• 1 For instance, it is widely reported that China produces 35 percent of the world’s coal but accounts (...)

1The People’s Republic of China (“China”) has over the past three decades experienced unprecedented rapid economic growth. In large part, China’s success results from an export-oriented economy relying on foreign direct investment (FDI), government subsidies, and low input and labour costs. The downside to this strategy, however, is a reputation as a sweatshop producing low-quality goods without recognising or managing externalities such as product standards and environmental protection.1

• 2 Interestingly, and unlike many Western countries, Chinese law provides that “where the provisions o (...)

2Primarily following a government-interventionist model utilised by the early-industrialising countries of East Asia, the Chinese government has managed and controlled almost every aspect of its economy and social development. Such management and control can be seen in China’s policies concerning, inter alia, its currency and exchange rate, FDI, export subsidies, and indigenous innovation policies, and even in its policies concerning the protection and enforcement of intellectual property rights (IPRs). In these and in other sectors and issues China has vigilantly pursued policies that arguably conflict with the rules and norms of international law, including those of the World Trade Organization (WTO).2

• 3 At the same time, and unlike the early-industrialising countries, China has given no indication tha (...)
• 4 For analysis of the effect of IPRs on investment, see Keith E. Maskus, “Lessons from Studying the I (...)

3Again, similarly to the early-industrialising countries, China now realises it must innovate in order to maintain its economic growth and developmental path. It is clear that in order to do so, China must advance beyond a low-level producer.3 In this regard, China has become adept at absorbing foreign technology by learning from multi-national enterprises (MNEs) that have invested in China, building internal capacity, and then utilising the acquired capacity to directly compete with MNEs. At the same time, China has seemingly accepted that it must increase the protection and enforcement of IPRs in order to assist its progress beyond that of a “world factory” and toward a true innovator nation.4 Accession to the WTO has accelerated the pace of change, with most now considering China’s IP laws to generally comply with its commitments under the WTO’s Agreement on Trade-Related Measures on intellectual property rights (TRIPS). Enforcement of these laws, however, remains problematic.

• 5 Daniel C. K. Chow, “Why China Does Not Take Commercial Piracy Seriously,” Ohio Northern University (...)
• 6 On why China counterfeits, see ibid., Section II.

4China is the world’s leading IP infringer. China is by some measure a producer of counterfeit and pirated goods (it is estimated that China accounts for over 80 percent of the world’s counterfeits),5 producing large quantities of goods such as knock-off designer-brand clothing and accessories, shoes, and apparel, pirated films and books, and fake consumer electronics, aircraft, and car parts for both the local and export market.6 China also is a large-scale infringer of patents, with both industrial giants and technology-related industry appearing to blatantly ignore the patent rights of foreign companies.

• 7 For analysis relating to film and music, see Eric Priest, “The Future of Music and Film Piracy in C (...)
• 8 Chetan Kulkarni, “Calls for Chinese crackdown on piracy,” United Press International, 17 May 2005, (...)
• 9 European Commission, Taxation and Customs Union, “Report of EU Customs Enforcement of Intellectual (...)

5Legitimate businesses are estimated to suffer annual losses of US$ 250-750 billion in lost sales as a result of counterfeit and pirated goods, while unsuspecting consumers have suffered great losses – including loss of life – from poorly-made imitation products.7 It is almost impossible to predict the losses suffered from patent infringement. Membership in the WTO has done nothing to curtail the infringements; ironically, liberalised trade policies (including fewer export restrictions and the cessation of the state-trading monopoly on exporting) coupled with the rise of the Internet and e-commerce has led to a dramatic rise in counterfeiting and piracy over the last decade. Indeed, estimates from the Chinese government, United States (US) Congressional Research Service, and others conclude that counterfeits constitute between 15 percent and 20 percent of all Chinese-made products, and that upwards of 90 percent of software in China is pirated.8 Rather amazingly, 85 percent of all infringing goods seized at EU borders are sent from China (with an additional 2 percent coming from the Hong Kong SAR), with around 90 percent seized for trademark infringement.9

• 10 Peter K. Yu, “The Second Coming of Intellectual Property Rights in China,” Occasional Papers in Int (...)
• 11 On IPRs protection prior to 1949, see generally William P. Alford, To Steal a Book Is an Elegant Of (...)
• 12 William P. Alford, To Steal a Book Is an Elegant Offense: Intellectual Property Law in Chinese Civi (...)

