China is one step closer to being hit with a WTO complaint after the US moved the country nearer the top of its blacklist of intellectual property-infringing countries.
The Office of the US Trade Representative (USTR) issued its annual Special 301 report at the end of April, naming and shaming countries it says have failed to protect IP belonging to US companies and individuals.
The USTR also released the findings of an out-of-cycle review of China's progress on IP enforcement, announcing that it was elevating the country to the Priority Watch List because of serious concerns about its compliance with international commitments under the TRIPs Agreement.
"[China has failed] to effectively protect intellectual property rights and to meet its commitment to significantly reduce infringement levels, despite efforts by China's senior leadership to do so," said acting US Trade Representative Peter Allgeier. "China must take action to address rampant piracy and counterfeiting, including increasing the number of criminal IP rights cases and further opening its market to legitimate copyright and other goods."
The USTR says that the US government seized $134 million-worth of counterfeits imported into the country from China in 2004, and that Chinese-made fakes make up over two-thirds of the counterfeits that it confiscates.
More worrying for officials in Beijing was the US government's threat to initiate a complaint at the WTO if China does not improve its record.
"The USTR will work with US industry and other stakeholders with an eye toward utilizing WTO procedures to bring China into compliance with its TRIPs obligations," the report said.
The US says it will also invoke transparency provisions in the TRIPs Agreement to obtain detailed information that illustrate aspects of IP enforcement that affect US rights under the Agreement. It is demanding to see statistics on the criminal and administrative penalties that the Chinese authorities actually impose on infringers.
"Statistics provided by China's central government list numbers of cases, but [they] often lack specificity on the legal basis for those cases and other important details," the report said. "We look forward to China's complete response."
If the US is to bring a complaint to the WTO accusing China of failing to meet its obligations under TRIPs to provide an effective deterrent to IP infringement, it is vital that it has detailed data about China's enforcement record. In its report, the USTR urged US rights holder groups to step up their own efforts to monitor IP enforcement, a move that one Hong Kong lawyer said could be crucial if the US is to get the information it needs to make a complaint. "The US won't want to bring a case that it doesn't think it will win, and the EU and Japan will be even less willing to do that," he said.
China will also be under pressure from the US to demonstrate progress on a series of specific points. The USTR says China must prosecute more IP infringers, speed up marketing approvals of genuine goods and demonstrate a "significant" decline in the exports of fakes, all of which will be central to the 2005 round of the US-China Joint Commission on Commerce and Trade. At last year's meeting, China's so-called IP Tsar, vice-premier Wu Yi, made a number of IP-related promises, including pledging that China would publish its long-awaited judicial interpretation on criminal thresholds by the end of the year. The interpretation was issued on December 21 2004.
The USTR designated China as a Priority Foreign Country in 1994, a title reserved for the worst IP offenders that carries with it the risk of trade sanctions. Since then, the US has monitored China's IP record closely under Section 306 of the Trade Act, a special provision for supervising the IP law progress of former Priority Foreign Countries.
Meanwhile, the USTR decided not to relieve Ukraine of its Priority Foreign Country tag. The decision means that Ukraine, the only country to remain on the US government's worst-IP offender list, is still subject to $75 million in trade sanctions that the US imposed in 2002.
