[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

UNFAIR TRADING PRACTICES AGAINST THE U.S.:
INTELLECTUAL PROPERTY RIGHTS
INFRINGEMENT, PROPERTY EXPROPRIATION,
AND OTHER BARRIERS

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HEARING

BEFORE THE

COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

JULY 19, 2012

__________

Serial No. 112-170

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Printed for the use of the Committee on Foreign Affairs

Available via the World Wide Web: http://www.foreignaffairs.house.gov/
or
http://www.gpo.gov/fdsys/

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COMMITTEE ON FOREIGN AFFAIRS

ILEANA ROS-LEHTINEN, Florida, Chairman
CHRISTOPHER H. SMITH, New Jersey HOWARD L. BERMAN, California
DAN BURTON, Indiana GARY L. ACKERMAN, New York
ELTON GALLEGLY, California ENI F.H. FALEOMAVAEGA, American
DANA ROHRABACHER, California Samoa
DONALD A. MANZULLO, Illinois DONALD M. PAYNE, New Jersey--
EDWARD R. ROYCE, California deceased 3/6/12 deg.
STEVE CHABOT, Ohio BRAD SHERMAN, California
RON PAUL, Texas ELIOT L. ENGEL, New York
MIKE PENCE, Indiana GREGORY W. MEEKS, New York
JOE WILSON, South Carolina RUSS CARNAHAN, Missouri
CONNIE MACK, Florida ALBIO SIRES, New Jersey
JEFF FORTENBERRY, Nebraska GERALD E. CONNOLLY, Virginia
MICHAEL T. McCAUL, Texas THEODORE E. DEUTCH, Florida
TED POE, Texas DENNIS CARDOZA, California
GUS M. BILIRAKIS, Florida BEN CHANDLER, Kentucky
JEAN SCHMIDT, Ohio BRIAN HIGGINS, New York
BILL JOHNSON, Ohio ALLYSON SCHWARTZ, Pennsylvania
DAVID RIVERA, Florida CHRISTOPHER S. MURPHY, Connecticut
MIKE KELLY, Pennsylvania FREDERICA WILSON, Florida
TIM GRIFFIN, Arkansas KAREN BASS, California
TOM MARINO, Pennsylvania WILLIAM KEATING, Massachusetts
JEFF DUNCAN, South Carolina DAVID CICILLINE, Rhode Island
ANN MARIE BUERKLE, New York
RENEE ELLMERS, North Carolina
ROBERT TURNER, New York
Yleem D.S. Poblete, Staff Director
Richard J. Kessler, Democratic Staff Director

C O N T E N T S

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Page

WITNESSES

Mr. Grant Aldonas, managing director, Split Rock International
(former Under Secretary of Commerce for International Trade)... 9
Derek Scissors, Ph.D., senior research fellow, The Heritage
Foundation..................................................... 25
Mr. David Hirschmann, president and chief executive officer,
Global Intellectual Property Center, U.S. Chamber of Commerce.. 38

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Dana Rohrabacher, a Representative in Congress from
the State of California: Prepared statement.................... 7
Mr. Grant Aldonas: Prepared statement............................ 12
Derek Scissors, Ph.D.: Prepared statement........................ 27
Mr. David Hirschmann: Prepared statement......................... 40

APPENDIX

Hearing notice................................................... 74
Hearing minutes.................................................. 75
The Honorable Gerald E. Connolly, a Representative in Congress
from the Commonwealth of Virginia: Prepared statement.......... 77

UNFAIR TRADING PRACTICES AGAINST THE U.S.: INTELLECTUAL PROPERTY RIGHTS
INFRINGEMENT, PROPERTY EXPROPRIATION, AND OTHER BARRIERS

----------

THURSDAY, JULY 19, 2012

House of Representatives,
Committee on Foreign Affairs,
Washington, DC.
The committee met, pursuant to notice, at 10 o'clock a.m.,
in room 2172 Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen (chairman of the committee) presiding.
Chairman Ros-Lehtinen. The committee will come to order
after we clean up my spilled Cuban coffee. The order will stay
here for about 6 months it is so strong. After recognizing
myself and the ranking member, Mr. Berman, for 3 minutes each
for our opening statements, sorry, Chris, I will recognize for
3 minutes, the chair and the ranking member of the Subcommittee
on Terrorism, Nonproliferation, and Trade.
I will then recognize any members who seek recognition for
1 minute and then we will hear from our witnesses, and without
objection, sirs, the witnesses prepared statements will be made
a part of the record. Members may have 5 days to insert
statements and questions for the record and the chair now
recognizes herself for 7 minutes.
It wasn't that long ago that we could watch other countries
grappling with their economic difficulties with considerable
detachment and relief that we were largely insulated from their
troubles. Those days are long gone. As our economy has become
increasingly integrated with that of the world as a whole, and
as millions of jobs in this country are now based on exports,
our economic future and prosperity are tied to events on
distant continents.
The unending crisis in Europe, the economic slowdown in
China, and the sharp reduction of the growth rates in an
increasing number of major countries means that the global
economy is already facing strong headwinds. That will impact us
in many ways and none more so than the threat to exports and
the jobs that they support. Even in good times, our exporters
often find their paths blocked by an endless array of obstacles
erected by foreign governments that range from quotas,
licenses, discriminatory regulations, to currency manipulation,
limits on investment, and mandated technology transfer.
Some of these barriers are the products of antiquated
ideologies or just plain ignorance, and the temptation to erect
barriers to foreign business in order to support domestic
industries is a strong one in every country, especially in
times of economic stress. Those policies have had the affect of
reducing the overall welfare of their own citizens while
rewarding favored businesses with high profits they otherwise
could not earn. But we bear the cost as well, and not only in
terms of lost sales.
In fact, it has been the resistance of countries such as
Brazil and India to further liberalization that has led the
Doha Round of global trade negotiations hostage for over a
decade. As a result, high barriers remain for services,
agriculture, and many other products where the U.S. leads the
world. But in addition to these familiar obstacles, U.S.
exporters face even greater challenges from predatory policies
by foreign governments. The most prominent is the theft of
intellectual property.
Governments do steal intellectual property for their own
use, but a far greater problem is their knowing toleration of
widespread theft in their societies to the point of actually
encouraging it. China is the most egregious example, where the
U.S. Trade Representative estimates that 99 percent of all
music downloads from the Internet is done so illegally. The
International Intellectual Property Alliance estimates that the
loss to U.S. companies from copyright violations of records and
music alone amounts to more than $0.5 billion annually.
Pirated copies of American movies that have just been
released in the U.S. are commonly on sale in the streets of
Beijing and other cities within days, openly marketed under the
benevolent gaze of the otherwise fearsome police. Despite years
of promises by Beijing to crack down on violators, and despite
a succession of formal commitments to do so, the theft of
intellectual property remains epidemic. Beijing claims that it
is virtually powerless to stop its citizens from using the
Internet for illicit purposes.
However, that same regime devotes massive resources to
controlling the Internet, including eliminating or blocking
vast quantities of information that it finds objectionable,
with little hesitation to use swift and harsh methods to
enforce its commands. And yet it also claims with a straight
face that it cannot prevent the unlimited theft of intellectual
property from sites that operate openly and with unrestricted
access.
But intellectual property theft is only one of China's vast
array of unfair trade barriers that include, among others,
state-owned businesses using government power for their own
ends, illegal subsidies of domestic companies, discriminatory
regulation, a bureaucracy impenetrable to outsiders, currency
manipulation, and a legal system that is all but worthless in
enforcing contracts.
China may have the worst record in unfair trade barriers,
but U.S. firms face many other challenges around the world. One
example is the expropriation of American property by foreign
governments, especially by leftist governments. From the
beginning of his reign, Venezuelan strongman Hugo Chavez made
clear his intent to seize control of key industries, such as
telecommunications, and has deliberately targeted American
companies. For example, Chavez forced Verizon to sell its 30
percent ownership of Venezuela's telecommunications giant CANTV
with the government taking control of the balance of shares at
bargain prices.
And he has used his power to bludgeon major oil companies
into forced sales and renegotiations of contracts that total
several billion dollars. China and Venezuela are among the most
outrageous and shameless predators, but they are far from
alone. Unfortunately, we have only limited tools with which to
create a level playing field for U.S. companies and provide
them with protection. The most proven method is through
enforceable free trade agreements with responsible countries.
Our network of free trade agreements has created enormous
opportunities for U.S. exporters, the most recent being with
the agreements with Columbia, Panama, and South Korea. But that
remedy cannot be effectively used at present in large part
because the expiration of the President's trade promotion
authority has made the negotiation and approval of new trade
agreements almost impossible. If we in Congress want to do more
than talk about creating opportunities for U.S. exporters,
especially at a time of economic difficulty, we must restore
the President's authority to negotiate enforceable agreements
that will enable our entrepreneurs to compete effectively and
to create the jobs so many Americans are desperately searching
for.
Although the image of the international marketplace as a
place of civilized exchange, of trust, and sanctity of contract
is often an accurate one, there will always be those in other
countries who wish to use the power of the government to erect
barriers against U.S. companies and individuals, and even to
subject them to criminal behavior. In such a world, we must
ensure that the executive branch vigorously uses the tools it
already possesses to deal with those countries that openly prey
on U.S. businesses, including strong and unilateral measures to
penalize governments which refuse to uphold their commitments
and agreements.
Only by doing so can we guarantee our economic security in
an ever more integrated world where enormous opportunity is
coupled with many challenges, and thereby ensure that the U.S.
will always remain the most prosperous nation on Earth. I now
recognize the ranking member, my friend, Mr. Berman, for his
opening statement.
Mr. Berman. Thank you very much Madam Chairman for
scheduling this hearing and in my opening comments I am going
to just sort of say what you said, but probably not as well.
Violations of intellectual property rights in international
trade are important aspect of a large global problem. According
to a study commissioned by the International Chamber of
Commerce, piracy and counterfeiting cost legitimate businesses
$455 billion in 2008. By 2015, that number is expected to
increase $1.2 trillion. And nearly \3/4\ of global IPR theft
winds up in world trade flows.
The latest USTR Special 301 report lists 40 countries on
our IPR watch lists. Of these, notable on the priority watch
list are countries such as Russia, where we are currently
evaluating the extent of their enforcement efforts in
conjunction with our review of their status under PNTR, and
Canada, where we acknowledge important improvements recently,
but they continue to lag behind international norms for a
developed economy.
Not surprisingly though, China dwarfs other countries in
violations of U.S. intellectual property rights. The USTR
reports that Chinese violations run the gamut of all forms of
IPR; patents, trademarks, copyrights, and trade secrets. Worse,
USTR reports that the Chinese Government is abetting some of
these violations by compelling foreign companies to transfer
intellectual property to Chinese companies as a condition of
licensing and regulatory approvals. These policies exacerbate
patent infringement, trademark counterfeiting, and outright
theft of trade secrets.
IP violations are also a national security threat. The
Defense Departments procurement system is being inundated by
counterfeit and pirated parts. To deal with this problem, DoD,
NASA, and other agencies have launched a drive to root out
these illegal and dangerous items from the government's supply
chain. To me, strengthening the protection of American
intellectual property must be a top priority. IPR plays a
critical role in our economy, in employment, and in our global
leadership. While every industry depends on IPR to some extent,
a recent Commerce Department report identifies 75 industries
that are ``IPR intensive.'' These account for $5 trillion in
annual U.S. output. That is like \1/3\ of the entire U.S.
economy. As the report indicates, companies in these sectors
directly employ 27 million American workers, or about 1 in 5 of
the entire U.S. workforce. In addition, suppliers to these
companies employ another 13 million workers, thus, ``IPR
intensive'' companies employ, directly or indirectly, 40
million Americans; 28 percent of the entire U.S. workforce.
In the Chamber's most recent report from 2010, in
California, ``IPR intensive'' companies account for $923
billion of our annual economic output; fully 58 percent of our
total economy. These companies and their suppliers employ 7.4
million Californians; 55 percent of our total workforce.
For America's future, it is essential that our Government
ensure protection of our intellectual property abroad. Our
trading partners must provide higher levels of protection for
our intellectual property, including effective enforcement
tools and more open markets. We have an opportunity now to
further our efforts in this area. The U.S. is currently
negotiating an ambitious agreement with countries in the Asia-
Pacific region; the Trans-Pacific Partnership.
It is critical that this agreement reflect and prioritize
the contribution of the U.S. IP industries to the U.S. economy
by including strong protections for IP and robust enforcement
provisions. This will benefit both the U.S. and our trading
partners' creative and innovative industries and economies.
Madam Chairman, thanks again for calling this important hearing
and I look forward to the testimony of the witnesses.
Chairman Ros-Lehtinen. Thank you so much Mr. Berman and
thank you for your leadership in that important topic of
intellectual property rights. Thank you. Mr. Smith, the
chairman of the Subcommittee on Africa, Global Health, and
Human Rights is recognized.
Mr. Smith. Thank you very much, Madam Chair, for convening
this timely and important hearing. Americans, as never before,
are focused on jobs and competitiveness. All of us know that
economic growth and vigorous exports are vital to our economic
prosperity, sustainability, and now, in these difficult times,
recovery. American companies and American workers can
outcompete anyone in the world, providing that the playing
field is level. The theft of intellectual property rights,
however, robs Americans of a fair return on their innovation
and their hard work.
The most egregious intellectual property rights thief in
the world today is China. Chinese companies, protected by a
ubiquitous dictatorship, steal, copy, and market American
software, music, and films. Chinese policies pry technology and
trade secrets from American firms that invest there and then
abandon them. China is certainly in the big leagues, there are
others, but they're the biggest perpetrator of industrial
espionage where cyber crime is a new tool. China seems to
believe that unfettered access to American markets is its
natural right, while they give Americans the stiff arm in a
myriad of ways, including, and especially, the stealing of
American intellectual property rights.
This colossal infringement of IPR by China, and others,
must end. I thank you and yield back.
Chairman Ros-Lehtinen. Thank you very much, Mr. Smith, for
you leadership. Mr. Gregory Meeks, the ranking member on the
Subcommittee on Europe and Eurasia is recognized.
Mr. Meeks. Thank you, Madam Chair, for holding this hearing
today. And as an advocate for U.S. I am keenly aware of the
risks associated with the U.S. companies venturing into
intellectual markets less regulated and protected than our own.
In fact, the producer of intellectual property need not
formerly enter a particular market to put her products, whether
those products are manufactured goods, IT content, books,
movies, or sophisticated patented scientific devices at risk of
theft.
Trade, travel, broadcasting, and the Internet make all
types of intellectual property vulnerable to appropriation. We
often hear about the impact of this type of theft in gross
numbers, billions of dollars lost to producers of intellectual
property. We hear about pirated movies and music, and everyone
immediately thinks California. This problem, however, is
pervasive; affecting every state in the nation. The impact of
IP theft hits home wherever home might be. In New York, for
example, the motion picture and television industry is
responsible for 91,608 direct jobs and $8.2 billion in wages,
including both production and distribution-related jobs.
Nearly 49,000 of the jobs are production-related. The IT
industry generated over $19 billion in wagers throughout the
state. Rampant software piracy, especially heavy in emerging
markets, destroys innovation and harms New York's economy. Just
10 percent reduction in PC software piracy would result in
nearly $3 billion in added New York GDP and would create nearly
1600 IT jobs. Just as we should look to expand U.S. exports to
protect and create new jobs in the United States, we need to do
better to protect the intellectual property that is the basis
of this employment in this vast segment of our economy.
Let me just add quickly, I also add that I am deeply
concerned about the risk to U.S. trade and investments in
countries that won't play by the rules. In this regard, the
issues facing Chevron in Ecuador are critical and I hope that
this is explored here today at this hearing.
Chairman Ros-Lehtinen. Thank you very much. And now I am
pleased to recognize Mr. Rohrabacher, the chairman of the
Subcommittee on Oversight and Investigations, who always has
nice things to say about China.
Mr. Rohrabacher. Thank you very much, Madam Chairman, and
thank you for holding this hearing. It is a significant issue
in that it dramatically impacts the people of the United
States. The Communist dictatorship in Beijing has caused
dramatic harm to the well-being of the people of the United
States. It comes down to that. And they are relying on us to
protect their interest, to protect their families, and we have
not been doing that. One of the most unforgivable elements of
the economic war China has been conducting against the people
of the United States is the massive government-approved and
government-organized theft of American intellectual property
rights.
So thank you, Madam Chairman, for your leadership in trying
to get something done where there has been hundreds of billions
of dollars of intellectual property that has been stolen,
hundreds of billions, and hundreds of billions of R&D that the
Chinese have gotten for free in order to outcompete our people.
We do the R&D, no wonder they have got a space program that now
is trying to compete with the aerospace workers in my district,
because they have stolen all of our R&D. And in California, I
hate to disagree with my friend, it is worse in California. We
have a lot of jobs that are tied directly to entertainment.
They have been stealing from the people of the
entertainment industry, especially in California, stealing the
product of their labor. No wonder our people don't have the
money to pay for rent, don't have the money to raise their
families, because we are providing free entertainment for the
people of China, the most populous people of the world, and who
is benefitting from that? The Chinese merchants who are tied in
to their Communist Party dictatorship. We have got to take a
stand. We have been cowardly up until now, Madam Chairman, in
confronting this horrible attack on the well-being of the
people of the United States.
Thank you for holding this hearing. I would like to put
into the record a statement that I have----
Chairman Ros-Lehtinen. Without objection.
Mr. Rohrabacher. Thank you. Thank you, Madam Chairman.
[The prepared statement of Mr. Rohrabacher follows:]

