<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:24934.wais]
S. Hrg. 109-587
ENSURING PROTECTION OF AMERICAN
INTELLECTUAL PROPERTY RIGHTS FOR
AMERICAN INDUSTRIES IN CHINA
=======================================================================
HEARING
before the
FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
INFORMATION, AND INTERNATIONAL
SECURITY SUBCOMMITTEE
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
NOVEMBER 21, 2005
__________
FIELD HEARING IN BEVERLY HILLS, CALIFORNIA
__________
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
SECURITY SUBCOMMITTEE
TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia
Katy French, Staff Director
Sheila Murphy, Minority Staff Director
John Kilvington, Minority Deputy Staff Director
Liz Scranton, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coburn............................................... 1
WITNESSES
Monday, November 21, 2005
Hon. Dan Glickman, Chairman and CEO, Motion Picture Association
of America, Inc. (MPAA)........................................ 20
Gary Burr, Nashville Songwriter, on behalf of himself and the
Recording Industry Association of America (RIAA)............... 24
Jack Sabo, Vice President, Market Data Services, New York Board
of Trade (NYBOT)............................................... 26
Loren E. Hillberg, Executive Vice President, General Counsel, on
behalf of the Macrovision Corporation.......................... 28
Timothy Minor, Vice President of Government Relations, Cummins-
allison Corporation............................................ 30
Ted C. Fishman, Author, ``China, Inc., and How the Rise of the
Next Superpower Challenges America and the World''............. 33
Patrick A. Mulloy, Commissioner, U.S.-China Economic and Security
Review Commission.............................................. 36
Alphabetical List of Witnesses
Burr, Gary:
Testimony.................................................... 24
Prepared statement........................................... 61
Fishman, Ted C.:
Testimony.................................................... 33
Prepared statement........................................... 93
Glickman, Hon. Dan:
Testimony.................................................... 20
Prepared statement........................................... 53
Hillberg, Loren E.:
Testimony.................................................... 28
Prepared statement........................................... 69
Minor, Timothy:
Testimony.................................................... 30
Prepared statement by William J. Jones with attachments...... 80
Mulloy, Commissioner Patrick A.:
Testimony.................................................... 36
Prepared statement with attachments.......................... 100
Sabo, Jack:
Testimony.................................................... 26
Prepared statement........................................... 67
APPENDIX
Article from China Financial Times............................... 89
Article from The Korean Times.................................... 92
Article from USA Today........................................... 111
Articles from The Wall Street Journal............................ 113
ENSURING PROTECTION OF AMERICAN
INTELLECTUAL PROPERTY RIGHTS FOR
AMERICAN INDUSTRIES IN CHINA
----------
MONDAY, NOVEMBER 21, 2005
U.S. Senate,
Subcommittee on Federal Financial Management,
Government Information, and International Security,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., at
the John H. Mitchell Theater, The Museum of Television and
Radio, 465 North Beverly Drive, Beverly Hills, California, Hon.
Tom Coburn, Chairman of the Subcommittee, presiding.
Present: Senator Coburn.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. The Subcommittee on Federal Financial
Management, Government Information, and International Security
will come to order.
Thank you, each and every one of you, for being here.
Today's Subcommittee field hearing will focus on the
massive piracy of American intellectual property that persists
in China.
This is an official act of the Subcommittee on Homeland
Security, and as such, your testimony, both will be made a part
of the record, as well as it being recorded.
The important thing is the information--what you have to
say is gathered and made available to Congress. And so the
purpose of having this hearing at this time is because how
large this issue is in terms of how it confronts us both in
terms of intellectual property, but also in terms of security,
also in terms of the future of our country, also in terms of
job loss versus job creation that has come about because of it.
This is a field hearing as a follow-up to a previous
hearing held by this Subcommittee this past June where the
Subcommittee took a snapshot of the direction of the World
Trade Organization (WTO) where we asked the question about how
U.S. economic interests were being served and sovereignty
protected.
One of the key findings at our hearing was the severity of
the intellectual property vandalism occurring in China against
American entrepreneurs, innovators, artists, and consumers.
That is why we wanted to take the next logical step and
zoom in on the issues specifically, and what better location
than here in the great State of California where major
industries affected by intellectual piracy are located.
Today we will hear firsthand accounts of companies and
representatives of various sectors who are experiencing
intellectual property theft in China.
One of the reasons why I like to hold hearings outside of
Washington is that sometimes the hearings are filled with a lot
of dry government language. When something is as close to the
pocketbooks of every American as today's topic is, it is
important that we do not obfuscate that with inside-the-beltway
jargon, and real language is used.
Robbery from employers and industries, as represented here
today, should resonate in the ears of American people because
ultimately it is their money. Money spent on high prices for
goods and services, jobs lost to foreign competitors, and lower
profit margins for employers and everyday investors in these
companies whose nest eggs do not grow as they should.
The point cannot be emphasized enough that American jobs
are at risk once China steals our American intellectual
properties by copied American goods. The U.S. Congress
estimates that counterfeit trade in China is worth from $19
billion to $80 billion a year in terms of loss for us.
When you apply the general rule of thumb that $1 billion in
economic activity equals 12,000 to 14,000 jobs, that means we
are talking anywhere from 240,000 to a million jobs a year that
are being impacted, opportunities for Americans to earn,
opportunities for the income and taxes off of that earnings,
opportunities to create a future.
The dictionary defines intellectual property as product of
the intellect that has commercial value, including copyrighted
product and property such as literary or artistic works,
ideation of property such as patents, applications, origins,
business methods, and industrial processes.
Taking the intellectual property of every American citizen
is the cornerstone of America's innovation and the success of
our Nation's economy.
American citizens must know that when they invest and
dedicate their energy, resources, and creativity providing the
product that has the potential to better and benefit our
quality of life, their intellectual property rights (IPR) will
be protected by our Nation's laws.
And as our Nation engages with other nations in trade
relations, it is the job of those of us in Washington to assure
that our international commercial partners abide by and protect
America's wallet on intellectual and property rights.
The founding fathers rightly identified property rights as
one of the fundamental rights upon which economic and cultural
life of a Nation must be based.
As Madison stated, the rights of persons and the rights of
properties are the objects for the protection of which the
government was instituted.
For some time now the U.S. Government and its citizens have
engaged with the struggle to stop China from stealing the
intellectual property of American citizens.
As the U.S. Chamber of Commerce stated in Congressional
testimony before the House Judiciary Committee in May of this
year, intellectual property rights violations in China now
severely affect virtually all industries, from consumer and
industrial goods, including medicines, autos, auto parts, food,
beverages, cosmetics, to copyright works.
As a result, on April 29, 2005, U.S. Trade Representative
Nance, said that he had placed China on a special 301 Priority
Watch List because of its failure to significantly improve
intellectual property rights protection.
And last month the Administration took an even stronger
step forward when U.S. Government filed, through the WTO, an
official request, Article 63, to have China explain in writing
what changes it is making in its legal system to fix the
problem of intellectual property rights theft, and also to
inform the United States of how many cases of IPR theft have
been filed by U.S. companies in China.
China has until January of this next year to provide this
information which could be helpful to the United States in
building a case against China and the WTO.
I have some doubts whether the WTO is strong enough to
carry out the enforcement mechanism necessary to protect
American rights.
Various American companies have recorded over and over the
struggles they are facing to have the Chinese government to
take proper legal action to protect their intellectual property
rights.
A great example is the manufacturing company Zippo that
produces lighters. I do not know if you've heard of this, but
it was reported by Assistant Secretary of Commerce William Lash
in his press conference on April 14.
It was discovered during the raid in China that 40,000
Zippo lighters had been counterfeited; however, because they
valued these lighters at 0.5, 1.2 remedy or 1, 6 to 15 cents a
piece, the case fell under the criminal threshold.
Here's a company that has guaranteed for life its product
that is made here in the United States. It is a high-quality
product. They will repair it for the life of the product, and
all of a sudden they find themselves flooded with products that
do not work, that do not meet the standards, that have that
name embossed on the bottom, with the trademark, an absolute
complete copy, but yet the fine and the value of it fell below
the threshold, so there is no consequences to copying.
So, therefore, the Administration is to be commended for
taking a step forward at WTO on such actions, but we have to do
more.
This problem is not going to go away. The U.S. trade
deficit with China has grown significantly in recent years due
largely to a surge of U.S. imports to Chinese goods relative to
U.S. exports of China. That deficit rose from $30 billion in
1994 to $162 billion in 2004 and estimated to exceed $200
billion this year.
As my good friend Ambassador Rob Portman, U.S. trade
representative, stated in his confirmation testimony, part of
that deficit is because the Chinese do not play by the rules.
China is now the sixth largest market for U.S. exports and
America's third largest retail trading partner overall. The
U.S. trade deficit with China is now larger than that of any
other trading partner.
U.S.T.R. testified before Congress this past May that U.S.
companies report billions of dollars in lost revenue,
irreparable harm to the brands of future sales, all of which
will ultimately affect U.S. workers to design and produce
legitimate products forced to compete against the Chinese
fakes.
In 2002 the value of Chinese counterfeits seized before
entering the U.S. markets rose from $194 million to $234
million.
And U.S. Customs and border protection estimates that
counterfeit merchandise worldwide is responsible for the loss
of at least 750,000 American jobs.
The bottom line is American leaders in Washington need to
get serious about how to handle this problem and take the
necessary steps to put an end to it. America's jobs are at
stake, and America's economy is at stake and is very
vulnerable. So what do we do?
We talked about the WTO in terms of China joining it and
their obligations associated with it. They agreed to fully
comply with the related aspects of intellectual property
rights, agreement obligations known as the TRIPS obligations,
but China has not kept its word in doing that.
The Administration has filed a request to require
information back from China on what it is doing to fix the
problem. It will be incumbent upon the Administration to make
sure China meets that deadline in 90 days and provide the
required information in January when it is due.
There is a great question to ask. It is what do we do if
China does not meet the deadline? What should be the
Administration's position?
The Administration is going to have to make a decision
based on the information it receives about whether or not to
let the clock run. And the time has come for the United States
to file against the Chinese government with the WTO.
When we debated the decision to grant China permanent most-
favored Nation status, a prestigious designation, it means we
trust you as a good faith trading partner. Some argued it was
asking for trouble to get into a financial bed with a communist
government that does not recognize individual rights.
Individual rights are what property rights are based on.
They also, of course, are what human rights are based on.
And we all know China's deplorable record on that front.
To my mind, it should come as no surprise that the
communist Chinese regime has violated Americans' rights given
that it does not even recognize its own citizens' rights.
