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AEJ 97 JayakarK INTL US-China copyright: A two level games analysis

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The United States-China Copyright Dispute:
A Two Level Games Analysis
 
 
 
 
 
 
Submitted to
 
The James W. Markham Competition,
International Communication Division
The 1997 AEJMC Convention,
July 30-August 2, 1997.
 
 
by
 
 
 
 
Krishna Jayakar
Department of Telecommunications
Radio-TV Building, Indiana University
Bloomington, IN 47405
Phone: (812) 857-0186
E-mail: [log in to unmask]
 
 
 
(March 31, 1997)
 
 
 
 
The United States-China Copyright Dispute:
A Two Level Games Analysis
 
 
 
 
 
Abstract
 
 
 
 
 
 
        For some years, U.S. media and computer software industries have alleged
that they lose billions of dollars to copyright piracy in China.
Negotiations under Special 301 have produced a series of domestic laws
and international agreements with China, without affecting the rising
trend of piracy statistics. Why is China unwilling to take action against
a pirate industry even at the risk of trade sanctions? Why is the U.S.
reluctant to impose sanctions even when statistics clearly indicate that
its objectives are not being realized? This paper uses two level games
theory to explore these questions. It summarizes the growth of the
Chinese copyright system since the late 1970s under the influence of
domestic and international factors. It then traces out the connection
between domestic interest group configurations and international
agreements, and the influence of negotiating strategies on the outcome of
two level games. Based on this analysis, the paper finally discusses the
prospects for future Special 301 enforcement actions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The United States-China Copyright Dispute: A Two Level Games Analysis
______________________________________________________________________________
The United States-China Copyright Dispute:
A Two Level Games Analysis
 
