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The annual report of the Office of the United States Trade Representative (USTR) on the adequacy of trading partners’ protection of US intellectual property rights celebrated its 30^th year this year with a sharper tone with China, in keeping with the Trump administration’s tough stance on the country. Also caught in the report are Colombia and Canada, which were downgraded to the “priority watch list.” Also, this year the report includes a special highlight on pharmaceuticals and medical devices.

The 86-page 2018 USTR Special 301 report is available here. The press release is here.

The fact sheet highlighting USTR engagement on pharmaceuticals and medical products is available here.

Out of 64 countries reviewed, 12 were named to this year’s priority watch list: Algeria, Argentina, Canada, Chile, China, Colombia, India, Indonesia, Kuwait, Russia, Ukraine, and Venezuela. “The IP issues in these countries will be the subject of intense bilateral engagement during the coming year,” USTR said in a release. Out-of-cycle reviews will be conducted this year on Colombia, Kuwait, and Malaysia.

Countries on the priority watch list should consider it “grave and urgent,” a USTR official told reporters on a press call today.

For Canada, the concern is continued failure to address copyright and border enforcement issues, allowing counterfeit products to enter the United States. The official could not say how directly the Special 301 report would factor into diplomatic efforts such as the North American Free Trade Agreement renegotiation (Mexico is also on the watch list), or an upcoming trip to China.

Colombia was downgraded to the priority watch list “for its longstanding failure to make meaningful progress in fulfilling obligations under the United States-Colombia Trade Promotion Agreement, such as obligations to amend its copyright law,” as the release put it.

Then 24 other countries were placed on the watch list: Barbados, Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Egypt, Greece, Guatemala, Jamaica, Lebanon, Mexico, Pakistan, Peru, Romania, Saudi Arabia, Switzerland, Tajikistan, Thailand, Turkey, Turkmenistan, the United Arab Emirates, Uzbekistan, and Vietnam. European countries seem to have mostly escaped penalty this year.

The pharmaceutical special focus states: “USTR has sought to ensure robust IP systems and reduce market access barriers to pharmaceutical products and medical devices so that trading partners contribute their fair share to the research and development of new cures and therapies. This includes fighting against measures that discriminate against U.S. companies, are not adequately transparent, or do not offer sufficient opportunity for meaningful stakeholder engagement, as well as pressing trading partners to appropriately recognize the value of innovative medicines. The Report also highlights concerns regarding unfair uses of compulsory licenses.”

It mentions actions taken on pharmaceuticals and medical products with Canada, China, Mexico, Japan, India, Indonesia, Korea, Argentina, Saudi Arabia, and the United Arab Emirates.

In perhaps a reflection of the increased focus on trade tensions in the United States and worldwide, the half-hour press call with a USTR official included many major media such as the Wall Street Journal, New York Times, CNBC, CBS Moneywatch, Thomson Reuters, Bloomberg, and AFP, along with more targeted publications such as Intellectual Property Watch and regional press from China and Colombia.

A USTR official told reporters the Special 301 report has been “an extremely valuable tool” for identifying challenges in a key industry for the US economy – intellectual property rights. It involves over 45 million American jobs, and reflects some 30 percent of growth in GDP, the official said.

The report underwent a “very robust” interagency consultation process across the US government, the official said.

China Reckoning

China was again placed on the priority watch list (14^th year in a row), which subjects a country to higher scrutiny and could eventually lead to sanctions. On China, the report highlights numerous longstanding problems. It cites “the country’s failure to implement promises to strengthen IP protection, open China’s market to foreign investment, allow the market a decisive role in allocating resources, and refrain from government interference in private sector technology transfer decisions.”

“The United States, other countries, and the private sector have stressed the urgent need for China to embrace meaningful and deep reform as it proceeds with a years-long overhaul of its IP-related legal and regulatory framework,” it says. “Yet, results to date have disappointed.”

“[A]lthough we continue to see some signs of progress in China, significant missed opportunities and troubling steps backward cast long shadows on the IP landscape in China,” the report states.

Examples of Problems in China from the Report:

China was praised for overhauling its IP system and instituting some judicial reforms, including work on specialised IP courts and tribunals, but USTR said, “interventions by local government officials, powerful local interests, and the Chinese Communist Party remain obstacles to the independence of the courts and rule of law.”

On trade secrets, “China did not address major flaws in the outdated legislation, including the overly narrow scope of covered actions and actors, the failure to address obstacles to injunctive relief, and the need to allow for evidentiary burden shifting in appropriate circumstances, in addition to other concerns. More fundamentally, despite long-term engagement from the United States and others—including from within China—China chose not to establish a stand-alone trade secrets law.”

China should issue “guiding court decisions to improve consistency in judicial decisions on trade secrets,” it added, and “reforms should also prevent the disclosure of trade secrets and other confidential information submitted to government regulators, courts, and other authorities, and address obstacles to criminal enforcement.”

“Given the scale, IP infringement in China’s massive online markets causes deep losses for U.S. right holders involved in the distribution of a wide array of trademarked products, as well as legitimate film and television programming, music, software, video games, and books and journals, including scientific, technical, and medical publications.  Compounding these losses in China are the export of pirated works to foreign markets.”

Despite some improvement, it said, “many piracy websites remain. One indication of the scope of the problem is that although China has the largest population and second largest economy in the world, it remains just the twelfth largest music market.”

“In 2017, China again failed to reform measures that bar or limit the ability of foreign entities to engage in online publishing, broadcasting, and distribution of creative content.”

“China remains a leading source and exporter of systems that facilitate copyright piracy, including websites containing or facilitating access to unlicensed content, and illicit streaming devices (ISDs) configured with apps to facilitate access to such websites,” the report states.

And the report highlights several concerns about regulations in China related to patents.

Also in the chapter on China are details of other actions against China, including the Section 301 investigation launched in August 2018 and completed recently that found numerous violations by China. Today’s report explains actions including:

“Pursuant to sections 301(b) and (c) and instructions from the President, the Trade Representative proposed that appropriate action would include increased tariffs on certain goods of Chinese origin and provided notice of a public hearing and opportunity to submit comments on the proposed action.  The USTR also initiated dispute settlement proceedings at the World Trade Organization (WTO) to address China’s discriminatory licensing practices, a concern highlighted repeatedly in past Special 301 Reports.  The President also directed the Secretary of the Treasury to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.”

The ensuing declarations by the United States and China of increased tariffs in the tens of billions of dollars on each other’s products have been well noted in the press.

Today at the World Trade Organization in Geneva, China again complained about the US Section 301 actions.