Statement of Jay Berman, Chief Executive Officer Emeritus, International Federation of Phonogram Industries, on behalf of the Recording Industry Association of America
Testimony Before the Full Committee
of the House Committee on Ways and Means
April 14, 2005
Mr. Chairman and Members of the Committee, my name is Jay Berman and I am Chairman Emeritus of IFPI, and formerly served as Chairman and CEO of both IFPI and RIAA. I have been deeply involved in working to address piracy in China for nearly two decades, and I greatly appreciate the opportunity to appear before you today on behalf of the Recording Industry Association of America to discuss U.S. economic relations with China and the music industry’s perspective on China’s implementation of its WTO accession commitments. I will add, at the request of MPAA, some comments about the problems affecting the motion picture industry’s ability to conduct business in China.
Before beginning to address the substance, I want to first highlight the excellent work that has been done, and is being done, by the Administration in attempting to tackle the piracy problem in China. USTR and the entire executive branch team has been vigilant, creative and relentless. The fact that China maintains unreasonable practices with respect to market access and piracy is something for which the Chinese Government is uniquely accountable. USTR, the Department of Commerce, the State Department, the US Embassy in Beijing, and other executive branch agencies have demonstrated tremendous resolve in attempting to persuade the Chinese Government to address these practices, and their continued efforts are greatly appreciated by America’s copyright industries.
International markets are vital to our companies and our creative talent. Exports and other foreign sales account for over fifty percent of the revenues of America’s record industry. This strong export base sustains and creates American jobs. The core copyright industries – including music, movies, software and videogames -- account for approximately six percent of US GDP. The United States possesses a strong comparative advantage in the creation and sale of entertainment products.
However, America’s creative industries are under attack. Piracy has grown in recent years with the advance of digital technology that facilitates both physical and online piracy. Indeed, this is especially so in China where high levels of piracy in conjunction with market access barriers plague our industry The combined effect of China’s massive piracy and rigid market access restrictions severely limits our ability to take advantage of our industries’ comparative advantage in China at the same time that China’s exports of other products surge into the United States. It is unfair and no longer tolerable that extremely competitive U.S. businesses are effectively banned from operating on fair and non-discriminatory terms in China.
As I will elaborate below, China’s intellectual property laws have some deficiencies, but even more important is their failure to enforce those laws effectively. We thank you Mr. Chairman and the Committee for holding this important hearing, and welcome this opportunity to explore mechanisms for ensuring China’s compliance with its WTO and bilateral obligations to the United States.
Our Problems in China
Last year, despite China’s various bilateral and multilateral commitments to the United States, the record industry lost over $200 million in China to pirate sales. 85% of the sound recordings sold in China were pirated. This means an astounding 17 of every 20 sound recordings sold in China are sold by pirates. Our colleagues in the motion picture industry face an even grimmer picture. They inform us that they lost $280 million to piracy in China last year, a 95% piracy rate.
There are five significant and related problems in China:
1. China is swamped with pirated recordings and motion pictures because the penalties imposed on pirates are simply ineffective. Chinese authorities might raid a manufacturing facility, a warehouse or a retail store and seize the pirate product, but the resulting penalty, if any, is generally just a small fine. Pirates are entrepreneurs who see raids and seizures as a cost of doing business and the occasional interruptions are built into the business model. The penalties do not deter or punish or incapacitate the thieves.
2. China is a net exporter of our music and movies. The pirates produce the copies in China, and then export to the surrounding countries and beyond. MPAA tells us that Chinese pirated DVDs have been seized in the United States, the United Kingdom, Australia, Hong Kong, Sweden, Thailand, and the United Arab Emirates. Exports of pirated music sound recordings have been found in several Southeast Asian countries. This practice had stopped after the 1995/96 trade agreements with the US, but resumed about three years ago and has been an increasing problem ever since, especially in the case of motion pictures.