        In recent years, a confrontation over copyright issues has become an
annual feature of diplomatic and trading relations between the United
States and China. The International Intellectual Property Alliance (IIPA)
has alleged that its members lost $2.3 billion in potential sales due to
piracy in China in 1995, up from $866 million in 1994,[1] and $827 million
in 1993.[2] Forty percent of all pirated CDs worldwide come from China
alone, a large part of which is derivative of U.S. works.[3] The U.S. has
come several times close to imposing trade sanctions on China under its
Special 301 law alleging insufficient protection for copyrighted material
like audio and video cassettes, computer programs, and video games. China
too has repeatedly announced retaliatory sanctions. But skilful diplomacy
and mutual compromise have succeeded till now in pulling both countries
back from the brink of an all out trade war.
        The recurrence of this confrontation is inexplicable at first sight. The
U.S. today is China's largest trading partner, importing $45.6 billion
worth of merchandise from China in 1995 and exporting $11.7 billion of
goods in return.[4] In 1994 alone, U.S. investors poured in $2.5 billion
worth of investments into China's booming economy, making the U.S. the
third largest foreign investor in China and the largest from outside the
Greater China region.[5] The U.S. Department of Commerce has identified
China as one of the most important of the ten big emerging markets (BEMs)
of the 21st century.[6] Despite temporary "glitches" like Tiananmen, human
rights and Taiwan, China and the U.S. have evolved an enduring and
mutually beneficial partnership. Within this context, a persistent
copyright dispute should be unacceptable for both nations.
        The U.S.-China copyright dispute raises several questions. Over the last
five years, there has been marked improvement in the Chinese copyright
regime, but this progress has been coeval with a rising trend in piracy
statistics. Why has the United States Trade Representative (USTR)
repeatedly withdrawn the threat of trade sanctions even as piracy
continued to flourish in that country? On the other hand, why does China
appear willing to engage in a recurring confrontation with an important
trading partner over an unorganized underground industry whose
contribution to the overall Chinese economy is negligible? Why are
China's CD pirates proving to be so resistant to international and
domestic pressure?
        To address these questions, I adopt the theoretical framework of
two-level games.[7] This approach has been used in several studies to
analyze the connection between domestic politics and international
relations.[8] To summarize, two level games theory argues that national
governments are not unitary actors capable of taking independent
decisions. Rather, there are many interest groups at the national level
who seek to influence international decision-making according to their
own agendas. Principal negotiators are thus engaged in simultaneous
negotiations at two levels; an international level where their
counterparts are the principal negotiators of the other nation, and a
domestic level, where the negotiations are carried on with domestic
constituents such as parliamentary groups, industry associations, labor
unions and political parties. Any agreement reached at the international
level remains tentative until ratified, either formally or informally, by
a coalition of powerful interests at the domestic level. The 'win-sets'
of the negotiations at the international level include those agreements
that can win ratification at the domestic level. Negotiations lead to
agreement when there is an overlap of the 'win-sets' of the two
international negotiators. The two-level games approach makes explicit
the connection between domestic politics and international negotiations
and provides a powerful framework for the discussion of complex issues
like the U.S.-China copyright dispute.
        To lay down the legal foundations for this analysis, the first two
sections discuss the salient features of the international copyright
regime and the provisions of the U.S. Special 301 law. In the third
section, I discuss several case studies of Special 301 negotiations to
identify some of the reasons why states accept or resist U.S. demands on
copyright issues. The fourth section summarizes the evolution of the
Chinese copyright regime from the late 1970s to the mid-1990s. In the
fifth section, I apply the two-level games approach to study the
U.S.-China copyright dispute. Based on this analysis, the summary and
conclusions section discusses the prospects of Special 301 and
implications for future copyright enforcement actions.
I. International Law on Copyrights
        Copyrights, along with patents, trademarks, trade secrets, and plant
breeders rights are part of a general bundle of property rights vested in
the creators of various types of intellectual property. Copyrights have
traditionally been awarded to "original works of authorship fixed in any
tangible medium of expression, which includes inter alia literary,
musical, scientific, dramatic and artistic works and sound recordings."[9]
Copyright is interpreted as the owner's exclusive right to reproduce,
adapt, publish, or perform publicly any form of the copyrighted work, and
to prohibit others from such use without the owner's permission. These
laws apply to a variety of media products like sound recordings,
audio-visual products, films, television and radio broadcasts, as regards
their reproduction, broadcasting, translation and adaptation, and to
computer software.
        Copyrights are generally governed by national law. They are either
granted to nationals of a country, or to the nationals of other countries
with whom the jurisdiction has treaty relations for the reciprocal
protection of copyright.[10] Though reciprocity is thus made the basis for
the international protection of copyrights, problems arise in practice
because the terms of protection offered by different jurisdictions may
not be the same. For example, there is some variance in the duration of
protection offered by different countries.[11] Also, rights admissible for
protection under one jurisdiction may not be available under another.[12] Due
to this non-uniformity in the levels of copyright protection in various
jurisdictions, international copyright treaties have become necessary
under which the signatories commit themselves to a minimum standard of
copyright protection.
        The major international copyright conventions are the Berne Convention
of 1886,[13] and the Universal Copyright Convention of 1952.[14] The Berne
Convention offers a relatively longer period of protection,[15] covers a
larger number of rights[16] and imposes no pre-conditions like registration
or deposit for recognition of copyright.[17] These conventions seek to
harmonize national laws with respect to the time period for which rights
are granted, the types of rights covered, specific remedies for copyright
infringement and so on. They lay down standards that signatories have to
reproduce in their own national law. Copyright conventions are based upon
the principle of reciprocity, whereby a work that secures copyright in
one country simultaneously secures it in other countries.[18] International
conventions also seek to ensure that all countries extend the same
protection to foreign nationals that they provide to their own citizens.[19]
        Since copyright is exclusively within the jurisdiction of the state,
international actors seeking to improve national protection for copyright
have to work through the state government. Typically, pressure is brought
on national governments to harmonize their laws with international
conventions, or to agree to a minimum standard of reciprocal protection
through bilateral treaties. Both multilateral and bilateral approaches
have been used by the U.S. At the multilateral level, the U.S. got
intellectual property included as an agenda item under the Uruguay Round
of multilateral trade negotiations. It also joined the Berne Convention
in 1989.[20] At the bilateral level, laws were created enabling the U.S. to
retaliate against foreign countries which afforded inadequate protection
for intellectual property. On the whole, the U.S. has preferred to rely
on bilateral means to improve intellectual property protection abroad,
due to a perception that multilateral adjudication procedures were too
time-consuming, politicized, and entangled in bureaucratic red-tape. The
next section briefly discusses the laws enabling the U.S. administration
to take bilateral enforcement actions.
II. Special 301 and Trade Negotiations
        Under the Trade Act of 1974, the U.S. could take retaliatory action
against any country that denied the U.S. rights owed to it under a trade
agreement, or which unfairly restricted U.S. commerce.[21] The Trade and
Tariffs Act of 1984 extended the definition of unfair trade paractices to
include intellectual property violations, and empowered the USTR to
undertake an annual review of problem countries.[22] The Omnibus Trade and
Competitiveness Act of 1988 added further to the powers of the U.S. to
retaliate against foreign trade barriers.[23] It stated that a principal
negotiating objective of the U.S. was "to seek the enactment and
effective enforcement by foreign countries of laws which recognize and
adequately protect intellectual property, including copyrights, patents,
trademarks, semiconductor chip layout designs and trade secrets."[24]
        The Omnibus Act introduced detailed procedures through which the USTR
could identify, investigate and take action against foreign countries
that had inadequate or ineffective safeguards against intellectual
property violations.[25] The Act empowers the USTR to undertake an annual
review of problem countries. Within thirty days of the publication of the
National Trade Estimate Report, the USTR has to name priority foreign
countries which have the "most onerous or egregious" policies that deny
intellectual property protection or market access to U.S. rights holders.
Once the priority list is announced, the USTR has to implement a
time-bound program for the initiation and conclusion of negotiations and
the declaration of sanctions, if necessary. Sanctions could involve the
imposition of tariffs on the foreign country's exports to the U.S., or
the withdrawal of benefits under the Generalized System of Preferences
(GSP).[26]
        The Omnibus Act tightened the USTR's investigation process by
introducing deadlines for the conclusion of negotiations, and
"bench-mark" expectations that a foreign country had to fulfill before
the threat of trade sanctions would be withdrawn. The USTR and her
foreign negotiation partners had to work towards specific objectives
within a given time-frame. The Omnibus Act also allowed the
cross-sectoral imposition of sanctions.[27] The USTR could target sanctions
at such industries that would have the maximum effect on the foreign
country, while minimizing the effects on the U.S. economy. Armed with
these new powers, the USTR initiated a number of bilateral negotiations
over copyright issues beginning in the mid-1980s. While significant
improvements in copyright protection were noted in several cases, the
results were not uniform. The next section discusses several case studies
of Special 301 negotiations, with countries in the Asian region.
III. Negotiations under Special 301: Case Studies.
        The consensus in the U.S. policy establishment is that unilateral trade
retaliation is a very useful tool for the U.S. administration to secure
better intellectual property protection and the removal of trade barriers
abroad. This assessment is generally supported by the record of Section
301 and Special 301 actions undertaken by the USTR. Some of the factors
that contributed to the success of bilateral enforcement actions can be
identified.
        The status of the foreign country as a recipient of GSP benefits from
the U.S. is an important factor.[28] This was particularly evident in the
