and we have high expectations of all of our global trading partners. 

To help American innovators secure and enforce their rights across the globe, we 

have new Federal services and assistance: We created a hotline (1–866–999–HALT), 

which is staffed by specialized attorneys who counsel businesses on how to protect 

13 

their IP and work with callers on how to best resolve problems. In cases where the 

individual or company has properly registered its rights, its issue can then be referred to a trade compliance team that will monitor their case and work to see what 

next steps can be taken. 

We also developed a website (www.stopfakes.gov) and brochure to provide information and guidance to rights holders on how to register and protect their IP in markets around the world. 

We created downloadable ‘‘IP toolkits’’ to guide businesses through securing and 

enforcing their rights in key markets across the globe. These toolkits are available 

at the stopfakes.gov website, and cover countries such as China, Russia, Mexico, 

Korea and Taiwan. 

In November 2005, Commerce Secretary Gutierrez announced, the China Intellectual Property Rights (IPR) Advisory Program. This program is done in conjunction 

with the American Bar Association, the National Association of Manufacturers and 

the American Chamber of Commerce in China. It offers small and medium sized 

U.S. businesses free IPR consultation with an attorney. 

Also, we are providing training for U.S. embassy personnel to be effective first responders to IPR issues in order to identify problems abroad and assist rights holders 

before fakes enter the market and the supply chain. 

Next, we need to increase our efforts to stop fake and counterfeit goods at America’s 

borders: Customs and Border Protection (CBP) has developed an online recordation 

tool for rights holders to record their trademarks and copyrights with them. Additionally, CBP has also begun implementing new risk assessment models and technologies to cast a wider, tighter net on counterfeit and pirated goods and to stop 

these goods from entering our borders. 

We are working with our trading partners to share information and improve our 

capabilities to assess and anticipate risks. We have seen the results of this effort 

with the European Union. We have followed up on the U.S./EU Economic Ministerial held last year, where leaders of both governments committed to expand information sharing of customs data. 

We are also working to build international support and rules to stem the flow of 

fake and counterfeit goods and keep them out of global supply chains. We have conducted outreach to Canada, the European Commission, France, Germany, Hong 

Kong, Japan, Korea, Mexico, Singapore and the United Kingdom laying the basis 

for increasing cooperation on IP enforcement. Outreach to other like-minded countries is underway. 

Law enforcement must play a leading role in dismantling criminal enterprises that 

steal intellectual property: U.S. law enforcement agencies are also working closely 

with industry to gather information, develop cases and bring convictions against the 

criminals who steal their IP. We need to be as sophisticated and creative as the 

criminals. It is important that government and industry work together with coordinated efforts. 

The U.S. Government (Department of Justice) has pursued numerous large-scale 

operations targeting criminal organizations involved in online piracy and trafficking 

in counterfeit goods. For instance, the Department of Justice (DOJ) has indicted the 

four leaders of one of the largest counterfeit goods operations ever uncovered in New 

England—broke up a scheme to sell more than 30,000 luxury goods—including 

handbags, wallets, sunglasses, coats, shoes, and necklaces, and found the materials 

to manufacture at least 20,000 more counterfeit items. 

The Department of Justice led Operation Site Down, an international online piracy investigation culminating in the execution of over 90 search warrants and arrests in the U.S. and eleven countries abroad in June 2005. Operation Site Down 

dismantled some of the largest and most prolific high-level distribution sites preventing tens of million in further losses to the content industry. To date, 44 individuals have been indicted and ten convicted of felony copyright offenses. 

As part of the STOP! Initiative, the Department of Justice formed an Intellectual 

Property Task Force to examine how it could maximize its efforts to protect intellectual property rights. In October of 2004, the Task Force Report was released and 

it included a comprehensive set of recommendations on steps that the Department 

of Justice could take to better protect IPR. 

In addition the Department of Justice has executed measures to maximize law enforcement’s ability to pursue perpetrators of IPR crimes. For example, we are increasing from 5 to 18 the total number of Computer Hacking and Intellectual Property Units in U.S. Attorneys’ Offices across the country. This increased to 230 (two 

in virtually every U.S. Attorney’s Office in the country) the number of specially 

trained prosecutors available to focus on IP and high-tech crimes. As part of the 

Task Force recommendations, the DOJ also appointed an IP Law Enforcement Coordinator for Asia, who is stationed in Bangkok. This individual will work with DOJ 

14 

officials in the Computer Crime and Intellectual Property Section and the Office of 

International Affairs to oversee their law enforcement efforts in the region. 

The Administration proposed the Intellectual Property Protection Act of 2005 to 

strengthen criminal intellectual property protection, toughen penalties for repeat 

copyright criminals and add critical investigative tools for both criminal and civil 

enforcement authorities. 

In addition, we have executed agreements to implement obligations of the U.S./ 

EU Mutual Legal Assistance and Extradition Agreements. These agreements ensure 

cooperation regarding intellectual property crimes with Austria, Belgium, Denmark, 

Finland, France, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Netherlands, 

Portugal, Slovenia, Spain, Sweden, United Kingdom; and we have completed negotiations with the nine remaining E.U. countries—Cyprus, Czech Republic, Estonia, 

Germany, Greece, Italy, Malta, Poland and Slovakia. 

Working closely and creatively with U.S. industry: As I mentioned earlier, we are 

conducting extensive outreach with U.S. industry and trade associations. Additionally, we are working with the Coalition Against Counterfeiting and Piracy, a U.S. 

Chamber of Commerce and National Association of Manufacturers led association— 

on the ‘‘No Trade in Fakes’’ program to develop voluntary guidelines companies can 

use to ensure their supply and distribution chains are free of counterfeits. 

We are also conducting post-entry audits to identify companies vulnerable to IP 

violations and working with them to correct their faulty business practices. 

We are reaching out to our trading partners and building international support. 

U.S. leadership is critical and we are active on a number of fronts: When U.S. Government officials meet with our global trading partners for bilateral and multilateral discussions, IP protection and enforcement are always top priorities. 

This Administration makes IPR a priority when negotiating new free trade agreements as you saw most recently with CAFTA–DR (the United States-Central America-Dominican Republic Free Trade Agreement). 

In January, we met with European Union Officials at the White House for a series of meetings to address global piracy. We are breaking new ground and have 

begun to expand our cooperation with the EU—focused on border enforcement, a 

strategy to address problems in developing countries and working with the private 

sector. Particularly with China, the EU announced that they will be posting an IP 

attache ́ in Beijing. 

At the G8 meeting, President Bush secured an agreement from fellow leaders to 

focus on IP enforcement, and we plan on working with Russia on IP issues during 

their presidency of the G8. 

At APEC last year, we secured an endorsement of a U.S.-Japan sponsored ‘‘APEC 

Anti-Counterfeiting and Piracy Initiative’’ to reduce trade in counterfeit goods and 

to combat online piracy, while increasing cooperation and capacity building. In close 

cooperation with industry and a number of U.S. Government agencies, USTR led 

this effort, which culminated last November in agreement by the leaders of APEC’s 

21 member economies in a set of model guidelines to reduce trade in counterfeit and 

pirated goods, and to protect against unauthorized copies, and to prevent the sale 

of counterfeit goods over the Internet. We are currently working to implement and 

expand these model guidelines. 

Also, the work of the U.S.-Russia IP Working Group remains a high priority, as 

the United States, through USTR, and Russia work to address a number of IP-related issues and steps that need to be taken. 

Additionally, we have commissioned a study by the OECD (The Organization for 

Economic Cooperation and Development) to examine the impact of global counterfeiting and piracy. My office and our interagency team have held several meetings 

with OECD officials to follow-up and assist with this study. We are looking for 

sound, reliable and accurate information to be produced with this study, so that we 

may have accurate metrics that can be used effectively by our principals and by industry as we continue building international support to stem the flow of fake and 

counterfeit goods and keep them out of global supply chains. 

Next, the U.S. has conducted several hundred IP training and capacity building 

programs around the world to improve criminal and civil IPR protection. To that 

end, the Administration has established a Global Intellectual Property Academy to 

consolidate and expand our training programs for foreign judges, enforcement officials and administrators. 

We are continuing to expand our IP attache ́ program in China and positioning 

new attache ́s in Brazil, Russia and India. Having IP attache ́s stationed in these 

countries will enhance our ability to work with local government officials to improve 

IP laws and enforcement procedures in addition to assisting U.S. businesses to better understand the challenges of protecting and enforcing their IPR. 

15 

On the domestic front, we have education campaigns that take place across America to teach small and medium sized enterprises how to secure and protect their 

rights and where to turn for Federal resources and assistance. It is important to 

note that only 15 percent of small businesses that do business overseas know that 

a U.S. patent or trademark provides protection only in the United States. Companies need to make sure that they register for intellectual property protection overseas. We had an education program in San Diego and a China-specific program in 

Atlanta last week, and we have upcoming programs in Nashville, Columbus and 

Northern Virginia. These events help educate businesses on what intellectual property rights are, why they are important, and how to protect and enforce these rights 

domestically and internationally. 

Mr. Chairman, the Bush Administration is committed to stopping intellectual 

property theft in China and providing businesses the tools they need to flourish in 

the global economy. As I work to coordinate the U.S. government’s intellectual property enforcement, trade and education efforts; and with your continued support and 

the partnership of this committee, we will be able to do even more to provide American businesses and innovators with the protection they need. America’s intellectual 

property is important not just for her national security, but it is also a necessary 

component in ensuring continued U.S. economic growth and technological leadership. We must take advantage of the opportunity to work together to better protect 

the knowledge industries of today so that we may continue to see the innovations 

of tomorrow. Thank you very much. 

Senator SMITH. Chris, to Senator Dorgan’s point about the enforcement that was seen as to the logo of the Olympics, do you 

know if that was done at a Federal level, a high level in China? 

Mr. ISRAEL. My understanding, Mr. Chairman, it was done at a 

very high level in China. My understanding is that even prior to 

the final decision made by the International Olympic Committee to 

place the 2008 Olympics in Beijing, there was federal legislation, 

national legislation that was put in place in China to protect that 

logo, and a number of different manifestations of that logo, different products that would come from that logo. So, yes, it was 

done at a very senior level, a national level in China. 

Senator SMITH. And most of this piracy, I assume, occurs 

throughout China and they would count on local enforcement of 

these copyright stealings, but apparently, it doesn’t get that far 

with the local area. 

Mr. ISRAEL. With regard to the logo? 

Senator SMITH. If the federal government or whatever they call 

their central government—— 

Mr. ISRAEL. Central government. 

Senator SMITH.—isn’t directly involved there, is there just no 

local enforcement? 

Mr. ISRAEL. Local enforcement is a huge challenge in China. I 

think it’s certainly something that’s been pointed—— 

Senator SMITH. Well, what stops it from your observation? Is 

it—— 

Mr. ISRAEL. With regard to the logo specifically? 

Senator SMITH. No, I mean anything, stealing anything. Is it just 

local authorities that are complicit in it? 

Mr. ISRAEL. That’s part of it. I think we see at a local level the 

political pressure and will that’s been exerted, and Beijing has a 

very hard time making it to the local level. You see local corruption. You see local protection of the points of production of these 

products. In remote areas of China, they employ a lot of people. 

They contribute to the local economy. So, transferring the commitments that we have seen made by senior officials in China to acVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
16 

tual on-the-ground enforcement actions throughout, you know, the 

very diverse and large country is a huge challenge. 

Senator SMITH. Well, President Hu acknowledges it’s a problem 

and has demonstrated he can do something about it. What’s holding him up from—what are you seeing? I mean, are you seeing any 

progress made? 

Mr. ISRAEL. We’re seeing some progress. I think if you look, there 

are some recent indications of progress locally and in a couple of 

court cases in Beijing. Starbucks won a trademark case late last 

year. There was a ruling against the landlord of a very notorious 

counterfeit market in Beijing last year, a case that was brought by 

trademark owners against that landlord. A European chocolate 

company had a favorable ruling in a Beijing court. So, I think we’re 

seeing some anecdotal things occur. I think that those are relatively new. I don’t know that those would have come out that way 

2 or 3 years ago had it not been for a lot of concerted pressure on 

the Chinese. You’re also seeing—according to the Chinese, they 

took about 2,500 criminal investigations of IP violations last year. 

That’s something they reported. Those are their numbers, so there 

are challenges to addressing those. They are reporting increased 

activity regarding their actions on IP violations in China, and we’re 

seeing some anecdotal progress. We’re also hearing from some individual U.S. companies who are stepping up their own activities in 

China, developing their own enforcement strategies, developing 

cases, taking them to Chinese prosecutors and seeing some 

progress in that regard. 

Senator SMITH. Let me—for all the investment there has been in 

China, my own sense is there would be a whole lot more if there 

were, in fact, some confidence in IP protections. And do you think 

that the Chinese leadership has an appreciation for what it’s costing them? Obviously, we can quantify what it’s costing us. Do they 

know what it’s costing them? 

Mr. ISRAEL. I don’t know that they have a specific assessment of 

what it’s costing them. 

Senator SMITH. Do you think they appreciate it? 

Mr. ISRAEL. In conversations that we have with them, they state 

their appreciation of it. If you—there are statements from Chinese 

leadership recognizing the need to protect intellectual property as 

a way to foster their own economic development and to spur an innovation-driven economy. 

Senator SMITH. And as the Chinese economy develops and Chinese are actually producing their own intellectual property, are 

they enforcing that? 

Mr. ISRAEL. I think that would be a big catalyst if there—as 

there does grow a domestic IP-based economy in China. The Chinese companies that are producing their own intellectual property, 

they, in a well-known case, recently bought the PC—the laptop PC 

business of IBM, and that’s a very big investment in a very innovative company. It’s hard for me to fathom that China wouldn’t forcefully exert the intellectual property of companies such as Lenovo 

and others. 

Senator SMITH. Well, I know I voted for China WTO, and I don’t 

know that I would today knowing what I know now in terms of 

how this has played out. And I know we’re going to be asked to 

17 

vote on Russia WTO, and frankly, they have a huge problem as 

well. And so, if that country cares about WTO, this Senator cares. 

And I’m only one, but they can’t afford to lose many. And the whole 

world knows that the Schumer Amendment passed by a big margin. It didn’t have my vote. It may have my vote next time. And 

so, time’s running out, and we’re sick of it. Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you very much. Let me 

begin by stipulating that the previous Administration was in office 

8 years and did precious little to address this issue. You’ve been 

in office—this Administration’s been driving for 5 years and have 

not yet filed a complaint. Senator Lindsey Graham and I have offered since the Senate resolution, asking that you file a complaint. 

We have also offered a piece of legislation saying we should withdraw our normal trade relations on a permanent basis and make 

it an annual basis, which creates the pressure on the Chinese. But 

let me ask directly why have you not taken action in 5 years to 

deal with this, especially because inasmuch as the fact that this 

deficit is growing and growing and growing exponentially? 

Mr. ISRAEL. Well, as I stated, Senator, I mean, it certainly is an 

issue that—and a question that’s open. It’s on the table, and it’s 

being considered by USTR, by Ambassador Portman and that we’re 

working actively with U.S. industry and other stakeholders to address head on the question of bringing a dispute resolution case 

against China. It’s under active consideration at this point. 

