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Concerns with Mainland China’s IPR Regime Highlighted in Annual Report

The Office of the U.S. Trade Representative released on 25 April its latest Special 301 report on intellectual property rights enforcement. Eleven economies – mainland China, Algeria, Argentina, Chile, India, Indonesia, Kuwait, Russia, Saudi Arabia, Ukraine and Venezuela – are listed in the Priority Watch List for 2019, down from 12 economies a year ago (reflecting the move of Canada and Colombia to the lower-level watch list as well as the addition of Saudi Arabia). While most of the 25 countries under regular watch list status were unchanged from the previous year, Paraguay was added to that list and Tajikistan was removed. No country was listed as a Special 301 priority country, the rarely-used highest Special 301 level.

Countries eligible for the Generalised System of Preferences are at risk of losing GSP benefits if they are listed as a priority country or remain on the PWL for many years, but the penalty for non- GSP countries is less specific. USTR stated in a press release that it will “review the developments against the benchmarks established in the Special 301 action plans for countries that have been on the Priority Watch List for multiple years.” For such countries that fail to address U.S. concerns, “USTR will take appropriate actions, such as enforcement actions under Section 301 of the Trade Act or pursuant to World Trade Organization or other trade agreement dispute settlement procedures, necessary to combat unfair trade practices and to ensure that trading partners follow through with their international commitments.”

USTR indicated that high-level discussions between the United States and mainland China on intellectual property concerns are on-going. “High-profile statements in support of IP and innovation” by mainland Chinese government officials “are no substitute for real structural changes to address shortcomings” in mainland China’s IP system, “which cannot be excused by the country’s stage of economic development,” the report noted. The United States believes that mainland China’s placement on the PWL reflects the urgent need for fundamental structural changes to strengthen IP protection and enforcement, including as to trade secret theft, on-line piracy and counterfeiting, the high-volume manufacture and export of counterfeit goods, and impediments to pharmaceutical innovation.

USTR has taken action under Section 301 of the Trade Act of 1974 to address a range of unfair and harmful conduct, including technology transfer requirements imposed as a condition to access the mainland Chinese market. The United States also initiated dispute settlement proceedings at the WTO to address discriminatory licencing practices and further contends that structural impediments to administrative, civil and criminal enforcement continue to undermine IP protections, as do certain information communications technology, IP-ownership and research and development localisation requirements.

The report’s full nine-page section on mainland China reiterates concerns voiced in prior reports. U.S. authorities claim, for example, that despite a broad government reorganisation (including of IP responsibilities among government agencies) and proposed revisions to IP laws and regulations mainland China has “failed to make fundamental structural changes to strengthen IP protection and enforcement” and has continued to interfere in private sector technology transfer decisions. The report is also critical of gaps in the scope of IP protection, stalled legal reforms, weak enforcement channels, investment and other regulatory requirements that pressure for technology transfer, discriminatory licencing restrictions, and unauthorised intrusions and theft from computer networks of U.S. companies to obtain unauthorised access to IP.

While recognising certain progress and the reorganisation of IP-related agencies in March 2018, USTR nonetheless expressed concern about implementation, noting that “given their recent completion, it is too soon to determine whether these efforts to reorganize and centralize administration and enforcement of IP will be positive for right holders.” There have been some positive judicial reforms of IP court structures, including the establishment of three Internet courts as well as a new appellate tribunal within the Supreme People’s Court (known as the SPC IP Court) with jurisdiction over appeals from lower courts in technically-complex IP cases as well as appeals of certain enforcement decisions. Despite these advances, U.S. firms report that procedural obstacles to appealing decisions of the CNIPA Trademark Adjudication Board to the Beijing IP Court may discourage appeals. Firms also continue to report that burdensome thresholds for criminal enforcement, onerous evidentiary requirements, lack of means to require evidence production, insufficient damage awards, and lack of deterrent-level statutory damages and criminal penalties all undermine the effectiveness of the court system. A broader concern is that intervention by local government officials, party officials and powerful local interests undermines the independence of the courts.

The transshipment of counterfeit goods from mainland China through Hong Kong is also addressed in the report. According to USTR, the Hong Kong Trade Description Ordinance prohibits imports and exports of goods bearing counterfeit marks but specifically excludes “goods in transit.” This ostensibly creates an opening for illicit actors to ship counterfeit products through Hong Kong unhindered. USTR added that the growing number of small commercial parcels moving through international mail and express facilities presents challenges in the fight against counterfeiting and piracy in FTZs. According to U.S. Customs and Border Protection, small shipments now represent a majority of all IP-related seizures, adding to the difficulty of enforcing IP in transit hubs.

A recent study by the Organisation for Economic Co-operation and Development and the European Union Intellectual Property Office noted, in reference to Hong Kong, Singapore and the United Arab Emirates, that “fake goods arrive in large quantities in containers and are sent further in small parcels by post or courier services.” USTR noted that “parcels containing counterfeit clothing and textiles are frequently mailed to developed economies from ‘transit points’ like Hong Kong and Singapore, both prominent FTZs.”

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