Members of the Commission:

My name is Eric H. Smith, and I am President of the International Intellectual Property Alliance, IIPA. I am pleased to have this opportunity to share with you the perspectives of the U.S. creative industries on copyright protection in China, and China’s WTO compliance.

About IIPA

IIPA is a coalition of six trade associations¹ representing the major U.S. copyright industries, from books, recordings and music, to films, videos and TV programming, to computer software for business and entertainment uses. Since 1984, this diverse range of industries has been working together, individually and under the IIPA umbrella, to strengthen the copyright laws and enforcement regimes in over 100 countries around the world. IIPA and its members have also represented the copyright-based private sector in the negotiation of key bilateral and multilateral agreements to raise international minimum standards of copyright protection and, of increasing importance, enforcement.

Specifically, IIPA and its members were at the forefront of discussions in 1992 that led to the signing of a Memorandum of Understanding between the United States and China. That MOU obliged China to protect copyright in line with international standards. IIPA was also at the forefront of USTR-led negotiations again in 1995 and 1996, resulting in exchanges of letters, by which China undertook to close down factories producing and exporting pirate CDs with impunity (causing catastrophic disruption of global markets), and commenced the setting up of a nationally-coordinated enforcement regime for copyright protection. IIPA had both a stake and a role in the agreement between the United States and China on China’s accession to the World Trade Organization, and IIPA and its members supported the granting of permanent normal trade relations in 2000. Finally, IIPA observed developments with great interest that led to China’s entry to the WTO on December 11, 2001. Each of these milestones has had significant commercial ramifications for the U.S. copyright industries. We thank the Commission for giving us the opportunity to examine where China stands upon its entry to the WTO with respect to copyright protection, both in terms of its legislative and regulatory regime, and in the context of anti-piracy enforcement.

The conclusion is that while there are many hopeful signs of improvement in copyright protection in China, there is, particularly in the area of effective enforcement, much more to be done.

WTO/TRIPS Compliance: Substantive Standards

First, the Copyright Law (following amendments made in late 2001) and certain regulations now ensure that U.S. right holders enjoy protection on the books that is TRIPS-compliant in most respects. Indeed, the latest round of amendments demonstrated the forward-looking nature of legislators in China, as they attempted to implement TRIPS obligations as well as many htmects of the new "Internet" treaties of the World Intellectual Property Organization.

Nonetheless, there are certain key areas China must look at now to strengthen its legislative framework including through adopting clarifying regulations directed at the new amendments. While time does not permit an extensive discussion, one of the more important areas the Chinese need to look at is strengthening criminal remedies against copyright infringement. Article 41 and 61 of TRIPS requires countries to provide "effective action" against "piracy on a commercial scale" which action must actually be a "deterrent" to further infringements. The Chinese law has provided for criminal remedies in certain cases of piracy since 1994, but the high threshold amounts that must be attained before prosecutors will prosecute piracy cases under that law has meant that these remedies have been used only rarely over the years, in contrast with other neighboring countries where criminal remedies are the rule. The Chinese government opts for using administrative fines but with a low penalty structure and system which brings too little deterrence to the enforcement infrastructure.

TRIPS Compliance: Enforcement Standards

Now turning to enforcement: Enforcement of copyright protection in China remains a major problem. Nevertheless this situation must be put into perspective. Seven years ago, China was flooding the world with pirate exports of CDs of all kinds, and domestically, China was often called a "one copy" market, in that only one legal copy of any product could be sold into China, as the Chinese would illegally copy the rest. We’re glad to say, however, that times have changed. In 1996 and 1997, in large part due to the pressure brought to bear by the United States government and our industries, the Chinese undertook an aggressive campaign against the illegal CD plants, and aggressively implemented licensing requirements for old and new plants. This type of CD plant regulation has now been put into place in many countries in Asia and elsewhere. The results were impressive, with dozens of CD pressing lines seized and dozens of illegal plants closed down. Pirate CD plant operators apparently got the message that their illegal businesses were no longer welcomed on the mainland, so they, unfortunately, migrated elsewhere in Asia. We have been chasing them ever since.

In 2001 and in earlier years as well, in addition to routine enforcement actions carried out all over China against pirate retailers of audio-visual works, sound recordings, software and the like, the Chinese government launched specific "crack-down" campaigns against pirates at the wholesale and retail level and have issued decrees to legalize government use of business software and government sponsored piracy of books and academic journals. The government of Shanghai, for example, in 2000 ordered all 150 state-run stores dealing in copyrighted materials to sell only legitimate product. However, these campaigns tended to be reactive and sporadic, rather than regularized and sustained. Moreover, the type of deterrence necessary to permanently reduce piracy levels was simply not present in the system. For the business software industry, where unauthorized copying within companies and government entities cause the greatest losses, the criminal and administrative systems have just not been effective in curbing this problem.

