China and its trading partners need to tread carefully in this minefield

Protecting intellectual property rights has been a contentious topic in international commerce since the first Paris Convention for the Protection of Industrial Property in 1883. It became a more heated topic when the United States pushed it into negotiations on the General Agreement on Tariffs and Trade in the mid-1980s. As economies become more integrated, IPR protection becomes an increasingly more central component of the commercial relationship. Nowhere is this more visible than in the years of dispute over IPR enforcement between China and the US.

The US presidential election has raised the temperature on US-China disputes, especially IPR. It is imperative that both sides recognize the IPR conflict for what it is: a long and contentious negotiation to develop mutually beneficial rules for commerce. Successful resolution of this negotiation will require great political patience and steady diplomatic resolve.

Protecting IPR is one of the most difficult and complicated policies in an advanced economy. It is also among the most important. The tangled web of smartphone litigation highlights both the value and the extreme difficulty of developing a sophisticated administrative/legal system to review, grant and enforce patents, trademarks and copyrights. It must handle products, such as smartphones, that contain thousands of patents held by scores of companies in dozens of countries. It must balance the benefits of encouraging innovation by permitting temporary monopoly profits against the broader social benefits from technology diffusion through open, competitive use of existing technologies. If done right, it is the foundation for rapid economic growth. If done poorly, economic growth will suffer.

An effective system to review, grant and enforce patents, trademarks and copyrights is neither easy to design nor cheap. A World Bank study more than a decade ago estimated that a basic IP protection system would cost more than $150 million. Today a system for a major economy costs many billions of dollars - typically a controversial allocation of public funds in emerging markets even if the countries (or other jurisdictions) want such a system, which often they do not. It costs about $3 billion a year for the US Patent and Trademark Office to support its more than 12,000 employees. Many argue it is not large enough. Private costs and litigation expenses are much larger. A recent study by the US International Trade Commission estimated that US firms spend nearly $5 billion a year on possible infringement just in China.

Building effective, 21st century IPR systems among its trading partners is a key goal for the US. It will be a dominant issue in US-China relations for years to come. The US put 13 nations on its most recent IP priority watch list; the US Chamber of Commerce targeted eight. Both lists had China on top. (Canada also made both lists, which gives some perspective.) US Customs statistics show that the Chinese mainland accounts for 62 percent by value of seizures of violating goods (when seizures from Hong Kong are added the number grows to 80 percent). The US Business Software Alliance claims that almost $9 billion worth of software was illegally obtained in China last year; the highest in Asia.

Domestic pressure in the US for more rapid progress by China is fierce. IP-intensive industries in the US support more than 55 million American jobs. These jobs pay 30 percent higher wages and account for nearly $6 trillion in national output. The OECD estimates that counterfeit and pirated products worth more than half a trillion dollars flood into the world market each year, costing G20 countries 2.5 million jobs. Another study predicts pirated goods could reach $1.77 trillion by 2015. The US International Trade Commission estimates that improved IP enforcement in China would add nearly 1 million new jobs in the US. In today's economic and political environment, these numbers cannot be ignored.

Meanwhile, China is moving toward a modern IPR system. Premier Wen Jiabao announced an IPR leading group within the State Council and made permanent the 2010 Special IPR Campaign to enhance enforcement. The Supreme People's Court added greater transparency in drafting a judicial interpretation regarding Internet liability, as did the Chinese government in drafting amendments to the copyright law.

In addition, China has made important commitments to expand its software legalization programs to local government departments and hold local government officials responsible for effective enforcement. In the last Joint Commission on Commerce and Trade negotiations, China agreed to require, and audit, licensed software in all government agencies, including provincial and municipal government, among a number of other measures to discourage the use of counterfeit software.

Despite its recent steps, China has much room for progress. One telling example is found in a USITC survey of American businesses in China. The US firms reported that Guangdong province, and the municipalities of Shanghai and Beijing, represented the best, and the worst, climates for IPR protection. How is this possible?

IPR protection is reported to vary significantly at the local levels. But more problematic, specific locations were ranked differently depending on the sector. Shanghai was generally rated as one of the best locations by information and services, transport and manufacturing. It was rated the worst by firms in the high-tech and heavy manufacturing sector. In contrast, Beijing was rated highly by the high-tech and heavy manufacturing sector, and rated as worst by firms in the information and other services sector. Guangdong was ranked highly by firms in the consumer goods manufacturing sector, but received low rankings from most other sectors, especially the high-tech and heavy manufacturing sector.

While industry may find IPR rulings in California generally less favorable than, say, in Texas, the curious sector-specific disparity across cities and provinces in China suggests opportunity for less discretion and more consistency. Recent draft amendments to the patent law that would confer more power on local patent offices may be moving in the opposite direction. Reliable IPR protection is crucial to a growing, innovation-led economy.

The growing integration of China into the IP-intensive developed markets and the aspirational indigenous growth policies build a domestic constituency for rapid IPR development in China. But it is not an easy path. It will take patience and resolve inside China and among its trading partners.

(Source: China Daily)