China announces punishments for intellectual-property theft

lower level of Shanghai China skyline waterfront on foggy day

December 4, 2018 - China announced an array of punishments that could restrict companies’ access to borrowing and state-funding support over intellectual-property theft, a key sticking point in its trade conflict with the U.S.

News of the measures came just days after President Xi Jinping promised to resolve the U.S.’s “reasonable concerns” about IP practices in a statement after meeting President Donald Trump at the Group of 20 summit on Saturday in Argentina. The White House said the sides agreed to hold off on tariff action for at least 90 days as they negotiate to resolve specific U.S. complaints.

China set out a total of 38 different punishments to be applied to IP violations, starting this month. The document was released by the National Development and Reform Commission and signed by various government bodies, including the central bank and supreme court.

“I think it’s potentially significant if they are implemented and result in a reduction in IP theft,” Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington. “We’ve been down this road with China many times on IP. The attention companies pay to IP theft has risen dramatically, and despite the great attention it’s getting the violations have increased.”

Late last month, Beijing batted down a U.S. accusation that China is continuing a state-backed campaign of IP and technology theft, saying it was based on hearsay and ignores reality.

The Trump administration began levying tariffs on China in July after the so-called Section 301 investigation by the U.S. Trade Representative’s office alleged that China’s IP and technology transfer policies are causing multiple billions of dollars in damage to U.S. companies.

In an update released last month, USTR said China was continuing its unfair IP policies and it accused Beijing of continuing a state-backed campaign of cyber-attacks on American companies that were both intensifying and growing in sophistication.

China says violators would be banned from issuing bonds or other financing tools, and participating in government procurement. They would also be restricted from accessing government financial support, foreign trade, registering companies, auctioning land or trading properties.

In addition, violators will be recorded on a list, and financial institutions will refer to that when lending or granting access to foreign exchange. Names will be posted on a government website.

Key Insights

“This is an unprecedented regulation on IP violation in terms of the scope of the ministries and severity of the punishment,” said Xu Xinming, a researcher at the Center for Intellectual Property Studies at China University of Political Science and Law. The newly announced punishments are “a security net of IP protection” targeting repeat offenders and other individuals who aren’t in compliance with the law, he said.
Chinese law enforcers have been hampered by insufficient means of punishment in the past, Xu said, but the new regulations could render IP violators “unable to move even a single step.”
The punishments are an attempt to extend the government’s “social credit” system to the IP sector and punish untrustworthy business and individuals, according to the release. That’s another step in the government’s campaign to influence the behavior of its more than 1.3 billion citizens.

Source: Bloomberg