case of Singapore.[29] In the mid-1980s, Singapore was named by the IIPA as
the world capital of piracy. Initial attempts by U.S. and British
governments and business groups to persuade Singapore to reform its
copyright system were futile. The turning point was the passage of the
Trade and Tariff Act of 1984, which threatened to withdraw GSP benefits
from copyright offenders. Singapore was keen to retain the $730 million
of benefits it received from GSP in 1985, and took quick action to curb
piracy. A new copyright act was passed, and a bilateral agreement was
signed with the U.S., both in 1987. Piracy rates plummeted from $358 in
1984 to less than $10 million in 1988.[30]
        A second factor is the importance of the U.S. as a major export market
and source of foreign investment for the targeted country. In the case of
Taiwan, for example, the U.S. was able to secure most of its negotiating
objectives because of the excessive reliance of that country on exports
to the U.S., and its need for U.S. political and diplomatic support
against mainland China. Under Special 301 pressure, Taiwan modified its
domestic media laws to prohibit the cable retransmission of American
films without permission, prohibited the parallel import of copyrighted
goods, and instituted a pre-export inspection system for computer
software and some trademarked goods to ensure that all components have
been legitimately licensed from copyright owners.[31]
        A third factor is the desire of countries to upgrade their local
technology competence. Supporters of better intellectual property
standards argue that it gives an incentive for domestic research and
development and attracts foreign investment in high technology. From a
two-level games perspective, national players in favor of better
copyright protection may use international pressure to bolster their own
positions. For example, in the case of Singapore, the state would
probably have made the required improvements in its intellectual system
on its own, but U.S. pressure led to speedier action.[32] In Malaysia too,
copyright reform owed more to the government's desire to develop a local
computer and software industry and protect the country's highly active
music business than to pressure from the U.S. government.[33]
        Fourthly, domestic political factors can sometimes make otherwise
unpalatable options viable for a state. In Taiwan for instance, the
government was willing to take action against unauthorized cable channels
which were broadcasting unlicensed American movies because the cable
networks were also being used by opposition parties for political
propaganda against the Kuo Ming Tang government.[34] In Malaysia, an added
incentive for the Islamic government to reform copyright laws was to
check the proliferation of pornographic and uncensored videocassettes.[35]
        Domestic political factors can sharply circumscribe a government's
freedom of action too. This is most dramatically illustrated in the case
of Thailand.[36] In spite of being a long-term U.S. ally and major GSP
recipient, U.S. demands for a bilateral copyright treaty ran into
unexpected opposition. The discussion of the proposal in Parliament
precipitated a crisis in the ruling coalition that led to the dissolution
of Parliament and the announcement of elections. The U.S. persisted with
its calls for a bilateral copyright treaty, and also demanded that the
Thais drop their move to give sui generis protection to computer
software. In November 1988, the Thai government agreed to sign a
bilateral treaty. However, it could not guarantee that no legislator
would introduce a separate bill for computer software protection. Finally
in December 1988, the U.S. dropped this demand. Though the U.S. achieved
most of its negotiating objectives, its perceived "bullying tactics" were
resented in Thailand. Some have argued that Thailand's first civilian
government after decades of military rule was too weak to push unpopular
policies through Parliament.[37]
        These four factorsDreceipt of GSP benefits, the importance of the U.S.
as an export market and source of investment, local industrial and
technology policies, and domestic political equationsDare important
determinants of a state's vulnerability to international pressures. We
will return to them in the analysis section. The next section discusses
the development of a copyright regime in China under the influence of
domestic and international factors.
IV. U.S.-China Copyright Relations
        In this section, we discuss the evolution of the Chinese copyright
regime from the 1970s to the 1990s. The discussion spans more than two
decades and considers several laws and international agreements that
incrementally advanced the copyright system in that country. I propose to
examine the evolution of the Chinese system in terms of four activities
that normally occur in the development of a national legal system for
copyright. They are as follows:
Definition: Recognition of copyrights and other intellectual property
rights in a nation's legal system, with definition of works covered and
the duration of protection;
Facilitation: Creation of enforcement mechanisms, like copyright
registration bureaus and courts to hear copyright cases, and legislation
enabling law enforcement agencies to take investigative and preventive
actions;
Internationalization: Extension of protection to foreign rights holders
through bilateral agreements or accession to multilateral conventions,
and harmonization of the terms of copyright protection with generally
accepted international norms;
Enforcement: Actual enforcement actions leading to a decrease in the
incidence of piracy.
        In proposing these activities, I do not argue that they fall into a
sequence which is typical is of the development of national copyright
systems, nor indeed that China followed this sequence. In fact, several
laws discussed in the following case study contributed to two or more
activities, and several occurred "out-of-sequence." Also, enforcement
actions can be expected to take place concurrently with any of the other
activities, after the domestic laws have been created. These activities
are only used as convenient milestones against which developments in the
Chinese copyright system can be assessed. However, they are useful
analytical devices because the efficacy of the later activities depend on
the prior performance of the earlier ones.
        Diplomatic relations were established between the U.S. and the People's
Republic of China in 1972. In 1979, the U.S. and China concluded a
Bilateral Trade Agreement granting each other Most Favored Nation status
(MFN).[38] As part of the agreement, the two countries made a commitment to
protect each other's intellectual property. Art. VI of the agreement
declared that both parties will "recognize the importance of effective
protection for patents, trademarks, and copyrights"[39] and take appropriate
measures "to ensure to legal and natural persons of the other Party
protection of copyrights equivalent to the copyright protection
correspondingly accorded to the other Party."[40]
        The principle of reciprocal copyright protection was thus incorporated
into U.S.-China bilateral relations. In terms of the schema laid out
above, U.S.-China copyright relations were leap-frogging into the
internationalization stage, bypassing the first two activities. China at
that time did not have a copyright law, nor any enforcement mechanisms.[41]
Nor was China a signatory to any of the multilateral conventions on
copyright that could have guaranteed minimum standards of protection for
foreign copyright holders in the Chinese legal system. At this stage
therefore, the Bilateral Trade Agreement's commitment to protect U.S.
copyright in China was empty and premature. Though this was the first
agreement between the U.S. and China to discuss copyright, it was
irrelevant to the future development of the Chinese copyright regime.
        The initial development of the Chinese copyright system occurred largely
uninfluenced by international factors. In the early 1980s, China was yet
to develop into the miracle economy it was to become later, and
international concern about the domestic legal regime was low. But there
was growing awareness in China itself that closer integration with the
global economy necessitated the reform of domestic laws to conform to
international standards. Beginning in the early 1980s, China took some
initiatives to reform its copyright system. In 1985, a National Copyright
Administration was set up under the State Council to implement copyright
laws, investigate cases of infringement, administer copyright agencies
and manage copyright affairs with foreign countries.[42] The General
Principles of the Civil Laws of the People's Republic of China, which
entered into force in January 1987 gave legal recognition to copyright,[43]
and created a civil liability in tort for copyright infringement.[44] But the
definitional phase was still incomplete because the General Principles
did not fully specify either the works covered or the terms of
protection.
        The next significant definitional advance occurred in 1990. The
Copyright Law legislated that year guaranteed the rights of publication,
authorship, alteration, integrity, exploitation and remuneration.[45]
Copyrights covered written works, films, television and video
productions, musical works, engineering designs and computer software, as
well as traditional Chinese arts and performances.[46] The duration of
protection for the rights of publication, exploitation and remuneration
were fixed at life of author and fifty years.[47] However, the rights of
authorship, alteration and integrity were guaranteed for an unlimited
period of time.[48] The 1990 Copyright Law effectively concluded the
definitional phase of the Chinese copyright system, though later laws and
agreements continued to refine the basic framework.
        The 1990 Copyright Law contributed to facilitation as well by describing
the general conditions under which copyrighted works could be licensed
and laying down penalties for unauthorized use. Penalties for copyright
infringement included cessation of the act, the elimination of the
effects of the act, public apology, and compensation for damages;
additional penalties could involve the confiscation of unlawful income
and the imposition of fines.[49] The Implementing Regulations for the
Copyright Law were published in May 1991 [50] and stated that "remuneration
for the exploitation of copyrighted works will be established by the
copyright administration department under the State Council;"[51] however,
payments could also be contractually fixed. The Implementing Regulations
added to the punitive actions, including warnings from the copyright
administration department, injunctions on the production and distribution
of copies, confiscation of unlawful gains, and seizure of infringing
copies as well as equipment used for illegal activity.[52]
        The 1990 Copyright Law began the internationalization of the Chinese
copyright regime too by enabling foreigners to enjoy copyright protection
in China under two categories: (1) if the copyrighted work was first
published in the Peoples' Republic, the term of protection will be the
same as that for Chinese works;[53] and (2) if there exists a bilateral
treaty between China and the foreigner's native country, or a
multilateral treaty to which both countries are a party.[54]
        Till this time, advances in the Chinese copyright regime were basically
the result of domestic concerns, primarily the desire of Chinese policy
makers for integration into the world economy. But by the early 1990s,
China was becoming a lucrative market and destination of investment for
international business and interest in domestic developments was high.[55]
Initially, the concern was with the internationalization of the Chinese
copyright systemDthe extension of full protection to foreign rights
holders, and the harmonization of Chinese law with international
