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Australia-China FTA Conference in Shenzhen

28-29 June 2006

Day 1 - Intellectual Property

Intellectual Property in a possible China-Australia Free Trade Agreement

Kimberlee Weatherall, Associate Director, Intellectual Property Research Institute of Australia
Lecturer in Law, The University of Melbourne

Intellectual property laws - copyright, patent, trade mark and others - are laws which are designed chiefly to promote creativity and innovation by providing creators with exclusive rights to their creations and innovations.  Over the last 12 years, since the Uruguay Round which created the WTO, intellectual property has become intertwined with trade, and ever more controversial.  Negotiating an IP Chapter to suit both Australian and Chinese interests poses a considerable challenge.

There are three aspects of such a negotiation which I wish to address in this paper.

1. Should intellectual property provisions be included in a bilateral free trade agreements ('FTAs') between Australia and China?

2. What models exist for inclusion of such provisions in an FTA, and are any of them useful, particularly from an Australian perspective; and

3. Are there any other options for drafting such a chapter?

As will appear from the discussion, in my view some real creativity is called for in drafting such a chapter.  The issues are more complex than they might appear given the long-standing debate over enforcement in China. 

Should intellectual property provisions be included in bilateral free trade agreements at all? General justifications for including IP chapters in FTAs

As someone who studies intellectual property and its relationship to international law, I am sometimes asked why chapters on intellectual property law are included in FTAs.  On one level, their inclusion might appear to be counterintuitive, for two reasons:

• Intellectual property standards would seem to be a matter of domestic economic and innovation policy, not having direct implications for trade relationships (as compared, for example, to matters such as tariffs); and

• Raising intellectual property standards sometimes seems to increase barriers to trade, by preventing goods legitimately sold in one country from being imported into another country.

It is sometimes argued, therefore, that IP should be simply left out of Free Trade Agreements altogether, and left to domestic policy.

The more accepted view, however, among academic commentators is that intellectual property and its protection is a legitimate subject matter for inclusion trade agreements.  In fact, bilateral trade agreements have included provisions on intellectual property since at least the late 18th Century.  Nation-states early on  recognised the need, in negotiating trade, to protect their authors and inventors from free-riding and copying abroad.  The relationship between trade agreements and intellectual property was further cemented at a multilateral level through the negotiation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in the Uruguay round which formed the World Trade Organisation in 1994.

There are also good reasons for the inclusion of rules which seek to increase IP protection in this context.  This becomes clear if we imagine two countries: one with a strong innovation culture, and export strengths in advanced technologies; the other specialising in cheap manufactured goods and primary resources for export income.  The first country may see its own interests as requiring strong intellectual property protection.  The second country, on the other hand, may see little or no advantage in such laws and, as a result, may have local producers who copy, and sell counterfeits and copies. 

If we consider the trade relationship between these two countries, the issues become clear. On the one hand, the primary produce and manufactured goods of the second country can be sold anywhere. However the technologically advanced country will suffer trade barriers where its neighbour provides insufficient protection.  It will be difficult to sell innovative products in the face of cheaper local copies.  Businesses from the first country may also hesitate to export their technology to the second, for fear that it will be copied.  Furthermore, the problems may be exacerbated where cheap copies are exported, undercutting profits in the home or primary markets of the innovator company.

In short, without some IP protection in the second country, a technologically advanced country, and its corporate sector, are not on a 'level playing field'.  This provides a general justification for including IP in trade agreements: a justification reflected in the long history of trade agreements dealing with IP law.   These issues have only become more important as the value and relative importance of IP have increased.

Australia and China: Congruent IP Interests?

If we accept, therefore, that protecting IP can be a legitimate aim for a country which is negotiating a trade agreement, a further important question remains open: what kind of IP provisions should be included?  This will depend on a number of factors: for example, the nature of the respective economies of the countries involved and where they consider their comparative advantage to lie; the stage of development at which the respective countries find themselves; and their respective 'clout' in international trade and bargaining terms in the negotiation of the FTA. 

In general, we would expect a country with a strong innovation culture to prefer to see high levels of IP protection in other countries, in order to ensure the maximum levels of royalty flow to their authors and inventors and the maximum return on investment for innovators.   Ideally, such a country will prefer to see others adopt its own systems, so that local innovators face predictable legal systems worldwide.

