How the World Trade Organization Can Curb China’s Intellectual Property Transgressions

Quite rightly, President Donald Trump and his Administration are targeting the transgressions of China against US intellectual property rights in their unfolding trade strategy. But why not use the WTO rules that offer a real remedy for the United States without resorting to illegal unilateral action outside the WTO?

Seventeen years after China joined the WTO, China still falls considerably short of fulfilling its WTO obligations to protect intellectual property. About 70 percent of the software in use in China, valued at nearly $8.7 billion, is pirated. The annual cost to the US economy worldwide from pirated software, counterfeit goods, and the theft of trade secrets could be as high as $600 billion, with China at the top of the IP infringement list. China is the source of 87 percent of the counterfeit goods seized upon entry into the United States.

One possible response by the United States is the one the Trump Administration seems to be taking: slapping billions of dollars of tariffs on imports of more than 100 Chinese products through unilateral trade action. Given its protectionist predilections, taking this approach is surely tempting to the Trump Administration. Doing so will, however, harm American workers, businesses, and consumers, and contribute to further turmoil in the global economy.

The results will likely include retaliation by China against the goods and services of American companies and workers; lawful economic sanctions imposed by China on American exports to China after the US lost to China in WTO cases; the hidden tax of higher prices for American consumers; less competitiveness in the US market and in other markets for American companies that depend on Chinese imports as intermediate goods in production; and doubtless still more American and global economic landmines from the downward spiral of tit-for-tat in international trade confrontations.

These tariffs are not only self-defeating and counter-productive; they are also illegal under international law. Where an international dispute falls within the scope of coverage of the WTO treaty, taking unilateral action without first going to WTO dispute settlement for a legal ruling on whether there is a WTO violation is, in and of itself, a violation of the treaty. The WTO treaty establishes mandatory jurisdiction for the WTO dispute settlement system for all treaty-related disputes between and among WTO Members. The WTO Appellate Body has explained, “Article 23.1 of the (WTO Dispute Settlement Understanding) imposes a general obligation to redress a violation of obligations or other nullification or impairment of benefits under the covered agreements only by recourse to the rules and procedures of the DSU, and not through unilateral action.”

Thus, the United States is not permitted by the international rules to which it has long since agreed to be the judge and the jury in its own case. Imposing tariffs on Chinese products without first obtaining a WTO ruling that Chinese actions are inconsistent with China’s WTO obligations is a clear violation by the United States of its WTO obligations to China – as WTO jurists will doubtless rule when China responds to the tariffs by challenging the tariffs in the WTO.

Such a legal loss by the United States, with all its unforeseeable economic and geopolitical consequences, can be avoided while still confronting Chinese IP violations effectively. Before resorting to unilateral action outside the WTO and in violation of international law, the United States should take a closer look at the substantial rights it enjoys under the WTO treaty for protecting US intellectual property against abuse.

Potential remedies in the WTO exist and should not be ignored. These remedies can be enforced through the pressure of WTO economic sanctions. WTO rules do not yet cover all the irritants that must be addressed in US-China trade relations. Even so, instead of just concluding that there are no adequate remedies under WTO rules to help stop IP infringement, the United States should first try to use the remedies in rules we have already negotiated that bind China along with all other WTO Members.

A number of these rules have not yet been tested against China or any other country – which is not proof they will not work. Generally, when tried for the first time, WTO rules have been found to work, and, generally, when China has been found to be acting inconsistently with its WTO obligations, it has complied with WTO rulings. The actual extent of Chinese compliance with WTO judgments can be questioned; in some instances it is seen by some as only “paper compliance.” But whether any one WTO rule can in fact be enforced cannot be known if no WTO Member bothers to try to enforce it.

The WTO rules in the WTO Agreement on the Trade-related Aspects of Intellectual Property Rights – the so-called TRIPS Agreement – are unique among WTO rules because they impose affirmative obligations. Yet, this affirmative aspect of WTO intellectual property rules has been largely unexplored in WTO dispute settlement. In particular, WTO Members have so far refrained from challenging other WTO Members for failing to enforce intellectual property rights.

On enforcement, Article 41.1 of the TRIPS Agreement imposes an affirmative obligation on all WTO Members: “Members shall ensure that enforcement procedures… are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringements and remedies which constitute a deterrent to further infringements. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.”

Note that this “shall” be done by all WTO Members; it is mandatory for compliance with their WTO obligations. And yet what does this obligation mean by requiring that effective actions against infringements must be “available”? Is this obligation fulfilled by having sound laws on the books, as is generally the case with China? Or must those laws also be enforced effectively in practice, which is often not the case with China?

The Appellate Body has said that “making something available means making it ‘obtainable,’ putting it ‘within one’s reach’ and ‘at one’s disposal’ in a way that has sufficient form or efficacy.” Thus, simply having a law on the books is not enough. That law must have real force in the real world of commerce. This ruling by the Appellate Body related to the use of the word “available” in Article 42 of the TRIPS Agreement and to a legal claim seeking fair and equitable access to civil judicial procedures. Yet the same reasoning applies equally to the enforcement of substantive rights under Article 41.

In the past, the United States has challenged certain parts of the overall Chinese legal system for intellectual property protection – and successfully – in WTO dispute settlement. Despite its overall concerns about enforcement by China of US intellectual property rights, the United States has not, however, challenged the Chinese system as a whole in the WTO. Instead of indulging in the illegality of unilateral tariffs outside the legal framework of the WTO, the Trump Administration should initiate a comprehensive legal challenge in the WTO, not merely, as before, to the bits and pieces of particular Chinese IP enforcement, but rather to the entirety of the Chinese IP enforcement system.

To be sure, a systemic challenge by the United States to the application of all China’s inadequate measures relating to intellectual property protection would put the WTO dispute settlement system to a test. It would, what’s more, put both China and the United States to the test of their commitment to the WTO and, especially, to a rules-based world trading system.

As Trump’s trade lawyers will hasten to say, a systemic IP case against China in the WTO would also involve a perhaps unprecedented amount of fact-gathering. It would necessitate an outpouring of voluminous legal pleadings. It would, furthermore, force the WTO Members and the WTO jurists to face some fundamental questions about the rules-based trading system. Yet it could also provide the basis for fashioning a legal remedy that would in the end be mutually acceptable to both countries, and could therefore help prevent commercial conflict and reduce a significant obstacle to mutually beneficial US-China relations.

Going outside the WTO to try to resolve this trade dispute will undermine the WTO and thereby ultimately undermine US trade in goods and services – not to mention the protection of US intellectual property rights – throughout the world. Far better for the United States to play by the rules within the WTO – not least because it was the United States that insisted the most on having those rules when they were negotiated. Far better, too, for China to have its compliance with its WTO obligations judged by impartial and objective WTO jurists than by Donald Trump.

A positive solution should be sought by the Trump Administration through dispute resolution in the WTO over the systemic shortcomings of Chinese intellectual property protection before plunging into the commercial black hole of unilateral trade action.