Senator DORGAN. But why under active consideration if it’s $200 or $250 billion a year? We know that it has gotten worse, not better after the 2004 promise by the Chinese. Why have you not taken 

action at this point? 

Mr. ISRAEL. Well, you know, I think there have been a series of 

commitments made by the Chinese. We’ve given some time to see 

if those come to fruition. There is an active discussion with industry, and we need to take into account the views of American companies and how they think a WTO case would impact the marketplace in China, and there are a number of factors under consideration. And I think the challenges are more evident than ever, and 

the frustration certainly remains there. 

Senator DORGAN. What’s your time frame for making a decision 

do you think on whether or not you will file an action under WTO? 

Mr. ISRAEL. I’m not in a position today, Senator, to discuss a 

time frame. I think it’s obviously under the leadership of Ambassador Portman of the U.S. Trade Representative’s Office. I’m simply not in a position to assess a time frame. I can tell you we are— 

one piece of information we’re actively waiting for is the response 

to our Article 63 request that was made under the WTO for very 

specific information from China about their enforcement activities. 

I think that will be very useful information in the formulation of 

a decision as well. 

Senator DORGAN. Can I tell you why I think action hasn’t been 

taken? On the last day of employment at the U.S. Trade Ambassador’s Office about 2 or 3 years ago, a fellow who on his last day 

gave a speech to a wheat group here in Washington, D.C., and he 

explained to the group that—whose interest was wheat sales to 

China, he explained to the group that the group inside the Administration that works on this, Trade Policy Group I believe it was, 

18 

which is a number of different agencies working together, had recommended that formal action be taken against China, a complaint 

filed against China with respect to wheat, and he said—but it 

was—that was denied—that recommendation to take formal action 

against China with respect to wheat trade was denied by the Administration because it would have been considered a ‘‘in-your-face’’ 

thing to do to China. And so, this fellow was unbelievably candid, 

I suppose, because it was the last day at work. You almost never 

get that kind of candid answer from someone who works in Trade 

or in any administration. But he said, you know, the fact is they 

sat around, decided action should be taken against China based on 

the facts, but then no action was taken because it was considered 

an in-your-face thing to do. Does that suggest, as I often think is 

the case, that trade policy, instead of being hard-headed economic 

policy is soft-headed foreign policy? 

Mr. ISRAEL. Senator, I am unfamiliar with the facts on the wheat 

case. I think I would point to the very specific and public statements that have been made by USTR, including the out-of-cycle 

301 Review of China last year where they stated clearly that all 

options are on the table. And it’s under active consideration, the 

question of whether to bring a dispute case against China, so, I 

think we’re assessing the input that we’re receiving from U.S. industry. We’re certainly assessing and making determinations about 

the type of progress we’re seeing in China and whether we think 

it’s on a trajectory to continue to improve and whether the best 

step is to make a WTO case at this point. 

Senator DORGAN. Yes, I see some products on the table, perhaps 

from the next witness, but we could go through a lot of products. 

I understand China has reverse-engineered Viagra, and—— 

Mr. ISRAEL. Some of it here, actually. 

Senator DORGAN.—I assume Pfizer is probably complaining to 

you about that and probably should. But you know something, my 

guess is China is not exactly shaking in their boots at the fact that 

you might, at some point, take action because the evidence from 

this country is we never take effective action. We never do that. 

And no matter where this line goes with respect to the trade deficit 

with China, it’s now $202 billion in a single year. You think of the 

imbalance there. No matter where all this goes, no matter whether 

piracy and counterfeiting get worse or better after they agree to 

make progress, this country, by and large, sees its trade policy as 

foreign policy. Our trading partners all see it as hard-nosed economic policy. They will do to us what they can as long as they believe they can, and I believe the Chinese, not just based on this Administration, but based on a number of administrations, will believe forever that we don’t have the guts to take action. We’re not 

going to do anything. All we’re going to do is say that—President 

Hu recognizes the problem. Yes, I hope so. He creates the problem 

and manages the problem and makes it worse. I hope he recognizes 

it. I appreciate your coming here, and I don’t mean to diminish 

your work, but I would say this—the proof ’s in the pudding. At 

some point, you either stand up—the Administration either stands 

up on behalf of American economic interest against what is clearly 

unfair trade, against counterfeiting and against piracy, or we just 

say none of this matters, and we’ll stop threatening because the 

19 

threats don’t mean anything at some point. A threat only means 

something if people believe there’s leverage and intent behind it. 

And so, Mr. Chairman, I have the numbers on how many people 

in Commerce are spending time enforcing our trade agreements 

with Japan and China and other countries. It’s minuscule. As you 

know, it’s 11 and 18 and so on. We are a country wholly uninterested in enforcing trade laws. We have never been interested in enforcing them. Why? Because we run it all through the State Department. We’re worried we’re going to offend somebody. And so, 

the result is we lose money, we lose leverage, we lose opportunity, 

and we lose jobs. So, Mr. Israel, again, I didn’t mean to use you 

for the opportunity to make another speech, but I appreciate the 

work you do, but we need a time frame. We need a decision, and 

we need to understand that this country is willing to stand up for 

its economic interests. 

Mr. ISRAEL. I would point to, and I certainly understand that, 

Senator, and I think the frustration is very well known. Chairman 

Smith, you mentioned Russia as well. I mean, there’s certainly a 

good degree of pressure being felt on that relationship. Well, I was 

actually just in Russia last week and had a chance to raise a number of these issues. I would point to the fact that thus far, we’re 

actually the only country that’s brought a WTO case to, I think, 

against China. We were on the brink of bringing one regarding 

some craft liner board, I believe it’s called, within the last couple 

of months, and the Chinese actually backed away from there, the 

posture that they had—that had elicited us to potentially bring 

that case. So, I think there has been some indication, certainly, 

that we are willing—more than willing to bring cases against 

China. And this is a—there are a lot of obvious calculations to this 

one, and they’re being assessed. 

Senator DORGAN. Mr. Chairman, if I might have one more 

minute, I did mention automobile trade with China. I should mention at the same time that 99 percent of the vehicles driven on the 

roads of South Korea are South Korean vehicles. Ninety-five percent of the vehicles driven in the country of Japan are Japanese 

vehicles. Last year, 730,000 Korean cars were shipped by boat to 

the United States to be sold in our marketplace. We sold 4,300 vehicles in South Korea, and the reason is obvious. They’re not interested in American products competing, and I would urge you to 

take a look at the Dodge Dakota pickup experience in South Korea 

and then ask yourself whether it’s China, Japan, South Korea or 

any number of others—if I had the time, I’d talk to you about 

them, whether we are standing up for our country’s economic interests. The answer is a pathetic answer. The answer is clearly no. 

So, on bilateral automobile trade and a range of others who I take 

a look at, I say that only because of the announcement recently by 

Ford and General Motors about huge layoffs and closure of plants. 

Mr. Israel, thank you. 

Senator SMITH. Chris, I wonder if instead of the Schumer 

Amendment of—I think the duty was 23 percent. I don’t know 

whether 23 percent was—— 

Mr. ISRAEL. 27, I think. 

20 

Senator SMITH.—or 27 percent or where that number was arrived at. How would it fit in WTO if we had a substitute amendment here that calculated the duty according to the level of theft? 

Mr. ISRAEL. I don’t know how exactly it would fit into the calculations of the WTO. I think if you play out what would likely 

happen under the scenario that we did bring a WTO case that went 

through the many years it would take to reach a final resolution 

after appeals and all the things that happen, the likely outcome 

would be the ability of the United States to levy a countervailing 

duty against China in what we estimate to be the impact that’s 

being felt on the U.S. economy through counterfeits. So, I don’t 

know if we did that proactively—if Congress did something like 

that proactively, I don’t know what the assessment would be. 

Senator SMITH. Would the Administration support it? 

Mr. ISRAEL. It’s something we’d have to certainly consider. I 

would be happy to—— 

Senator SMITH. Senator Dorgan says he can answer that. But I’m 

throwing this out because I just think a lot of us are looking to give 

you leverage to enforce American intellectual property that they 

have agreed to enforce as well, but clearly are not. 

Mr. ISRAEL. Leverage is important, Senator, it’s difficult in these 

situations, as you know, to always find leverage, always find ways 

you can play offense. I think we have—in our discussions with 

China and other countries where we see this as a problem, we don’t 

hesitate to note the fact that the U.S. Congress is exceedingly articulate and forceful in its views about the protection of American 

intellectual property on behalf of the companies and workers in 

your states, and that is certainly something that’s well understood, 

whether it’s Russia, China and any number of other countries. And 

I think the ability of the Administration and the Congress to work 

together to develop any and all leverage we can come up with is 

a very positive thing. 

Senator SMITH. Well, I throw that out because I think the mood 

in Congress has changed, not changing, it has changed, and I just 

don’t think we can keep going on on this basis with these escalating problems. I think we have to do something for the sake of 

our own Nation’s economic future and the integrity of our own laws 

and the respect of our own industries, not protectionism, but—— 

Mr. ISRAEL. Yes. 

Senator SMITH.—protecting what our Nation is frankly best at, 

and that’s new ideas, new products, new commerce that is transforming the world, but if it’s just stolen, it’s value is much diminished and our jobs are unfairly compromised. I believe in free 

trade, I don’t believe in being a big sucker. We’ve been joined by 

Senator DeMint of South Carolina. 

STATEMENT OF HON. JIM DEMINT, 

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. Thank you, Mr. Chairman. I don’t always agree 

with Senator Dorgan, but I share a lot of his concerns, and I’m 

coming from a different perspective because I have been a free 

trader from a state that’s not very free trade and was a big part 

of helping to win the approval in the House of China getting into 

the WTO. I felt it was critically important that we put China in 

21 

a rules-based system. But as you know, a rules-based system is 

meaningless if we are not able to enforce the rules. And my concern 

is—I mean, you could double or triple the size of your department, 

but China is so big and growing so fast, there is no way at all that 

we can litigate all the violations that we—the only way it could 

possibly work is if it’s leadership in China was committed visibly, 

forcefully and creating a legal structure in China that would stop 

this kind of pirating. We can’t do one case at a time. We’ll just be 

scratching the surface two decades from now. I know this question’s already been asked, but I guess it’s a two-part question at 

least, is first, if the leadership in China really wanted to do it, do 

they have the legal structure, the government structure, the cohesion to even do it, or is their industry, which is very international—it’s public-private in many cases, it’s government in some 

cases, is there any way to even enforce this, or was my idea that 

doing business and putting China in a rules-based system, was 

that a naive idea, that they don’t even have the capability to follow 

a rules-based system in a country that large? And does it really— 

the second part of my question is what can we do on this side, and 

I know that you have created a position, an ombudsman, who took 

position in February who is supposed to be an advocate for American business. Again, that’s one person against five billion. I don’t 

know how much they can really do, but I would just like to have 

some assurance from you that you think there is a social and government mechanism in China that could even uphold the law if 

they wanted to. I’d like some indication from you. In working with 

them, do you really think there’s any commitment at all for them 

to do that, or do we just need to back away from this idea that we 

can do business as two trading partners operating within the law? 

Is that a false idea? 

Mr. ISRAEL. I don’t know that, Senator, I can be 100 percent reassuring to you that the infrastructure is completely in place in 

China to enforce throughout the entire country, across all the 

range of localities and across all the depths of the industry that are 

there, the IP laws that are in place. I think that is the big question, the capability of the enforcement mechanisms in China to administer, forcefully and effectively, the laws that they’ve put in 

place is really where the challenge and the disconnect in China is. 

I do believe we’ve seen indications that there is significant political 

will in China to address this problem, and you asked the right 

question. What happens then? And what capacity is there in China 

to affect that political will and act on it? I think when you look at 

some of the larger cities, when you look at Beijing, when you look 

at Shanghai, there is a growing capability of the law enforcement 

infrastructure there. There’s a recognition of the—and a better understanding of the intellectual property laws. There’s more acceptance of them and willingness to take—to bring cases. They largely 

are still brought on behalf of Chinese rights holders and very rarely brought on behalf of foreign rights holders, let alone American 

rights holders, but in some of the larger jurisdictions, we are seeing 

some increased recognition of the problem and ability to deal with 

it. And then you very quickly get into the inter-lands of China, the 

outer areas of China, the outer cities, and it becomes exceedingly 

difficult for that political will, for that desire that has been exVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
22 

pressed at a senior level in China to manifest itself in a efficient, 

predictable and deterrent intellectual property system, and that’s 

what China committed to do when they joined the WTO. They committed to have a rules-based transparent deterrent IP enforcement 

system, and that simply does not exist in China right now. 

Senator DEMINT. Well, I think we need to consider ideas such as 

Senator Smith mentioned. If some find penalties, I hate to mention 

the word terrorists or whatever, but if the Administration doesn’t 

come up with the idea, I very much suspect that Congress will, and 

it may not be to my liking or yours, but we don’t feel like the— 

that the United States now has the leverage or the will or the 

mechanisms in place to enforce the laws that are on the books. So, 

something’s got to give, and its either got to come from your side 

or—I know it’s going to come from ours because when folks from 

the protectionist side and the free trade side start getting together, 

I think there’s probably nothing that we couldn’t do. So, there are 

a lot of us who are pretty aggravated about it, and a wait and see 

what happens in 2 years doesn’t suit. 

Senator DORGAN. Senator DeMint? 

Senator DEMINT. But I do—I appreciate you being here, too. And 

again, I don’t mean to pile on, but I think it’s time to put up the 

flags and say hey, we’ve got a problem. 

Senator DORGAN. Senator DeMint, I actually refer to it as a fair 

trade and the free trade side. 

Senator DEMINT. I see. Oh, OK. 

Senator DORGAN. And then the protectionists, but Senator 

DeMint, you weren’t here when I described, I think, what answers 

the—evidence that answers the question clearly. The ownership of 

the logo for the 2008 Olympics in China is owned by the Chinese 

Government. People in China began to counterfeit on the street 

corners, on glasses and cups and banners, and the Chinese Government shut it down immediately because they own that. These were 

Chinese people trying to counterfeit and pirate something owned by 

the Chinese Government. They clearly effectively shut that down. 

So, that demonstrates, at least to me, that they can, if they have 

the will, shut down that sort of activity. 

Senator SMITH. Chris, I have a final question. If my colleagues 

want a second round, they can as well. I’ve read reports that in 

some cases, the piracy of counterfeited products are connected, in 

fact, to organized crime. These include optical disks, automobile 

parts, T-shirts, even toiletry products. Is this—is that for real? Is 

this a real problem, and what are your thoughts about the criminal 

nature of this organization? 

Mr. ISRAEL. Very serious thoughts, Senator, I do think that there 

are sophisticated global organized criminal enterprises that are behind piracy and counterfeiting around the world. It’s relatively low 

risk, and it’s high return. 

Senator SMITH. And it’s in China? 

Mr. ISRAEL. And it’s in China. It’s in other places as well. I do 

know that this is—that’s a dynamic that obviously has our law enforcement agencies very focused on this. Our Department of Justice 

and our Customs agencies are exceedingly focused on this for that 

very precise reason. 

23 

Senator SMITH. Should we regard it as a national security issue 

more than just a criminal issue? 

