China’s ‘Indigenous Innovation’ Draws U.S. Concern in Special 301 Report

China’s policy of promoting its own homegrown intellectual-property industries at the expense of those trying to make inroads in the country drew the top concern in the U.S. Trade Representative’s Special 301 report on IP protection, released Friday. Also earning criticism were Spain and Canada for lax policies on punishing Internet piracy.

But Poland, Hungary and the Czech Republic were dropped from USTR’s “watch list” altogether, largely because of improved enforcement at borders, street markets and online. IP industries generally praised the report, while a public interest group said USTR should make transparent its factors in designating countries.

Eleven countries made the “priority” watch list: Algeria, Argentina, Canada, Chile, China, India, Indonesia, Pakistan, Russia, Thailand and Venezuela. It’s Canada’s second straight year on the priority list, despite having gone through extensive consultations to update its copyright law to be more in line with the U.S. The regular watch list has 29 countries, including much of Latin America, Italy, Finland, Norway and Spain. Notably absent is Sweden, home to The Pirate Bay and two Pirate Party members of the European Parliament. There’s disagreement over whether its year-old IPRED enforcement law, which let copyright holders obtain suspects’ identities from ISPs, has made a dent in file-sharing traffic. Canada’s election authority also recently certified its own Pirate Party.

Copyright piracy in “virtually all formats” is growing rapidly because of the potential for “enormous profits and little risk” for criminal enterprises, who in many countries won’t be penalized much if they are caught, the report said. The online sale of physical pirated and counterfeit goods is “matching the volumes associated with street vendors and physical markets,” with China, Romania and Ukraine among others full of Internet ads for such products. Unauthorized live-sports streaming is growing especially in China, the Netherlands are becoming a hub for “linking sites,” and mobile piracy is growing, not only through end-user downloads but preloading before sale in some countries, the report said. China, India, Paraguay and Thailand fall short on optical-disk manufacturing controls.

Without naming countries, USTR said misuse of trademarks in country-code top-level domains and inconsistent uniform dispute resolution policies for names were a concern. The U.S. has made “considerable progress” in getting other countries to stop the governmental use of illicit software. “Further work remains” with China and a handful of other trading partners on the issue, though.

China’s preferential treatment of local companies and technologies, especially in government procurement and restricting market access for foreign tech and products, is “deeply” troubling to the U.S., the report said. China asked companies to register their products under an “indigenous innovation” accreditation late last year and updated guidance in April. One of the requirements is that some R&D on those products happen in China, USTR said.

China’s enforcement regime “remains largely ineffective and non-deterrent” across IP industries, and Chinese origin for infringing goods seized at the U.S. border fell slightly to 79 percent in 2009, from 81 percent in 2008. The government can clearly control infringement to a greater extent than it usually does, as evidenced by a recent enforcement campaign that shut down 375 infringing websites, USTR said. The problem is that crackdowns seem to include “more serious” examples of infringement under Chinese law than copyright or trademark, so it’s not clear to the public that authorities are enforcing IP rules specifically.

Russia will stay on the priority list because it hasn’t fully implemented its bilateral IP protection commitment to the U.S. made in 2006, which nearly fell apart over the now-shuttered Russian download site AllofMP3.com, USTR said. New infringing sites have sprung up to replace closed ones, and plans of raids against optical disk plants often are leaked to the operators. Argentina has poor civil damages and non-deterrent criminal penalties for infringement, the report said. Canada’s failure to complete its legislative reforms on copyright, especially fully implementing the World Intellectual Property Organization’s so-called Internet treaties, kept it on the priority list, as did other concerns. But USTR highlighted problematic border enforcement more than Internet piracy.

Internet piracy is “particularly significant” in Spain, the report said, urging that government to take “prompt and effective action” such as amending a 2006 circular that appears to decriminalize illicit file-sharing. Rightsholders can’t get information from ISPs to prosecute infringers and Spain’s legal system generally doesn’t apply criminal penalties to infringement. But the U.S. said it’s encouraged by a government proposal in January to designate a special committee that would ask ISPs to block access to infringing material online.

The report compliments the Czech Republic for a new criminal code raising maximum penalties for IP crimes to eight years in prison from two and criminalizing the making and storage of counterfeits. Hungary has taken “proactive steps” against Internet piracy, its customs officials are getting better at identifying infringing goods, and its “numerous public awareness” campaigns have educated both the public and legal officers, the report said. Poland has taken “initial steps” against Internet piracy, cooperated more with rightsholders and reduced infringing goods at border markets.

Swedish efforts have driven locally hosted BitTorrent trackers and “DC-hubs” -- central repositories of content -- out of the country in the past year, and legal alternatives including Spotify, Film2Home and Voddler “have generated growing interest,” the report said. The government also implemented the European Union’s enforcement directive. The EU’s ratification of the WIPO Internet treaties have greatly helped to counter Internet piracy, the report said. USTR mentioned the Anti-Counterfeiting Trade Agreement in passing and noted the draft text is public (CED April 22 p7).

The International Intellectual Property Alliance, composed of the movie, TV, music, publishing, business and entertainment software industries, pushed the U.S. to go beyond Special 301. Approving ACTA and free-trade agreements with South Korea, Colombia and Panama, which have strong IP provisions, is crucial, the group said. The U.S. Chamber of Commerce’s Global IP Center asked Congress to improve the tools available to the Obama administration to “engage more effectively” with countries with IP enforcement problems. The MPAA focused on Canada and Spain as laggards in protecting content online.

The RIAA said governments should analyze their legal and regulatory structures and bring them closer to France, the U.K. and New Zealand, among other countries that have taken steps to crack down on file-sharing. It’s especially galling that Chinese search engine Baidu has openly admitted in SEC disclosures that its music service depends on copyright infringement, and yet China has done nothing to stop it, the RIAA said.

The report “once again … mirrors the views of big media companies,” said Public Knowledge. USTR isn’t making public the statistics it uses to judge other countries’ IP protection, the group said. “In most cases, the public has no idea why a country was put on a watch list because of the vague nature of the descriptions of the activities of countries, and of the vague nature of the recommended remedies.” Public Knowledge and copyright groups, among others, testified at USTR’s first-ever public hearing to gather input for the Special 301 review two months ago.