27 September 2012
USTR Charlene Barshefsky’s Negotiation with China over its Enforcement of IP Rights
In December of 1995, an American delegation under USTR Mickey Kantor travelled to the People’s Republic of China to continue negotiations with regard to the lack of enforcement of American intellectual property rights in China. While staying in Beijing, one of the U.S. negotiators visited a Chinese store to buy some shampoo. After purchasing what he thought was a bottle of Procter & Gamble shampoo, he later discovered that the bottle contained a high concentration of lye and was not a Procter & Gamble product at all, but simply a bottle with a pirated label.
To say in 1993 that manufacturers and markets in the People’s Republic of China were infringing intellectual property rights would be an understatement. The development of increasingly sophisticated counterfeiting techniques combined with the growth of the Chinese economy and international trade “fueled piracy on a scale never before witnessed.” Despite previous efforts going as far back as 1980 by the Office of the United States Trade Representative (USTR) to negotiate an agreement on IP rights, blatant violations continued in the PRC not because the Chinese statute books lacked the laws to protect such rights, but rather because the government was unwilling to carry out any enforcement of those laws.
Confronted by this growing problem, the Clinton Administration in 1993 appointed Charlene Barshefsky as a new Deputy USTR to develop a negotiating strategy that would reach a bilateral agreement on piracy of intellectual property in the PRC with more success than her predecessors’ efforts. Such an assignment presented Barshefsky with several multi-faceted challenges to overcome, and despite the need for an IP rights enforcement agreement, many contemporary observers feared that Barshefsky would make little progress by reaching an agreement on paper that would then fail to induce significant action on the part of Chinese to stop the counterfeiting of American goods.
Nevertheless, Barshefsky did manage to reach two separate agreements in 1995 and 1996, and although the first agreement did suffer from some of the same enforcement issues as ones prior, the second agreement yielded tangible results in the form of actual enforcement, specifically through closed factories and the near elimination of pirated exports within two years. Barshefsky’s utilization of a comprehensive negotiation strategy enabled her to find and integrate common interests that ultimately proved effective in reaching a historic negotiated outcome.
Prior to 1949, Chinese IP law was near non-existent, having little regard for such rights and providing few legal remedies for foreigners with IP-related complaints. With the Communist Revolution in 1949, any laws protecting IP rights that had emerged were repealed along with all other laws that had existed under the nationalist Kuomintang government. As a result, the general lack of IP rights (along with many other rights) continued in “the legal void of the Maoist era,” as Barshefsky herself described it. The Communist Party under Mao Zedong considered IP rights to be part of a bourgeois and capitalist conception of rights held by foreigners and intellectuals who were not part of the proletariat.
When the U.S. and the PRC reestablished diplomatic relations in the late 1970’s, the U.S. put pressure on the Chinese to ensure the protection of American IP rights, which the reforming Chinese government was eager to do in order to attract foreign capital investments and technological transfers to support domestic growth and innovation. In accordance with this outlook, both countries reached the 1980 U.S.-China Trade Agreement, which secured Most Favored Nation treatment for each country’s exports, and in which both the U.S. and the PRC promised to offer IP rights protection “equal to the protection correspondingly according in the other country.” However, as trade between the U.S. and the PRC increased in the 1980’s, so too did piracy of American goods, in spite of the Trade Agreement. The U.S. began negotiations in 1986 to bring the PRC in line with international standards.
The IP Rights Memorandum of Understanding reached in January 1992 focused primarily on reforms to the PRC legal system to match international standards. Although by the end of that year, Chinese statute books contained IP protections similar to the laws of many advanced nations, the change in the law resulted in very little advances on the ground where piracy and counterfeiting continued unhindered by its newly created illegality. When this issue came to the recently-appointed Barshefsky’s attention in 1993, the widespread Chinese indifference to violations of American IP rights was well-recognized, particularly in the southern province of Guangdong, one of the most capitalist-oriented of the PRC provinces. Specific to that province were twenty-nine factories producing approximately seventy-five million CD’s per year containing pirated software and stolen audiovisual works, of which the vast majority (about seventy million) were not consumed in China but rather were exported.
Although cautious of being too confrontational with the Chinese to the endangerment of cooperation in issues of trade and nuclear non-proliferation, the Clinton Administration sought to take a tougher position than the previous administration. President Clinton signed an Executive Order in May 1993 to place conditions on the renewal of the PRC’s Most Favored Nation status based on six related areas including human rights, freedom of immigration, and nuclear non-proliferation. Such a revocation of Most Favored Nation status, reserved only for pariah states, would have resulted in sharply higher tariffs on Chinese exports to the U.S. Soon after the Executive Order announcement, however, the PRC responded with contempt, threatening tens of thousands of trade-dependent American jobs as well as stepping up human rights abuses in defiance of American “human rights” imperialism. As a result of the PRC’s reaction coupled with calculated indifference from other U.S. trading partners and strong domestic opposition from the business community, “a deeply embarrassed [President] Clinton] ultimately felt forced to revoke the order...[in] a politically humiliating about-face.”