Mr. ISRAEL. I mean, our focus right now and the focus that we 

have and that I personally have, our office is to address this as a 

trade issue, as an economic issue. I would respectfully defer the 

questions of national security to those in a place to better assess 

the threats, the particular threats that they see regarding national 

security, but we do know, as you said, there are criminal and sophisticated organizations behind this. We’re trying to be sophisticated and organized in our approach to combat them. 

Senator SMITH. Well, for the record, according to the U.S. News 

and World Report, a counterfeit T-shirt operation funneled money 

to an Egyptian sheik to help finance the 1993 attack on the World 

Trade Center. So, that’s why I asked the question. And obviously, 

that’s a hot issue around here right now. 

Mr. ISRAEL. Right. 

Senator SMITH. Do you know anything about China’s government-licensed optical disk plant? 

Mr. ISRAEL. A bit, I know it’s something we’ve raised frequently 

with them. 

Senator SMITH. And are you aware of any involvement of that 

plant with organized crime? 

Mr. ISRAEL. I’m not aware of any specific—right now, I think 

there are multiple plants. That’s another problem. There’s many 

many optical disk plants in China that are producing—— 

Senator SMITH. This is a specific one that is government licensed. 

Mr. ISRAEL. OK. I would need to probably get a little more information and maybe get back to you with some precision on that. 

Senator SMITH. Well, get some more information and I urge you 

to look into it. 

Mr. ISRAEL. I will do that. 

Senator SMITH. Need a second round? 

Senator DORGAN. Thank you, Mr. Israel. 

Senator SMITH. Thank you very much, Mr. Israel. We appreciate 

your attendance with us, and we’ll call up now our second panel 

that consists of Mr. Franklin Vargo, who is the Vice President of 

International Economic Affairs at National Association of Manufacturers. And Mr. Andy York, my constituent, he is the Vice President of Leupold & Stevens. They have been in business since 1907. 

And if any of you are hunters, you have used their scopes. Our 

final witness will be Professor William Alford, Director of East 

Asian Studies at the Harvard Law School, and Mr. Alford will discuss the scale of the IPR problem in China and its potential implications on the world economy. Mr. Vargo, why don’t we lead off 

with you and welcome. Pull the mike close to you so we can hear 

you. 

STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT 

FOR INTERNATIONAL ECONOMIC AFFAIRS, 

NATIONAL ASSOCIATION OF MANUFACTURERS 

Mr. VARGO. Thank you, Mr. Chairman, Mr. Dorgan. The NAM is 

very pleased to testify today on one of the most serious problems 

that we’re facing out of China. That is counterfeiting. We have 

other problems. We have a very, very undervalued currency. We 

24 

have problems of subsidies, but the counterfeit products are a very 

serious problem as well. Lots of people talk about the piracy of 

copyrighted products, CDs, videos, et cetera, but the counterfeiting 

of trademark products is a real problem with China as well. Just 

about everything gets counterfeited, not just American products, 

Japanese products, European products, and we have to parse the 

problem out. It’s bad enough that so much of the products sold in 

China are counterfeit, but they don’t stay within China’s borders. 

They go around the world. They don’t just affect large companies. 

Actually, large companies—the question’s been asked is China getting better. In honesty, their laws are getting better. I think they’re 

still deficient, but they’re getting better, and some of the large companies that operate within China that have banded together in 

something called the Quality Brands Protection Commission, the 

QBPC, have learned how to work with the Chinese authorities, 

they’ve learned how to—they can hire their investigators. Things 

are getting a little better for them. But for the smaller companies, 

they just can’t afford this. And I have an example here of some 

products. There’s a great NAM member manufacturer in Fort Lauderdale, Florida, Uniweld Products. They make refrigeration testing equipment, and they have a big market in the Middle East 

where there are a lot of refrigeration and air conditioning products 

that’s needed. So, their product—this is the genuine product here. 

It’s a very high-quality product that is in very high demand. This 

is the fake Chinese product, exact same packaging, says made in 

the USA, has Uniweld’s warranty card in it. Same sort of thing 

here, here we have the genuine product, and we have the fake 

product, made in the USA. 

Senator SMITH. What are those? 

Mr. VARGO. These are manifold testers, and these are refrigeration manifold testers. They are, as I said, a very high-quality product, but the market for their product in the Middle East is being 

ruined by these Chinese fakes. They’re not a high-quality product. 

So, the company started noticing that they’re getting a lot of warranty cards being sent in, they said geeze, you know, we’re not selling that many products in that part of the world. So, they have 

been working with the authorities in the Middle Eastern countries 

to crack down and are getting some relief there, but they don’t 

have the funds to hire investigators to go all around China and see 

where this is being made and to go through the civil process and 

then into a criminal process. So, we feel the laws in China are deficient. You know, the counterfeiting is a—ought to be a crime. Now, 

there is a threshold in China right now, and I’m not exactly sure 

what it is, but it’s too high, the dollar value or the Yuan value of 

the goods that have to be seized. And also, the goods are valued 

not at the value of the genuine goods, but at the value of the fake 

goods, which is so much less. So, it’s difficult to get criminal prosecution. So, to many counterfeiters in China, being caught is just 

a cost of doing business. There is a civil fine. They move the equipment, they go back into production. And we want them thrown in 

jail. We want them to be locked up, and we want to throw away 

the key and really make examples of them, not just a 6-month sentence or something, but years because it is a very serious problem. 

And there are some indications that the Chinese Government, cerVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
25 

tainly in Beijing, sees this as a growing problem and is trying to 

do more about it, but they really need to get at their laws. They 

need something—remember that old TV series ‘‘The Untouchables’’ 

and Eliot Ness. You know, they need a police strike force. Why 

should American companies or other companies have to hire investigators, find out where the crime has been committed and drag the 

police in. The Chinese police ought to be doing that. So, we need 

more from them. We need more out of China Customs. They ought 

to stop the stuff from being exported. If a container-load of stuff is 

being exported out of Shanghai or somewhere, and it says made in 

the USA, that ought to be a tipoff that something’s wrong here. We 

want U.S. Customs to do more. And they are doing more, but we 

still need more. And in third countries, particularly where we have 

trade agreements that provide more rights against transshipment, 

we want them to begin enforcing those agreements so we can really 

make a dent in the problem. And it’s not just a matter of hurting 

the bottom line, it’s a matter of the product’s brand reputation as 

well. But also, it’s a matter of health. If you get brake linings that 

are made of sawdust or you get fake airplane parts or fake auto 

belts or fake window glass that’s supposed to be safety glass and 

is not, this is a real safety problem. We have worked with the U.S. 

Government. We have worked with USTR and Commerce and others, and more is being done. We appreciate the STOP! Program. I 

think that Chris Israel’s position, we need to coordinate. There is 

so much disjointed effort within the U.S. Government. They’re 

doing better, but we need more resources to go into this, and we 

need to work with them more closely. I’d like to think that there 

was a magic wand we could wave that would just bring a WTO 

case. Bringing a WTO case is tough. The standard of evidence is 

very high. We really—at the NAM, we’re starting to talk with our 

companies and trying to get the evidence that would be necessary. 

And if we can accumulate a sufficient amount of evidence, we won’t 

hesitate to demand the U.S. Government bring a WTO case, but 

that’s a long process. You know, that’s 2 years. Then, you’ve got 15 

months to come into compliance. And what’s the remedy necessarily? Are they going to say now we, you know, we’re going to 

line up 30 people and throw them in jail for life, and the problem 

is solved? The best way is to get the Chinese to recognize that 

they’ve got to do something about this. But failing that, and our 

patience is limited, failing that, we certainly want to see our WTO 

rights pursued. We appreciate your interest and your interest, the 

interest of the whole Senate and the House. We need to see that 

the Administration efforts are well funded. We need to do more for 

small companies who just don’t have the resources to deal with this 

problem. Thank you. 

Senator SMITH. Thank you, Mr. Vargo. 

Mr. VARGO. Oh, could I add one more point? 

Senator SMITH. Of course. 

Mr. VARGO. Mr. Chairman, we’re very very pleased at your introduction of S. 2134 because it’s not just a matter—we have to protect our intellectual property because it’s intellectual property that 

allows us to compete against lower-wage countries, but we have to 

continue to develop that technology. And your bill, and I hope it 

will be marked up soon and favorably, and we particularly like the 

26 

advanced technology program that you are trying to preserve and 

that as being necessary. So, I just want to express the gratitude of 

America’s manufacturers. Thank you, sir. 

[The prepared statement of Mr. Vargo follows:] 

PREPARED STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT FOR INTERNATIONAL

ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Chairman and members of the Subcommittee, 

I am pleased to have the opportunity to testify on behalf of the National Association of Manufacturers (NAM) this afternoon on ‘‘Piracy and Counterfeiting in 

China.’’ We applaud the Committee’s initiative in holding the hearing. The damaging impact of this illegal activity on U.S. industry and the general public is serious and growing. And if we don’t get this problem under control, we are going to 

face severe consequences for our businesses, workers and the health and safety of 

our citizens. 

The NAM is the Nation’s largest industrial trade association, representing small 

and large manufacturers in every industrial sector and in all 50 states. Protection 

of intellectual property rights has never been more important for U.S. manufacturers than it is today. Our companies and workers—whether in Detroit, Los Angeles, 

Atlanta or Houston—are competing in a global economy against rivals not only in 

well established industrial countries but also, increasingly, in emerging economies 

such as China, India, Korea, Taiwan and Malaysia. These emerging economies, particularly China, are rapidly expanding their industrial base on an extraordinarily 

large scale, taking advantage of low labor costs, a less burdensome regulatory environment, lower taxes and, in some cases, deliberate currency undervaluation. 

America’s ability to create and use intellectual property such as patents, copyrights and trademarks provides U.S. companies with a critical competitive advantage that helps to offset lower labor costs and other advantages that these emerging 

economies have. Consumers also benefit. The protection of trademarks and copyrights ensures that consumers of U.S. products, whether these products are lifesaving medicines, critical safety components in automobiles or software used to 

manage complex industrial processes, have authentic products that will perform 

with the high standards and quality assurances of the U.S. producer. 

In light of the importance of intellectual property rights (IPR) for manufacturers, 

the NAM has devoted considerable attention and resources to addressing their concerns. The NAM is co-chairing the Washington-based business Coalition Against 

Counterfeiting and Piracy (CACP) that is seeking to raise awareness of international trade in fake products and promote stronger efforts by government and 

business to address the problem. We have lobbied for stronger enforcement measures against counterfeiting in U.S. legislation and more resources to strengthen cooperation with foreign governments, including the Chinese Government. And we are 

seeking to mobilize manufacturers to improve their own internal practices to prevent counterfeiting, for example, by strengthening their supply chain systems to 

prevent fake products from getting into the hands of suppliers and customers. 

How big is the problem of global counterfeiting and piracy? It is already huge and, 

according to our members, is getting worse—and China appears to be the center of 

the biggest international counterfeiting and piracy rings. The estimate of counterfeit 

products most widely used by both industry and government is 5 to 7 percent of 

world trade or a volume of products valued at over $500 billion annually. 

Much attention has been given to the problem in China and other countries of 

the widespread pirating of copyrighted products, such as computer software, films 

and music. There is no question that this remains a serious problem, and despite 

the attention it has received, relatively little progress has been made. In China, for 

example, it is estimated that less than 10 percent of films and software sold on the 

market are authentic products. 

The counterfeiting of manufactured products, however, is also serious and affects 

a broad spectrum of U.S. industries: medicines, auto parts, components for industrial equipment, personal care products, chemicals, sophisticated computer routers 

and aircraft parts. Counterfeit products, of course, result in financial losses to U.S. 

companies when they are sold in place of legitimate products. But they also are a 

very real threat to consumers. Examples of defective products include: 

• Medicines that contain life-threatening ingredients or grossly inaccurate dosages 

• Batteries that explode because of faulty manufacturing 

• Brake pads containing sawdust 

27 

• Engine timing belts that break after only 1/5 the time of the authentic product 

• Razor blades that don’t shave despite the quality brand name 

• Refrigeration testing equipment that wouldn’t test properly 

• Faulty consumer electrical products that had false testing marks of a well 

known U.S. testing firm 

• U.S. brand name golf clubs that could break because of poor quality production 

The volume of the counterfeiting and piracy in China, according to reports we receive, appears to be growing. But so is the sophistication of those engaged in illegal 

production. The packaging of counterfeit products has improved so much that even 

U.S. company marketing experts have difficulty telling the authentic product from 

the counterfeit one. Some pharmaceutical companies have told us that the only way 

they can determine whether a suspected counterfeit product is real or fake is by 

sending the item for testing at a company laboratory. 

How counterfeiters manufacture fake products to avoid detection has also become 

more sophisticated. One U.S. consumer products manufacturer found that the counterfeiters were producing parts of the product in six different locations stretching 

over 80 miles. Final assembly was performed at different locations depending on the 

risk of detection. 

Much of the counterfeit production in China is consumed in the local market. But 

a substantial quantity is also showing up in markets around the world—Russia, 

Saudi Arabia, the UAE, Mexico, Canada, Costa Rica, Colombia, Uruguay and, of 

course, the United States. In one case, Chinese and French police worked together 

to intercept 800,000 units of counterfeit consumer products that were transiting 

Paris from China en route to Uruguay. 

Small companies face particular challenges in dealing with counterfeiters. One 

small NAM manufacturer that makes refrigeration testing equipment was not even 

aware that its products were being counterfeited in China until it started getting 

requests for warranty coverage in Saudi Arabia with products that had phony serial 

numbers but looked nearly identical to the company’s products. An investigation revealed that the products came from China, but the company doesn’t have the resources to pursue the case there. 

To qualify for membership in the World Trade Organization (WTO), China had 

to bring its domestic IPR laws into conformity with standards established by the 

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

China’s laws on defining intellectual property rights did in fact improve. But the 

enforcement of these rights still remains problematic. 

On the positive side, the Chinese Government has been receptive to discussing 

U.S. business concerns and taking some actions. The NAM appreciates the high priority that U.S. Trade Representative Portman and Commerce Secretary Gutierrez, 

and their predecessors, have given to engaging their Chinese counterparts on counterfeiting and piracy. Discussions on counterfeiting and piracy in the 2004 and 2005 

U.S.-China Joint Commission on Commerce and Trade (JCCT) were substantive and 

resulted in specific commitments on issues important for U.S. business. Key outcomes included: 

• China’s pledge to significantly increase penalties and crackdown on violators 

• Commitment to expand the range of IPR violations subject to criminal (as opposed to solely civil) penalties and increase the number of criminal prosecutions 

• Agreement to increase enforcement action by Chinese customs to stop the import and export of counterfeit products 

• Assurance that Chinese Government entities would only use legal software 

• Commitment to rid Chinese trade fairs of counterfeit products 

These are all important outcomes for U.S. manufacturers. Chinese follow-through 

on these commitments, however, has been uneven. Significantly, China did issue a 

judicial interpretation that permits, in theory, more criminal prosecutions. Some 

companies report aggressive enforcement actions by national and local authorities 

when detailed evidence of counterfeiting was presented. In a number of cases 

brought to our attention, police reportedly undertook extensive investigations in several locations that resulted in the arrest of many suspects (e.g., a dozen in one case) 

and the confiscation of hundreds of thousands of counterfeit items. The Chinese 

Government claims that it has taken many enforcement actions that resulted in the 

closing of thousands of commercial establishments that sold counterfeit products. 

