The trade talks between the United States and China broke down on Friday with no agreement. As a result, tariffs were raised to 25% and future U.S. tariffs on additional Chinese products are extremely likely. The Chinese side responded with retaliatory tariffs on a host of U.S. products. The parties will continue to negotiate, but there is no clear path to an agreement.
One of the core disputes centers on Chinese theft of U.S. intellectual property. It is reported that the talks broke down because of U.S. demands that the agreement contain enforcement provisions that would require the Chinese side to implement any agreement on IP protection. The U.S. required a) that Chinese laws be changed to implement the commitments and that b) an enforcement mechanism be established that would allow the U.S. to directly penalize China for inadequate implementation of the agreed IP protections. The Chinese side refused on both counts and the talks broke down.
Though the talks with China have broken down, the Chinese side fully understands that IP protection remains a key issue in its relations with all countries. It is not an issue restricted to just the United States. This can be seen by President Xi Jinping’s comments in his April 26 opening remarks at the recently concluded Belt and Road Forum. In those remarks, President Xi commented forcefully on China’s intention to protect intellectual property of all countries:
[W]e will intensify efforts to enhance international cooperation in intellectual property protection. Without innovation, there will be no progress. Full intellectual property protection will not only ensure the lawful rights and interests of Chinese and foreign companies; it is also crucial to promoting China’s innovation-driven and quality development. China will spare no effort to foster a business environment that respects the value of knowledge. We will fully improve the legal framework for protecting intellectual property, step up law enforcement, enhance protection of the lawful rights and interests of foreign intellectual property owners, stop forced technology transfer, improve protection of trade secrets, and crack down hard on violations of intellectual property in accordance with law. China will strengthen cooperation with other countries in intellectual property protection, create an enabling environment for innovation and promote technological exchanges and cooperation with other countries on the basis of market principles and the rule of law.
Go here for the complete text of President Xi’s talk.
President Xi’s remarks were made before an audience that did not include anyone from the United States. President Xi made these remarks to his Belt and Road supporters. It is therefore clear that the Chinese government sees IP protection as an issue of general concern to all countries that deal with China.
On April 27, the day after President Xi’s speech, a group of Chinese IP protection agencies announced a new “Strike Hard” program, titled Sword Net 2019. This program has been initiated by four Chinese government agencies: China’s National Intellectual Property Administration, the Cyberspace Administration of China, China’s Ministry of Industry and Information Technology and China’s Ministry of Public Security. This Sword Net program is set to run from April to October 2019.
The Sword Net program is focused on copyright infringement in China, an area that has been a major problem for China for decades. The Sword Net program will focus on the following three areas of copyright infringement that currently infect Chin’s Internet and social media (WeChat):
1. Plagiarizing media outlet news stories, usually by direct translation into Chinese.
2. Filming movies in cinemas and selling pirated videos.
3. Illegally selling photographs by online picture agencies.
These commitments on IP generally and on copyright specifically come from the very top levels of the Chinese government. Is this not sufficient to show that the PRC government is serious about dealing with its pervasive IP infringement/theft issue?
The answer is NO. Since the mid-1990s, it has become a ritual for the Chinese authorities to announce some sort of “strike hard” campaign (usually with a cool name) focused on wiping out copyright infringement. In the 1990s, the issue was DVDs. In the early 2000s, the issue was luxury goods. This latest program is focused on online infringement.
But none of these cool-sounding campaigns have had any real impact and China remains the most significant infringer of copyright in the world and pretty much any film or musical piece or book or photograph or just about any other sort of content can be downloaded in China without restriction or cost. In the market for textbooks and other educational materials, China is a major infringer. It is a rare Chinese college student who purchases a authorized copy of a textbook. Other educational materials are freely available on the Internet. Both India and China has been identified as the major infringers in the education market, but internal research by our own clients indicates the level of infringement in China is at least twice as high as in India.
What this means is that after 20 years of “strike hard” programs and promises from the PRC central government, hardly anyone with China experience believes China when it acts all serious about cracking down on IP infringement. And certainly it should come as no surprise to anyone (including especially the Chinese government) that the U.S. authorities seeking to negotiate a trade agreement with China would be willing to rely on a bare commitment from the Chinese side that it will “take care of it.” The U.S. trade negotiators are justifiably seeking IP protection commitments from China that are based on statute, that include a strong enforcement mechanism, and that are verifiable by the United States. The Chinese side has said “just trust us” but there is no basis for that sort of trust. It is this entirely justified lack of trust that is the source of the trade war and the source of the break down in talks. And this is not just coming from the United States either. Our own clients from Europe, Australia, Canada and Latin America have all expressed their hopes to us that the United States “hang tough” on this so that they too can benefit.
Since both China and the United States seem fixed in their positions on intellectual property, it does not appear there will be a short term resolution to the IP theft issues. Without a resolution on that key issue, a quick resolution of the 301 agreement discussions is not plausible. As we stated the day before President Trump issued his Tweet imposing new tariffs against Chinese products, winter is coming. I suggest you get prepared.