3. Market access and investment barriers prevent our members from serving the Chinese market in a timely manner. As a result, legitimate product gets to the consumer weeks or months after the pirates have successfully exploited our products. Thus, a solution to piracy requires relief from the barriers we face just to enter the Chinese market. Until China closes this exclusive window of opportunity for the pirates to offer our products to Chinese consumers while we are barred from doing so, efforts to combat piracy will not succeed. We understand the cultural sensitivities of Chinese society, and do not intend to challenge the maintenance of fair, timely and transparent censorship regulations. However, it is essential that any such censorship regulations do not operate as a disguised barrier to entry, and that they do not result in commercially prejudicial delays in securing approval for release of products. Interestingly, the Chinese Government doesn’t appear to be too troubled by the avalanche of piratical products for which no censorship approval has been secured, suggesting that present rules limiting the scope of market access have little to do with cultural sensitivities.
4. Given present imbalances in our trading relationship, it is time for the U.S. government to insist that China expand the opportunities for US businesses to operate in China in sectors where the United States is competitive—particularly in the music and film sectors. We permit access for Chinese enterprises to operate in the United States. As stated in the introduction of my testimony, it is unfair and no longer tolerable that extremely competitive US businesses are effectively banned from operating on fair and non-discriminatory terms in China.
5. Internet piracy is growing rapidly in China. Many websites offer the unauthorized downloading of music files, some for a financial charge, others for free. Certain China-based ISPs have become online “warehouses” for international pirate syndicates. Many of the legal deficiencies that enable physical piracy to flourish in China plague the on-line environment as well.
Demand for American musical recordings and filmed entertainment in China is enormous, as evidenced by the massive piracy of our products across China. The result has been a colossal lost opportunity for American writers, performers and record and movie producers to benefit from the fast growing Chinese society and economy. To put this in economic terms, the United States has a tremendous “comparative advantage” in creating and producing entertainment products that we want to make available to China’s citizens. But we are unable to do so as result of the continuing piracy and market access restrictions described in my testimony.
Frankly, Chinese writers, performers and producers—indeed Chinese culture more generally—is undermined by the massive Chinese piracy of their own music recordings and filmed entertainment. China’s culture is also harmed by the market access restrictions China maintains which seriously restricts the ability of our world-class companies to bring to our modern recording technologies and distribution techniques to the delivery of music recordings and filmed entertainment products in China.
Chinese Law and Treaty Obligations
The entertainment industries have a long history of working with the Congress and the Administration to protect and defend this uniquely successful sector of the U.S. economy. We very much appreciate the efforts of this Committee as well as the dedicated officials within the various agencies. As a result of a lot of hard work, today the U.S. copyright industries can look to three primary mechanisms for protecting intellectual property in China -- a 1995 bilateral agreement, the WTO and JCCT.
I personally worked very closely with the Office of the U.S. Trade Representative on the intellectual property negotiations with China in 1995 and 1996 pursuant to Section 301 investigations. Those efforts resulted in bilateral agreements that obligated China to: 1) close factories producing pirated CDs, and 2) stop the exports of pirate CDs that were causing catastrophic disruption of our global markets and other actions.
These 1995 and 1996 agreements were largely successful, and the Chinese government closed many of these plants and halted the exportation of pirate products. However, we are concerned that exportation of piratical goods is once again on the rise, and our hopes that China’s self interest in being a significant player in world trade and the information society would lead to a significant reduction of piracy across the board have not yet been fulfilled.
China’s Commitments in the WTO’s Agreement on Trade-Related Intellectual Property Rights -- aka the “TRIPS” agreement
The WTO’s TRIPS Agreement is basically divided into two parts: (1) substantive norms (e.g. what rules must be in a copyright law) and (2) requirements that members enforce the law and provide remedies that are adequate to deter further infringements of these norms. China is not in compliance on a number of counts, particularly as regards effective enforcement.
For example, the enforcement section of TRIPS -- Article 41 – states that “members shall ensure that enforcement procedures…are available under their law so as to permit effective actions against any infringement…covered by this Agreement, including expeditious remedies…which constitute a deterrent to further infringements.” China’s excessive reliance upon administrative sanctions in the form of the seizure of infringing product and, if the guilty party doesn’t flee, the imposition of small fines, do not deter further infringements.
