SPECIAL 301 AND THE FIGHT AGAINST

TRADE PIRACY

MONDAY, APRIL 19, 1993

U.S. SENATE,

SUBCOMMITTEE ON INTERNATIONAL TRADE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:10 a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max Baucus (chairman of the subcommittee) presiding.

Also present: Senators Rockefeller, Daschle, Grassley, and Hatch. [The press release announcing the hearing follows:]

[Press Release No. H-11, April 6, 1993]

INTERNATIONAL TRADE SUBCOMMITTEE SCHEDULES HEARING ON SPECIAL 301 TRADE REMEDY LAW

Senator Max Baucus (D.-Mont.), Chairman of the Senate Finance Subcommittee on International Trade, announced today a hearing in advance of this year's designation of "priority foreign countries" under the "Special 301" trade remedy_law. The hearing will begin at 10:00 a.m. on Monday, April 19, in room SD-215, Dirksen Senate Office Building.

Senator Baucus said the hearing will focus on which countries to target this year under the Special 301 law for failing to protect U.S. intellectual property-U.S. creative works and inventions-from illegal copying.

"Trade piracy costs our exporters billions of dollars annually in lost sales overseas," Senator Baucus said. "Through Special 301, the United States has an annual opportunity to seek an end to piracy of U.S. patented, trademarked, and copyrighted goods through negotiations.

"With the Clinton administration's Special 301 designation due by the end of April, I consider this hearing a timely opportunity to explore the records of our trading partners in this important area."

Under the Special 301 provisions of the 1988 Trade Act, the U.S. Trade Representative (USTR) is required to identify, within 30 days of the submission of the annual National Trade Estimate report, those countries that deny adequate and effective protection of intellectual property rights. USTR must also identify which of the cited countries are "priority" countries. Special 301 requires USTR to initiate section 301 investigations on the practices of the "priority" countries.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA, CHAIRMAN OF THE SUBCOMMITTEE

Senator BAUCUS. The hearing will come to order.

On April 30th, under the Special 301 trade law, the U.S. Trade Representative will release the annual list of priority foreign countries for negotiations on strengthening protection of intellectual property, along with the accompanying priority watch list and the watch list.

This process is America's strongest weapon against piracy, weak legal protection, and barriers to access for American intellectual

property works abroad. Like the Super 301 law, it sets deadlines and forces action.

That's why it works! We need to renew Super 301 this year if we hope to make the same sort of progress in other sectors that Special 301 brings about in intellectual property.

Today, with the Special 301 lists due in 11 days, we will give the USTR Office and representatives of private industry a chance to share their views on the effectiveness of the law in general and on their priorities for this year in particular.

Intellectual property products are broadly divided into three types: copyrights, patents, and trademarks.

Copyrighted works include books and magazines, musical scores, films and videos, sound recordings, and computer software.

Patented products include pharmaceuticals, agrichemicals, and innovative machines, tools, and processes.

Trademarked goods include a vast array of products from food to apparel to machines and more, recognizable by the name or symbol of their producers.

Together, these industries rank with agriculture and aerospace as one of America's three most successful export sectors.

American film and TV programs generate a $3.5 billion trade surplus each year. American pharmaceuticals generate a $1 billion surplus.

American computer software leads all competitors. I believe we have about 75 percent of the world market. And American trademarks get instant recognition worldwide.

Creative works like these are difficult and often expensive to make, but they are often easy to copy.

A software program, for example, takes years, technological wizardry, and millions of dollars in R&D to write and publish. Pirating the same program takes seconds, minimal skill, and an 80 cent floppy disk.

This problem is worldwide, and is extraordinarily damaging to our economy. Several years ago, after an exhaustive survey, the International Trade Commission estimated that they cost America somewhere between $43 billion and $61 billion dollars in lost exports every year. It is likely that the figure is even higher today. The financial injury is at times even accompanied by physical injury. One of my constituents from Bozeman, MT, permanently injured her knee a few years ago when a pair of Korean-produced counterfeit Reebok sneakers came apart while she was playing tennis.

This problem requires a strong American response. In 1988, Congress provided it by passing the Special 301 law. It directs the USTR to identify the countries in which intellectual property receives the weakest legal protection and meets the strongest barriers to entry.

USTR must then begin trade negotiations with these priority foreign countries. If this fails to get results, the United States can impose trade sanctions against the country in question.

This is our strongest weapon against piracy of intellectual property overseas. Two developments are proof enough: first, the record number of filings by American industries this year; and second, the

troops of foreign officials which have come to Washington to negotiate last-minute deals to avoid listing.

This year, India, Taiwan, and Thailand are among the highest priorities. They have all been named before as priority foreign countries, but have not changed their ways.

We should not hesitate to retaliate against them unless they adopt dramatic changes in the next 10 days.

The credibility of Special 301 depends on willingness to use retaliation as a last resort. A very important point, the credibility of Special 301 depends upon the willingness of the United States to use retaliation as a last resort. And I believe we have reached that last resort in these cases.

There are many candidates for priority foreign country status this year. Poland continues to be a notorious center for piracy of software, sound recordings, and books, and has taken little action to resolve the problem.

Copyright industries add Italy, South Korea, and Turkey as targets for PFC status. Saudi Arabia, one of the richest countries in the world, continues to allow blatant piracy of films, sound recordings, and CDs, and, in fact, does not guarantee protection of foreign works at all. It is a disgrace.

Despite years of promises, Argentina and Brazil have not yet upgraded their patent regimes for pharmaceuticals.

