The 1996 Sino-US IP Agreement: An Analysis

Laura W. Young Partner Wang & Wang Taipei - San Francisco - Beijing

I.  Background to the 1996 Sino-US Agreement

In June 1996, the US and China reached an agreement on the protection of intellectual property. The US agreed not to impose sanctions on China for IPR violations, and failure to effectively enforce its February 1995 commitments. To understand the significance of the US-China agreement reached in June 1996, one must place it in the context of the February 1995. Amid much enthusiasm from the Clinton administration, the U.S. Trade Representative (“USTR”) executed an agreement on February 26, 1995 stating the US approved of China's “Chinese Action Plan for Effective Protection and Enforcement of Intellectual Property Rights”. The high level of press attention then, as now, is due to the fact that sanctions against China were inevitable unless the USTR found a way to divert them.

However, the 1995 agreement was in essence merely a letter of intent. The agreement lacked definite timetables and failed to address the practical implications of its agenda. In that agreement, China stated its intention to protect various types of IP, and to raise standards of enforcement, but did not establish deadlines for changing its legislation to implement such goals. In several cases, the promises in the action plan contradict China’s own laws. Until specific remedial amendments are incorporated into the Chinese legal system, there is little reason to expect systematic success in enforcing the major concessions of the agreement, including the protection of unregistered famous trademarks in the PRC, the protection of rental rights for copyright holders, the protection of unregistered well-known marks, the authorization of local police to undertake raids and seize infringing goods, and numerous other provisions which constitute the ‘success’ of the agreement.

It was then no surprise to the US Intellectual Property industry and US officials that China did not fulfill all the promises of its action plan one year later. The Chinese, however, were incredulous that the US expected all the promises of the 1995 agreement to be fulfilled within one year. From the execution of the agreement, the two sides were set on a collision course, for the Americans expected great improvements by 1996  and the Chinese thought they had bought themselves several years’ inattention from the US. US negotiators did repeatedly state to their counterparts, through various trade missions and mid-year negotiations, that the US expected substantial improvement by the next year’s annual trade review.

II. Terms of the Agreement

In the June 1996 agreement the US consented to lift threatened sanctions against China in recognition of China’s recent efforts to satisfy US demands. The US did not reverse its position, which would have been required if the USTR investigation revealed that China had made significant improvement; the US merely stated that China's recent efforts merited lifting sanctions. The actions taken, and listed in the US’ announcement of lifting sanctions, include the following four major promises or representations:

1. Closure of Compact Disk Plants

The first and most significant promise by China is the promise to close 15 specific CD plants, in provinces of Guangdong, Haina, Jiangsu and Guangxi. This is one of the major disputes with China, worth an estimated US$1.8 billion, and arose in recent years as some 35 CD factories produced roughly 30-50 million units each year. Of those, only a small portion were authorized by US copyright owners, although the majority of works on the market and being pirated are US works. The frustration of US industry was compounded by the fact that the factories are few, large, heavily invested, and therefore relatively easy to identify and control. Nonetheless, the Chinese government refused to move to stop pirate production. The term "closing” has been used in a liberal fashion by Chinese negotiators, often to mean only that a plant is closed for reorganization, and allowed to re-open shortly after "changing its catalogue". US inquiries are becoming more specific and frequent. In the recent round of negotiations, Chinese officials represented that the closed CD plants' local business licenses were revoked, CD molds and machines were confiscated, and individuals responsible for operating the plants would be criminally charged. Local reports indicate that the Chinese government has taken limited enforcement actions since June. It revoked an additional two business licenses of Guangdong-based CD plants, confiscated and destroyed their counterfeit products and imposed RMB 200,000 yuan fines (roughly US$24,000) on each facility. The 15 CD Plants remain closed. Meanwhile, China is conducting 24-hour monitoring of each plant by positioning 2 inspectors at each location. However, Guangdong IP officials refuse to disclose any information regarding actions related to the monitoring.

2. Promise of Continued Enforcement

China also promised that the Ministry of Public Security would include IPR crimes in a new “Campaign Against Crime” and the Ministry of Culture initiated a national “Concentrated Enforcement Period” focused on distribution of pirated goods, from wholesale and transport to retail of such goods. At the local level, Guangdong province was singled out for special attention. It promised to take action on pirates at all levels of the production-distribution chain. Local officials promised the crack down would last for at least seven months - to January, 1997.

