It finally happened. After years of hints and threats the US has taken its dispute with China over its record of enforcing IP rights to the WTO.

In fact the US has brought two cases; the first over what officials described as deficiencies in China's legal regime for protecting and enforcing copyrights and trade marks, and the second over China's alleged barriers to trade in books, music, videos and films.

Susan Schwab, the US Trade Representative, said in a statement on April 10 that "while the United States and China have been able to work cooperatively and pragmatically on a range of IPR issues...we have not been able to agree on several important changes to China's legal regime that are required by China's WTO commitments".

The case was filed on the same day. China and the US now have 60 days in which to hold consultations. If no progress is made, the US can refer the matter to a WTO dispute settlement panel. The three-person panel usually takes six to nine months to issue a decision, which can then be appealed.

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Looking for allies

Some of China's biggest trading partners have been taking their time in deciding whether to take part in to the WTO action. In the week the case was filed Viviane Reding, the EU Information Society and Media Commissioner, told journalists in Beijing that the EU was pursuing IP issues with the Chinese on a bilateral basis and "will follow the WTO proceedings as observers, but will not formally join them".

But one week later EU trade commissioner Peter Mandelson told a press conference: "I do not rule out initiating or joining action at the WTO if, in our view, China is failing to takes its responsibilities seriously." While some argue the EU is playing an astute game of good cop to the US's bad cop to encourage China to make IP concessions, right now it seems to be more of a confused cop.

Australia has joined the US as a third party in previous WTO disputes (see figure 2) and is still deciding whether to join the latest trade row and in what capacity. While in Beijing for the second high-level economic cooperation dialogue, trade minister Warren Truss said there was "a possibility" that Australia might join the dispute.

Japan and Switzerland both joined an earlier US effort to force China to provide details of its attempts to enforce IP laws (see timeline). Japan announced on April 21 that it would be joining the consultation as an observer. As MIP went to press, Switzerland had yet to decide.

Japan undoubtedly delayed its response because it was hosting a rare visit from the Chinese prime minister in the week the US launched its IP offensive. But an official from the Japanese Ministry of Trade and Industry told MIP that the government also wanted to ask business leaders whether a judicial interpretation issued by the Supreme Court and the Supreme People's Procuratorate on April 4 would satisfy their demands for action.

The judicial interpretation revises the rules for criminal enforcement (see box), which should make it easier for the authorities to charge counterfeiters with criminal offences.

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Repeated complaints

Since China joined the WTO the US has complained that the thresholds necessary for trade mark counterfeiting and copyright piracy to be considered criminal offences are too low.

Article 61 of TRIPs states that criminal procedures and penalties should be applied "in cases of wilful trade mark counterfeiting or copyright piracy on a commercial scale". The US argues that Chinese counterfeiters are careful to keep below the thresholds, where they are only subject to administrative penalties such as fines. This creates a safe harbour for IP infringement, they argue.

The US complaint also suggests that China's rules for disposing of infringing goods seized by Customs breach its obligations under TRIPs. Article 46 of the Agreement states that "the simple removal of the trade mark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce".

China hits back

Although China has now addressed this issue (see box below) its action was not enough to win over the USTR. US officials instead went on to request WTO intervention. China's response was predictably hostile. Wang Xinpei, a spokesman for the Ministry of Commerce, said the complaint would "seriously undermine the cooperative relations the two nations have established in the field and will adversely affect bilateral economic and trade ties". Tian Lipu, commissioner of SIPO said: "It is not a sensible nor a rational move for the US government to file such a complaint [with the WTO]."

Chinese officials have since made efforts to demonstrate that the government is successfully fighting fakes. On April 6 officials revealed a national action plan on IPR protection for 2007. In it, the government promises to accelerate the revision of the trade mark law and to "study on the improvement of the copyright law". It also promises "to harness criminalization tools to achieve better punitive and deterrent effects," but gives no detail about how this will be achieved.

State media reported in the week before the complaint that China will now allow foreigners involved in legal challenges to attend IP trials as part of efforts to improve transparency.

And on April 14, China's official news agency Xinhua said that officials had destroyed 30 million pirated digital DVDs, VCDs, CDs and pieces of software as part of a campaign to raise awareness of IP issues in preparation for World Intellectual Property Day.

Mixed response

Reaction among IP practitioners to the US move has been mixed. Luke Minford, head of Rouse & Co's Beijing office, told MIP that it was "a positive step for us and for our clients". He argues that the USTR's decision to take the matter to the WTO shows that the US is looking at a multilateral solution to the problem of IP enforcement in China, rather than relying on the bilateral Special 301 Report.

But Zhengfa Wang, a partner of China Patent Agent (HK) in Beijing, said that "China is trying very hard to strengthen enforcement," and pointed out that counterfeiting is a global problem that does not only affect China. And Horace Lam, a partner of Lovells in Beijing, stressed the improvements he has seen since he began working in China five years ago.

Inevitably, there are many who suggest that domestic political concerns prompted the Republican administration to act. The US trade deficit with China reached a high of $232.5 billion in 2006. The Democrat-dominated Congress believes China is inflating this deficit by not playing fairly by trade rules and wants the government to take a tougher line.

Democrat Senator Charles Schumer, who said of the WTO case "late is better than never" and Republican Senator Lindsey Graham are sponsoring a bill that threatens China with sanctions if it does not revalue its currency. US Treasury Secretary Henry Paulson's next US-China strategic economic dialogue is scheduled for May this year. There will be lots to discuss.

None of the China-watchers with whom MIP spoke believed the dispute would be resolved during the 60-day consultation period. China is taking the US's action seriously and can be expected to mount a spirited defence if and when the case goes to a panel. But it is difficult to believe that US would have initiated a WTO action if it thought it would fail. The parties will now be engaged in a high-stakes game of bluff. If neither country backs down and the case goes to a WTO panel, the trade body's dispute resolution process looks set to be tested as never before.

WTO TRIPs cases

This is not the first WTO case to deal with the way in which countries enforce IP rights under the TRIPs Agreement. Figure 1 shows how earlier TRIPs enforcement cases were dealt with, and Figure 2 shows three of the most recent TRIPs disputes at the WTO.