And other patent offenders include Colombia, Hungary, South Korea, Turkey, and Venezuela. Trademark industries cite China's inadequate trademark law as a major problem, to go along with other serious problems in Taiwan, Thailand, Brazil, and South Korea.

With this year's deadline approaching, we have already reached an important agreement with the Government of the Philippines to protect American copyrights, patents, and trademarks. And lastminute efforts to upgrade pharmaceutical patent protection are going on in Argentina.

We have seen energetic raids on sellers of pirated shoes in South Korea, and a factory making pirate audio cassettes in Thailand. There is activity in the Taiwanese legislative Yuan and the Russian parliament. All are a result of Special 301.

Today, we will hear about these events from representatives of U.S. Government charged with determining this year's listings, and from private industry representatives who have participated in filing petitions with the USTR this year.

It promises to be an enlightening morning. And with no further delays, let's begin.

[The prepared statement of Senator Baucus appears in the appendix.]

Senator BAUCUS. First, I will turn to my colleagues in order of appearance. And Senator Grassley, I think, was first.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman.

Before I get into some comments I have on Special 301, I think I would make a more generic comment about trade generally and say that it looks very positive.

The President took a strong point of view last week with the Japanese Prime Minister when he was here.

And weekend reports in both the Japanese press and the American press indicate that there might become a new day. We will not be taken for granted as Americans in international trade negotiations, and maybe our efforts will be taken a little more seriously. I know this is just a preliminary report, but at least it kind of implies that we are getting their attention to a greater extent than we have in the past.

And so maybe on your efforts on the Special 301, we would say the same thing for these nations that you have just named and some that I am going to name.

It might do the same thing in a more specialized area of the law on Special 301 to send a signal that the United States is tired of being unfairly treated.

So I believe that, Mr. Chairman, it is expressly important for the United States to be able to identify those countries that deny adequate and effective protection of intellectual property rights or deny fair or equitable market excess to U.S. exporters that rely on intellectual property protection.

I took the liberty in getting ready for this hearing of reviewing the 1993 National Trade Estimate Report on unfair foreign trade barriers released by the U.S. Trade Representative office to be very candid.

I am alarmed by the problems that currently exist in the areas of intellectual property rights from Argentina to South Africa.

Argentina is an example of a country with a very old patent law dating back to 1864. And it does not provide adequate patent protection.

Specifically, it excludes pharmaceutical products from protection. Argentina has been on the Special 301 watch list since May of 1989 and remains yet today.

South Africa, like the United States, is a member of two major multi-lateral conventions pertaining to intellectual property: the Paris Convention for the protection of industrial property, and the Berne Convention for the protection of literary and artistic works. South Africa does not, however, belong to some agreements that are important from the standpoint of U.S. business, including the Patent Cooperation Treaty, the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the purpose of patent protection procedures, and the convention for the protection of procedures for phonograms.

The South Africans have passed a copyright act in 1992. And a number of major U.S. software companies have been reassured of domestic legal protection for their intellectual property, and have decided to enter the South African market.

Yet, in that very same country, the motion picture industry reports that piracy, including unauthorized public performances, video piracy, and parallel imports pose a problem for doing business in South Africa today.

Now, Mr. Chairman, I pick the extremes from the front of the report to back of the report. I could just as easily have picked countries like Chile, Japan, Korea, Mexico-as other examples.

And in fact, I will refer to some of these other countries as examples in the questioning I have this morning.

The point is, Mr. Chairman, that regardless of which country it is that is placed on the watch list or the priority list, we must aggressively pursue and resolve this unfair trade practice.

And I say that specifically as it relates to 301, but to remind you that in other areas of law that it applies not only for the enforcement of law, but as the President in his own initiative has decided in a more generic way to pursue a stronger message. I think it is going to be very effective.

Senator BAUCUS. Thank you very much, Senator.

And I also appreciate your statement with respect to the President meeting with Prime Minister Miyazawa.

Our trade deficit with Japan is about $49 billion. And that is more than half our worldwide trade deficit. So it is a significant problem.

And I think it only appropriate that the President and Prime Minister did not sweep that problem under the rug, but apparently dealt with it in a very open and frank way. And it usually is a necessary precondition to resolution. I hope now that we follow up and get that deficit reduced.

Senator Rockefeller.

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, A U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I hesitate to hold up the testimony of the General Counsel for the USTR, but I will do so for just a moment or two because I want to observe that all three of us have very strong views on this. And they are all very similar.

Sometimes we come to the Finance Committee and we do not give statements. Sometimes we come to the Finance Committee and we want to give statements. This is one of those times.

I have said frequently since I have been in the Senate that the protection of intellectual property rights is really a fundamental trade issue facing U.S. business around the world.

Intellectual property is the technology that determines our National income, our social well being, and our international competitiveness.

When the intellectual property of Americans is not protected, our country loses jobs, production, and obviously profits.

The degree to which the U.S. Government protects property rights goes to the heart of our ability to maintain a successful industrial society.

I do not believe that the U.S. Government has done enough to protect U.S. intellectual property rights overseas. And I expect this hearing will very strongly confirm that view this morning.

At present, USTR has complete discretion whether to identify a bad patent system, and consequently whether to take any remedial action. Carla Hills used this discretion to put countries with inadequate intellectual property rights under the watch list, but she did not formally identify them under the Special 301 provisions. As a result, the USTR was not required to seek improved patent protection. Therein lies the critical difference.