Against this backdrop entered Barshefsky. Her appointed position did not entitle Barshefsky to the support of the nation in her pursuit of a trade agreement, mainly because of the many parties with diverging interests both inside of as well as outside of (but still aligned in general with) the U.S. Although the USTR’s negotiations enjoyed strong support from IP-related industries such as film, music recording, and software industries (who were often considered favored by and inclined toward the Democratic Party), other industries dependent on free, unhindered trade with China were as actively opposed to efforts that might sour Sino-American business relations. A similar attitude prevailed among other U.S. trading partners, who were also unwilling to risk a direct confrontation with the PRC that might disrupt their own economic interests. Finally, there were some industries such as domestic manufacturers that opposed maintaining trade relations with the PRC because the cheaper Chinese labor market was driving them out of business.
At the same time, other American constituencies opposed wasting negotiating time and capital on the “low-level commercial consideration” when there were more pressing issues on the agenda, such as human rights abuses, environmental concerns, and PRC cooperation in leveraging North Korea. Within the federal government itself, Barshefsky faced lukewarm support from the White House, who was cautious to avoid the same business community backlash and political embarrassment that resulted from the Most Favored Nation debacle.
Just as the U.S. was not a monolithic entity, so too was Barshefsky’s opponent across the Pacific Ocean not a unified party (despite the One Party System). Although the main negotiations took place between the Barshefsky and her counterpart in the PRC’s State Council in Beijing, Barshefsky and her team also reached out to the provincial-level government officials in the province Guangdong where much of the illegal production was taking place. Although both the national and provincial governments opposed further American interference in the internal Chinese matter of rights (IP or otherwise) enforcement, the Guangdong officials had both more control over as well as a direct economic interest in the piracy and counterfeiting occurring under their (most likely fake Rolex) watches.
Although the positions of the Chinese government and the UTSR seemed diametrically opposed, there were still a number of shared interests between the two sides. Both the U.S. and the PRC had a strong common interest in free trade and access to each other’s markets uninterrupted by a trade war. Specifically, the PRC wanted to acquire American technology to develop its own domestic industries while the U.S. wanted to invest its capital in those growing industries. As Barshefsky herself described, “China knew it needed to accelerate its development, and that to do so it would need to jump over many of the stages of development.” In addition, both countries had an interest in the PRC’s eventual accession into the World Trade Organization.
The principle divergent interest of the U.S. was stopping both the manufacture and export of counterfeited goods. Another American interest, particularly for the USTR, was to induce the Chinese to enforce the agreements that the USTR had negotiated in the past that had looked promising on paper but had resulted in minimal to no enforcement. The U.S. also had an interest in not disrupting the American jobs linked to trade with the PRC and the domestic markets that had become dependent on cheaper Chinese imports.
As the party more interested in changing the status quo, Barshefsky and her team needed a strong but tempered alternative to simply hoping that this time the Chinese would carry out any agreed enforcement of IP rights. The first potential alternative, which enjoyed some support both domestically and internationally, was to do nothing in the hope that continued trade and regular business engagement would eventually lead to more enforcement of IP rights in the PRC. Barshefsky determined quickly that this was not a viable alternative because American interests were being harmed far too much to justify waiting. A second alternative was to halt technology transfer that had to pass through the Department of Commerce, which would have limited some of the IP rights damages but at a high economic cost and with little stoppage of the piracy already in progress. A final alternative was to amass international support from other U.S. trading partners such as Japan and European Union countries to seek a multilateral agreement, or at the very least to put multilateral pressure on the PRC from countries affected by piracy and who had power over the PRC’s accession to the WTO. Although this option was not exclusive of pursuing directed negotiations, Barshefsky decided that it would be insufficient to resolve the problem due to the reluctance of such states to rock the boat with the PRC.
For these negotiations, Barshefsky judged that “real results would require a multi-pronged approach, underpinned by a threat to initiate [unilateral] Section 301 sanctions.” As a result, Barshefsky and her team’s Best Alternative to a Negotiated Agreement (BATNA) was to pursue Section 301 sanctions tailored to fit the violation. Disclosing this alternative to the Chinese in the form of declaring the PRC a “Priority Foreign Country” under Section 301 as the USTR had done in 1991 served to strengthen the USTR negotiating power because the Chinese realized that unlike the Most Favored Nation threat, the U.S. would follow through with this alternative if no agreement was reached.
Revealing her BATNA of Section 301 sanctions was only the beginning of Barshefsky’s negotiating strategy as the power of that alternative depended on presenting as credible the threatened sanctions. Barshefsky bolstered the credibility of the Section 301 sanctions while overcoming opposition by arguing that unlike the Most Favored Nation revocation, this alternative matched trade sanctions to trade violations with tariffs designed to compensate the U.S. in direct proportion for losses due to piracy. The USTR also promoted the impact of Chinese piracy as wide-spread across the U.S., and indeed the world, thus framing the issue as broader than the narrow conception of a few stolen movies and software.
