complementary trade structure and u.s.-china negotiations over intellectual property rights

COMPLEMENTARY TRADE STRUCTURE AND U.S.-CHINA NEGOTIATIONS OVER INTELLECTUAL PROPERTY RIGHTS Ka Zeng

The United States and China have been involved in endless bicker- ing over Beijing's protection of American intellectual property products since the early 1990s. Several times, through Section 301 of the U.S. trade law, the American government has attempted to press Beijing not only to improve its protection of U.S. intellectual property rights (IPR), but also to provide greater access to intellectual property-related products. The United States has three times (in 1991, 1995, and 1996) threatened to impose sanctions on China should Beijing fail to provide more adequate protection for U.S. intellectual property products.

The drawn-out U.S.-China IPR disputes demonstrate two interest- ing patterns. First, as the world's largest economy and as the country that provides most of China's hard currency, one would expect the United States to get what it wanted from the Chinese through these negotiations. Yet in reality the U.S. Trade Representative's (USTR) highly leveraged sanction threats under Section 301 have not always elicited the desired Chinese response. Even when the United States was able to secure China's written consent, it rarely received substantial compliance with the terms of the agreement and, as a result, rampant IPR infringement remained in China.

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Second, despite American trade negotiators' repeated threats to impose retaliatory tariffs on Chinese exports should the country fail to improve its protection for American IP products, the United States managed to reach last-minute agreements with Beijing in each round of the IPR negotiations mentioned above, withdrawing the threatened sanctions against Chinese exports. In other words, although the two sides have several times come to the brink of a trade war, a pattern of"trade peace" has by now become a distinctive feature of U.S.-China IPR disputes.

This paper explains the ineffectiveness of America's unilateral pressure and the absence of U.S.-China trade war over the IPR issue by tracing the effect of a system-level variable, the structure of trade between the two countries, on the level of domestic support for sanction threats in the United States. It argues that since trade between the United States and China is highly complementary (i.e., the United States imports from China mostly commodities it no longer produces at home), America's sanction threats suffered from domestic divisions resulting from the divergent policy preferences of export-seeking and import-using industries. In other words, U.S. sanction threats in these cases enjoyed backing only from the export- seeking sectors, who would gain only if the sanction threat succeeded. Unlike trade negotiations between the United States and its competitive trading partners such as Japan and Europe where the United States exports to the partner country commodities very similar to those it produces at home, there existed virtually no or only a very small import-competing sector that would benefit from, and hence support, sanctions whether threats succeed or fail. Instead, America's sanction threats against China have encountered opposition from a large import-using sector that makes extensive use of, and has in some ways become dependent on, the labor- intensive products made in China. Divergent policy preferences between the export-seeking and import-using sectors not only reduced the credibility of American threats, but also diminished the chances of aggressive escalation leading to a trade war involving tit-for-tat retaliation.

The argument proceeds in several steps. The first section of this paper will provide a brief chronology of U.S.-China IPR disputes. After laying out my argument regarding the influence of complementary trade on the degree of domestic support for trade sanctions in the United States, the paper will then test this hypothesis against the record of U.S.-China IPR negotiations. The last section considers the influence of domestic

56 East Asia / Spring 2002

politics in China on negotiation outcomes, discusses my additional find- ings, and addresses the implications of this research for America's attempt to unilaterally open foreign markets.

Background

The drawn-out dispute between the United States and China over IPR protection originated in the early 1980s, when China's growing economic exchanges with the outside world began to accentuate the differ- ence between Western and Chinese practice in IPR protection. Although, beginning in the early 1980s, the Chinese government had adopted incre- mental measures to reform its legal framework for IPR protection to conform to international standards, ~ international concerns about China's ineffective IPR protection, which pertained to both alleged deficiencies in China's IPR protection regime and lax enforcement of IPR laws, deepened throughout the late 1980s and 1990s.