China also fails to comply with Article 61 of the TRIPS Agreement, which specifically requires that criminal penalties “be applied in cases of willful trademark counterfeiting or copyright piracy on a commercial scale.” China has conducted few prosecutions and made very few convictions for copyright piracy. China has persisted in defining “commercial scale” through the use of complicated numerical thresholds and ambiguous definitions which, despite the new Chinese “judicial interpretation” described below, make it highly unlikely any pirate will face criminal penalties.
Moreover, the remedies provided in China’s criminal code are only available in those instances where the pirate is making a profit. Ironic, isn’t it, that the concern is the pirate’s profitability and not the fate of the legitimate business. In addition, the profit test is actually more difficult to meet than the commercial scale requirement. For example, someone intentionally posting online a single copy of a copyrighted recording on the internet without authorization, will cause serious economic harm on a commercial scale if that recording or motion picture is downloaded over and over again. It would not, however, meet China’s “for profit” test. In addition, a “profit” test violates the TRIPS Agreement.
China’s Commitments in the US-China Joint Commission on Commerce and Trade—the “JCCT”
In April 2004 during a meeting of the US-China Joint Commission on Commerce and Trade – the JCCT – China made several potentially important commitments to improve intellectual property enforcement.
-increase the scope of IPR violations subject to criminal investigation and criminal penalties;
-apply criminal sanctions to the import, export, storage and distribution of pirate product;
-apply criminal sanctions to online piracy;
One reason why piracy and counterfeiting have remained so high for so long is that China almost never criminally prosecutes anyone for committing these acts, no matter how extensive the piracy or counterfeiting may be. An important outcome of the JCCT was China’s commitment to revise substantially its “judicial interpretation” governing application of its criminal code to copyright piracy—and to trademark counterfeiting—so that criminal prosecutions and convictions would more readily occur against these acts.
As mentioned, China has long relied upon a complex system of numerical thresholds and ambiguous definitions for deciding when to criminally prosecute and convict for copyright piracy and trademark counterfeiting. We have long advocated that China abolish this system, or at least simplify and substantially lower these thresholds.
China did issue a new judicial interpretation in December 2004 that does reduce many of these thresholds. However, China has maintained its complicated and ambiguous definitions that leave us uncertain as to whether criminal prosecutions and convictions are any more likely now than in the past. Vice Premier Wu Yi, who is responsible for IPR and led the Chinese JCCT delegation, may be serious about bringing about a significant reduction in piracy, but the police, prosecutors and criminal judges still seem to regard IPR violations as activities that do not merit their serious attention..
A one year campaign was launched last September that resulted in noticeable increases in the number of inspections and product seizures. However, the usual remedies are being still applied—product is seized and modest administrative fines are sometimes levied. Not only is this campaign ineffective, it is set to expire in September!
Our Recommendation
China’s current reliance on the threat of administrative inspections, seizures and modest fines does not work. China’s criminal enforcement authorities are not seriously involved in intellectual property enforcement. Unless this changes, we foresee unacceptably high rates of copyright piracy in China for years to come.
At its own initiative, the U.S. Government is conducting a Special 301 “out-of-cycle review” of China’s compliance with its obligations to the United States under the 1995 bilateral agreement, the WTO and JCCT. It is impossible to conceive that USTR could conclude anything other than that China is not in compliance with these important obligations.
Given that China is now in the WTO, the U.S. government is no longer free to unilaterally impose the type of sanctions that worked in the mid-1990s. Options available to the U.S. appear to be (a) initiating a WTO dispute settlement case; (b) placing China on one of the Special 301 lists (priority foreign country, priority watch list, watch list); (c) imposing some form of trade sanction that is consistent with our WTO obligations and/or (d) more discussions in the JCCT and elsewhere.
The U.S. recording industry, joined by its sister organizations in other copyright sectors, strongly recommends that the U.S. government request initiation of consultations with China in the WTO over China’s failure to comply with its obligations to provide deterrent remedies and criminal sanctions against willful copyright piracy, as required by the TRIPS Agreement. USTR should also use any and all other pressure points available to it to press our concerns on this matter. This includes bringing into the WTO process other countries whose companies are suffering from this scourge. China must come to realize that the United States—and hopefully other countries— will not tolerate the continued piracy of our products.
