Hong Kong: Special 301 - Agreement With China Plus USTR Report For 1996 - China, Hong Kong

Last Updated: 15 July 1996
On June 17 1996, a trade war between the USA and China was averted by the signing of an accord setting out the actions taken by China since the signing of last year's Memorandum of Understanding on the Enforcement of IPRs (February 1995), and promising further enhanced activity against infringers, including:

  • a nationwide Concentrated Enforcement Period to last until the end of August `96 and to be extended to the end of `96 "if piracy remains serious".
  • continued attention to the clean up of CD factories, including regular inspection of CD factories by state inspectors and a prohibition on importation of CD presses without approval from the relevant authorities.
  • clarification and prompt implementation of the title verification system promised by the Feb `95 MOU.
  • increased ex officio activities by Customs to seize IPR infringing goods, and further co-operation with Customs bodies in the US and Hong Kong (where cross-border piracy is a concern).

The accord also details proposals for freeing up the market in China for US audio-visual products, including the approval on a case-by-case basis of joint venture production projects with Chinese companies, licensing arrangements with Chinese entities for domestic exploitation of US film libraries and the lifting of quotas and reduction of tariffs on audio-visual products.

Initial reports suggest that enforcement is being stepped up in China. Ironically, this has affected US IPR holders whose genuine imported products are being detained by PRC Customs acting ex-officio, pursuant to the accord and to Customs Regulations on IPR Enforcement published in October 1995, which require importers to declare the IPR status of their products. Those shipping computer or audio-visual product to the PRC should therefore give particular attention to providing certification for the genuiness of their product with each shipment.

The signing of the Accord followed from the USTR Special 301 Report published at the end of April 1996 by the US Trade Representative Office in Washington DC. This named China as a Priority Foreign Country. It also put Hong Kong on a Special Mention List, along with Taiwaan and Vietnam (in Asia) and recommended Hong Kong for an `out of cycle review' to maintain pressure for improved IPR protection.

Other countries in Asia mentioned in the report included India, Indonesia, Japan and Korea (Priority Watch List) and Australia, Philippines, Singapore and Thailand (Watch List).

The consequence of appearing on the various Watch Lists is to receive increased `bilateral scrutiny' from the USA, except for China which, as a Priority Foreign Country became automatically subject to a Special 301 Action. Normally, this involves a Special 301 investigation initiated after 30 days, with a six-month timetable extendable by up to three months. However, because of the special circumstances for China, which averted a trade war with the US in February 1995 by signing a Memorandum of Understanding for improved enforcement of IPRs, the US in May 1996 announced a list of retaliatory tariffs aimed at textiles and apparel articles, electronic goods such as telephones, fax machines and TVs, and consumer products including sporting goods, bicycles and jewellery, currently worth US$3 billion in exports from China. These were intended to have particular effect on Chinese industries in Southern China, where the US perceives most IPR infringements are taking place.

The tariffs wereto come into effect on 17 June if China had not by then agreed to further action including four specified matters:

  • clamping down on pirate CD factories
  • concentrating enforcement on offenders in Guangdong province
  • cutting the flow of pirate goods to Hong Kong and other overseas markets
  • opening China markets to US audio visual and software products.

The Chinese authorities announced that if these US sanctions were implemented, China would itself retaliate by imposing tariffs on specified products including cars, telecommunication equipment and farm products, potentially affecting US/Sino trade to an even greater extent.

China also defended its record on IPR protection, saying that more than 300,000 officials currently inspect factories and distribution centres each day, with millions of private CDs, CD Roms and software packages already seized and destroyed since the 1995 MOU was signed. The empowerment of Customs pursuant to the MOU has also led to in excess of 1,000 seizures during 1995 of IPR infringing exports or imports. 20 provinces in China now have special IPR courts to handle cases, and each province has a single designated `task force contact' to which complaints from rights holders can be directed. Each CD plant is required to encode unique serial numbers onto their pressing moulds and is monitored by state supervisors; a copyright verification scheme launched in 1995 also requires these factories to obtain letters of authorisation from copyright proprietors before producing any master CD. (Various of these statements were re-iterated in the June 17 Accord.)