In 1989, in response to industry concerns about the loss of a potentially lucrative market to copyright theft, the Bush administration for the first time designated China as a priority country under Special 301 provi- sions of the 1988 Omnibus Trade and Competitiveness Act. When two years of negotiations failed to produce any substantial inroads, the Bush administration in April 1991 launched another Special 301 investigation of China's IPR practices, threatening to impose sanctions on $1.5 billion of Chinese exports unless China agreed to more stringent standards for IPR protection. However, in January 1992, shortly before the threatened sanctions were to take place, the two sides managed to sign a Memoran- dum of Understanding (MOU) in which China committed itself to far- reaching reforms of its IPR regime, z

In the months following the signing of the MOU, China largely fulfilled its promises by putting in place a relatively complete framework of IPR protection. 3 But while these developments temporarily placated American negotiators, disputes over IPR issues remained unresolved as American IP industries and the USTR soon shifted their attention to the gap between legislation and enforcement, in addition to the Chinese government's continued restrictions on the market access of U.S. intellectual products. 4 This set the stage for yet another Special 301 investigation in July 1994. In December 1994, based on the finding that China's lax

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IPR enforcement was "burdensome and unreasonable," the Clinton administration threatened to impose 100 percent retaliatory tariffs on $2.8 billion worth of Chinese products unless Beijing fulfilled a series of Ameri- can demands, including shutting down the twenty-nine factories across the country producing counterfeit CDs, strengthening IPR protection measures, and providing access to IPR courts. 5

When the ensuing negotiations failed to resolve the differences between the two parties, the United States on February 4, 1995 announced that it would impose 100 percent tariffs on $1 billion worth of Chinese exports unless Beijing took measures to address the problem within three weeks. The Chinese, in turn, threatened counterretaliation, bringing the two sides to the brink of a trade war. At the same time, however, the Chinese government also made gestures indicating its willingness to de- fuse the dispute. For example, it conducted highly publicized raids on street vendors of counterfeit CDs and computer software, shut down a number of prominent factories in southern China involved in illegal production, and indicted some of the most offensive software retailers. Fi- nally, as in previous U.S.-China intellectual property disputes, the two countries managed to reach another agreement on February 26, 1995, the day the sanctions were supposed to take effect, in which the Chinese government pledged to take concrete actions to address the piracy issue. 6

The 1995 agreement, which was impressive in wringing China's written commitment, substantially raised U.S. hopes for improved IPR protection in China. But this period of raised expectations again turned out to be short-lived. By the end of 1995, the USTR became sufficiently frustrated with China's slow progress on the enforcement front to launch yet another Special 301 investigation of China's IPR practices and, in May 1996, announced that it would impose $2 billion in punitive tariffs on Chinese exports if no agreement on enforcement could be reached by June 17, 1996. 7 The expectation in Washington was that since one-third of Chinese exports went to the United States, substantial threat of trade retaliation would force Beijing to strengthen its enforcement efforts.

Insisting that it was in compliance with the 1995 IPR agreement, China countered the American move with its own threat to retaliate against various U.S. exports and investment projects. Finally, in a pattern that was typical of U.S.-China disputes over intellectual property rights, the two sides reached another agreement at the last minute. In June 1996, the USTR


announced that the United States would withdraw the trade sanctions since "China had reached a critical mass of enforcement actions" and that the "core elements of an operational intellectual property rights enforcement system" were in place. 8 Another trade war had been averted. However, this time the Americans walked away from the negotiation table without obtaining any major concessions.

The above chronology of U.S.-China IPR disputes suggests two important points. First, U.S. pressure against China on IPR issues has been, at best, only partially successful. Although, in the negotiations prior to 1996, Beijing agreed to U.S. demands on paper and also made genuine efforts to transform its legal regime for IPR protection, it repeatedly failed to follow through with enforcement. As a result, the United States con- stantly had to prod the Chinese to change their policies and practices. In the 1996 negotiations, the U.S. even withdrew the threat of trade sanctions with no concessions from China. Moreover, although, in the 1995 negotiations, China did shut down more than 100 production lines producing counterfeit IPR products at the last minute, thus allowing the industry to achieve its most immediate objective of cutting off the flow of counterfeit products to third-country markets, it has been slow to respond to most other U.S. demands. On the whole, it seems fair to say that U.S. attempts to force improved IPR protection in China, at best, have produced only mixed results. The reemergence of IPR issues in the bilateral negotiation agenda in itself suggests the difficulties American negotiators faced in using trade sanctions to pry open the Chinese market.

The absence of "trade war" is another pattern that emerges from the above history of U.S.-China IPR negotiations. Even though the United States was sufficiently frustrated with China's poor record of IPR protection and has repeatedly threatened trade sanctions, it has consistently failed to make good on its threats. In each of the three episodes of the IPR disputes outlined above, the United States issued sanction threats, raising the specter of a trade war, but has always backed down at the last minute and accepted Chinese promises of enhanced enforcement effort.