In other positive developments, Starbucks announced earlier this year that it had 

won a trademark lawsuit against a Chinese coffee chain that was using its Chinese 

trademark. Luxury goods maker Louis Vuitton also scored a victory recently when 

28 

a Chinese court reportedly sentenced two men to prison for exporting copies of its 

perfumes. And in November 2005, General Motors reported that it had reached a 

settlement with a Chinese auto company Chery that GM says acquired its compact 

car designs and was producing automobiles identical to the GM model. 

Yet despite these positive anecdotes and Chinese claims of many enforcement actions, companies continue to tell us that counterfeiting and piracy in China is rampant, growing and on a very large scale. Enforcement actions, even when vigorously 

undertaken, appear to have little effect on the overall level of production and sale 

of counterfeit products. Moreover, we continue to receive reports of counterfeit products from China finding their way to countries around the world. The reports indicate that the Middle East is a major market for counterfeit products and transit 

point to third countries. 

Manufacturers in other countries have also experienced similar problems with 

counterfeiting and piracy in China. Counterpart business organizations in Japan, 

Korea and Europe have told us that their members are seriously concerned about 

the large-scale counterfeiting and piracy of their products in China and the sale of 

these products in the domestic market and abroad. The Korean newspaper Joong 

Ang Daily reported on August 22, 2005, that two-thirds of electronics shops in Beijing, Shanghai and Guangzhou were selling fake Samsung products and that 30 percent of auto parts marked ‘‘Made in Korea’’ in eight Chinese cities were found to 

be fake. Counterfeit Korean consumer electronic products from China have been 

found in Peru, Israel and Egypt. 

Chinese authorities continue to assert that the number of enforcement actions 

against counterfeiters is large and increasing. The authorities, however, have yet to 

provide detailed information on the penalties imposed on those involved in the production and sale of counterfeit products or the actions taken to close down factories 

and commercial outlets engaged in the illegal activity. We are particularly concerned that China has not substantiated its pledge to significantly increase the 

number of criminal prosecutions for counterfeiting and piracy. 

China’s failure to provide this information after repeated requests led the United 

States to seek help from the WTO. On October 26, 2005, the U.S. Trade Representative initiated a special process under Article 63.3 of the TRIPS Agreement to request that China release more detailed information about its IPR enforcement efforts. The NAM supported this action. We are disappointed that, thus far, China has 

not responded positively to the request. 

In the next several weeks, the Administration will have important opportunities 

to seek further progress on improving China’s performance on IPR enforcement. On 

April 11, the JCCT will meet again in Washington to review progress on the bilateral trade agenda, including IPR enforcement. The participation of Chinese Vice 

Premier Wu Yi and our two senior trade officials—Ambassador Portman and Secretary Gutierrez—will permit a high-level exchange on key policy concerns and a 

detailed review of past commitments, which in our view have not been fully implemented. Then later in April, President Bush will be meeting with Chinese President 

Hu Jintao to discuss the overall bilateral relationship. We will be recommending 

that counterfeiting and improved IPR enforcement receive priority attention at both 

meetings. 

Barring a significant improvement in China’s performance on IPR enforcement, 

we see no alternative but for the United States to consider filing a complaint with 

the WTO and requesting that a dispute settlement panel determine whether China 

is living up to its TRIPS obligations. The apparent small number of criminal prosecutions, for example, suggests that China’s IPR laws may not be adequate to ensure enforcement of companies’ rights. Similarly, the unevenness in IPR enforcement among the different Chinese localities also seems to indicate that the national 

government has not effectively implemented the TRIPS agreement on China’s behalf. The NAM is now exploring with member companies and organizations whether 

it would be possible to develop the kind of detailed information that would fully substantiate these claims in a WTO dispute settlement case. 

The NAM, however, does not believe that business and government should leave 

resolution of the China counterfeiting and piracy problem solely to the WTO. Business needs to do a better job to raise awareness of the threat from international 

counterfeiting and the need to be pro-active to fight against it, for example, by improving company and industry practices on supply chain security. The NAM will be 

encouraging this through the CACP as well as its own member working groups. 

U.S. agencies—particularly Commerce, State, USTR and Customs & Border Protection—need to continue strengthening their efforts to address counterfeiting and 

piracy in China and other countries. The STOP! Initiative has provided a good 

framework to do this. We are particularly pleased that more resources are now in 

place here in Washington and additional IPR experts are being assigned to U.S. emVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
29 

bassies, including Beijing. We would urge even more attention to how improved customs procedures in the United States and our trading partners can be used to prevent the import and export of counterfeit products. 

Finally, we hope that Congress will also continue to support efforts to stop international counterfeiting and piracy. First, we ask that Congress ensure the enactment without further delay of the Counterfeiting in Manufactured Goods Act (H.R. 

32). At the time I was preparing this testimony, we learned that the House had 

scheduled a vote on March 7 to approve H.R. 32, as amended by the Senate. We 

appreciate the Senate’s earlier action on the bill. The legislation is important because it will make it easier to prosecute individuals engaged in the production and 

sale of counterfeit marks that are intended for use on counterfeit products. We had 

been pressing other countries to adopt similar legislation to fight counterfeiting, and 

the United States would set a poor example if it hadn’t done so. U.S. anti-counterfeiting laws should be the gold standard, but we have a gap on counterfeit marks 

that must be fixed. 

Looking ahead, Congress also needs to ensure that U.S. agencies have the resources to address a global problem that will have serious consequences not only 

for U.S. industry but the entire U.S. economy if it is not contained. The budget for 

the next few years will likely be tight. We shouldn’t short change anti-counterfeiting 

efforts that are so important for U.S. economic interests. 

Thank you for holding this hearing and giving the NAM the opportunity to 

present its views. 

Senator SMITH. Thank you. Thank you very much. Andy York, 

thank you for coming from Oregon, and thank you for your great 

products for nearly a century now. You haven’t been here that long, 

but your products have. 

Mr. YORK. Not quite that long. 

STATEMENT OF ANDREW YORK, VICE PRESIDENT, 

LEUPOLD & STEVENS, INC. 

Mr. YORK. Good afternoon, Chairman Smith and Ranking Member Dorgan. I’m pleased to join you today to discuss the impacts of 

piracy and counterfeiting of American goods and intellectual property in China. I want to begin my testimony by thanking the Committee for your efforts to understand the impact that these activities have on American business, large and small, and I want to just 

take a few minutes to let you know how they’re impacting our business, Leupold & Stevens. As you mentioned, we were founded in 

1907. We’re getting ready to celebrate out 100th year next year. 

We’re a well-established manufacturer of rifle scopes, binoculars, 

spotting scopes and rangefinders, and we serve both the sports optics and tactical markets for our law enforcement and military. We 

are based in Beaverton, Oregon. We have been building rifle scopes 

since 1907. We have approximately 600 employees, and we’re a 

fifth-generation family owned company. We registered the Leupold 

trademark in the United States on January 12, 1971. And since 

then, we have obtained registrations for Leupold in the European 

Union, Australia, New Zealand, Hong Kong and Japan. Frankly, 

we probably should have filed for a trademark in China decades 

ago, but probably like a lot of small businesses, we were unaware 

of the potential issues we would face in the Chinese market. It 

wasn’t on our radar screen. And frankly, with the Tiananmen 

Square-related sanctions, rifle scope sales to the People’s Republic 

of China are prohibited. So, it’s not an active market for us. It became one on December of 2001, when we learned that SAM Optics 

(Nantung) Company Limited had filed in the People’s Republic of 

China for the word Mark Leupold in English for goods manufactured and sold by Leupold & Stevens. We later learned that SAM 

30 

Optics had also filed to register 19 applications for 16 other company’s marks in the sports optics and telescope market. These 

marks include BSA, Bushnell, Swarovski, Simmons and Celestron 

among others. We later learned—— 

Senator SMITH. Can I ask you a question? 

Mr. YORK. Yes, sir. 

Senator SMITH. You don’t sell anything into China, though? 

Mr. YORK. We do not. We source products in China. We do not 

currently sell—— 

Senator SMITH. It’s prohibited, right? 

Mr. YORK. It is prohibited. There is one potential sale that we 

are exploring right now with the police department, I believe, in 

Hong Kong. 

Senator SMITH. Thank you. 

Mr. YORK. So, their law enforcement people know us fairly well. 

Senator SMITH. But you have never seen any upside to the China 

market? 

Mr. YORK. There is not a lot of hunting in China. 

Senator SMITH. Got it. 

Mr. YORK. BSA paid $25,000 to reclaim their mark from another 

company in China, Asia Optical, who had registered their mark, 

and we also learned from our council in China that recently, SAM 

Optics sold one of these marks that had registered for between 

$50,000 and $80,000. It is our perspective that this is a fraudulent 

intent, a case of fraudulent intent, to register the trademarks of 

other well-known international brands for the sole purpose of attempting to extort money from the rightful owners of these trademarks. We have been fighting a legal battle for close to 5 years 

now. We filed our own applications in both classes 9 and 13 in the 

People’s Republic of China. We have cited the Trademark Law, the 

Paris Convention. We provided much evidence in the People’s Republic of China to support our claim that Leupold is a well-known 

brand and is rightfully ours. The trademark office there refused 

our application. They rejected our opposition to SAM Optics in 

class 13. We have appealed that rejection, but it could take several 

more years to ultimately get a decision. 

Senator SMITH. And are your products manufactured there, not 

by you, but your intellectual property. Are they being sold? 

Mr. YORK. Yes, I’m going to tell you in a moment about some 

products right now, some counterfeit goods that are showing up in 

the international market for Leupold rifle scopes. I did want to pick 

up on a theme earlier. China is a member of the WTO. They’ve 

signed onto the World Intellectual Property Organization. They’ve 

acceded to the Paris Convention, the Madrid Agreement and Protocol, the Nice Agreement. They signed the Trademark Law Treaty. 

They supposedly patterned their trademark law after the TRIPS 

Agreement. However, it appears that there has been a breakdown 

in the interpretation and implementation of these standards into 

domestic law in China or a failure to effectively enforce those laws, 

most likely both. Further agreements must seek to ensure that provisions are incorporated into domestic law in China exactly as enacted in the signed international agreements. I want to talk to you 

now about counterfeiting operations in China. Leupold sources 

many finished-good products from China, including binoculars and 

31 

rangefinders. If we lose control of our mark, we are concerned that 

our exports from China to Leupold are at risk of being deemed 

counterfeit goods in China, and we would then be the counterfeiter. 

We find that very ironic. Leupold is also experiencing increased incidents of counterfeit goods, clones, replicas and knock offs of our 

tactical rifle scopes on eBay from sellers in the Hong Kong area. 

We are seeing these show up in the United States, the European 

Union in Australia, and we have reports form our distributors in 

Russia that those counterfeit goods are now showing up in the 

Moscow area as well. If we lose control of our market, we may face 

increased risk that these tactical rifle scope copies could be legally 

branded Leupold in the People’s Republic of China. If they were 

confused with the real thing and used in the line of duty by our 

law enforcement officers or members of our military, the potential 

for failure and the resulting consequences would be significant. I 

wanted to let you know who uses our scopes and how they are used 

by the Department of Defense, the Department of Energy, the FBI, 

Border Patrol, Capital Police, Secret Service, and Homeland Security. Ninety percent of all local police departments in the United 

States, Special Forces and SOCOM. They are used to fight terrorism, both domestically and internationally, but I think it’s the 

least that we can do for these folks that put their lives on the line 

everyday to ensure that the rifle scopes on their equipment are 

original equipment and not knock offs. I want to read to you, if I 

can, just—I know I’m going over here, one brief statement. This is 

a correspondence that I’ve initiated with one of the knock off sellers 

in Hong Kong. I think you have photos there that were provided 

of our Leupold Mark 4 LRT. It’s a long-range tactical scope that 

our sniper teams use. It’s a 3.5x10x40 product, and you have a picture there of a counterfeit good being sold on eBay. This is from 

a company called Sun Clear Trading, operating out of Shanghai 

where I was inquiring about my opportunity to import these goods 

into the United States, posing as a wholesaler. I was glad to have 

your e-mail. I sell a lot of scopes on eBay, and I export a lot of 

them to the U.S. in your own market. Most of my scopes are excellent quality with several tests of my customers. Leupold copy is the 

same appearance as the original. It can be used on the real fire 

weapon. Frankly, I can’t guarantee the copy is 100 percent as good 

as the original. Of course, you have to buy one or two for a test. 

If you are satisfied with them, I can supply you a good wholesaler 

price. The M1 sample fee is U.S. $100. 

Senator SMITH. Where did that originate, that e-mail? 

Mr. YORK. This is a direct correspondence from me to a seller on 

eBay. 

Senator SMITH. So, you just—you’ve invited the—— 

Mr. YORK. Posed as a buyer. 

Senator SMITH. Yes. 

Mr. YORK. He’s selling them for $100. The real scope sells in the 

United States for a suggested retail of $1,400 and as rightfully it 

should. These are scopes that are designed to survive 5,000 hits on 

the equivalent recoil of a 375 H and H Magnum and hold point of 

aim. The scopes that are coming—these counterfeit goods are a little more than toys, look-alike toys. So, it’s very troublesome. It’s 

very bothersome. You know, we’re extremely concerned about this 

32 

trademark issue that we’re facing there. It’s exacerbated now by 

what appears to be a rapidly expanding counterfeiting operation, 

both in China, and also, we have reports that it’s out of Japan as 

well. We’re extremely concerned. We would like to thank you on behalf of Leupold & Stevens for addressing this situation, not just for 

ourselves, but obviously, for all Americans doing business in China. 

[The prepared statement of Mr. York follows:] 

PREPARED STATEMENT OF ANDREW YORK, VICE PRESIDENT, LEUPOLD & STEVENS, INC. 

Chairman Smith, Ranking Member Dorgan and members of the Committee, I am 

pleased to join you today to discuss the impacts of Piracy and counterfeiting of 

American goods and Intellectual Property in China. 

I want to begin my testimony by thanking the Committee for your efforts to understand the impacts these activities have on American business, large and small. 

I would like to present to you today an insight into one such American company, 

Leupold & Stevens, Inc., and how piracy and counterfeiting are impacting our business. Your focus on these issues is greatly appreciated and we think it holds great 

promise that this Committee will identify and implement strategies that will lead 

to further refinement of international intellectual property standards and the corresponding domestic legislation where these international agreements, conventions 

and protocols are interpreted into the laws of the member countries. 

Leupold & Stevens, Inc. is based in Beaverton, Oregon. We have been in business 

since 1907. As our business has grown, we have expanded our workforce to approximately 600 employees. Leupold is a fifth-generation family owned company. We pioneered the manufacture of waterproof riflescopes in 1947 and have steadily developed a worldwide reputation for building the world’s finest hunting scopes, binoculars, spotting scopes and rangefinders, sold under the trademark LEUPOLD. 

Over time, our brand has been built on the principle that every customer is entitled to a square deal. Leupold has become legendary for its rugged dependability, 

absolute waterproof integrity and lifetime guarantee. This is an old fashioned guarantee from an old fashioned kind of company: If any Leupold Golden Ring product 

is found to have defects in materials or workmanship, we will, at our option, repair 

or replace it. FREE. Even if you are not the original owner. No warranty card is 

required. No time limit applies. These are the building blocks that our brand and 

LEUPOLD trademark have been built upon. 