This second promise by China was intended to address US complaints that China's six-month Special Enforcement Period had no long-term effect. A series of crackdowns at the retail level did not significantly affect pirate production of infringing goods, although urban markets appeared temporariliy free of pirate goods until the special period was over. Although China could technically state that it had complied with the 1995 agreement by holding the special enforcement period, American industry's complaints remained unresoved.

While local reports indicate little new enforcement against CD plants in Guangdong, Beijing appears to be maintaining a relatively high level of action, at least at the retail level. Beijing security authorities report 104 audio-video shops closed after inspection of over 1,500 such shops. More than 60,000 copies of pirated audio-video recordings were confiscated by authorities according to local news reports.

3. Report on Border Controls

In response to US complaints that Chinese Customs' new border control system was not effective, China reported that it had seized 30,000 pirated goods in 1996. Customs also reported it had seized tens of thousands of pirated CDS VCDs and LDs in Guangdong in the weeks preceding the US’ announcement, clearly actions taken specifically to persuade the US not to impose sanctions. In June, China issued a “directive” that forbids the import of CD production equipment unless approved by three government agencies: the Press and Publication Administration, the Ministry of Foreign Trade and Economic Cooperation, and local Aministrations of Industry and Commerce.

Nevertheless, the Customs' border control system is fundamentally flawed, and the June agreement failed to address its deficiencies. Without copies of IP registrations in each port, or without a computer network or other shared database, IP registrations filed by rights holders in Beijing are useless when pirated goods pass through a port in Tienjin or Xiamen, or anywhere else. Despite several training sessions in 1995 conducted in the US and China by US customs officials, no effective improvements were made to China’s border control system.

4. Increased Market Access

Given the high degree of significance the copyright industries had placed on the issue of market access, the June 1996 announcement was a disappointment, although industry officials held criticism in check. The US announcement merely restated the February 1995 agreement that US sound recording and movie companies may enter joint ventures with Chinese companies. This term in the 1995 agreement was already deficient because US companies had legal right to operate wholly-owned subsidiaries in China, although some companies had been blocked by local or agency specific policies.

The market access issue is of particular concern to the copyright industries which previously had to tackle the cultural barriers erected by China’s censorship authority. China’s earlier focus on the importance of spiritual purity prevented development of a large potential market for US copyrighted works. One example of the lack of progress is viewed in China’s promise to lift quantity limitations on imports of foreign films. However, as foreign films are still of dubious moral value, numerous other limitations, such as national safety, reputation and interests, etc. may be raised to block operation of theaters or video shops featuring foreign films. China recently re-launched the spiritual civilization movement. Market access will be denied if a foreign film is not in compliance with ideological criteria periodically set by the Chinese government.

III. Conflicts with Existing Chinese Law

The 1995 agreement created several contradictions with China’s domestic laws which virtually ensure that those provisions of the agreement are meaningless until legislation to remedy the inconsistencies is introduced. From the Chinese perspective, however, such contradictions ensure several more rounds of negotiation, and set up "straw men" obstacles that they can resolve in exchange for future concessions from the US, such as once again not imposing sanctions. Future disputes will probably be resolved by Chinese promises to revise its IP laws. One example is China's agreement to protect world famous trademarks, including unregistered famous marks. Although China’s negotiators argue that foreign parties may cite the Paris Convention in order to obtain such protection, the Trademark Office has stated it must and will follow China'sTrademark Law, and that the Agreement is irrelevant to them. The recently issued Regulations on Determination and Administration of Well-Known Marks specifically exclude the verification of unregistered famous marks. It is apparent that China has no intention to comply with the 1995 US-Sino Agreement and the Paris Convention in this respect.

Another example lies in the 1995 Agreement's promise to extend the statute of limitations from one to five years for the filing an invalidation against a trademark similar to a famous mark. Since this extension is not reflected in the Trademark Law, the promise is meaningless. Article 27 of the Trademark Law states that the statute of limitations is one year. One must assume that owners of opposing trademarks against which such invalidations are filed will cite Article 27 in their defense.