Why did repeated U.S. sanction threats fail to induce Chinese concessions? Why was the United States able to withdraw sanction threats and to resolve IPR disputes cooperatively with China? Why did China's persistent failure to abide by the terms of signed agreements fail to pro- voke a more confrontational U.S. response? Drawing on the two-level

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game approach, the following analysis will seek answers to these ques- tions by tracing the influence of trade structure on the constellation of domestic forces in the United States.

Complementary Trade Structure and Its Domestic Repercussions

In approaching the two empirical puzzles outlined above, I draw on the notion of "two-level games" to show how domestic and international politics interact to affect negotiation outcomes. The two-level game approach, in Robert Putnam's original formulation, views national leaders as engaging in two sets of negotiations simultaneously: one with their international counterparts and the other with their respective domestic constituents. Chief negotiators not only need to "win" at the international table, but also have to make sure that any deal that is cut internationally will be accepted by those who could veto or block implementation of the deal at home. 9 By integrating a number of previously disparate observa- tions into a single theoretical framework, the two-level game approach not only helps to remedy the neglect of domestic variables resulting from the dominance of structural realism in international relations theory, but also provides a basis for organizing further empirical study.

Using the two-level game approach as the starting point of my analysis, I develop a causal logic that lays out clearly the linkage between the structure of domestic interests and preferences and international negotiation outcomes by specifying the conditions under which threats are likely to be supported and ratified by domestic interest groups. It will be argued that the complementary trade relations between the United States and China created deep schisms between export-seeking and import-using groups in the United States, thus substantially reducing the credibility of American threats. This same factor also constrains the United States from escalating the dispute to the level of a trade war.

Defining Trade Complementarity

Trade complementarity refers to a situation where two nations en- gage in the production and export of a different set of commodities. When two nations' comparative advantages differ, each has an incentive to con- centrate on the production of those commodities that best utilize its com-


parative advantage and produce the highest profit margin, and to trade them for goods that it cannot produce at a reasonable cost at home. U.S.- China trade relations provide a good example of a complementary trade structure as the United States specializes in the manufacturing of technology-intensive products (such as aircraft, telecommunications equipment, and machinery) and exports them to China in return for imports of labor- intensive products (such as shoes, toys, and textiles) that it no longer produces at home.

Complementary trade structure contrasts sharply with competitive trade structure under which two countries' comparative advantage con- verge. In the latter situation, both countries specialize in the same set of products that will allow them to capture the greatest profits. Since their economic structures are similar, each will have home substitutes for imports from the other and, as a result, trade is more "competitive." Trade between the United States and Japan (or Europe) provides an example of a competitive trade structure, as both focus on the export of technology- intensive products.

The concept of competitive versus complementary trade structure has been employed by other scholars in their analyses of the sources of trade wars. For instance, in his study of bilateral trade wars throughout history, John Conybeare has used the terms "complementary" and "competitive" in a way very similar to the way I employ the terms here. 1~ Conybeare gives the trade pattern in the ancient world as an example of a complementary trade relationship. In ancient times, the structure of trade consisted of complementary exchanges of essential commodities such as food and raw materials. Each country produced only one or a few commodities in which it had a clear comparative advantage, and exchanged them for commodities that it was incapable of producing efficiently. He contrasts this pattern of trade with that in the contemporary world, where countries import commodities (such as autos, steel, and televisions) for which they have close substitutes at home. In this case, countries have higher elasticities of demands for imports and hence trade is more "competitive." While Conybeare considers trade relations in the contemporary world to be generally more competitive than those in the ancient world, I would argue that there remains in the modern world a fair degree of varia- tion in trade complementarity and that the U.S. trade relationship with China is one of the most complementary in the world.

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To put the degree of trade complementarity between the United States and China in comparative perspective, I report the number of overlaps between the top twenty commodities the U.S. exports to the world with the top twenty commodities it imports from a particular trading partner. A greater number of duplicates between the two lists suggest a more competitive trade relationship, whereas fewer overlaps between the two indicate a more complementary trade structure. The result, shown in Table 1, suggests that the United States has a far more complementary trade relationship with countries such as China, Brazil, and India (located near the bottom of the table) than with countries such as Japan and the European Union.