----------

Chairman Ros-Lehtinen. Thank you. My New Jersey colleague,
Mr. Sires.
Mr. Sires. Thank you, Madam Chairman, for holding today's
hearing on a topic so vital to our economy and I might just add
that I agree with a lot of what my colleague on the other side
have said about China. Usually we are on the same wavelength on
a lot of things, but it is critical when implementing trade
policies that we ensure a level playing field. Unfortunately,
as it stands today, the United States is at a disadvantage to
countries like China that have weaker protections on
intellectual property rights. Not only the weaker regulations
and standards surrounding intellectual property rights in other
countries put us at a disadvantage economically, it jeopardizes
public health.
We have seen the health and safety risk of negligent
intellectual property laws in the form of poisonous products,
fake medicines, and medical devices, and counterfeit airplane
parts. In determining the level of protection of intellectual
property rights, we must strike a balance that protects
innovation in our country and allows the United States to
continue to be a leader, not an obstacle, in foreign
development assistance. We must commit to engaging with foreign
governments to truly protect industry and consumer rights,
guarantee an even playing field, and global trade will boost
our technological leadership and help grow our economy.
And I look forward to hearing our distinguished panel
members and I yield back.
Chairman Ros-Lehtinen. Thank you very much. Ms. Schmidt of
Ohio is recognized.
Ms. Schmidt. Thank you, Madam Chairman. I would just like
to add to the discussion that we are not alone in this thought.
Thomas Friedman's book, The World is Flat, and Pat Choate's
book, Hot Property, illustrates what international property
theft has done to the integrity and the intelligence of our
nation. Quite frankly, both authors have said it is quite
difficult for us to stop it alone, that we need global support.
The second thing I would like to bring up is that it is not
just counter theft with the music and film industry alone. In
my district, Proctor & Gamble was created. It is one of the
largest companies in the world and international property is a
big issue with them.
One of the sub-issues is their product of Tide, a great
laundry detergent, the counterfeit product that is in China
today not only loses their revenue, but quite frankly, the
integrity of the product. So when a Chinese woman uses an
inferior product that says the cloak of Tide, they don't see it
doing what it says it does, and so it is a double loss for
companies like Proctor & Gamble, and I look forward to hearing
what our folks have to say.
Chairman Ros-Lehtinen. Thank you so much, Ms. Schmidt. Mr.
Chabot, the Subcommittee on Middle East and South Asia chairman
is recognized.
Mr. Chabot. Thank you, Madam Chair, for holding this very
important hearing. The U.S. is the world's entrepreneurial
leader, as evidenced by the overwhelming number of patents, and
copyrights, and trademarks filed in the United States annually;
however, U.S. industries are facing very real threats to their
intellectual property abroad. Many foreign actors are actively
engaged in eroding our intellectual property rights, often
using a guise such as protection of the environment, to demand
IP transfers. This is becoming a significant threat to the U.S.
economy due to the dozens of industries that rely on the
adequate enforcement of their patents, and trademarks, and
copyrights in order to stay competitive in this global
marketplace.
Many companies in the Southern Ohio region that I
represent, and Ms. Schmidt represents, are significantly
affected by lack of enforcement abroad. IP supports close to
2.7 million jobs in our state, in Ohio, which constitutes 57
percent of the private sector there. IP has always been
critical to innovation and entrepreneurship in the United
States, which is why it is imperative for our trade agreements
to appropriately recognize and enforce these IP rights.
I hope our witnesses here today will shed light on how we
can address this critical problem. And I yield back.
Chairman Ros-Lehtinen. Thank you so much, Mr. Chabot. And
now the chair is pleased to welcome our witnesses. First, we
will start with Mr. Grant Aldonas, the founder and principle
managing director of Split Rock International. Mr. Aldonas
serves as the senior advisor with the Center for Strategic and
International Studies and as an adjunct professor and fellow of
the Institute for International Economic Law at Georgetown
University Law Center. My youngest is a law student there, so
if you see her in her classes, double the homework. She needs
that.
Prior to forming Split Rock, Mr. Aldonas served as
President Bush's Under Secretary of Commerce for International
Trade and Executive Secretary for the President's Export
Council from the years 2001 to 2005; welcome. Thank you.
Next, we will welcome Dr. Derek Scissors, a senior research
fellow for economics at the Heritage Foundation's Asian Studies
Center, where he focuses on the economies of China and India.
Before joining Heritage, Dr. Scissors was the China economist
at Intelligence Research, where he wrote its weekly China
bulletin, China Watch and China Quarterly Forecast. Thank you,
Dr. Scissors.
And finally, we would like to welcome David Hirschmann, the
president and CEO of the U.S. Chamber of Commerce for Capital
Market Competitiveness. He also serves as president and CEO of
the Chamber's Global Intellectual Property Center, and is a
senior vice president at the Chamber, where he serves on its
management committee, but I know him as Susan's hubby, and he
better make a lot of money because Susan has an extensive shoe
collection that would make Sarah Jessica Parker envious.
So thank you to our witnesses. We kindly remind all of you
to keep your testimony to no more than 5 minutes. Without
objection, your written statements will be inserted into the
hearing record, and, Mr. Aldonas, we will start with you, sir.

STATEMENT OF MR. GRANT ALDONAS, MANAGING DIRECTOR, SPLIT ROCK
INTERNATIONAL (FORMER UNDER SECRETARY OF COMMERCE FOR
INTERNATIONAL TRADE)