Leupold & Stevens projects worldwide sales of well into the hundreds of thousands of units in 2006, totaling in the hundreds of millions of gross revenue dollars, 

for hunting scopes and related goods sold under the mark LEUPOLD. The trademark LEUPOLD for hunting scopes and related goods was first registered in the 

United States on January 12, 1971. Since then, Leupold & Stevens has obtained 

registrations for the mark LEUPOLD in the member countries of the European 

Union, Australia, New Zealand, and Japan. 

Leupold sells its products to three unique markets; Hunting/Shooting, Observation and Tactical. Our riflescopes are used for hunting and target shooting all over 

this great country and, in fact, all over the world. Our tactical line of riflescopes 

is used extensively by law enforcement officers and by many branches of our military. Our troops in Afghanistan and Iraq rely on our riflescopes on a daily basis 

to complete their missions. 

Aside from the U.S., we have distributors and/or representation in Austria, Australia, Belgium, Bulgaria, Canada, Czech Republic, Denmark, England, Finland, 

France, Germany, Holland, Ireland, Israel, Italy, Japan, Kazakhstan, Latvia, Mexico, New Caledonia, New Zealand, Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia & Montenegro, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Ukraine and the United Arab Emirates. Although we source components and 

finished goods such as binoculars and range finders from China, we do not export 

riflescopes there due to Tiananmen Square-related Sanctions that are in place at 

the U.S. State Department. If market conditions in China and export laws were to 

change in the future, Leupold would consider expansion into this market just as we 

have done elsewhere in the world. 

Before we begin to recount the history of what has transpired in regards to 

Leupold’s efforts to trademark and protect our brand LEUPOLD in China, I do want 

to state for the record that Leupold has strong business partners in China. Most 

companies and authorities that we have dealt with in China and certainly those relationships and partnerships that are currently in place are based upon mutual reVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
33 

spect, trust, honor and proper business ethics. From Leupold’s perspective, we find 

it most unfortunate that with such positive business dealings with our many partners in China that a single company could cause us such problems. What is more 

troublesome however is that with the extent of trade between China and the U.S. 

and all of the international agreements, conventions and protocols that China has 

acceded to, one would think that the PRC intellectual property laws would not allow 

such behavior. That has not been the case, at least from our experience over the 

past 5 years. 

In December 2001, Leupold & Stevens learned that an application for the word 

mark LEUPOLD, in English, had been filed in the People’s Republic of China for 

goods including those manufactured and sold by Leupold & Stevens. That application, filed for goods in International Class 13, was owned by a company called SAM 

Optics (Nantong) Company Ltd., hereafter SAM Optics. Note that Leupold & Stevens has never had a relationship with SAM Optics in any capacity, either as a distributor, retailer, or manufacturing partner. 

Following counsel’s advice, Leupold & Stevens filed trademark applications in 

China in International Classes 9 and 13, covering all the Goods it manufactures and 

sells in order to support filings to oppose the SAM Optics application. The 

LEUPOLD trademark applications were filed on January 21, 2002. 

In preparing evidence to oppose the SAM Optics LEUPOLD trademark application, Leupold & Stevens learned that SAM Optics had filed to register 19 applications for 16 other companies’ marks primarily in the sports optics and telescope 

markets. These included such widely-known marks as CELESTRON, SWIFT, 

BURRIS, BUSHNELL, SWAROVSKI, SIMMONS, WALTHER, and BSA (See attached list of Marks). In January, 2002, at the Annual SHOT Show, a representative of Leupold, Fritz Kaufman, met with a representative of BSA, Roger Vallecorse, 

to discuss SAM Optics. Roger Vallecorse followed up that meeting with an e-mail 

to Fritz Kauffman, which I attach. In that e-mail, Roger Vallecorse offers to introduce Leupold to SAM Optics, who had assisted BSA with buying back its mark from 

another China company, Asia Optical, to whom BSA paid $25K. Roger Vallecorse 

states that SAM Optics’ motives in registering the marks referred to above are to 

prevent those marks from being registered by Asia Optical. Vallecorse, then, paints 

SAM Optics as a good guy—Asia Optical are the bad guys. Note that Vallecorse’s 

e-mail was copied to both an officer of SAM Optics (Yin Zhu Hua) and the company 

lawyer (Guo Jun). 

We later learned from our counsel that SAM Optics sold one of the marks (we 

do not know which one) for somewhere between $50,000 and $80,000 (USD). This 

is the kind of experience that awaits U.S. businesses seeking to register their trademarks in China. 

SAM Optic’s trademark registration pattern and practices were cited in the opposition filed by our counsel on April 20, 2002. That opposition was based on the bad 

faith of SAM Optics in seeking to register LEUPOLD, among other marks. The opposition cited Article 31 of the PRC Trademark Law, which states: 

An application for the registration of a trademark shall not create any prejudice 

to the prior right of another person, nor unfair means be used to preemptively 

register the trademark of some reputation another person has used. 

The opposition also cited Article 6bis (1) of the Paris Convention concerning protection for well-known marks, which states: 

The countries of the Union undertake, ex officio if their legislation so permits, 

or at the request of an interested party, to refuse or to cancel the registration, 

and to prohibit the use, of a trademark which constitutes a reproduction, an 

imitation, or a translation, liable to create confusion, of a mark considered by 

the competent authority of the country of registration or use to be well known 

in that country as being already the mark of a person entitled to the benefits 

of this Convention and used for identical or similar goods. These provisions 

shall also apply when the essential part of the mark constitutes a reproduction 

of any such well-known mark or an imitation liable to create confusion therewith. 

Shortly after filing the opposition to the Sam Optics application in Class 13, a second SAM OPTICS application for the mark LEUPOLD in Class 9, for additional 

Goods manufactured and sold by Leupold & Stevens, was published for opposition. 

Leupold & Stevens filed an opposition against that application as well. 

Leupold & Stevens had diligently filed to oppose both PRC applications for the 

mark LEUPOLD, filed in bad faith by SAM Optics, and it had filed its own applications in the PRC to protect its own goods. 

34 

In October, 2005, the PRC Trade Mark Office refused Leupold & Stevens application for the mark LEUPOLD: in November 2005, the PRC Trade Mark Office rejected Leupold & Stevens opposition to the first SAM Optics application opposition 

on the following grounds: that Leupold & Stevens did not own a registration or application for the mark LEUPOLD in the PRC for the same Goods—which was incorrect; and, that the demonstration of trademark registrations, sales and manufacturing volume, affidavits of fame of the mark, were insufficient to prove that SAM 

Optics had filed in bad faith. 

Leupold & Stevens is filing to appeal the rejection of its opposition to the SAM 

Optics mark for LEUPOLD in Class 13. According to our counsel, we will not receive a decision for 2 or 3 years. If Leupold & Stevens loses this final appeal, and 

if it loses its opposition against the Class 9 Application for the LEUPOLD mark 

owned by Sam Optics, Leupold & Stevens will have no recourse except either to pay 

whatever price SAM Optics sets for the registrations it has obtained in bad faith 

or run the risk of being prosecuted for infringement of its own mark, LEUPOLD, 

registered in China by SAM Optics. 

This is obviously just the type of Fraudulent Intent that numerous international 

conventions, agreements and treaties have sought to prevent. China became a member of the World Intellectual Property Organization in 1980. China acceded to the 

Paris Convention for the protection of Industrial Property on November 14, 1984 

and became an official member on March 19, 1985. China acceded to the Madrid 

Agreement for the International Registration of Trademarks on October 4, 1989 and 

to the Madrid Protocol on December 1, 1995. China acceded to the Nice Agreement 

concerning the International Classification of Goods and Services (ICGS) on August 

9, 1994. China signed the Trademark Law Treaty (TLT) on October 27, 1994. Finally, China has patterned its intellectual property law after The Agreement on 

Trade-Related Aspects of Intellectual Property Rights (TRIPS). 

While all of these efforts have contributed immensely to bringing China’s intellectual property laws up to internationally accepted standards, a more basic question 

still remains: Do these international agreements go into effect directly upon signing 

or are they only implemented through the resulting domestic laws of those countries 

signing the agreements? In China’s case, it appears to be the latter and it has been 

this translation or interpretation into domestic law in China that the original intent 

of these international standards seems to break down. What is possibly needed is 

stricter wording in these international agreements that treaty provisions take precedence over domestic trademark law provisions, and these treaty provisions must be 

incorporated exactly as enacted in the signed agreements. 

It is clearly not ethical or acceptable that SAM Optics runs out and files trademarks in China for 19 well know international brands of optical equipment with the 

sole intent being to extort a ransom from those companies to purchase back trademarks which those companies rightfully own by internationally accepted trademark 

standards. Furthermore, it is absolutely not acceptable that China, after having 

agreed to these international standards, fails to implement them into law or to correctly apply those trademark laws which it has implemented. How can it be that 

after all of the work that has gone into setting these international standards that 

Leupold and Stevens, Inc. cannot register and protect the LEUPOLD trademark in 

China, even in the face of such a case of pure fraudulent intent by SAM Optics? 

If Leupold loses control of the LEUPOLD trademark in China there are resulting 

potential consequences that we are concerned about. Leupold sources many finished 

goods directly from various manufacturers in China, including range finders and 

binoculars. If these goods are stopped for inspection at a point of export from China, 

with the name LEUPOLD on them, we are concerned that we may run the risk of 

being charged with attempting to illegally export goods branded LEUPOLD, a trademark that we would not own in China. Ironically, we could be viewed as the counterfeiter. 

A similar concern exists in the fact that for some time there have been counterfeit 

goods coming from China that are being sold on eBay as Leupold clones, replicas 

or knock-offs. These products are marketed as being the same as Leupold tactical 

riflescopes but without the Leupold name on them. Whereas a true Leupold tactical 

scope may retail for over $1000 (USD), these look-alikes will sell on eBay for about 

$100 (USD). There are several sellers who apparently seem to be working out of the 

Hong Kong area. 

Our concern is that if we lose control of the LEUPOLD trademark in China, these 

replica riflescopes could legally begin to appear with our name on them and from 

all outward appearances would look just like an original Leupold. Our Leupold tactical riflescopes are built to meet the demanding requirements of our law enforcement officers and military personnel. If these knock-offs are taken to be the real 

thing, which they definitely are not, they could be mistakenly purchased either new 

35 

or years from now as used equipment by customers who mistakenly assume them 

to be genuine Leupold tactical riflescopes. What would happen if these look-alikes 

then failed in the line of duty? This is a very grave scenario to say the least and 

the potential ramifications on Leupold are substantial. Everything we have built 

over the past century under the Leupold brand name would potentially be at risk. 

I would like to conclude my testimony with a simple thought. Over 50 years ago, 

our company’s founder, Markus Friederich Leupold declared that, ‘‘the customer is 

entitled to a square deal.’’ That simple ideal has driven our company to always 

strive to do the right thing and take care of our customers. Mr. Chairman, after you 

read all of the international agreements, treaties and protocols, ask yourself a simple question... are American businesses getting a square deal when it comes to 

intellectual property protection in China? I can tell you that from Leupold’s perspective we definitely are not. Thank you very much. 

Fritz Kaufman 

From: Shaganash@aol.com 

Sent: Friday, February 08, 2002 1:19 PM 

To: fkaufman@leupold.com; euppiano@leupold.com; mbierig@leupold.com 

Cc: michaelguo@pub.nt.jsinfo.net 

Subject: Leupold Chinese registration/Meeting with BSA Optics at SHOT. 

Gentlemen, 

Thanks for stopping by to visit with us on the last day of the show. I hope that 

you had a pleasant and uneventful return home. 

RE REGISTRATION OF LEUPOLD NAME IN CHINA

Pursuant to our discussion, please allow me to confirm that Asia Optical (formerly 

Asia Optical Japan), under the direction of Mr. Misao Ozaki, registered the name 


308FRITZ1.eps
36 

of BSA Optics in China and offered us the alternative of either purchasing all of 

our Chinese made goods through them or purchasing our name from them. Although I saw this as little more than legalized extortion, we felt it was best to negotiate and pay a USD 25,000 settlement which secured ownership of our name and 

allowed us to get on with business. 

In China, we were represented by the president of one of our suppliers, Sam 

Optical’s Yin Zhu Hua, and his chief counsel Guo Jun. They were quite helpful in 

this regard and I recall Mr. Yin indicating to me that he was going to register the 

names of all his current customers as well as other U.S. and European optics firms 

with the intention of blocking additional extortion/coercion attempts by Asia Optical. 

Significant animosity remains today in the eastern provinces of China, especially 

Jiangsu where the Japanese military committed numerous atrocities on civilian populations. As such, it is likely that Yin’s efforts to register the names of companies 

other than his customers’ were not entirely altruistic in nature. In any case, I am 

sure that you will find him to be highly motivated to assist you in this regard. However, do note that today is the beginning of the Chinese new years holiday and most 

businesses and government offices will be closed through at least the end of the next 

week. 

Ozaki’s actions were completely reprehensible and if I may be of any further assistance, do not hesitate to call on me. After IWA, I will be in China for several 

weeks and not opposed to following up directly with Yin and Guo on your behalf. 

With best regards, 

ROGER J. VALLECORSE, 

VP Purchasing and Technical Services, 

BSA Optics

cc: Michael Guo (Guo Jun) michaelguo@pub.ntisinfo.net 

Yin Zhu Hua yinzhuhua@pub.nt.jsinfo.net 

Senator SMITH. Andy, have you ever had a warranty claim made 

to you for one of these counterfeit products? 

Mr. YORK. I think probably—that would have come to my attention, so I am not aware that that has happened as yet. 

Senator SMITH. How much quantity are you aware of that has 

come here with your brand on it from China? 

Mr. YORK. You know, I just started into this really diligently last 

week in preparation for this hearing, and I searched on eBay from 

a couple of these sellers, and it looks like it’s in the neighborhood 

of 500 tactical scopes per year roughly that I can track through 

that one channel. I don’t have a good idea of how many may be 

coming in through different wholesalers. 

Senator SMITH. Outrageous. Professor Alford. 

STATEMENT OF WILLIAM P. ALFORD, HENRY L. STIMSON 

PROFESSOR OF LAW; VICE DEAN FOR THE GRADUATE 

PROGRAM AND INTERNATIONAL LEGAL STUDIES; DIRECTOR 

OF EAST ASIAN LEGAL STUDIES, HARVARD LAW SCHOOL 

Professor ALFORD. Chairman Smith, Ranking Member Dorgan, 

thank you very much for inviting me to appear today. The infringement in China of American intellectual property is obviously very 

harmful to both the Americans and to Chinese. I know this firsthand. Parts of my book on intellectual property in China entitled 

To Steal A Book is an Elegant Offense, which comes from the old 

Chinese saying, have recently been reproduced in China without 

authorization and without attribution, and sadly enough, by one of 

China’s leading professors of intellectual property law. I brought 

one copy of the book. You open it up, and there are parts of my 

book just used without any acknowledgment that they’re from my 

book. You know, the problem is not that China lacks laws against 

37 

infringement. As the USTR and most observers have noted, China’s 

laws, the formal laws on the books, are largely consistent with its 

international obligations, although as Mr. Vargo noted, improvements could be made. The real problem, the principal problem, instead is one of enforcement. You know, it’s tempting to see this as 

only a matter of will, namely that if the Chinese Government, 

which after all, is not a democratic government, wants to, it can 

bring this illicit behavior to halt fairly quickly, or if it doesn’t want 

to, that we in the U.S. then have sufficient pressure that we can 

bring to bear to force it to do so. Will or lack of will on the part 

of the Chinese Government clearly is very important. I wouldn’t be 

honest if I suggested otherwise. Will, when it’s there, accounts for 

some of the improvements such as, for example, the establishment 

in major cities courts of special intellectual property chambers and 

the courts that are among—they have among the most capable Chinese jurists. And lack of will, clearly, is evident than what we’ve 

heard already in the discussion today in the Chevy automobile 

matter, in the fact that there’s a city called Yiwu in Zhejiang Province that’s a major distribution center known far and wide, specializing in infringing products and the inadequate staffing of the Customs Service and the National Copyright Administration and so 

forth. 