In a further initiative launched on 1 April 1996, China set up a state-backed IPR training centre in Beijing to educate investigators, lawyers and judges on IPR matters.

It is undeniable that rapid progress has been made by China over a relatively short period to implement IPR laws giving, in theory at least, to equivalent protection to that required by the WTO TRIPS accord - not least so as to ease China's entry to the WTO, which it still seeks. Awareness of the importance of IPRs at the domestic level within Chinese businesses is also rising, with increased numbers of court cases brought by local companies, which is in turn motivating the Chinese authorities to do more. However, China's size and demographics, combined with administrative and legal systems still developing from the post-Cultural Revolution era, mean that the central Chinese authorities cannot guarantee consistent and equitable nationwide enforcement for IPRs.

Some observers see the dispute with the US as giving Beijing a valuable opportunity to crack down on renegade local provinces where there is protectionism of local interests. As others have observed, the US position suggests on the one hand a desire to see a more uniform rule of law applied to IPR protection in China but at the same time a disbelief that more cannot be done under the current administrative or `rule of man' based system to stamp out blatant infringing activities.

To put the dispute in perspective, it is worth noting that:

  • The US has renewed Most Favoured Nation State for China, thus making it clear that it wishes any trade war over IPRs to be limited in scope.

With other countries on the Watch Lists, the US is now using the WTO dispute resolution mechanisms to resolve IPR disputes (eg. bringing a copyright case before the WTO in February 1996 concerning Japan's lack of protection for pre-1971 works) rather than using the bilateral Special 301 procedures.

Other countries on the USTR Special 301 lists include the European Community, Israel and South Africa - countries generally considered to afford comprehensive laws and legal mechanisms for the protection of IPRs.

Hong Kong's listing surprised many, as it has traditionally been held up as an exemptary territory among Asian nations for its tough laws to protect IPRs. The USTR report takes exception, however, to the way blatant flouting of these laws is taking place in street markets and other notorious shipping locations (eg. Temple Street market for fashion brand names and the Golden Arcade for computer software) which have been named in Hong Kong guide books for many years.

The problem for Hong Kong is that blatant piracy requires special measures to combat it, such as John Doe orders to prevent anonymous street venders from selling and running, powers to close down premises which are used repeatedly for infringing activities but by ever changing individuals, and so on. However, Implementing such measures is not easy at a time when Hong Kong is about to be handed over to China and its people are therefore particularly sensitive about retaining British style safeguards for individual liberties under its own separate legal system (guaranteed by the Chinese until at least 2047).

To illustrate this, take the Intellectual Property (World Trade Organization Amendments) Ordinance 1996, gazetted just before the USTR Report came out and now being brought into force in Hong Kong by stages. One of its new provisions introduces a criminal offence, making persons who participate in acts outside Hong Kong, but with the intention of bringing copyright infringing goods into Hong Kong, criminally liable as though the acts were committed in Hong Kong. This provision created controversy when debated in the Legislative Counsel (Hong Kong's parliament) - understandably enough, when Hong Kong has been criticising China for detaining Hong Kong businessmen without trial for acts allegedly done in Hong Kong but which constitute crimes in China - and for which the penalties run to execution by firing squard. It is a measure of the Hong Kong Government's commitment to the problem of cross-border enforcement that, notwithstanding such concerns, it pushed through this new offence - and a further measure of its commitment that within days the new offence had been relied on to arrest persons in Hong Kong co-ordinating shipments of copyright infringing product from China into Hong Kong. Whether such displays of commitment will be sufficient to satisfy the USTRs is, of course, another matter.

FURTHER INFORMATION on the above may be obtained via Linklaters & Paines Hong Kong office or via any of the other nine Linklaters & Paines offices world-wide, located in Singapore, Tokyo, London, Brussels, Paris, Frankfurt, New York, Washington D.C. and Moscow. Contact details for the various L&P offices worldwide are available via the Linklaters & Paines corporate listing c/o Business Monitor Online - http://www.businessmonitor.co.hk

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