Mr. Aldonas. Thank you, Madam Chairwoman and Ranking Member
Berman, members of the committee, I feel like I could short
circuit the process by simply associating myself with the
comments of the entire committee. The reality is, we are in an
unacknowledged competition of economic models. And it is more
than the individual aspects of unfair trade practices. The
reality is, it is a battle between free minds, free markets on
the one side and between state capitalism on the other. And the
sooner we recognize that we are engaged in that competition and
we understand the importance of vindicating our freedoms, not
only because of the economic consequences, but because of the
model that our country represents and the moral solvency of
that model, the better off we will be. So I welcome the
hearing.
It is an incredibly important topic, certainly at this time
in the global economy and our own economy, but I think it is
also important to recognize the reality of the challenges that
we face. Let me start by underscoring the importance of trade,
both exports and the imports, to the U.S. economy. It is not
just that our trade is 25 percent of GDP, but that, every
morning, every man and woman in the United States wakes up
already wired into a global economy. That is true of General
Electric's workforce making gas turbine engines in Greenville,
Michigan, just as it is of my friend Bruce Hultgren who owns a
paving business in my hometown in Minneapolis. His inputs, his
trucks, all that depends on our trade policy. He understands he
is in the global economy every time he gets up in the morning.
For that reason, the rules governing the global economy
matter. The institutional incentives in the global trading
system can either favor individual freedom, reward initiative,
and encourage innovation, or they undermine the scope of
individual effort, discourage investments in research and
development, and ultimately slow both U.S. economic growth and
the growth of the global economy. To ensure that we contribute
to and benefit from a dynamic world economy capable of
providing a foundation for lifting out of poverty and ensuring
a more broadly shared prosperity, every nation, not just the
United States, bears a responsibility to foster the world
trading system rather than systematically undermining it.
The current fragile state of our own economy and the world
economy underscores that fact. Expanding opportunities for
trade essential and not only is a spur to short-term growth,
but a basis for improving our productivity and competitiveness
over the long term. Conversely, protectionism in its various
forms, which we will discuss today, represents the worst
possible policy response to an economic downturn. One of the
great lessons of the inter-war years and the Great Depression
is the extent to which protectionist trade policies can
exacerbate an economic slump.
To a large extent, at least at the outset of the financial
crisis and the recession, we thankfully avoided the mistakes of
the 1920s and 1930s. We did not see a widespread resort to what
I would describe as conventional protectionist measures as a
response to the downturn caused by the financial crisis. Over
the last several years, however, what we have witnesses is a
very significant increase in foreign policies and unfair trade
practices that are, not only inimical to our trade interests,
but undercut the prospects for economic recovery growth of full
employment here and abroad.
While seemingly expedient in the short run, those practices
also undercut the growth potential of the countries that adopt
them and they limit the prospects for success globally. That
logic applies whether it is China or elsewhere, with still
greater a force to practices that undermine intellectual
property rights or compel U.S. companies to transfer their
technology. Innovation drives productivity, which ultimately
yields stronger economic growth. By diminishing the return on
investments of U.S. companies that they made in research and
development, such practices eventually lead to less investment
innovation and less growth, both in the United States and
globally.
In other words, confronting the unfair trade practices on
which the hearing focuses is not simply a question of defending
U.S. interests, it is critical to restoring global economic
growth and delivering a more broadly-shared prosperity,
particularly to those who live at the bottom of the economic
pyramid. The importance of rolling back these practices is
particularly acute for the world's poor. All prosperity
ultimately flows from expanding individual freedom and
improving the capacity of the individuals to exercise it.
Government intervention in markets, expropriation, intellectual
property theft, limits on consumer choice, diminished
opportunity for private investment and entrepreneurship, erode
the scope of individual freedom and undermine the rule of law.
In other words, wholly apart from their economic importance
at a time of slow economic recovery and high unemployment in
the United States, the policies and the practices governments
use to distort markets in favor of their producers come at a
price in terms of the values that are foreign policies should
be designed to vindicate. There is also important strategic as
well as economic consequences that flow from failing to
confront these policies, as Ranking Member Berman alluded to in
terms of our national security, our economic vitality,
translates directly into an ability to project power, slow
growth, and limited economic opportunity limits our ability to
pay for America's global reach.
But allowing these things to fester is probably more
important in one way. The more profound strategic reason for
confronting these practices is that our failure to do so will
result in a far less dynamic U.S. economy and will inevitably
weaken the moral solvency of the example we set as a free
society. Thank you, Madam Chairman.
[The prepared statement of Mr. Aldonas follows:]

----------

Chairman Ros-Lehtinen. Thank you very much. Dr. Scissors.

STATEMENT OF DEREK SCISSORS, PH.D., SENIOR RESEARCH FELLOW, THE
HERITAGE FOUNDATION

Mr. Scissors. Thank you to the chair and the committee for
having me here. I am going to focus my remarks on China. The
committee has already given many reasons for that, and
actually, Grant has as well, talking about the battle among
models. I will say that China is not the worst example of
imposing trade barriers, but it is the biggest. It is not the
only one, but it is the most important. We can learn a lot by
assessing what China is doing and we can gain a tremendous
amount by trying to get them to improve their practices to the
extent that is possible.
I will start with IPR. IPR is a core issue in the China
trade because the trade relationship between the U.S. and
China, the American comparative advantage there is in
innovation. Without IPR protection, you don't get as much
innovation, which means that the U.S. comparative advantage is
blunted, and that means we don't get the kinds of gains from
trade that we want and we expect, and that we get in many of
our other relationships. You see this in the composition of
U.S.-China trade. China sends us more cell phones than we send
them; that doesn't make as much sense as it should. The
composition doesn't make as much sense as it should. You also
see it in public attitudes.
The public likes trade, and yet, it has problems with trade
with certain countries, and there is a good reason. The public
is right. We are not having the kind of trade relationship with
China that we should. And the main reason, if I had to pick one
out, would be that, we don't get our comparative advantage in
the China trade because they don't protect intellectual
property. What is the problem with talking about intellectual
property? Everybody here knows that there is no solution that
is a magic bullet. Retaliation is very unlikely to help. It
would have to be very carefully done; trying to give them the
right incentives; managing their response.
If we sign a bilateral investment treaty with the China,
very likely, they are just going to circumvent it. They are
very good at that. The chairman actually hit the solution on
the head. It is not direct and it is not perfect, but it will
work better than others, which is, to sign agreements with
like-minded countries that are very strong on IPR, that don't
have Chinese involvement where they are trying to gain the
agreement so they can step around it, and therefore, the Trade
Promotion Authority is very important in this task. If we want
to address Chinese IPR violation, we really need to be able to
have the freedom to make agreement with like-minded countries
and put indirect pressure on the Chinese that way.
The second topic I want to address, which I actually think
is just as important, the committee hasn't really brought it
up, but I know you are all aware of it, is subsidies. IPR is at
that core of the U.S. economy; subsidies are at the core of the
Chinese economy. It is, therefore, just as important to the
relationship also, and unfortunately, in a negative way. We
have been very focused here on subsidized Chinese goods coming
into the American market. The latest example is solar panels,
but our consumers gain from those subsidies. The subsidies that
just hurt the United States are the subsidies that block off
the Chinese market. We gain nothing from that, and in fact, the
Chinese people lose as well.
Financial subsidies are a major part of this. I have a
little joke I tell here that state-owned enterprises have
effectively borrowed $3 trillion at no cost since 2009 and even
the U.S. Government has to respect those kinds of amounts, but
the subsidy I would like to focus on is not financial, it is
not the $3 trillion in no-cost borrowing, it is protection from
competition, because protection from competition is
fundamental. If you can't compete you can't win, and the rest
of it all is details. How does China prevent the U.S. from
competing? They essentially do it by law.
State-owned enterprises don't go out of business ever, they
are just merged with other state-owned enterprises and they
never shrink, so there is no market space created when a state-
owned enterprise fails. Vital sectors of the economy are to be
dominated by state-owned enterprises by law; autos, banking,
construction, insurance, I have a long list in my written
testimony. If you can't get a majority share, if you are not
fighting for most of a market, then the rest of the policies
don't really matter. Those are just the ways of implementing
China's goals to keep everyone out.
They discourage new businesses. They push out small
competitors and businesses saying it is disorderly competition.
There are a range of issues, but the bottom-line here is, if
you don't allow competition, there is no way U.S. firms can
win, and the other policies just don't make any difference in
that framework. Solution; measure and pressure. The first thing
we need to do is measure the subsidies. That is not very
exciting, but when we go to China and we say we demand this and
that, if we don't have a measurement, they will just say they
improved it. We did want you wanted. We changed the policy. And
they just invented a new policy.
We need to be able to measure what they are doing and come
back to them and say you are not making any progress. How do we
pressure them? The pressure is, we need to pick something. I
would pick increasing competition, reducing their barriers to
competition, but we can't have 15 things that we are asking
them for in the SNED and the JZZT. It doesn't work. We have
been doing that for years; it doesn't happen. So there has to
be focus. Now, the positive side of all of this, it gets back
to China being important.
The committee has mentioned Venezuela and Ecuador.
Venezuela and Ecuador have very significant economic ties to
China. We get the Chinese to change their policies it would be
much harder for the Venezuelans, the Ecuadorians, and other
countries, I don't mean to just pick on them, to practice the
policies they are practicing. So China is the biggest problem,
but it also offers us the opportunity for the most progress.
And I am going to close on a personal note. I want to say thank
you to my grandmother on the occasion of her 103rd birthday.
[The prepared statement of Mr. Scissors follows:]

----------

Chairman Ros-Lehtinen. All right. A 103rd, you are going to
live forever, Dr. Scissors. All right. I feel like Al Roker
here. Mr. Hirschmann, you are next, sir.

STATEMENT OF MR. DAVID HIRSCHMANN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, GLOBAL INTELLECTUAL PROPERTY CENTER, U.S.
CHAMBER OF COMMERCE

Mr. Hirschmann. Madam Chairman, Ranking Member Berman, and
distinguished members of the committee, thank you for allowing
me to testify on behalf of the Chamber's Global Intellectual
Property Center, and the chairwoman was kind enough to mention
my wife, Susan, all I can say is, I assure you her shoes are
not counterfeits. This is a very timely hearing and just the
latest example, frankly, of the bipartisan leadership in this
committee on these issues. I think that is fitting because
protecting the millions of jobs tied to inventing, creating,
discovering, and bringing to market new products and services
is a goal that unites all of us and impacts every business in
this country.
Study after study has shown that innovation and creativity,
incentivized by a strong intellectual property rights system,
are the driving forces behind the U.S. economy. In fact, our
most recent study that was cited here shows that more than 55
million American jobs are tied directly and indirectly to
intellectual property. These are jobs that pay 30 percent
higher wages than on average and account for $5.8 trillion in
national output. IP is also one of the most valuable trading
assets and a key to our global competitiveness. In 2011, our
innovative and creative industries comprised close to \3/4\ of
all U.S. exports, and this is true in all 50 states, to the
tune of $1 trillion.
Today, I would briefly like to make five points before
taking any questions. First, while counterfeiting and piracy
are not new crimes, the scale, scope, sophistication, and
devastating impact of intellectual property theft has grown
dramatically. The criminal networks engaged in the systematic
theft of everything we invent may not spend money on research
and discovery, as has been mentioned, but they are very
sophisticated marketers and distributors. Cross-border theft of
IP-protected products has mushroomed from a cottage industry
into a global network of illicit crimes, including counterfeit
and piracy both in the physical world and in online
environments.
Second, counterfeiting and digital theft impact every
industry across the nation. In February 2011, Frontier
Economics found that the global value of counterfeited and
pirated goods is up to $650 billion every single year. And they
further estimated that that would triple to $1.77 trillion in
just 3 years. Counterfeiters and digital thieves are
increasingly sophisticated and deceive us into purchasing
counterfeit automobile parts, food, medical devices, medical
supplies, electrical supplies, pharmaceuticals, that do not
even meet the most minimal safety standards, or in the space of
pirated movies and music, consumers are falling prey to
malicious computer viruses and identity theft.
The entities behind these illicit goods aren't haphazard
infringers. They are operators of sophisticated, organized
criminal networks. For example, recent news reports have found
that the sale of pirated movies and music now provides a major
source of income for the Zetas, the drug cartel in Mexico.
Third, business is doing and must do everything it can to
protect its own IP. This includes both embracing and investing
in new and innovative ways to distribute their products and
developing new technologies and partnerships to protect both
consumers and their supply chains. Every government must also
redouble its efforts to protect intellectual properties, and we
need to set the example right here at home. The recent
extraordinary efforts of the IPR Center, led by Immigration and
Customs Enforcement, are evidence of what can be accomplished,
and it has been done thanks to the great support on a
bipartisan basis from this Congress.
Lastly, we need to achieve meaningful advances in
protecting our greatest trading assets overseas. Foreign
governments increasingly allow, and even encourage has been
said, unwarranted exceptions to IP that weaken company's
ability to innovate. Examples include India's recent issuance
of its first compulsory license to allow generic manufacturing
of patent anti-cancer drug and Australia's recent passage of
legislation that stripped trademark owners of their ability to
use brand on tobacco products.
Meanwhile, a number of countries have inadequate IP laws or
fail to effectively enforce their own IP laws. China is the
best example and remains, as everybody has said, the leading
source of counterfeit and pirated goods worldwide. While China
has taken some steps to advance certain IP reforms, we believe
the real change will only occur when intellectual property
environment has changed in China. One of the most immediate
opportunities to assert U.S. leadership in promoting our
innovative and creative economy is the negotiation of a Trans-
Pacific Partnership, as Ranking Member Berman has indicated.
This is a template for future agreements, so it is
essential that TPP include comprehensive high standards for
intellectual property protection, looking at the U.S.-Korea
Free Trade Agreement as a benchmark. We urge governments to
continue to ensure that TPP provides such strong protections.
We can't exclude any sector of our economy and we must secure
meaningful, important opportunities for biotech pharmaceutical
companies, including the 12 years of data protection for
biologics that is currently in U.S. law.
In concluding, let me simply reiterate that it is essential
for the administration and this Congress to continue to
identify ways to combat foreign theft of our creative and
innovative products, to protect the 55 million jobs that these
products support, and we look forward to working with this
committee to continue to advance that agenda.
[The prepared statement of Mr. Hirschmann follows:]

