ORAL REMARKS OF ROBERT A. KAPP, PRESIDENT
UNITED STATES-CHINA BUSINESS COUNCIL
TO THE
TRADE POLICY STAFF COMMITTEE HEARING ON
CHINA'S PROGRESS IN IMPLEMENTING
ITS WTO ACCESSION COMMITMENTS

Thursday, September 23, 2004
Washington

Madame Chairman, members of the Trade Policy Staff Committee:

Thank you for permitting me to appear before you today to discuss the perspectives of the United States-China Business Council on China's continuing progress toward fulfillment of the wide-ranging commitments it accepted at the time of its accession to the World Trade Organization in December, 2001.

This is the third year in which I have had the opportunity to offer the Council's testimony. We have very much appreciated the careful attention that this Committee has paid to our testimony and to that of other witnesses at each annual hearing. We hope you believe, as we do, that the public and private sectors are working well together on this important task of assessment, and we again thank our colleagues in the many agencies of the United States Government who work with such dedication to support full realization of China's commitments. Those commitments, many of them embodied in the bilateral US-China WTO agreements signed in November of 1999, reflect in significant measure the views and hopes of American businesses as conveyed to our official negotiators during those crucial months. The partnership that led to the formation of a strong, commercially defensible final accession agreement with China in late 2001 remains vitally important to our Council's community as we continue to progress through the long, difficult, multi-stage process leading to China's full implementation of its commitments.

My oral remarks will today be brief, in recognition of the fact that you have received a fairly detailed written statement from our Council already. That statement should provide a relatively full perspective, from the US-China Business Council and its member firms, on the major issues relating to your inquiry.

Let me emphasize here, as we do in our paper, that the annual TPSC hearing occurs approximately two and one-half months before the December 11 anniversary of Chinese accession to the WTO. Since the annual phase-in deadline for various WTO commitments is December 11, testimony before this hearing cannot address China's compliance record through the end of each "WTO membership year." Instead, annual testimony considers a period that includes two and one-half months of the previous "membership year" and nine and one-half months of the current one. Since China often acts on its pending WTO commitments at the December 11 deadline, this testimony does not offer conclusions as to China's record in the complete current year of membership.

In our first year's testimony, I said that the "glass was half full," on the basis of early Chinese efforts to revise laws, train officials in the new concepts and procedures of the WTO.

Last year, I cited progress in some areas, but noted that deadlines for important changes had not been met and that there were ominous signs of the emergence of a "yard by yard ground game," in which each step toward implementation would come only after contentious arguments over terminological definitions, delays to or beyond mandated deadlines, or imposition of new measures -- ostensibly directed toward WTO compliance -- that actually created new serious obstacles to foreign business activity.

This year, approximately three months before the formal end of Year Three on December 11, 2004, our report suggests that, while numerous specific irritants remain and a number of concerns about future developments can be cited, overall progress on PRC WTO implementation has proceeded more vigorously. The mythical "glass" is, in our view, again well better than "half full."

As in earlier years, our broad views arise in part from staff analysis of policy and legal changes in China, and in part from member company responses to a Council survey that seeks each year to define appropriate categories of inquiry and measure Council members' assessments of WTO progress in an orderly manner susceptible to simple tabulation.

Broadly speaking, we suggest that a number of holdover issues from earlier years have been acted on by the PRC in the period from September 2003 to September 2004, taking off the table some of the Council's most serious concerns in our testimony of one year ago. Not all of China's actions on these fronts have been embraced without qualification by US firms, but they have nonetheless represented steps sufficiently appropriate to remove them from the list of unfulfilled WTO requirements urgently demanding action.

Furthermore, certain matters that were coming into view by a year ago, which seemed to portend the grinding "yard by yard ground game" about which we expressed concern, have been resolved, at least for the present. The agreements reached at the April meetings in Washington of the Joint Commission on Commerce and Trade, particularly on tax treatment of imported semiconductors and the enforcement of standards policies on wireless communications, if fully lived up to in the months and years to come, are important indicators that continuing US-China engagement can result in successful agreements of great importance to China's WTO standing and to the interests of US companies, workers and communities.