[The prepared statement of Senator Coburn follows:]
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Senator Coburn. I want to thank our distinguished guests
and witnesses for being here. I know many of you took time out
of a busy schedule to do this. This is an important topic that
the Congress has to face. We serve a function to be both a
sounding board, but also an accountability board, to the
Administration in carrying out the laws and treaties of this
country and making sure we are protecting the future of this
country.
I would like to introduce our witnesses and ask them to
testify. Each of your full written testimony will be made a
part of the record. And if you could summarize that in 5 to 7
minutes, and then we will spend some time with questions.
I would love to have some bantering going back and forth
between the panelists as well as some questions so that we
could actually develop this up into what needs to be done, how
it needs to be done, when it needs to be done, and what the
consequences are.
Our first witness is the Hon. Dan Glickman, who serves as
chairman/CEO of the Motion Picture Association.
As chairman and chief executive officer of the Motion
Picture Association of America, Mr. Glickman represents the
interests of the U.S. film and entertainment industry before
the U.S. Government, as well as being the U.S. movie industry's
emissary to foreign capitals and foreign moviemakers.
MPAA's members are Metro-Goldwyn-Mayer Studios, NBC/
Universal, Paramount, Sony, Walt Disney, Twentieth Century Fox,
and Warner Entertainment.
MPAA members all employ hundreds of thousands of U.S.
workers, entertain millions across the globe, and unique among
U.S. industries, generate a positive trade balance in virtually
every country in the world.
Dan Glickman came to the Motion Picture Association of
America following a long career of public service. Before
taking on leadership of MPAA, Congressman Glickman led the
Institute of Politics at Harvard University's J.F.K. School of
Government.
He served with distinguished distinction in President
Clinton's Cabinet as Secretary of the Department of
Agriculture. And prior to this, he served 18 years in the U.S.
House of Representatives.
Mr. Glickman, we welcome you, and the floor is yours.
TESTIMONY OF THE HON. DAN GLICKMAN,\1\ CHAIRMAN AND CEO, MOTION
PICTURE ASSOCIATION OF AMERICA (MPAA)
Mr. Glickman. Thank you, Senator, very much.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Glickman appears in the Appendix
on page 53.
---------------------------------------------------------------------------
This is a very important hearing, I believe, to call
attention to the Chinese authorities that you consider the
theft of U.S. intellectual property to be a high priority.
The President is just coming back from China where I
believe he raised the issue. Governor Schwarzenegger is just
coming back where he's raised the issue. I think this hearing
is extremely important.
Unless the Chinese government exercises the political will
to address the rampant theft of U.S. intellectual property
rights (IPR), all the tools that we have--effective
enforcement, private sector initiatives, adequate laws--do not
mean very much. This hearing keeps IPR high on the U.S./China
agenda, demonstrating in an important forum to the Chinese
government the priority that you place on this.
First of all, in some sense the movie industry is the
poster boy for this problem. You see that almost everybody who
goes to China holds up that DVD they have bought on the
streets.
The problem is shared by all the industries represented
here and many others, in many respects, we are kind of the
physical manifestation of this problem.
The source of the problem is twofold: First, China imposes
strict limits on the number of foreign films that can be
exhibited in its theaters on a revenue-sharing basis and
applies burdensome regulations and confiscatory taxes on
foreign home video and television content. This creates a
market vacuum that pirates are only too happy to fill.
Second, China has not asserted the political will necessary
to reduce the level of piracy.
Yes, it has conducted some raids and even put a few pirates
in jail, but it has not materially reduced the level of piracy
and the ready availability of pirated products in the shops and
in the streets.
Regrettably, to coin a phrase, if you did not see a
counterfeit DVD, you were not in China. Unfortunately, I fear
our collective perception of China has become so ingrained with
the notion that China is overflowing with pirate DVDs, we
frequently fail to appreciate the magnitude of the problem.
The problem is ubiquitous--on virtually every street
corner, packed to the shelves in audiovisual shops in every
neighborhood. We estimate the piracy rate exceeds 90 percent,
that is, over 90 percent of the DVDs sold in China are fake.
More than nine of every ten DVDs in the Chinese market is a
fake, stolen product.
Too many see this as an American problem. Well, we do bear
the disproportionate share of the burden, because of the scale
and size of the American movie industry. But, movie piracy in
China affects filmmakers all over the world, and it is
beginning to affect Chinese filmmakers as well.
It is clearly more than an American problem, and what we
have to do is to convince the Chinese filmmakers, as well, that
they have a stake in this issue.
As we dig deeper into this problem, particularly the global
spread of China-sourced pirated material, we are coming to a
disturbing conclusion: There is a growing link between piracy
of motion pictures and organized crime.
Our Asia-Pacific Regional Office just completed a new study
on these connections.
With your permission, Mr. Chairman, I have included a copy
of that study in my statement. I think it will be helpful for
you as you build the record, but let me cite a couple of
findings.
Criminal theft of IPR dwarfs criminal revenues from
narcotics trade: U.S. Government and international law
enforcement records peg the illegal narcotics trade at $322
billion last year; criminal revenues from all IPR theft were
significantly higher, $512 billion.
Part of the allure for organized crime to move into DVD
piracy is the incredible profit margins, much higher than they
are for drugs. The markup of pirated DVDs made in Asia and sold
in Europe, for example, averages an astounding 1150 percent,
three times the markup of heroin that is sourced in Asia and
sold on the same street corners. And the criminal risk, as you
pointed out, is far lower.
The report cites two recent cases linked back to China with
tentacles around the world, including into the United States.
In September of this year, a Federal grand jury in New York
indicted 39 individuals tied to a syndicate based in New York,
but funneled much of its $1 million per year in earnings back
to China.
And an American was arrested in this case for leading this
particular syndicate. When he was arrested, the Chinese
authorities seized more than 210,000 DVDs in his possession.
I think it goes without saying that many of these revenues
finance other illegal activities in which these criminal
organizations are involved. This is not just an American
problem. It is not just a motion picture problem. It is now
underwriting activities that threaten all walks of life.
Our industry employs about 1 million American men and women
directly and indirectly at all job levels. There seems to be a
view, a myth, that buying a stolen DVD only means that a movie
star earns a few dollars less on that movie.
Let me be clear. The notion is just a myth. Every dollar
the pirate earns is one less dollar going to an American
worker, a worker employed in an industry that is one of the few
in this country bringing much more money back to the United
States in export earnings than it sends overseas.
Chinese piracy of U.S. pictures also hits some of us
personally. I was in China last May. I strolled the
neighborhood across from my hotel and looked in one of the
audiovisual stores. I admit I was not surprised to see all the
DVDs that were there. Most of them were pirated. But one caught
my eye. It was called ``The Hitchhiker's Guide to the Galaxy.''
At the time the movie was not available on DVD in the
United States, so I knew it was a fake, taking the money out of
a U.S. filmmaker's pocket. And that filmmaker is my son. He is
a producer, and that was his most recent film.
I relayed the story to him, and he replied: ``And what,
Dad, Mr. Chairman of the MPAA, are you going to do about this
as well?''
MPAA invests millions of dollars each year in fighting
piracy. As I previously indicated, piracy in China is indeed a
China problem, but it is also a problem with a global reach. A
pirated disk made in China can, in a day or two, be on the
streets in Los Angeles.
Someone can illegally camcord a movie in Moscow, send the
file by way of the Internet to someone in Guangzhou, who then
dubs and subtitles the Russian dialogue and then presses
thousands of DVDs.
We fully appreciate the global reach of this problem, and
we have aggressively pursued a strategy to stop the illegal
camcording of movies, which is still the largest source of
pirated product.
We are very appreciative of the action Congress took to
make illegal camcording a federal crime, and that the President
signed the bill earlier this year.
We seek to track the production of optical disks to make
sure the plants are not making illegal discs. We are on the
ground in China. Our representatives survey the market for
information about the incidence of piracy, and in some cases
this helps the Chinese authorities formulate raids on these
sellers and distributors.
We are also participating in training sessions for Chinese
authorities and jurists on IPR laws and enforcement, something
that we hope can produce some benefit as well.
My statement talks to some of the other things that we have
done with respect to a memorandum of understanding recently,
but I wanted to give you some results of that.
On October 25, we met with Chinese officials to review the
results of a memorandum of understanding with the MPAA and
various Chinese departments regarding market piracy.
For our part we surveyed a small selection of shops in four
cities: Beijing, Shanghai, Guangzhou, and Shenzhen. The surveys
were by no means intended to provide a comprehensive assessment
of any piracy, but what they showed is the following:
In Shanghai our survey showed that of the films covered
under the agreement, under the MOU, no pirate versions were
available at all, at the time the shops were surveyed. A
positive trend. I do not know how long it will last, but at
least at the time we surveyed, it was positive.
In Guangzhou the availability of pirated versions of the
identified titles was down quite sharply from September, when
almost all titles were available.
In Shenzhen, availability of pirated titles fell 50 percent
from September.
And in Beijing, in August, with the exception of one shop
that carried only 50 percent of the protected titles, pirated
versions of the films still ran from 70 to 90 percent.
So this MOU is an attempt to try to get the Chinese to
involve themselves on some enforcement. There have been a
limited number of successes, but, by and large, we are very
disappointed with the results.
Senator Coburn. Can you summarize for us?
Mr. Glickman. OK. In any event, let me just mention a final
thing in terms of how you can help.
Having surveyed the scope of the problem, I would say the
following:
First, help make sure our government has the resources it
needs. Not only do we need tough laws in the United States,
such as the recent package from the Attorney General, we need
people to enforce the laws, inspect imports, train foreign
officials in IPR, and enforce international trade agreements.
Some of this is going to take money, realizing the problems
with the Federal budget deficit, but we've got to have
enforcement authorities overseas.
Second of all, why do we run a piracy problem at all? One
of the reasons is because of these burdensome restrictions we
have on doing business in China.
We have a positive balance of payment surplus with every
single country in the world that we sell movies to except one,
and that one is China.
The good news is that our movies made in China in 2004
doubled the amount they made in 2003. The sobering news is that
the amount was only $10 million. One American movie on an
opening weekend makes more, as we saw from this last weekend,
where we had successful operations.
In recent years, in fact, two Chinese movies, ``Kung Fu
Hustle'' and ``House of Flying Daggers,'' made more in the
United States than all the U.S. movies made in China for the
years they were released, and, ironically, both were
distributed in the United States by our member companies here
at MPAA.
So these market barriers are critically important, and
they're one of the reasons why we have so much piracy in China.
At the same time, you can buy any movie in China that you
want, including movies that were not allowed into the Chinese
legally.
So I would just finally say that what we need in this
country is to continue our efforts to try to get the Chinese to
enforce; the political will to move ahead if, in fact, they do
not comply with the agreements; and to keep the pressure on.
When the Chinese want to stop piracy, they can be
enormously effective. They do not need 20 more years'
experience with IPR. They have the resources, they have the
basic statutes, and they can make the changes needed to improve
them. They need the political will to protect our goods as
effectively as they are protecting the Olympic logo.
