```

[Senate Hearing 109-1105]
[From the U.S. Government Publishing Office]

                                                       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

                  U.S. GOVERNMENT PRINTING OFFICE
  63-758 PDF              WASHINGTON : 2011
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              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                  BYRON L. DORGAN, North Dakota, 
JOHN McCAIN, Arizona                     Ranking
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
JOHN ENSIGN, Nevada                  JOHN D. ROCKEFELLER IV, West 
GEORGE ALLEN, Virginia                   Virginia
JOHN E. SUNUNU, New Hampshire        JOHN F. KERRY, Massachusetts
JIM DeMINT, South Carolina           MARIA CANTWELL, Washington
DAVID VITTER, Louisiana              FRANK R. LAUTENBERG, New Jersey
                                     BILL NELSON, Florida
                                     E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas

                            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

 
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 
several 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.
    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 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 
bilateral 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 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 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 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 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 Attaches 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 gold-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 exporters 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 state-owned 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 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.
    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 audio-video 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 large-scale 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 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 
five-point 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 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 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 attaches in Brazil, Russia and India. Having IP 
attaches 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.
    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 actual 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 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, 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 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.
    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 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 expressed 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.
    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 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, 
certainly 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 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

   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 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. 
embassies, 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 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 
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 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 respect, 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.
    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 
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: [email protected]
Sent: Friday, February 08, 2002 1:19 PM
To: [email protected]; [email protected]; [email protected]
Cc: [email protected]
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 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) [email protected]
Yin Zhu Hua [email protected]

    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 
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 Top-to-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 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!
---------------------------------------------------------------------------
    \1\ Stanford University Press (1995).
---------------------------------------------------------------------------
    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, 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.
---------------------------------------------------------------------------
    \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 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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    \5\ Xinhua, ``China to Accelerate Implementation of National IPR 
Strategy,'' February 9, 2006.
---------------------------------------------------------------------------
    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 Ancients.' '' \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \8\ Id.
---------------------------------------------------------------------------
    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 naive 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
    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.
---------------------------------------------------------------------------
    \10\ Alex Scott with Andrew Wood, ``Intellectual Asset 
Management,'' Chemical Week, January 18, 2006.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 
Confucian-oriented 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 
publication, 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----
    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 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.
    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 free-
traders, 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 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 
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.]
                            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.

    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 
attaches 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?
    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 
        brand-name 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.

    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.

                                  
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