LEXIS-NEXIS® Congressional Universe-Document

Search Terms: Permanent Normal Trade Relations, House or Senate or Joint

Document 205 of 374.

April 6, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 2634 words

HEADLINE: PREPARED STATEMENT OF DOUGLAS LOWENSTEIN PRESIDENT INTERACTIVE DIGITAL SOFTWARE ASSOCIATION

BEFORE THE SENATE COMMITTEE ON FINANCE

BODY:
thursday, april 6, 2000

Mr. Chairman, thank you for inviting the Interactive Digital Software Association to appear before you this morning to discuss legislation granting Permanent Normal Trade Relations status to China. My name is Douglas Lowenstein and I am President of the IDSA, the trade body representing U.S. video and computer game software companies. IDSA supports granting PNTR to China and its eventual full admission into the World Trade Organization.

In 1999, our industry generated $6.1 billion in retail software sales in the US alone. IDSAs 32 members account for 90% of the edutainment and entertainment software sold in the US. Worldwide, our industry generates in excess of $17 billion in software sales alone, and many of our members generate 40% or more of their revenue from foreign markets. Between 1991-99, the industry has grown more than 145%, far outstripping the growth rate of any other entertainment sector in the world. In 1999, 215 million electronic entertainment games were sold in America alone, or two per household. It is estimated that our industry now employs more than 50,000 people in the United States, many in highly skilled positions. Video and computer game software developers and publishers are in dozens of states across America.

Background on Computer and Video Game Industry While video games were once thought to be mainly the province of children, todays industry appeals to people of different ages, genders, and tastes. In fact, the average age of computer and video game players in America is now 28 years old, and 43% are women or girls. Overall, it is estimated that 145 million Americans regularly play computer and video games. Increasingly, the interactive entertainment industry is seen as both a content provider and also a high tech industry driving major advances in artificial intelligence, computer hardware, 3D graphics, and silicon chip design. The next generation of video game console hardware, some available now and some available over the next few months, will offer consumers a set top box unit which can play video games, DVD movies, audio CDs, connect to the Internet, download content, handle e mail, and more, all for under $300. Perhaps this is why a recent story in Newsweek said, "In the century to come, the medium producing the most dynamic, vital, and exciting new art will be video games."

I offer this background to dramatize just how important our industry is to the US economy, particularly the high tech economy of the new millennium. Our industry relies totally on intellectual property to fuel its growth. Demand for video and computer games is huge. Its clear that wherever our industry can sell legitimate product, sales explode. Without strong IPR protection in the United States and around the world, including the Internet, we cannot sell our products. Indeed, piracy is our biggest trade barrier. Without strong copyright protection and enforcement, the kind of growth weve experienced over the last decade will be jeopardized. The plain fact is that large and small countries around the globe are riddled with counterfeit and pirate products, making it virtually impossible to create legitimate markets and build strong businesses.

Computer and Video Game Piracy in China

Which brings us to China. We estimate that our industry loses $1.38 billion annually due to piracy in China, and that the piracy rate there hovers around 95%. In other words, all but 5% of the products sold in China are pirate or counterfeit. While we experience similar piracy rates in other countries, the financial losses we sustain in China far outstrips that of any other country in the world.

The obvious question is, given these problems, why on earth would we support PNTR and Chinas entry into the World Trade Organization (WTO)? There are three major reasons: First, notwithstanding the continuing domestic piracy problems in China, we believe China has taken some important strides under the 1992 and 1995 Sino-US bilateral trade agreements to improve the IPR environment.

Second, we believe that membership in WTO offers the best way to sustain and build on even the limited progress made to date.

Third, we believe that membership in the WTO will hasten Chinas ratification of the World Intellectual Property Organization (WIPO) treaties with respect to copyright protection on the Internet. Given the central role the Internet will play for our industry as a vehicle for distributing content, this is a fundamental and critical business issue for us.

The 1992 and 1995 Memoranda of Understanding (MOUs)

In 1992, and again in 1995, the US and China signed Memoranda of Understanding regarding intellectual property rights in China. The 1995 MOU was further supplemented by a 1996 Action Plan for implementation of its key provisions. These are relevant in the current debate since one of the issues is whether China can be trusted to carry out its obligations under international trade accords. Indeed, there are some critics who point to the IPR agreements as an example of why China cannot be trusted.