----------

Chairman Ros-Lehtinen. Thank you very much. Excellent
testimony, gentlemen. I will ask questions on two issues.
Although we have not talked about the Arab boycott on Israel, I
wanted to ask you what thoughts you have about the impact that
the Arab League boycott on Israel has had on U.S. companies.
How effective have been the steps taken by our Government to
reduce its impact? What measures can we take in Congress to
ensure that neither U.S. businesses nor Israel are negatively
impacted by this boycott?
And secondly, on the issue we have been discussing, Beijing
claims that it cannot control the illegal copying and
downloading by its citizens of music, and movies, and other
types of U.S. intellectual property, yet, the Chinese regime
invests massive resources and efforts in blocking the free
exchange of information by its citizens, including simple
messages in support of democracy, or prisoners of conscience,
of course, that cannot be allowed, they say. What are your
comments on the Chinese regime's control of political
expression at all costs, yet saying that it cannot prevent
illegal downloading from open sites?
So anyone who wishes to comment on the Arab League and the
Chinese line.
Mr. Aldonas. Sorry. Let me start with the Arab boycott. My
own experience in private practice for many years as an
international lawyer was that it had a very significant impact.
And that the choices that firms were required to make wasn't
just dealing or coping with our regulations, which they were
happy to comply with, it really was the impact and the power of
what you had in terms of purchasing power in the Middle East as
a result of oil. So ironically, I think the two things that we
could do that are most important don't relate to our regulatory
regime, they actually relate to developing our own energy
resources, so that, in some respects, we reduce the power of
the boycott.
The second thing is, we have a free trade agreement with
Israel which is not as broad as it should be. When we
negotiated in 1984, it was our first step toward free trade. It
was our first bilateral agreement and on both sides we did not
go as far as we could. At this point, Israel has found its own
energy resources. We don't have an energy chapter in the FTA.
In terms of the linkages between our economies, so much of what
Israel contributes to our economy is high-tech. We actually
don't have a chapter that expands on that trade or thinks in
terms of, how would you create an electronic market?
And what I would think about doing is then building from
that to a regional initiative. We do have free trade agreements
with Morocco. We do have free trade agreements with Jordan. We
do have a QIZ program in the Palestinian Territory. Trying to
build off of the U.S.-Israeli model and build, frankly, a model
that is in opposition to the boycott, I think, is the most
profitable way to do it and also the most positive way to do
it.
Chairman Ros-Lehtinen. Thank you very much. Dr. Scissors.
Mr. Scissors. I think I will stick to the China question
after Grant's excellent answer on the Israel question, the
Chinese could obviously do better. They don't devote the
resources to IPR that they devote to lots of other things that
are apparently more in their interest, but we know that. We
know the resources that are available to the Chinese state. We
see it in evidence all the time in negative, and sometimes
positive, ways, and they are important in IPR. We have to
change their incentives. And I think my colleague, Mr.
Hirschmann, and members of the committee, have indicated the
way to do that, it is not to try to bludgeon them into doing
it. They just won't listen.
The way to do that is to say, okay. You want to play that
way. We are going to get a group of people, including trade
partners you really value, we are going to play a different
way, and if you want to trade with Australia, maybe Indonesia
comes into this, countries that have resources, you are going
to have to change the way you behave. So bilaterally, I don't
know what we can do to get them to use more resources that they
have, the chairman is exactly right, but indirectly, I think we
can change their incentives where they realize, all right,
well, if we don't go along with this we are going to lose more
than we are gaining by stealing.
Chairman Ros-Lehtinen. Thank you very much. Mr. Hirschmann.
Mr. Hirschmann. China's laws are stronger than its
practices and you are right that when China recognizes that it
is in its self-interest in an area, it has demonstrated that it
is also able to enforce its laws. And it has not done so
consistently on intellectual property. But China is also not
monolithic and we have found that there are certainly
businesses within China, government leaders within China, who
understand that China's future is in innovation. And one of the
things we have tried to do is strengthen their hand, work with
them, because ultimately, while China's enforcement of
intellectual property is inconsistent, to the point that the
problem continues to grow, to agree that businesses in China
begin to demand from their government that their own
intellectual property be protected, and the rest of the world
joins forces in holding China accountable, I think we will make
real progress.
Chairman Lehtinen. Well, thank you, and I will end with a
question that I don't have time to answer, but a number of
countries in the Middle East, including Saudi Arabia, are
notorious for widespread commercial abuses, such as their
refusal to pay foreign companies and individuals for services
rendered. And these individuals and businesses have few, if
any, effective means for redress, and Congress has enacted
legislation to require the administration to seek resolution of
these disputes, including the establishment of a special claims
process, but the problem remains. It has not been eased up at
all and I had wanted to ask what we can do in Congress to
ensure that there is a fair and speedy resolution on these
cases. So we will leave that for another day. Mr. Berman is
recognized for his questioning period. Thank you, gentlemen.
Mr. Berman. Yes, I mean, you have touched on some of these
issues, but I would like to just push a little harder on China
specifically. Dr. Scissors creates a model of Chinese
Government intentions. They don't want competition. State-owned
enterprises don't fold for failure, they merge in other
entities. They don't allow market space. Other than the obvious
importance of measuring in the area of intellectual property
violations--the costs and scope of the theft, the activity, and
the conduct--tell me a little more what you mean by pressure
because, hoping that the Chinese private innovative sector
creates enough pressure on its own government that, for their
interest, they decide to force this, sounds like a very long-
range plan.
What is the short-range plan? Because it does occur to one
that dealing with what we are dealing with here, should there
be a huge escalation? Should we be talking about threatening
China with the issue that it probably takes most seriously,
which is its market access to us? And with all the costs that
has for American consumers, for trade wars, for all of this,
what is the argument against a rapid escalation of our tactics
and weapons to challenge China's notorious market? What are the
arguments against doing that and finding more moderate, more
incremental, kinds of strategies?
Mr. Scissors. There are two arguments, and I think the
whole committee is aware of one of them, it would cost the
United States. China is very much in favor of competition
overseas. Other people should compete and that competition is
good for everyone. Competition is what drives economic progress
and if we take away Chinese competition we hurt ourselves. They
don't like competition at home. Competition is good for others,
so there are costs to the United States. I think we are aware
of those. I would add to that, we haven't----
Mr. Berman. But in and of itself, is the cost to the United
States in the short term greater than the price of what is
occurring continuing?
Mr. Scissors. Sir, I don't think those are the only options
because I don't think we have done a good job in confronting
the Chinese without going to the big retaliation phase. We
don't confront them on a bilateral basis with, look, this is
exactly what the harm that is being done, we are measuring it,
and the harm is not dropping. We don't do that. We do lots of
things. We ask them for lots of things. They tend to be very
vague and policy-drive, not outcome-drive. The WTO is stalled.
I think that is very unfortunate. I think an American effort in
the WTO on IPR and subsidies would be much preferable as a
first step to taking action against China, and as the
committee, including yourself, has recognized, grouping of
like-minded countries have a way of influencing China without
causing a confrontation.
So if you are asking me if we have tried everything else,
is it worth it? I might say no, because, you know, we haven't
measured the situation yet, so I don't know exactly, but I
understand the question. I don't think we have tried everything
else. I don't think we have been very effective in what we are
trying to do. TPP is a great possibility for changing that, but
I think we need to try other things before we go to massive
retaliation.
Mr. Berman. Okay. Let me just try one last quick response
from Mr. Hirschmann on the Russia issue. You advocate granting
PNTR status and I think there is a lot of logic to that. Are
the current Russian commitments on intellectual property
protection adequate? Are they meaningful? Are we better off
with Russia in WTO and them having normal trade relation status
in terms of making progress here?
Mr. Hirschmann. Well, thank you for raising Russia. At this
point, Russia is going to get into the WTO, so the question is,
will we have, you know, the benefits of PNTR will accrue
largely to the United States by having access to that market.
But the reason this has taken a number of years is because the
United States and this Congress were right to insist that
Russia not just make promises in exchange for getting into the
WTO, but that it make actual commitments.
Mr. Berman. You mean, not replicate the China model.
Mr. Hirschmann. They actually practice what they say they
are going to do. There have been some improvement in some
areas, but overall I think Russia still has a lot to do and
this Congress should continue to hold Russia accountable to
live up to its commitments.
Mr. Aldonas. Madam Chairman, could I just take 10 seconds
to respond to Congressman Berman's first question? The first
thing, and I am going to go back to the analogy of where our
conversation started this morning, which is export controls.
The problem with sanctions, which you have said eloquently over
so many years, is, they are frequently not sufficiently
targeted to have the impact we want. And the broader cost, both
to our economy and to a lot of people in the Chinese economy of
the simple escalation is, it is not targeted to actually affect
the actors that would make a difference.
What I would suggest is that, many of the tools we have
domestically are not well-adapted to the global economy in
which we operate. So, for example, we do have provisions that
allow you to enforce, at the border, your intellectual property
rights. The reality is, it is only on the finished product;
whereas, many of the intellectual property violations are deep
in the value chain. But there is a series of things we could do
with our own laws that would be much better at targeting the
individual companies, and particularly the state-owned
enterprises that engage in this kind of behavior.
Chairman Ros-Lehtinen. Thank you very much. Thank you, Mr.
Berman. Mr. Rohrabacher, the chairman of Subcommittee on
Oversight, is recognized.
Mr. Rohrabacher. Thank you very much, again, Madam Chairman
for holding this very significant discussion. I know people
think that I am not for free trade because I am rather
passionate about some of my beliefs in dealing with China, but
I am a free trader. I believe in free trade between free people
and I do not believe that it is possible for free people to
have free trade with their fellow citizens of the world if the
other people they are dealing with live under a Communist-style
dictatorship as they do in China. I believe that the rules will
always be manipulated so that there is a flow of power and
wealth, not only from one country to the other, but from one
people to the ruling dictatorship. That is why they are a
dictatorship in the world's most populous country because they
know how to wield power for their own benefit.
We have been played for suckers over the years. We have
been played for fools. And we should because we have been
permitting ourselves to act like fools. Oh, we are so afraid.
We are so afraid of this dramatic confrontation that will
happen. We are cowardly. They are not cowardly. They are brazen
in their theft of wealth that should be going for our people to
help our way of life, to help people pay for their family's
education, or their family's home, and instead, the wealth is
going, because we are permitting a one-way free trade. We are
permitting massive theft of value that we have invested to go
to another country that is dominated by a click of people that
ensure that the wealth and power that goes there is under their
control.
It is not bizarre. It is cowardly. And let me ask about
WTO. Well, first of all, let me know about Russia. When Russia
sees the way we are acting about China, why would they think
that they have to change any problem that they have got? They,
in fact, think that they are being discriminated against if we
are letting China off the hook. They don't even have any
political reform in China as compared to Russia. Russia has
dramatic political reform over these last 30 years, yet, they
have all these massive restrictions still on them from the Cold
War, and yet, we let China, which is the world's worst human
rights abuser, literally, get away with murder.
If we do rely on the WTO, which I voted against permitting
China into the WTO, do we have a situation where we can enforce
our own findings against China if we see that there is an
organized effort by the Chinese Government to steal
intellectual property from us, which we know exists? If we
prove that, can we then unilaterally move forward or then do we
have to rely on some panel from the WTO, perhaps with really
significant countries like Cambodia or Nigeria, making the
decision for us?
Mr. Aldonas. If I could, first of all, thank you for your
comments because I largely agree with the idea; if it is not a
free people, free trade is hard to have. Having said that, with
the WTO, the answer is yes or no. You know, if we are in a
situation where the rules, as they currently are, cover the
practice, we have actually had a considerable success in
litigating against the Chinese. The real problem is that, the
WTO rules, such as they are, are largely confined to trade in
industrial goods. They don't reach many of the things that are
a competitive advantage. They don't go far enough. So the
bindings on China are insufficient to go after the kind of
broad panoply that you have described, Congressman, in terms of
their affairs.
That is why I think what Derek has said is, we need to be
working with other countries to be developing the disciplines
that go further, and it goes to the point you made about
Russia. The reality is, we got into the trading system, the
