BATTLING PIRATES IN CHINA: THE EFFECTIVE ROLE FOR THE U.S. IN FIGHTING FILM PIRACY IN CHINA
Perry W. McConnell [*]
On April 10, 2007, the United States (U.S) filed two requests for consultation against China with the World Trade Organization (WTO).  These filings primarily dealt with intellectual property (IP) issues, including film copyrights.  In the first filing, the United States alleged that the Chinese were violating the Agreement on Trade-Related Aspects of International Property Rights (TRIPS) primarily through lack of enforcement of Chinese IP laws.  The second complaint outlined the United States’ concern that China was improperly restricting their access to the Chinese audiovisual equipment market.  The first consultation was later joined by several other members of the WTO, including the European Union.  Subsequently, the United States initiated the second step in the WTO process by filing a request for the establishment of a panel on the audiovisual issue.  Additionally, a panel has been both requested and created for the intellectual property enforcement issues. 
These filings were, in many ways, a result of the rampant problem with film piracy in China within the setting of America’s large trade deficit with the country.  For example, one study estimates that the rates of film piracy in China were 95% in 2003.  These staggering numbers led the head of the Motion Picture Association of America to say, “If you did not see a counterfeit DVD, you were not in China.”  As a result, the estimated losses for the film industry are $178.0 million in that same year.  The DVDs that are being sold without a copyright are not low quality, but are just as good as the copyrighted version.  For example, in 2006, a Chinese reporter was able to purchase a pirated copy of Superman Returns which had a cover, bilingual audio, and the option of subtitles. 
This paper will explore both the causes of the rampant film piracy in China as well as the appropriate response of the U.S. Section I will explore the history of copyright laws in China. Section II will focus on the root causes of the problems with film piracy in China. Section III analyzes the efficacy of the WTO for dealing with this problem. Section IV outlines other methods the United States could utilize to overcome piracy. Section V offers a few options that China could utilize to join in the effort. This note concludes that the U.S. should de-emphasize the threat of sanctions against China, work toward a settlement with the current WTO action, and focus on other means of reducing film piracy.
II. History of Copyright Laws in China
In order to understand the current situation of IP law in China, it is important to know the history. The first copyright law in China was put into effect under the Qing Dynasty in 1910.  However, when China was liberated in 1949 this law was undone.  It was not until 1979 that the first copyright law was enacted by the People’s Republic of China (PRC) through a trade agreement with the United States in which both parties agreed to mutually respect the other’s laws.  The PRC did not adopt a national copyright law until 1990.  This law “explicitly protects the copyright and other legitimate interests of the authors of literary, artistic and scientific works, including the protection of films.”  There were several penalties available for a violation including fines and criminal or civil liability.  Further, the owner of the copyright could sue for “damages, an injunction, or an apology.” 
Despite these new intellectual property laws, the United States identified China as a “priority foreign country” in 1991 based upon their failures to adequately enforce IP laws.  The House of Representatives further revoked China’s Most-Favored Nation status that same year.  Soon thereafter China was threatened with increased tariffs if they did not comply with U.S. demands regarding intellectual property.  The negotiations following this threat eventually lead to the Sino-U.S. Memorandum of Understanding on the Protection of Intellectual Property.  Among the key changes were increased requirements of enforcement and the addition of computer software for copyright protections. 
Although there was an agreement and a temporary peace, in June 1993 a report was issued in the United States that estimated 94 percent of Chinese software was pirated and China was soon put on the “priority watch list” in the United States.  Again, the U.S. threatened trade sanctions for China’s failure to enforce.  An “Action Plan,” which outlined the methods and structure with which China would enforce its intellectual property laws, was eventually put into effect in 1995 to deal with the inadequate enforcement.  China pledged to create a task force to raid illegal factories, assist foreign investors to redress injuries, and put together a plan for further enforcement.  Despite these efforts, China was again labeled a priority country in 1996. 
The last big change in Chinese copyright law came about when the country joined the WTO on December 11, 2001.[ 31] As a result of joining the WTO, China agreed to follow TRIPS.  TRIPS is an attempt by the WTO to provide universal rules for enforcement of laws relating to intellectual property.  “TRIPS specifically mandates that countries give adequate intellectual property rights, imposes minimum standards for how those rights should be enforced domestically, and instructs how disputes between countries should be settled.”  Even with the adoption of the TRIPS agreement, the enforcement problems in China have persisted.  This has currently culminated in the present complaint brought by the United States.