In fact, China has complied with many of the key provisions of both MOUs. This is not to say its been easy, or that all is well. In fact, neither is the case. But it is also indisputable that progress was achieved under both the 1992 and 1995 agreements.

The 1992 plan dealt mostly with steps China needed to take to enact laws to meet various relevant international copyright conventions, such as the Berne Convention. And, in fact, China did everything it was asked to do under that agreement within the prescribed deadlines. However, China did fall well short of meeting the agreements general commitment to improve enforcement of the new laws it enacted, and it was this failure that gave rise to the negotiation of a new, much more specific agreement in 1995.

The 1995 agreement and the 1996 Action Plan thus zeroed in on enforcement generally and particularly on the increasingly grave problem of uncontrolled production in China of counterfeit optical media products of all kinds. The main focus of the 1995 agreement was to pressure the Chinese Government to shut down these illegal CD replication plants that were churning out massive quantities of illegal video game software, movies, and sound recordings and exporting them around the world. Indeed, in the mid-nineties, the illegal CD plants in China were supplying pirate goods to numerous global markets, from Southeast Asia to South America, thus disrupting many of our legitimate and growing markets.

Candidly, our industry was not entirely satisfied with the 1995 agreement since it did not cover all forms of entertainment software (our members now publish games in three formats: cartridges, CD-ROMs, and DVD-ROMs, and the 1995 pact only covered optical media, not cartridge product). Nonetheless, the agreement was an important effort to reduce the global supply of pirate CD software emanating from China and was a net plus for our industry.

The fact is that the Chinese, over a two year period, have mostly lived up to their obligations under the 1995 agreement and the 1996 action plan to close down this pirate optical media production and halt exports. China closed down 86 production lines producing pirated optical media product since 1996. In addition, China established strict licensing controls over 50 plants that produce legitimate products. The volume of pirate CDs being exported out of China is significantly lower than it was in 1995 and 1996. We believe these gains stem directly from the determination of the Office of the US Trade Representative, led by Ambassador Barshefsky and her staff, to enforce the 1995 agreement.

The Current Environment in China

What remains to be done under the 1995 agreement is to complete the job of cleaning up the domestic market now that the export problem has diminished. It is in the domestic market where we still face massive piracy problems in China.

As noted above, the piracy rate for our products is 95% and the estimated losses are $1.38 billion. According to the International Intellectual Property Alliance Special 301 Report submitted to USTR in February, "the levels of optical media piracy in China across all lines of copyright business continue to remain high despite reports of active raiding at all levels in the production and distribution chain."

Entertainment software companies have noted that there is now massive illegal importation of pirate and counterfeit copyright product into China from Hong Kong, Macau, Malaysia, and Taiwan. This flood of illegal imports has kept piracy rates unacceptably high even though the Chinese have achieved some success in shutting down indigenous pirate manufacturing capacity. For example, we believe that 100% of the pirate games for use on the Sony PlayStation console are imported, and 70% of the pirate games for the PC are imported. Many of these pirate products are titles published by US software companies.

Beyond problems with illegal imports, weak domestic enforcement remains a major problem in China. The good news is that the Office of National Antipiracy and Pornography (NAPP) has taken charge of all copyright enforcement activities throughout the country. But IIPA noted, "enforcement remains the principal weak point within the Chinese IPR system. All industries continue to believe that the system lacks significant deterrence to further piracy due to nondeterrent administrative penalties and the woeful lack of resort to the criminal enforcement system."

Examples of enforcement impediments abound. For example, the central copyright office in Beijing must clear local copyright bureau enforcement actions that involve foreign rights holders, a clear violation of the Agreement on Trade Related Aspects of International Property Rights (TRIPS) which slows down or even stops enforcement. In addition, fines are too low, both in the law and as imposed, and retail shops that sell pirate goods often remain open even after convictions for copyright piracy. The list goes on. In short, the requisite deterrence is lacking.

