People's Republic Of China Implementation Of The 1995 Intellectual Property Rights Agreement--1996

Chines Implementation of the 1995 Enforcement Agreement June 17, 1996

U.S. discussions with the Chinese over the last two weeks in Beijing have confirmed that the Chinese have taken actions as follows:

CD Factories

For many Americans, pirate CD factories have become the symbol of China's failure to protect intellectual property rights. USTR has confirmed that China has closed 15 of these factories, including 12 factories in Guangdong. These factories have an estimated production capacity of between 30 - 50 million units a year.

The 1995 Agreement outlines the specific manner in which factories must be closed. We have verified that China has followed these steps in closing the 15 factories, including:

--revoking audiovisual permits and local business licenses;

--seizing and confiscating materials and machinery used to manufacture pirated products, including destruction of the CD molds and liquidation of other equipment;

--investigating and prosecuting those accused of criminal activity in connection with the plants, including at least 70 people in Guangdong Province alone.

In a significant new initiative aimed at the problem of so-called "underground" CD plants, China issued regulatory guidance directing seven enforcement agencies to undertake an intensive search for such factories and close them immediately whenever they are found. These factories are per se illegal. Three of the recent factory closures are underground facilities.

In another major enforcement action, China on June 12 announced a current prohibition on the establishment of any new CD plants, and has prohibited the importation of CD presses for any plants, including action against factories using presses whose importations were not authorized. These steps will help limit the universe and production capacity of potential pirates in China.

Special Enforcement Period

The United States asked China for a second major step -- reinstatement of the "Special Enforcement Period" provided for in the Agreement. A Special Enforcement Period is a focused enforcement effort on regions of rampant piracy. In April, Ambassador Barshefsky was very clear with Chinese officials that the United States did not care what the renewed effort is called, but we needed to see concentrated and sustained action.

When U.S. officials were in Guangdong last week, they learned that Guangdong Provincial authorities have initiated a major enforcement effort. The Guangdong program includes a sustained crack-down on producers, wholesalers, distributors, retailers, transporters, underground factories and laser disc theaters. It also focuses on major cases and on expeditious completion of ongoing criminal investigations into piracy, including severe punishment for infringers.

Our U.S. government officials and U.S. industry officials came away from Guangdong Province impressed with a new sense of commitment to enforcement in Guangdong. Concerted action is also being taken at the national level. On May 23, the Ministry of Public Security announced that it would make IPR crimes a part of a newly announced national "Campaign Against Crime." This effort has added tens of thousands of enforcement officials to the anti-piracy effort, and has established an important national symbol of China's commitment to crack down on piracy.

Effective June 1, China's Ministry of Culture -- with the assistance of Chinese Public Security and other enforcement officials -- initiated a nationwide "Concentrated Enforcement Period." The focus of this effort is wholesale and retail markets, as well as transporters of pirated goods. This enforcement period will be in force at least until August, or as long as piracy remains serious.

China's crack-down has gone beyond factories. In addition to the factory closures, for example, Chinese officials have shut down six notorious CD distribution markets in Guangdong, including the largest -- the Yifa Market.

In another important step, over 5,000 so-called "laser disc showing rooms" have been shut. These mini-theaters have been a major source of infringement activity.

Border Enforcement

The third area in which the United States asked China for improved enforcement of the 1995 Agreement is border enforcement. The export of pirated IPR products has seriously hurt U.S. industries in third-country markets. And the import of unlicensed manufacturing equipment has contributed to the problem of underground factories.

In particular, the U.S. asked China to focus on exports of major cargo shipments and the import of the presses used to manufacture CDs. This is an area in which China Customs has not been active in the past.

Chinese Customs officials have scored several important successes in the area of large scale seizures, including the seizure of 20,000 pirate CDs and VCDs at Beijing Airport; 19,000 VCDs seized by Guangdong Customs officials; and a joint Guangdong/Hong Kong Enforcement Action seizing 16,000 CDs on the Guangdong/Hona Kong border. Since the beginning of 1996, China Customs has seized 80,000 pirated CDs, VCDs and LDs. These are only initial efforts by Chinese Customs. They are significant, and we expect more as Customs gains expertise in this area. Chinese Customs officials also have undertaken a special effort against the import of illegal CD presses. On June 12, China issued a directive that forbids the importation of equipment used in CD production lines -- unless expressly approved. Equipment without required documentation is subject to immediate seizure.