III. A Flawed System
Although the copyright laws in China are relatively sophisticated, movie piracy is still rampant.  The numbers speak for themselves: in 2003, 95 percent of motion pictures available for purchase in China were pirated copies.  There are many contributing factors to this dismal figure, including: a cultural and economic predisposition, poor enforcement of copyright laws, restrictions on legal American films, de-centralized enforcement, lack of transparency in the legal system, and lack of education of the judiciary.
One contributing factor to rampant piracy in China is that there is a cultural predisposition towards it.  In early China there were protections for intellectual property in a few areas such as calendars and almanacs.  However, these protections were generally discouraged by the teachings of Confucius who encouraged learning through copying the works of others.  Further, “Traditional Chinese writers were compilers rather than composers – they memorized vast sequences of the classics and histories, [and] they constructed their own works by extensive cut-and-paste replication of phrases and passages from those sources.”  This must be viewed in combination with the more contemporary teachings of communism which attempted to undo the idea of private ownership.  Private ownership was viewed as a “sin” to the socialist society and private works were for the benefit of the society generally.  Rather than seeing private enforcement of the law as an option, the Chinese people view the government as the body in charge of enforcing the law. 
There is also an economic predisposition towards film piracy in China.  There are no local incentives to enforce copyright laws because in many regions of the country, a village is dependent upon the revenue generated by film piracy as a significant portion of its income.  Further, there is no individual incentive to enforce copyright laws.  First, the Chinese creating works themselves are usually employed by the state at a fixed salary and are therefore not dependent upon revenue generated by copyright infringement.  Second, the pure economics of the issue demonstrate the need to spend less on DVDs.  The average income in a rural area is $100 a year and in coastal cities it is $400 a year.  The Chinese pay significantly less for a pirated copy of a movie.  For example, a “pristine, counterfeit version of Superman Returns was for sale right after the movie came out for $1.25.”  Finally, the central government has little economic incentive to enforce the copyright laws when doing so will likely increase the cost of living and divert resources away from essentials such as medical costs. 
The central government not only lacks economic incentives to enforce IP laws, but also has difficulty in enforcement due to the decentralized nature of politics in China.  China covers a large land mass and is broken into thirty regions.  Further, the central government has fractured control of these regions.  There are also complicated and inefficient relationships between the government agencies, especially between the central and regional agencies.  Finally, there are a lot of differences between the regions within the country which creates problems with creating a uniform plan. 
Furthermore, there is a strong sense of economic protectionism at the local level where the laws must be enforced which often leads to corruption.  Local judges are responsible to the local officials who typically control their salaries.  The local officials support the local economy which is often dependent upon selling pirated films and exercise their influence over the judges.  An easy escape from negative repercussions from Beijing is the argument that the local economy is doing well and the local officials are rarely punished.  There have even been instances where local officials have attempted to teach pirates how to beat the system.  Finally, there are many instances of outright corruption where bribery takes place. 
Another reason there is rampant piracy in China is that the judicial system itself is unprepared.  In 1979 there were only 10,000 attorneys for a population of nearly 1 billion.  This was the case because the traditional Chinese method of dispute resolution was grassroots without litigation.  Since that time, the legal system has developed to some degree, but there is still a lack of education for attorneys and judges.  There is also a deficiency of workers in the legal field.  These attorneys have limited exposure to intellectual property laws.  Additionally, the judges have limited training in both intellectual property laws and the legal system in general. 
The judicial system is also lacking in that there is very limited transparency in the legal system.  There is no clear precedent for legal opinions within the system which allows for inconsistent opinions.  The courts should not always be interpreting the law on their own, or guessing or this will lead to inconsistencies and poor enforcements.  Furthermore, the updates in the intellectual property law are not widely disseminated and both the courts and local officials do not have the up-to-date law. 
Finally, China restricts the amount of films that can come into their country which does not quench the local thirst for American films.  The country currently allows a maximum number of 20 U.S. films per year.  China has this power under the cultural protection exceptions which exists to both protect the local industry and allow the domestic industry to compete.  Further, there is a lengthy review and editing process by the Chinese government which makes it take even longer to come into China.  As follows, the typical consumer in China has more choices and can see movies at an earlier date if they use a pirated copy.  This encourages purchasing these copies. 
IV. Settling Through the WTO
- a. The Process
In order to understand the current action filed by the U.S. with the WTO, it is important to understand the process of settling through the WTO. This process is contained in the WTO charter and titled “Understanding on Rules and Procedures Governing the Settlement of Disputes.  The Dispute Settlement Body is in charge of overseeing all disputes in the WTO.  The first step for the governments in dispute is to attempt to settle the matter between themselves in a “consultation.”  If no agreement is reached within sixty days, then the matter is sent to a “panel” which has six months to make a decision.  During that time, each government presents its case and evidence is gathered.  The panel then makes its final decision which is adopted unless a consensus opposes it.  If there is an appeal, then the Appellate Body will review the findings of the panel and issue their own opinion based upon the interpretation of the law. 