The Chinese Government clearly can and should do much more 

to ensure protection for intellectual property, and we in the U.S. 

should maintain the type of vigilance called for in the USTR’s Topto-Bottom Review. But I also believe that we need to understand 

that there are other dimensions to this problem that are important 

to take into account, not as an excuse for illegal behavior, but in 

order to come up with the most effective strategy possible for the 

U.S. Let me just mention a couple here. 

The legacy of Confucianism, which was a dominant ideology in 

China before the 20th century, and of communism mean that intellectual property still remains a fairly novel idea for many of the 

people in China, and that there continues to be an insufficient 

sense that stealing a book is not elegant, but it’s illegal. And we 

need also to appreciate that because of the weakness of institutions 

in China today, the problems of local favoritism, of inexperience, of 

corruption that have impeded the enforcement of intellectual property are not unique, but in fact, they’re mirrored in virtually every 

other area of the law, including areas that Beijing cares about very 

much. 

There were, for example, more than 75,000 instances of civil unrest in China last year. One could also look at Internet filtering 

where the Chinese Government is trying hard to constrain it, but 

is not entirely effective. As a result of all this, a strategy on our 

part that’s premised entirely on foreign pressure or principally on 

foreign pressure and that envisions a relatively quick solution will 

not, I fear, suffice. 

In addition to maintaining some pressure, we need to do what we 

can to promote rights consciousness in general in China and to 

help build better institutions in a stronger civil society. History, 

after all, tells us that intellectual property protection flourishes 

most fully in societies in which citizens have private expression 

and other such interests to protect, are keenly aware of their 

38 

1Stanford University Press (1995). 

2 United States Trade Representative, ‘‘Out-of-cycle Review Results,’’ posted on the USTR 

website, April 29, 2005 (last visited March 6, 2006). It should be noted that at the end of this 

review, the USTR elevated China to its Special 301 ‘‘Priority Watch’’ list because these laws 

rights, are able to band together to protect those rights and have 

well-developed institutions through which to vindicate those rights. 

China has a long way to go on these accounts, but as civil society 

and private enterprise are beginning to emerge, we can see the beginnings of a domestic constituency that has its own valuable intellectual property and other interests to protect, a constituency that 

by advancing such interests, also serves to advance ours in ways 

that we as foreigners cannot do as directly or as effectively. 

We are certainly correct to hold the Chinese Government to its 

word when it announces as the state council, the principal administrative arm of the Chinese Government, recently did that stronger 

intellectual property enforcement is crucial to the fostering innovation China needs for its growth. We certainly absolutely should 

hold them to their word, but I think it also behooves us to work 

as best we can to promote both the popular consciousness among 

the Chinese people generally and the domestic institutions in 

China that are necessary to make better protection of intellectual 

property rights—indeed, all rights a reality. Thank you very much. 

[The prepared statement of Mr. Alford follows:] 

PREPARED STATEMENT OF WILLIAM P. ALFORD, HENRY L. STIMSON PROFESSOR OF

LAW; VICE DEAN FOR THE GRADUATE PROGRAM AND INTERNATIONAL LEGAL

STUDIES; DIRECTOR OF EAST ASIAN LEGAL STUDIES, HARVARD LAW SCHOOL

Mr. Chairman and distinguished members of the Subcommittee: 

I want to thank you for inviting me to appear. My name is Bill Alford and I am 

the Director of East Asian Legal Studies at Harvard Law School. 

I have been studying the law of the People’s Republic of China since before there 

was much to study (i.e., in 1970), and I first began to focus on intellectual property 

issues there in the 1980s—initially as a practicing lawyer at a law firm in Washington representing American companies doing business in China, and subsequently 

as a scholar who has both taught in China (I was a co-founder in the early 1980s 

of the first academic program in American law in the PRC) and conducted research 

there. Indeed, my interest in writing about intellectual property law issues in China 

as a professor grew out of the challenges I had to deal with as a practitioner. What 

I would like to do today is to share with you some of what I have learned about 

the setting that gives rise to the problem of intellectual property infringement in 

China (the subject that brings us here), and to offer a few comments about its implications. 

To do so is not to offer an apology for it. The scale of the problem, as we all know, 

remains massive, and harmful to Chinese and Americans alike. Beyond economic 

harm, fake medicines and counterfeit auto and airplane parts, by way of illustration, have the potential to cause grave, if not fatal, injury. Indeed, at a much less 

important level, I am a victim myself. Significant parts of my book on the subject— 

entitled To Steal a Book is an Elegant Offense: Intellectual Property Law in Chinese 

Civilization 1—have recently been reproduced commercially without authorization, 

attribution or compensation—by no less than a professor of intellectual property at 

one of Beijing’s leading universities! 

Rather, I want to discuss the broader context because I believe that understanding it is crucial if we are to appreciate the nature of the problem and what 

part our government might play in addressing it. 

China today has a fairly complete set of intellectual property laws—most observers agree that in terms of law on the books, China for the most part has met its 

obligations under the TRIPS agreement of the World Trade Organization. As the 

United States Trade Representative noted less than year ago in announcing the results of its ‘‘out-of-cycle review’’ of China vis-a`-vis intellectual property matters, 

‘‘China’s central government has made largely satisfactory progress in bringing China’s IPR laws and regulations into line with China’s WTO obligations.’’ 2 To be sure, 

39 

were not adequately enforced. The view that China now has a reasonably complete body of intellectual property law at the national level is shared by others. Scott M. Flicker and Matthew 

S. Dunne, in ‘‘China has Stepped up IP Enforcement Recently,’’ The National Law Journal, May 

9, 2004, indicate that ‘‘China is a party to every major intellectual property convention and treaty, and its laws and regulations are mostly up to the rigorous standards imposed by . . .’’ the 

WTO’s TRIPS agreement. Also, Alex Scott with Andrew Wood, for instance, in ‘‘Intellectual 

Asset Management,’’ Chemical Week, January 18, 2006, describe ‘‘China’s IP regulations . . . as now among the toughest in the world,’’ citing Ian Harvey, ‘‘chairman of the Intellectual Property 

Institute (London) and former CEO of pharmaceutical technology transfer company British 

Technology Group (London).’’ 3 Joseph Simone, ‘‘SPC and SPP Issue New Criminal Liability Standards for IP Crimes,’’ 

China Law & Practice, February 2005. 4 Xinhua, ‘‘China to Revise Patent Law,’’ November 24, 2005. 5 Xinhua, ‘‘China to Accelerate Implementation of National IPR Strategy,’’ February 9, 2006. 

there are calls for a number of further refinements, including stiffer penalties and 

greater ease of action against wholesalers and re-sellers of infringing items,3 and 

the Chinese Government has announced that it is contemplating some noteworthy 

provisions—including possibly simplifying the patent application and examination 

process, increasing penalties for infringement, and establishing specialized intellectual property courts.4 But still, by and large, China’s laws are, on their face, not 

the principal problem. 

What China lacks is uniform, effective enforcement of those laws, resulting in the 

large intellectual property infringement both in China and in the export market 

that brings us here today. 

It is tempting, of course, to view this as a matter of will—or lack of will—which 

has implications for how we would want the U.S. Government to approach the matter. People who hold this view basically believe that if the Chinese authorities were 

willing to crack down and enforce their laws with sufficient vigor, the problem 

would largely go away. The logical concomitant of that is that our government ought 

to be marshalling its energies to bring as much pressure as possible to bear on the 

Chinese authorities to do just that. And indeed, the U.S. Government has been endeavoring to do just that over the past decade and a half, threatening, during the 

first Bush Presidency and the Clinton years, to impose what, at the time, would 

have been the most substantial trade sanctions in U.S. history. 

Will is certainly not irrelevant. On the positive side, the importance of will clearly 

is evident in the fact that China has established specialized intellectual property 

chambers at the intermediate court level in many major urban centers and has chosen to staff these chambers with some of the Nation’s best trained and most capable 

judges, including many with advanced degrees. And it is better than not that the 

State Council—the primary administrative entity in the Chinese Government—has 

recently unveiled a comprehensive 15-year blueprint for scientific and technological 

development that makes the argument that China needs better legal protection to 

foster the innovation necessary for continued economic growth.5 On the negative 

side, will—or the lack thereof—clearly helps explain such things as the government’s toleration of things like the Chery automobile, the city of Yiwu (in Zhejiang) 

whose economy was heavily dependent on its being a distribution center for infringing goods, and the fact that the National Copyright Administration continues to be 

inadequately staffed (having some 200 persons for enforcement issues nationwide). 

And yet we would be mistaken if we think that we are here dealing only with 

a matter of will and that if we bring enough pressure to bear, we can effect the type 

of change we would like to see. As mentioned, the U.S. has tried that in Republican 

and Democratic administrations alike to limited avail. There are, I would suggest, 

very fundamental challenges that are a product of China’s history, her present institutional structure, and her course of future development that we need to heed if we 

wish to enhance the prospects for intellectual property protection in China—and 

particularly if we hope to contribute to building a China in which more is done 

through the private sector and through civil society than through the state. 

History ought not to be an excuse for inadequate adherence to international obligations nor is it all-determinative—Hong Kong and Taiwan are Chinese, after all, 

and they each seem to have addressed their infringement problems more effectively—but nor can history be ignored if our goal is a realistic strategy. As I discuss 

in the beginning of my (pirated) book in detail, there was essentially nothing comparable to our idea of intellectual property protection prior to its introduction by the 

West in the early 20th century. Confucianism, the pre-eminent ideology in pre-20th 

century China, venerated the past and extolled its emulation as a way for individuals both to understand its lessons and demonstrate their respect for it. In the 

words of the Confucian Analects, the seminal text of Confucianism, ‘‘The Master 

[Confucius himself] said ‘I transmit rather than create; I believe in and love the AnVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
40 

6 Arthur Waley, trans., The Analects of Confucius, Book 7, Chapter 1 (1938). 7 Alford, To Steal a Book is an Elegant Offense: Intellectual Property Law in Chinese Civilization (1995). 8 Id. 

9 United States Trade Representative, ‘‘U.S.-China Trade Relations: Entering a New Phase of 

Greater Accountability and Enforcement: Top-to-Bottom Review,’’ February 2006. 

cients.’ ’’ 6 More practically, the emperors who ruled China prior to the 20th century 

were, indeed, concerned about unauthorized publication but for the purpose of controlling rather than promoting private expression.7

Western ideas of intellectual property rights were introduced early in the 20th 

century but, unfortunately, much of what was introduced then was done via threats, 

and intended chiefly to protect foreign property—which has meant that it was and, 

to some degree, continues to be, readily associated in many Chinese minds with foreign impositions rather than understood as useful for China’s own development.8

Furthermore, the chaos that characterized much of the first half of the 20th century 

and the impact of Marxism that marked much of the next three decades, meant that 

it was not until the 1980s—scarcely more than a generation ago—that one began 

to see the introduction of modern ideas of intellectual property in China, and even 

now, for many citizens, these remain novel ideas. 

Compounding the task of grounding intellectual property in China is the nature 

of that nation’s institutions today more generally. We tend to think that because 

China is not a democracy, its leaders have the ability fully to assert their will as 

they wish. It would, however, be more accurate to say that even in areas about 

which they care deeply—such as endeavoring to control the flow of information— 

their efforts fall well short of what they would like to accomplish. Beijing can and 

does assert itself with regard to the Internet or the Falungong, often with considerable impact, but still, coercion ultimately is no substitute for effective institutions 

that run on their own and enjoy popular support. It is hard to think of an area of 

Chinese law today that routinely operates as intended. The problems of local favoritism, insufficient expertise, and corruption that aggravate enforcement of intellectual property rights also crop up across the board in Chinese legal affairs. 

Appreciating the relevance of history and of institutions underscores why pressure 

alone, especially if principally from outside, is not enough. External pressure has 

a role (and it would be naı ̈ve or disingenuous to suggest otherwise) but I doubt that 

we (even working with our allies) possess sufficient pressure to get the Chinese authorities to embrace policies that they otherwise would not be inclined to follow and 

which, in any event, they still lack the institutional infrastructure fully to carry out. 

Moreover, even if we did possess such pressure, I believe that we are better advised 

to be at least as concerned with enlisting the support of, and enhancing the capabilities of, non-state actors as we are with encouraging officialdom to exert more control, particularly when it comes to publication and other media of expression. 

If we want to create a better climate for intellectual property protection in China, 

we need, in addition to the type of external vigilance called for in the well-crafted 

‘‘Top to Bottom Review’’ of the USTR,9 to do what we can to promote better and 

broader public understanding there of rights generally, and to help build better institutions—even as we appreciate that these entail long-term processes and that 

their ultimate shape will (and should) rest primarily with the Chinese people. With 

respect to rights, this means not only working to educate people about intellectual 

property rights but about rights more generally, for, as I argue in my book, it seems 

unrealistic to expect that people will heed complex abstract rights of foreigners if 

they are not accustomed to asserting their own fundamental rights. 

This also means that there ought to be more support—from our government and 

from private sources alike—for programs that foster the development of legal institutions and the growth of civil society, such as, but not limited to, the State Department’s rule-of-law initiatives, as well as efforts more specifically tailored to intellectual property. Contrary to the conventional wisdom, a greater attention on the part 

of the business community to issues of human rights is likely to advance, rather 

than impede, the realization in China of important economic objectives such as 

greater protection for intellectual property rights. 

The reason for this is that there is a far closer correlation between a strong civil 

society and strong intellectual property protection than there is between a strong 

state and strong intellectual property protection. Put differently, intellectual property protection flourishes in states that nurture free expression and free association. 

This ought not to be surprising when you think that in such states, citizens have 

more private expression and other private interests to protect, have a greater rights 

consciousness, are better able to band together to protect their interests, and have 

more in the way of rights-protecting institutions on which to call. 

41 

10 Alex Scott with Andrew Wood, ‘‘Intellectual Asset Management,’’ Chemical Week, January 

18, 2006. 11 An example would be the recent suit by Netac, a Shenzhen producer of flash memory external storage drives, in Texas against a U.S. company alleging infringement of a U.S. patent. AFX 

News Limited, ‘‘China’s Netac Files IPR Lawsuit Against U.S.-based PNY Technologies—Report,’’ Forbes, February 16, 2006. 

We are seeing early evidence of this in China. As civil society and private business have started to emerge, we are seeing the beginnings of a domestic constituency with valuable intellectual property and other interests of their own to protect. 

