OP-ED

by Hugh Stephens

Macdonald-Laurier Institute
October 28, 2017

Expectations are high for an announcement this fall that Canada and China will take the next step toward negotiating a trade agreement, either a full-blown FTA (Free Trade Agreement) or, more likely, some form of sectoral liberalization agreement, where both sides will seek opportunities in specified sectors without necessarily making all concessions reciprocal.

The Trudeau government has been engaged in public consultations to seek the views of Canadians about whether and how to achieve closer economic ties with China. According to most surveys, including the annual poll conducted by the Asia Pacific Foundation of Canada, Canadians are ambivalent, with concerns expressed about the extent of Chinese investment in Canada, possible access to Canada by Chinese contract labour, and China’s human rights situation. Most business groups are supportive but among business the question of intellectual property (IP) rights looms large, given China’s reputation as a country where IP theft is common and China’s growing appetite for western technology. How big a concern then should the IP issue be for Canada as it embarks on negotiations with China?

Intellectual property is as important for Canada as it is for any advanced industrialized nation, despite the talk about a Canadian “innovation gap,” meaning that relatively little home-grown IP is successfully commercialized, and that Canadian intellectual property in the form of successful patents is often sold to offshore companies rather than being further developed at home. Canada generally lacks well-known international trademark brand names that are flagships of commercial presence for the US, Japan, Korea and many European countries. Likewise, the copyright industries in Canada – publishing, film-making, music, etc. – are generally less well developed than in some other countries, particularly the US.

For all these reasons, and perhaps some others, Canada, in comparison to the United States and indeed the EU, has not been particularly aggressive in pushing an IP agenda in its trade negotiations with other countries. In fact, in past trade negotiations Canada has often seen IP as a defensive issue, where instead of seeking concessions it has sought to fend off demands from other trade partners. This was seemingly the case in the TPP (Trans-Pacific Partnership) negotiations, where IP “concessions” were used to obtain advantage in other areas (even though those “concessions” were good for Canadian creators of intellectual property). For understandable reasons, the United States has always put intellectual property objectives high on its list of priorities when negotiating trade agreements, given the key role the US plays in industries with high IP content.

Canada... has not been particularly aggressive in pushing an IP agenda in its trade negotiations with other countries.

The view that Canada is more of an IP-consuming than an IP-producing economy has driven Canada’s negotiating approach to IP issues in past trade agreements, but it is high time this approach changed. A future agreement with China would be a good opportunity to take a more offensive as opposed to defensive approach. If Canada doesn’t push for better IP protection in an agreement with China, it is unlikely that China will. If Canada wants to nurture its IP intensive industries, it has to take a more pro-active approach toward using trade negotiations to strengthen IP protection abroad, with a concomitant benefit of strengthening respect and protection for IP at home.

Protecting the intellectual property of foreign companies in China has traditionally been a challenge. Although China signed on to the TRIPS (Trade Related Aspects of Intellectual Property) Agreement when it joined the World Trade Organization (WTO) in 2001, implementation has been spotty and sporadic. Horror stories of foreign IP being appropriated by Chinese competitors (some of them the erstwhile partners of the foreign investor) in order to launch competing, but cheaper products in the Chinese market, are legion. China made content piracy into an international industry, not only allowing open sale of pirated DVDs on the streets of its major cities, but becoming the centre of production for the distribution of pirated content globally. Pirating of DVDs in largely a thing of the past, however, with the focus having shifted to streaming and online piracy – but China is still a “leader” in this respect.

Western companies seeking to market their products in China have found that they have to localize their brand image and name into Chinese, given the uniqueness of the Chinese language. Often, to their dismay, they have learned that their preferred Chinese brand name has already been registered in China by someone else. Or, if they registered a Chinese name for their product, a very similar rendition is soon launched in the local market, altering one character in the name but producing a label that was virtually indistinguishable from the original. Chinese producers are very good at “piggybacking” on someone else’s brand recognition. Attempts to challenge this hijacking of brand names, or to get local authorities to crack down on production of openly counterfeited or pirated goods, has been difficult and often unsuccessful. On its website, Canada’s Trade Commissioner Service has a long list of recommendation for companies on how to protect their IP in China. Care and due diligence is a must.