Countries at a lesser stage of development, on the other hand, are likely to prefer to maintain the maximum extent of flexibility consistent with existing international obligations under TRIPS.  Doing so will allow them to maintain lower levels of intellectual property protection which will minimise royalty flows out of the country.  Lower IP protections may also enable companies within the country to take advantage of technology developed elsewhere: to learn, absorb, and then improve on the lessons of other foreign innovators.  It may be, too, that a country's interests will vary depending on the type of intellectual property involved: a country may have a strong interest in protecting inventors, but less interest in protecting copyright owners if its potential export strengths lie in scientific advancement rather than cultural products.

Considering the respective economies of Australia and China, it might be expected that the two countries' interests would be relatively congruent.  Neither Australia nor China is currently a world power in innovation terms - although Chinese companies appear to have made great strides in recent times: according to World Intellectual Property Organization (WIPO) Statistics, China was listed among the top 10 countries for patent applications for the first time in 2005, recording an increase of 44 per cent compared with the previous year.   Both countries assert that development of a more innovative economy is a goal of public policy.  Australian policy statements emphasise innovation, and Chinese officials have clearly underlined the importance of promoting local innovation.  Both countries, then, might be said to have similar aims, consistent with developing a strong, enforceable intellectual property regime which will support the development of an innovative economy. 

There is no doubt truth in this expectation of consistent interests between the two countries.  However, it is also important not to underestimate the challenges, and the very real differences between the interests of the two countries which will continue to exist in the short to medium term.  First, it is by no means clear that the current 'state of play' of similar interests in promoting innovation will remain the case.  The Australian and Chinese economies are quite different, and China, in particular, has increased its 'production' of IP, particularly in the area of inventions, in recent times.

Second, there are differences in the legal framework that must be taken into account.  Australia, in part as a matter of deliberate national policy, and in part as a result of its 2004 Free Trade Agreement with the United States, has adopted very high standards of intellectual property protection.  These standards are sometimes referred to as 'TRIPS-plus'.  Examples of this higher level of protection include a longer copyright term than is required by TRIPS, extensive digital copyright provisions, the availability of extended patent terms for pharmaceuticals, and 'data exclusivity' laws which prevent government authorities from accepting applications to approve generic medicines based on the original drug for the period of exclusivity.  It is important to realise, too, that the effect of TRIPS is to instil 'national treatment' and 'most favoured nation' requirements in respect of Australia's IP laws.  That is, Australia must grant these same protections to nationals of all WTO members - including China - even where China does not provide reciprocal protection to Australian innovators within its own borders.  The combined effect is that Australia has a strong 'self-interest' in seeing other countries adopt similar, high standards to those which it is obliged to observe.

China, on the other hand, is undergoing a process of shifting to a more protective intellectual property regime.  Moreover, while it appears clear that the Chinese government has adopted a policy in favour of more intellectual property protection, difficulties arise where there are many constituencies within China which may not favour stronger IP laws or more enforcement.  Chinese consumers, for example, have little interest in seeing more IP enforcement which will deprive them of the ability to buy copies of IP-protected material cheaply.  Some Chinese businesses have little interest in laws which will prevent or restrict some of their activities - even though that activity is infringing.  And some officials, particularly at a local or provincial level, may have little incentive to shut down companies which provide significant local employment.  

Cleary China does have an interest in increasing the effectiveness of its IP regime.  Clearly, too, the Chinese government has taken policy steps in that direction.  Comments by many of China's trading partners in recent times reaffirm that significant changes have occurred within China.  It is simply worth recognising that the immediate, practical challenges of finding congruence in IP is more complicated than a superficial view of the respective economies might indicate.  In summary, as China gradually shifts to a stronger focus on innovation, it would be likely to seek to preserve the flexibility it can in setting its own domestic policy and priorities.

Models for an Intellectual Property Chapter

With all this in mind, then, what kinds of IP provisions might we expect to see in an Australia-China FTA? 

One guide is to look at existing precedents.  While China does not have IP chapters in its existing trade agreements, Australia does.  Unlike the United States, Australia's IP Chapters do not follow a consistent pattern.   Broadly speaking, they come in two 'varieties':

• The first 'variety' is exemplified by Australia's agreements with Thailand and Singapore.  These might loosely be termed 'cooperation' agreements: they require the parties to adhere to multilateral agreements, and to cooperate on enforcement, through exchange of information between relevant agencies, policy dialogue, and other initiatives.  These cooperation agreements do not contain any 'substantive' provisions on what IP law should look like, nor are the terms on cooperation detailed or specific. 