7With the rise of Chairman Mao and Communism in 1949, notions of private property rights essentially became meaningless.10This included IPRs, with the abandonment of existing methods and schemes for rewarding and stimulating creation.11A system of limited rewards followed, but even that was called into question as hard-core ideology rejected any material inducement to innovation.12The Cultural Revolution dealt a final blow to IPRs and banned all incentives to creation by deeming all such creations national assets. With this, innovative creation virtually ceased in China for several decades.

• 13 US–China Memorandum of Understanding on Enactment and Scope of PRC Copyright Law (1989).

9Fearing China would present the same IP-related problems of a rising Japan, in the mid-1980s the US began pressuring China to adopt a general domestic framework for strengthening IPRs and to sign on to some of the more important international IP treaties, such as the Paris Convention (1985), Madrid Agreement (1989), and the Integrated Circuits Treaty (1989). At the same time, China also established the State Intellectual Property Office (SIPO) and the Trademark Office and restructured its judicial process for dealing with matters involving IPRs. Under the threat of being designated a “priority foreign country” – that is, a country whose trade policies and/or inadequate IP protection are deemed injurious to US commerce – under Section 301 of the US Omnibus Trade and Competitiveness Act (1988) and thus facing retaliatory US trade sanctions, China committed to the US in a 1989 Memorandum of Understanding to submit a copyright bill to the National People’s Congress.13The bill became law in 1990.

• 14 Memorandum of Understanding between the United States of America and the People’s Republic of China (...)
• 15 At the same time, China also ratified the following treaties: the Universal Copyrights Convention ( (...)

10Shortly after being designated a “priority foreign country” in 1992, China reached a comprehensive agreement on IPRs with the US.14As part of the agreement, China strengthened and expanded copyright protection, joined the Berne Convention (1992) and Geneva Convention (1993),15provided pharmaceutical protection for chemical and pharmaceutical products, restricted the use of compulsory licences, and committed to protecting trade secrets through forthcoming legislation. China also agreed to adopt effective measures to enforce IPRs in China and at its border. In return, the US removed the designation and likely also committed to renewing China’s MFN status.

• 16 In February 1995, the USTR executed an agreement stating that the US approved of China’s “Chinese A (...)
• 17 See, e.g., Copyright Law of the People’s Republic of China (effective 1 November 2001), www.sipo.go (...)
• 18 See, e.g., Regulations on the Protection of Layout-Designs of Integrated Circuits (promulgated by S (...)
• 19 Such judicial interpretations are recognised as binding within the judicial system. See Provisions (...)
• 20 See generally Catherine Sun, China Intellectual Property for Foreign Business, op. cit.; Yahong Li, (...)
• 21 Shi Miaomiao, “China’s Participation in the Doha Negotiations and Implementation of Its Accession C (...)
• 22 See Chinese Patent Law, Articles 11, 46, and 48-50. See Peter K. Yu, “From Pirates to Partners (Epi (...)
• 23 See Chinese Patent Law, Articles 3(4) and 14.
• 24 See Chinese Patent Law, Article 10.
• 25 See Chinese Patent Law, Article 22. See Article 13 of TRIPS.
• 26 See Peter K. Yu, “From Pirates to Partners (Episode II): Protecting Intellectual Property in Post-W (...)

11It quickly became apparent that China was not wholeheartedly fulfilling its obligations, and the US and China negotiated two additional agreements, one in February 1995 and the second in June 1996. In these agreements, China committed to further strengthening IP enforcement measures (including improving enforcement at the border and additional criminal penalties for violating IPRs under certain conditions), and undertook to reduce counterfeiting/piracy and to open its internal markets to US copyright material (i.e., computer software, sound recordings, and movies). For its part, the US agreed to provide Chinese lawyers and judges with training in IPR.16As part of its accession package to the WTO, China undertook further commitments and obligations regarding its protection and enforcement of IPRs. Through a combination of revised laws,17implementing and administrative measures,18and judicial interpretations,19these commitments essentially completely overhauled China’s system of protecting and enforcing IPRs in a number of areas, including copyright, trademark, and patent.20Many of the revisions were clearly made in direct response to – that is, in order to comply with – the obligations contained in the TRIPS Agreement.21In relation to patents, such revisions include the prohibition of “offering for sale,” judicial review of patent invalidations, and stricter standards for the issuing of a compulsory licence.22For copyright, protection was extended to architectural works, compilations, and databases,23the right of communication was added for information networks, public performance rights, and rental rights, and protection for computer software was also added.24The revisions also modified China’s fair dealing provision in order to comply with obligations sets out in the TRIPS Agreement.25The trademark law was also significantly revised in order to meet China’s obligations under the TRIPS Agreement. For instance, registerable subject matter was extended so as to include three-dimensional and colour marks, protection for “well-known” marks protection was brought in line with the international standard, protection for certification marks, collective marks, and geographical indications was granted, the time limit for challenging fraudulently or unfairly acquired marks was removed, and judicial review of all trademark and administrative decisions was added.26Revisions relating to the enforcement of IPRs – including allowing for injunctions and criminal liability – were also added in order to comply with the TRIPS Agreement.