agreements, with regard to the works covered and terms of protection.
Later, the locus of foreign concern was to shift towards enforcement.
        The initial manifestation of international concern about the Chinese
copyright regime was dissatisfaction with the 1990 Copyright Law. First,
foreign copyright holders complained that the first publication
requirement in the law was unreasonable, and increased their risk of
doing business in China. Secondly, though computer software was included
in the Copyright Law as a protected work,[56] the regulations for the
protection of computer software were to be established separately by the
State Council.[57] This raised concerns that computer software would be
offered sui generis protection under terms less favorable than those
assigned to general copyrighted works.[58] Third, the period immediately
following the passage of the 1990 Copyright Act was marked by the
emergence of CD factories in southern China, which came to symbolize
Chinese piracy through the 1990s.
        In the late 1980s, China had acquired the technology for the large scale
manufacture of compact discs. Taiwan- and Hong Kong-based pirate
operations which were facing increasing prosecution at home entered into
joint ventures with entrepreneurs mainly in China's southern provinces
and transferred the funds and technology needed to set up factories.
These factories used cheap digital recording equipment to pirate compact
discs, ranging from pop classics to the latest computer software from the
U.S. The number of these factories grew from three in 1990 to about
thirty by the mid-1990s.[59] By 1994, it was estimated that China was
producing about 75 million pirated compact discs per year.[60] This
represented tremendous over-production for the Chinese market; the
surplus was exported to third countries where it competed with legitimate
products.[61]
        Confronted with the loss of a potentially lucrative market to copyright
theft, a number of industry groups including the Recording Industry
Association of America (RIAA) petitioned the USTR in 1991 to initiate a
Special 301 investigation of China. While China had figured in the
Priority Watch List of countries in 1989 and 1990, its status was
upgraded to that of a Priority Foreign Country in May 1991, making it
eligible for trade retaliation.[62] The ensuing consultations led to the
signing of a Memorandum of Understanding (MOU) between the U.S. and
China, under which the latter undertook to improve its patents,
copyrights and trademarks regimes.[63] With regard to copyrights, the Chinese
government agreed to accede to the Berne Convention by October 15, 1992
and the Geneva Phonograms Convention by June, 1993.[64] The MOU committed
China to modify the 1990 Copyright Law and its Implementing Regulations
to bring them into conformity with the above international agreements.[65]
Finally, computer programs too were to be protected as literary works for
a period of fifty years.[66]
        Through the Memorandum of Understanding, China and the U.S. agreed to
extend copyright protection for all works including sound recordings and
computer programs to each other's nationals on a reciprocal basis.[67] On its
part, the U.S. agreed in Article 7 of the MOU to revoke China's
designation as a priority foreign country. The designation was officially
terminated on January 17, 1992.[68] In October 1992, China joined the Berne
Convention and for good measure, the Universal Copyright Convention. The
International Copyright Treaties Implementing Rules, which entered into
force in September 1992 declared that the provisions of the Berne Conv
ention would overrule all pre-existing administrative regulations with
respect to copyright.[69]
        With these developments in late 1992, the internationalization of
China's copyright system was complete. On paper, the Chinese legal system
was comparable to that of any other country in the world. Temporarily at
least, U.S. government seemed satisfied with the pace and direction of
progress. The USTR's priority designations for 1992 reflected this
changed perception, with China designated only as one of eighteen watch
list countries.[70]
        But several months later, copyright violations continued unabated in
China. Having achieved the internationalization of the Chinese copyright
regime through the Memorandum of Understanding, U.S. copyright industries
and the USTR were now recognizing enforcement as the new battleground. In
the USTR's announcement for 1993, China was back on the Priority Watch
List. On June 30, 1994 the USTR again put China on the list of priority
foreign countries.[71] To avoid trade sanctions, the Standing Committee of
the National Peoples' Congress adopted a decision in July 1994 for the
enforcement of copyright laws.[72] Copyright infringement was taken off the
civil statute and made a criminal offence. The new law penalized not only
the producers but also the distributors of illegal material.[73] Article 4
declared that punishment could be up to seven years imprisonment for
producers and up to five years for retailers and distributors, with
additional fines in cases where the illegal income has been great. The
decision allowed copyright administrations to confiscate illegal copies,
the revenue from infringing activity, and the equipment and tools used
for copyright infringement.[74] Finally, the Decision provided for the
payment of compensation to copyright holders.[75] Factories producing compact
discs would henceforth have to be certified by the government, so that
the products could be tracked down to their point of origin. The Chinese
government also undertook to prohibit new factories from coming up.
        Following these actions, the USTR decided to postpone the imposition of
sanctions for a six-month investigative period during which the
implementation of the new regulations would be monitored. By the end of
the year, the USTR remained unconvinced about progress on the ground. On
December 30, 1994 a preliminary determination was made that China's lack
of copyright rights enforcement was "burdensome and unreasonable," and a
retaliation list covering $ 2.8 billion worth of Chinese exports to the
U.S. was announced.[76]
        Hectic negotiations followed in the next one month, but not much
progress was made. On February 4, 1995, the USTR announced the imposition
of 100 percent tariffs on $ 1 billion worth of Chinese exports, giving
the Chinese a three-week grace period before sanctions would take effect.[77]
China immediately announced counter-sanctions, and the situation
threatened to rapidly escalate into a full-scale trade war. Finally, in a
pattern which was by now typical of U.S.-China copyright relations, the
two countries concluded an agreement on February 26, the day the
sanctions were supposed to take effect. The USTR and the Chinese Minister
of Foreign Trade and Economic Cooperation (MOFTEC) Wu Yi concluded the
Intellectual Property Rights Enforcement Agreement, 1995 [78] which ended the
Special 301 investigation in return for a Chinese commitment to take
concrete steps to improve copyright protection.[79]
        Minister Wu's letter to USTR Kantor which formed the text of the
agreement stated that China had already closed down seven factories
producing illegal CDs and revoked their business licenses, and seized and
destroyed more than 2 million illegal CDs. The Chinese government stated
that it would complete an investigation of all production lines suspected
of producing illegal CDs by July 1, 1995, and institute a unique source
identifier system for CDs, CD-ROMs and laser discs to make it easier to
identify the producers of illegal material. An Action Plan attached to
the agreement announced the formation of Working Conferences on
Intellectual Property Rights at the national and provincial levels.[80] A
six-month long nationwide copyright enforcement campaign was announced
beginning in March 1995 under the direction of the national Working
Conference on Intellectual Property. Task forces comprised of police,
customs and federal and provincial copyright administrations were set up
as part of the effort.
         Initially, there were some signs that the piracy of CDs in China may be
decreasing. News reports in May 1995 said that the price of CDs in
Taipei, Hong Kong and Bangkok had increased by 30 percent, because the
steady supply of pirated CDs was finally drying up. In March and April
1995, China closed down 13 illegal CD factories and the remaining ones
were put under a legal obligation to register their output with the
government, making the monitoring process easier.[81]
        However, this period of raised expectations too proved short-lived. In
late 1995, it became clear that progress in enforcement was not up to
U.S. expectations, in spite of the special enforcement periods and task
forces, and numerous meetings between Chinese and U.S. officials at every
level of government. The 1996 National Trade Estimate noted that China
had made significant efforts to eliminate the retail distribution of
pirated sound recordings and computer software, but action against the
producers of this material was lacking.[82] In pursuance of these findings, a
press release from the Office of the USTR on April 30, 1996 announced
that China had again been designated as a priority foreign country under
Special 301 "because of its failure to implement the 1995 Intellectual
Property Enforcement Agreement."[83] On May 15, the USTR published a
preliminary list of $ 3 billions of Chinese exports targeted for
retaliation.[84]
        Even before this preliminary retaliation list was made public, Chinese
officials had gone on record announcing their intention to respond
immediately with an even longer list of counter-sanctions. A Chinese
Foreign Ministry spokesman claimed that U.S. criticism of China, in spite
of its "great achievements" since the 1995 IPR Agreement were "unfair."[85]
In Washington too, Administration officials were expressing concern that
the imposition of trade sanctions on China could compromise other vital
U.S. interests.[86] The reaction from sections of the U.S. industry too was
predictable and not long in coming. Major corporations, some of them with
vast investments in the Chinese market, requested the U.S. government to
avoid confrontation with China, and to make efforts to ensure that a
trade war, if unavoidable, would not widen to include other sectors of
the economy.[87] On June 17, 1996, the USTR announced that "China had reached
a critical mass of enforcement actions", and that the "core elements of
an operational intellectual property rights enforcement system" were in
place; hence sanctions would not be imposed.[88] Another trade war had been
averted, and this time without any major Chinese concessions.
        To summarize, the Chinese copyright regime has been considerably
transformed from the mid-1980s to the present by a number of national and
international legal instruments. Till 1991, most of these developments
were impelled by domestic factors, primarily the desire of the Chinese
policy establishment for a closer integration with the global economy. By
1991, copyrights were recognized in the Chinese legal system and basic
enforcement mechanisms had been defined, though implementation left much
to be desired. After 1991, international factors began to play a more
important role. Under their influence, China acceded to international
agreements on copyright, extended copyright protection to foreign rights
holders and harmonized the terms of protection with international
standards. But enforcement remained weak or non-existent. The latest
battleground between the Chinese and U.S. governments has thus shifted to
the enforcement activity. Figure 1 represents this case study
schematically.
(Figure 1 here)
        In the next section, I return to the questions stated at the beginning
of this paper. As we saw in the case study, the outcome of each round of
negotiations between the U.S. and China was a legal documentDan
international agreement or a domestic law or administrative regulation.
