By: Garth Mashmann

At the request of the U.S. Senate Committee on Finance, the United States International Trade Commission (USITC) has recently issued the first report in a two-part series addressing the effects of intellectual property rights (IPR) infringement and indigenous innovation policies in China on U.S. jobs and the U.S. economy. While the initial report provides a framework for the USITC’s analysis, the second report, expected in May 2011, will attempt to quantify the effect of IPR infringement in China on the U.S. economy.

Growth in China’s position in the global economy has spurred significant interest in IPR enforcement issues. Over the past 10 years China’s economy has grown by approximately 10% per year, and the value of US direct investment in China rose from $9.4 billion in 1999 to $49 billion in 2009. China is now the second-largest U.S. trading partner, after Canada.

Although the Chinese intellectual property system, in theory, does not differ drastically from the United States, IP procurement and enforcement practices can be very different, with ineffective enforcement of IPR laws noted as a serious problem in China. Reasons cited in the report include lack of coordination among government agencies, insufficient enforcement resources, local protectionism, lack of judicial independence, and ineffective penalties to deter repeat offenders.

Copyright infringement, in both physical and digital goods, is widespread in China. Piracy is often the only way to acquire certain materials due to government bans and limitations on video games, music and movies. The low per capita GDP limits the amount of income that can be disposed of on entertainment also contributes to rampant infringement. Internet activity, in particular, has made copyright infringement ubiquitous and difficult to control in China. Many users access the internet and violate copyrights only through internet cafes, making it difficult to track and monitor their activities.

Trademark counterfeiting is also noted as one of the most serious problems facing U.S companies doing business in China. The USITC report indicates that 79% of all trademark-infringing seized customs packages originate in China. Low-cost imitations from Chinese counterfeiters result in lost sales and revenue, tarnished brand reputation, and high enforcement costs for legitimate brand owners. Counterfeiting was identified as a particularly acute problem for smaller companies with less experience and funding available for IPR enforcement.

In the patent realm, there is considerable debate about whether there is a bias in favor of Chinese applicants during the patent examination process and in enforcement actions in Chinese courts. A majority of invention patents, design patents and utility models are owned by Chinese companies. Utility models, a type of protection not available under US law, are sometimes acquired by Chinese companies and subsequently enforced against the original owner of the invention patents, the equivalent of utility patents in US law. It is necessary to acquire patent rights early in China, as it is easy for competitors to usurp inadequately protected rights, and U.S. applicants with Chinese partners may have certain advantages in the acquisition and enforcement of rights.

Despite the well known challenges in IPR enforcement, it is impossible to ignore China as a market and as a source of competition. The Chinese government has set ambitious goals for development, with several of the goals are tied to intellectual property, typically patent rights. In addition the Chinese government is aggressively supporting state owned entities that are investing in intellectual property rights. Tax incentives and other benefits are granted to Chinese companies that are particularly active in the acquisition and protection of rights.

The USITC report is available at