As Chemical Week magazine observes, ‘‘China’s efforts to increase IP Protection is 

linked to the fact that the country has increasingly more IP of its own to protect.’’ 10

Indeed, in 2004, some 95 percent of infringement litigation was initiated by PRC 

plaintiffs. This phenomenon has the potential to diminish the idea that intellectual 

property is something foreign at the same time that it is creating allies in the effort 

to improve enforcement, as the Quality Brands Protection Committee (comprised of 

foreign-invested firms) has been discovering as it works informally with Chinese 

companies to seek better protection. 

But lest we make too much of this, we need be mindful of two caveats. The first 

is that even as we see the role of non-state actors growing, we ought not to underestimate the ongoing role of the Chinese state. One hopes that the State Council’s 

call for more attention to the legal protection of Chinese innovation can be turned 

to the protection of intellectual property rights in general, but we should also remember that Chinese authorities have also of late been expressing concern that intellectual property rights may account for what some see as an excess flow of royalties out of China. 

And second, we do need to appreciate that the very same economic changes that 

are nurturing potential allies, by definition also have the potential to make them 

strong future competitors. The Chemical Week story quoted above also states that 

‘‘Chinese patented technologies will soon begin to enter the global market, with electronic goods coming in the next 5 years and pharmaceuticals in up to 15 years, he 

[Ian Harvey of the Intellectual Property Institute (London)] says. ‘China is on the 

verge of becoming a major technology and IP generator, creating a tidal wave of patents likely to wash over the U.S. and Europe’s shores in the next decade, enabling 

China to dominate significant technology areas,’ he adds.’’ Indeed, we are already 

beginning to see Chinese companies thinking about how to use intellectual property 

law, anti-trust law, their economic power, and, of course, the assistance of the state, 

to protect and advance their own interests against leading foreign companies as well 

as domestic competitors at home and even abroad.11

In any event, I do hope that these modest observations are of some use to you, 

and I stand ready to try to answer any questions you may have about them. 

Senator SMITH. Professor, I’m going to ask this for my own edification. I understand why the legacy of communism would leave the 

notion of ownership as a fairly weak concept in the civics of China, 

but you also represented that the teachings of Confucius were similar? Well, I’m just curious. 

Professor ALFORD. Sure. 

Senator SMITH. What did Confucius say that said that this stuff 

doesn’t matter? 

Professor ALFORD. Right, so I offer this not as an excuse. After 

all, we can look at Hong Kong or Taiwan and see that Confucianoriented societies can reach much more effective levels of intellectual property protection than the PRC mainland itself, but Confucian ideology celebrated the past, that people were to find the content of the moral norms, the way they were supposed to behave, 

by looking to the past, by imitating, by emulating the past, by 

copying the past, not a slavish copy, but borrowing from the past 

and putting their imprint on it. And so, the idea that there would 

be strong private property interests in the expression of ideas 

wasn’t something celebrated in Confucianism. Also, to the extent 

that the Chinese state before the 20th century regulated publicaVerDate Nov 24 2008 13:42 Jan 25, 2011 Jkt 063758 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\63758.TXT SCOM1 PsN: JACKIE
42 

tion, it was not, again, to protect private property interests in it, 

but to suppress a heterodox, to suppress dissident publication. 

Senator SMITH. But to your—— 

Professor ALFORD. It’s not an excuse—— 

Senator SMITH. Yes. 

Professor ALFORD.—Senator Smith. 

Senator SMITH. Well, and to your point, Hong Kong and Taiwan 

certainly are evidence that whatever the Confucian legacy, it certainly is not ultimately an impediment to the rule of law as it relates to private property. 

Professor ALFORD. Agreed, agreed. 

Senator SMITH. I’m actually encouraged from what you said 

about the point that as an economy develops there and people are 

allowed to own property, that perhaps attitudes are changing, but 

you may actually have hit on the root of this problem in terms of 

local conduct toward the property of others, that there’s a real cultural education that has to go on before people will just automatically respect the notion of property of others. 

Professor ALFORD. Again, I offer that not as an excuse or justification for behavior that is inconsistent with obligations that the 

Chinese Government has undertaken voluntarily, but I do think it 

is part of what explains why it is so frustratingly slow. 

Senator SMITH. But you’re seeing change? 

Professor ALFORD. Well, I don’t want to overstate it, but we see 

some change—some change. I mean—— 

Senator SMITH. I actually think that that’s fairly threshold, that 

there would be that change if there’s going to be effective enforcement beyond just the Chinese Government getting more engaged in 

as big a country with as large a population as they have. 

Professor ALFORD. I think that’s right. I think it’s ultimately not 

realistic too soon that the Chinese Government can do it all by 

itself, and I’m not sure that I personally would want that to be the 

case. I’m not sure I’d want to encourage the Chinese Government 

to, as a general matter, make its presence even more felt in the 

lives of ordinary people everyday. In other words, yes, they do need 

to enforce their laws far more seriously than they have in this— 

in other areas, but I think a better long-term strategy is in addition to try to help cultivate civil society, better rights consciousness 

so that Chinese citizens, Chinese actors, Chinese companies will 

also be pushing for similar goals. 

Senator SMITH. Well, thank you to Mr. Vargo and Andy. A question, Senator Dorgan and I can come up with a bill that calculates 

the amount of theft and that determines the duty. Would you support—would your organizations support that? And Andy, would you 

want to see that money given to the companies that have been the 

victims or go into the Federal Treasury? 

Mr. YORK. I think it’d be something we’d want to look into. I’m 

fairly confident we’d support that kind of legislation. I think that 

would be a good move. As far as where the dollars go, if it was shut 

down, and the piracy and the counterfeiting was shut down, I don’t 

really see how it’s costing our company, at that point, any additional dollars. I think that there are probably some better uses for 

that money in our economy right now that this money could be 

used—— 

43 

Senator SMITH. You just want it to stop? 

Mr. YORK. I’d like it to stop—— 

Senator SMITH. OK. 

Mr. YORK.—and I did want to make one comment about, the receptivity to the government in China to change, and this is hearsay. This is from another seller on eBay, but they do say that this 

brand new Leupold Mark 4 M3 clone version illuminated mil-dot 

optical scope was made for the China military army. And so, I don’t 

know. That would be something we’d want to look into and find out 

just really how receptive their government really is to knock-off 

products if, indeed, they’re purchasing knock-off products for their 

own use. 

Senator SMITH. Do you think they are purchasing that? 

Mr. YORK. Well, I—this buyer claims that. They could just be 

making a marketing claim here, but I think it’d be something we’d 

want to investigate and look into. 

Senator SMITH. Sounds to me like that would be a dumb thing 

if they’re as unreliable as you just described. 

Mr. YORK. Yes, I think it would be. 

Senator SMITH. Mr. Vargo? 

Mr. VARGO. We want to solve the problem. I have a hard time 

seeing how that particular approach would be helpful because it’s 

so difficult, first of all, to identify where the counterfeit products 

are or value them, and if we could find that, whether there are 

other things that we could do that would be a lot easier. I would 

like to see us spend a lot more effort and put a higher priority on 

the part of our customs service and other customs services and just 

stop the trade, and I do think there’s more that can be done there. 

I don’t think that either we or China have put enough emphasis 

on the role of China customs here. A lot of our effort has gone into 

working with them on their laws. And as Professor Alford notes, 

there has been a payoff from that. And there is a gradual change 

there, and we can see a growing number of prosecutions, but it’s 

still very slow. In our view, the most effective way to handle this 

problem would be to intercept the goods at the border, and that is 

where we are putting more emphasis with the U.S. Government 

now. 

Senator SMITH. Well, I think we would share your belief that the 

best thing to do is to stop what’s happening, but it seems to me 

from what I’ve heard today, we don’t have a lot of tools other than 

long WTO processes and warm, fuzzy words about there’s a problem. In the meantime, there’s wholesale larceny taking place. And 

interdicting it at the border is fine if it’s our border, but if it’s going 

to other places in the world, as you have pointed out—— 

Mr. VARGO. Right. 

Senator SMITH.—these products, we have no ability to stop that. 

Mr. VARGO. Mr. Chairman, we haven’t put enough emphasis 

there. I was just looking at some things on the Internet as I was 

preparing to come before you today and noticed that in Saudi Arabia, for example, the Saudi Chamber of Commerce has just set up 

an anti-counterfeiting task force because they’re very concerned by 

what they see as 30 percent of the auto parts in Saudi Arabia 

being counterfeit and substandard and also noting that this affects 

44 

the legitimate customs collections and revenues of the Saudi Government, and so it is for other governments as well. 

Frankly, from our point of view, there hasn’t been enough emphasis on working with the customs forces of countries around the 

world, and we think that that would be one of the most effective 

things that could be done—certainly not the only one, but we want 

to see a lot more done there. 

Senator SMITH. Good point. Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you. I was thinking a bit 

about Ronald Reagan’s old story about the child that sees a pile of 

manure and then thinks there must be a pony somewhere. We talk 

about—I’m not suggesting any testimony was a part of that description. 

[Laughter.] 

Senator DORGAN. We talk about improvement of laws and the 

growing number of prosecutions, but Mr. Vargo, you just talked 

about the growing number of prosecutions. In fact, we do trade 

agreements, that I have voted against, with other countries that 

have perfectly fine laws. They just don’t enforce them at all. So, 

having better laws or even having laws that relate to this is completely irrelevant unless they are enforced. Second, the issue of 

growing prosecutions on piracy and counterfeiting in China is a 

myth because, as I showed you on the chart, prosecutions are diminishing, not growing. And from the 2004 admonition by this 

country to China to the April 29, 2005, statement by USTR, things 

got worse, not better. 

So, I mean, I understand that everybody, when we talk about 

this, wants to try to say a little something positive because there’s 

so much negative, but boy, there’s precious positive, and it should 

not include there are more prosecutions because I think the evidence suggests just the opposite. Mr. Vargo? 

Mr. VARGO. Well, Senator, from what we hear from our companies, I would have to disagree. Now, it’s still very small, and it is 

still a benefit to the companies that can really afford to do their 

investigations, but in that respect, it does seem to be getting a little better. But this, you and I are on the same page with the vast 

bulk of it. 

And I don’t think their laws are adequate. I think that counterfeiting is a criminal act, and the states and the provinces should 

be prosecuting it, and clearly, they are not. 

Senator DORGAN. One of my thoughts about this for some time, 

and I may be right or wrong, I don’t have the foggiest idea, is that 

the National Association of Manufacturers and the U.S. Chamber 

of Commerce, just to name two, two of the more prominent, very 

significant, prominent organizations have never really pushed to 

say we want action. They do talk, both of them talk about these 

things, but really stop short of getting to the starting gate here of 

wanting to push. 

And one of the reasons I’ve thought about that is, that perhaps 

your membership includes a fair number of firms that do business 

here and also have moved plants to China and other countries and 

really don’t want our country to take action. Am I—disabuse me of 

that if I’m wrong. 

45 

Mr. VARGO. I will disabuse you because certainly, we have large 

companies, small companies, we have importers, we have exporters, we have companies that produce in China, companies that 

produce around the world. On average for our large members, two 

thirds of their production is here in the United States, and one 

third is around the world. 

But the companies large and small are affected by counterfeiting, 

and we have not pulled back at all. Again, if there was some magic 

wand that we think could be waved, we would demand it. Now, we 

are looking at a possibility of a WTO case, but we’re also—the 

NAM is a very pragmatic organization. We want to focus on what 

would really make a difference, and that brings me back to the one 

thing on customs where you could really make a difference. 

And again, the laws in China, we are seeing more prosecution. 

I just noticed it for the first time that a retailer was prosecuted 

under the criminal statutes in China for selling counterfeit golf 

equipment. 

But this is still very small, you know. And if we let it go at the 

rate that it is going, it’s much—we don’t have that kind of patience. 

And as you see, the trade deficit is getting worse and worse, and 

one figure you may not be aware of is that the U.S. deficit in manufactured goods worldwide grew about $55 billion last year with 

the whole world. $40 billion of that growth came out of China. Only 

$15 billion came with the rest of the world. So, it’s a very serious 

problem. Counterfeiting is part of it. Believe me, currency is a very 

big part of it, and there are other reasons as well. 

Senator DORGAN. Right. I’m not so sure that—you said we don’t 

have the patience. I’m not so sure our patience isn’t biblical. I’m 

not so sure we don’t have the patience of Job. Let me show you. 

I only went back to 1996, but I was actually on the House Ways 

and Means Committee when Sam Gibbons and others were saying 

you know, we have a $5 billion trade deficit with China, and we’re 

going to fix that. I said no, it’s going to get much, much worse. No, 

no, we’re going to fix it, they said. It’s going to get fixed with this 

issue. But if I went back further, I’d show you the origin of this. 

But the fact is all the way along here we keep thinking—now this 

is the imbalance in trade, but you can trace, it seems to me, counterfeiting and piracy just with these lines as well. I’m not so sure 

we don’t have patience that really is straining the American public. 

The reason you can’t hold a meeting about trade any place in the 

world anymore without having 10,000 or 20,000 people show up in 

the streets is because I think people understand what’s going on, 

and they’re furious about it, and it relates to their jobs. And all of 

the institutions are worried about taking or suggesting any definitive action because it will upset the—my colleague, Senator 

DeMint, said it perfectly. He describes it as protectionists and freetraders, which is a perfectly worthless description. 

That is not the choices, protectionists and free-traders. It is those 

of us who want to be engaged in trade, that we believe it is fair 

between our countries and those who will not accept unilateral free 

trade agreements that are not mutually beneficial. The basics of a 

trade agreement must be mutually beneficial, especially bilateral 

and multilateral agreements. So—I really regret, Mr. Chairman, I 

46 

have a 4 o’clock event that I have to be at, but I wish I had time 

to talk to Professor Alford and to thank Mr. York. 

Mr. York, you’ve come a long way, but you have demonstrated 

the issue of counterfeiting in a very dramatic way, a product that 

you create and you sell, and the knock-off is an extraordinarily 

cheap imitation. And so, how do you compete? How do you compete 

with the $100 knock off if the real thing with real quality costs 

$1,400? The answer is you can’t compete. 

And Professor Alford, you haven’t come quite as far, but good 

plane service, I guess, between here and Boston. I appreciate your 

work, and I think you’ve demonstrated with your book as well what 

happens. You wrote the words, and someone in China decides to 

copy them and sell them as theirs. I mean, that’s piracy and counterfeiting. And so, I thank all of you on the panel, and I especially 

want to thank Senator Smith. I said when we started we may not 

come at this from the same point in the compass, but I think in 

many ways, it doesn’t matter whether you’re a so-called free trader 

or a fair trader. At some point, you conclude that what is happening is now unsustainable and that our country has to stand up 

for it’s economic interests. If you set up conditions in which we 

must compete, and we can’t, then shame on us. But if you set up 

conditions in which the competition is fundamentally unfair to 

those who risk their capital and the workers who go to their jobs 

everyday, and they can’t compete because it’s unfair, then shame 

on us for not taking action. 

So, that’s the point. So, Mr. Chairman, thank you very much for 

agreeing to hold this hearing. I think it has been very constructive. 

Senator SMITH. Thank you very much, Senator Dorgan, and I’ve 

got a 4 o’clock as well, but I have one more question. Andy York, 

you said in your testimony that you do business in lots of different 

countries. 