Repeatedly, the USTR has ruled that this was sufficient proof of the
Chinese government's intention to protect copyright, in spite of sharp
increases in the quantum of copyright piracy in China during the same
period. Why has the USTR repeatedly ignored these statistics, and
preferred to cite the creation of new laws as evidence for improvements
in the Chinese copyright regime? On the other hand, why have the Chinese
proved so obstinate in their inaction against an illegal industry, even
when threatened with reduced access to a $45 billion a year market? An
analysis based on two level games provides some of the answers. This
approach has been briefly summarized in the Introduction. Additional
theoretical elements are introduced where required.
V. Application of the Two Level Games Approach
        Any game theoretic analysis of a negotiation needs to separately examine
the players in the game, the action choices available to them, the
payoffs (or benefits) associated with particular actions, and the
strategies used by the players.[89] The two level games approach introduces
an additional degree of complexity by tackling games that take place
simultaneously on two levels. In this section, I examine the players,
action choices, payoffs and strategies of the players involved in the
U.S.-China dispute at two levels of analysis: the international and the
domestic, in that order.
        Level I (international): At the international level, a brief description
of the game is as follows. The two players are the U.S. and China. The
U.S. places a demand for the improvement of copyright protection in
China. China has two options: either agree or disagree to the U.S.
demands. If China agrees the U.S. does not impose trade sanctions, and if
China disagrees the U.S. will impose trade sanctions. Since China is sure
to impose counter-sanctions, the outcome of U.S. sanctions is a reduction
in mutual trade. The order of play is assumed to be simultaneous.[90] TC and T
U.S. denote the gains from mutual trade to China and the U.S. equivalent
to the trade lost when sanctions are imposed. I will shortly explain why
these two figures are assumed to be different. P denotes total quantum of
piracy in China, which is a net gain for China and a net loss for the
U.S. in case China disagrees to enforce copyright laws, and the reverse
if China agrees to enforce copyright laws. Based on these action choices
and payoffs, the payoff matrix given in Figure 2 can be constructed. The
first expression in each bracketed set is the payoff of the row player
(in this case, China) and the second expression is the payoff of the
column player (in this case, the U.S.). The arrows signify the direction
in which the players are likely to move based on their preferences. We
will discuss preferences in more detail shortly.
(Figure 2 here)
        According to the USTR's procedure, the quantum of trade sanctions are
fixed at a level that would cancel out the benefits from continued
piracy. That is, TC is fixed equal to P. China too has announced
counter-sanctions equivalent to the sanctions announced by the U.S. In
practice, it is possible for the USTR and her Chinese counterpart to
target the most vulnerable industries of the other side, and thus maxi
mize the effects of sanctions beyond the dollar value of the consequent
reduction in trade. Also, trade sanctions of even limited nature increase
the possibility that a trade dispute in one industry may escalate into an
all-out trade war with each country targeting the other's most vulnerable
industries. This is a possibility that neither country can afford to
ignore. Thus in practice, both TC and TU.S. are more than P.
        In two level games, comparative negotiating strengths are dependent on
the relative costs of no-agreement to either side. In other words, the
side with the lower cost of no-agreement is in a more advantageous
negotiation position. In the U.S.-China case, a preliminary analysis
based on the size of the U.S. annual trade deficit with China would
suggest that the latter had much more to lose from a break-down of
trading relations than the former.
        But a more sophisticated analysis suggests the contrary. Though
privatization has proceeded to a large extent in China, the major
investor in the Chinese economy continues to be the national government
and other elements of the official establishment like the Communist
Party, the provincial governments and the military.[91] In case sanctions are
actually imposed, the Chinese establishment will absorb most of the
shock, while in the U.S. the effects of a trade war will be felt mostly
by a large number of privately owned businesses. Given the differences in
the two countries' political systems, the Chinese can afford to
contemplate a trade war, while it carries tremendous political costs for
any U.S. administration. The U.S. has to confront an additional political
cost of trade sanctions in addition to the economic costs common to both
sides. Based on the above argument, and including both the political and
economic costs of trade sanctions in the calculations, we need to assume
that TU.S. > TC. In effect, the outcome associated with (Disagree,
Sanctions) is more unacceptable to the U.S. than to China.
        Given the payoff matrix given in Figure 2, it can be seen that a Chinese
rational decision-maker has the incentive to defect from Agree to
Disagree, and a U.S. rational decision-maker has the incentive to defect
from Sanctions to No Sanctions. Thus, the preferred strategy for the
Chinese is not to enforce copyright laws, while the preferred strategy
for the U.S. is not to impose trade sanctions. Since the outcome
(Disagree, No Sanctions) results from the preferred strategies of the
two sides, it can be considered to be quite robust.[92]
        This analysis suggests that agreement in the U.S.-China copyright
dispute is not very likely, which is contrary to our experience. Though
the U.S. has failed to realize its ultimate objective of reducing the
quantum of piracy in China, the two sides have agreed on policy measures
and China has shown some willingness to accede to U.S. demands. This is
explained by the existence of side payments.[93] Placing the U.S.-China
copyright dispute in the overall context of relations between the two
nations allows us to elucidate the complicated role that side payments
have played in this case study.
        Under the "comprehensive engagement" policies followed by both the Bush
and Clinton administrations, a deliberate attempt was made to promote
relations with China on as many fronts as possible. The aim of these
policies was to give China a stake in the global political and economic
system, in order to secure Chinese "good behavior" on issues crucial to
U.S. interests like nuclear non-proliferation, human rights and the
security of Taiwan. A working relationship with China was expected to
have a positive effect on these areas of U.S. concern.[94]
        Vital Chinese interests too hinged on a harmonious relationship with the
U.S. Since the 1980s, China has been trying to modernize its domestic
technology sectors, for which it needed investment and high technology
from the U.S. Though China was not a GSP beneficiary like Singapore (See
Section III), it was still interested in a continuing MFN relationship
with the U.S. Finally, China needed U.S. support for entering the World
Trade Organization (WTO). These potential side payments made the Chinese
more keen to avoid a break-down of trade relations with the U.S. In this
respect, China's situation was similar to that of Taiwan, Singapore and
Malaysia discussed in Section III of this paper.
        To summarize the Level I discussion so far, the preferred strategy
outcome of the Level I game indicates that agreement is unlikely at the
international level. But the existence of side payments changes the
payoff structure and gives both sides an incentive to come to some form
of agreement.[95] The contours of this agreement, however, are determined at
Level II of the two level games. At Level II, the principal negotiator
has to win ratification for the agreements negotiated at Level I. Those
Level I agreements that can win ratification at the domestic level
constitute the 'win-set' of the principal negotiator at the international
level. We can now look at the outcomes included in the win-sets of the
two negotiating sides.
        Level II (U.S. domestic): For the U.S., the most desirable outcome in
this negotiation was the full protection of U.S. copyright in China.
Associations of U.S. copyright owners like the RIAA and the MPEAA have
consistently advocated this position with Congress, the White House and
the USTR. Because copyrighted material has become an important component
of U.S. exports in recent years, these demands have attracted a lot of
attention in U.S. policy circles.[96]
        But U.S. copyright industries are not the only pressure group at the
U.S. domestic level. Two other groups are relevant for this case study,
the U.S. State Department and the manufacturing industries like the big
three U.S. auto-manufacturers. In the U.S.-China copyright dispute, these
two domestic players have advocated a position that conflicted with that
of the copyright industries. The State Department, for example has argued
that a trade war with China would endanger vital U.S. interests like the
security of Taiwan, the termination of the sale of Chinese missile and
nuclear weapons technology to Pakistan and the Middle East, and improving
China's human rights record. As already mentioned in the case study, the
State Department was a vocal advocate of a "soft line" towards the
Chinese in the copyright dispute.[97] The big three auto-makers too have
voiced their opposition to any measure that could upset U.S.-China
relations.[98] At stake for them were considerable investments in joint
ventures in the short run, and a potentially huge market in the long run.
The Chinese too have proved to be astute at exploiting the differences in
the opposition camp. At a delicate stage in the 1994-95 negotiations for
example, the Chinese hinted that certain joint ventures with the U.S. car
companies would be canceled unless the trade sanctions were dropped. They
suggested that negotiations would be initiated with the Japanese instead,
playing on the deepest fears of the U.S. car companies.[99]
        In two level games theory, the concepts of homogeneity and heterogeneity
address factional conflict at the domestic level.[100] In the U.S.-China
copyright dispute, conflict at the domestic level was clearly
heterogeneous because all the three domestic constituents mentioned above
had their own objectives to achieve. In addition, the Special 301 process
itself contributed to the heterogeneity of the domestic coalitions in the
U.S. The petition process at the initiation of the USTR's annual
investigations gives domestic constituents an opportunity to raise
complaints about trade barriers and other anti-competitive actions they
face in foreign countries. But at the same time, it reduces the
homogeneity of the U.S. negotiating position. As the number of interested
parties increases, the principal negotiators of the U.S. have a larger
set of constraints placed upon them. Though this effect cannot be
questioned on normative grounds, it does place a strategic burden on the
USTR which came out clearly in negotiations with China.
        Given the heterogeneity of the domestic coalitions at the U.S. domestic
level, an outcome that obtained its desired objectives for any one
constituent and left the others dissatisfied would not have won
ratification, because no one constituent commanded sufficient clout to
win ratification on its own. But this gave the U.S. administration an
opportunity to put together a "package-deal" that would apparently
advance the agendas of all the groups without satisfying any one
completely. The outcomes of the annual Special 301 negotiations were such
"package-deals." China changed its copyright laws as demanded by the
