U.S. Lodges Two More Complaints Against China at the WTO

Combative Move

U.S. Trade Representative Susan Schwab yesterday announced that the United States is launching two legal challenges at the World Trade Organization (WTO) over China's alleged infringement of intellectual property (IP) protection rules. One challenge relates to pirated copies of music and movies, and the second to market access barriers erected against U.S. companies offering legitimate IP products. The rife piracy of U.S.-produced entertainment titles has long been a thorn in the countries' relations and is said to cost the United States billions of dollars a year. The Chinese government has announced a range of measures to crack down on the problem, but only with limited success. The United States argues that several key outstanding measures have yet to be undertaken by the Chinese, all of which are in contravention of Chinese undertakings under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

• Certain provisions of Chinese law allegedly create a "safe harbour" for wholesalers and retailers to avoid criminal liability. Quantitative thresholds for the amount of goods produced before legal action is taken effectively exempt many players.
• The United States is also challenging the way in which seized goods are disposed of by Chinese customs authorities. The United States charges that these are often released back onto the market once fake labels or other infringing features are removed.
• Chinese rules allegedly mean that for works poised to enter the market but awaiting censorship approval the copyright holder has no means of complaint in the event of IP violations. Chinese producers apparently do not face the same problem.
• A grey area in Chinese law has allegedly exempted producers of counterfeit material from legal action if they are not the distributors. However, the United States acknowledges that a recent Chinese ruling has helped to clarify this issue.

The second challenge relates to market access. The United States argues that its publishers and producers of legitimate audio-visual goods do not have proper access to the Chinese market, obstructed by import controls and internal distribution barriers. All such imports have to be channelled through specially authorised state-approved companies, thus denying the U.S. firms control over when, where and how their products enter the country. Distribution is, moreover, hindered by tight restrictions on foreign players' operations. The obstructions slow the distribution of new titles and increase the potential market for pirates who are quicker off the mark. The United States argues that such barriers are inconsistent with China's obligations under its WTO Accession Protocol, as well as under the General Agreement on Trade in Services (GATS).

The Chinese reaction was predictably angry yesterday. A spokesperson from the Commerce Ministry spoke of the government's "great regret and strong dissatisfaction at the decision of the United States to file WTO cases against China over intellectual property rights and access to the Chinese publication market…,It's not a sensible move for the U.S. government to file such a complaint. By doing so, the United States has ignored the Chinese government's immense efforts and great achievements in strengthening IPR protection and tightening enforcement of its copyright laws."

Ratcheting Up the Pressure

Whatever the U.S. administration might say, it certainly seems that its diplomatic tactics are shifting. For years the administration of President George W. Bush has generally sought to keep confrontations at a minimum, resisting stiff pressure from Congress (particularly from the Democrats who recently took control). There has been plenty of official rhetoric goading China, but actual legal challenges were few before this year. The appointment of Hank Paulson, a seasoned China operator, as Treasury Secretary last summer appeared to confirm the administration's preference for quiet diplomacy. He launched a "strategic economic dialogue" and has visited the country three times in the last six months. Many in the U.S. government argue that it is much more constructive to work with China behind the scenes to achieve economic reform, rather than creating confrontation. They also argue that China is now becoming so entwined with the U.S. economy that a rupture would be hugely damaging to both. There are, moreover, other areas where the United States needs China's help, most notably on North Korea.

So has the "softly-softly" approach now been abandoned? The signs so far this year would suggest that there has been a significant change in tack. This is the third time that WTO challenges have been lodged, each time provoking Chinese ire. It seems many in the administration have lost patience with the quiet approach, and they argue that tougher signals are needed. Last month a challenge was lodged over alleged export subsidies, initially targeting glossy paper. Tough new duties are threatened. The other, in February, targeted China's alleged subsidies of manufactured goods more widely. Schwab was nonetheless at pains yesterday to deny that policy has changed, saying that the latest steps "should not be viewed as hostile actions against China" and that WTO challenges are "the normal way for mature trading partners" to resolve differences. Commerce Secretary Carlos Gutierrez praised Schwab's announcement, but Paulson was notably mute. Reports suggest that he nonetheless signed off on the move.

Outlook and Implications

The legal challenges are seen as unnecessarily provocative in China and they certainly carry risks. However, the administration calculates that warning signals are warranted given the slow progress on China's part. The moves also help to dampen some of the anti-China chorus in Congress and possibly forestall more damaging moves. Without a response to the chorus, China threatens to become a key issue in the upcoming presidential election, where candidates may seek to outdo one-another with their China rhetoric. A tougher China approach may also help to convince Democrats to extend Bush's all-important fast-track trade negotiation powers. These are pre-requisites for the troubled Doha Round of multilateral trade negotiations. Using a movie analogy, one might see the China strategy as akin to "good cop, bad cop", where Paulson plays the former role and Schwab the latter. Paulson's quiet diplomacy might achieve more if China sees a much worse alternative should it be abandoned. Whether such strategy works in practice is not clear, however. All eyes will be on the Chinese delegation that visits Washington in May, led by Deputy Prime Minister Wu Yi. The mood at this second session of Paulson's strategic dialogue will show how much damage has really been done by the succession of legal challenges seen this year. So far, China has tended to avoid knee-jerk reactions to the United States’ legal moves.