As our full report indicates, all is not perfectly well. A number of issues loom ahead of us, in the form of final promulgation of laws or regulations still in the preparatory phases, fragmentary information about which has led to significant concerns in major US business sectors. These forward-looking concerns are listed in a special section at the end of our report. We remain concerned about specific standards-related actions both in agricultural trade and in telecommunications that appear to raise inappropriate barriers to imported goods and technologies.

To no one's surprise, the most far-reaching problem our report isolates is the continuing pervasiveness of intellectual property violation, in its myriad forms. Although a few of our survey respondents indicated their perception that IPR problems had declined over the past twelve months, many other firms indicated otherwise. The activities of the US Government in the IPR sector, as well as the actions and statements of many US business associations whose members are directly affected by the unwholesome IPR environment in China, bespeak the salience of the IPR issue. Our written report reveals that IPR concerns have risen significantly on the ranked list of priority concerns of our companies operating in China.

In the first week of September, the Chinese government announced the inauguration of a heavy effort to combat intellectual property abuse in China. Vice Premier Wu Yi, who has taken command of this effort, informed members of our Council's Board of Directors about the program in a private meeting in Xiamen, and a few hours later discussed the effort in a public speech to a large gathering there of Chinese and international officials and business people.

The program, aimed at fifteen provinces and cities in which intellectual property abuse is held to be most serious, will attempt to bring into coordination the efforts of more than a dozen government agencies, both at the central and at the provincial and local levels. The program seems intended to address the major concerns of China's trade partners, including the need for a lower "threshold" measurement of criminal conduct in IPR cases, extensive indoctrination and training of lower-level bureaucrats and law enforcement personnel, linking of customs agencies to domestic IPR enforcement efforts, and so on. Full details of the program are expected to be published shortly on Chinese government web sites.

The Council wishes Vice Premier Wu and the many thousands of Chinese government officials involved in this unfolding campaign every success.

As I remarked in a brief discussion of IPR issues at a seminar on IPR during the recent Xiamen China International Fair for Investment and Trade, a key concern in the present IPR epidemic, like the opium epidemic of the early l9th century, is the degree to which administrative conduct by central and local officials is corrupted and polluted. The long-term implications of this bureaucratic pollution for the integrity of China's politico-administrative system should, I believe, be of immediate concern to those entrusted with the operation of that system at all levels. I would add here that it will be essential, in my view, for the prosecution of major intellectual property violations in China to go wherever thorough investigation takes it; the implicit message, to Chinese society, of an investigation that suddenly goes cold as it approaches sensitive levels of political or economic power would be extremely unhelpful.

Our Chinese friends have pointed out to us the important news that a large majority of intellectual property complaints in the past year have been brought not by aggrieved foreign businesses but by Chinese companies. This, of course, represents a "hopeful" trend; for those in the United States who are optimistic in the long term about China achieving a level of respect for intellectual property rights compatible with world standards, it is virtually an article of faith that, as China's economy becomes more and more sophisticated, and more and more individuals and firms in China create and register items of intellectual property value, China's society itself will develop the crucial vital interest necessary to bring about permanent change for the better.

Nevertheless, there is room for caution on IPR, and a need both for unstinting vigilance by US companies and by our government. There is also an undiminished need for efforts to work with Chinese authorities dedicated to improving the IPR situation, even while we must remain agnostic as to the extent to which the full range of Chinese officialdom has been persuaded to join the effort.

I believe our companies take a results-oriented approach to the campaign against intellectual property abuse in China, and I have tried to convey that to our Chinese friends. Running a steamroller over ten times as many pirated DVDs next year as were steamrolled this year does not constitute success, if the number of pirated DVDs next year rises by a hundred times, or even twenty times.

