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US-China Trade War: Phase One Deal and Chinese IP Law

Summary

While the Phase One trade deal marks a milestone in the US-China Trade War, it will likely disappoint foreign businesses seeking improvements in intellectual property rights protections and enhanced market access in China. Regardless, there were a few positive points of progress in the Phase One trade deal that pave the way to address improvements on additional securities and protections for American businesses abroad in a subsequent ‘Phase Two’ agreement.

Of the 96 page US-China Phase One trade deal signed on January 15, 2020, 22 pages addressed intellectual property with 28 mentions of the phrase “China shall” and 22 repetitions of the phrase “The United States affirms that existing U.S. measures afford treatment equivalent to that provided for in this Article.”

At first glance, the deal appears to strongly favor US interests; however, when considered in the context of China’s general IP policy stance, the details reveal a different story. Many promises within the deal are riddled with vague and unenforceable language, while other ‘concessions’ are reminiscent of commitments previously made through other agreements or policies. While President Trump takes home his short-term win in securing additional agricultural exports, many IP policy and technology transfer concerns still remain for American businesses abroad.

Intellectual Property Reform: The Good

The Deal brings several points of progress. China has committed to increasing transparency in IP enforcement and protections against IP infringement, thus benefiting the United States and broader global community. As increased transparency provides additional visibility for the US and other global nations to verify IP enforcement, this could open the door for more comprehensive trade deals in the future. Furthermore, new rules outlined within the Phase One trade deal may help combat trademark infringement in manufactured products, enabling domestic and foreign businesses selling tangible goods in the Chinese market to strengthen their bottom lines. 

Six months after the Deal was signed, China will begin publishing IP infringement enforcement data online, most notably releasing information on cases pertaining to counterfeit medicines, confiscation of pirated goods, and market enforcement practices. Most of these reports will be released quarterly and will help create benchmarks for IP protection while providing the US with a starting point to pursue future policy enhancements.

Distributors and suppliers of tangible goods are likely to significantly benefit as China has made numerous concessions throughout the agreement to strengthen protections against counterfeit and pirated goods. China has agreed to destroy pirated goods stopped at the border with no compensation given to the infringer (Article 20) and will increase personnel and training for those tasked with spotting counterfeit items.

Historically, when pirated goods were identified, it had been common practice for border security to order the removal of trademarks from these goods and, once removed, allow them to re-enter the market. The Phase One trade deal may serve to reverse this practice and improve enforcement on suspected IP infringement. Moreover, the same standards shall be upheld in court, should infringing products make it to market. To enable rights holders to more easily take infringers to court, China will also eliminate liability for erroneous complaints submitted in good faith and extend the deadline for judicial complaints to twenty days after receipt of a counter-notification (Article 13).

Going forward, foreign producers should see fewer counterfeit products on major e-commerce platforms and physical markets. Rights holders will have increased opportunities to take infringers to court and recoup damages. These improvements, coupled with past promises by China to reverse the burden of proof to infringing counterparties, will ideally create a less hostile environment for producers to work with judicial systems in a market notorious for knock-off goods.

Intellectual Property Reform: The Bad

Though the Phase One trade deal appears to emphasize the importance on improving Chinese IP laws, many articles contain little-to-no actionable impact. Several points addressed in the deal mirror minimum obligations already outlined for China prior to its initial accession in the WTO in 2001. For accession, China agreed to meet certain minimum policies for intellectual property protection. Although it had wiggle room to tailor regulations according to its needs, China was, and is, subject to basic standards that must be upheld through domestic policies as outlined in China’s accession agreement. It is unlikely that China would significantly amend domestic policy in response to the Phase One trade deal when it has failed to do so for the same obligations as outlined upon accession into the WTO.

Below are a few articles of the US-China Phase One deal that strongly resemble portions of China’s accession agreement: 

“China shall prohibit the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third party experts or advisors in any criminal, civil, administrative, or regulatory proceedings conducted at either the central or sub-central levels of government in which such information is submitted.” – Phase One Trade Deal (Article 1.9)

“The representative of China further confirmed that China would, in compliance with Article 39.3 of the TRIPS Agreement, provide effective protection against unfair commercial use of undisclosed test or other data submitted to authorities in China…” – Report of the Working Party on the Accession of China (Article 284)

“At the right holder’s request, its judicial authorities shall order a counterfeiter to pay right holders the profits from infringement or damages adequate to compensate for the injury from the infringement.” – Phase One Trade Deal (Article 1.20)

“…to the effect that damages paid by the infringer to the right-holder would be adequate to compensate for the injury suffered because of an infringement of that person’s intellectual property right by an infringer…” – Report of the Working Party on the Accession of China (Article 292)

China’s pattern of policy commitments without enforcement

In early 2019, China addressed numerous points contained within the Phase One agreement. For example, revisions to the Trademark Law instituted two major principles seen in the Deal. First, China will penalize those guilty of filing for trademarks in bad faith without intent to use them. Second, China will increase the minimum range of punishments available to those that steal trademarks and other intellectual property. China will “quintuple damages for ‘malicious’ trademark infringements and increase the statutory limit for damages payout to RMB 5 million.” (Trademark Law, Article 63)

Additionally, China has enacted numerous improvements to its Anti-Unfair Competition Law. Many articles in this document show rhetoric resembling the section on trade secrets in the Phase One deal. For example, both documents promise to reverse the burden of proof to the defendant in a civil trade secret suit “when the plaintiff can produce certain prima facie showings.” (Phase One Trade Deal, Article 1.27)

Many articles within the ‘Phase One’ deal have been raised before, and if China has not historically prioritized progress on these fronts, then this deal will likely fall subject to China’s pattern of policy commitments without enforcement.

A Long Road Ahead for Intellectual Property Rights

Despite the good and the bad, the ‘Phase One’ trade deal is nonetheless a milestone in the US-China Trade War. Primarily symbolic, the Phase One trade deal may disappoint foreign businesses seeking improvements on intellectual property rights protections and enhanced market access in China. Numerous concerns laid out in initial investigations against Chinese trade practices in 2018 remain unaddressed, including the high cost of Chinese court systems, systematic technology transfer through joint venture requirements, and cyber hacking.

Since the onset of the Trade War, it is increasingly clear that IP and technology protections are taking a backseat in President Trump’s motives while he instead continues to focus on the more superficial trade imbalance. Regardless, there were a few points of progress in the Phase One trade deal that may pave the way for additional improvements on securities and protections for American businesses abroad in a subsequent ‘Phase Two’ agreement.

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