Market Access Restrictions
My testimony to this point focuses specifically on China’s massive copyright piracy and the damage this causes American and Chinese legitimate performers and producers of sound recordings and motion pictures. However, solving China’s piracy problem will also require significantly improved market opportunities for our industry and other US copyright industries, so that we can conduct the full range of commercial activities that are integral to our businesses.
U.S. record companies' possess great expertise in developing and recording new artists, and distributing, promoting, and advertising their recordings so that the public is aware of them. RIAA member companies work with local talent to refine and enhance their skills and market their new sound recordings to local consumers. That is what we do. Today China severely limits the ability of American record companies to engage in developing, recording and distributing the music of Chinese performers, and in fully participating in developing the Chinese marketplace.
This is done in a number of ways:
Content Regulation and Review:
(1) Chinese government officials are required to review the content of foreign-produced sound recordings before their release. Domestically produced Chinese sound recordings face no such oversight process. Of course, pirated product – be it domestic or foreign -- is not censored either and thus has free reign of the Chinese market while our legitimate products are tied up in the Censorship Office. China should at minimum terminate this discriminatory process between imported and domestically produced product.
(2) Censorship offices are understaffed, causing long delays in the distribution of new recordings. In recent months, we have seen some improvement and a new recording takes an average of two weeks to be approved. But that still gives the pirates a crucial two week head start over the legitimate retail channels. The best result would be for censorship to be industry-administered, as it is in most other countries. If this is not an acceptable option, the Chinese should be encouraged to find some other mechanism that allows legitimate music to be marketed in a timely manner.
Producing and publishing sound recordings in China:
Another onerous restriction requires that a sound recording be released through an approved “publishing” company if it is to be brought to market. Currently only state-owned firms are approved to publish sound recordings. China should end this discrimination and approve foreign-owned record publishing companies.
Further, production companies (even wholly-owned Chinese ones) may not engage in replicating, distributing or retailing sound recordings. The extra layers eliminates synergies and needlessly cripples the process of producing and marketing legitimate product in an integrated manner. China should permit the integrated publishing, production and marketing of sound recordings and allow such companies to have foreign investors.
In addition, U.S. record companies may market non-Chinese sound recordings only by (1) licensing a Chinese company to produce the recordings in China or (2) importing finished sound recording carriers (CDs) through the China National Publications Import and Export Control (CNPIEC). China should permit U.S. companies to manufacture, publish and market their own recordings in China and to import directly finished products.
Distributing sound recordings:
Foreign sound recording companies may own no more than 49% of a joint venture with a Chinese company. However, the recently concluded Closer Economic Partnership Agreement (CEPA) between China and Hong Kong permits Hong Kong companies to own up to 70% of joint ventures with Chinese companies engaged in distributing audiovisual products. China should grant at least MFN status to U.S. record producers per the terms of the CEPA.
Market Access barriers affecting filmed entertainment:
On the film side, you have probably heard that China only allows the distribution of twenty imported films per year. In addition, MPAA states that China maintains a state enforced monopoly on the import of foreign films. Only a small number of Chinese companies are permitted to distribute imported films. These barriers result in long lag times between the worldwide release of a film and its début in China; last summer, that lag time reached three months – a period when the films were widely available in China, but only in pirate format!
Conclusion
Sound recording and film piracy in China remains rampant. Much more needs to be done by China in order for it to meet its bilateral and multilateral enforcement obligations to fight piracy. In addition, it is time for the Chinese government to acknowledge the nexus between meaningful market access and the ability to effectively fight piracy. Piracy cannot be defeated or effectively deterred by enforcement alone – it must be accompanied by market-opening measures. The continuous vacuum left by China’s closed market will always be promptly filled by pirates. We urge the United States—and the rest of the international trading community—to bring greater pressure on China through the WTO and other processes to much more effectively combat the rampant piracy in China and to open the Chinese market to our legitimate products. Congress should deliver a clear message to the Chinese Government—that they cannot expect to continue to exploit their wares in the United States while maintaining practices that effectively prevent the entry of our most competitive industries. Present Chinese policy contributes to an imbalance of trade by severely restricting our economic opportunities in sectors where we are most competitive. This must not be allowed to continue. It has already gone on for far too long.