Thank you very much, Mr. Chairman.
Senator Coburn. Thank you.
Next we will hear from Nashville songwriter Gary Burr, who
represents the Recording Industry Association of America.
No stranger to the Nashville scene, Mr. Burr has penned
numerous hit songs for an impressive roster or country artists,
including Wynonna, Collin Raye, Doug Stone, Patty Loveless, and
The Oak Ridge Boys.
Gary Burr has been awarded ``Songwriter of the Year'' on
three separate occasions by three separate organizations:
Billboard, Nashville Songwriters Association International, and
ASCAP. He has also received over 20 ASCAP recognition awards
for radio play activity and CDs featuring his songs that have
sold more than 50 million units worldwide.
We welcome your statement, Mr. Burr. Please summarize, if
you would, and your full statement will be made part of the
record.
TESTIMONY OF GARY BURR,\1\ NASHVILLE SONGWRITER, RECORDING
INDUSTRY ASSOCIATION OF AMERICA (RIAA)
Mr. Burr. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Burr appears in the Appendix on
page 61.
---------------------------------------------------------------------------
The last several years have been tough ones for my
industry. The piracy of our music, physical, amd online--has
been the major reason for this.
In rough terms, the combination of growing global physical
piracy, easy Internet piracy, illegal CD-burning--it has made
us go down by 20 percent. There has been a 20 percent decline
in our industry sales since 1999.
The impact of the revenue crash has been profound in human
and creative terms. There are hundreds of large and small
record companies in the United States which contribute to
America's culture, cultural diversity, and our Nation's
economic welfare that have been severely affected.
Successive rounds of job losses have occurred in the
American record companies--the small and large ones. There have
been additional losses with closing of thousands of retail
stores.
Yet the creative cost is even more troubling. Artist
rosters have been slashed dramatically. Piracy robs the
industry of the capital it needs to invest, and the result is
fewer artists finding the financial support they need to put
food on their table.
American recordings are sold all over the world because--
I'm biased, but American music is the best.
And the sales of this benefit everyone in the industry, and
they add significantly to our Nation's trade balance and to our
national welfare. And our Nation's welfare is reduced and our
composers, artists, and all the employees of record companies,
small and large, suffer when foreign governments permit our
recordings to be pirated in their countries.
When it comes to ripping off American sound recordings,
China is one of the worst. The magnitude of record piracy there
eclipses any other country. This has been a point of conflict
between our countries for years.
I understand that China has taken steps to improve its laws
against copyright piracy. But China runs a few raids and it
seizes lots of products, yet the problem remains as bad as
ever.
Mass quantities of pirated Chinese CDs are found all over
China, and all over the world, in large part because realistic,
meaningful penalties are never imposed by the Chinese
government on the pirate producers.
The challenge for us as Americans is to get China to impose
penalties on large-scale pirating and to truly discourage such
piracy. Unless and until they do, not much is likely to change.
Our own government is pressing China hard on this--that
isn't the problem--But China isn't responding. I think we need
to use all the tools available to get this problem solved.
I have no idea--I'm a songwriter. I have no idea what those
tools are, but if the tools are out there, we really need to
use them.
I also want to say a word about Russia, which is fast
becoming the next China when it comes to the blatant piracy of
our products.
Sound recording pirates in Russia are producing far more
sound recordings than are needed for legitimate demand and
exploiting them all over the world, ruining our industry's
market inside and outside Russia. In addition, Russia is
tolerating one of the world's worst online music pirates, an
entity named ``allofmp3.com.'' Nice name.
But we have a unique opportunity with Russia. They hope to
join the World Trade Organization. And the U.S. Government
should not agree to this until Russia effectively addresses
these problems. I urge Congress to insist on this.
The U.S. Government must press China and Russia harder to
strengthen their antipiracy enforcement regimes. The current
systems in these countries do not work. Unless the United
States uses each and every option available to it, we will
continue to face the same situation we do today for the
foreseeable future: Overwhelmingly pirate markets and lost
opportunities for legitimate U.S. companies.
Thank you, Mr. Chairman.
Senator Coburn. Thank you, Mr. Burr.
Next I would like to introduce Jack Sabo. He serves as vice
president of Market Data at the New York Board of Trade. As
vice president of Market Data Services, he is responsible for
Market Data revenue at the New York Board of Trade. The
function entails technology, finance, education, antipiracy,
and marketing.
The New York Board of Trade is New York's original futures
exchange where the world trades futures in coffee, sugar,
cocoa, orange juice, cotton, and certain financial products.
He currently serves on the board of the Software and
Information Industry Association, is on the executive council
of that board, the Financial Information Services Division,
where he's cochairman of the Governance Advisory Committee and
Chairman of the Redistribution Advisory Committee.
We welcome your statement, Mr. Sabo.
TESTIMONY OF JACK SABO,\1\ VICE PRESIDENT, MARKET DATA, NEW
YORK BOARD OF TRADE
Mr. Sabo. Thank you, Chairman Coburn. Good morning,
everybody.
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\1\ The prepared statement of Mr. Sabo appears in the Appendix on
page 67.
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Chairman Coburn, I appreciate the opportunity to appear
before you today to discuss the challenges faced by the U.S.
financial community and, in particular, the New York Board of
Trade. This problem is due to piracy of realtime market data in
China.
While the issue of piracy in China is often dominated by
high-profile industries, such as motion pictures, recording,
and software and publishing, Chinese piracy also affects the
financial industry by robbing exchanges of fees from the sales
of market data and by robbing customers from licensed market
data vendors, such as Bloomberg, e-Signal, Reuters, and others.
Revenue from market data can be as much as 25 percent of
total exchange revenues. This market data that is provided by
our derivative exchanges is vital information used by the
global financial industry.
It includes brokerage houses, banks, fund managers,
farmers, brokers of cotton, coffee, sugar, cattle, corn, orange
juice, and many more.
As Senator Coburn mentioned, New York Board of Trade,
commonly referred to as NYBOT, is an old part of the financial
community.
In its pits on the trading floor, traders scream, yell,
wave their hands, and jostle one another all for one reason: To
get the best possible price for their customers.
Like many businesses, NYBOT has gone through some tough
times. On September 11 its facility at 4 World Trade Center was
destroyed and some of our people were killed.
At the time it appeared that our entire business, our
entire franchise was destroyed, but, fortunately, we are in the
risk management business, and as a result of the 1993 bombing
of the World Trade Center, we had built a backup trading
facility.
No one could have anticipated how much we would need it. We
worked out of that limited facility for 2 years.
Now we have returned to lower Manhattan in an expanded
state-of-the-art facility with 13,000 square feet packed with
screaming traders.
I do not know if any of you have ever visited NYBOT's
trading floor, but if you have not, please call me sometime and
come visit. It is a unique experience, and you will love it.
More than 2 years ago, we discovered a Chinese firm very
well known in Beijing that was offering realtime market data of
the world's derivative exchanges on their Web site. To test it,
we subscribed. The subscription for all those exchanges should
have cost somewhere around $10,000 per month. We paid $600 for
an entire year.
This firm is not a licensed vendor and, to my knowledge,
does not remit any revenue to exchanges, certainly none to
NYBOT.
If something like this were to happen in the United States
or even in Europe, we would know how to stop it immediately.
However, we had no clue how to proceed in China.
Now, we are members of the Software & Information Industry
Association called SIIA, so we gave them a call and asked them
to help. On our behalf, SIIA tried to contact the chairman of
the offending firm and asked that the company cease and desist
from their infringing activities. To date, there has been no
response from the firm, and still any individual from anywhere
in the world can today still subscribe at well below market
rates.
Even as we have pursued and continue to pursue our own
efforts to stop this piracy, we have appreciated the
willingness of the U.S. Government to hear our concerns and
work with us to put this on their agenda.
NYBOT is especially appreciative that Commissioner Sharon
Brown-Hruska of the Commodity Futures Trading Commission has
helped her government colleagues to understand the importance
of the market data industry to our economy and explain some of
the technical issues surrounding our operations.
With SIIA we have had constructive meetings with the Office
of the U.S. Trade Representative who understands the issues and
is working with us to raise them with their Chinese
counterparts.
Right now the Web site is only in Chinese, but the
company's chairman and CEO, ironically, got his graduate degree
here in the United States, and we are very concerned that the
Web site will soon be translated into English. If that happens
I believe it will cause us to lose even more revenue.
Chairman Coburn, as you and your colleagues in the U.S.
Government work to improve the environment for conducting
business in China, we ask that the challenges facing the market
data industry remain an important part of the agenda.
It is our hope that with your help, sometime in the near
future the Chinese government will take concrete steps to
prevent entities from illegally obtaining and selling U.S.
exchanges' proprietary Market Data.
I greatly appreciate this opportunity to appear before you
today and would be glad to answer any questions you might have
later.
Senator Coburn. Thank you very much, Mr. Sabo.
Next we will hear from Loren Hillberg, who serves as
general counsel for the software company Macrovision. Mr.
Hillberg handles all corporate legal matters for Macrovision.
Prior to joining this company, Mr. Hillberg served as vice
president and general counsel of Macromedia. And prior to that,
Mr. Hillberg served as vice president and general counsel for
Micro Focus Group U.K., a U.K.-based provider of enterprise
software tools.
Mr. Hillberg, thank you very much. Your entire statement
has been made a part of the record, and if you would summarize
that in 5 minutes, I appreciate that.
TESTIMONY OF LOREN HILLBERG,\1\ GENERAL COUNSEL, MACROVISION
CORPORATION
Mr. Hillberg. Thank you, Chairman, Mr. Coburn.
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\1\ The prepared statement of Mr. Hillberg appears in the Appendix
on page 69.
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I appreciate the opportunity to testify before you today on
very significant piracy problems affecting the U.S. software
and information technologies companies in China.
Macrovision is the world's leading supplier of digital
distribution commerce and consumption solutions for software
and entertainment content. Our media software and network-based
solutions deliver protection and enablement capabilities to the
home video, PC games, music, cable satellite, consumer
software, and enterprise software industries.
Macrovision has delivered, installed, and managed software
on over 500 million desktops. It serves all 1,000 of the
Fortune 1000 companies and has enabled over 10 billion units of
packaged media, 5 billion DVDs, a half billion CDs, and 300
million online games.
Macrovision is also a member of the Software & Information
Industry Association.
Macrovision holds a total of 220 issued or pending United
States patents and 1,200 issued or pending international
patents and continues to increase its patent portfolio with new
and innovative technologies in related fields.
In addition, and perhaps more relevant to this hearing, in
China, Macrovision has 35 issued patents and another 25
applications pending. We also have registered or pending
registrations for 10 trademarks and numerous copyrights.