copyright industries, trade sanctions were averted much to the relief of
the manufacturing sector, and the State Department added one more success
to its policy of comprehensive engagement. In each episode of
international negotiation, the U.S. obtained concessions from China not
large enough to fully satisfy the copyright industries, but sufficient to
show Congress and the general public that progress was being made and
avoid imposing trade sanctions.
        Level II (China domestic): A similar analysis of the domestic level in
China is possible, but harder due to the lack of transparency in Chinese
decision-making. We can only infer the shape of domestic coalitions in
that country from the reported activities (or inactivity) of various
constituents. First of all, a number of actions of the Chinese government
lead us to infer that there was a section of the policy establishment
that favored improvement of the copyright regime. It should be remembered
that the Chinese had already established the National Copyright
Administration in 1985 and legislated the 1990 Copyright Law before the
initiation of the first USTR Special 301 investigation in 1991 (see
Section IV and Figure I). I do not argue that this was done for purely
altruistic reasons. As we saw in Section III, states have improved
intellectual property laws in a conscious attempt to attract foreign
investment and technology transfer, and promote domestic research and
development. A section of the Chinese government, most likely conc
entrated at the national level, evidently advocated copyright reform
independently of international pressure in order to gain the above
objectives.
        Provincial administrations present a sharp contrast. Most pirating
activities have been concentrated in the southern provinces of China,
where much of the country's free market economic activity too is located.
In the boom-town atmosphere of these provinces, the local governments
possibly viewed pirating industries as lucrative businesses rather than
illegitimate activities. Also, there is reason to suspect that pirate
entrepreneurs were well connected politically to provincial
administrations. As news reports point out, Chinese military and civilian
government agencies were involved with at least a few of the twenty-nine
factories producing pirated CDs. The involvement of some influential
Communist Party officials was also not ruled out.[101]
        This contrast between a faction at the national level interested in
improving copyright protection and provincial administrations keen on
maintaining the status quo partially explains the anomalous situation in
which copyright laws multiply even as the quantum of piracy increases. A
common argument the Chinese federal government officials have put forward
is that they are doing their best by reforming copyright laws, but that
they have little control over implementation because enforcement is a
provincial responsibility. The federal government itself may be reluctant
to take strong action against any powerful faction, especially in the
context of the power politics accompanying the transition to a post-Deng
era.
        Still, it would be wrong to suppose that the Chinese government is
totally ham-strung in its dealings with the provinces. A parallel with
the Thai case discussed in Section III does not apply here. The Chinese
have always idealized the strong center, and the federal government has
repeatedly proved itself capable of strong action when the situation
demanded it. But in the copyright case, the advocates of better copyright
protection have not been able to muster the political capital necessary
to convince other domestic constituents that long-term Chinese interests
depended on a strong domestic copyright regime.
        The existence of domestic constituents in China interested in better
copyright protection presents an opportunity for the U.S. As we have
already seen, these sections might be government agencies interested in
attracting foreign investment and technology to China, or domestic
copyright industries. Once these groups begin to profit from a stricter
copyright regime in the country, they could form the nucleus of a
domestic coalition advocating further reform. Thus, it is in U.S.
interests to help local industries develop a vested interest in better
copyright protection. This can be done, for example, by distributing a
larger share of music, computer software and videocassettes through local
distributorships and investing the profits in local production. The re
sulting transnational alliances between domestic constituents on either
side with identical interests can do more to reform domestic copyright
regimes than unilateral pressure from the U.S.
        In the preceding paragraphs, we examined the configuration of Level I
and Level II of the U.S.-China copyright dispute. But these
configurations only determine the framework for the game. Within the
limitations imposed by this framework, players can still employ creative
negotiating strategies that maximize their own payoffs. International
negotiations, like all adversarial interactions, often hinge on the
psychology of the players. In the rest of this section, we will examine
the negotiating strategies used by the two players.
        The negotiating strategy used by the USTR was largely set down in the
Omnibus Trade and Competitiveness Act of 1988 which created the Special
301 procedure. Earlier, negotiations under Section 301 had a tendency to
drag on for ever without resolution, during which U.S. exporters would
continue to be disadvantaged in foreign markets. The Special 301
procedure intended to change that and substitute a well-defined,
time-bound program for the investigation of copyright disputes and
imposition of sanctions. Legislators hoped that this would put pressure
on foreign trading partners to deliver on specific promises within a
given time-frame. As we saw in Section III, this expectation was mostly
vindicated in copyright negotiations with countries like Singapore, Tai
wan, Malaysia and Thailand.
        With China too, the U.S. followed the same "tested" procedure expecting
similar results. The Chinese however managed to utilize an apparent
procedural disadvantage to further their own interests. Acting on the
assumption that the USTR herself was reluctant to impose sanctions, the
Chinese delayed negotiations until the last moment on most occasions.
With the dead-line looming and no agreement in sight, the psychological
advantage of the USTR was replaced by an eagerness to find some common
ground that could eliminate the need for trade sanctions. The USTR had no
alternative but to accept Chinese guarantees of better copyright
enforcement.
        The negotiation strategies used by the Chinese give us further insight
into the dynamics of two level games. A proposition of two level games
theory is that the size of the win-set is inversely related to the
strength of a player's negotiating position. The more narrowly defined a
player's win-set, the fewer options she gives her opponent and the
tougher her negotiating stance. But a smaller win-set increases the
chances of no-agreement too, in which case both sides have to bear the
costs of no-agreement. As we saw in the Level I analysis, the existence
of side-payments made the Chinese willing to agree to U.S. demands. But
the configuration of the domestic level in China limited the size of the
win-set, and made agreement more difficult. This presented a tactical
dilemma for the Chinese principal negotiators. On the one hand, they
could present a narrow win-set at the international level reducing the
chances of agreement, in which case the side payments too could be lost.
Alternatively, they could present a broader win-set and tackle the
chances of no ratification at the domestic level. In two level games the
latter situation is labelled involuntary defection.[102]
        As the case studies reveal, the Chinese consistently chose the second
option. By presenting a larger win-set, the Chinese improved the chances
of agreement, but portrayed poor enforcement actions as something over
which they had no effective control. They thus converted an action they
were reluctant to perform into a case of involuntary defection.
Interestingly, theorists of two level games would argue that the chances
of involuntary defection are reduced in iterated games.[103] In this case, the
U.S.-China copyright dispute went through several iterations, in each of
which the Chinese promised to improve copyright protection and later
failed to deliver on the promise. This "involuntary" defection apparently
did not affect the chances of agreement at the next iteration. This can
be explained only by the robustness of the U.S. preferred strategy of No
Sanctions, discussed in the Level I analysis.
VI. Summary and Conclusions
        Since the 1980s, there has been a lot of change in the Chinese copyright
regime. While the initial impetus for these changes came from domestic
factors, international pressure has played an important role in the
reforms especially after 1991. In that year, the USTR initiated the first
of several annual Special 301 investigations of China for insufficient
copyright protection. Trade sanctions were averted only by the Chinese
acceptance of some U.S. demands. China joined the Berne Convention,
extended copyright protection to foreigners, and established enforcement
mechanisms. But actual enforcement remained poor. Statistics collected by
associations of Western copyright industries showed huge losses due to
copyright piracy in China.
        To explain this contradiction, I used the two level games approach. An
examination of the U.S.-China copyright negotiations from this
perspective allows us to see why the Special 301 process failed to
achieve the outcomes desired by the U.S. At the international level, a
game theoretic analysis revealed that China could maximize its gains by
refusing to succumb to U.S. pressure, whether the U.S. decided to impose
sanctions or not. This would indicate that agreement would be
particularly difficult to achieve at the international level. However,
both China and the U.S. have several strategic interests that could be
furthered through mutual cooperation, and this provided them with an
incentive to cooperate in copyright relations as well. The nature of that
agreement was determined by the domestic political configurations in the
two states.
        Three major interest groups were active in the U.S.-China copyright
dispute at the U.S. domestic level: the copyright industries, the
manufacturing sector and the foreign policy establishment. Because of the
divergent demands of these interest groups, the USTR had to evolve
"package-deals" that would satisfy some of the demands of each group
without alienating the others. This process by its very nature produced
incomplete solutions to the main problem, which was better copyright
enforcement in China. On the Chinese side, we can infer that a section of
the federal government was in favor of better copyright protection, but
they were unable to overrule the political support that the pirate
industries enjoyed at the provincial level. But the Chinese were able to
portray their reluctance to improve the copyright protection as
"involuntary defection," or the inability of the principal negotiators to
deliver on a promise made at the international level.
        So how strong are the prospects of Special 301 to solve international
problems like the U.S.-China copyright disputes? As we have seen, Special
301 is a powerful tool to bring foreign governments to the negotiating
table to discuss issues of interest to the U.S. In this case too, the
Chinese may not have been willing to discuss copyright issues without the
threat of trade sanctions. However, the success of Special 301 is based
on the assumption that the effects of trade sanctions will be larger on
the adversary than on the U.S. domestic economy. Three factors negated
this assumption in the Chinese case: the sheer size and growth potential
of the Chinese economy, and the relative imperviousness of the Chinese