Let’s be clear: China did a great job in virtually eliminating export piracy, but, despite good rhetoric and many raiding actions, is still making only minor dents in the overall problem that affects its domestic market. To this day, piracy levels in China, namely, the percentages of products appearing on the domestic market in China that are illegal, remain very high for all sectors of the copyright industries, close to or over 90%. And the Chinese government has had to remain vigilant to track down pirate producers, lest they lose control of the problem altogether. For example, the Chinese government reports that 127 underground CD production lines were seized by it between 1994 and the end of May 2001.² One of IIPA’s members reports that, in 2001 alone, central and local enforcement authorities seized over 51 million pirated VCDs and over 4 million pirated DVDs of film material alone. This is likely merely a fraction of the pirated product trading in China, showing the colossal magnitude of the problem.

We all continue to hear stories of first run films like Harry Potter and Lord of the Rings appearing on the streets of China days after the film’s release in the United States (and well before the film’s release elsewhere). The same is true of popular music and software titles. However, the fact is that in China today, such pirated VCDs and DVDs could as easily have come from Malaysia or Taiwan as they might have from an illegal plant in China. Indeed, One of China’s biggest problems today is stopping pirate imports through effective Customs enforcement.

However, it must be said that the Chinese government appears serious about reducing piracy and that government ministers are sincerely concerned about the problem. Indeed, these government officials readily admit that there is still a serious piracy problem in China, and both the problem and the government’s awareness of it are widely reported in the Chinese press.³ This is a remarkable change from the situation in 1995, when Beijing was in effect denying the existence of the problem, and the U.S. government was on the verge of imposing trade sanctions on China for failure to enforce its law against massive piracy. In attitudinal terms at least, the shift has been 180 degrees.

What is clear is that the Chinese government must continue to take strong action to turn the tide against domestic Chinese piracy. Positive signs abound, such as the shift from overt piracy to the present underground nature of the retail piracy business in cities like Beijing.⁴ However, in other parts of China – in the South for example – pirate product is still blatantly on display. Aggressive enforcement must continue, and whether under the National Anti-Piracy and Pornography Working Committee, or a revitalized effort at the State Council level, the enforcement infrastructure must be better coordinated, and be more transparent to ensure that local and provincial enforcement agencies in China – including, most importantly, the Public Security Bureaus (PSBs) and national prosecutors -- are effectively carrying out the campaigns announced at the national level, and put into place enforcement mechanisms that lead to sustained and deterrent results, including the use of criminal procedures against commercial pirates. As noted, the thresholds for bringing criminal actions must be lowered, and administrative fines must be raised, to make such actions truly effective and sustainable.

In addition, more must be done to keep piracy out of China at the borders. Also, the government must continue to convey to the Chinese people that piracy is wrong – that it hurts China first and foremost. Local copyright owners must be encouraged to contribute to the message that Chinese creators are being terribly damaged by these high piracy levels. And, as noted by my colleague from MPAA with respect to audiovisual product, China must continue market-opening measures that will only further encourage Chinese people to buy legal products.⁵

Conclusion: Still a Long Way to Go, But Getting There

Surprising statistics are starting to pour out of China, such as this one: China's software industry expected sales in 2000 to hit 20 billion Chinese yuan (or US$2.42 billion dollars) despite the fact the industry is only one-fifth the size of China's computer hardware sector.⁶ Another one: China has more than 10,000 software companies as of mid-2000, among which 3,000 focus on software research and development.⁷ Facts like these and the counterpart increasing internal development of the entertainment industry sector indicate a turn in the tide in China, for now that China’s leaders recognize the possibility that Chinese creators will contribute positively to the economy, the drive to legalize copyright uses in China will do far more than simply placate foreign trading partners. Of course, there is the WTO, and from what we have seen, China is keenly aware of its obligations, and what it will take to meet them. Have they done this yet entirely? The answer must be no; they are not yet in compliance with their TRIPS obligations. But the wheels are turning, and we look to the future with great hope.

Thank you.

_______________


ENDNOTES

1. IIPA’s members are: the Association of American Publishers (AAP), AFMA (formerly the American Film Marketing Association), the Business Software Alliance (BSA), the Interactive Digital Software Association (IDSA), the Motion Picture Association of America (MPAA), and the Recording Industry Association of America (RIAA). IIPA’s members represent over 1,100 U.S. companies.

2. Report of the Office of National Anti-Piracy and Pornography Working Committee, the People’s Republic of China, June 2001.

3. E.g., Copyright law solid but needs fortifying, China Daily, Sept. 14, 2000 (quoting then National Copyright Administration Commissioner Yu Youxian as saying that the Copyright Law in China needed amending because "[a]nti-piracy regulations are not strong enough, since piracy was not serious when the law first took effect," and that "more provisions must be added because piracy has become rampant [in China] today").

4. Whereas once pirate product was openly sold on the streets, now peddlers are relegated to enticing customers to back alley ways by calling out "VCD" or "DVD."

5. China’s WTO market access commitments in the audio and audiovisual area continue to make it difficult to fully serve the Chinese market with legal product and thus contribute to the difficulties in lowering piracy rates. We hope that the Chinese government re-evaluates these commitments as its other WTO commitments kick in over the next three years.

6. Software sees solid growth in sales, China Daily (citing a report of the China Software Industry Association (CSIA)).

7. Id.