If one of the parties is found to be in noncompliance with the international trade rules, then there are several options.  First, the party that is in noncompliance could alter its ways and conform to the international trade rules.  Second, the parties could fail to comply within a reasonable time period and the complying party could move for compensation.  If compensation is granted, which could include trade sanctions, embargoes, tariffs, or monetary payment, then the non-complying party can appeal the decision. 
In the current action the United States is utilizing against China, the panel is in the process of investigation in order to issue a report as a result of the parties being unable to work out their differences.  Although compensation authorized by the WTO would clearly give the United States some temporary benefit, there are many critics of this approach. 
- b. Critique
The U.S. should emphasize cooperating with China through the WTO process to enforce IP laws rather than the threat of sanctions. Also, the U.S. should proceed carefully and push for settlement given the possibility of failure and the bad effects in the present action. Peter K. Yu has outlined four major critiques of using the WTO for settlement rather than other avenues.  First, although TRIPS does require that the each member nation effectively enforce IP laws, it does not define what effective means.  There are published figures estimating piracy at over 90%, but there are those that challenge those figures.  As follows, Yu has stated that, “Because the figures were controversial and were supplied by a self-interested trade group, the WTO Dispute Settlement Panel is very unlikely to take them at face value.” 
The second argument Yu makes is that WTO cases typically focus on specific provisions rather than an overall lack of enforcement  as alleged in the current complaint.  China’s IP laws are generally in conformity with the requirements of TRIPS.  Additionally, TRIPS only requires that China show that piracy is not worse than any other area of law enforcement in order to comply.  For example, China is not required to put more resources into IP enforcement than into tax collection. 
Third, the United States could lose this action which would set a dangerous precedent for them.  Other small and developing countries such as Antigua have been able to get judgments against the United States.  This could encourage other developing nations to challenge the United States and not fear sanctions when their resources do not allow for compliance without great strain on their economic resources. 
Finally, this could hurt trade between the U.S. and China which is presently booming.  China is a new member of the WTO and as it develops within that community does not need to be weighed down with large lawsuits.  Delaying its development and trust of the system could eventually end up backfiring. 
Other commentators have vocalized similar concerns such as the opinion that bringing such an action will be negative because it will put China in a defensive posture.  Others argue that imposing sanctions upon China would more likely embarrass them rather than fix the problem of copyright laws in China.  Further, if the Chinese prevail in this lawsuit, then the enforcement within China could become even more relaxed.
V. Other Options for the U.S.
In light of all of the potentially negative repercussions of the suit in the WTO, the U.S. should pursue other options to encourage compliance with IP laws in China. The prime way to get the country to adhere more closely to the copyright laws is to both convince them and create an environment where it is in their own economic best interests.  First of all, the Chinese businesses themselves are hurt by lack of copyright enforcement.  This discourages the Chinese corporations from developing their own new products because these products will lack adequate copyright protections.  It specifically hurts the Chinese film industry which suffers lost revenue when the films are illegally distributed.  Second, the Chinese government suffers from lack of taxes from those engaging in piracy.  Finally, foreign investors are less likely to invest in a country where their products are not afforded adequate protection.  This lack of investment will make it so less money is invested in the country. 
In addition to convincing them it is already in their best economic interests, the United States and Hollywood could take affirmative steps to make it in China’s best economic interests. China has opened the door for foreign investors to enter into joint partnerships with local businesses.  Here, both partners will share the same risk of profits or losses.  If the United States businessman partner with local businesses, then the Chinese will have more of a stake in the results. It follows that they will be more likely to enforce the copyright laws.  Further, the Chinese partners will more likely be effective in navigating the complexities of the Chinese system and be able to have the copyrights enforced. 
A similar method to joint ventures is that of partnering with the Chinese.  This partnering means: “establishing an active relationship or alliance . . . to obtain a stated or common goal.”  Partnering emphasizes working together, pooling resources, and gaining a shared interest in business goals.  This will bolster both grassroots efforts and the cultural differences that have made Americans policy appear so “ugly” to the Chinese. 
The United States could also encourage or fund educational opportunities for both those in the legal profession and the laypeople in order to change the culture in China that accepts piracy as normal and acceptable.  Since the laypeople are the typical culprits of purchasing pirated movies, they must be educated.  One example of education by the Chinese government is when it invited over a hundred entertainers for an anti-piracy campaign in 2005.  The proceeds benefitted an anti-piracy fund in China as well as all of the education for those in attendance.  The U.S. could sponsor similar activities.
