Intellectual property, for which the U.S. government provides broad protection through means such as copyrights, patents, and trademarks, plays a significant role in the U.S. economy, and the United States is an acknowledged leader in its creation. According to the U.S. Intellectual Property Rights Coordinator, industries that relied on IP protection were estimated to account for over half of all U.S. exports, represented 40 percent of U.S. economic growth, and employed about 18 million Americans in 2006. However, the economic benefits that copyrights, trademarks, and patents bring are threatened by the fact that legal protection of IP varies greatly around the world, and several countries are havens for the production of counterfeit and pirated goods. The global illicit market competes with genuine products and it is difficult to detect and take actions against violations. Although the public is often not aware of the issues and consequences surrounding IP theft, counterfeit products raise serious public health and safety concerns, and the annual losses that companies face from IP violations are substantial. The Organization for Economic Cooperation and Development recently estimated that international trade in counterfeit and pirated products in 2005 could have been up to $200 billion. Eight federal agencies as well as entities within them undertake a wide range of activities in support of protecting IP rights, as shown in figure 1. These are the Departments of Commerce, State, Justice, Health and Human Services, and Homeland Security; the U.S. Trade Representative (USTR); the Copyright Office; the U.S. International Trade Commission; within Justice, the Federal Bureau of Investigation (FBI); and within Commerce, the U.S. Patent and Trademark Office (USPTO). In addition, two entities coordinate IP protection efforts: the National Intellectual Property Law Enforcement Coordination Council (NIPLECC), created by Congress in 1999, and the Strategy for Targeting Organized Piracy (STOP), initiated by the White House in 2004. (These are discussed later in this testimony.) U.S. agencies use policy initiatives and enforcement activities to improve IP protection in the United States and abroad. Policy initiatives include reviewing IP protection undertaken by foreign governments and negotiating agreements that address intellectual property. Trade policy initiatives to increase IP protection and enforcement are primarily led by USTR, in coordination with the Departments of State, Commerce, USPTO, and the Copyright Office, among other agencies. Enforcement activity in the United States includes detecting and seizing IP-infringing goods at the U.S. border and investigating and prosecuting those who engage in IP- infringing activities. The Department of Justice, including the FBI, and the Department of Homeland Security’s Customs and Border Protection (CBP) and Immigration and Customs Enforcement take actions such as engaging in multicountry investigations involving intellectual property violations and seizing goods that violate IP rights at U.S. ports of entry. The Food and Drug Administration (FDA) also investigates intellectual property violations for FDA-regulated products as part of its mission to assure consumer safety. U.S. intellectual property is increasingly at risk of theft as U.S. firms become more integrated into the world economy and the production of more sophisticated processes and investments move overseas. High profits and technological advances have also increased the risk of IP infringements by making counterfeiting and piracy progressively attractive and easy, while the deterrents, such as penalties and other measures, fail to keep pace. The seriousness of these risks has been exacerbated by weak enforcement in some countries, particularly China, whose enforcement problems has persisted despite U.S. efforts. The risk of IP theft increases as U.S. companies operate more globally and locate their production facilities in other countries. Our report on the U.S. semiconductor industry illustrates this movement of production to other countries and increasing concerns about IP theft. Initially, U.S. firms invested in overseas manufacturing facilities such as India and China, to perform the labor-intensive assembly of semiconductors for export to the United States. However, as the technological and manufacturing capability in Asia increased, more sophisticated parts of the process have been sourced in India and China. This shift where more advanced technology is being used abroad creates a greater risk for those firms involved by making advanced technologies protected by IP laws more readily available to those who might want to copy them illegally. The shift of operations to overseas facilities is also evident in the U.S. investment statistics. For example, we reported in December 2005 that U.S. investment in China has been growing, and the value of U.S. affiliate sales in China began to exceed the value of U.S. exports to China in 2002. U.S. companies have generally concentrated their investments in China in the manufacturing sector, in industries such as transportation equipment, chemicals, and computers and electronic products. U.S. investment in China funds the creation of U.S. affiliates, who then sell in China and to other countries, including the United States. U.S. affiliate sales of goods and services have become