The Impact of the US-China Trade Dispute on IP Rights in China

Contributed by: Louis Chew

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Introduction

On 4th December 2018, China announced that a total of 38 different punishments would be applied to IP violations. This was set out in a document released by the National Development and Reform Commission, which was also signed by various government bodies, including the Supreme People’s Court and the central bank.

The new penalties for IP violations include being banned from issuing bonds and other financing tools, restricted from accessing government financial support, foreign trade, registering companies, and have their names recorded on a list which financial institutions will refer to when lending or granting access to foreign exchange.

China has previously denied accusations from the US of corporate espionage, IP theft, and forced technology transfers[1]. Indeed, it has not acknowledged any of these concerns, stating that there are no laws that compel such technological transfers. Against this backdrop, China’s recent announcement signals a potentially large shift in the enforceability of IP rights, with observers noting that “this is an unprecedented regulation on IP violation in terms of the scope of the ministries and the severity of the punishment”[2].

This article aims to summarise recent developments in China’s IP regime, and determine whether such changes have been directly caused by the US-China dispute.

 

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Start of the US-China Trade War

Although trade relations between the US and China have long been fraught with distrust[3], this relationship took a sharp downward spiral in March 2018 when the Trump administration imposed tariffs on $50 billion of Chinese imports. The stated reason for such tariffs was because of China’s unfair practices to obtain American intellectual property[4]. Under Section 301 of the Trade Act of 1974, the US President may take all appropriate action to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts US commerce.

This has led China to respond with its own set of tariffs on American goods and to file for consultations with the World Trade Organisation. Under the Dispute Settlement Understanding of the WTO, bilateral consultations are the first stage of formal dispute resolution[6]. Only after consultations have failed to produce a satisfactory solution within 60 days may the complainant request for adjudication by a panel.

While the trade dispute is far from resolved, a temporary reprieve was granted when President Donald trump and President Xi Jinping agreed at the 2018 G20 Buenos Aires summit to delay further planned tariff increases for 90 days.

 

IP Developments in China

Given that the announcement was made just three days after a delay was agreed between the US and China, observers have noted that this may be a direct reaction to US pressure. The dispute may have influenced such an announcement, but the reasons for this development are likely to be more nuanced.

China has long taken steps to build a functional IP regulatory framework. Since 1980, China has been a member of the World Intellectual Property Organization (WIPO), which aims to encourage creative activity and to promote the protection of intellectual property throughout the world[7]. Comprehensive sets of IP laws, regulations, and administrative procedures were further established and refined in the 1990s. These included the Law Against Unfair Competition (1993), as well as the Regulations on Customs Protection of Intellectual Property Rights (1995), which strengthened border control to stop counterfeited goods from entering or leaving the country.[8] Furthermore, China has also acceded to the Paris Convention for the Protection of Industrial Property, the Madrid Agreement for the International Registration of Trademarks, and entered into the 1995 Agreement Regarding Intellectual Property Rights with the US. These steps demonstrate that attempts have been made to create an IP regime that is consistent with international standards.

More recently, the Standing Committee of the National People’s Congress established the first specialised IP courts in Beijing, Shanghai, and Guangzhou. These courts were set up in part to increase the speed in which IP disputes were heard given the increasing amount of IP cases – local courts at all levels across China received 59,612 new IP related civil cases in 2011 alone.[9]. Furthermore, these courts are also staffed by specialist judges who are experienced in IP matters to ensure consistency across judicial interpretation. This is especially important as China uses a civil law system, where little to no deference is given to prior decisions by judges facing the same issues[10]. Further reforms were made in December 2018 when China announced that appeals on matters requiring significant specialised knowledge would bypass the provincial courts and go straight to the supreme court. These moves, spread over a long period of time, suggest that China has been gradually improving IP regulations even without political pressure from the US.

 

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IP Reform and Economic Policy

If such developments are not driven by political pressure, what then, is China’s motivation to strengthen its IP regime?

Much of this change can be attributed to the rapid development of China’s economy. The protection of intellectual property has been justified because it stimulates innovative activity, and in turn provides economic benefits to society[11]. However, this must also be balanced against the potential cost associated with the creation of a monopoly on knowledge[12]. The enforcement of intellectual property rights by a single firm effectively excludes other firms from using the product to create social value. Less developed countries, which often have a comparative advantage in imitative as opposed to innovative activities, would hence be less eager to enforce IP rights simply because there is insufficient resources to engage in innovation to an extent that would be necessary to make such protection beneficial[13].

This potentially explains the shift in China’s attitudes towards the enforcement of IP rights as they have advanced from a less developed country to a developed one. Under the “Made in China 2025” plan, China’s latest economic strategy seeks to pivot the nation away from depending on manufacturing and cheap exports to a service-oriented and consumer-driven market. In particular, it plans to promote technological breakthroughs in ten sectors, including information technology, aerospace equipment, and pharmaceuticals. This requires that its domestic industries invest in research and development, which is unlikely to happen with a lax IP regime.

Furthermore, with China driving global growth in filings for patents, trademarks, and industrial designs[14], there is further incentive to strengthen its IP regime. This would be consistent with how China has used judicial reform to bolster its national and economic policies. As China continues to modernise and inevitably becomes the world’s largest economy, it is likely that firms will increasingly face less difficulty in enforcing their IP rights.

 

Conclusion

While China’s new penalties have been announced in the midst of the US-China trade dispute, it should not be viewed merely as a response to political pressure. Rather, it should be seen as part of China’s slow but gradual shift towards a stronger IP regime as its economy has modernised. It is acknowledged however, that the US-China trade dispute may have accelerated this shift given the desire of both parties to reduce tensions.

It is also unclear if the new penalties introduced would be effective in deterring IP infringement. Only time will tell. But until then, this recent announcement provides reason for optimism that companies and individuals alike will be better able to enforce their IP rights in China.

 

[1] https://news.bloomberglaw.com/ip-law/china-denies-accusations-of-stealing-us-intellectual-property

[2] https://www.bloomberg.com/news/articles/2018-12-04/china-announces-new-punishments-for-intellectual-property-theft

[3] https://www.tandfonline.com/doi/abs/10.2753/CES1097-1475470304?journalCode=mces20

[4] https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-additional-proposed-section-301-remedies/

[6] https://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c6s2p1_e.htm

[7] https://www.wipo.int/treaties/en/text.jsp?file_id=283854

[8] Strategies for Surviving in China’s Intellectual Property Minefield (2014), Llewyn and Williamson https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=3250&context=sol_research

[9]Ibid

[10]Ibid

[11] D. A. Gregory et al., Introduction to Intellectual Property Law (Washington: BNA Books, 1994).

[12] The North-South Debate Over The Protection Of Intellectual Property , Rafik Bawa https://ojs.library.dal.ca/djls/article/viewFile/5562/5007

[13] Ibid

[14] https://www.wipo.int/pressroom/en/articles/2018/article_0012.html

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