China Promises Better IPR Protection By 2025 – Analysis

By Michael Lelyveld

China has promised tougher protections for intellectual property rights, but the government’s new guidelines suggest that strict safeguards may take years to gain popular support.

Despite a “Phase One” deal announced Friday to avert looming tariffs, progress toward a breakthrough on protections for intellectual property rights (IPR) remained unclear. The issue could pose a challenge for a final trade agreement between China and the United States.

Conflicting reports left it uncertain whether and how much the interim deal would settle long-standing IPR problems, and whether it would also cover complaints about China’s forced technology transfers.

A Chinese statement reported by the official Xinhua news agency said the Phase One text includes chapters on both IPR and technology transfer, although earlier U.S. reports said transfers were to be addressed at a later stage.

A statement by U.S. Trade Representative Robert Lighthizer credited President Donald Trump for the agreement but provided few details.

“President Trump has focused on concluding a Phase One agreement that achieves meaningful, fully enforceable structural changes and begins rebalancing the U.S.-China trade relationship,” Lighthizer said.

At a briefing, Lighthizer said the agreement would be made public in the next few weeks, including “very specific” commitments by China to combat counterfeiting, as well as patent and trademark violations, The Washington Post reported.

In an interview with Bloomberg News, Myron Brilliant, executive vice president of the U.S. Chamber of Commerce, hailed the agreement as “good news,” but added that “we still need to see the details.”

In the absence of specifics on a range of issues including rebalancing and structural reforms, critics saw little value in what has been announced so far.

“There is still significant ambiguity about what is in the deal but based on what we can surmise, it is unclear whether the struggles of the past two and a half years have been worth it,” wrote Asia economist Scott Kennedy at the Center for Strategic and International Studies (CSIS) in Washington.

Last minute efforts in China were evident as the government announced a draft regulation on implementing the country’s revised foreign investment law, which includes a ban on forced technology transfers.

Mixed progress

But earlier efforts in recent weeks have suggested mixed progress on IPR.

On Nov. 24, the cabinet-level State Council and the Communist Party of China (CPC) Central Committee issued an outline of new measures to address U.S. complaints about IPR violations.

“Strengthening IPR protection is the most important content of improving the IPR protection system and also the biggest incentive to boost China’s economic competitiveness,” the offices said in a statement on the government’s website.

The guideline was intended to provide a framework for harsher penalties, stricter enforcement of existing laws, and lower thresholds for prosecution of violations, the Associated Press said.

IPR protection will also become one of the criteria for evaluating the performance of local officials, helping to spur compliance, according to the report.

“Putting future promotions and income on the line could create much stronger motivation to more effectively enforce such laws,” the AP said.

But local officials will have to weigh whether their careers will depend more on enforcing IPR laws than on protecting jobs and promoting economic growth.

While China appears to be moving toward better protections on several fronts, an immediate or sweeping crackdown on violations could prove costly at a time of economic stress.

An executive State Council meeting chaired by Premier Li Keqiang on Dec. 2 set the jobs issue as the government’s highest priority.

“The meeting urged more efforts to implement an employment-first policy and further improve measures to boost employment,” the official Xinhua news agency said.

Top issues for US trade

China’s infringement of patents and copyrights, counterfeiting, cyber hacking, outright theft, and forced technology transfers have been top issues for U.S. investors and trade interests, as well as the basis for President Trump’s decision to impose retaliatory tariffs under Section 301 of the Trade Act of 1974.

But getting U.S. companies to talk about their concerns has been difficult.

“As U.S. companies have stated for more than a decade, they fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices,” the Office of the United States Trade Representative (USTR) said in a March 2018 report.

The USTR report cited an estimate by the independent bipartisan Commission on the Theft of American Intellectual Property (IP Commission) that Chinese thefts of American IP cost between U.S. $225 billion and U.S. $600 billion (1.5-4.2 trillion yuan) annually.

In 2017, the commission also cited estimates that the cost of trade secret theft was equal to between 1 percent and 3 percent of U.S. gross domestic product, or U.S. $180 billion to U.S. $540 billion (1.2-3.8 trillion yuan) annually at the time.