A third example is found in China's promise in the 1995 action plan to employ local police in future raids and seizures of counterfeit goods. Such actions would specifically violate a regulation joinly issued by the Supreme People’s Court, Supreme People’s Procuratorate and Ministry of Public Security in 1979. With such authority still in place, trademark infringers, and possibly resentful Public Prosecutors, will cite the 1979 regulation in their defense. We can hope a Chinese judge will rule on the basis of recorded laws, if only to reinforce the autonomy of those laws. To rule on the basis of the agreement would injure the integrity of the judicial system.

In addition, in some cases, the Action Plan may grant too much power to domestic agencies, as when it grants the Trademark Office the authority to review trademark related contracts to determine if they are consistent with the Trademark Law. Local companies who feel they have struck a bad bargain with a foreign rights holder can be expected to try to appeal to this authority. In other cases, the grant of authority is impractical. For example, the National Copyright Administration is empowered to direct enforcement efforts and investigate and punish infringement. In fact, the NCA does not have the staff, nor the will, necessary to do so. The Action Plan itself has not changed that fact.

IV. A Look to the Future of US-China Relations

While the behavior of both sides may seem irrational at times, it has a logic of its own. Although the actual terms are extremely vague and do not demonstrate achievement of US goals, the public attention is justified by the importance of the Sino-US relationship. In addition, 1996 is a year in which the US President faces a bid for re-election. At the same time, the Chinese leadership must also be prepared to face a challenge by its opponents in the event Deng Xiaoping passes away. President Clinton was elected with great support from Hollywood and Silicon Valley. He cannot ignore that constinuency. On the other hand, Jiang Zemin cannot fend off the "hard-liners" if he appears to appease the US.

Perhaps the real value of this deal is that every enforcement action China takes is good for training its security apparatus, and should improve IP enforcement. Every case should make each subsequent case easier. April through June provided a crash course for China in IP enforcement, as Chinese authorities raced to create enforcement statistics. To the extent that the actions are verifiable, as they are in court, there is valuable experience earned.

While the June 1996 “agreement” did not establish any new rules or new concessions, it did confirm the US’ power to threaten China’s access to US markets, and tested China's committment to rational behavior. The significance of the June 1996 deal is that China implicitly accepted that the US has power to threaten its economy, and that it will act rationally to preserve US investment and the US market. While China has a great range of geopolitical interests, and is a global military power, it still has economic interests to preserve. Those economic interests create internal pressure to behave in a rational manner, and this has been of increasing importance within the Chinese power structure over the past few years.

Of course, recent indications are that China's leaders have other concerns greater than those perceived as rational by its trading partners. Among other worrisome indicators is the 1996 decision to control foreign news, including the blocking of Internet sites and the requirement that all foreign news be distributed by the government's news agency, Xin Hua. There is no guarantee that the same result will be achieved in the future, although the longer the history of rational behavior, the more venerable the precedent.

If rational behavior continues, we can expect China to follow a course of progress somewhat similar to that of Taiwan. Over the past ten years, Taiwan has blustered and rejected various American proposals. However, generally Taiwan is finding its own interest best served by adopting the IP regime demanded by American industry and government. China’s interest in maintaining its largest customer, source of hard currency, and source of promising technology, should afford American interests significant concessions in the future as long as rational policies prevail.

Endnotes: . Laura Wen-yu Young writes, lectures, and handles cases involving protection of intellectual property and contract matters in Taiwan and China. She works from the firm's San Francisco, Taipei and Beijing, and Napa Valley offices.

Since Congress passed the 1988 Omnibus Trade Act, the US Trade Representative must annually report trading partner’s “unfair trade practices” to the President. US industry has reported foreign governments policies or actions which hinder US sales’ in foreign countries. The USTR accepts industry input in February of each year, and the review of such practices is generally dubbed “301 review”. This annual exercise has become a framework for industry and government communication, and US relations with trading partners.

These plants include Dali, Zhongqiao, Cailin, Baodie, Jinfa, Yisheng, Jinleilian, Xinle, Anmei, Shenyan, Hongsheng, Jindie, Jinxingm Xiaoshan and Weifa.