In addition to the education of the general masses, those in the legal profession, government, and business should be educated concerning intellectual property laws. The United States legal community should take part in such actions.  In order to educate Chinese officials, the United States should provide assistance programs.  These seminars should keep pace with the constantly increasing technology.  The United States has made some efforts in this area, however.  An example of present efforts is that the American International Education Foundation (AIEF) has partnered with the Shanghai Municipal People’s Government and Shanghai Intellectual Property Administration in order to facilitate intellectual property rights reform through education programs for the “Shanghai policy makers, administrators, educators, judges, customs officers, business owners and enforcement agents.”  European Union judges have set an example of one approach the U.S. could utilize by making several efforts to engage their Chinese counterparts in conversations about intellectual property law.  One example is that they have set up a training program in which 200 judges have been trained regarding intellectual property rights. 
Furthermore, the United States should advocate for an increase in the film quota in China.  China has a very limited quota on the amount of foreign films that can be shown within the country.  There is a high demand for films in China as evidenced by the rampant piracy which is not adequately addressed.  This demand is not being met under the argument that allowing more films in would encroach upon the local culture. For example, the release of Shrek 2 and Spiderman 2 was delayed in 2004 with the argument that this would strengthen the morals of China’s youth.  However, with the high rates of piracy this goal is undermined.  Without adequate enforcement of copyright laws, the quotas promote piracy.  As follows, the quota should be set with the goal of having more movies shown legally which would result in a higher quota.  Further, blackout periods in China need to be eliminated or at least reduced.  Blackout periods are when the Chinese Government shows no foreign films for a certain period of time and has been used occasionally in China. 
VI. Steps that China Can Take
There are also several steps that China could take in order to decrease piracy in the country. One of the underlying problems in the Chinese legal system is that the law does not hold the same place in that country as it does in the United States.  Chinese scholars argue about whether the “rule of law” undoes the “rule of man.”  This is pertinent within the context of China which is communist and emphasizes the power of the ruling party.  In China, politics has become intertwined with the legal system since it has no power as a separate entity.  Attorneys are supervised by the Ministry of Justice which has the ability to remove them.  There is not a strict adherence to a rule of law and local protectionism and political officials must be appeased.  However, China has recently been moving more towards a rule of law as it is seen in its best interests as it becomes increasingly involved in the international community.  For example, they have elevated law to a supreme level in their constitution, but that remains to be seen in its practical application. 
Another method that China should use in order to better enforce copyright law is to centralize the enforcement of the laws.  The current system enforces primarily at the local level.  The local governments protect the local economy and are increasingly able to subvert the central government.  When it comes to enforcing IP laws, the central government does not have the resources to enforce at the local level and relies on the local governments.  However, the local governments have too much of an interest in allowing piracy to adequately enforce these laws.  As follows, the central government should play a greater role in enforcement.  This could likely take the form of organizing more raids of counterfeiting operations. 
In conclusion, the U.S. should emphasize working cooperatively with China for their mutual benefit rather than threatening sanctions. In the current action, this means working for a settlement, or setting a plan in which China can avoid sanctions through a well-crafted plan for better compliance with TRIPS. IP law is still new to Chinese culture and eliminating piracy is a long process.  Further, the threats of sanctions and adversarial tactics have failed in the past to create more enforcement of IP laws in China.  The key in working in this process is patience. 
[*] J.D. Candidate, 2008, Gonzaga University School of Law.
 See World Trade Organization, Dispute Settlement: Dispute DS362, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm (last visited March 12, 2008) [hereinafter WTO Dispute DS362]; See World Trade Organization, Dispute Settlement: Dispute DS363, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm (last visited March 12, 2008) [hereinafter WTO Dispute DS363].
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 Id. at 107.
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 Id. at 43.
 Id. at 45.
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[F74] Id. at 101.
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 Enforcement of IPR Laws to Improve, http://www.china.org.cn/english/2001/Jun/13894.htm, June 2, 2001 (last visited March 11, 2008).
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 Id. at 256.
 Id. at 257.
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 Nanping Liu, Judicial Interpretation in China 195-196 (Thomson Corp. 1997).
 See Id. at 198
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 See generally Yonehara, supra note 38, at 96, 101.
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 Id. at 100.
 Yigiang Li, Evaluation of the Sino-American Intellectual Property Agreements: A Judicial Approach to Solving the Local Protectionism Problem, 10 Colum. J. Asian L. 391, 401 (1996).
 Id. at 402.
 See generally Yonehara, supra note 38, at 100.
 See generally Id. at 107.
 See generally Mertha, supra note 21, at 42-47.
 Yonehara, supra note 38, at 106.