Despite the damage, U.S. companies have been reluctant to speak out individually about IPR conflicts for fear of Chinese retaliation and concern about losing market access.

The unwillingness to complain openly about China’s cyber hacking and data theft was cited by National Public Radio (NPR) in April following an investigation with the Public Broadcasting System (PBS) series “Frontline.”

China’s violations were “an open secret for almost two decades,” the networks said, citing dozens of interviews with U.S. government and company officials.

“None of the dozens of companies or organizations that NPR reached out to that have been victims of theft or corporate espionage originating in China would go on the record,” the broadcaster said.

The IP Commission also cited the risk of further damage as a problem in calculating more precise estimates.

“Victims of trade secret theft — to the extent that they are aware of the crime — are often reluctant to share information on the resulting financial loss … out of fear of declining investment opportunities or diminished market evaluation,” the IP Commission said.

Problem is widespread

China has published a flurry of statistics in an effort to persuade foreign investors that it has already cracked down on IPR theft. But the numbers may only serve to suggest how widespread the problem is.

According to a Xinhua report last December, Chinese courts heard 213,480 IPR cases in 2017, a 40.4-percent increase over 2016 and double the number in 2013.

While the new guideline promises further progress on protections, its highly-qualified language seems to stop short of firm assurances to take immediate steps and may also be a sign of the prevalence of IPR problems.

“According to the document, by 2022, China will strive to effectively curb IPR infringement and largely overcome challenges including high costs, low compensation and difficulties in providing evidence for safeguarding intellectual property rights,” Xinhua quoted the guideline as saying.

“By 2025, social satisfaction with IPR protection in China will reach and maintain a high level,” it said.

The benchmarks suggest an extended timeframe for improvements with a long period needed to persuade domestic entities that tougher enforcement will serve China’s interests.

In what may be a further measure to gain acceptance of enforcement and legal protections, the government plans to open 25 IPR centers, “which are welcomed by all sectors of society, especially small and medium-sized science and technology enterprises,” another Xinhua report said.

The centers are intended to reduce the time and cost of pursuing IPR cases and to “solve the proof-providing difficulties,” said Zhang Zhicheng, head of the protection department of the National Intellectual Property Administration (NIPA).

The official English-language China Daily reported a series of positive comments on the guideline from IPR experts, citing patent protections for industries including pharmaceuticals and copyright enforcement for sport broadcasts.

“These are typical of many of the provisions in the guideline. They are helpful for foreigners, and many foreigners have long lobbied for their consideration by China,” said Mark Cohen, director of the Berkeley Center for Law and Technology.

A firm commitment?

But other IPR measures were cited only as recommendations.

Authorities were urged to study the feasibility of creating a fundamental law on IPR and speeding revisions of laws on patents, trademarks and copyrights.

Consideration should also be given to confiscating illegal gains, destroying counterfeits and imposing bigger fines, the guideline said in a puzzling recommendation, since officials have made a show of seizing and destroying counterfeit goods as part of periodic campaigns and crackdowns for years.

There were also questions about whether the guideline represents a firm commitment to imminent change or a wish list for IPR measures with longer timelines.

“In its promise to bolster intellectual property protections, Beijing set benchmarks for improvement by 2022 and 2025. But some experts said the vaguely worded guidelines offered few details on how leaders would achieve these goals,” The Wall Street Journal said.

The less than iron-clad terms of the target dates and the lengthy course of pursuing IPR cases suggest that it could take years to find out whether conditions for foreign investors have fundamentally improved.

While China has made IPR improvements on paper, it has simultaneously argued that none were needed, as in the case of forced technology transfers, which have been a problem for foreign automakers in required Chinese joint ventures for decades.

“Let’s be clear. The Chinese government has never made any such request to foreign companies,” said China’s U.S. ambassador, Cui Tiankai, writing in the daily USA Today in July 2018. The government subsequently banned forced transfers as part of the new foreign investment law this year.

William Reinsch, an international trade expert at CSIS and a former Commerce Department undersecretary, said that doubts about the new guideline are likely to persist without further evidence that China has changed its ways.

“I believe the general reaction has been that this is all words, not deeds. Given the Chinese track record, there will be a lot of skepticism about anything they promise until companies see if anything has actually changed,” Reinsch said.