As a company, we have been active in our efforts to
preserve our intellectual property rights in China.
Unfortunately, while the Chinese government has established
portions of an infrastructure for intellectual property
protection, they have not so far provided a critical element of
that infrastructure: A clear and reliable enforcement process.
In order for the software industry to effectively protect
and invest in China, this notable failure must be rectified.
The proliferation of computers, internal computer networks,
and the Internet has made illegal reproduction and distribution
of protected material much easier to accomplish and more
difficult for software companies to police.
Macrovision, as a software provider that protects the
copyrights of media companies, is uniquely negatively impacted
by the lack of the Chinese enforcement efforts. Our ability to
provide effective solutions to our customers depends both on
our technology and the ability to police the misuse of our
technology in the marketplace.
The Chinese government is to be applauded for its efforts
to join the world community respecting intellectual property
over the past 10 years. Unfortunately, they have fallen down
with respect to the most important aspect of such protection,
and that is enforcement.
There have been initial efforts to address the piracy of
intellectual property. Unfortunately, the appropriation of
intellectual property in China has occurred on such a massive
scale that these small initial steps are simply not sufficient
to address the impacted international businesses.
Core technologies across the array of the information and
communications industries have been copied in China without
impunity.
Further, notwithstanding the commitment of China's leaders
to require all governmental branches and agencies to use
legally licensed software, the lack of compliance even within
the government sector continues to be significant.
Closely related to these troubling intellectual property
policies is the regulatory framework emerging around the
development of tactical standards requiring the use of
intellectual property in China standards and competition
policies. These are commercial terms under which U.S. companies
are unwilling to play.
What needs to be done?
The framework for success has a foundation. The outcomes of
the Joint Commission on Commerce and Trade announced in July
2005 offer real opportunities for improvement, but only if the
Chinese government plays the important role that it must.
A few of the important commitments intended to address U.S.
concerns with respect to intellectual property include
increasing criminal prosecution, reducing the exports of
infringing goods, improving national police coordination,
enhancing coordination across all law enforcement authorities,
ensuring the use of legal software in the state-owned sector,
and fighting software and end-user piracy.
What further steps are required?
The first and most important is a significant increase in
enforcement resources. This year the Ministry of Public
Security in China has increased somewhat its enforcement, but
much more needs to be done to move intellectual property into
the realm of law enforcement rather than leaving it solely
within the purview of administrative agencies.
Legal authorities are now better armed with guidance that
enables them to prosecute more cases of intellectual property
infringement. Now the cases need to be pursued. In a country
where in a single year more than 150 million pirated DVDs are
confiscated, 52,000 trademark violations are prosecuted, an
average of less than 600 arrests is simply inadequate.
Another area of importance is anti-circumvention
legislation. A critical element enabling the U.S. content
profession are the circumvention provisions of the DMCA, the
Digital Millennium Copyright Act.
Through the TRIPS process, China has agreed to implement
similar legislation in this area. Until these laws are fully in
place and provide a meaningful enforcement avenue for rights
holders, piracy will remain a rampant problem.
In summary, China has made great strides over many years.
Nonetheless, for an effective intellectual property protection
system to exist, the most important aspects of the system are
the need to allow the enablement to actually enforce the rights
that are protected by the system. China needs to do much more
to meet these obligations.
Thank you, Senator.
Senator Coburn. Thank you.
Next we will hear from Timothy Minor, who serves as vice
president of government relations for Cummins-Allison
Corporation.
Mr. Minor was gracious enough to fill in for the chief
executive officer at Cummins-Allison, Bill Jones, who at the
last minute had to cancel his plans here.
Cummins-Allison Corporation is an office equipment and
security products manufacturer and currency protector founded
in Chicago in 1887. The founding families were prominent
families from Iowa and Indiana respectively at the turn of the
century.
B.F. Cummins, the first president of Cummins-Allison, grew
up in the State of Iowa. B.F. Cummins' eldest brother, Albert
Baird Cummins, served as governor of Iowa from 1902 to 1908,
elected to the U.S. Senate, and served as Senator from 1908 to
1926.
Senator Cummins served as president pro tem of the Senate
during the 66th through the 69th Congress. Albert B. Cummins
was a member of the progressive wing of the Republican Party
and thus was closely aligned with Theodore Roosevelt regarding
the legislation reform of the railroads and other powerful
trusts and business interests.
Mr. Minor, welcome. Thank you for filling in for Mr. Jones.
And your entire statement--his entire statement has been made a
part of the record.
And if you would summarize.
TESTIMONY OF TIMOTHY MINOR,\1\ VICE PRESIDENT OF GOVERNMENT
RELATIONS, CUMMINS-ALLISON CORPORATION
Mr. Minor. Thank you, Mr. Chairman. Good morning, fellow
members of the panel, other attendees here today. My name is
Tim Minor. I'm vice president of government relations for the
Cummins-Allison Corporation, which is a privately held
manufacturing company headquartered in the Chicago area.
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\1\ The prepared statement of Mr. Jones submitted by Mr. Minor with
attachments appears in the Appendix on page 80.
---------------------------------------------------------------------------
Originally William Jones, chairman and my boss at Cummins-
Allison, was invited and was scheduled to participate in this
hearing. It is quite ironic that a patent infringement suit
against one of our Japanese competitors is finally coming to
trial and forced him to remain in Chicago today.
Mr. Chairman, Mr. Jones asked that I extend his apologies
to you. He very much wanted to be here and participate in the
hearing, commends you for addressing these critical issues
associated with the theft of intellectual property.
We thank you for the invitation to participate in this
important hearing on the protection of intellectual property of
American industries. Your work is crucial to the identification
and implementation of meaningful--and I highlight
``meaningful''--solutions to the expensive and debilitating
problems associated with intellectual property theft by foreign
governments and businesses.
Cummins-Allison was founded in 1887 by the Cummins and
Allison families. Today Cummins-Allison is the last American-
owned manufacturer of currency-processing equipment.
Our products scan, sort, denominate, and authenticate U.S.
currency as well as many foreign currencies.
Cummins' currency-processing products are utilized by
banks, retailers, governments, armored carriers, and casinos.
The high-speed processing and counterfeit detection
capabilities of our products help to protect the integrity of
the dollar as a world reserve currency. This is critical to our
Nation's economy and security.
The theft and utilization of America's intellectual
property by foreign manufacturers and nations is only one
component of an ineffective American trade policy. The U.S.
trade deficit with China will likely top $200 billion this
year, a clear indication that our policies are not working.
Beijing manipulates its currency to gain commercial value
without consequence. Its manufacturers dump products into the
United States without retribution.
The export of industrial and innovative capabilities to
China, along with the theft of intellectual property, has done
grievous damage to the U.S. economy.
When U.S. companies lose business to Chinese rivals or need
to cut costs to the bone as their margins shrink, jobs are
displaced, wages fall, taxable income vanishes, vital public
revenue streams decline, and resources for new investment in
research and development diminishes.
As far as Cummins is concerned, unlike our foreign
counterparts, our American Government provides us with no
industry support or protection. The Chinese government, on the
other hand, has declared that currency and currency processing
are matters of national security.
Therefore, even after their entry into the WTO, tariffs of
38 percent to 40 percent continue to be assessed by the Chinese
government on Cummins-Allison products exported to China.
Compounding the problem, Cummins has no practical or
effective means to protect our patents or intellectual property
rights in China. As a result, China's currency-processing
industry can and does copy Cummins technology with impunity.
Another trade barrier and threat to our intellectual
property is a suit called the CCC safety certification, which
was recently implemented by the Chinese government. China
requires foreign manufacturers to apply for and secure CCC
certification for every imported electronic component or
product.
In order to receive a CCC certification, Cummins would have
to agree to let the Chinese government officials annually tour
and inspect our facilities here in the United States and pay
for all of their travel expenses.
In addition, they want full access to the engineering
drawings and the design schematics for our products. They also
require that we ship the finished product, intellectual
property and all, to China for their evaluation.
Clearly, it is not in the best interest of our national
security to provide Chinese government officials with access to
Cummins product design and production especially when these
technologies protect the integrity of U.S. currency and help to
identify sophisticated counterfeit money.
As a result of trade barriers and potential loss of
intellectual property, Cummins has chosen to withdraw from the
Chinese market. Given the high tariffs, the government
intervention, and the new so-called safety requirements, we
have decided it is not practical or profitable for Cummins to
export to China and risk compromising or losing our
intellectual property.
Of course, fewer Cummins product sales resulting from the
abandoned Chinese market translates into fewer research and
development resources and jobs here in the United States.
Senator Coburn. Can you summarize for us?
Mr. Minor. Sure.
For some time we have seen excellent counterfeits of
American currency coming out of North Korea circulating around
China and into South America and the Middle East. One of these
pieces of currency that you're looking at, Mr. Chairman, is
counterfeit; one is not.
Senator Coburn. I can't tell the difference.
r. Minor. It is indeed a national security issue for the
United States when foreign governments collaborate to produce
and circulate excellent counterfeit U.S. currency. America, in
fact, has a serious problem, as was confirmed in the recent
story of ``The Korea Times.''\1\
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\1\ The article from the Korean Times appears in the Appendix on
page 92.
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Currency counterfeiting also creates potential security
risk through the illicit financing of terrorist activities. As
terrorist-funding resources have been eradicated, there is
increased likelihood that terrorists will turn to
counterfeiting as a means to purchase technologies and attain
future objectives.
In short, counterfeiting and theft of intellectual property
are very serious problems which threaten our economy, quality
of life, and national security.
As a last remaining American-owned manufacturer of
currency-processing equipment, Cummins-Allison believes that
the United States lacks a complete, coordinated currency
protection policy, which should be an important component of
our national security.
We encourage Congress and the Executive Branch to develop
and coordinate a substantive U.S. currency protection program
which, in part, recognizes the importance of protecting
America's intellectual property in the currency-processing
industry.
Thank you, Mr. Chairman.
Senator Coburn. Thank you.
I can't tell the difference.
Our next witness is Dr. Ted Fishman. Ted C. Fishman's best-
selling book ``China, Inc., and How the Rise of the Next
Superpower Challenges America and the World,'' has helped
describe for the world the effects of China's momentous change
on the lives and businesses of people everywhere.
In addition to its success in America, the book, translated
and published in 21 languages, is an international bestseller.
In 2006 it will appear in Chinese editions in both The People's
Republic and Taiwan.
Mr. Fishman has testified before Congressional committees
and commissions, and consults on China with a wide range of
government officials, including some of the Nation's most
influential officeholders.
His essays and reports appear in many of the world's most
prominent journals, including The New York Times Magazine,
Harper's, Esquire, U.S.A. Today, GQ, The Times of London, and
others.