government to the political consequences of trade sanctions, and the
globalization of the U.S. domestic economy. Because of these factors,
trade sanctions were an option the U.S. could not afford to exercise. The
Chinese realized this and capitalized on it.
        With the increasing regionalization of world trade, future adversaries
of the U.S. in Special 301 actions are likely to be large trading blocs.
It is possible that the threat of trade sanctions in the future will not
work as effectively as they did with smaller and relatively more
vulnerable trading partners. In that sense, the U.S.-China Special 301
case is symptomatic of the new problems U.S. trade policy is likely to
face in the future. The creation of transnational alliances between
domestic constituents on either side with identical interests is an
option the U.S. could investigate.
        Secondly, a prominent feature of the Special 301 process was its
time-bound procedure for the identification and investigation of
copyright violations and imposition of trade sanctions. We saw in this
case study how the Chinese were able to manipulate this time-bound
program to secure U.S. acceptance of their promises of enforcement
actions, which were not delivered in most instances. It could be argued
that the time-bound nature of the Special 301 process contributed to the
piece-meal nature of progress in China's copyright regime, while a more
sustained process could have achieved more concrete progress. On a
tactical level too, the USTR had to concede at the end of every year's
trade negotiations that substantial progress had been made in copyright
enforcement in China, to avoid the necessity of imposing sanctions. In an
effort to defend her decisions, the USTR was in effect becoming an
advocate of Chinese good intentions before the U.S. Congress and the
general public. This too could have been avoided if the Special 301
process did not have a requirement to bring negotiations to an annual
closure.
        Finally, the U.S.-China trade dispute exposes a fundamental dilemma in
U.S. international trade policy. Much as the U.S. would like to encourage
sunrise industries like electronics, computers and entertainment through
aggressive market-opening actions abroad, it is still not willing to
expose its vulnerable labor-intensive manufacturing sector to the effects
of counter-sanctions. Ultimately, the fate of the compact disc pirate in
Guangzhou is linked to that of the assembly line worker in Detroit. This
is an irony no country can escape in our globalizing world.
[1] .. China Defends its Piracy Pact Record, Apr. 11, 1996 (LEXIS, News
library, Curnws file). The IIPA represents the Recording Industry Association of
America (RIAA), the Motion Picture Association of America (MPAA), National Music
Publishers' Association and other media-related industry bodies.
[2] .. Goldstein, Pirates' Lair: U.S. Pressures Beijing over Copyright
Protection, FAR E. ECON. REV, May 19, 1994, at 55.
[3] .. Clark-Meads, IFPI: '95 Piracy Stable, Russia and China Cited, BILLBOARD,
May 18, 1996, at 8.
[4] .. OFF. OF THE U.S. TRADE REP., 1996 NATIONAL TRADE ESTIMATE REPORT (1996).
Though a $33.8 billion trade deficit does indicate why the U.S. is keen to
restore a more favorable balance of trade with China through better protection
for its products, it makes the Chinese inability to find a solution to a
potentially destabilizing confrontation with a major trading partner all the
more inexplicable.
[5] .. Economist Intelligence Unit Country Report, China-Mongolia (2nd Quarter,
1995). The Greater China region is understood to include China, Taiwan, Hong
Kong and Macau.
[6] .. INT'L TRADE ADMIN., U.S. DEP'T OF COM., THE BIG EMERGING MARKETS:
OUTLOOK AND SOURCEBOOK (1996).
[7] .. Putnam, Diplomacy and Domestic Politics: The Logic of Two-Level Games,
42 International Organization 427 (1988). See also DOUBLE EDGED DIPLOMACY:
INTERNATIONAL BARGAINING AND DOMESTIC POLITICS (P. Evans, H. Jacobson & R.
Putnam 1993).
[8] .. See, e.g., A. GEORGE & D. RAPKIN, GATT NEGOTIATIONS AND THE OPENING OF
JAPAN'S RICE MARKET: A TWO-LEVEL GAME APPROACH (Australia-Japan Research Center,
Pacific Economic Paper No. 215, 1993); Li, Trade Negotiations between the United
States and China: Interest Structures in Two-Level Games, 34 ASIAN SURV. 692
(1994); see generally DOUBLE EDGED DIPLOMACY: INTERNATIONAL BARGAINING AND
DOMESTIC POLITICS (P. Evans, H. Jacobson & R. Putnam 1993).
[9] .. 17 U.S.C. _ 102 (1994)
[10] .. E.g., 17 U.S.C. _ 104 (b) (1) (1994)
[11] .. For example, France grants protection for life of author and seventy
years for musical compositions and for life of author and 50 years for all other
works [Law No. 57-298 on Literary and Artistic Property of March 11, 1957, Art.
21, 2 Copyright Laws and Treaties of the World (BNA) Supp. 1984-89, (1992)]. At
the same time, the former U.S.S.R. offered protection for life of author and 25
years [Fundamentals of the Copyright Laws of the Soviet Union of December 8,
1961, Chap IV, Art. 105, 5 Copyright Laws and Treaties of the World (BNA) Supp.
1981-83 (1992)]. Compare this to the life of author and fifty years offered
under U.S. law [17 U.S.C. _ 302 (a) (1994)].
[12] .. For instance, French legal tradition recognizes the moral rights of the
author (droit d'auteur), which are not recognized under the common law
tradition. The moral rights of the author are interpreted as the right of the
author to preserve the artistic integrity of the work, and it survives the
transfer of the other rights to a different entity.
[13] .. Berne Convention for the Protection of Literary and Artistic Works, of
September 9, 1886 as revised at Paris on July 24, 1971, 1161 U.N.T.S. 18,338
[hereinafter Berne Convention].
[14] .. Universal Copyright Convention of September 6, 1952 as revised at Paris
on July 24, 1971, 943 U.N.T.S. 13,444 [hereinafter UCC].
[15] .. Protection is granted for life of author and 50 years in the Berne
Convention (Art. 7); in the UCC, it is life of author and twenty-five years
(Art. IV. 2.(9)).
[16] .. The 1971 Paris Act of the Berne Convention recognizes 10 rights, the
publishing (or reproduction) right, translation right, adaptation right, public
recitation right, public performing right, broadcasting right, recording right,
film right, moral right of the author, and the author's droit de suite. In
contrast, signatories to the UCC are bound to protect just three rights: the
reproduction right (including publication right), broadcasting right, and public
performance right. See MADDISON, COPYRIGHTS AND RELATED RIGHTS: PRINCIPLES,
PROBLEMS AND TRENDS (The Economist Intelligence Unit Special Report No. 153,
1983)
[17] .. Art. 5(2) of the Berne Convention states that the "enjoyment and
exercise of these rights shall not be subject to any formality". At the same
time, Art. III. 2 of the UCC states that a contracting state is not precluded
from "requiring formalities or other conditions for the acquisition and
enjoyment of copyright in respect of works first published in its territory, or
works of its nationals wherever published".
[18] .. Art. 3 of Berne Convention; Art. III. 1 of UCC.
[19] .. Art. 5(3), Berne Convention; Art. II. 2 of UCC.
[20] .. Berne Convention Implementation Act of 1988, 102 Stat 2853; 17 U.S.C. _
101 note (1994). Though the U.S. had been a signatory of the UCC, it was
believed that joining the tougher Berne Convention will give the U.S. more
credibility while negotiating with other countries on copyright issues.
[21] .. Trade and Tariff Act of 1974, Pub. L. No. 93-618, _ 301, 88 Stat. 2041,
2042-43 (codified at U.S.C. __ 2411-20) (1994).
[22] .. Pub. L. No. 98-573, 98 Stat. 3002.
[23] .. Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 102
Stat. 1107; 19 U.S.C. _ 2901 (1994).
[24] ..Id., _ 1101; 19 U.S.C. _ 2901 (1994).
[25] .. Id., _ 2242.
[26] .. Under the Generalized System of Preferences (GSP), the U.S. provides
preferential duty-free entry for approximately 4,500 products from designated
beneficiary countries and territories. Initiated under the Trade Act of 1974 for
a ten year period, it was renewed till 1993 by the Trade and Tariff Act of 1984.
Thereafter it was renewed annually until it expired in 1995. See OFFICE OF THE
U.S. TRADE REP., EXEC. OFF. OF THE PRESIDENT., A GUIDE TO THE U.S. GENERALIZED
SYSTEM OF PREFERENCES (1996) (http://www.ustr.gov/reports/gsp).
[27] .. 19 U.S.C. _ 2411 (c (1)).
[28] .. Sykes, Constructive Unilateral Threats in International Commercial
Relations: The Limited Case for Section 301, 23 LAW & POL'Y IN INT'L BUS. 263
(1992).
[29] .. This case is discussed in detail in UPHOFF, INTELLECTUAL PROPERTY AND
U.S. RELATIONS WITH INDONESIA, MALAYSIA, SINGAPORE, AND THAILAND (1991).
[30] .. Id. Ironically, though Singapore managed to retain its GSP benefits
following the anti-piracy actions, GSP itself was withdrawn for all Newly
Industrialized Countries (NICs) the following year in a routine review of the
system. Singapore complained about the U.S. "double-cross", but continued to
crack down on piracy.
[31] .. Comment, Special 301 and Taiwan: A Case Study of Protecting United
States Intellectual Property in Foreign Countries. 15 NW. J. INT'L L. & BUS.
206 (1994) (authored by Y. Kurt Chang); see also Liu, A Review of Intellectual
Property Laws in Taiwan: Proposals To Curb Piracy and Counterfeiting in a
Developing Country, 3 BRIGHAM YOUNG UNIV. L. REV. 619 (1988).
[32] .. See Uphoff, supra note 29.
[33] .. Uphoff, supra note 29.
[34] .. Brewer, The 'fourth network', CABLE & SATELLITE EUROPE, Oct. 1991, at
38.
[35] .. Uphoff, supra note 29.
[36] .. The U.S.-Thailand copyright negotiations are discussed in detail in
Uphoff, supra note 29. See also McDorman, U.S.-Thailand Trade Disputes: Applying
Section 301 To Cigarettes and Intellectual Property, 14 MICHIGAN J. OF INT'L LAW
90 (1992), and Note, The Thai Copyright Case and Possible Limitations To
Extraterritorial Jurisdiction in Actions Taken Under Section 301 of the Trade
Act of 1974, 23 LAW & POL'Y IN INT'L BUS. 725 (1992) (authored by Chris Shore).
[37] .. Uphoff, supra note 29.
[38] .. Agreement on Trade Relations Between the United States of America and
the People's Republic of China, Presidential Proclamation 4697 of October 23,
1979, 44 Fed. Reg. 61,161 (1979).
[39] .. Id., Art VI (1).
[40] .. Id., Art. VI (5).
[41] .. Some protection for patents and trademarks was offered by the
Regulations on Awards for Inventions, 1963, and the Regulations on the
Administration of Trademarks, 1963 respectively. BACKGROUND READING MATERIAL ON
THE INTELLECTUAL PROPERTY SYSTEM OF CHINA, (WIPO), Pub. No. 686/CN(E) (1993),
at 16-17.
[42] .. BACKGROUND READING MATERIAL, id., at 117.
[43] .. "Citizens and legal entities enjoy authors' rights (copyright) {in
their works}; they have in accordance with the law, the rights to claim
authorship, to disclose or publish {their works}, and to receive remuneration."
General Principles of the Civil Law of the People's Republic of China of April
12, 1986, Chap. 5, _ 3, Art. 94, 1 Copyright Laws And Treaties of the World
(BNA) Supp. 1989-1990 (1992).
[44] .. "Citizens and legal entities, where that authors' rights (copyright) or
rights to patents, trademarks, discoveries, inventions or other fruits of
scientific or technological research are infringed, shall have the rights to
demand that the infringement be stopped, its effects be eliminated, and any loss
be compensated." Id., Chap. 6, _ 3, Art. 118.
[45] .. Copyright Law of China of September 7, 1990, adopted at the 50th
Session of the Standing Committee of the 7th National Peoples' Congress, 1
Copyright Laws And Treaties of the World (BNA) Supp. 1989-1990 (1992).
        Chap. 2, _ 1, Article 10 defined the following personality rights and property
rights.
        (1) the right of publication, that is, the right to decide whether to make a
work available for the public;
        (2) the right to authorship, that is, the right to claim authorship and to have
the author's name mentioned in connection with the work;
        (3) the right of alteration, that is, the right to alter, or authorize others