Tab le 1

N u m b e r of overlaps between the top 20 commodities the United States exports to the world and the top 20 commodities

it imports from major trading partners.

Country Number of Overlaps Japan 13 EU 12 Canada 9 Mexico 9 Israel 9 Singapore 8 Taiwan 7 South Korea 7 Hong Kong 6 Malaysia 6 Thailand 5 Philippines 5 Switzerland 4 China 4 Argentina 2 Indonesia 2 Brazil 2 Nigeria 2 Dominican Republic 2 Venezuela 1 Saudi Arabia 1 India 0 Russia 0 Colombia 0

Source: U.S. Department of Commerce data. Top 20 commodities, which are based on 3-digit SIC codes, are sorted by 1995 values.


Figure 1, which lists the top five commodities (at the SITC-3 level) in U.S. trade with China between 1997 and 2001, further illustrates the extent of trade complementarity between the two countries. As we can see, U.S. exports to China primarily products with high-technology con- tent and agricultural products, whereas leading Chinese exports to the United States consisted primarily of toys, footwear, and apparel.

Trade Complementarity and Domestic Support for Sanction Threats

How does trade complementarity affect the effectiveness of Ameri- can threats against China and the likelihood of trade war? I hypothesize that having a complementary trade relationship could produce serious divisions among interest groups in the United States, thus reducing threat credibility and constraining the propensity of American negotiators to escalate the conflict to the level of a trade war.

This hypothesis derives from the observation that when trade relations are complementary, the nation making the threat is likely to have

Figure 1

Top Five Commodities in U.S. Trade with China (SITC-3), 1997-2001 (million $)

12000

10000

8000

6000

4000

2000

�9 Export to China

�9 Import from China

�9 ~ c~d~ �9 C~ t ~ es6~ ~ \os ~" I~x~d ~ ~ ~ .~ e\eoo~ ~e~$~,~x~

Source: U.S. International Trade Administration.

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both a large export-seeking and a virtually non-existent import-competing sector. Since China exports to the United States mostly commodities no longer produced in America (such as toys, shoes, and apparel), there are very few, if any, import-competing interests in the United States. Instead, there is a large import-using sector in the United States that has benefited from, and has in some ways become dependent on, the labor-intensive products made in China. Thus, when the United States threatened to cut off Chinese imports unless the nation enforced rules protecting U.S. fLrrns who sought to export music, video, and software, sanction threats enjoyed support only from the export-seeking firms (i.e., the intellectual property industry), who won only if the sanction threats succeeded. Unlike trade disputes between countries with competitive trade relations such as the United States and Japan, there was no import-competing sector eager for the sanctions to fail. Rather, import-using industries, including importers and retailers of toys, footwear, and consumer electronics, campaigned to make sure that the sanctions were not carried out (even if no concessions had been won). With this structure of interests, sanction threats ought to be much less credible. The detailed account of the positions of various domestic interest groups involved in U.S.-China IPR disputes bears out this pattern.

If American threat credibility against China can be sharply curtailed by domestic divisions resulting from the complementary trade structure between the two states, U.S. sanctions ought to enjoy enhanced credibility when directed against countries with which it has competitive trade relations. It is worthwhile to note the contrasting patterns of domestic coa- litional support under different trade structures. When trade relations are competitive (that is to say, when the two nations compete in the same product lines) rather than complementary, the nation issuing the threat would most likely have large export-seeking and import-competing sectors that produce the same commodities made in the target. In such cases, domestic interests in the sender of threats are more likely to be united in support of trade sanctions, since both exporting and import-competing interests gain from aggressive tactics that promise benefits whether the threat succeeds or fails.