Mr. Fishman, welcome. I have read both of your books. I
appreciate you being here. And please try to keep your comments
to 5 minutes.
TESTIMONY OF TED FISHMAN,\1\ ARTHOR, ``CHINA, INC., AND HOW THE
RISE OF THE NEXT SUPERPOWER CHALLENGES AMERICA AND THE WORLD,''
Mr. Fishman. Thank you very much. I'm glad to be here. I'm
so frightened from Mr. Minor's remarks, I do not know if I can
speak. It was really chilling.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Fishman appears in the Appendix
on page 93.
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I'm going to speak off of my testimony. You have my
testimony for the record, but I'm just going to speak based on
what I've heard and some notes I made from reading a news
article last night and today.
As you know, Mr. Chairman, I have a strong conviction that
this is the most important issue facing our trade with China.
And it is one of the most important issues facing the vitality
of the American economy, not only because we lose sales, but
because we lose vitality out of our economy.
And it affects everything up and down the architecture and
contours of our economy, every decision from where a company
invests to how a university student plans his future, whether
he wants to be an engineer and produce world-leading knowledge
products, or whether that kind of enterprise is threatened by
China's theft of our intellectual property.
And it strikes me that California is a particularly
important place for this hearing, not only because it is the
home of the entertainment industry, but it is also the home of
high-tech industries, biotech, software that serves the service
industries, and also the home of the greatest entrepreneurial
boom, one of the greatest entrepreneurial booms in American
history.
As you know, entrepreneurs begin their businesses because
they have a new idea, and they aren't just mom-and-pop ideas.
Sometimes they're world-class ideas. When those ideas are
threatened, entrepreneurship, which is an engine of our
economy, is also threatened.
We have made a bargain in this country which is that we are
willing to shed low-cost manufacturing to other countries, cut
and sews, simple assembly manufacturings, if we can move up the
economic feeding chain into higher-value knowledge goods, but
when those knowledge goods are threatened and when the world's
fastest-growing economy provides no market for those goods
because those goods are--simply migrate there at no cost, then
this bargain that we have made with our own people is not
working.
Instead, we just lose the low-end jobs, and we threaten the
high-end jobs.
It is one thing to talk about the consumer in China as the
beneficiary of a regime that does not police intellectual
piracy--intellectual property, the piracy of intellectual
property.
But I would encourage us all to think about what Mr. Minor
said and maybe even broaden it to the shop floor in the United
States and how China's intellectual property regime threatens
the shop floor of the United States.
If you look at consumer software, consumer entertainment,
they end up in the hands of an end user, but if you look at the
means of production that are pirated inside China, they end up
on shop floors and in factories. And one of the highest costs
for American companies competing in the world market is the
technology cost.
Often we can compete with low-cost labor around the world,
like automating our factories. And we do this by making better
and better investments in better and better technology. And a
technology cost for an American company is often among its
highest cost that it pays, but for a Chinese company, it is
among the lowest cost that it pays because it does not pay
them.
So when you go to an American factory, particularly the
kinds of factories I'm familiar with and Mr. Minor must be
familiar with in the Midwest, you go into a bread and butter
manufacturing company, whether they are forging or injection-
molding or creating any kind of product that goes into the 80
percent of American industry which provides parts for American
industry, you are likely to see a row of CAD/CAM machines, all
other kinds of sophisticated software, other machines on the
shop floor. What you won't see is a lot of people on the shop
floor.
But these machines, these CAD/CAM machines, can cost
$60,000 to $100,000 a year in license fees. It can cost
millions of dollars for a company that is not that big, and yet
these companies must compete with Chinese competitors who pay
nothing for that. We can compete against the low-cost labor,
but we can't compete away the technology costs because American
companies pay full bore for that.
Another issue I wanted to stress in listening to the other
panelists was how are Americans partnered in the piracy that
goes on in China? And why our role as partner in the piracy
also puts us in a unique role as a problem-solver for Chinese
piracy.
One thing we shouldn't overlook is we benefit from the low
cost of Chinese goods. I think it would be very hard to find a
Chinese factory which was not running on pirated software,
reverse-engineered machinery.
Chinese research institutes exist, in essence, to reverse-
engineer the world's leading technology, and yet about one in
six dollars of the Chinese GDP cycles through the United
States. That is the size of our trade deficit with China.
And we benefit from the low cost that comes out of these
factories that use this pirated and reverse-engineered
technology, and yet we do not police the factories.
Often the legitimate goods that arrive on our shores look
legitimate when they get here, but the environment they come
out of is wholly illegitimate.
There is an interesting case that is been covered by the
papers lately about a Chinese-born American businessman who
owes half a billion dollars to a Chinese television company
presumably for not paying the license fees for DVD players.
Well, those DVD players came at steeply cut prices into
America's big-box retailers for Thanksgiving specials, for
Christmas specials. Nobody asked at those retailers, how are
you selling DVD players for $30 when a license fee on a DVD
chip costs about $14?
In a way there is a wink and a nudge that comes from the
American buyer into the Chinese marketplace who bring those
products here, and we have to think about that.
And with due respect to Mr. Glickman, while we complain
about pirated DVDs, we might also raise a flag on the DVD
player market also, which is part of the issue.
It is interesting to look at when the United States
tolerates and does not tolerate piracy. All poor countries are
forced to pirate in some degree. They simply can't afford the
drugs, the entertainment, and the means of production that they
need to bootstrap themselves up. And we have benefited from the
growth of China's economy. But now we are at an inflexion point
where we have to think anew about it and say, how are we
creating these massive competitors?
And one thing I would propose is that we think deeply about
creating an economic incentive about how--why China should stop
piracy rather than a police incentive. And we might think about
how American companies can reach back into the Chinese
workplace, look to see whether the workplace itself is
legitimate, and if it is not, do not allow those goods inside
the country.
Create the kind of certification regime that exists against
child labor, that exists against rain forest lumber, that
exists against environmental degradation. These are effective
enforcement regimes that exist around the world, and it is
something that we can benefit from.
Thank you, Mr. Chairman.
Senator Coburn. Thank you.
Our next witness is Commissioner Patrick Mulloy. He was
reappointed to the U.S.-China Economic and Security Review
Commission on March 25, 2003, by Senate Democratic Leader Tom
Daschle, to a 2-year term expiring on December 31, 2006.
Commissioner Mulloy previously served as a member from
April 1, 2001, to January 7, 2003.
United States-China Economic and Security Review Commission
is a bipartisan commission established by Congress in the year
2000 to investigate, analyze, and provide recommendations to
Congress on the economic and national security implications of
the U.S.-China relationship.
And recently, just 2 weeks ago, it released its 2005 Annual
Report to Congress.
Prior to assuming his current responsibilities,
Commissioner Mulloy was nominated by President Clinton and
confirmed by the U.S. Senate as Assistant Secretary for Market
Access and Compliance in the Department of Commerce's
International Trade Administration where he served from 1998 to
2001.
In that position he directed a trade policy unit for over
200 international trade specialists which focused worldwide on
removing foreign barriers to U.S. exports and on ensuring that
foreign countries comply with trade agreements negotiated with
the United States.
Commissioner Mulloy, welcome. And if you would, limit your
comments to 5 minutes. Your complete testimony will be made a
part of the record.
TESTIMONY OF COMMISSIONER PATRICK MULLOY,\1\ U.S.-CHINA
ECONOMIC AND SECURITY REVIEW COMMISSION
Mr. Mulloy. Thank you, Mr. Chairman, for having this
hearing on this most important issue.
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\1\ The prepared statement of Mr. Mulloy with attachments appears
in the Appendix on page 100.
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I want to just use my time to briefly highlight a few key
points about China's continued violations of the obligations it
assumed when it joined the WTO.
China is enjoying enormous economic benefits from being in
the WTO. The United States permanently gives most-favored
nations tariffs to China. If you do not have most-favored
nations tariffs, goods coming from China would face about a 40
percent tariff coming into our market.
Because they have M.F.N., which we have now locked in place
through their WTO entry, their average tariff coming into the
United States is about 2.5 percent. This does not mean that
U.S. goods going to China have a 2.5 percent tariff. We
bargained too. I think their average tariff on our goods going
to China is about 10.5 percent. So there is a discrepancy. But
that is the agreement that was made when they joined the WTO
and we are living up to it.
But what we did, we wanted them to sign on to the WTO TRIPS
agreement, the Trade Related Intellectual Property Rights
Protection. That was one of the reasons we wanted them in the
WTO.
Prior to them coming into the WTO, we could have used
Section 301 of our trade laws to limit their exports of goods
into our market if they continued to violate their copyrights
and patents of our companies in China.
We gave away that leverage when we got them in the WTO. We
can no longer unilaterally use Section 301 to force them to
live up to their obligations.
Our only option now is to take them into WTO dispute
settlement if we want to stay within the system that we have
signed up to.
So that is an enormous gift that we gave to the Chinese.
Mr. Chairman, you talked about the enormous trade deficit
that we have with China. Let us just look at this.
Last year, 2004, our total trade with China was $231
billion, $197 billion of that was imports coming from China
into this country. We had about $35 billion going off to China.
That is an enormous discrepancy, and this year it is going to
be much larger. Our trade deficit with China is going to be
over $200 billion.
Now, it is not just T-shirts and it is not just tennis
shoes. We are running an increasingly large trade deficit in
advanced technology products as defined by our own Commerce
Department. Last year, 2004, our trade deficit with China in
advanced technology products was $36 billion. This year it will
be over $40 billion, I assure you.
From 1990 to the end of 2005, our total trade deficit with
China is over a trillion dollars. The Chinese now have about
$700 billion of U.S. dollar assets which they can now directly
invest in our Treasury bills as part of their scheme to keep
their currency undervalued, but it also gives them enormous
leverage over American interest rates.
So that is something. If we do not turn this situation
around, we will, as the old Tennessee Ernie Ford song goes, be
another day older and deeper in debt.
Now, what can we do?
Oh, there are two things that you have to think about.
We want to try and get them to enforce intellectual
property protection for our companies doing business in China.
We can't enforce our laws in China. The TRIPS agreement
requires them to put the laws on the books and to enforce them,
including criminal penalties. That is what the TRIPS calls for.
But what we can do, we can police our own borders and our
own market and stop those counterfeit goods from coming into
our market.
Two-thirds of the counterfeit products in the world market
are of Chinese origin.
That means we will have counterfeit medicines coming into
this country, counterfeit parts for automobiles, maybe even,
God forbid, counterfeit parts for airlines. This is an enormous
health and safety hazard to the American people, and this is an
area that we really should beef up tremendously.
Now, you heard the different industries, the entertainment
industry, the software industry. It is not just them, though.
It is our manufacturing firms whose patents is being ripped off
as well.
Now, can the Chinese really enforce these laws? Let me put
into the record, Mr. Chairman, an article that appeared in The
Washington Post on November 4.\1\ The Chinese have this Olympic
logo that they make money from. They enforce those laws. There
is not a lot of pirating of their Olympic logo.
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\1\ The article from The Wall Street Journal appears in the
Appendix on page 112.
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They can do it if they want to do it, but they do not want
to do it. Why? Because there is no economic incentive.
We should give them an economic incentive by, one, keeping
those goods out of our market and, two, bringing a WTO case and
getting the right to put tariffs on selected products from
China. If we win a case, we would then show how much damage
their violations caused, and then we would have a right to put
tariffs on that amount of goods coming from China into our
market.
And we would select which goods we could put the tariff on
to get the most leverage on them. I think it is a no-brainer
that we have to go ahead and bring a WTO case against them.
Now, let me tell you one of the problems with that. USTR
and others, they love this WTO so much that they're afraid that
if they bring a case and do not win it, it will show that the
WTO does not work.
Well, for me, my view is bring the case. If it does not
work, then we have to do something else because we cannot let
this situation continue.
I would just note that today there was a report on
President Bush's and Secretary Rice's visit to China. We have
been after this issue for 15 years negotiating with the Chinese
on WIPR violations. Here's what the U.S.A. Today quotes:
``Secretary Rice, Mr. Hu promised to do more to end piracy
of U.S. movies, music, and other products. Secretary Rice said
the discussion on intellectual property rights was, `much more
detailed, much more specific than previous talks.' ''
I guarantee you, if we do not bring a case and we do not
get some leverage on these guys, people will go over there
another year from now and they will have the same discussion.
Finally, Mr. Chairman, when Mr. Portman, your former
colleague, finally began to use the WTO mechanism and filed
that Article 63 request for information about what their
enforcement activities are, here is the way The Wall Street
Journal reported that, and this is what really makes you
wonder.
``In a move expected to ratchet up tensions with China . .
.''
Why should that ratchet up tensions with China? We are
asking China to live up to agreements that it assumed as part
of its WTO commitment. This is an organization that gives them
enormous benefits, as we just went through, in terms of their
access to our market. We should not let our media and people
who want to keep this situation--many of our companies are
making enormous amounts of money--beginning to make money in
China by making things in China and shipping them back here.
But we can not let them run our policy toward China.
Because if you look at the size of these deficits, you know
what it is doing to our overall economy. Ted Fishman went
through that, what that does, and some of these other folks as
well.
So we have to get very tough and focused on this issue, Mr.
Chairman. And it is not just IPR. It is exchange rates. It is
subsidies. We tried to go into this, Mr. Chairman, in the
report that we recently sent up to the Congress.
I appreciate very much the opportunity to be here with you,
Mr. Chairman. As I said in the report, in my additional views,
we have to rely on the elected representatives of our people to
be more active in our China policy.
In my view, for too long we have subcontracted our China
policy to corporate interest. And they are not necessarily
working in the national interest. They will work for the
interest of that corporation. They are not charged to look out
for the national interest. They are charged to make money for
their shareholders. It is the elected representatives of the
people who have to get into this.
And I worked in an administration, and I know what goes on
in these meetings in the Executive Branch.
You need to have the Congress very active and pushing on
these issues or nothing will get done. Thank you.
Senator Coburn. That is why you are here, Commissioner
Mulloy.
Mr. Mulloy. Thank you.
Senator Coburn. Thanks to each of you.
A couple of thoughts. The situation with intellectual
property is pretty grim. And I heard Mr. Fishman say that--I
think his comment was that the Chinese are forced to pirate.
I take a little bit of issue with that in terms of nobody
is forced to steal. Nobody--that is not the only option that
they have.
As a matter of fact, by their own signatories through the
WTO, they say that they will not steal. And so I do not want to
give them that out. They are not forced to pirate. They can be
good actors.
What I am concerned about more than anything is a couple of
things Mr. Glickman said, is that organized crime seems to be
getting into the intellectual property duplication.
And if anybody has any comments on that, I would love to
hear that, because that portends a much greater problem and a
much more difficult solution if, in fact, that is the driving
force behind it, other than economic advance for a country is
that individual economic advance in terms of organized crime.
The other thing that I am concerned about and I would love
to have the input is what is the response to the Chinese
government, when you all have interacted with them in terms of
you say, well, you are going to do this and you are going to do
this and then you go around the streets and they are better and
then you send somebody a month later and they are right back
where they were. What's the answer to that? And what is the
response?
Are we dealing with somebody that we can deal with, or are
we dealing with somebody that is not--we can not deal with?
The decision for the Congress to make, is if you lie to me
once, that is my problem. If you lie to me twice, then it is
our country's problem, and we can not trust you anymore.
And the TRIPS agreement, the WTO, the most-favored nation
status, we are down that road, but we went down that road on
the basis of knowing that there is a participation by everybody
on both sides of this agreement. And what we have heard today
would seem that there is much less of a participation on the
part of China and others in Asia than there is this country.
And the real concern is the long term. As Commissioner
Mulloy said--if the WTO does not work and as we lose over the
next 10 years our ability to compete worldwide, as we lose our
manufacturing base, and as our intellectual property is
whittled away because we can not protect it, then the creation
of intellectual property is going to go where it can be most
cheaply created.
And all you have to do is look at several U.S. businesses
today--3M is one and many others--where they are moving their
intellectual property development there so that you can develop
it there. And so you start from that basis.
So we undermine our economy both not at the workplace and
small-piece job, but we also undermine our economy
intellectually.
And then the other thing that is concerning me is the
short-term philosophy of many American businesses and our
government, which means we make hay in the short term, but in
the long-term our country is depleted and undermined, and our
ability to protect ourselves, which is really the only true
function of government, is to protect our national security.
The ultimate No. 1 is undermined because we do not have a
manufacturing base with which to defend ourselves.
So anybody that wants to comment, I am going to let you go
back and forth a little bit and just comment as you would, and
then we will get into some specific questions.
Mr. Fishman. If you do not mind, I would like to start with
a thought. I do not want to overstate the forced to steal. Of
course, no one is forced to steal. It is just the how--what
makes you go to rationalize the theft.
Governments are charged with certain functions. They have
to provide for the health of their people, the economic well-
being of their people, the entertainment of their people, and
the education of their people.
If you are the leader of 1.3 to 1.6 billion people, most of
whom are desperately poor, and you could save millions of lives
by having them spend pennies on the dollar for drugs, you could
give them a presence in the global economy by having them spend
pennies on the dollars for software, you can make your students
smarter by taking textbooks for pennies on the dollar and
expect to pay no consequence for that behavior, all of us might
make the same decision.
Senator Coburn. That is the question, whether or not there
is a consequence, and that is what this hearing is all about.
Can China continue to ignore the TRIPS agreement? Can China
continue to ignore the world norm in terms of intellectual
property? Can China continue to ignore the fact that you do not
have free trade when you do not have a free-forming currency?
Can we allow China to continue to do that as the U.S. Congress?
And, therefore, if we do, then, I would say, yes, we can
rationalize that it is OK for them to steal that because we
have not said there is a consequence.
Mr. Fishman. Yes. Here, here. I agree. All that more
important that the solution come from us.
When Mr. Glickman was in China--I think you should just
live in China, because when you were there, there were no
pirated DVDs on the street, and it was very hard to find even
the shops. But they used that little brief time to make their
shops that much nicer so when you left, they all looked like
Blockbuster.
Mr. Glickman. I have no desire to live there, but I do
appreciate the suggestion. Maybe I can go there more often.
Mr. Fishman. You seem to be somebody capable of keeping
them in line.
But that is why I think the enforcement we should expect
should not necessarily be from Chinese police, but we have to
create a culture of compliance.
So if you want to sell $200 billion worth of goods to the
United States, you have to do it out of a factory that is I.P.-
compliant. And then those factories, those tens of thousands,
hundreds of thousands of factories will not want to compete in
an economy where their competitors are stealing I.P.
And you would get pressure internally inside of China to
comply. And we have to have a strategy that creates that. And
one way to do that is to put conditions on the goods that we
buy from China, which is a huge amount of their GDP.
Mr. Glickman. Can I just comment on that?
Senator Coburn. Sure.
Mr. Glickman. I used to be chairman of the Fair Labor
Association, and one of the things we did was to--we were--it
was a private sector group composed of apparel companies. And
what they would do is they would certify companies and
investigate their human rights violations to determine if
mostly apparel that was coming in met those specifications.
I think that is what you are talking about here, is some
sort of internal certification process. And that is an
interesting idea.
And the other thing I think you mentioned, which I think is
important, is the whole issue of consumer electronics coming in
in this country and maybe we are taking advantage of those.
There is this big annual consumer electronics show in
January. I do not know to what extent antipiracy--we raise it
there, but I do not know to what extent it is embedded in the
entire subject of billions and billions of dollars in consumer
electronics that are sold in this country. I think that is an
interesting point.
I also think this issue of the Beijing Olympics logo--and I
would be interested to know what Mr. Fishman might think about
the Olympics as being----
Senator Coburn. A leverage.
Mr. Glickman [continuing]. A leverage point to maybe work
the Chinese, if you think there is any realistic possibility
there.
Mr. Fishman. Yes. It reminds me of a story of a book author
in the audience of one of my talks, and he says my book has
been pirated into China. What do I do about it?
And I said, you should insert references to Tibetan
independence. Because the Chinese do clamp down when they see a
political need to, and they have the ability to do it.
And I think as you get closer to the Olympics, they will be
embarrassed by cameras going everywhere finding these pirated
DVD shops, and they will disappear from Beijing.
Now, what happens in the west of China, I have no idea,
because it seems like it is only the glare of the cameras in
any given place that makes it stop temporarily.
But we can hope that the Olympics will be kind of a coming-
out party for more responsibility.
Senator Coburn. But the point is, is that the Chinese
government does have the ability, should they so desire, to
enforce intellectual property in China.
Would the panel agree with that?
Mr. Minor. I am not sure they have the legal
infrastructure.
Senator Coburn. Well, where they want to enforce it, they
can. So they obviously have the legal infrastructure when they
selectively enforce if it goes against either what they do not
want in terms of political, like Guangdong and several of the
others.
Mr. Hillberg. I think the key is that the government can
enforce certain intellectual property rights. I think the
regime does not necessarily permit companies or other
participants in the marketplace to be successful.
Senator Coburn. The government does have the power to do
it. It may not run as smooth as it does here, but they--if they
choose to do it, they could do it.
Would anybody disagree with that?
Mr. Fishman. I would disagree with that on this, that there
is a lot of jurisdiction shopping in China. And there is a lot
of different kinds of enforcement from jurisdiction to
jurisdiction. Andrew Mertha at Washington University in St.
Louis has written at length about it.