GATT and the WTO, with a bunch of countries that had similar
underlying assumptions about free-market economies. We never
bothered to state those assumptions and the principles on which
the entire system has to be based, and until we get there, we
won't actually have global free trade.
Mr. Scissors. Just really quickly, I mostly agree with what
Grant said. There are some things you can make progress on in
the WTO; there are some things you can't The WTO is a partial
answer. It is not a complete answer. We can do better with the
WTO if we go to them with a measurement of what the Chinese are
doing. We don't do that on some issues, like subsidies, now,
but that isn't going to finish the process. The process also
has to be finished, as you mentioned in the outset, by making
agreements with countries that agree with us, and making a
stark choice between, you can play it this way and this is who
you get to deal with, or you can play it this way and you get
to deal with a much bigger, more prosperous, set of countries.
Mr. Hirschmann. I would just add that, in addition to the
very excellent points here, we do need to have an all-of-the-
above strategy. The U.S. is not only a big market for Chinese
legitimate products, it is also a big market for counterfeit
Chinese products and we don't do enough to enforce our own laws
here and to address the counterfeits that come into our own
economy. Second, what we have seen that when, as Dr. Scissors
and Grant Aldonas have pointed out, China's leading trading
partners unite behind an issue, you don't make perfect
progress, but you make better progress. And we need to put
every effort we can to working with Europe and other trading
partners with China to put this issue higher on the agenda for
all of us.
Chairman Ros-Lehtinen. Thank you very much, Mr.
Rohrabacher. Thank you. Mr. Meeks, the ranking member on the
Subcommittee on Europe.
Mr. Meeks. Thank you, Madam Chair. Let me ask Mr. Aldonas
first. I just want you to elaborate a little bit more on the
Russia situation, that Russia is getting into the WTO, and
whether or not, by Russia being in the WTO, and by us granting
PNTR, will that have any effect at all with reference to
reducing IP theft? I just want a little more elaboration on
that.
Mr. Aldonas. They will be subject to the disciplines of the
TRIPS agreement and as I am comfortable as I am as a free
trader of saying that you want a society, going to Mr.
Rohrabacher's point, where everything isn't free as a
participant in the system, we are better off with them under
those rules. There is absolutely no doubt in my mind.
Mr. Meeks. So to anybody then, what do we do? You know, the
realities of the global marketplace, we made certain trade
commitments that we are not going to undo, but what can we do
when a trading partner is acting in a manner that is
unfavorable to American interests? What should we do? I mean,
you heard my comments earlier about what is taking place in
Ecuador and Chevron, and, you know, you just have some people
that they are not going to--what should we do in those
instances?
Mr. Aldonas. I think Ecuador is an interesting example
because we do have leverage in the fact that they are a part of
the ATPA process, whether or not, given what they have done
with expropriation, and given the violations they have
committed of the Bilateral Investment Treaty, particularly with
respect to Chevron, whether they should be entitled to those
tariff preferences, is a serious question. My own instinct,
that is an opportunity where you do retaliate because they are
flatly flouting the rules of the Bilateral Investment Treaty
and investment is one measure that we are supposed to be taking
into account when we think about the preferences we offer.
More broadly, you have to be thinking about whether you can
help Peru with an FTA, as you have done, outcompete Ecuador
because the answer at the end of the day, even with China, is,
can you build a better model that starts to outcompete them for
capital and for investment? And so my instinct, even in the
Western hemisphere is, as Derek was saying more broadly, let us
find a way to get back in touch with the people that are
committed to free trade. Let us build that.
It may not include Brazil or Argentina right off the bat,
it certainly won't include Venezuela and Ecuador, but if we get
started in terms of that and connecting into Asia, we are in a
far better position to say that Correa and the other
politicians in Ecuador are going to have to listen and start to
move in the direction we want. So in the medium and short run,
use the enforcement tools, longer run, we create a better
mousetrap.
Mr. Scissors. I just have a quick thing to add, because we
all seem to be agreeing with each other on this, but
documentation is really important here. We have this kind of
knee-jerk reaction, they are doing something wrong, but you
can't fix every trade problem. We are not going to fix every
trade problem in China. We are not going to fix every trade
problem in the United States. So what are the big ones? And we
really need to be able to document that in comparison, where do
we put our eggs? I think Ecuador is a good candidate, but I
really want to see, what are they costing U.S. businesses, U.S.
workers, with their action, as compared to other actions we
have to go after?
There has to be a set of priorities here; otherwise, we
just degenerate down into a knee-jerk reaction to everything,
and I don't mean to imply that is the case in Ecuador, I am
just saying, when you want to know what can we do with trade
partners, the first thing I want to know is, how bad is it
really? Because I am not going to solve all the problems. Is
this a problem I really need to solve? Do I have to bring out
sticks and carrots for this one or can I really just say, I got
to move on to something else?
Mr. Meeks. Mr. Hirschmann?
Mr. Hirschmann. I just want to add one point on Ecuador,
and Venezuela for that matter, you know, expropriations are
exceedingly negative in that they impact more clearer than
anything else in the investment climate in a country, even
worse, if that is possible, is when expropriations are carried
out without any process whatsoever. And Ecuador and Venezuela
have gone even one step further by not even recognizing the
international agreements they have reached or binding
international arbitration. So I think, you know, there is
almost a three-part test there. The other thing I would add is,
when all those things are happening, it is also symptomatic of
larger violations of rule of law across the board that severely
impact the citizens of those countries, so those would argue
for a tougher approach.
Mr. Meeks. So, I mean, we are sitting here today and we are
doing this hearing, and I think part of the purpose of the
hearing is, Congress is frustrated. We don't want, as you heard
in my opening statements, the loss of revenue that takes place
in my little state called New York, but we are trying to get,
and I am trying to find out, what affirmative action should we
take? Some say end the preferences agreement. Is that the right
thing to do or is it not the right thing? What is the line when
you cross that line that you are talking about, when it is more
serious than others, you know, or something that we can remedy?
You know, that is what we are trying to determine. I think
we have to determine it as legislators, and I don't have any
more time, but just saying that those are the kinds of
questions that we have, or I have, and I would love to know
what you think in that regards because I don't want to cut off
our nose despite our face.
Mr. Aldonas. I love the direction of the question,
Congressman Meeks, because the reality is, there is a lot of
things that we have, whether it is Section 337 on intellectual
property, whether it is customs enforcement, which could be
better. They don't do anything on their own motion. They have
to wait for somebody to petition, even though they got a ruling
from the ITC that should ban the intellectual property
violations. There is all sorts of things we should be cleaning
up that are specific to the tools we could use ourselves on
enforcement of things like IP.
With expropriation, since the investment is there, the
question is, how are you going to try and discipline that
process more broadly? And frankly, that really depends on what
kind of incentives we create for investment elsewhere.
Chairman Ros-Lehtinen. Thank you so much. Thank you, Mr.
Meeks. Thank you to the panelists. Mr. Turner of that little
state of New York is recognized.
Mr. Turner. Thank you, Madam Chair. I want to relate a
personal experience I have had. About 20 years ago I worked for
a Hollywood studio and I traveled to Moscow to secure an
agreement for the home video rights for a new movie that we
expected to do very well there called Red Heat. I don't know if
you remember it, Arnold Schwarzenegger, it was a good movie. I
was there about a day and walked into the subway station by
Lubyanka, the famous prison, and there were boxes of Red Heat,
the Cyrillic alphabet around our graphics and artwork. I bought
one, copy was absolutely terrific.
This would bespeak that, they had ties, this was pre-
release, into Hollywood to get the artwork and all the other
things they needed. This would be a vast criminal network. The
income on this had to be tremendous. That was a long time ago.
And if anything, I am sure they have gotten a lot better. There
have been a number of regime changes in Russia, but these guys
are still working and working well. Also, I think there is
evidence that they are taking American properties, copying it,
and then sending it back to us in the black market.
Are we aware of this as a criminal enterprise and what
steps are we taking that you know of or should we be taking?
And I direct this, you mentioned this, Mr. Hirschmann, so if
you would like to lead on that and I would like all your
opinion's if you would. Thank you.
Mr. Hirschmann. I recently met with a young woman who is a
film editor out in Hollywood and I asked her why she wasn't
working. She said, well, I have been working for a film that
was filmed in China by a Chinese filmmaking company and
employed thousands of Chinese to make it, and I was helping
edit it here in Hollywood, and by the time we got done editing
it, it had been distributed so many times counterfeit in China
that there was no longer a market in China for their own movie.
And so there are countless examples of that across the world.
You know, one thing to remember is that, increasingly,
people who distribute counterfeit products, whether it is
physical products or movies and videos, are using the Internet
to do that. The Internet is a vibrant distribution network for
all kinds of products and we need to be very careful to
preserve the innovative properties of the Internet and continue
to encourage innovation there. But at the same time we have to
recognize that it is also being used by a few to distribute
products in that way. So I think one thing we can do is to
begin to work with the world to find reasonable pro-Internet
freedom, but still rule-of-law approaches to address the
distribution on the Internet of counterfeit goods and stolen
digital properties.
Mr. Turner. Do we know if these criminal enterprises are ad
hoc or is there a continuing thread in this?
Mr. Hirschmann. In most case they are not ad hoc. They are
very sophisticated networks operating, usually not in one
country, but in multiple countries. You might find the servers
in one country and the business, the place where they take the
credit card orders, in another country, so it really requires a
global approach to addressing that problem. And this are every
bit the sophisticated, organized criminal networks that their
predecessors were that we dealt with effectively here in the
United States.
Mr. Scissors. Just something that is indirectly, but I
think important in its relevance, there is a bill in front of,
well, I am not sure of its status, there is a bill in the House
on economic espionage, which is a criminal activity and goes at
IPR the same way as you are talking about. It involves large
criminal enterprises, and the bill has to do with penalties,
and there are possibilities. There are lines of attack that
work. As David just said, these are global enterprises, which
means it is not the case that if we pass a penalty in the U.S.
we will never see these guys because they are safe in some
country that we can't get access to. They are not in one
country. They are in lots of countries.
They like to travel. They like to portray themselves as
legitimate multi-nationals. Globalization gives us ways to put
pressure on them just like it gives them more access to us. So
I do think, in thinking about economic espionage, which is more
my area of expertise in this matter, that there are ways that
the U.S. can change its laws, not to solve the problem, but to
exert more pressure on these companies and make it more
difficult for them to be very organized, and very large, and
very profitable.
Mr. Aldonas. If I could, I think you are absolutely right
to treat it as a criminal enterprise and what that implies is
that there are tools available. The individual theft becomes a
predicate offense for a RICO charge and that becomes a criminal
enforcement matter and we can turn to INTERPOL to help us
enforce it, but we don't do that now, all right? I mean, the
sad fact is, is that, even with the way we have thought about
access to our securities markets, the U.K. securities market,
they are a large enterprise that benefit from making profits of
these illegal activities, and we don't do an awful lot to
enforce disclosure under those circumstances. Specific
conditions that said we are going to force disclosure of this,
the sunshine would help. It really would.
Chairman Ros-Lehtinen. Thank you so much. Thank you, Mr.
Turner.
Mr. Aldonas. Thank you.
Chairman Ros-Lehtinen. Mr. Sires of New Jersey is
recognized.
Mr. Sires. Thank you, Chairperson. You know, I would like
to share a story with you that happened to me and really opened
up my eyes. I was having lunch here at the Members' restaurant
and they happen to have catfish that day. I don't eat a lot of
catfish, but I ate the catfish. You know, I took some catfish,
I went to the table, and the ranking member of the Agriculture
Committee, as I am eating the catfish, says to me, ``You know,
we had to put some language in the Agriculture Committee bill
because most of the catfish is imported in this country now,
that is consumed here, and actually, in Vietnam, they grow the
catfish right next to the sewage outflow.''
So needless to say, I haven't eaten any catfish since, but,
you know, that goes to the question that the American people
don't know what is coming in. I mean, I was like, oh, my God.
Then we have the other issue--and then, of course, obviously
that industry is being destroyed in Alabama, where we have a
legitimate catfish industry, because, obviously, it is a lot
cheaper to raise the catfish in Vietnam than it is in Alabama.
But, you know, the other question that I have also is, you
know, with the development of the solar panels.
You know, we develop the solar panels, you know, I guess we
help China, whatever, they stole it, you know, the way of
making it, then they come here and they dump all these solar
panels in this country and it basically destroys our industry.
I mean, we have got to find a way of dealing with these things
because they are costing us a great deal of jobs in this
country. And when I say that I agree with some of the comments