My own feeling, which I have again tried to express to our Chinese interlocutors, is that against the background of this geometrically expanding problem, the first task is to slow the rate of growth of the epidemic. That is extremely urgent. How one measures that rate must be carefully defined and agreed to by all sides, lest they fall back into a battle over definition of terms. But the first order of business must be to show that the patient's fever is rising less rapidly, even if it is still rising. Following that, and hopefully fairly quickly once that advance of the fever has been slowed, the advance must be completely stopped. Then the fever must be reduced until it reaches some semblance of "normal."

I believe that the IPR situation, and the situation with regard to reforming the Chinese financial services sector (most notably the state banking sector) pose challenges to China and its global trade partners which even the manifest successes of the Chinese economy over the past two decades do not clearly prove to be surmountable.

Much of the remarkable and positive change that has gathered speed in the Chinese economy over the past twenty years has been the result of the lightening of the suffocating burden of Chinese governmental control over the behavior of individuals and organizations. As we point out in our report, the passage of the Administrative Licensing Law in the past year may well prove a very important milestone in this continuing process of economic liberalization and reform leading China closer and closer to full market economy status.

On the other hand, inducing behavior change throughout Chinese society in regard to intellectual property protection and to the operation of China's banks requires the successful imposition of government power on the behavior of literally millions of officials, company employees, ordinary citizens and families in China. In spite of the confidence that China's achievements in recent years has rightly induced outside of the PRC, I think we must await results on IPR and bank reform alike.

The primary issue facing China, I believe, is not lack of awareness in key central government agencies as to what the problem is, or even as to what needs to be done to confront it. The problem is how to do what needs to be done.

I will leave the banking sector reform for another time, other than to ask rhetorically, just how do top leaders of a bank with 40,000 branches bring about "cultural change" -- their words -- among all the bank's employees in short order, whether by training, by exhortation, by internal disciplinary procedures, or by criminal prosecutions?

On IPR, again, the question is exactly how the politico-administrative system's power can be applied to bring about "cultural change" among more millions of citizens in public office, in businesses, and in society at large.

That is why the announcement of the concentrated twelve-month effort under Vice Premier Wu on intellectual property is significant, in my view; it places the prestige of the central government, and of a senior leader who has earned great respect both inside and outside China, on the line in the battle over IPR. The program has been defined as a twelve-month effort; such a deadline invites Chinese and non-Chinese alike to measure results, as the TPSC tries to do each September on WTO implementation itself. We must wish Vice Premier Wu and her team every success with this program, which represents an unprecedented marshalling of government resources and an explicit recognition of the centrality of the IPR issue in the minds of China's global trade and investment partners.

Nevertheless, I think caution is in order. With IPR and banking reform, the WTO "rubber" meets the "road" of entrenched Chinese interests and administrative behavior in ways that other forms of WTO implementation have not required.

As China wades through its "transitional period" between the operation of the now-discarded Soviet-derived economic model and the anticipated operation of some kind of market economy model, we must remind ourselves that the end of the "transition" is unlikely to be an economy "just like ours." Or, to put it differently, we must not confuse the length of China's self-described "transitional period" with the length of time prescribed in China's WTO accession agreements.

As China proceeds with its WTO implementation -- and as American companies acclimatize themselves to the more open Chinese economy that WTO requirements are helping to create -- we need to contemplate the likely shape of China's economic order post-WTO.

In other words, we should realize, as many of our companies do, that the end of the WTO phase-in period may not be a Millennium Moment.

Just how the United States and China conduct their massive commercial and economic engagement in the longer run will be heavily affected by our common participation in the WTO system, and both countries should avail themselves of the instrumentalities presented by the WTO to harmonize their behavior and address disputes whenever possible.

But it would be idle to dream that the end product of the WTO implementation process will be a Chinese economy wholly congruent with our own, because it may well not be. We are both going to have to live with deeply rooted structural differences in our political-economic systems, and to mitigate as much as possible the potentially destructive conflicts arising from those differences.

Thank you for permitting me to offer both the views of the US-China Business Council and some personal reflections today, the last occasion on which I will appear before you as president of our Council. You have my best wishes for the continued success of your extremely important monitoring work.