The international aspect of the problem of CD presses is an issue of which we are aware. In Washington last week, Ambassador Barshefsky called in the Ambassadors from Germany, Switzerland, the Netherlands and Sweden to discuss their cooperation in preventing the shipment of presses in violation of Chinese law.

As part of a continuing border enforcement effort, China Customs will be cooperating with its regional and international counterparts, including Hong Kong Customs and U.S. Customs.

Market Access

The final area of U.S. focus has been market access for legitimate US audiovisual and computer software products and companies. As was expected, this issue has been the single most difficult one to address. That said, we made significant progress this week in securing new opportunities in China for American IPR industries --including computer software, sound recordings and motion pictures.

A key goal of our record companies was to enter into cooperative relationships with Chinese publishing houses to sign artists, produce them and ultimately -- through those publishing houses -- to sell, produce display and perform. These are new opportunities created by the past week's work.

A key goal of our film companies is the right to the unlimited import of films on a revenue sharing basis. In addition, U.S. film companies will be able to enter into projects with Chinese companies to coproduce motion pictures and -- for TV -- dramas, plays and motion pictures. This creates new market opportunities for these companies. The Chinese Government will also no longer maintain quotas on the import of motion pictures.

On software, the Chinese have reaffirmed that public and private sector entities will use only legitimate software. As a commercial matter, entities from both the United States and China have been invited to discuss legitimate purchases at the Joint Commission on Commerce and Trade hosted by Secretary Kantor this summer with Minister Wu Yi.

Monitoring and Verification

The actions described here are important indicators of China's willingness to live up to the terms of the 1995 IPR Agreement. Over the long term, however, the real test of the Agreement lies in the strength of the underlying system the Agreement establishes. Over the past weeks and months, we have focused considerable attention on the monitoring and verification systems that make the IPR protection system effective over time. China will undertake a major effort to improve the functioning of several aspects of the Agreement, including SID codes, title verification and inspections.

One of the key aspects of our verification system is to ensure that CD factories and Chinese publishing houses must demonstrate that the titles that they wish to produce are properly licensed. The Chinese will correct flaws in the current title verification system and have guaranteed that the validity of the license for each foreign title brought to any CD factory or publishing house will be checked with the appropriate U.S. trade association before production can begin. Strictly applied, this system -- which our industries use in many other countries of the world -- will prevent piracy at its source.

SID codes are the "signatures" that identify which CD press produced a particular CD. At a glance, they allow an inspector to determine what factory manufactured a given CD. As you might imagine, pirates don't use them -- making any CD without an SID code an obvious infringing good. Thus, a working SID system is a key foundation of China's IPR enforcement system.

In another key action, the PPA recently issued a new "Notice on Implementing SID Codes." Under this notice, any CD sold on the market without an SID code will be deemed per se illegal and subject to immediate seizure. This is an important, practical step that will greatly facilitate enforcement of the Agreement.

China has also acted to station inspectors in all CD factories during all shifts, 24 hours a day. The inspectors will be responsible for checking title verification and the presence of SID codes on molds, ensuring that there are not off-hours, illegal runs of pirated CDs and other illegal activities.The inspectors will also keep audits of CD press runs and ensure that the factories keep accurate records. Inspectors are assigned for three month periods by Copyright and Press and Publications Bureaus and act as an in-house enforcement arm of the Chinese Government.

Conclusion

The 1995 IPR Agreement has resulted in fundamental change in China in the area of IPR enforcement. Three years ago, intellectual property enforcement was an abstract concept. Last year, our IPR Agreement established the parameters of an enforcement system. Since April, China's actions have animated this system through concrete, tangible actions.

As I said earlier, China's system of IPR enforcement must become self-sustaining. We're not there yet. But the actions taken thus far are an important beginning. With this or any trade agreement, the ultimate test is implementation. China has begun to demonstrate its vigilance through the actions of the past two months. For our part, the United States will continue aggressively to work with China, monitor the situation, and ensure that our economic interests are protected. American jobs depend on it.