by Dana Rohrabacher, we have to get a little tougher, you know,
with some of these things. And I don't think the American
people really know, sometimes, what comes in and what we
consume. We are just not that well informed.
I mean, I watch it and I am here listening to everything
that goes on here in this country all day long. So I was just
wondering if you have a comment about that.
Mr. Aldonas. Yes, I do. So I think Congressman Meeks would
testify, I am a free trader, and what I would tell you is
that----
Mr. Sires. Don't eat the catfish.
Mr. Aldonas. Yes, I would. There is no consumer benefit,
which is what free trade is about, to allowing unsafe products
into our country, and it does mean doing what governments
should do. That is not a debate about whether this, as a
government function, should do, which is to protect our
consumers. And that is not in opposition to the idea of free
trade. So if that catfish is a health problem, of course we
should be focusing on it. We want to participate and get the
benefits of the global economy, but only to the extent it is
serving our consumers. So you instincts are right and I just
want to reassure you, it is not a protectionist measure when
you are doing that, that is free trade.
Mr. Scissors. On Chinese solar, I think the opening topic
of the committee is IPR. That is the key issue here. If the
Chinese, on their own, develop better and cheaper solar panels,
we should be able to buy them. I don't want to tell people they
can't buy them. I don't want to tell people they can't expand
solar power because it is too expensive. There is a cheaper
solar panel over here, but you can't have it. I don't want to
do that. If the Chinese stole the solar panel technology, now,
that is a totally different story, and that is why information
is crucial here.
I mean, I don't mean to say anything about our solar panel
companies, because we do some great work in this country in
solar panels, I don't want a solar panel company to be able to
come to Congress and say, they stole it. Just trust me. They
steal lots of stuff. They stole that. I want evidence and I
want a process by which we can take that evidence and say, here
is the problem; here is what it costs us; here is our
retaliation. So free trade says, if they are making better
solar panels on their own, we want to be able to buy them. IPR
protection, what we are talking about here, says, if they are
stealing it, we need to document that and we need to take the
action that is appropriate to what they have done.
Mr. Sires. But what happens when they dump in the market,
you know, to purposely hurt another industry in another
country?
Mr. Scissors. Well, I mean, dumping is a separate issue
from IPR. That is a perfectly legitimate issue. The Chinese are
very likely to be dumping because they originally grew up
selling to Europe and Europe doesn't have the money anymore, so
they are very likely dumping solar panels, or have been at
certain times, then the Congress has a choice to make. Cheaper
products have a benefit for the clean energy industry in this
country; they do, but there is a tradeoff. And we have means to
decide, we don't like the dumping, we are going to measure the
dumping, and take retaliation appropriately, but there is a
cost and a benefit there when they are doing it legitimately.
The great thing about this hearing is, if they steal the
IPR, that is just theft. It is a clear-cut case. When we get
into dumping you have to decide, do I want the cheap product or
do I want to punish them for dumping?
Mr. Sires. Mr. Hirschmann, do you have a----
Mr. Aldonas. Just to add further on the dumping side. I
used to have to administer that part of the Commerce Department
and it is another one of those areas where the tools that we
have are not adequate to the global economy in which we
operate. The reality is, you know, going to Derek's good point,
I don't want to prevent cheaper products where somebody is
competing on the basis of their own innovation from coming to
the country, but I do think it is time to reconsider what we do
with the dumping laws and it may be time to consider whether or
not a private right of action makes more sense than asking the
Commerce Department to investigate it.
In other words, put a tool in the hand of the company that
is most affected, put them in a position where they have to
provide the evidence that Derek suggests, but also allow them
to be able to go after the company that is penalizing their
potential and find a way so they have direct recourse rather
than a tariff, which sort of damages our economy. It doesn't
actually have that much of an impact on the dumping company.
But I think it might be time to rethink how we approach that
issue.
Chairman Ros-Lehtinen. Thank you. Thank you so much, Mr.
Sires.
Mr. Sires. Thank you.
Chairman Ros-Lehtinen. Have you seen that show, Hillbilly
Catfishing? I don't think you want to eat it from the United
States either. Mr. Marino of Pennsylvania is recognized.
Mr. Marino. Thank you. Thank you, Madam Chair. That is why
I am a meat-and-potatoes guy. My professor in undergraduate
work told me a long time ago to watch the sleeping bear; China.
And he predicted with a great deal of accuracy where we are at
today concerning China. And if we believe that private industry
in China, which is an oxymoron in and of itself, will have any
effect on IP theft, I think we are truly kidding ourselves.
China is a dictatorship. It is a brutal regime that will not
change its basic ideology. Nevertheless, China wraps its arms
around capitalism, which I think, to a certain extent, we are
responsible for because they are getting rich, in part, because
of capitalism.
And the Chinese Government has absolute control over
everything. I have spent my life in college, and graduate work
in law school, and up until this point of studying China pretty
significantly, and it reacts on a day-to-day basis. I don't
think China is concerned with long-term future. And as far as
Russia, Russia already is very much aware of our lack, the
U.S.'s lack, of a response to China's IP theft. Russia is just
waiting. I just visited Russia a short period ago. They are
very concerned and want to get into WTO. It is the ultimate for
them. But watch what happens when Russia does get into the WTO,
it will step up its intellectual property theft to the levels
of China.
So with that little dissertation, and we will start with
Mr. Hirschmann, and then anyone else who has a comment, please
chime in, because I have a couple of questions, what is the
reality? What are the facts, the bare-bone facts, if the U.S.
simply says to China, within 6 months, if you do not change
your policies of flooding the market, stealing our intellectual
property, products coming in this country will substantially
curtail, if not stop?
Mr. Hirschmann. I don't think we, you know, as Grant
Aldonas pointed out, you have to balance our desire to make
progress in China with also making sure that, where we benefit
from the relationship from China, we don't shoot ourselves in
the foot, and simply denying consumers products from China, or
starting a trade war with China, while, you know, it would
certain escalate the confrontation with China, but I don't
think it would be a swifter path to solving the problem. I wish
there was a simple solution and I can see why that is tempting,
and I don't think that simply waiting for indigenous businesses
in China to rise up is the answer, but it is part of the
answer, because China is not monolithic.
It is also true that we can do a better job of closing off
markets to counterfeit Chinese products. We can also join with
the rest of the world. The one thing I do know is, they are not
likely to listen just to us. And too often, to be candid, other
issues in the U.S.-Chinese, or in the European-Chinese,
relationship end up trumping these issues. If we are going to
make progress on these issues we have to be united and put them
at the high up top of the list.
Mr. Marino. Doctor?
Mr. Scissors. If you were to do that in the short term it
would be much more harmful than it needs to be. There are a lot
of corporate supply chains that run through our allies, our
companies, their companies, and then also China. And a short-
term adjustment like that is going to be very difficult. I am,
you know, going to caution, there are a lot of gains from--we
just had a Chinese State entity today buying GM pension assets.
It helps GM, but might save the U.S. Government some money.
There are a lot of gains in this relationship. If you were
going to go the route of saying enough is enough, we have a new
Chinese Government coming in this fall, you tell them, look,
the last government was a disaster, we are not putting up with
10 more years of this.
Give them a time period. Don't say 6 months, it is not fast
enough for them, it is not fast enough for us. Give them a time
period, give everybody warning, if you are going to go the
retaliation route and say, new government, you get to change
gears, we are not accepting another 10 years of statism, that
would be a more responsible retaliation route because it is us,
it is our allies, it is our companies, we are all involved in
this process.
Mr. Marino. Thank you. Sir.
Mr. Aldonas. You know, I guess what I would say is that, we
have this disturbing tendency, I know I do, to assume that
China is monolithic and that there is no politics going on over
there, but China has gone through a generational shift. The
folks who have been in charge for 10 years are the people who
kept their heads down and made their way through the Cultural
Revolution. The people who are coming now brought you the
Cultural Revolution and there are two different factions that
draw very different conclusions from that experience.
One part of that generation desperately doesn't want to go
back, another part wants to embrace that reality and reinforce
it. And I think our job is to be sophisticated enough to bring
pressure to bear on them where we can influence their
decisions, but actually to create the political space for that
reform movement to move in the direction they know they have
to. They know they are living with a 4000-year-old system of
Guanxi rather than a rule of law. They have to make a
transition. They know they have to make that transition and
employ that 650 million people that are west of Shiyan with
nothing but a handheld hoe.
Mr. Marino. Okay.
Mr. Aldonas. But I think we have to provide the incentive
for them at the same time we are providing a stick to the other
side to say, that is not going to work and it makes me start
thinking about, what is the biggest ticket item you could use
to send a signal that the relationship has to change? It
doesn't necessarily have to be across-the-board tariffs on
imports, but we do have to send a signal that enough is enough.
Mr. Marino. Thank you.
Chairman Ros-Lehtinen. Thank you, Mr. Marino. And we will
conclude with Ms. Bass, the ranking member on the Subcommittee
on Africa, Global Health, and Human Rights. You are recognized.
Ms. Bass. Thank you, Madam Chair, and I want to thank the
gentlemen who have given us testimony for you expertise today
and congratulations to your grandmother. You are very blessed
to still have her in your life. You know, this is a very
important issue for my district. We have spoken a lot about
Hollywood. I actually represent Hollywood, Culver City, a lot
of the entertainment industry, a number of studios, and also
the music industry, and I just, in listening to you, wanted to
know if any one of you could provide me some specific examples
so I can understand a little better. For example, I think I
have heard several things. I think I have heard that there is a
need for--well, that we could do better.
For example, we don't necessarily have the tools, then I
believe I have heard we actually have the tools, but they are
not necessarily enforced. I was wondering, is it a question of
resources? Is it political will? What is missing? Because it
seems as though you have described that the parts are there,
but for whatever reason, we have not put it all together and
have actually enforced, or used the tools, when we could, and
maybe you could give me some examples.
Mr. Scissors. I will go first because I am short. What is
missing is focus. We need to decide what our priority is. I
said this in my opening statement, you can't go to the Chinese
with eight vague demands. It is not going to work. They don't
want to cooperate and you are giving them an opportunity not
to. So the hardest thing for Congress to do is to not pressure
the administration that at the next meeting, at the next
Presidential Summit, I want you to bring up my issue, and I
want you to bring up mine, and mine, and mine, and mine, and
mine.
Ms. Bass. Right.
Mr. Scissors. There has to be some sort of decision about,
this is the big thing. IPR would be a very tough one, but it
would be a justified one. So the number one thing I would
suggest is, there has to be some sort of consensus on, this is
where we draw the line and, you know, the relationship isn't
going to be perfect, but this needs to improve.
Ms. Bass. Do you have opinions about what that priority
should be?
Mr. Scissors. Yes, and my opinion is that, until you get
the Chinese to accept more competition within China, we can't
make progress. Everything else is at a level below that. And
right now, they were moving toward more competition, for about
20 years, 25 years, this government, they have moved away and
they need to move back. And everything else gets better if they
do that and it gets worse if they don't. So that is where I
would put it. I have a lot of specifics, but I don't want to
take up all the time.
Ms. Bass. Okay.
Mr. Aldonas. We have a lot of debate about currency. The
Chinese are actually getting worse on currency right now. They
are actually driving the Renminbi down relative to the dollar
because they are concerned about European markets at this
point, but we shouldn't overlook the fact that the more
powerful reason is actually the lack of competition in capital
markets and the fact that you have, essentially, a system of
indentured capital for Chinese savers. That is the real
problem, right? And one of the answers is expanded market
access.
And when I think about Hollywood, my daughter is trying to
be a comic out there, and when I talk with Kiki about, you
know, these sorts of issues, and she asks me very similar
questions, I say, look, you know, the irony is, is that,
ensuring that there is broader market access for Hollywood
studios in China so that the product gets there, that the cost
is low, that the Chinese people have access to a legitimate
product, which they now have the income to buy, is our best
answer, and that is a very specific demand, and it is a
positive one.
It is not saying we are going to bash you. What I am saying
is, let us go to the table and say, sorry, part of the answer
on IP, particularly as it affects Hollywood, is you deny our
studios the ability to market their product the way they can do
it cost effectively and serve the consumer. So there are
specific and, I think, positive ways to try and address the
problem at the end of the day, but it starts, not only with
focus, it actually starts with what the concept of the
challenge is. And I think the real challenge we face is, we
have a set of tools that, frankly, aren't geared toward the
world we live in, and until we get there and we rethink all of
the tools with that perspective in mind, China is the