• 27 Ibid.

12Other revisions, however, are not directly related to accession to the WTO. It is suggested that these revisions grew organically in response to the domestic market. For instance, revisions to the patent law also included a simplification of the invalidation and revocation process, clarification of the ownership of patent rights between employees and employers, and damages based on appropriate royalties.27Similar revisions in relation to copyright include the elimination of preferential treatment to foreigners, certain requirements relating to the assignment of copyright, and even enhanced protection of acrobatic art.

• 28 See also Yahong Li, “The Wolf Has Come: Are China’s Intellectual Property Industries Prepared for t (...)
• 29 While the disclosure of such information violates IP, contract, and anti-unfair-competition laws, e (...)
• 30 For details on this case and subsequent lawsuit in US courts, see Danny Friedmann, “Update on CYBER (...)
• 31 Yu traces this phenomenon to historical reasons: “Local protectionism has been a dominant problem i (...)

15As mentioned above, China’s laws and regulations concerning IPRs are for the most part consistent with its TRIPS obligations.28The enforcement of those laws and regulations, however, is lacking. The problem is widespread and encompasses all forms of IPRs. Moreover, the problem is not limited to underground counterfeiting networks, as legitimate businesses regularly engage in IP violations with impunity and often target competitors’ senior or knowledgeable employees for the purpose of acquiring trade secrets and proprietary information.29Foreign rivals also regularly accuse Chinese companies of blatant patent infringement. It is also well known that most government computers have pirated software installed; even the controversial and ill-fated “Green Dam Youth Escort Internet” filtering software, which the government required installed in all computers sold in China for a short time, included approximately 3,000 lines of code from US-based CYBER sitter and is now subject to a copyright infringement lawsuit in the US.30This is not a controversial statement, but the more difficult issue is why enforcement of IPRs in China is largely absent. Here there is substantial disagreement among scholars and onlookers. Even so, there is a certain degree of common ground between the varying positions. For instance, no one doubts the substantial progress the central government has made over the past two decades in the protection and enforcement of IPRs. Importantly, most commentators also point to provincial governments and local protectionism as the main impediment to adequate enforcement.31This sentiment is echoed by former Assistant US Trade Representative Joseph A. Massey, who in the context of China’s failure to enforce its commitments in the 1992 Agreement with the US stated:

• 33 See, e.g., Tao Jingzhou, “Problems and New Developments in the Enforcement of Intellectual Property (...)
• 34 Jeffrey Sheban, “In the Land of Counterfeit,” The Columbus Dispatch, 25 October 2010, www.dispatch. (...)

16Almost all commentators agree that combating the problem of local protectionism will be difficult. The differences of opinion are on whether the central government has the power to control the provinces and whether it sees it in its interest to do so. Put simply, while some believe the central government is powerless to act (and often repeat the well-known Chinese proverb that “the mountains are high and the emperor is far away” (shan gao huangdi yuan 山高皇帝远), others believe the central government could rein in the provinces and improve enforcement of IPRs throughout the country, and they question the government’s commitment to IP enforcement. Local protectionism seems to be at the heart of large-scale counterfeiting and piracy in China,33with both local leaders and the entire community (including the criminal element) benefiting from the infringing activities.34In this regard, it has been reported that “leaders of local government bureaucracies are often intimately involved with companies that profit from [counterfeit and] pirated goods,” while the community benefits from employment and income distribution both directly in the manufacturing and indirectly though increased access to goods and support for the wider economy. Noted China-law expert Professor Daniel Chow succinctly states:

• 36 Joseph A. Massey “The Emperor is Far Away: China’s Enforcement of Intellectual Property Rights Prot (...)
• 37 Daniel C.K. Chow, “Why China Does Not Take Commercial Piracy Seriously,” op. cit., p. 203 (stating (...)

17Massey concurs with Chow’s assessment of local leaders in China, stating: “Provincial authorities […] benefit financially or politically from the proceeds of piracy or [simply] turn a blind eye to powerful local interests that do [benefit from piracy].”36Given communities’ heavy dependence on counterfeiting and piracy as part of their economic development,37it is unsurprising that local governments provide only limited resources to IP enforcement activities.