Why is China so difficult? China, of course, is not the only Asian country with a weak IP regime, but it is a unique combination of a huge, potentially lucrative market, combined with a loose, decentralized legal and administrative system where local authorities in many matters (those not considered strategically important by the Central Government) are given wide degrees of latitude, and a creative entrepreneurial class that is skilled at taking advantage of every loophole.

China, however, is changing, albeit slowly. Chinese now file more patents than any other country in the world. The US shoe company, New Balance, has just won a US $1.5 million trademark infringement judgment against three Chinese shoemaking companies, in an award from a court in Suzhou. Chinese e-commerce platforms like Taobao and Alibaba are taking more strenuous efforts to cleanse their sites of counterfeit and pirated products. There is a growing film and video licensing market in China. In short, as China has become more of a stakeholder in IP-intensive products, it has stepped up its awareness and enforcement activities.

China is now using IP as a lever to gain competitive advantage.

At the same time, it is putting forth a blueprint to be a world-leader in a number of critical industries, and to do so it has embarked on a policy of favouring domestic innovation over that of IP introduced from abroad, to the consternation of foreign investors who are worried they will be shut out from critical sectors. This push, combined with a parallel drive to obtain access to foreign IP, either through compulsory licensing requirements imposed on foreign investors, or through espionage, is of great concern to foreign companies and governments.

So, China’s IP is bad, but improving, but China is now using IP as a lever to gain competitive advantage. What implications does this have for Canada-China trade negotiations? A look at the China-Australia FTA (ChAFTA) might give us some indication.

Under ChAFTA, Australians get “national treatment” with respect to the protection of IP (that is, they will be given the same protection as Chinese nationals). Other areas, such as patents, trademark and copyright contain vague promises of cooperation. The area of enforcement is somewhat more robust, requiring the implementation of effective IP enforcement systems to eliminate trade in goods and services that infringe IP rights. For willful trademark and copyright infringement on a commercial scale, each nation must provide criminal procedures and penalties consistent with TRIPS. Penalties must include imprisonment and monetary fines sufficient to provide deterrence. Disputes over issues within the ChAFTA IP chapter are subject to the Agreement’s dispute settlement provisions. This is important as the right to invoke a bilateral agreement to ensure fair treatment will help Australian companies in dealing with recalcitrant local authorities in China.

Canada needs to seek at least this level of commitment in the IP chapter, but should go beyond these terms. In particular the reciprocal agreement signed in June of this year to forego “cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors” should be made subject to the agreement, with the ability to enforce its provisions through the dispute settlement mechanism. Also, if China wants looser review of investment in Canada by Chinese companies through a trade agreement, the agreement needs to protect Canadian companies in China from being forced to disclose sensitive IP in return for receiving foreign investment approval, and needs to ensure that China’s drive for domestic innovation does not discriminate against Canadian companies seeking to operate in China.

Canada has a good, though not perfect, regime with respect to fostering and protecting intellectual property. Chinese companies investing in Canada will be able to take advantage of that. China’s record in the area of IP is less reassuring. Any Canada-China agreement needs to ensure that Canadian companies have the ability to protect their IP in China through fair and balanced application of Chinese law (the law in China is generally not the problem; it is the interpretation and application of the law that is the main issue), subject to adjudication under the Agreement if necessary. Canada should seek national treatment for its companies when it comes to any preferences for “domestic innovation” and should ensure that the existing cyber-espionage agreement is respected and enforced through any Canada-China Trade Agreement.

IP may not be a central feature of a Canada-China trade agreement, but it is a vital part of the infrastructure. This is a chance to improve the risk environment for Canadian companies in China. If we get it wrong, or overlook the importance of this chapter, we will have missed a unique opportunity to give Canadian exporters and investors a fairer and more level playing field when it comes to operating in the Chinese market.

Hugh Stephens is a Distinguished Fellow at the Asia Pacific Foundation of Canada, an Executive Fellow of the School of Public Policy of the University of Calgary and a Fellow of the Canadian Global Affairs Institute. He publishes a blog on international copyright issues, hughstephensblog.net.

Image credit: Asiapacificmemo.ca