to alter one's work;
        (4) the right of integrity, that is, the right to protect one's work against
distortion and mutilation;
        (5) the right of exploitation and the right of remuneration, that is the right
of exploiting one's work by reproduction, live performance, broadcasting,
exhibition, distribution, making cinematographic, television or video
production, adaptation, translation, annotation, compilation and the like, and
the right of authorizing others to exploit one's work by the above-mentioned
means, and of receiving remuneration thereof.
[46] .. Id., Chap. 1, Art. 3.
[47] .. Id., Chap. 1, Art. 21.
[48] .. Id., Chap. 2, _ 3, Art. 20. The rights of authorship are evocative of
the droits d'auteur from the French legal system. It is not clear whether the
legislative intent of the Chinese lawmakers was to synthesize the two major
copyright traditions, or the implication arose out of the inadequacy of the
English translation on which this information is based.
[49] .. Id., Chap. 5, Art. 46.
[50] .. Copyright Implementing Regulations of May 24, 1991, reprinted in
BACKGROUND READING MATERIAL, supra note 41, at 113.
[51] .. Id., Chap. 3, Art. 27.
[52] .. Id., Chap. 6, Art. 50.
[53] .. The Copyright Implementing Regulations, id., defined first publication
for foreigners as follows:
        Rule 25: Works of foreigners first published in the territory of China means
that unpublished works of foreigners are first published in the territory of
China by lawful means; and any work by a foreigner first published outside the
territory of China shall be deemed to be first published in the territory of
China, provided that it is published in the territory of China within 30 days
after its first publication.
[54] .. Copyright Law of China, supra note 45, Chap. 1, Art. 2.
[55] .. For an account of the increasing importance of China to the world
economy, see Lardy, CHINA IN THE WORLD ECONOMY (1994).
[56] .. Id., Art. 3.
[57] .. Id., Art. 53.
[58] .. Significantly, the Implementing Regulations did not include computer
software as a protected work. See list of protected works in Copyright
Implementing Regulations, supra note 50, Chap. 1, Art. 4.
[59] .. Pride, WIPO ups ante on CD Piracy, Seeks Mandatory Source Codes,
BILLBOARD, Feb. 12, 1994, at 3.
[60] .. Senser, Will China Kick the Habit?, COMMONWEAL, May 5, 1995 at 7.
[61] .. Watson, A Little Fight Music, NEWSWEEK, Feb. 13 1995, at 38.
[62] .. Notice of Countries Identified as Priority Foreign Countries, 56 Fed.
Reg. 20,060 (U.S. Trade Rep. 1991).
[63] .. Memorandum of Understanding Between the Government of the Peoples'
Republic of China and the Government of the United States of America on the
Protection of Intellectual Property, January 17, 1992, 34 I.L.M. 677, at 680
[hereinafter Memorandum of Understanding].
[64] .. Id., Art. 3 (1) & (2).
[65] .. Interestingly, China agreed to explain in its amended copyright laws
that the "right of distribution . . . includes making copies available by rental
and that this exclusive right survives the first sale of copies." [Memorandum of
Understanding , Art. 3 (4)]. Compare with the First Sale Doctrine in the U.S.
[66] .. Id., Art. 3 (6).
[67] .. Id., Art. 3 (9).
[68] .. Termination of Section 302 Investigation: Intellectual Property Laws
and Practices of the Peoples Republic of China and Revocation of Priority
Foreign Country Designation, 57 Fed. Reg. 3,084 (1992).
[69] .. International Copyright Treaties Implementing Rules of September 25,
1992, Ordinance No. 105 of the State Council of the People's Republic of China,
1 Copyright and Neighboring Rights Laws and Treaties (WIPO), Pub. No. 616 (E),
at CN. 4-01. Art. 19 of the Implementing Rules states that "Where pre-existing
administrative regulations relating to copyright may conflict with these rules,
these rules shall apply. Where these Rules may conflict with international
copyright treaties, the international copyright treaties shall apply."
[70] .. Notice of Trading Partners Identified as Priority Foreign Countries, 57
Fed. Reg. 19,329 (1992).
[71] .. Identification of Priority Foreign Country and Initiation of Section
302 Investigation, 59 Fed. Reg. 35,558 (1994).
[72] .. Decision of the Standing Committee of the National People's Congress
Regarding Criminal Sanctions for Copyright Infringement, Adopted at the 8th
Session of the Standing Committee of the 8th National People's Congress of the
People's Republic of China on July 5, 1994, [hereinafter Decision of the
Standing Committee], 1 Copyright and Neighboring Rights Laws and Treaties
(WIPO), Pub. No. 616 (E), at CN. 5-01.
[73] .. Id., Decision of the Standing Committee, Art. 2.
[74] .. Id., Decision of the Standing Committee, Art. 4.
[75] .. Id., Decision of the Standing Committee, Art. 5.
[76] .. Extension of 301 Investigation of the Peoples Republic of China's
Protection of Intellectual Property and Provision of Market Access to Persons
Who Rely on Intellectual Property Protection; Proposed Determination; Request
for Public Comment; and Notice of Public Hearing, 60 Fed. Reg. 1829, and Fed.
Reg. 3032.
[77] .. Determination of Action Concerning the Peoples Republic of China's
Protection of Intellectual Property and Provision of Market Access to Persons
Who Rely on Intellectual Property Protection, 60 Fed. Reg. 7230 (1995).
[78] .. China-United States Agreement Regarding Intellectual Property Rights of
February 26, 1995, 34 I.L.M. 881 (1995); see also Termination of Section 301
Investigation and Action Regarding the Peoples Republic of China's Protection of
Intellectual Property and Provision and Market Access to Persons Who Rely on
Intellectual Property Protection, 60 Fed. Reg. 12,582 (1995).
[79] .. Id. Better copyright enforcement was not the only condition: the others
were better border enforcement against export of pirated products to
third-country markets, and increased access for U.S. firms to the Chinese
audiovisual and computer software markets.
[80] .. 34 I.L.M. 887 (1995).
[81] .. Levin, Pirates Losing Battle, BILLBOARD, May 20, 1995, at 29.
[82] .. The result of this was counter-productive from the U.S. point of view,
because it diverted a larger share of illegal Chinese production to foreign
markets, where pirated music and software was priced at higher levels than in
the Chinese domestic market. This would have generated greater losses for U.S.
copyright owners, especially when combined with inadequate border enforcement.
[83] .. Identification of Countries That Deny Adequate Protection or Market
Access for Intellectual Property Rights Under Section 182 of the Trade Act of
1974, 61 Fed. Reg. 19,969 (U.S. Trade Rep. 1996).
[84] .. USTR Press Release No. 96-42; see also Request For Public Comment and
Notice of Public Hearing: Determination Involving Expeditious Action; Proposed
Determination Concerning What Further Action to take Under Section 301 (a) in
Response to the People's Republic of China's Unsatisfactory Implementation of
the 1995 Agreement on Enforcement of Intellectual Property and Market Access, 61
Fed. Reg. 25,000 (U.S. Trade Rep. 1996).
[85] .. China says it will retaliate if U.S. imposes trade sanctions, N.Y.
TIMES INT'L, May 10, 1996, at A9.
[86] .. U.S. Warns China over violations of trade accord, N.Y. TIMES INT'L,
Feb. 4, 1996, at 1.
[87] .. Tread carefully with China, business leaders urge U.S., N.Y. TIMES
INT'L, May 11, 1996, at 5.
[88] .. USTR Press Release 96-53, "Statement by Ambassador Barshefsky", June
17, 1996; See also, Notice of Determinations and Further Monitoring: People's
Republic of China's Implementation of the 1995 Agreement on Enforcement of
Intellectual Property and Market Access, 61 Fed. Reg. 33,147 (U.S. Trade Rep.
1996).
[89] .. Much of the analysis in this section is based on standard game theory.
For a good treatment, see E. RASMUSEN, GAMES AND INFORMATION (1994).
[90] .. It may be argued that the U.S. decision to impose or not impose
sanctions is taken consequent to the move of China to agree or disagree to U.S.
demands, and so the game is better classified as sequential. But this would not
be accurate, because the U.S. decision on trade sanctions is taken on the basis
of a Chinese promise to implement (or not implement) U.S. demands, and the U.S.
has no prior knowledge about this future action. The Chinese too face
uncertainty about U.S. actions because sanctions can be announced at the end of
"review periods."
[91] .. Sixty one percent of the value of national properties in China belongs
to state-owned enterprises. Economist Intelligence Unit Country Report,
China-Mongolia (4th Quarter, 1996), at 22.
[92] .. Preferred strategies are the action-sequences that maximize the payoffs
to a player irrespective of the actions of the other players. In Figure 2, we
can see that China is better off with Disagree, whether the U.S. chooses
Sanctions or No Sanctions. Therefore, Disagree is the preferred strategy for
China. Similarly, No Sanctions is the preferred strategy for the U.S. The
preferred strategy equilibrium is considered robust because neither player has
an incentive to defect from it.
[93] .. Side payments can be defines as a transfer of resources from one player
to the other unrelated to the outcome of the game, which favorably change the
payoffs for the latter and increase the chances of cooperation. See Rasmusen,
supra note 89.
[94] .. A different argument with substantially the same result could be as
follows. Market access itself has been used as a side payment by the U.S. to
secure Chinese compliance with the former's strategic designs. Having already
used market access to influence Chinese behavior on these issues, the latitude
of the U.S. government to use it further in the area of copyright protection was
limited. This makes the U.S. more willing to seek agreement with China.
[95] .. The effect of side-payments is to alter the payoffs associated with the
outcome (Agree, No Sanctions) by an additional benefit SP to either side, so
that China now prefers (Agree, No Sanctions) to (Disagree, No Sanctions). The
alteration of China's preference makes (Agree, No Sanctions) the new equilibrium
outcome.
[96] .. For data on the rising trends of U.S. exports in media-related products
like recorded music, films, videocassettes and television programs, see NAT''L
TELECOM. AND INFO. ADMIN., U.S. DEP'T OF COMMERCE, GLOBALIZATION OF THE MASS
MEDIA, NTIA SPECIAL PUB. 93-290 (1993).
[97] .. U.S. Warns China over violations of trade accord, N.Y. TIMES INT'L,
Feb. 4, 1996, at 1.
[98] .. Tread carefully with China, business leaders urge U.S., N.Y. TIMES
INT'L, May 11, 1996, at 5.
[99] .. Watson, A Little Fight Music, NEWSWEEK, Feb. 13, 1995, at 38.
[100] .. Domestic politics is said to be homogeneous when there is agreement
between interests groups about the outcome of negotiations. Then, the crucial
trade-off will be between the expectations of the domestic constituents and the
negotiable outcome. Putnam calls this a boundary conflict. But when there is no
agreement on the outcome at the domestic level, or when constituents advocate
multiple outcomes, domestic politics is said to be heterogeneous. The problem
here is to put together a winning coalition at the domestic level, which can
ratify a multi-issue outcome. See Putnam, supra note 8, at 442-446.
[101] .. Senser, Will China Kick the Habit?, COMMONWEAL, May 5, 1995, at 7.
[102] .. Putnam defines voluntary and involuntary defection as the two modes by
which a player may renege from a contract. Voluntary defection is the decision
of a rational actor not to comply with an agreement in the absence of
enforceable contracts. Involuntary defection, on the other hand, arises when a
principal negotiator is not able to deliver on a promise because of
non-ratification at the domestic level. See Putnam, supra note 8, at 438.
[103] .. Involuntary defection has "reputational constraints." A principal
negotiator who fails to deliver on a promise made at Level I due to
non-ratification at Level II loses credibility and weakens her position in the
next round of negotiations. See Putnam, supra note 8, at 439.