We also remain extremely concerned that China continues to reserve the right to keep product out of the country using vague cultural standards. China requires our members to submit software for content screening to a Software Approval Board. Only foreign companies are required to go through this screening process. The Board can reject sale of this product, and it can take months to do so. Meanwhile, pirate versions of the same product freely circulate! We were disappointed that the agreement governing entry into the WTO did not address this issue.

However, the fact that enormous piracy and market access problems in China persist does not mean that China is not taking the problem more seriously, or that no progress has been made, or that there is not an improved attitude in China toward addressing the issue. To the contrary, we believe there has been progress and there are signs China recognizes additional steps are required. Indeed, recent speeches by top Chinese officials have been noteworthy for their open acknowledgement that domestic piracy is rampant and much more needs to be done to attack it. I am not sure these statements would have been made absent the prospect of PNTR and WTO membership.

WTO: Best Road to Reform

WTO membership is a linchpin in the long term effort to advance the cause of US copyright interests in China. It offers the following benefits to our industry:

* As a member of WTO, China will be obligated to meet the requirements of TRIPS immediately upon accession. This is a significant step forward and will bring China into line with dozens of other countries that accept TRIPS standards. Most notably, a major TRIPS obligation relates to enforcement and will require China to take more effective action to deter further infringements. This imposes a critical international obligation on China which we believe China will want to abide by, and holds out the promise of a vast improvement in the piracy landscape in China.

We believe the WTO dispute settlement procedures offer the most powerful leverage to exact progress in the IP area. If, for example, China does not move to becomes TRIPS-compliant, the WTO affords a multilateral channel to enforce these obligations, with real teeth. As the Committee know, under WTO rules, if the US were to bring a successful action against China in the IPR area, it would be free to retaliate in any sector, even the most vulnerable domestic Chinese industry. This threat is a powerful weapon to induce responsible behavior.

The alternative is continued reliance on the bilateral Special 301 Process. While we have generated some results through this route, it has inevitably involved repeated brinksmanship, threats, and counter- threats that have unavoidably polarized dialogue. Moreover, it is not clear to us that any future Administration, Democratic or Republican, given the tremendous geo-political issues involving China, will be prepared to risk the relationship over IPR issues. Thus, bringing China into the world body established to address IPR and trade related issues is likely to offer future governments a less confrontational way to push for continued progress in the IPR area.

* The agreement negotiated between the US and China governing its accession to WTO included a range of market access provisions which will be helpful to our industry, including tariff reductions and according "entertainment software" status as an audio-visual work, enhancing distribution options. These market access gains will be lost if PNTR status is not granted. Moreover, WTO becomes a forum in which our industry can pursue these and other market access relief reforms, such as the content review issue I mentioned earlier.

* The Internet is growing rapidly in China. There are now an estimated 8.9 million Internet users, double the level in 1998. IDSA knows from our experience in the US and around the world that Internet piracy is costing our industry untold millions, perhaps even billions of dollars. China is currently amending its copyright law, giving it the opportunity to add provisions implementing the WIPO Internet treaties which would increase protection of digital works and provide critical protection against hacking and the use of circumvention devices to defeat copy protection. While compliance with TRIPS itself as a condition of WTO ascension will heighten copyright protection for digital works (since TRIPS covers both analog and digital works), we believe membership in WTO will create a more positive environment for full implementation of the WIPO treaties by China. As an industry widely regarded as providing some of the core content which will drive the Internets continued emergence, copyright protection of Internet distributed works is a critical business goal.

Conclusion

As the fastest growing entertainment industry in the world over the last five years, we see tremendous opportunity for American entertainment software companies to continue to expand sales in foreign markets. China is a huge opportunity in this regard. If one looks at sales figures for our industry in the US and Europe alone of $6.1 billion and $6.6 billion respectively, its easy to see the potential for American entertainment software companies to significantly grow market share in China. On balance, we believe that PNTR, coupled with membership in the WTO, offers the best hope for building a viable, legitimate software market in China and realizing that potential. And that, in turn, means more jobs in the US entertainment software industry as we continue our sustained growth and expansion.

Thank you.

END

LOAD-DATE: April 7, 2000

Document 205 of 374.


Search Terms: Permanent Normal Trade Relations, House or Senate or Joint
To narrow your search, please enter a word or phrase: