Porosity of China’s Intellectual Property Law

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Adithya Paul Ambrose
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AUTHORED BY: Adithya Paul Ambrose

AMITY LAW SCHOOL, LLM (Taxation Law)


The Porosity of China’s Intellectual Property Law and the Road Ahead for India

Abstract: The scarcity and inconsistent nature of China’s published judicial decisions indicates that its IPR enforcement is still virtually nonexistent when compared to the number of violations. Paired with jurisdictional confusion and decentralization, Confucian and communist beliefs impede IPR protection. The nation’s rapid growth further hinders IPR protection, but may eventually incentivize copyright and trademarks enforcement. Conflicting messages from the United States do not clarify the issue’s importance. This paper discusses that a new strategy is necessary to tackle this laxity and inconsistency better late than never.

On average, 20 percent of all consumer products in the Chinese market are counterfeit. If the product sells, it is counterfeited. Rolex watches, Gucci handbags, Duracell batteries, Gillette razor blades, Safeguard soap, Head & Shoulders shampoo, Viagra and luxury automobiles are just a few of the many fake goods available for purchase. The Chinese often joke that in China, “everything is fake but your mother” and “we can copy everything except your mother.”Providing counterfeit items ranging from car-inspection stickers and college diplomas to designer clothing and computer software, this paper delves deep into the issue and exposes this shameless and dastardly practice that takes place in a rampant manner in places like Yiwu and Treasure Street. While piracy is a serious problem in China, it is also a global concern. Within the domestic and the TRIPS context, this article discusses various forms of copyright violations in China, their impact on the enforcement of the Chinese Copyright Law, and their causes. In particular, this paper discusses the unique aspects in China which make the enforcement of Copyright Law extremely difficult; it also analyses how the Criminal Law should be used in the combat against piracy, and how China interprets the TRIPS Agreement as it is applicable to China.

Furthermore, this article reveals and shows how China’s Development Policy of the Automobile Industry (NAP) ratified by its State Council is in blatant violation of China’s WTO commitments.

   Finally, how this has percolated the Indian market and what needs to be done is the climax of this paper. Should the system be revamped or its resources be reorganized. Should the State be on the defensive or on the offensive? These are some of the saliencies that have been considered in this research analysis as it aims to give the avid Indian reader deep and thought-provoking hindsight as well as a foresight as to what lies ahead.

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The Troubling Attitude of China toward the IP Protection of Gray Market Goods

  • The Gray Market Fiasco

A “gray good” belonging in the “gray market,” as defined by the United States, is “a foreign-manufactured good, bearing a valid United States trademark, that is imported without the consent of the United States trademark holder.” Thus, the phrase is technically very narrow. However, this concept has been extended and is often used interchangeably with similar provisions for patented and copyrighted materials, such as “parallel market,” and need not be manufactured abroad. The gray market or parallel market occurs when goods intended for one market are redirected, unauthorized, to another. The goods literally parallel those imported through the authorized channel. For example, “Business” authorizes ten units to be sold to a retailer in country A and five to be sold to a separate retailer in country B, pricing the same goods differently to target specific markets. Business is unaware that the retailer in B resells its units to stores in A and C. The stores in A and C have just engaged in parallel importation. Essentially, Business ends up competing with itself, as its lower priced goods destined for B compete against the higher priced goods in A’s market. The purpose of this indirect importation is often to supply the product to a void, like the iPhone’s initial China release, but more likely, it is to undersell the goods intended for that market. Essentially, those who parallel import from cheaper nations can sell the same product at a lower price than those who use the authorized channel.

September 17, 2010: Apple’s newest, hottest release, the iPad@, successfully debuted in China, one of the world’s largest markets. This was an achievement for Apple@ after the disastrous launch of the Chinese iPhone@ in 2009, when the typically dynamic company could not move stock from the shelves. The reason? Interested Chinese buyers had long owned iPhones@. Apple’s iPhone@ debut in China lagged nearly two years behind its introduction to the United States and Europe. Many Chinese consumers ordered hacked and reprogrammed phones, shipped in from hubs like Prague and New York. Some of the phones made an even shorter journey as they simply “leaked” into the market from the Chinese factories where they were produced. Apple’s global vision was no match for the dynamic gray market. Westerners are comfortable importing goods on a whim from major developing countries like China. Seldom, however, do Westerners contemplate China’s own massive economy and subsequent pull on the gray market. Some may see parallel imports as a fair extension of the global marketplace. This does, after all, allow companies to reach new markets. However, the gray market expert David R. Sugden explained, “As the name aptly suggests, gray market goods reside in the murky area of law between legitimacy and illegality.” Governments are concerned about the lack of regulation of gray market goods-when unauthorized products used or even ingested by consumers may be tampered with or of inferior quality. Lack of control over one’s products opens parallel imports to typical black market problems. Not only does the gray market pose risks and disrupt a company’s profitability, it also poses problems for the entity’s intellectual property rights (“IPR”).China, well known for its exports, is one of the world’s largest economies with the world’s largest population, and is thus naturally a dynamic importer. Over 12% of its $954.3 billion importsdynamic importer.3 4 Over 12% of its $954.3 billion imports come from Japan and another 7.66% from the United States. China, as an extremely populous importer of expensive goods, is ripe for parallel importation issues. Those attune to IPR around the world should carefully watch the issue of gray goods. China is already branded with a scarlet as it is often labeled a “chronic and notorious abuser of IPR.” This is particularly important considering that China today is the third largest trading nationand is obligated to protect IPR through a series of treaties. Copyright and trademark laws with respect to trade are loosely enforced in China, and though improving, it is dubious whether China is ready to address IPR to the same degree as the developed world. This potentially poses problems for companies hoping to protect against parallel imports in China by asserting IPR claims. Although the gray market’s channels were carved by shifting global policy and technological advancement, industry itself is instrumental in supplying the market with product. Sugden asserts that by dumping inventory to meet short-term sales goals, companies undermine their long term plans. Of more international concern is global pricing strategy. In order to penetrate international markets and achieve some level of sales success, companies will price goods to sell in a nation’s specific market. However, this has unintended consequences. A company may price a bicycle for $300 in the United States, but only $250 in Brazil and $180 in Mexico. Businesses in the United States will buy the bicycles from Mexico at $180, incur the shipping costs, and still be able to sell the bikes for $250 in the United States, underselling those bikes that were priced for the American market.

  Controlling distribution channels prevents underselling as well as other harms. Black market goods, which may harm consumers and brands, often intermingle with parallel imports that are out of the brand’s control. The term gray market itself reflects this possible contamination. Gray market has many definitions including the traditionally illegal, but most accurately refers to “goods diverted from a brand owners’ authorized sale channel.” While industry numbers are disputed, the impact of the parallel market is economically significant.

   Intellectual property is an increasingly important barrier to the gray market, particularly trademark and copyright. IPR has largely been imposed on China by the Western world through a complex system of treaties. As gray goods have tenebrous legal status in global treaties, it is unlikely that treaties provide adequate foundation to pursue action against the gray market despite enhanced IPR standards. However, China potentially faces disputes over gray goods with large trading nations even despite consensus on parallel import legality in the Western world.

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International Scrutiny

  • China faces “severe scrutiny”over its TRIPS and WTO Accession Protocol enforcement obligations,which could evolve into formal action to curb parallel importation. China could face a WTO suit regarding parallel importation. China’s WTO status channels its bilateral disagreements through the WTO dispute settlement framework. The Dispute Settlement Understanding (“DSU”) offers consultations, and if the issue remains unresolved, it then escalates into a panel review culminating in a report for the parties’ compliance. The United States has pursued the WTO dispute settlement process against China eleven times since China joined the WTO, and another four times with the European Union. The last case brought by the United States against China was decided in 2010, demonstrating commitment to this method. Most notably, the United States pursued DSU solutions with China in 2007regarding China’s disposal and penalty threshold for infringing goods, and IPR protection and enforcement. The United States claimed China dodged TRIPS by having an impracticably high eligibility threshold in implementing criminal sanctions against pirates and IP violators. China defended its enforcement system, dividing the infringements between high profile criminal cases and smaller administrative cases. Agreeing mostly with China, the WTO did find that China’s auctions of contraband essentially pushed the items into the stream of commerce again. The United States cited another claim concerning China’s lack of copyright protection for banned works. The WTO found that China violated TRIPS by denying copyright protection to certain works, even though China may prohibit the works.

       Beyond the WTO, China could also face sanctions from the United States, among others. The negative attention does not come exclusively from the United States, however. The European Union has been nearly as concerned, and Japan is afraid of the risk of “serious damage” posed by China’s IPR laxness. The United States’ 2008-2009 Chamber of Commerce Report recommended that China be more vigilant on regional violative “hotspots,” allocate greater resources for IPR enforcement, launch criminal investigations focused on the wealthy and the powerful, and focus on “transborder cases” of violative goods (specific to gray goods) and “potentially dangerous products”(arguably, unscreened tires that create peril for drivers). The Chamber of Commerce complained in this report that in spite of the Chinese government’s constant actions, very little has actually changed.

What needs to be done…

  • Pragmatically, the problem of gray goods in China should be addressed directly. This requires a two pronged action: enhanced Chinese IPR enforcement and creation of a specific action for gray goods across borders. The gray market is not illegal as it exists without trademark or significant copyright violations, and thus needs to be targeted directly. The deliberate distance from the gray market in TRIPS arguably allows parallel importation. WTO member countries need not adopt border measures as to “goods put on the market in another country with the consent of the right holder.” Additionally, TRIPS does not require members to “devote more resources to intellectual property enforcement than other areas of law enforcement.” Without muscle from the strongest applicable treaty, China’s behavior is unlikely to change.

    The logic is very simple: make parallel importation illegal globally. However, the simplicity of such an argument faces fatal hurdles. It is doubtful that the world will agree universally on all the facets of the parallel importation problem, as the United States has no clear official policy and international treaties that deliberately sidestep the issue. Even if the consensus is reached, it will take time to get the many trading nations of the world to literally “sign on” to such a treaty. Thus, it must be approached from a more creative angle.

     Pragmatically, the United States and other nations need to be forthcoming about their concern regarding parallel products. As parallel imports mingle with black market goods in the gray market, the former are arguably less damaging than counterfeited goods, and thus may be prioritized below counterfeits. In the interim, however, major companies are losing significant sums of money. While this may just be the downside of a global economy, if the corporations of the United States, European Union, and others are so highly impacted, the parent nations must be proactive. Companies should be vigilant themselves and proactively pursue existing enforcement mechanisms.

    To effectively address parallel importation, the United States, Japan, Australia, and China, or ideally all of the major trading nations (with essential Chinese participation), must create a treaty, targeting gray goods, through the avenue of trademark protection. This treaty must use explicit language, stating that such violations in pursuit of the gray market, in excess of an agreed amount, will be subject to a specific and uniform punitive trademark violation/parallel import tariff. With internationally agreed price equalization, a limitation to the right of the first sale could be preserved if a nation so chooses, but governments could temper the effect of gray goods on the industry. China will need to enforce this provision, seeking out violations and taxing gray goods. China’s weak IPR enforcement pertaining to parallel imports is highlighted by its patchy judicial decisions. While it appears that the first sale doctrine exists to some degree, limiting copyright claims, trademark protection continues to compete with parallel importation. Although at least three cases have been decided on the topic, and the only clarification is that safety inspections of a product will alter the product’s status. Instead, China seems to simply gesture to its international treaty obligations but still hides behind its ability to grow its economy and cultural differences. While WTO action from the United States and the European Union could follow, this process is proving impotent. Unless there is a specific pact and tariff, parallel importation will likely remain one of the negatives (from the corporate and developed nation perspective) of globalization. In order to compete globally, one must set prices to sell in each market, and the gray market is an undeniable side effect. While there is some legal protection in affluent developed countries, this issue may deepen the schism of development.

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China’s Infamy as a Prolific Counterfeiter

China has a valid justification to strengthen its intellectual property protection. What’s more, for reasons best known to them. Intellectual property rights have not been the focal point of much attention throughout China’s history. One does not have to dig profound into China’s history to reveal its intellectual property laws. The little endeavor was made to protect patents and trademarks before the 1990s. Maybe one of the earliest indications of China’s endeavor to adopt Western concepts in intellectual property protection was with the Agreement on Trade Relations between the United States of America and the People’s Republic of China of 1979 (“Agreement”).

The United States before long acknowledged subsequent to entering the 1979 Trade Relations Agreement with China that protection of intellectual property rights in China was verging on hopeless. China unquestionably passed laws on the recognition of intellectual property rights, but tailored them so that they would only “promote socialist legality with Chinese characteristics.” As a result, the United States attempted to solve China’s intellectual property rights problems by invoking Section 301 of the Trade Act of 1974, which permitted the President to examine and impose sanctions on countries engaging in unfair trade practices that threaten the United States’ economic interests. At the request of American business executives, China was placed on the “Priority Watch List” (maintained by the USTR of countries whose intellectual property practices or market access barriers warrant special attention) by the USTR in 1989. As an outcome of this worldwide weight, China passed a copyright law in 1990, however, it was more emblematic than substantive.

For instance, foreign works copyrighted in different nations would be given no protection unless they first registered for copyright protection in China. The Chinese additionally wreaked havoc with traditional notions of trademark and patent protection. These laws carried a distinctly socialist flavor. The government placed limits on the rights granted by the patent and trademark laws. The Patent Law of 1984 granted patent protection to “job-related invention-creation” but it limited ownership to the work unit, the enterprise, or the joint venture. China’s “first-to-register” framework requires no evidence of prior use or ownership, leaving registration of popular foreign marks open to third parties. Not surprisingly, these modest and superficial attempts at dealing with intellectual property rights violations did nothing to stem the tide of massive counterfeiting. Yiwu is the counterfeit capital of China. Every day, approximately 200,000 distributors buy up to 2,000 tons of goods from the city’s wholesale black market. In Beijing, China’s official capital, which is a five-hour train ride from Yiwu, you can find a makeshift outdoor market dubbed “Treasure Street,” where buyers can purchase counterfeit products wholesale. Yabaolu is a modem building housing 300 private showrooms, each representing a Chinese factory where the fake goods are produced. The United Nations Office on Drugs and Crimes estimates that two billion counterfeit products worth $8.2 billion are produced annually in China. The World Customs Organization has determined that 65 percent of all counterfeit shipments globally originate in mainland China. In 2009, $230 million of counterfeit goods from China and Hong Kong were seized in the United States, which represents almost 90% of the value of all counterfeits intercepted that year. The problem is even worse in Europe, where customs officials reported nearly 50,000 seizures in 2008, a tenfold increase over the previous ten-year period. European customs official estimate twothirds of all counterfeit articles seized originated in China or Hong Kong. 57% of the seized counterfeits were clothing or related accessories, while jewellery and watches accounted for 10%, and electrical devices constituted 7%.

Not every single fake article are innocuous impersonations. Many are deadly, including: antibiotics made of talcum powder and birth control pills filled with rice flour. The World Health Organization estimates that 10% of the world’s medicine supply, and, more alarmingly, 30% of the developing world’s supply is counterfeit, i.e. drugs “deliberately and fraudulently mislabeled with respect to identity and/or source.” A 2003 research study revealed that 22 of 25 places where artesunate, an anti-malarial drug, was sold were actually selling a counterfeit version of the drug. Another examination conducted across Southeast Asia in 2008 found that half of the 391 artesunate samples they collected were fake. The researchers analyzed the counterfeit artesunate and traced it to southern China.
To help battle the spread of counterfeit medicines, the International Criminal Police Organization, commonly known as INTERPOL, has coordinated numerous multi-country operations. In 2008, “Operation Storm” helped national law enforcement officials raid sites in China and several other Southeast Asian countries, resulting in the arrests of 27 people and the seizure of 16 million fake pills. The following year, “Operation Storm II” reallocated 20 million doses of counterfeit medicines and shut down 100 outlets for these illicit products across the region.

The counterfeit medicines also have fatal outcomes within China itself In 2006, at least 18 people died after being given counterfeit Amillarisin A, a drug designed to treat gallbladder problems, while hospitalized in Guangdong province. The problem is not constrained to the streets alone but reaches into the highest echelons of intensity. In 2007, China executed the former director of the State Food and Drug Administration for approving numerous fake drugs, some of which caused fatalities, in exchange for bribes. In the face of this worldwide problem originating on its shores, China has taken some action to combat counterfeiting. In 2008, the State Administration for Industry and Commerce seized more than $220 million worth of counterfeit products. The following year, the General Administration of Quality, Supervision, Inspection and Quarantine seized nearly $500 million in counterfeit goods and dispatched nearly two million inspectors across the country. In spite of the fact that the Chinese government’s endeavors have blocked huge amounts of fake articles, these seizures speak to just a negligible detail and duplicating stays far reaching.

In December 2001, China joined the World Trade Organization and many in the global community hoped that this would relegate Yiwu’s outrageous counterfeit business practices to a thing of the past. However, despite China’s continuing efforts to align its standards of intellectual property protection with WTO standards, such as through the TRIPS Agreement, the country is still faced with the daunting task of embracing (and enforcing) western notions of property rights. For most Chinese, trademark piracy is too tempting to turn down. Nobody truly knows why the Chinese are the best and the most productive in damaging each idea of western protected innovation rights. It could involve financial aspects, or it could be social.

It will not be easy to eradicate counterfeiting in China without hurting the domestic economy. Piracy employs both directly and indirectly 3 to 5 million people in China. Recent estimates place the market value of counterfeit goods upwards of $25 billion annually. It is so pervasive that companies established by local governments operate as some of the 40,000 outlets nationwide for these fake goods. Many of the most flagrant brand violators are state enterprises and run by the same governments that should be policing them.
The legal system in China is poorly arranged to deal with thenumerous intellectual property right violations. China’s laws are fairly new and they are a mixed bag of unfairness and arbitrariness. China does not protect creators; it protects the person who reaches the registration office first, even if he or she stole the idea from someone else. China draws a distinction between “famous” trademarks and those that are not so famous. The legal profession in China is inadequate by western gauges, and the legal executive is similarly maladroit and unpracticed.
China’s misusing of intellectual property rights is not only detrimental to foreign firms but domestic ones as well. Many Chinese companies are not properly prepared to protect those works that may be considered intellectual property.

One suggestion to improve current authorization components of intellectual property rights is to increase the presence and effectiveness of private (i.e., court and contractual) means of resolving intellectual property disputes. This idea is premised on the fact that the current system of enforcement in China, which is dominated by government agencies at the local level, is ineffective and too localized in nature to be a true watchdog of intellectual property rights.

Clarke contends that while China does have courts, currently these courts suffer from problems such as difficulty in issuing injunctions, difficulty in enforcing any rulings it makes, and relatively small damage awards so as to fail to truly deter intellectual property right infractions. Should China be willing to change these problems in its courts, so that these courts may more effectively enforce private measures of recourse for intellectual property infringements, then more foreign investors would be willing to work directly in China. However, there appears to be little indication that China would be willing to make any sweeping changes in the near future. Therefore,

Clarke contends the best mode of recourse at this point is to use the TRIPS Agreement and the WTO to pressure China to reform its courts with respect to intellectual property issues in accordance with China’s commitments to these organizations and agreements.
Another change would be to reform the Chinese law that links the severity of the penalty for trafficking counterfeit goods to the value of the material seized.

In the event that China needs to wind up a key player in this new global financial framework, it must take it upon itself to create effective intellectual property protections for all holders of intellectual property rights, both foreign and domestic. If not, then China will only be harming its own economic achievement in the decades to come.

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China’s National Automobile Policy- a policy of whims and fancies

Investments

  • China’s Protocol containing its general commitments provides that: “China shall ensure that… the right of… investment… is not conditioned on:…performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development (R&D) in China.” During WTO negotiations, the Chinese representative added that: “amendments would be made to ensure that all measures applicable to motor vehicle producers restricting the categories, types or models of vehicle permitted for production, would gradually be lifted. Such measures would be completely removed two years after accession, thus ensuring that motor vehicle producers would be free to choose the categories, types and models they produced.”However, its National Automobile Policy suggests otherwise.                                                                                    

    On June 1, 2004, China’s National Development and Reform Commission (NDRC), after ratification by the State Council, announced the Development Poliy of the Automobile Inaustre (NAP) that would direct the future of China’s automobile sector. The NAP can be broken down into the following categories: investment, export subsidies, importing, distribution, local requirements, and intellectual property (IP) protection. The NAP has placed conditions on investment, including: performance requirements, requiring research and development to take place in China, and restrictions on the type of cars produced. Article 47 of the NAP requires: “new manufacturers of automobiles must establish research and development facilities. It also imposes the following performance requirement: “new car plants must have a minimum annual output of 50,000 units for four-cylinder cars and 30,000 units for six-cylinder cars.” In addition, it restricts the type of cars produced by requiring: “Automobile manufacturers that want to enter new product lines must have a record of batch sized automobile production, have accumulated more than 1 billion RMB (1,000,000,000) of aftertax profit in the last 3 years (with tax documentation), have assets and liabilities ratio of within 50%, and AAA level of bank credit.

    China’s conditioning of the right of investment on the number of cars produced, the establishment of research facilities in China, and the type of car produced, explicitly contravenes their commitment not to do so. The requirement that new car factories establish R&D facilities also acts as a performance requirement on investment. The conditions required by China to enter into new product lines prevent the manufacturer from investing in new product lines. China protects its domestic manufacturers against foreign manufacturers with the performance requirement because it forces foreign manufacturers to produce at least 50,000 four-cylinder cars and 30,000 six cylinder cars in China. Most foreign manufacturers would rather produce all their car parts elsewhere and then ship them to China for assembly. Instead of importing their inventory into China, foreign manufacturers will now need to produce at least a portion of their cars in China. Foreign manufacturers will now need to use their factories in China to produce cars rather than just for assembly. China protects its domestic manufacturers against foreign manufacturers with the R&D requirement because it forces the transfer of technology to China. Similar to producing cars outside of China, foreign producers conduct R&D abroad to protect their trade secrets. Installing R&D facilities in China forces foreign manufacturers to transfer their knowledge to China, which better enables China to nationalize their cars. Many manufacturers may establish one superficially because of the lack of utility of such a facility. Although the conditions for entering into new product lines do not necessarily protect Chinese manufacturers against foreign manufacturers, it still directly contradicts China’s promises to the WTO member countries.

Ownership Limitation

  • Unlike manufacturers of motor vehicle engines, which China committed “to remove the 50% foreign equity limit for joint-ventures upon accession,” there was no mention of removing the ownership limitation on joint ventures for the production of entire automobiles. However, one of the two basic tenets of the General Agreement on Tariffs and Trade (GATT) is the national treatment clause. The national treatment clause mandates that WTO members treat foreign individuals and foreign-funded enterprises no less favourably than domestic individuals and enterprises. Thus, under GATT, China must treat foreign manufacturers no less favorably than domestic manufacturers. Nevertheless, Article 48 of the NAP  prohibits the Chinese partner’s stock percentage to fall below 50% in a Sino-joint venture for the production of entire cars, specific-purpose cars, agriculturally-used transport cars, and motorcycles. Article 48 of the NAP provides that: “One foreigner may establish no more than two joint ventures for the production of the same type of automobiles.” However, this restriction does not apply to acquisitions by the Sino-joint venture. The NAP clearly discriminates against foreign manufacturers because they impose restrictions that are not imposed on domestic producers. The Chinese partner may own more than half of the Sino-joint venture but the foreigner may not. Chinese producers may establish more than two joint ventures to produce the same type of automobile but foreign producers may not. Most foreign investment in China’s automobile industry has taken the form of joint ventures. This limitation shows that China fears foreign takeover of its car plants. Nevertheless, foreign manufacturers may still escape this limitation by forming Sino-joint ventures in which two separate Chinese companies each own 25% of the company, but the foreign company owns 50%, and thus the majority share. Domestic producers, on the other hand, are allowed to form as many joint ventures as they want, which enables them to better compete against foreign manufacturers that may only sell one or two types of cars. Multinational corporations would prefer to choose two or more partners because they want to obtain more political resources, attack more markets, and reduce the risks of just relying on one or two partners. But because most of the multinational corporations have already entered China and have signed partnership contracts with the three major state-related enterprises, the new limitation of foreigners to two joint ventures precludes them from entering into any additional joint ventures or buying any domestic producers. Also, this limitation prevents a foreign manufacturer from partnering with all three of the Chinese conglomerates and eventually controlling them. For example, Volkswagon has already partnered with FAW and SAIC, and thus will not be able to partner up with Dongfeng. China’s major automobile companies have already formed multiple joint ventures with foreign automobile manufactures and will be able to continue to form more.

IP Protection

  • Chinese companies are more interested in attracting foreign capital and ramping up production than researching new technologies. Since 2003, IP disputes have erupted due to the conflict of interest between China, which wants to barter technology for cheap Chinese labor, and multinational companies. Neither party wants to share their technology or give anything in return for the cheap labor. Disputes began to occur in 2003 between Nissan and Great Wall Automobile (a domestic Chinese company), Toyota and Geely, and GM and Gery. China’s first IP case involves Toyota suing Geely in Beijing Highest People’s Court, alleging that Geely’s model Meiri copied Toyota’s “Toyota” insignia, thus violating Toyota’s trademark. But Toyota lost this case for lack of proof. The disputes continued in 2004 when Honda sued Hebei Province’s Shuanghuan Automobile Company and its retailer, the Beijing Xu Yang Heng Xing Economic and Trade Limited Company, in Beijing’s Highest People’s Court for pirating the Honda CRV. Moreover, in December 2004, Dongfeng joined Honda in its suit against Shuanghuan, marking the first time a Chinese partner in a Sino-joint venture sued a domestic private company.

China has implemented new measures that do not conform to the WTO Agreement. China does not have to completely eliminate its restrictions on the automobile industry because it is subject to phased elimination. The NAP, however, actually increases those restrictions. The NAP will protect its three state-related automobile manufacturers from foreign manufacturers by limiting foreign investment, providing export subsidies, burdening importing, separating distribution, adding local requirements, and creating Chinese IP rights. Contrary to the WTO’s encouragement of creating free market conditions, China has reverted to the command economy of the Mao era instead of allowing competition and market forces guide the industry because it feels that that is the quickest way to eventually exporting Chinese cars. This year, China exports of entire cars exceeded $4,700,000,000 (USD). China hopes to “become the major automobile manufacturing country in the world before the year 2010… to have automobile products satisfy the majority of domestic demand and enter the global market in batch-sizes.”China may achieve this goal even with all of the NAP’s WTO violations because by the time the implementing legislation details the protections, and other member countries collect the statistics on the discriminatory effects.

   If the rest of the world waits to see the effects of the NAP, it may be too late. According to the director of the Office of Automobile Affairs at the U.S. Department of Commerce, the U.S. will begin to import large numbers of cars produced in China. But by that time, China may have already developed its three state-related automobile manufacturers into the world’s major exporters.

The Road Ahead for India

In the backdrop of China’s massive counterfeit industry which makes it the biggest source of counterfeit goods in Asia and the piracy rate soaring at more than 90%, it would be interesting to pore over this comparative analysis between the India’s and China’s economy on various key fronts and parameters to identify the loopholes in the economy of India as it presently stands and eradicate them permanently.

India’s Service – oriented Economy v/s China’s Manufacture oriented Economy

  • Even though the Indian export sector plays a significant role in the domestic economy by contributing close to 25 percent to India’s GDP (in 2009), its contribution to world exports continues to remain minimal, at a mere 1.5 percent of world exports in 2009 (however, this share has improved since the economic reforms of 1991). Between 1991 and 2009, India’s share in world exports rose from 0.56 to 1.52 percent. But overall, the economic reforms implemented in India did not have a significant impact on India’s position in the world export market, unlike the reforms implemented in China. This may be in part due to the unusual development model followed by India. The transition phase for East-Asian economies was characterized by a reduced dependence of the economy on the agriculture sector and increased emphasis on the labour-intensive manufacturing sector. Economies have traditionally developed a strong manufacturing base and over time moved towards a capital and skills- oriented services sector. However, Thirlwell (2006) states that India has followed a different trajectory. Following the economic reforms in 1991, the Indian economy made a transition from being agriculture-driven to being considerably service oriented. The manufacturing sector, which had been the prime engine of growth for countries such as China or South Korea, was not as strengthened in India and its development was constrained by a combination of factors. As a consequence of this, the Indian economy was not able to fully exploit its potential comparative advantage in the sector.

Sectoral composition of Exports

  • Merchandise exports used to comprise a major portion of India’s exports to the world. However, a decline in its share and thus a rise in the contribution of services is visible post 1996. India has experienced a rapid growth in its services sector in the last decade and this is likely to continue in the near future. A combination of demand and supply side factors has influenced the growth of services in India. High income elasticity for final product services fueled demand, whereas increased levels of foreign direct investment and constant supply of technically skilled workforce ensured the necessary resources for the growth of the services sector. A comparison of India’s export composition with that of its competitors reveals a major point of difference. While for India, services has grown to be a major contributor to its world exports, China continue to earn close to 90 percent of its export revenue through merchandise exports alone. Therefore, the merchandise component plays a bigger role in the exports of other emerging economies, a fact which could explain why India’s share in world merchandise exports has remained low. China has become a leading market for merchandise exports which accounts for the difference between India and China’s market positions. Between 1995 and 2009, China’s share in world merchandise exports has risen from 3.2 percent to 10.3 percent, whereas India’s share rose from a mere 0.7 percent to 1.5 percent in the same period.

   Despite the importance of the manufacturing sector to the Indian economy, the sector’s exports have had a minimal impact on the global scale, as seen in Figure 6. India’s share in world manufacturing exports increased from 0.6 percent to 1.4 percent between 2000 and 2009, whereas China tripled its contribution from 3.2 percent to over 10 percent in the same period. The question is why at all even give a legitimate recognition of the merchandise emanating from China which is nothing but a brand imitation of some of the best and counterfeited and then made to look like it was a product of genuine and authorised manufacture. China’s spurious goods are sold all over the world including India, counterfeit goods are easily accessible in Indian markets. Countries like Singapore and Hong Kong which are regarded as shoppers’ paradise are also a den for counterfeited goods brands like Louis Vuitton. It has been recorded that 20 percent of goods sold in the Chinese market are counterfeit goods. These goods span across a wide range of products including apparel, cigarettes, electronics, food, mobile phones, pharmaceuticals, skin care products and many others. In particular, as the Chinese are avid consumers of luxury goods, the counterfeiting of luxury brands has reached astronomical levels.

   India could however learn a few lessons from China as far as channelising of its resources and the FDI coming in are concerned.

Boosting Competitiveness

  •   The large share of manufacturing in a country’s GDP can be explained by a combination of government policies which promote industrial growth and a high investment rate which keeps the demand for materials and machineries high. The Chinese government liberated the agricultural sector in the early stages of their reform plan. An example of this was a special programme named ‘Township and Village Enterprises’ (TVE), which was primarily responsible for initial labour-intensive rural industrialization in China. As a result of this, an important portion of labour was released from the agricultural sector and channelized into the manufacturing domain. This meant higher rural incomes, which stimulated the demand for consumer goods (met by rural enterprises). India’s approach, however, has been different and it has been a policy priority of the Indian government in recent years to address the need for higher levels of public investment in agriculture.

   Moreover, the Chinese government had supported small and medium sized enterprises (SMEs) and policies were designed to encourage firms to expand their operations. However, SMEs in India had incentives to remain small as certain sectors had been exclusively reserved for these categories. As these sectors were highly protected, there was little fear of competition and minimal need to grow and realize economies of scale. Moreover, regulatory frameworks, and labour laws, in particular, were often biased against larger firms. Access to credit was yet another challenge for many SMEs which compounded the problem further and they consequently depended on informal markets for resources.

Flexibility of the Labour Market

  •     Another advantage of the Chinese economy was in the form of labour reforms which reduced rigidities and made the labour market flexible. This resulted in firms hiring labour without worrying about the implications of an economic slowdown. The flexibility of the Chinese market ensured that retrenched labour would secure similar jobs in other firms. In comparison to China, India continues to have a rigid labour market which hampers efficient utilization of human capital in the manufacturing sector. Additionally, unlike China, India has not been able to effectively mobilize labor from rural areas, primarily due to low skills of the rural population. China on the other hand, has succeeded in doing so due to a large number of technical training institutes which provide a bulk of the labour force with the appropriate technical education needed for small and medium scale firms in China’s manufacturing sector. As a result of this, the manufacturing sector has employed a growing workforce over time. This is precisely why a strong wage growth for senior jobs is lacking in India because of skill shortages for key professional and managerial roles and the increasing connection to a more globalized pay market at the senior levels- a market where India still pays less than most other countries but is soon catching up. Regarding the poorer wage growth at the bottom, a report released by the Hay Group by Korn Ferry said that it was more because of an oversupply of people. According to the report, India’s salary growth stood at 0.2% in real terms with a GDP gain of 63.8% over the same period whereas China, Indonesia and Mexico had the largest real salary growth of 10.6%, 9.3% and 8.9% respectively during the period under review.

FDI in exports

  •   The Chinese economy also opened up to foreign direct investment (FDI) in export-oriented sectors during the seventies, whereas the Indian economy liberalized two decades later. Evidence also suggests that China adopted a more comprehensive and pro-active approach to attract FDI and focused on export-oriented FDI (which brought in better technological knowledge) whereas India’s emphasis was on FDI in its domestic market rather than exports. As a result of this, FDI gave an impetus to China’s exports and provided the manufacturing sector with strong incentives to expand production.

  

   In recent years, the Indian government has considered the average performance of the manufacturing sector and taken an important policy initiative in 2011 by approving the New Manufacturing Policy. This policy is aimed at building the capacity of the sector, strengthening its contribution to the GDP (from 16 percent to 25 percent) as well as improving the international competitiveness of the manufacturing sector. The initial industry reactions to the NMP has been positive and it is expected that proper execution of the NMP will be beneficial for the Indian economy as it can generate large-scale employment for nearly a hundred million workers in the next ten years. We think it is high time that we turn this policy into a reality with employment and export being the bulk of the focus. The logic is this: you might as well encourage domestic manufacture and trade of genuine and standard merchandise than be a dump-yard of counterfeit, sub-standard merchandise. The choice is ours. And it’s now or never. With the gems and jewelry industry accounting for nearly 15% of total exports since 1986, the diamonds are forever with India! 


1 K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 285 (1988).

2 DAVID R. SUGDEN, GRAY MARKETS: PREVENTION, DETECTION AND LITIGATION 4 (2009); Stefan M. Miller, Parallel Imports: Towards a Flexible Uniform International Rule, 15 J. COM. BIOTECHNOLOGY 21, 22 (2009). In this Note, “gray good”and “gray market” are used as general terminology indicating products imported through unauthorized channels. However, “parallel import” refers to the verb, due to nuance. “Parallel import,” referring to goods, is only used for clarity while mentioning both gray goods and the black market.

3 Jorge Espinosa, What is the Parallel Market?, THE GRAY BLOG (last visited Sept. 30, 2010), http://espinosaiplaw.com/wordpress/?pageid=5.

4 For an illustration of this concept, see WARWICK A. ROTHNIE, PARALLEL IMPORTS 1(1993).

5 Loretta Chao, China Gets the iPad, WALL ST. J. CHINA REAL TIME BLOG (Sept.

17, 2010, 5:30 AM), http://blogs.wsj.com/digits/2010/09/1 7/china-gets-the-ipad/.

6 Id.

7Compare Matthew Honan, Apple Unveils iPhone, MACWORLD (Jan. 9, 2007), http://www.macworld.com/article/54769/2007/01/iphone.html, with Chao, supra note I (providing date of iPhone debut in China).

8 Peter Burrows, Inside the iPhone Gray Market, BLOOMBERG BUSINESSWEEK (Feb.

12, 2008), http://www.businessweek.com/technology/content/feb2008/tc20080211 152894.htm.

9 Id.

10 DAVID R. SUGDEN, GRAY MARKETS: PREVENTION, DETECTION AND LITIGATION 4 (2009) at 30 and 31.

11 Peter Burrows, Inside the iPhone Gray Market, BLOOMBERG BUSINESSWEEK (Feb. 12, 2008),

12 DONALD A. GREGORY ET AL., INTRODUCTION TO INTELLECTUAL PROPERTY 1-2 (1994).

13See GORDON C. K. CHEUNG, INTELLECTUAL PROPERTY RIGHTS IN CHINA: POLITICS

OF PIRACY, TRADE AND PROTECTION 5 (2009).

14 As of July 2010, China’s population was 1,330,141,295. CENTRAL INTELLIGENCE AGENCY (CIA), THE WORLD FACTBOOK, EAST & SOUTHEAST ASIA: CHINA (2010) [hereinafter WORLD FACTBOOK], available at https://www.cia.gov/library/publications/theworld- factbook/geos/ch.html (follow “Download Publication” hyperlink).

15 The CIA World Fact Book lists China as the third largest purchasing power and the sixth largest “real growth rate” in the world.

16 2009 estimate. Id.

17 WORLD FACTBOOK, supra note 15.

18 Greg Creer, The International Threat to Intellectual Property Rights Through Emerging Markets, 22 WIs. INT’L L.J. 213, 218-19 (2004).

19 Susan Ariel Aaronson, How Disciplining China Could Save the WTO, VoxEU.ORG (Feb. 9, 2010), http://www.voxeu.org/index.php?q=node/4581.

20PETER GANEA & THOMAS PATELOCH, INTELLECTUAL PROPERTY IN CHINA, at xiii (Christopher Heath ed., 2005).

21 Supra note 10 at 40-41.

22Jorge Espinosa, What is the Parallel Market?, THE GRAY BLOG (last visited Sept.

30, 2010), http://espinosaiplaw.com/wordpress.

23 Supra note 10 at 53.

24 Id at 4.

25Quoting DAVID M. HOPKINS ET AL., COUNTERFEITING EXPOSED 10 (2003).

26 Grant Gross, US Panel Looks at Intellectual Property Violations in China, PC WORLD (June 15, 2010).

27 See GORDON C. K. CHEUNG, INTELLECTUAL PROPERTY RIGHTS IN CHINA: POLITICS OF PIRACY, TRADE AND PROTECTION 5 (2009) at 16.

28 Supra note 10 at 298-299.

29 Konstantina K. Athanasakou, China IPR Enforcement: Hard as Steel or Soft as Tofu? Bringing the Question to the WTO Under TRIPS, 39 GEO. J. INT’L. L. 230 (2007).

30 Id. At 217.

31 See A Summary of the Final Act of the Uruguay Round, WTO, http://www.wto.org/english/docs-e/legal e/ursum e.htm#Understanding (last visited Dec. 20, 2010).

32Parties also have the option to seek alternate settlement arrangements (arbitration, etc.) and there is an appellate process. Id.

33 Disputes by Country/Territory, WTO, http://www.wto.org/english/tratop e/dispue/dispu by countrye.htm (last visited Mar. 10, 2011). Compare this to India’s four times and the United Kingdom’s three times. Id.

34This case was over car parts. Id.; see also Elizabeth Williamson & Tom Barkley, U.S. Beats China in Tire Fight, WALL ST. J., (Dec. 13, 2010), http://online.wsj.com/article/SB10001424052748703727804576017473322868118.html. This is not without irony, as one of the key cases in Chinese parallel importation is Michelin regarding tires. The United States also requested consultations three more times in 2010. China Measures Affecting Imports of Automobile Parts, WTO, http://www.wto.org/english/tratope/dispue/casese/ds340_e.htm (last visited May 28, 2011).

35 Panel Report, China-Measures Affecting the Protection and Enforcement of

Intellectual Property Rights, WT/DS362 (Apr. 16, 2008); see also Athanasakou, supra note 29 at 236.

36 Supra note 29 at 218.

37 Peter K. Yu, The US-China WTO Cases Explained, MANAGING INTELL. PROP., Oct. 2009, available at http://www.peteryu.com/managingip 362.pdf.

38 Id.

39 Id.

40 Id.

41 AMBASSADOR RON KIRK, OFFICE OF THE USTR, 2010 SPECIAL 301 REPORT 16,

[hereinafter USTR 2010 SPECIAL 301 REPORT], available at

http://bangkok.usembassy.gov/root/pdfs/2010_special 301 report.pdf.

42 Supra note 29 at 220-221.

43 U.S. CHAMBER OF COMMERCE, CHINA’S WTO IMPLEMENTATION AND OTHER ISSUES OF IMPORTANCE TO AMERICAN BUSINESS IN THE U.S.-CHINA COMMERCIAL RELATIONSHIP 28 (2008-2009), available at http://www.uschamber.com/sites/default/files/international/asia/china/files/chinawtosingl

epages.pdf.

44 Id. at 8.

45 Michael A. Ugolini, Gray Market Goods Under the Agreement on Trade-Related Aspects of Intellectual Property Rights, 12 TRANSNAT’L L. 461 (1999).

46 Peter K. Yu, Three Questions that Will Make You Rethink the U.S.-China Intellectual Property Debate, 7 J. MARSHALL REV. INTELL. PROP. L. 418 (2008).

47Doris E. Long, Protection in China, Post-Olympics, NAT’L L.J. (N.Y.), Aug. 18,

2008, available at http://www.jmls.edu/academics/iplaw/NLJ%20 %20Doris%2OLong%201P%2OChina%2OArticle%2OAug%2018%2008.pdf). China made

“[a] significant advance in IP protection by broadening the potential administrative avenues

for relief and providing a more rational basis for determining fines and penalties.”

48Peter K. Yu, From Pirates to Partners: Protecting Intellectual Property in China in the Twenty-first Century, 50 Am. U. L. Rev. 131, 134 (2000).,

49 Id. at 138.

50 Id. at 136.

51 UNOff. on Drugs and Crime, The Globalization of Crime: A Transnational Organized Crime Threat Assessment 175, 181 (2010), available at http://www.unodc.org/documents/data-andanalysis/ tocta/TOCTAReport 2010_lowres.pdf.

52 Id. at 177.

53 Id.

54 Id.

55 Id.

56 Id. at 175,181.

57 Id. at 185.

58 Id.

59 Id.

60 Id. at 186.

61 Id.

62 Id. at 176.

63 Id.

64 Donald Clarke, “Private Enforcement of Intellectual Property Rights in China,”        Nat’l Bureau of Asian Research Analysis, vol. 10, no. 2, at 29 (April 1999).

65 UNODC Report, supra note 51 at 178.

66 World Trade Organization, Accession of the People’s Republic of China, Decision of 10 November 2001, WT/L 432.

67 World Trade Organization, Report of the Working Party on the Accession of China, WT/MIN(01) (Nov.10, 2001) 41.

68 See STATE DEVELOPMENT and Reform Comiission, Qiche Chanye Fazhan Zhenche [Policy on The Development Of The Automobile Industry] (UN 28, 2004) http:// www.sdpc.gov.cn/

69 Id. at Art. 47.

70 Id.

71 Id.

72 Id.

73 Jia Xinguang, Qiche Ye: Minqi “Weicheng” [Automobile Industry: Private Enterprises ‘Besiege Civ’], 221 ZHONGuo GONGSHANG [CHINA BUSINESS]  (May, 2004) 41.

74 Id. at 3-4.

75 Supra note 68 at Art. 48.

76 Id.

77 Id.

78 Dominique Jolly, Innovation in China. Building an Economic Superpower,5 INNOVATION: MGMT. POL’Y & PRACrICE 200 (Dec. 2003), available at http://www.innovation-enterprise. com/5.2/5.2.200ht-d.

79 Supra note 68 at Art. 48.

80 Xu Ke, KujaguoQi Chang: Yi Tao Bani Guanyong Hal Shi Liang Tao Ban~i Heshuan [Multinational Automobile Manifacturers: One Organi!Ztion Useful or Two OrganiZadons Worthwhile], SOHU ONLINE, Jan. 27, 2005, http://auto. sohu.com/20050127/n224120562. shml (Jast visited Jan. 30, 2005).

81 Id.

82 Id.

83 Daniel Chow, The Legal System Of The People’s Republic Of China (West Group) (2003).

84 Wang Jinying, lraiguan Xiang Xiang Mafan Shangshen Ping San Qi Qicbe ,Qinquan An [Commentary on the

Three Automobile Tort Cases Thai Look Like Trouble On the Outside], DONGFANG WANG [EASTERN PORTAL] (Dec. 9, 2003), available at http:// www.shlottery.gov.cn/epublish/ gb/paper282/ I /class028200001/ hwz1356285.htm.

85 PRC Second Intermediate Court’s Judgment Order in the Japanese Toyota Automobile Association’s [-T [B P1 ±] Lawsuit Against Zhejiang’s Geely for Violating its Trademark and Anti- Competitive Practices, Civil Case

Judgment No. 06286 (Nov. 24,2003), available at http://bjgy.chinacourt. org/pubfic/detAil.phpid=6534&k_

title=%B7%E1%CC%EF&k_ content=%B7%E1%CC%EF&k_author=.

86 Id.

87 An Tong, Bentian Coo Wo Shuangban .Qiche Qinquan, Zhongguo Che Yao Yanfa Zi Qiang [Honda Sues China’s Shuanghuan Automoivefor Tort, China’ Cars Must Research and Develop Itseff to Become Stron] (April, 8,2004), http:// news.xinhuanet.com/herald/2004- 04/08/content_ 1408598.htm.

88 Denfeng Bentian Zai She Shuanghuan .Qinquan Di Yi An Lakai Di Er Mu [The First Tort Case by Dongeng and Honda ‘ Against Shuanghuan Enters Its Second Pbase], XIAMEN RIBAO [IAMEN DAILY] (Dec. 5, 2004), available at http://yibbszt.xicp.net/Article/ Tmanli/Tmjf/200412/3515.html.

89 Wang Yu, Qiche Maoyi Shengce He Qehe Pinpgai Guanli Banfa Zheng Zai Zhiding [The Automobile Trade Polisv and Automobile Brand Management Measures is Currenty Being Formed] ZHONGGUO QICHE BAO [CHINA AUTOMOBILE NEWSPAPER] 14, June 15, 2004, available at http://wwwanews. cn/anews/ist.asp?id= 18007 (ast visited Nov. 10, 2004).

90 Supra note 68,Art. 2.

91 Mei Jiang Zai 2010 Nian Jingkou Zhongguo .Qiche [U.S. Will Import Chinese Cars in 2010] ZHONGGUO

QICHE BAo [CHINA AUTOMOBILE NEWSPAPER] (June 29,2004), available athttp://-4 w.anews.cn/anews/list. asp?id=18466 (last visited Nov. 10, 2004).

92 Athukorala, Prema-Chandra (2008). 

93Banga, Rashmi (2005).   

94 “Strategies to kill fake product in Indian rural market”, pp. 25,www.indianmba.com /Faculty_Column/FC448/fc448.html.

95 Id. at 346-349.

96http://www.displaysearchblog.com/2011/11/indian-government-approves-new-manufacturing-policy.

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Adithya Paul Ambrose
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AUTHORED BY: Adithya Paul Ambrose

AMITY LAW SCHOOL, LLM (Taxation Law)


 

 

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