LEGISLATIVE UPDATE:

President Trump and Chinese President Xi both face tremendous pressure to decrease counterfeits and intellectual property rights (IPR) violations in China in order to protect U.S. companies and continue foreign investment in China. The U.S. Chamber of Commerce found that 72 percent of counterfeits seized by U.S., Japanese, and EU customs officials originated in China between 2010-2014.

This year, both Presidents have publically issued policy statements committing to cracking down on counterfeits and IPR fraud. While it would appear that both leaders are cooperating on this issue, President Trump increased the pressure on China in August by issuing an Executive Memorandum directing the U.S. Trade Representative to “consider all available options” of enforcement and inquiry into Chinese IPR violations and forced technology transfers. Depending on the option selected, some have speculated that it could lead to curtailed trading relations between the two countries. We investigate how these U.S. and Chinese policies may be implemented, and its impact on brands.

China’s Policy Statements

In late July, President Xi called for greater enforcement of IPR violations and harsher punishment in China, stating, “wrongdoing should be punished more severely so that IP infringers will pay a heavy price.” His comments were made at the National Financial Work Conference which sets national policy for financial and regulatory reforms. His focus on this issue signals a changing approach in the Chinese government and will likely lead to policy changes such as greater compensation for damages related to IPR violations, and a strengthening of the IP court system (currently there are courts in Beijing, Guangzhou, and Shanghai and tribunals in Chendu, Suzhou, Wuhan, and Nanjing). The Chinese government understands that as it continues to grow and position the nation as an innovator (in addition to a manufacturer) patent protections and stronger IPR are paramount for national growth. This has positive ripple effects for brands both manufacturing in and selling to the Chinese market.

The U.S. Policy Perspective

The Trump administration’s more protectionist view towards international trade means that foreign IPR violations and counterfeits have been taken very seriously and are viewed as attacks against American products and businesses. This year, the bilateral goods trade deficit with China totaled $170.7 billion from January through June, compared to $161.0 billion in the first half of 2016.

Section 301 Investigation

When signing August’s Executive Memorandum, Trump told U.S. Trade Representative Robert Lighthizer, “you are empowered to consider all available options at your disposal. We will safeguard the copyrights, patents, trademarks, trade secrets and other intellectual property that is so vital to our security and to our prosperity.” Lighthizer is now reviewing options; the most likely mechanism to address IPR violations in China would be conducting a Section 301 investigation of Chinese industrial policies requiring U.S. companies to share technology in order to do business in the Chinese market. These “forced technology transfers” and potential IPR violations hurt U.S. companies and there has been bi-partisan support for an inquiry. Circumventing the World Trade Organization’s dispute settlement system, Section 301 authority has not been used in recent years, though Lighthizer has experience using it in the 1980s against Japan.

If initiated, the Section 301 investigation would last six months to a year and focus on issues including market access, patent protections, and cybersecurity. At the end of the investigation, the U.S. could enter into negotiations with China on improvement measures and otherwise threaten unilateral sanctions against China. A Section 301 probe would send a strong signal to China, though some fear a retaliation from the Chinese should onerous sanctions be imposed.

Conclusion

China is at a crossroads when it comes to IPR and enforcement measures against counterfeits. But will China’s national push towards stricter enforcement and harsher punishments towards violators be enough for the Trump administration? As U.S. policy and rhetoric against counterfeiters overseas ramps up, it appears that China and the United States could be on a collision course over these issues unless an agreement is reached before an official investigation is launched.