In order to gain the support of resistant parts of the U.S. business community, Barshefsky argued that IP violations would threaten other industries as Chinese imports and exports increased, and as more patented and copyrighted materials found themselves in the hands of potential exploiters in the PRC. Additionally, she framed the USTR’s goal of enforcement of PRC law as not limited to the realm of intellectual property, but as an issue of the rule of law that could result in the Chinese living up to their fungible and often ignored human and civil rights laws, thus making IP rights a test case for broader U.S. concerns in the PRC.
Although Barshefsky had no control over with whom she would be negotiating, she took notice that one of her counterparts was a scientist by trade, and adjusted her strategy to negotiate with that person from his individual background. As a scientist, her counterpart “understood perfectly that the lack of [IP] enforcement was dampening indigenous scientific progress in China,” and as a result, was more receptive to the argument that technological transfers from the U.S. to the PRC would be severely hindered if the rights to them were not protected. Even still, after months of negotiation in 1994, Barshefsky’s Chinese counterparts were still unwilling to accept the full range of demands that the USTR presented. Renewing her threat of Section 301 sanctions, the Chinese responded to Barshefsky with threats of countersanctions and cancelling several important U.S. contracts with PRC companies.
Finally, after a marathon negotiations session, a Memorandum of Understanding agreement was signed on February 26, 1995, a full ten hours after the sanctions imposition deadline. Such last-minute deals were typical in Sino-American trade negotiations due to a Chinese strategy of holding out in order to give the impression that the maximum possible concessions had been extracted from the opposing side. Barshefsky acknowledged that the Chinese interest in avoiding a perception of caving to the demands of American imperialists was part of the broader problem of lack of IP rights enforcement. Thus, she adjusted her negotiating strategy to match the Chinese’s by meeting their impatience and insistence with patience and flexibility that avoided a contest of wills. For example, when her counterpart aggressively leaned over the table and insisted that his current proposal was a take-it-or-leave-it deal, Barshefsky “surprised her counterpart by sitting quietly [and waiting thirty to forty] seconds...[before replying:] ‘If the choice is take it or leave it, of course I’ll leave it, [but] I can’t imagine that’s what you meant.” After they reconvened to negotiate the next day, much more progress was made as the Chinese discovered that no amount of intransience was going to break Barshefsky.
Barshefsky argued that the 1995 MOU agreement was the “single most comprehensive and detailed [IP rights] enforcement agreement that the [U.S.] had ever concluded.” While prior USTR agreements with the Chinese had focused on the PRC laws, Barshefsky shifted the focus to enforcement with an action plan for specific enforcement measures. These included a six-month “special enforcement period” from March through August of 1995, during which the PRC was to increase enforcement of its IP rights laws while the two countries consulted regularly, giving the USTR a direct mechanism to evaluate the progress made under the agreement. Such a mechanism proved necessary as after seven months of being in force, the Chinese attempts at compliance with the 1995 MOU were not having the intended effect.
With very little decrease in the production of pirated goods, Barshefsky and her team in early 1996 attempted repeated consultations with the Chinese to enforce the previous year’s agreement with little success. As a result, the USTR started the “Section 301” provisions process and negotiations with the Chinese all over again, this time on the topic of continued non-compliance. Deciding that a different approach was required, Barshefsky and her team broke with diplomatic protocol by going to Guangdong Province to engage with local businessmen and government officials in order to learn more about the pirated production and to engage with those in direct control over it.
Despite the fury of Chinese negotiators in Beijing, Barshefsky was able to gain valuable information about the illegal factories and brought even more precise demands that the PRC government shut down fifteen specific factories. Although Barshefsky’s counterpart initially denied the existence of the factories and later argued that they could not take action due to involvement by People’s Liberation Army officials, an Implementation Agreement for the 1995 MOU was reached in June 1996. Now facing two agreements and a very persistent USTR, the Chinese followed through not only closing those fifteen factories, but also closing an additional 55 over the following two years. As a result, the export of pirated goods from the PRC to the outside world was reduced to “virtually nil.”
Barshefsky was able to realize U.S. interests by articulating specific points that the U.S. wanted to address in this agreement beyond some vague notion of respecting IR rights. Adhering to a very precise list of demands, Barshefsky knew exactly what the U.S. wanted and was prepared to articulate it to her counterpart. She also carefully planned her “multi-pronged” approach by building a domestic coalition that supported engagement and using trade sanctions against the PRC, which strengthened the U.S.’s BATNA while decreasing the appeal of the PRC’s alternative of maintaining the status quo ante.
Although Charlene Barshefsky’s efforts took two separate agreements, her negotiating strategy worked, securing a deal that advanced the common interests of both nations. Barshefsky’s comprehensive approach enabled her to overcome diverging parties and interests on both sides of the dispute to reach an effective agreement. Despite the success that followed the 1996 Agreement, Barshefsky acknowledged that this agreement had only “scratched the surface” and that she was “by no means satisfied that piracy [had] been eradicated.” However, Barshefsky was given the opportunity to continue her work when she became the twelfth United States Trade Representative in 1997 and negotiated more trade agreements with the PRC, including its accession to the WTO in 1999, which was in no small part facilitated by Barshefsky’s earlier success.
This article was originally published in the CAT Company's special annual APEC Summit 2012 edition. Published with permission.