• The second 'variety' is found in the Australia-US Free Trade Agreement: a comprehensive agreement on the way substantive IP law should look, plus detailed provisions on cooperation and provision for yearly meetings on the FTA as a whole.  This agreement thus covers substantive law, and enforcement.

Neither of these varieties provides a good model for a prospective Australia-China FTA. 

A 'cooperation agreement' such as that reached with Thailand or Singapore will not respond to the very real concerns that Australian stakeholders have expressed relating to the enforcement situation which currently pertains in China.   Numerous submissions to the Australian government, made in the context of the negotiations, have pointed out the impact of IP enforcement issues for Australian industries ranging from education providers to auto parts manufacturers and plant breeders. Although China has taken considerable steps to strengthen IP, the most recent report from the US Trade Representative notes that China does not provide owners of intellectual property with the enforcement to which they are entitled, even under international obligations, and that there has been 'only limited progress by China in addressing … deficiencies in IPR protection and enforcement'. General reports from private sector bodies indicate that counterfeiting may have increased, and that in general, enforcement efforts, particularly the administrative system, have been ineffective.   The major enforcement problems reported by the various government and private sector bodies reporting on the issue include:

• Poor coordination of government ministries and agencies and bureaucratic delays;
• Local protectionism and corruption;
• Problematic thresholds which must be overcome before investigations or criminal prosecutions will occur;
• Non-transparent processes;
• Over-reliance on administrative enforcement which is relatively 'toothless', given that administrative fines are too low to constitute a deterrent.

There are also reported problems and delays in registering both trade marks and patents in China.

On the other hand, a comprehensive agreement following the model of the US-Australia Free Trade Agreement is neither attainable nor, arguably, desirable given the impact of such an agreement in constricting local policy development.  In any event, once again such an agreement would not truly respond to the main concerns of Australian stakeholders.  The negotiations between the US and Australia were between two high-protection countries, where the only real outcome to be sought was more 'harmonised' laws, facilitating trade between the countries.  In an Australia-China Agreement, Australia is likely to be the demandeur, seeking stronger and more effective IP protection.

Is there another way?

How, then, can Australia's IP interests be protected in a China FTA? It would appear that a 'third way' needs to be found.  An effective, useful IP chapter, from Australia's perspective, would need to do two things:

1. It would need to address any important, immediate concerns that have been identified by the industry.  If, for example, trade mark applications are taking an inordinate time to be processed, then those delays could be specifically dealt with.  If there are concerns about the adequacy of particular aspects of Chinese law (for example, on trade secrets), these, too, should be addressed. 
   
   This, on its own, however, is a rather 'static' approach.  It deals with immediate issues, but Free Trade Agreements are of their nature forward-looking documents.  They need to make provision for future issues: a considerable challenge in the area of intellectual property where the market, and the law change rapidly.

2. Thus as a second matter, an effective IP Chapter must contain a dynamic element: it must contain provisions that institute mechanisms for dealing with substantive and enforcement issues on an ongoing basis.  A number of possible precedents may be found in the systems instituted between Europe and China, and between the US and China:

1. A Working Group in which Australina and Chinese officials, IP specialists and law enforcement authorities could consult on specific problems on an annual basis;

2. Some form of case referral or specific arbitration system to deal with Australian IP disputes in China which does not rely solely on the existing, overworked and under-resourced enforcement systems.

The 'dynamic' aspects of the Agreement must, to be effective, deal with both enforcement issues and problems, and possible future debate over substantive law.  No doubt there are other, even more interesting options available to create a 'dynamic' element to an IP Chapter with China.  It would appear, however, that only an agreement that contains such a dynamic element: that creates mechanisms for dealing with the new issues which are bound to arise as both Australian and Chinese interests in this field shift, will provide the kind of basis for ongoing harmonisation and cooperation that is required.  The question that will remain is whether such a chapter can, in fact, be negotiated.  This remains to be seen.  There should be common ground between the countries, but the challenges should not be underestimated.