• 38 Chetan Kulkarni, “Calls for Chinese crackdown on piracy,” op. cit. See also Rogier Creemers, Explai (...)
• 39 Chetan Kulkarni, “Calls for Chinese crackdown on piracy,” op. cit.
• 40 See Peter K. Yu, “Three Questions That Will Make You Rethink the U.S.-China Intellectual Property D (...)
• 41 This is increasingly becoming problematic as Chinese government subsidies for patent applications h (...)
• 42 The most notable example is the unsuccessful lawsuits brought by the International Federation of th (...)
• 43 Joseph A. Massey “The Emperor is Far Away: China’s Enforcement of Intellectual Property Rights Prot (...)
• 44 Daniel C.K. Chow, “Why China Does Not Take Commercial Piracy Seriously,” op. cit., p. 206.
• 45 Ibid.

18Professor Chow is one of the main proponents of the view that China could and should do more to control counterfeiting and piracy. In this opinion, the central government has both the power and ability to rein in the provinces and implement stronger IP enforcement initiatives. In this regard, Chow shares an opinion with Eric Smith, president of International Intellectual Property Alliance, who argues that political will rather than other administrative or legal impediments most severely hampers IP enforcement efforts.38Both Chow and Smith thus argue that IP enforcement could be improved through the concerted effort of the central government. To substantiate this claim, Smith points to the government’s successful effort to curtail pornography,39while Chow’s example of the crackdown on counterfeit Beijing Olympic 2008 merchandise is less persuasive.40Proponents of this position also point to the labyrinth of administrative processes and proceedings needed to enforce IPRs, the difficulty of persuading authorities to begin a criminal investigation, and the unequal level of judicial enforcement of IPRs (with Chinese companies seemingly receiving adequate remedies for violations of their IPRs41while foreign firms struggle to find favour with the courts).42Correspondingly, it is widely believed that even when infringers are successfully identified and authorities are convinced to act, the Chinese system does not impose penalties strong enough to serve as a deterrent.43According to statistics compiled by the Chinese State Administration of Industry and Commerce, only 45 of the 22,001 cases registered in 2000 were referred to the Public Security Bureau for criminal prosecution. Those convicted faced average fines of $794, and the average compensation awarded by administrative authorities to a brand owner was about $19.44With such low rates of prosecution and negligible punishments it is no exaggeration to say that large-scale counterfeiters view occasional IP enforcement as merely a “cost of doing business.”45

• 46 Ralph Oman, “Copyright Piracy in China,” John Marshall Review of Intellectual Property Law, vol. 5, (...)
• 47 Peter K. Yu, “Three Questions That Will Make You Rethink the U.S.-China Intellectual Property Debat (...)

19The position that the Chinese government is a capable but unwilling power is shared by several others, including Ralph Oman, the former Register of Copyrights, and James Shinn, political commentator and Lecturer at Princeton’s School of Engineering and Applied Science. In this regard, Oman states that China “could end piracy with a telephone call. All that is needed is the political willpower,”46while Shinn adds: “It is laughable to hear excuses from Beijing that they can’t control the 50 pirate CD factories. If they were turning out thousands of copies of the BBC documentary on the Tiananmen Square protest – rather than bootleg copies of ‘The Lion King’ – the factory managers would be sharing a cell with other dissidents in a heartbeat.”47

• 48 Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China, op. cit.
• 49 See Peter K. Yu, “Still Dissatisfied After All These Years: Intellectual Property, Post-WTO China, (...)
• 50 Peter K. Yu, “Three Questions That Will Make You Rethink the U.S.-China Intellectual Property Debat (...)

20Other commentators, most notably Peter K. Yu (Drake University, Law) and Andrew Mertha (Cornell University, Government),48counter by pointing out the substantial progress the central government has made over the past two decades and the difficulties the central government faces in convincing its 31 provinces to steadfastly enforce IP protection.49Proponents of this view argue that the enforcement problem in China is not limited to foreign IPRs. Trademarks of Chinese companies are regularly counterfeited, and locally produced music and movies are veraciously pirated in both digital and physical form. Countering Chow’s premature example of China’s successful efforts to protect Beijing Olympics merchandise, these commentators often point to the seemingly ubiquitous presence of counterfeit merchandise both prior to and after the Olympic Games in 2008 as evidence of the central government’s inability to control the problem. In this regard, Yu states: “If one could draw any lesson from the protection of Olympic symbols in China, it is how serious and entrenched the piracy and counterfeiting problems are in the country… Due to the country’s rapid decentralization, the central government does not have the ability to fully protect the Olympic symbols throughout the country.”50

• 51 Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China, op. cit., es (...)