When you clamp down in one area, activities move to
another. There is also the difficulty of driving an economic
wedge between conflicts of interest. In pharmaceuticals, for
example, the government is the No. 1 producer of drugs and the
No. 1 buyer of drugs.
As a buyer, it has the huge incentive to get the lowest
price possible. As a producer it has incentive to take drug
technology as its own and sell it for pennies on the dollar.
And it is very hard to drive a wedge in between those conflicts
of interest.
Mr. Mulloy. Mr. Chairman, in my view, you need to give them
the economic incentive to enforce their laws. If you are able
to bring some WTO cases and win them and then you target key
exports and put quite high tariffs, as you will be permitted to
do, then you have economic leverage on them, and they will then
pay more attention and begin to find ways to enforce those
laws.
Remember how much talk there was that the Internet was
really going to free up that society?
They are putting an enormous amount of money into
controlling the Internet in that country. They have an interest
in controlling the Internet, and they do it. If they had an
interest in getting after this issue, they will do it. But they
are not going to do it if we continue to talk rather than see
if this mechanism in the WTO will work.
We strongly recommended that we work with both the E.U. and
Japan to bring these WTO cases because then there will even be
more leverage.
It is very interesting on that request filed by Mr.
Portman, the Japanese joined us, the Swiss joined us, but the
E.U. did not. I think we need to work on the E.U. and get them
into this ball game a little bit more. And that is what we
strongly recommended.
Senator Coburn. This also does not just play in terms of
trade. One of the great proprietors of Iran's progression in
terms of the uranium enrichment happens to be the Chinese.
And so if we do not take a stand on our economic
intellectual property, then we are perceived as weak in every
other area of our foreign policy as well. And so it is
important that we take that stand so that we hold them
accountable.
Mr. Mulloy. I would think that they must wonder that we
have the President of the United States over there saying,
pretty please, do this for us, and this has been going on for
15 years with no results. I mean, they must not take us
seriously about these things.
Senator Coburn. So it is not a Republican or Democratic
thing? It is this policy stinks in terms of enforcement of the
things we do?
Mr. Mulloy. Absolutely. There was a requirement in the law
that the Banking Committee wrote in 1988 requiring Treasury to
identify currency manipulators. Early on the Bush
Administration, Bush 1, actually identified Korea, Taiwan, and
China as currency manipulators.
Beginning in 1992 that passed under both Clinton and now
Bush 2. Nobody's identified China as a currency manipulator,
although everybody knows they are a currency manipulator.
When Tim Adams, our undersecretary of the Treasury,
complained to the IMF and said, why aren't you working to stop
China's currency manipulation, the IMF came back and said, you
have not even named them a currency manipulator in your reports
to Congress.
Because we have not been truthful, then we get bitten. We
have to be truthful, and then you can deal with the reality or
you find policies that deal with the reality. If you pretend it
is not happening and you put your head in the sand, it is just
going to get worse.
And one last thing, on Ted Fishman, he talked about the
big-box retailers. They are bringing in this stuff--maybe some
of it is pirated or counterfeit goods. We ought to have a law
that says if American companies are going to be part of this
process and they know or have reason to know that the goods
they are bringing in are counterfeit goods and can be
threatening to our people, that they should be faced with
punishment for doing that.
That is what we did on bribery. When our companies were out
bribing people, we put a law on the books and forbade them to
do so. Now, they may find ways around it, but at least it is
out there and I think it is a real deterrent on that behavior
and we could do the same thing here.
Senator Coburn. Mr. Sabo.
Mr. Sabo. Senator, all I can say, based on everything I
have heard today, is that this is something we better address
right now because if it continues like this for 5 more years
without addressing it and addressing it strongly, our economy
is really going to be hit hard.
Mr. Minor. It is not only our economy; it is our national
security that is at risk. As we transfer technologies to China,
as we transfer the ability to manufacture key military
mechanisms to protect ourselves, we become weaker and weaker
each day.
So far the policy with the Chinese has been to ask politely
and hope for the best and that just can not continue.
I was wondering if we could share those pieces of currency,
Michelle, with the other members of the panel.
Senator Coburn. I thought I was going to get to keep them.
Mr. Minor. Well, one of those you do not want to keep,
Senator.
We have known as a company for some time through our
customers of our products that the very good counterfeits are
coming out of North Korea and likely manufactured by the North
Korean government. Only recently a major Chinese bank was
charged in the United States for funneling and laundering these
counterfeits.
But we are finding them all over the world: Central
America, South America. And if our currency and our military
are compromised through intellectual property theft, there is
no turning around. Five years might be too long.
Mr. Fishman. Here is a scenario you might think of, which
is imagine we do get some sort of redress on intellectual
property, possibly through this compliance regime that I have
talked about.
You get a double advantage. One, you chip away at China's
low-cost manufacturing advantage because factories have to buy
technology. Two, is you inject some vitality into our tech
sector because you create a market for technology where a
market didn't exist before. And it is not just any market; it
is the fastest growing market in the economic history of the
world. And right now we do not sell into it.
Senator Coburn. And three, is if we had a free-floating
currency, the price of our technology would go down to the
Chinese, and the price of their products would come up.
Mr. Fishman. Absolutely. Exactly.
Mr. Glickman. One thing that is interesting. My whole life
being involved in agriculture, we often had disputes with
Chinese on certain sanitary issues. But by and large--this is
one area that the Chinese, need us to feed their population,
particularly to increase as their standard of living goes up,
their protein consumption goes up, and, therefore, they've got
to have feed and meal to feed those animals over there. It is
an interesting dichotomy here.
Because where they need us, they will take advantage of
what we have to give them. I do not know if anybody's ever
really explored the relationship between agriculture and the
peasants on the revolution side of the picture with the
manufacturing-industrial side of the picture that we have here,
and I think we should.
The other point I would make is it goes back to something
Mr. Fishman said. I went to the Fortune Conference in Beijing
in the spring, and it is a tricky situation because everybody
wants to be polite when they are there.
But what I saw, by and large, is not a very confrontational
atmosphere between the American private sector and the Chinese
authorities.
Now, I was not looking for people to pick a gratuitous
fight with them, but it is an interesting juxtaposition when
you look at globalization in this world. The
internationalization of a lot of American companies have made
them a lot, I think, less likely to want to pick a fight.
And I do not think the government can do this by itself. I
think you have got to have the people who are employed
Americans involved in this fight as well.
Mr. Mulloy. Can I speak on that?
Senator Coburn. Yes. Let me just put something in. One of
the real disappointments for me was that you do not see a
Microsoft here today, the leader who has lost more in China
than all the other software firms combined. And I am set to
presume that they do not want to offend the Chinese because it
might hurt their short-term business interest.
That is where we are in terms of the government. How do you
not offend the Chinese, but yet hold them accountable?
And if the short-term price of your stock is more important
than the long-term future and security of our country, then
that is a terrible scenario for American business.
And I can tell you it does not just apply there. It applies
in asbestos litigation and in all these other things that we
are trying to solve.
What we are seeing is a change in perspective by American
business, that they have chosen to go the short run instead of
the long run. And they have chosen to make profits in the short
term instead of secure the future of their firm and their
country and their employees by doing what is in the best long-
term interest of their firm.
And so it is very concerning to me that people want to duck
this discussion because it might have a negative reverberation
in China on their business.
And if it does, then what it says is, who are we dealing
with? And what is the long-term quality prospects for fair
trade with China if, in fact, you can not be critical of
somebody who is supposed to be doing something who is not and
because you happen to be critical it hurts your business? You
are not dealing with somebody that you really want to deal with
or--unless you are going to hold their feet to the fire, you
never win on that.
And so it is concerning to me that we have seen that
philosophy take over in terms of our international business
company--the companies that do international business, that the
short term is more important than the long term.
Mr. Mulloy. Senator, the American companies can try and use
the Chinese legal system like GM went after Chaney. I saw in
the Los Angeles Times today that they settled that case.
It was a big article about how Chinese automobile
production has expanded. They are going to be the third largest
auto producers in the world next year. So they are coming on
pretty fast in autos, and we expect them here.
But the thing we have to understand is we can go after them
to live up to their international agreements both on IMF
currency, WTO, IPR, or other issues. Our companies are in a
system where they have to make profits, and they are going to
make profits if they want to survive.
The Chinese have figured out how to incentivize our
companies and other foreign companies to build their industrial
base.
Sixty percent of China's exports are from foreign-invested
companies. We were over there in August. We went through these
scientific and industrial parks. It is amazing. You had it
exactly, that the R and D is beginning to flow over there now
as well.
So they figured out how to incentivize them. We have to do
some going back to understanding our own system. How do we
incentivize our guys to serve our interests rather than the
Chinese interests?
I heard on NPR, somebody talking the other night. It was
not Ted--you were on NPR, but another show coming from China,
was saying that the American corporations in China are almost
like spokesmen for the Chinese government. They are like an
echo chamber. You will hear the government say things, and then
before long the American companies were saying the same things.
Mr. Fishman. That was me.
Mr. Mulloy. That was you? OK.
I found the same thing when I am over there traveling
around, meeting with these people.
Mr. Burr. Mr. Chairman.
Senator Coburn. Yes, Mr. Burr.
Mr. Burr. A few years ago when music lovers started to
discover that they could use the Internet and basically just
take songs off it for free and not have to pay for them, that
was the beginning of a huge decline of our industry and
everyone was really scared about it and it started this--retail
stores and the mom-and-pop record stores were all closing. And
we all had a very doomsday scenario in our heads.
And the organization--the RIAA and NARIS and organizations
like that, they all got together and they started suing 14-
year-old kids. And it got ugly, but it worked.
Everyone said, Oh, how can they do this? It is just these
kids. But I tell you what, you throw a lawsuit where the father
has to pull out $20,000 to settle a lawsuit for the 15-year-old
stealing Oasis songs, pretty soon that kid finds his computer
unplugged.
And I think that we are going to have to--with China, I
think we are going to have to sometimes maybe treat them like a
14-year-old and it is going to get ugly and we can not be
afraid to have it get ugly for a while. Because on the other
side after it gets ugly, they will get the message.
Senator Coburn. I think that is good input. Anybody else?
Mr. Fishman. Yes.
I would say something to that point, which is it is
essential on this issue to get a public consensus on it. And it
is very hard to get the public consensus around it on the
consumer issues because consumers also steal when they can.
But if we talk about it more and more in terms of the shop
floor, in terms of the jobs lost--I know Mr. Minor brought an
article from the Chicago Tribune which talked about the $6,000
drop in the average paycheck in Illinois because of the loss of
manufacturing. Michigan actually lost more. And there have been
3 million manufacturing jobs lost from the United States since
2000.
This is even a higher cost to pay than what you pay for
your 14-year-old.
Senator Coburn. Sure.