Mr. YORK. Yes, sir. 

Senator SMITH. And Europe, was that one of them? 

Mr. YORK. Europe, I could read you a list. It’s very extensive. 

Senator SMITH. OK, but it’s all over the world? 

Mr. YORK. It’s all over the world, yes. 

Senator SMITH. Do you have these problems anywhere else? 

Mr. YORK. As I said, we are getting feedback from our distributor 

in Moscow that he’s being impacted with counterfeit goods—— 

Senator SMITH. OK. 

Mr. YORK.—coming from China as well, and I know that there 

are—these same sellers, that are working out of Hong Kong, are 

listed with sites in Australia and in the European Union as well. 

Senator SMITH. So, before anybody else seeds the WTO on our 

vote, you’d want us to deal with that, wouldn’t you? 

Mr. YORK. It would be very helpful, yes. It’s not just an issue in 

the United States, it is a global issue. 

Senator SMITH. Can you name any other country or region where 

you’re having a problem? 

Mr. YORK. Those are the only ones that I have concrete evidence 

of at this point. 

Senator SMITH. China and Russia. 

Mr. YORK. China and Russia, and I know that we’re getting— 

that they’re selling products into Australia and the European 

47 

Union. I assume that it’s much larger than that. I think if you’re 

a counterfeiter, I don’t know why you’d try to restrict your markets. 

Senator SMITH. I don’t know either, but we have to stop them. 

Gentlemen, all of you, you have added measurably to the Senate 

record today, and our understanding of what you’re up against, and 

we pledge out best efforts to do something about it and apply pressure where we need to because it’s wrong and ought to be stopped. 

And this is wrong, and we’ll do our level best to stop it and get 

more action than we’ve had to date. 

With that, we’re adjourned. 

[Whereupon at 4 p.m., the hearing was adjourned.] 

(49) 

A P P E N D I X 

PREPARED STATEMENT OF HON. DANIEL K. INOUYE, U.S. SENATOR FROM HAWAII

It amazes me that the movie industry, one of our only industries that can claim a positive trade balance, lost $280 million to piracy and counterfeiting in China last 

year, and it is losing an additional $100 million more each year. That is astounding. 

No one can disagree that piracy is rampant, it is a problem with real consequences, 

it shows little sign of abating. and it requires much stronger enforcement efforts. 

However, there is an odd and troubling irony to this problem. Piracy has become 

such a large part of the Chinese economy that eliminating it could lead to economic 

problems elsewhere in the world, including here in America. Piracy accounts for 8 

percent of China’s GDP. If that were abruptly erased, the impact could be widespread. 

To date, China has not lived up to the agreements it made to join the World 

Trade Organization (WTO). We realize that China will not be compliant overnight. 

However, the Chinese Government should have made far greater progress by now. 

I would like to hear more from our witnesses today about the realities we are facing. What must be done to stop the counterfeiting and speed up the compliance? 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

CHRIS ISRAEL

Question 1. In 2004, the USTR, the DOC, the Department of Justice, and the Department of Homeland Security (DHS) released an initiative called Strategy Targeting Organized Piracy (STOP!). The initiative benefits innovators and manufacturers that have been negatively affected by piracy and counterfeited goods by exposing 

criminal networks, stopping trade of pirated goods at U.S. borders, and helping 

small businesses secure and enforce their rights in overseas markets. The MPAA 

estimates that its members lost $280 million to Chinese piracy, up from $180 million in 2003. Increases of $100 million per year in piracy losses will swallow our 

movie industry whole if left unaddressed. The problem is only getting worse. What 

is the STOP! Initiative going to do to get this problem under control? 

Answer. Stopping copyright piracy, including motion picture piracy, is an important goal of the STOP! Initiative. The problem of global piracy and counterfeiting 

confronts many industries, exists in many countries and demands continuous attention. As part of STOP!, the Bush Administration is taking steps to increase our efforts to seize counterfeit goods at our borders and aggressively engage our trading 

partners to join our efforts. 

With China we recognize that though they have expanded their efforts there are 

still critical deficiencies in IPR protection and enforcement. The Administration has 

an IP Attache ́ on the ground in Beijing, who will soon be joined by additional IP 

experts, to work with U.S. rights holders and the Chinese Government to stop illegal optical disc production and piracy. A key element of the Bush Administration’s 

IP strategy with China is bilateral engagement, which is conducted primarily 

through the U.S.-China Joint Commission on Commerce and Trade (JCCT). As part 

of our JCCT discussions with the Chinese, we continue to raise the issue of optical 

disc piracy and make it clear that China needs to take steps to eliminate all illegal 

optical disc production. Also, China has agreed to regularly instruct enforcement authorities throughout the country that copies of select films which are still in censorship, and not yet ready for distribution are deemed pirated and subject to enhanced 

enforcement. And the Chinese Government recently signed a memorandum of understanding with the Motion Picture Association (MPA) to protect the 15 theatrical 

films released in China. However, we understand that much work remains on both 

of these initiatives and we plan on pushing these issues, among others, at the upcoming JCCT on April 11th and as part of our ongoing initiatives in STOP. We plan 

on continuing to work with the motion picture industry, and are leveraging our resources to actively address the issue of copyright piracy. 

50 

Question 2. Please describe the specific services that the STOP! Initiative provides 

to small businesses that have piracy issues in China. 

Answer. To help American innovators secure and enforce their rights across the 

globe, the STOP! Initiative has put in place several new Federal services and assistance: Including, the STOP hotline (1–866–999–HALT), website (StopFakes.gov) and 

a China-specific IP toolkit. In November 2005, Commerce Secretary Gutierrez announced, the China IPR Advisory program. This program is done in conjunction 

with the American Bar Association, the National Association of Manufacturers and 

the American Chamber of Commerce in China. It offers small and medium sized 

U.S. businesses free IPR consultation with an attorney. Each of these programs 

under STOP! helps provide businesses with the resources and assistance they need 

to level the playing field and deal with potential piracy issues in China. 

Question 2a. How many American businesses use the services provided? 

Answer. The Bush Administration’s extensive outreach efforts have allowed us to 

reach countless American businesses and help to empower American businesses 

with the tools they need to secure and enforce their rights at home and abroad. In 

the first 3 months of 2006 the StopFakes.gov website received over 20,000 visits. 

In FY 2005, the STOP Hotline received over 950 calls and, so far, during the first 

quarter of FY 2006 we received over 550 calls. During our four 2005 IP Road Show 

events, in Salt Lake City, Phoenix, Austin and Miami we had a total of 740 SME 

representatives in attendance. 

Question 2b. Have small businesses made more suggestions for assistance they 

would need in China, and if so what were they? 

Answer. We are working actively with the business community for assistance as 

we go forward. They are our eyes and ears on the ground and know better than 

anyone how inadequate IPR enforcement affects their businesses. My office conducts 

active outreach with industry, and we want to hear their stories and find ways to 

use the data that they have collected in China. We will continue to work together 

to find solutions and lead enforcement efforts. 

In China we currently have an IP attache ́ in Beijing and plan on adding an additional attache ́ in the near future. The Administration’s attache ́s enhance our ability 

to work with local Chinese Government officials to improve IP laws and enforcement 

procedures in addition to assisting U.S. businesses to better understand the challenges of protecting and enforcing their IPR in China. 

Another important tool that we use is the IPR Case Referral Mechanism (CRM) 

which was created by the U.S. Government to facilitate the submission of individual 

U.S. company IPR cases through MOFCOM (China’s Ministry of Commerce) to relevant Chinese agencies. Our inter-agency team reviews cases where the Chinese 

Government fails to provide adequate protection of IPR to U.S. businesses, and after 

an internal vetting process, sends approved cases to the Chinese Government to facilitate their resolution. Five cases have already been submitted to the Chinese 

through the Case Referral Mechanism. 

Also, Ambassador Clark Randt at our Embassy in Beijing holds an annual IPR 

Roundtable which brings together senior Chinese officials and U.S. business representatives. The Roundtable gives U.S. rights holders the opportunity to discuss 

the problems they are facing and find the solutions that they need. Our Embassy 

and Consulate officers on the ground are another valuable asset for U.S. companies. 

They play a critical role as IPR ‘‘first responders,’’ helping U.S. businesses resolve 

cases when their rights are violated. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. DANIEL K. INOUYE TO

FRANKLIN J. VARGO

Background: The National Association of Manufacturers (NAM) has made a submission to the U.S. Trade Representative (USTR) on Chinese violations regarding 

the protection of Intellectual Property (IP) and the growing counterfeiting problem. 

The NAM had pushed for the USTR to engage in more formal actions through the 

World Trade Organization (WTO) to force the Chinese to increase enforcement of 

the laws it has on its books. 

Question. The Chinese have had difficulties in integrating its citizens into a market-based economy. Counterfeiting has become a source of employment for the poor. 

It has been estimated that counterfeit goods constitute about 15–20 percent of all 

products made in China and account for approximately 8 percent of China’s gross 

domestic product (GDP). If the Chinese enforced IP protections as it should, it could 

potentially create economic chaos. How do the Chinese solve this problem quickly 

without creating economic dislocation? 

51 

Answer. China is undoubtedly the largest source of counterfeit and pirated products in the world today. Anecdotal information suggestions that fake products are 

displacing billion of dollars in legitimate sales in China and a substantial amount 

of sales in third-country markets, particularly in developing countries. Fake products cover a wide range of sectors from pharmaceuticals and consumer health care 

products to auto parts and testing equipment. Copyright experts estimate that over 

90 percent of the software sold in China is counterfeit. 

We often hear that the reason Chinese authorities, particularly at the local level, 

do not crack down more forcefully on counterfeiters is because China needs to generate as much manufacturing employment as possible to absorb excess labor flooding into the cities from rural areas. Counterfeit production, it is claimed, offers the 

opportunity to employ some of this excess labor. These views, however, ignore the 

many negative consequences of unchecked counterfeiting for the Chinese economy. 

• Failure to curtail counterfeiting and protect foreign brand names is hurting 

China’s own efforts to move up the value chain and develop its own brands that 

can be sold at quality-brand prices, for example, as Lenovo, the owner of IBM 

personal computer maker technology, is seeking to do. 

• Counterfeit products made in China, often of inferior quality and below required 

technical standards, damage the overall reputation of Chinese manufactured 

products and gives them lower status in the market place. 

• Unchecked counterfeiting discourages foreign investment. We hear frequently 

from manufacturers that they limit their investment in China out of fear that 

advanced manufacturing technology will be stolen or used in counterfeit production. Foreign investment in China has reached record levels but could be even 

higher if brand names and other intellectual property were more effectively protected. 

• Proponents of counterfeiting also overlook the costs to Chinese consumers of 

counterfeit products. Fake pharmaceutical products pose enormous health risks 

for Chinese consumers and, according to Chinese press reports, result in thousands of deaths every year. Consumers face other hazards from: fake brandname batteries that explode due to improper manufacture; counterfeit car parts 

(e.g., brake pads and timing belts) that do not function because they don’t meet 

accepted international technical standards; testing equipment (e.g., for refrigeration equipment) that provide faulty results; razor blades that don’t shave; 

and personal care products that contain harmful chemical ingredients. 

Over the past 20 years, the Chinese economy has undergone a dramatic transformation from a centrally directed, state-controlled system to a more market-oriented model that encourages large-scale shifts in employment between sectors. In 

the process, millions of workers employed at state industrial enterprises were displaced. While closing plants engaged in counterfeit production could well cause some 

localized and short-term dislocations, China would also benefit from the positive economic effects of protecting intellectual property and brand names. Chinese workers 

have demonstrated a remarkable resiliency and adaptability to economic change and 

opportunity. It is by no means clear that the disruption from enforcing intellectual 

property rights would be more severe than other economic changes that have occurred in recent years. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

WILLIAM P. ALFORD

Background: Professor Alford contends that two of the hurdles to Chinese adoption of western style intellectual property (IP) protections are the differing historical 

paradigms of how IP protections were used and cultural differences. The Chinese 

were forced to accept Western legal concepts after the Opium Wars in the 1840s and 

had to accept western IP concepts as a condition to join the World Trade Organization (WTO), even before the Chinese themselves internally changed its approach to 

protecting IP. Copyright statutes only recently appeared in the Chinese legal system, with the National People’s Congress adopting legislation in 1990. Present day 

efforts to apply economic pressure on the Chinese, through threats of tariff sanctions, may force them to pass Western-type patent, trademark, and copyright legislation, but it will not ensure compliance and enforcement of such laws so long as 

they are perceived as outside impositions. Professor Alford sees this as one of the 

main reasons for Chinese reluctance to adequately enforce the protections on the 

books. 

52 

Question 1. I understand that the Chinese think it improper to give an individual 

‘‘ownership’’ over a concept that was likely built through contributions from the community. Furthermore, the country’s recent history with Communism and ownership 

of real property, much less conceptual property, is foreign. 

China’s entrance to the WTO was predicated on protection of intellectual property 

rights in accordance with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). While China did overhaul its legal regime so as to 

be facially compliant with TRIPS, it did not improve enforcement. Can the Chinese 

overcome the views of its own people to comply with the WTO TRIPS mandates? 

Answer. Thank you, Senator Inouye, for this probing question. You are, of course, 

correct that China did commit itself to the level of intellectual property protection 

called for in the TRIPS agreement when it joined the WTO. And you are also correct 

that China did, indeed, revise its laws so as to be compliant with those obligations. 

Enforcement does, indeed, continue to be a very serious problem, as the testimony 

of each panelist today indicates. I think that it is important to understand the impact of history and culture—but by that I am not suggesting it is an excuse. After 

all, China’s government has taken on certain obligations and should be expected to 

live up to them. 

Intellectual property law was not, as I try to show in my book, an indigenous idea 

in China. Ideas, though, about the nature of property in general have begun to 

change in important ways during the past quarter century in China. If we want further to promote respect for intellectual property, I think we need a multi-faceted approach. External pressure alone will not work and I, for one, am not sure that I 

want the U.S. using whatever influence we have to strengthen the hand of the Chinese Government vis-a`-vis its citizens. I think it is important that we do what we 

can to strengthen civil society there so that Chinese citizens will have more reason 

to and more vehicles through which to seek to protect rights, including intellectual 

property rights. If we want our IP protected, we need a domestic constituency there 

for rights protection generally. It can’t really be done for us (that is, foreigners) 

alone or for IP alone. 

Question 2. How did other Asian countries with a history of poor Intellectual 

Property (IP) protection, like Japan and Taiwan, manage to overcome their historical barriers to come to protect IP vigorously? 

Answer. The experience of Japan and Taiwan bear out my argument about how 

respect for intellectual property grows. Foreign pressure alone was not enough 

(though it surely had a role). Serious change has come about as civil society and 

democratic political institutions—and a domestic private constituency for intellectual property law—have grown. Taiwan is an especially good example of this. Prior 

to its democratization in the late 1980s, Taiwan was notorious for its failure to adhere to its international intellectual property obligations. Since that time, the picture is much improved (though some challenges remain there and in Japan, as is 

also the case here in the U.S.). Again, there is a certain common sense to this— 

that as citizens have more to protect by way of rights generally, and more vehicles 

through which to protect it, the quality of protection will be greater than in a situation of greater state limits on rights and on citizens’ capacity to organize themselves 

and to vindicate their rights. 

Æ