21Yu and Mertha share similar beliefs that China’s size, heterogeneity, and historical complexities all play a role in the local attitudes and difficulties in addressing the problem. More specifically, both scholars point to the multifaceted and layered levels of bureaucracy related to the protection and enforcement of IPRs at the central, provincial, and local level as a reason for the inefficient and maze-like system, the considerable differences in economic development among and between the different cities and provinces as a structural administrative problem perpetuating low levels of enforcement, and a lack of deterrents, local protectionism, and significant conflicts of interests.51

• 52 Peter K. Yu, “Three Questions That Will Make You Rethink the U.S.-China Intellectual Property Debat (...)
• 53 Ibid., emphasis in original.
• 54 See generally Peter K. Yu, “Three Questions That Will Make You Rethink the U.S.-China Intellectual (...)

22Yu also takes a radical approach to the issue in arguing that the failure to resolve piracy and counterfeiting problems in China can be “partly attributed to the lack of political will on the part of U.S. policymakers and the American public to put intellectual property protection at the very top of the US-China agenda.”52Thus, Yu believes, “It is not only the Chinese who lack political will, as many critics have claimed, but the Americans as well.”53In support of his position,Yu points to the fact that the US does not prioritise IPRs in its negotiations with China (instead focusing on currency manipulation and nuclear proliferation), its lack of will to strengthen the Chinese central government, and American interest in promoting censured material.54Yu further (and correctly) points out that counterfeiting and piracy are also major problems in major US cities, where counterfeit CDs, DVDs, clothes, and apparel are readily available through street vendors, and that online piracy is rampant throughout the US.

• 55 Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China, op. cit., es (...)

25Despite over 30 years of continually strengthening the protection of IPRs, China remains the hub of counterfeiting and piracy. This article outlined several reasons for the lax enforcement of IPRs and raised the question of whether the central government has the power to enforce IPRs in the provinces. Whatever the answer, it is clear that persistent pressure from the international community is not the way to convince China to increase its enforcement efforts.55China must on its own draw the conclusion that the economic and social benefit of allowing large-scale counterfeiting in the provinces is outweighed by, inter alia, its international obligations or the infusion of central tax revenues if consumers increased purchases of legitimate goods.

• 56 Joseph A. Massey, “The Emperor is Far Away: China’s Enforcement of Intellectual Property Rights Pro (...)

26Regardless, China cannot escape the fact that the enforcement of IPRs depends on “the extent to which Beijing can compel Guangdong and the other provinces to accept that Beijing’s laws are not ‘irrelevant’ but are the law of the land that must be enforced.The provincial and local committees cannot become ‘Potemkin villages’ mouthing lip service for IPR as piracy continues unabated.”56Thus, if the central government is serious about enforcing IPRs, it must gain the cooperation of the provincial authorities and administrative agencies through central power, coercion, or inducement.

• 57 See Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China, op. cit. (...)

27This does not mean that industry should sit idly by waiting for the central government to act; instead, industry must take a measured but serious approach to increasing enforcement of its IPRs. In this regard, industry would be wise to study Mertha’s assessment of the three most important yet least understood aspects of the enforcement of IPRs in China, namely the nature and politics behind criminal enforcement; the complex relationship among and between the various administrative enforcement bureaucracies; and the economics behind the industry.57In terms of the nature and politics behind criminal enforcement, Mertha concludes that in the short-to-medium term, China’s legal infrastructure does not have the capacity or the power to effectively handle the volume of infringements of IPRs. In large part, this is due to local protectionism – courts are under the influence of local governments, which in turn either indirectly or directly have an interest in the infringing activities. Intellectual property infringing is a big business employing large numbers of people and supporting additional businesses (such as suppliers, restaurants, transportation, etc.).Thus, it is safe to assume that the counterfeit culture will not shift on its own and that the legal infrastructure will suddenly begin taking infringement of IPRs more seriously. This leads to the second identified aspect, the web of complex and administrative enforcement bureaucracies. In Mertha’s view, understanding these agencies is critical to enforcing IPRs in China. In this regard, it is also necessary for IP owners and industry to identify the deficiencies and inefficiencies in these institutions and to attempt to find ways to compensate for them or to lobby to change them. Finally, Mertha believes that simply appreciating the economics of IP infringement, as opposed to understanding the legal or cultural aspects of, say, counterfeiting, is one of the most important aspects to counterfeiting. Simply put, most consumers purchase counterfeit or pirated goods because they are cheaper than their legitimate counterparts. For the most part, these consumers do not care if the product infringes an IPR. Given this reality, alternative sales and marketing strategies will not end counterfeiting and piracy, but unlike enforcement and court action, this recognises that business as usual is no longer and will never again be the appropriate strategy for operating in China.