paradigmatic example, we probably won't make the progress we
have to.
Ms. Bass. Well, the example that Mr. Hirschmann mentioned
about how the film was being counterfeited before it was even
in the editing stages, I have heard that many, many times.
Mr. Aldonas. Absolutely.
Ms. Bass. And, I guess, if you do, and, you know, not right
this minute, have legislative proposals, I would certainly be
interested in knowing what they are.
Mr. Hirschmann. Let me raise one to build on what Dr.
Scissors and Grant Aldonas have said, which is, we recommend in
our testimony that we strengthen the 301 process, which is the
process at the United States Trade Representative's Office. You
know, it has been a useful tool to do that report every year.
USTR uses it to guide, but really, we need a process that has
much clearer metrics, much clearer benchmarks, and that we can
use to rally and focus the world's attention on specific
problems and make real progress. So that is one area. And the
second is, Congress can play a useful role in ensuring that the
administration negotiates the strongest possible provisions on
intellectual property in the Trans-Pacific Partnership
Agreement.
You know, China will be watching to see what we do there
and if we don't continue to raise the bar when we do negotiate
trade agreements, we will pay a price for that.
Ms. Bass. Thank you very much.
Chairman Ros-Lehtinen. Thank you, Ms. Bass. Mr. Royce, the
chairman of the Subcommittee on Terrorism, Nonproliferation,
and Trade. Thank you, Mr. Royce.
Mr. Royce. Thank you, Madam Chair. The Chinese Government
estimated its public procurement market at, I think, $110
billion in 2009, but we have figures from our Department of
Commerce report, Doing Business in China, that puts that actual
figure in excess of $200 billion. We saw some figures from the
European Chamber of Commerce, they report that their estimate,
because of the way these companies work there, or are publicly
owned, of the Chinese Government contracts, they put their
estimate at over $1 trillion.
So that is a lot of money. A lot of potential contracts out
there for U.S. business, but only in theory, because in fact,
that market is closed, largely, to us in the United States. But
at the same time, Chinese entities continue to be awarded U.S.
Government contracts despite not being a party to the WTO's
general procurement agreement. That agreement among 40 major
WTO member countries is intended to open up contracts to
foreign competition, so they just won't sign it. To address
this problem, I have introduced a bill with Mr. Connolly which
prohibits Chinese-based companies from receiving U.S.
Government contracts until China joins the GPA, which will then
force them to open their market.
And I was going to ask each of you, would this approach be
a helpful incentive for China to join the GPA and would its
joining help eliminate Chinese unfair trade practices against
U.S. companies in the public contract market? The other aspect
of this that is so troubling is just how much of China is, in
fact, you know, big government in China as opposed to an
evolution toward more market economy, but if I could have your
views.
Mr. Scissors. Unfortunately, I am going to have to say no.
We have plenty of examples of the Chinese signing agreements
and finding ways around them because of the extent of state
intervention. They have a lot of options for how to do things.
Mr. Royce. So your presumption is that they will just
violate that rule and that we won't use the enforcement
mechanisms under the WTO to compel them to?
Mr. Scissors. My presumption is that, if you are talking
about really opening the GPA market----
Mr. Royce. Right.
Mr. Scissors [continuing]. Government procurement market in
China, not making improvements, because you can make
improvements, I am not arguing that, but the big one, where we
count all the SOEs and those very large numbers you are talking
about, that is much more fundamental than signing another WTO.
Mr. Royce. Yes, but how do you do that? I mean, I have
given you one suggestion of a way in which we cut off their
contracts here.
Mr. Scissors. Their contracts here are minor, Congressman.
That is not going to have an effect. You have set the stage
perfectly.
Mr. Royce. Right.
Mr. Scissors. You can count this up to a $1 trillion.
Mr. Royce. Right.
Mr. Scissors. They are not making anything like a $1
trillion here, so I mean, they are just going to weigh those
two things and say, no, I don't think so. You know, you have to
go at, if you want access to big things, which is pushing the
state back, opening the market, which I completely agree with
you, is the proper goal, you have to involve big things. And
big things are, look, this is the nature of our relationship.
We are not getting our comparative advantage and you are. We
are going to start trading with other people more through the
Trans-Pacific Partnership, through other kinds of deals like
that, because the whole nature of the relationship needs to
change.
Mr. Royce. But I understand we have this dialog with them,
but I have suggested a concrete act where we cutoff contracts,
you are saying, that alone won't--then can you suggest
something decisive? Because I am not certain dialog, as much
dialog as we have had, is going to lead us to where we need to
go. Is there decisive action we can take in terms of access to
the U.S. market which would cause them to reconsider?
Mr. Scissors. I know I am taking up all the time, I
wouldn't use access to the U.S. market. A big, expanding, well-
done, TPP is the best lever on the Chinese.
Mr. Royce. Let us go to----
Mr. Aldonas. Yes, I don't disagree with Derek's point about
a TPP and outcompeting them for investment capital is
ultimately the answer in terms of what will sway people, it is
creating the political space for a new generation that does
want to move in the direction of reform, but I differ in the
sense that I like your idea. We reach an agreement with certain
countries to provide certain preferences under that, and the
fact that countries like China benefit from that agreement and
from an open procurement market while they don't open their
procurement market, I feel perfectly comfortable as a matter of
political economy as opposed to economics to say that we
definitely should adopt that approach. I would go one step
further.
I would say that you also need rules within the GPA that
reinforce things under TRIPS, so there ought to be a linkage
between intellectual property violations and GPA that says,
even if you are a member of the GPA, if your computers are
running pirated Microsoft software, sorry, you don't get the
benefits of the procurement code. And then what I would also
say is that, I would be looking hard at the rules on state-
owned enterprises in the WTO, and any other agreement we reach,
to make sure that similar sets of disciplines apply to the
SOEs, because I think Derek's point is that, you know, GPA,
government procurement, you have those definitional problems,
but if you really accept the Chinese economy as it is, it is
the state-owned enterprises that----
Mr. Royce. Mr. Aldonas, we worked together some years ago
when you were on the Senate Finance staff on AGOA. I would like
to just ask if afterwards I could talk to you about your ideas
on how to add that to the legislation.
Mr. Aldonas. Sure. More than happy to do it.
Mr. Royce. All right, very good.
If I have time I will ask Mr. Hirschmannn for a response,
if not, I yield back.
Chairman Ros-Lehtinen. Go right ahead.
Mr. Royce. Thank you.
Mr. Hirschmannn. I think we would agree that China is very
focused on what might emerge as competing markets for itself.
So if we can surround China, while that may not be as swift an
action, we have certainly--they are watching very carefully
what happens in Vietnam and other countries in Southeast Asia,
and they are losing market share in some areas to the--if we
can raise the bar in the rest of Southeast Asia through strong
TPP, I think we will make progress far faster than any other
approach.
Mr. Royce. Thank you, Mr. Hirschmannn. Thank you, Madam
Chair.
Chairman Ros-Lehtinen. Thank you, Mr. Royce. Pleased to
yield for his questioning time to Mr. Sherman, the ranking
member on the Royce committee, the Subcommittee on Terrorism,
Nonproliferation, and Trade.
Mr. Sherman. The Royce committee, the best.
Washington and Wall Street have backed the trade policies
over the last 20 years. We see the results. And we are told
that if we just rearrange the deck chairs on the Titanic, we
won't need to use the lifeboats. Well, this is simply absurd to
have you gentlemen come to us and say, we gave MFN for China,
we saw the result, so now we need more free trade agreements
without fair trade, without balanced trade. But we are told we
have got to get tough with China. How do we do that? More
imports to the United States from more places that may or may
not accept our exports. We are told that yes, we were in a
$700-billion trade deficit, but that is because American
workers are lazy or overpaid, not because Washington and Wall
Street have adopted terrible policies in their own best
interests and not in the interests of American working
families.
I will start with Mr. Aldonas. I know we are focused on
movies and intellectual property. China limits the number of
screens where American movies can appear. Have we had the guts
to say there will only be 20 stores in America that sell
Chinese apparel? I think that is a one word answer.
Mr. Aldonas. No.
Mr. Sherman. And this is because Wall Street makes money by
selling that apparel here. Nothing prevents a man from
understanding something so much that his livelihood depends
upon him not understanding it, and nothing is clearer than that
MFN for China and the host of so-called free trade agreements
have destroyed the American dream.
What would happen to the Chinese economy if we ended MFN
for China?
Doctor?
Mr. Scissors. They would have a period of rather difficult
adjustment so they would probably have about a 2-year slump, an
outright slump. They would either make the adjustment to move
toward more market economy, or they would subsidize goods to
send then to other countries which would then ship to the U.S.
Mr. Sherman. When I say MFN, I don't mean transshipment
would be allowed. You are positing a world where we end MFN for
China and so the Chinese goods come to the United States by way
of Mexican ports? You are changing my hypothetical.
Mr. Scissors. I know, but I am trying to indicate, sir,
that your hypothetical doesn't involve just stopping MFN for
China. It involves unraveling a large part of the world trading
system.
Mr. Sherman. No. It means that when goods come into our
country we have to know their origin, we do that already. I
assume that when something says made in China it is not made in
North Korea. If you tell me that that is not the case then----
Mr. Scissors. Well, sir, think about the supply chain.
Think about the supply chain. Is a computer that was assembled
in China, made in China?
Mr. Sherman. A computer with over 51 percent value-added in
China is majority value-added in China. A computer that is 21
percent value-added in China is 21 percent. And if you impose a
tariff on a good and you say it is 21 percent value-added in
China, therefore it is subject to 21 percent of its value is
subject to a tariff, then you have an endless sliding scale.
You simply have to determine what percentage of the good was
made in that country.
Now you bring up sourcing rules, of course we now have
sourcing rules that allow that we have a China free trade
agreement already. We call it the South Korea Free Trade
Agreement. Goods that are 60, 70 percent made in China get to
come into our country duty free, no reverse access.
Five minutes is simply not enough time to discuss how
Washington and Wall Street have acted in their own interests
and have been responsible for what we have seen over the last
20 years, which is the destruction of the American dream. I
yield back.
Chairman Ros-Lehtinen. Thank you very much, Mr. Sherman.
Thank you.
Mr. Manzullo, the chairman of the Subcommittee on Asia and
the Pacific, the Manzullo subcommittee.
Mr. Manzullo. Thank you. Good to be here. Grant, good to
see you, and I appreciate all the efforts that you have made to
help out with the steel embargo. Steel tariffs were placed by
the Bush administration and I fought those, and you were the
portal in commerce that allowed us to get the specialty steel
that kept thousands of American jobs. I just want to thank you
publicly for that.
Our committee held a hearing several months ago dealing
with the piracy of intellectual property rights in China and
one of the witnesses was a fellow by the name of Fellowes, F-E-
L-L-O-W-E-S, world renowned in the making of paper shredders.
Their American facility is located in the suburbs of Chicago.
Mr. Fellowes testified that he had a partnership with a Chinese
entity and an investment of about $180 million. One day the
American partners were locked out. The shop was closed. A
lawsuit was filed by the so-called disgruntled customers who
had ordered these shredders and could not get them, and then
the Chinese courts entered judgment levied on the property,
smoking Fellowes. This is another example of what happens with
the piracy and the complicity of the Chinese courts.
My question to the three of you is, in these cases where
the Chinese courts are getting involved, do you see any
indication at all with the exception of a few cases, of them
doing anything to protect American property rights?
Mr. Aldonas. No. I mean the problem, Congressman Manzullo,
is that oftentimes in their legal process, the judge is looking
over their shoulder at what the provincial governor wants. And
if the provincial governor is someone like my former
counterpart who just took the fall, they are trying to find a
way to shift those assets that Mr. Fellowes had invested in
into the hands of one of their colleagues in China. So no great
surprise the judge is looking over their shoulder at the
provincial governor and decides to disenfranchise the U.S.
investor.
Mr. Scissors. Unfortunately that is true. The judiciary is
controlled by the Party, and the interesting thing, I guess,
from an academic perspective is the local Party versus the
central Party. The best option U.S. firms have, and this is not
a good option, is to be able to go to the central Party
leadership and say, the local judiciary is making a decision
which will hurt China as a whole. That means the same
government we have been rightly criticizing as not respecting
IPR as a whole is the better option in the court cases. It is
not a very appealing situation. But local judiciary as Grant
said is responsible, but it is responsible to local officials.
So they don't care about precedent. They just care about what
is benefitting the local economy at that time. And when your
better outcome is to go to Beijing, you are not in a very good
situation.
Mr. Hirschmannn. I think that is exactly right, and it is
another example of why, both how complex it is to deal with
China and why we need to understand that China is not
monolithic. Even at the provincial level we have occasionally
found people who understand the need to move forward. And so
the only way I would amend what Dr. Scissors says, I think you
have to push at both levels at the same time, and you have to
also use the competition among the provinces to your advantage
within China.
Mr. Manzullo. One of the things that I have noticed is
several years ago a local firm had made a bid on a waterworks