Mr. Fishman. And this is one place where I think we can get
national consensus on it by really stressing that the workplace
is in danger, not just the home theater.
Senator Coburn. Right. Middle income America is at risk.
I thought it was interesting to note that we have talked
about movies, recording, financial, software, core
technologies, patents, manufacturing, currencies,
macroeconomic, and advanced technology. Every aspect of our
economy is under attack----
Mr. Fishman. Agriculture.
Senator Coburn [continuing]. In terms of intellectual
property rights being ignored. It is not just recording a
movie. It is every aspect of our economy.
The same thing is happening--we see it more visible because
it is easier to see the results of it in terms of the recording
industry or the movie industry because it is out there and it
is also shipped back here.
But the subtleties of the other is there is not an area of
our economy that is not under attack.
Mr. Fishman. Well, there is a kind of war in industry in
this country, and it is between large corporations and this 80
percent of American industry, which is medium and small
businesses.
Large corporations have the resources to go into China to
fight their intellectual property battles. Small industry,
which sees the rug being pulled out from under them as their
large clients move to China and find suppliers in China and
benefit from pirated technology in the Chinese workplace are
really at risk here, and they do not have the resources to
fight their own battles inside China.
It is impossible as a company that is 50 million and under
to have played a Chinese legal system for years.
Senator Coburn. Let me put the question out to you. So let
us say we are going to do the TRIPS, we are going to enforce,
we are going to file through the WTO. What happens when we
lose? What happens if we lose, knowing the truth, knowing the
facts? What happens when we lose?
I do not have a lot of confidence in some of the WTO
rulings, as we have seen from the past. What happens when we
lose? What do we do?
Mr. Minor. Hopefully we would reassess our membership in
the WTO.
Senator Coburn. But what do we do?
Mr. Sabo. Is not that our only choice?
Mr. Mulloy. Secretary Glickman.
Mr. Glickman. Well, you have to fight the battles. We
fought them for years on the agriculture front, and we
certainly have not won every battle there. And we fought them
on consumer issues and international financial issues.
We also have to have a good case too. It does not mean we
do not file the case, but we have to have the data there. We
have to have the facts there. That is what the Administration
has finally done. Now we have to keep pushing them to make sure
that they follow through on that kind of thing.
China has wanted for years to get in the WTO. They are now
in this organization. It means a lot to them. And, I do not
think that they want to ignore the WTO. They kind of do that at
their peril if they really become--if they want to play roles
around the world.
That is one of the reasons I thought that when Mr. Burr
talked about Russia was so important.
Russia is not in the WTO, and the Russians are actually in
a much more lawless situation even than the Chinese are. So we
have an opportunity with Russia maybe to advance the situation.
But, I am not going to presuppose whether we should file
the case or not, but my belief is we are probably not going to
get the attention of China without filing the case. And we just
have to have the best case we can possibly do.
Senator Coburn. Is there a function that the Congress can
do outside of the WTO in terms of carrying forward--both
sending signals to China, but also in terms of setting meaty
legislation that will have an impact on them, and what is that?
Mr. Minor. The currency bill would send a message, I think.
Senator Coburn. You mean in terms of floating of the
currency?
Mr. Minor. Right.
Mr. Mulloy. Revaluing--upward revaluation of their currency
is enormously important.
We can put laws on our books to control what comes into our
country in terms of counterfeit goods.
Senator Coburn. Yes.
Mr. Mulloy. There is no right to bring counterfeit goods
into this country, and we can pass good, tough legislation so
that does not happen.
Then the next step is only the government. USTR is the only
place that can authorize bringing a case to the WTO. Private
companies can not do it. It has to be the government. So we
have to go ahead and see if it works. It will take 2 years to
bring one of these WTO cases before you are even in a position
to put the tariffs even if you win it. So get started.
Now, what Senators Schumer and Graham, in their currency
bill, have done--do you remember how they said, we will put
immediate tariffs on you if you do not stop manipulating the
currency? They went to Article 21 of the WTO agreement, which
provides that you can protect your national security as an
exemption to everything else that is going on.
So your obligation--you always have the national security
out. Sweeney at one time used Article 21 to protect its
footwear industry. In the GATT it was always held self-judging,
a country can make its own judgment as to its national
security.
Now, that is an enormous step to go. I would prefer to get
the case in the WTO to find out what happens first.
Senator Coburn. Let me question you on that for a minute.
Going to be a quarter of a billion dollars--quarter of a
trillion dollars that flow out of this country this year in
China. We are going to lose another 200,000 or 300,000
manufacturing jobs because of intellectual property that is not
protected in terms of small businesses. We are going to lose
the ability to fund and grow our own economy and fund our own
intellectual property for the future, and development of R and
D.
Why is that not a national security and national emergency
issue for us right now? Not 2 years from now, right now.
Mr. Mulloy. Do you want me to comment?
Senator Coburn. Sure. I want anybody to comment on that.
Mr. Mulloy. Well, I think it is, and that is why I was very
happy with--we endorsed the concept of the Schumer-Graham bill
on currency because we think it is a national security issue.
One more thing I want to tell you, Senator.
In our report we do not blame everything on China. There is
much that we have to do here at home with our emphasis on
science and technology, getting our economic house in order.
That also has to be a part of this.
Just getting our economic house in order is not going to do
this because we can not get it in order unless we deal with
this other issue. The two have to be done at the same time.
So our commission endorsed using Article 21 on the currency
issue.
Senator Coburn. Anyone else?
Mr. Fishman. I have a comment. One is--what can you do at
home? One is to shed daylight on some of the practices that
keep China's regime going. China's had this enormous benefit
from the way it has done business.
Senator Coburn. That is what we are having this hearing
for.
Mr. Fishman. And one thing that the Subcommittee can do
is--and I do not know the legal structure of the Subcommittee.
But if you have subpoena power, you can go into some agreements
and look at what is the dynamic.
There is this great case where Huawei, which is a Chinese
telecom firm, basically built itself into a multi-billion-
dollar company by copying virtually everything in the Cisco
catalog, including the catalog.
And then it entered the United States market and Cisco sued
it, filed suit. Well, that suit was settled. We do not know the
terms of the settlement. And, it will be very interesting to
know whether part of the terms of that settlement was access to
the Chinese market by Cisco, but there was no redress on the
piracy itself.
Instead, Whawei, which is now a global player in telecom,
competing against our best companies, went out and bought the
Qualcomm patent portfolio, which gives it 30,000 legitimate
patents.
So these intellectual piracy regimes in a way become like
the Mafia buying the liquor store. They can legitimate
themselves once they grow to scale. That is quite a threat. So
if you have the investigative power to look at that, I would
encourage it.
Also, it would be interesting to look at the pricing
demands that big-box retailers put on their suppliers.
Factories that supply big-box retailers are asked every
year to cut their prices sometimes 15 percent a year. Do you
think with those demands for the price cuts there is also a
demand that you pay full bore for technology? You are forcing
your suppliers to cut your costs somewhere. It would be
interesting to know what is the chain of events that leads to
that piracy.
Mr. Mulloy. Well, we did a hearing on that, Senator, in New
York to look at the role of the big-box retailers. There is
tremendous pressure on the smaller manufacturers if they want
to stay in the supply chain of the larger manufacturers who are
in China. In order to meet the China price to stay in, they are
forced also.
So there is a tremendous incentive from the big guys and
Wal-Marts and others, those big-box guys, to force the smaller
guys who want to stay in their supply chains to move their
operations to China. That is the situation we are now in.
Mr. Glickman. I think this whole idea--I do not know what
the criminal laws are, but knowingly importing counterfeit
material, in the same way that--knowingly importing material
that is done with human rights violations or improper labor
violations, it is, I think, something the Subcommittee could
explore looking at the laws.
I would like to mention, however, part of the issue is they
do not buy anything that we--or very little we produce. It is
the reverse. I want to go back to the situation because here we
are in Los Angeles, the entertainment business.
The WTO provided that the Chinese would allow into their
market--we saw it as a minimum of 20 foreign movies a year for
domestic distribution. They saw it as a maximum.
Out of that 20 movies, the United States gets in roughly
about 14 movies a year, and they--the Chinese determine, based
on a lot of different formulas, what those 14 movies a year
are.
On the streets of Beijing, Shanghai, Guangzhou, and all the
other cities, on the average there are probably 2,000 to 3,000
of titles a year on the streets. So all these movies we are
trying to get in, legally we can not, and there they are.
Senator Coburn. Now they are creating the demand.
Mr. Glickman. They create the demand for this kind of
stuff.
So in addition to them selling us stuff that may be
counterfeit--there is a tremendous need for market opening
stuff on our part as well.
Senator Coburn. All right.
Senator Carper could not be here. He had made a commitment.
And we work in a bipartisan fashion. He's a partner--he's the
Ranking Member, Senator Carper from Delaware, and he will look
at this material as well.
Any other final closing comments?
Mr. Mulloy. I just want to let you know, Senator, that we
are a Commission created by the Congress, bipartisan. And our
last report came out 11 to 1. All six Republicans and six
Democrats were on that report.
We are here to be of assistance to you and your staff in
any way we can in dealing with this larger phenomenon of how we
are going to deal with the U.S.-China economic relationship.
Because when you transfer the amount of resources we are
transferring to China now, it enables them to have a much
stronger power projection militarily as well.
Senator Coburn. Right.
Mr. Mulloy. You can not decouple these things. And I am not
saying that we want to demonize those people, but we better
start getting our act together and enforce what we bargained
for.
Mr. Fishman. If I could add one more thing, it is about the
culture of compliance at home.
We have Fortune 50 companies in the United States that have
paid hundreds of millions of dollars to settle patent and
copyright infringement cases because these drag through our
courts just as long as any cases drag through the Chinese
courts.
If we could take this more seriously at home, then we would
certainly be taken more seriously abroad.
Senator Coburn. I agree.
Mr. Minor. Congressman Glickman suggested that China needed
to develop political will to address some of these issues, and
I would add to that, that both within the Executive Branch and
the Legislative Branch we need to develop the political will to
get tough on trade and fix these problems.
Large multinationals, Fortune 50, Fortune 500, 750
companies have the resources to fight patents and litigate.
When you are a smaller manufacturer, medium-size manufacturer,
you do not have the resources, and you certainly do not have
the time. We need the help from our government.
Senator Coburn. All right. Thank you all very much.
Mr. Mulloy. Mr. Commissioner, can I ask permission to put
the three articles that I referred to in my testimony to be
made a part of the record?
Senator Coburn. They will be made part of the record if you
will submit it.
Mr. Mulloy. Thank you, Mr. Chairman.
Senator Coburn. And the hearing is adjourned.
(Whereupon, at 11:50 a.m., the Subcommittee was adjourned.)
A P P E N D I X
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