an important avenue for accessing the Chinese market. Factors such as the growing Chinese market, lower labor costs, and China’s accession to the World Trade Organization (WTO) have drawn U.S. companies to increase their investment and sales in China. Economic incentives to commit counterfeiting and piracy activities contributed to the growth in IP rights violations in recent years. Economic incentives include low barriers to entering the counterfeiting and piracy business, potentially high profits, and limited or low legal sanctions, including penalties, if caught. For example, one industry pointed out that it is much more profitable to buy and resell software than to traffic in cocaine. In addition, the low prices of fake products are attractive to consumers. The economic incentives can be especially acute in countries where people have limited income. Economic incentives have also attracted organized crime in the production and distribution of pirated products. Federal and foreign law enforcement officials have linked intellectual property crime to national and transnational organized criminal operations. The involvement of organized crime increases the sophistication of counterfeiting operations, as well as the challenges and threats to law enforcement officials confronting the violations. Technological advances have lowered the barriers to counterfeiting and piracy by allowing for high-quality, inexpensive, and accessible reproduction and distribution in some industries. The mobility of the equipment makes it easy to transport it from one location to another, further complicating enforcement efforts. Industry and government officials described this as the “whack-a-mole” problem — when progress is made in one location, piracy operations often simply move. Likewise, the Internet provides a means to transmit and sell illegal software or music on a global scale and provides a sales venue for counterfeit goods. According to an industry representative, the ability of Internet pirates to hide their identities or operate from remote jurisdictions often makes it difficult for IP rights holders to find them and hold them accountable. How economic incentives and technological advances can contribute to IP piracy can be seen in the optical media industry (CD’s, DVD’s). The cost of reproduction technology and copying digital media is low, making piracy an attractive employment opportunity, especially in a country where formal employment is hard to obtain. According to the Business Software Alliance, a CD recorder is relatively inexpensive. The sometimes large price differentials between pirated and legitimate CDs also create incentives for consumers to purchase pirated CDs – even those who might have been willing to pay a limited amount extra to purchase the legitimate product. Low-cost, high-quality reproduction and distribution in some industries are creating increasingly strong incentives for piracy. Private sector representatives have identified Russia as a prominent source of pirated software and optical media, which include music, movies, and games. For instance, USTR reports that the U.S. copyright industries estimate that they lost in excess of $2.1 billion in 2006 due to copyright piracy in Russia. The U.S. copyright industries also reported that in 2006 Russia’s optical disc production capacity continued to be far in excess of domestic demand, with pirated products apparently intended for export as well as domestic consumption. While a number of factors increase the risk of IP theft, the deterrent effect of IP enforcement efforts has not kept pace. A number of industry officials believe that the chance of getting caught for counterfeiting and piracy, along with the penalties, when caught, are too low. CBP only inspects a small percentage of containers entering the country each day even for counterfeit goods seized at the border. CBP officials said that the enforcement penalties are not an effective deterrent. In reviewing CBP penalty data for fiscal years 2001 through 2006, we found that less than 1 percent of the penalty amounts were collected. Federal officials we interviewed remarked that the penalties or even the loss of goods through seizures are viewed by counterfeiters as the cost of doing business. In work we did several years ago on small business efforts to patent abroad, we reported that patent attorney experts viewed the potential for unauthorized production as well as the level of IP infringement and enforcement in other countries as highly important factors that needed to be considered in developing a foreign patent strategy. They also advised that firms need to understand the practical—or enforcement—value of the patent, and China and Russia were both mentioned as countries where the patents were of limited value but the situation was improving. China’s track record for enforcing IP laws has been historically weak. We reported in October 2002 that when China joined the WTO in 2001, some WTO members noted concerns about enforcement of IP regulations in China, and the majority of China’s commitments in its WTO accession agreement were intended to address these concerns. For example, members raised concerns about filing civil judicial actions relating to IP violations in China, and they noted that the way in which damages resulting from IP violations were calculated often resulted in inadequate compensation.