improvement facility and the Chinese stole everything, the
intellectual property, they even downloaded and stole their Web
site. I asked the Chinese Ambassador to come into the office
and he did, along with the DCM. We explained to them the
situation, and the word got back that you don't do stuff like
this, and there was a favorable ruling in the Chinese courts.
If you asked the Chinese Ambassador to do that today, no one
comes in. The relationship that Members of Congress now have
with the Chinese is nothing as it was a few years ago. Does
that indicate anything to any of you?
Mr. Scissors. Yes, this government, the government that has
been in charge since 2002 that is about to leave, thankfully,
is a statist, aggressive government. And it is not the same
government that presided over Chinese true reform period which
ended about the time this government took over. So what it
indicates is that you have the possibility of a better
government in China and a worse government in China. As David
has repeated, it is not a monolithic entity. We have a worse
government now. We also have a new government coming in for 10
years. It is coming in in the fall. I am not going to promise
you they are better. That is a very difficult question. But
that is an important question for Congress to get a handle on.
You guys have front-line experience. Are the new people who are
coming in more responsive? If they are not that is a piece of
information because they are going to be in charge for 10 more
years.
Mr. Aldonas. And I can, actually, Congressman, is my most
recent trip to China was to Hong Kong, and the surprising thing
there was how many Chinese entrepreneurs were leaving. In other
words, they are betting against their own country and sort of
the strengthening in some respects of the position of the
state-owned enterprises, the strengthening of this model of
having the right political connection to get the right result
in the Chinese court. And the next generation of Chinese
leaders, there certainly are leaders in that next generation
that understand that that is a much deeper threat to, what,
even to the Party maintaining its position in Chinese society
than the idea that you shouldn't engage in free trade. So
ultimately things are changing. I am not sure they are changing
in a positive way in the short term, but China is going to come
very quickly to the point where it confronts the fact that the
very things like private property, contract enforcement that
allowed them to move from 1979 to the present day with that
growth are going to come to a short stop. Because every step
they are taking is eroding that set of underlying institutions
that actually allow their economy to grow.
Mr. Manzullo. Thank you.
Chairman Ros-Lehtinen. Thank you very much, Mr. Manzullo.
Mr. Connolly is recognized of Virginia. Thank you, sir.
Mr. Connolly. I thank my friend the chairman, and I want to
welcome our panel on being here.
Last year I was on the congressional trip to the Silicon
Valley and to Seattle where we visited Microsoft, and we
actually had sort of a big seminar for the business community
and it was talking about this very topic, intellectual property
protection and infringement. And what stunned me was, we had a
string of business representatives, every single one of them
had his or her own story about blatant intellectual theft in
China. There was a candy manufacturer where right down to the
color picture packaging of the package of their products was
outright stolen. Starbucks, whole and entire replications of
Starbucks' coffee shops plunked down in Chinese markets, right
down to the logo, the product looks exactly the same, entirely
unrelated to Starbucks, stolen. Microsoft software, stolen. It
was really an astounding presentation and what struck me was--
and I am going to elicit your reactions--what is the United
States Government doing about this? I mean it is across the
board. It is blatant. We are not talking about knock-offs in a
certain part of town that we have got to kind of crack down on.
This is not Itaewon in Seoul years ago.
What is your honest assessment of the United States
Government's enforcement, vigorous enforcement, what should it
be, and what leverage do we have to try to make sure the
Chinese come into the family of nations in terms of
respectable, honest, predictable, reliable protection of
intellectual property when the violations are so sweepingly
blatant and across the board in terms of products?
Mr. Aldonas. So I am tempted to use an analogy to the
environment. There is this thing called a Kuznets curve where
things get a lot dirtier before they get better, and it all
depends on rising income. And so the irony in all this is that
we are actually better off with the China that has the
incentive to move in the right direction, because as incomes
rise those consumers want to buy the right thing.
I am charmed a little bit by your example because I had
some negotiations at one point with the vice chairman, Madam Wu
Yi. We literally walked out of those; I walked into a
Starbucks, bought a Starbucks cup that said Beijing on it,
walked outside and saw the replica on the street. And she was
standing next to me and all I had to do was point out the
obvious that we are now outside the street, here is the--so it
is that deep, just as you suggest.
But I think the answer honestly is to say, how do we appeal
and create the political space for the folks who still do very
much want to perform? They don't want their entrepreneurs to
leave. They do want a China that can employ the 650 million
people west of Shiyan. That really is the struggle. Because you
have got to find things that target the people, the state-owned
enterprises that are the negative element, and you also at the
same time be sophisticated enough to say, let's provide an
incentive for that other part of China from which we can both
benefit from a mature relationship. That is not what we have
now.
Mr. Scissors. I am going to not disagree with Grant. I am
going to compliment him in the sense of providing another
angle. I was a business consultant for more than a decade on
China, and one of my clients would ask me, how do I keep the
Chinese from stealing my intellectual property? I said, don't
deal with the Chinese. That is the only answer. Well, I have
to; they are such a huge, wonderful market. Okay, well, then
you are making the decision.
And I want American companies to be able to make that
decision. I mean Qualcomm is a great American company that has
been able to protect its intellectual property through very
hard work in China, so it can be done. But the real response
from the government is to create relationships that are better
than the relationship that we have with China. And we keep
bringing that up again and again and again, but if American
companies look at other American trade partners and say, wow,
we can really do good work in Indonesia, say, or in Brazil,
then the Chinese are going to have to change and we don't have
to fight over the details because they will just lose all this
business.
The reason people get their stuff stolen in China is
because they are in China and someone says, oh, I want to copy
that and take their market share. The best way, the
unanswerable way, the thing the Chinese can't do anything about
is if companies say, I like my business opportunities better
elsewhere, and the U.S. Government can help with that.
Mr. Hirschmannn. There is an even more recent news story
about an Apple store in China where the employees didn't
realize they actually weren't Apple employees because they wore
the t-shirts and thought they were going to work for Apple
every day.
These are highly sophisticated thefts. It is not fly-by-
night. It is not your grandfather's counterfeiting and piracy,
and I wish there was a simple answer but there simply isn't. It
is an all of the above approach to dealing with the problem. We
have to deny them markets for those products. We need to
organize a global response. And we need to realize that what
many companies do is not just stay out of the Chinese market
but they withhold from the Chinese market their most innovative
products. And ultimately China will want to attract that as
well.
Mr. Aldonas. Just one final comment really, to pick up on
what Derek was saying. We have an opportunity with the
Transpacific Partnership, and it is going to be a challenge for
Members of Congress because we are going to be negotiating with
Vietnam. But I will say, the single most important reaction
that I have seen out of the Chinese Government is when Intel
decided to put a plant in Vietnam rather than in China. And to
the extent we can use the TPP process to encourage Vietnam with
its historic relationship with China to make choices that China
has yet to make, and they do start to outcompete the Chinese
for capital because the reality is Vietnam has become the new
south coast of China. The go-West policy of the Chinese
Government hasn't worked. The more you see of that the more
responsive they have to become because they have to deal with
the economic reality of trying to continue to attract that
investment flow. And that will come to an end if there is a
better option.
Chairman Ros-Lehtinen. Thank you very much, Mr. Connolly.
Mr. Connolly. Thank you.
Chairman Ros-Lehtinen. Excellent answers. Thank you,
gentlemen.
Mr. Kelly, my friend, vice chair of the Subcommittee on
Asia and the Pacific, is recognized.
Mr. Kelly. Thank you, Madam Chairman.
Mr. Scissors, in your testimony you suggest about a grab
bag approach that the administration has as opposed to being
very specific to make sure that we get more production out of
it. What can we do to push that initiative?
Mr. Scissors. Well, the first thing, I hate to put it this
way because I am going to make myself really unpopular, is
Members of Congress have to not start pushing their own
agendas, right. I mean one of the things that people in the
administration complain about is that they feel like there are
10 members with 10 different things they want to accomplish. So
whatever Congress decides. If Congress decides it is IPR, then
IPR. If Congress decides as I would it is subsidies, Congress
can decide whatever it wants. But there has to be more of a
unified voice. The administration ends up, different
departments respond to different members and then we go with
this long laundry list. IPR is a great choice. And what you get
is some sort of sense of the Congress, either legislatively or
resolution or even just private communication from the
leadership saying, look, you have 2 years. We want you to focus
on IPR for the next couple years. That would really put the
administration, whichever administration, Republican or
Democrat, on the hook that the Congress is united. When the
Congress isn't united you get the tendencies within
adninistrations for Treasury to want one thing and Commerce
wants another thing and State wants another thing, and it is a
lost cause. So I would pick subsidies, Chinese subsidies.
Somebody else might pick IPR. Congress passing legislation just
encouraging the administration. All they need to do is signal.
That is the first step.
Mr. Kelly. All right. And I understand what you are saying.
And I would say that it is probably not, there is 435 agendas,
and certainly during a year of reelection that it becomes even
more intense. So the idea for me has never been who is the most
popular, who is the most productive, so we have got to start
looking at that because, I think, as we become more productive
as a body our popularity will rise with it. The opportunities
though, when we look at the TPP, tell me, how can KORUS serve
as a good model for TPP, especially when it comes to IPRs? Any
of you can answer. In fact, all of you can answer. We struggled
with that agreement for so long, and we waited too long, in my
opinion, to get there, and it caused a great deal of problem
internally with the republic. It caused a shift actually in
some of the government there.
Mr. Aldonas. I agree with you completely about both the
delay. It serves as sort of the baseline. But I am troubled by
this idea that we are bragging in the TPP about negotiating a
21st century agreement. It is literally true, we are in the
21st century, right, it is not wrong to say it is a 21st
century agreement. But think about what we are saying. You can
either take an incremental approach based on KORUS, or you
could say our entire economy has shifted onto a different
basis, industrial organization has been changed fundamentally
by globalization. We need to reenvision what our goals have to
be in that context.
What I would say is, it is time that we actually
articulated in TPP the notion of free trade and ideas. What are
the institutional settings that would allow not only to develop
technology, make use of it, make a profit at it, but encourage
diffusion, particularly in the poorest countries in the world?
That ought to be our goal. In other words, it is reimagining
what we should be doing. It is not content with just saying,
well, we have TRIPS, let us make an incremental change there
because we have seen a particular problem in this country or
that country. Of course that is part of the way the negotiation
works, but the much more fundamental shift we have to say is
where is the global economy going, where our economy is going.
If growth depends on innovation what do we have to negotiate,
and it is free trade and ideas ultimately.
Mr. Kelly. Any other witnesses?
Mr. Hirschmannn. The reason we keep pointing to the Korea
Free Trade Agreement is because it is the highest level
protection that we have achieved internationally. I keep
remembering that when the NAFTA was negotiated, the word
``Internet'' was not part of the agreement. The world does
evolve. And the purpose of the next agreement is to build upon
that. So what Congress can do is make sure that it is united in
asking the administration to build upon the model in Korea and
to seek stronger protections that aren't just in our interests
but really are in all the TPP partners' interest to protect
intellectual property.
Mr. Scissors. And just to add to that. If Korea, that is a
great issue for Congress to coalesce around. We passed the
KORUS. It has good IPR standards. Congress can build upon that
and encourage the TPP process that way. In response to your
first question, What can Congress do?, that is a great avenue
for Congress to follow.
Mr. Kelly. I thank you all for being here today. And I
think the opportunity is so great that for us now to be
debating things that really don't add to the ability to create
jobs and take advantage of a market that is out there for us, I
don't want to participate in it from this country. I want to
make sure we dominate in it. So I think that should be our goal
always, and as we go forward that would be my goal and I think
all the goals of the members I serve with here. I don't know of
anybody that doesn't want to see our country retain its status
and go forward.
And so with that I yield back. Thank you, Madam Chairman.
Chairman Ros-Lehtinen. Amen. Thank you so much, Mr. Kelly.
Thank you to all of the members for excellent questions, but
most especially, thank you, our panelists, for good solid
recommendations and suggestions about what we can do working
together with private businesses to level the playing field and
do away with these unfair trade practices. So thank you very
much for being here, and the committee is now adjourned.
[Whereupon, at 12:04 p.m., the committee was adjourned.]

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