U.S. efforts to pry open the Japanese construction market in 1987- 88 may help to illustrate this point. In the late 1980s, convinced that U.S. construction firms, especially those involved in high-tech services, had


been excluded from the Japanese public sector market by unfair Japanese practices, the U.S. Trade Representative announced that a ban would be imposed on Japanese firms' participation in U.S. public works construction unless Japan modified its government procurement policy. In this case, the U.S. construction firms pushing for trade sanctions were mainly large international firms that wanted to expand their presence in the Japanese construction market. At the same time there were also many U.S. construction firms that felt threatened by Japan's increasing success in the American construction market. These firms supported sanction threats because they would benefit from the restrictions on Japanese competition in the U.S. building market if sanctions were carried out against Japan. H Given this situation, American threats to impose sanctions unless Japan opened its market presented American industries with a no-lose situation. If sanction threats succeeded in extracting concessions, export-seeking interests (the larger international firms) won by obtaining greater access to the Japanese market. If threats failed, and sanctions had to be imposed, import-competing interests (flmas threatened by Japanese competition in the U.S. market) won. Because they produced the same things as the target, protectionism promised to provide them with "rents" previously unavailable under free trade. Sanction threats under these conditions consequently enjoyed much more unified support from affected organized interests and were therefore more likely to be effective.

The high-profile U.S.-Japan semiconductor trade conflicts demonstrate a similar pattem. In the drawn-out U.S.-Japan conflict over semiconductors in the mid-1980s, American threats to impose sanctions on Japanese computers, television sets, and other electronics products unless Japan opened up its market to American semiconductor products were supported not only by semiconductor manufacturers who were seeking to expand exports in the Japanese market, but also by industries targeted for trade sanctions (such as the computer and electronics manufacturers). These latter industries faced stiff competition from Japanese imports. Conse- quently, they would not have minded if threats failed and sanctions had to be carried out because they would benefit from limiting Japanese exports to the American market. Domestic unity under such competitive trade relations ought to make threats of sanctions more credible to foreign governments.

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Summarized briefly, the above analysis suggests that the structure of trade has an important impact on domestic interests in the country issuing the threat: U.S. threats to impose economic sanctions against China will most likely lack credibility due to domestic opposition. I further argue that the same set of factors that explain the difficulties American negotiators faced in opening markets in China also contribute to the U.S.-China IPR trade peace. Divisions between import-using and export-seeking interests over the utility of an aggressive negotiation strategy substantially lessened the pressure for brinksmanship in bilateral trade disputes, leading American negotiators several times to refrain from retaliatory trade tactics.

Explaining the Ineffectiveness of American Pressure and U.S.-China "Trade Peace"

The relative positions of the American industry groups involved in the IPR disputes documented below provide substantial support for my hypothesis. As my theory predicts, American threats against China on IPR issues suffered from factional conflict at the domestic level. Due to the complementary trade structure between the two sides, the prospect of a trade war had created a deep schism between American industries that focused on IP as a means of expanding their share in the Chinese market on the one hand, and American importers and retailers on the other. Op- position by those industries insisting on market access alone without any concerns about the existing IP practice in China further strengthened the opposition. Although American IP industries, represented by such organizations as the Recording Industry Association of America (RIAA), the International Intellectual Property Alliance (IIPA), the Business Software Association (BSA), the Motion Picture Association of America (MPA), and the International Federation of the Phonographic Industry (IFPI), consistently pushed for trade sanctions, they were counterbalanced by other segments of the business community, most notably importers of labor- intensive products who have developed a high degree of reliance on the Chinese market. In this case, manufacturing industries such as automobile and aircraft manufacturers also advocated a position that conflicted with that of the copyright industry. The absence of solid support from the business community not only weakened the hands of the U.S. negotiation


team, but also impeded American negotiators' ability to escalate the dispute. The following sections chronicle the positions of each of the groups of actors involved in the dispute and their impact on negotiation outcomes.

IPR Industries: Key Advocates of Sanctions

U.S. IP industries were the most forceful proponents of Special 301 investigations against China. For example, the International Intellectual Property Alliance (I]PA), made up of industry groups representing film makers, book publishers, the music industry, and computer software manufacturers, pointed out that Chinese piracy rates in computer software, motion pictures, sound recordings, books, and periodicals ranged from 90 to 100 percent. 12 Citing the substantial dollar losses U.S. industries in- curred from Chinese piracy, the IIPA insisted that the USTR place China on the list of "priority countries" that would face retaliatory actions by the United States.

The International Federation of the Phonographic Industry (IFPI) was particularly irked by China's illegal production and export of fake CDs. According to the 1995 estimates by the United States Trade Repre- sentatives (USTR) office, there were a total of thirty-one officially licensed factories capable of producing 54 million compact discs a year. Another 150 million units were being produced in underground factories. The bulk of these products were being exported to foreign markets in Asia, Latin America, and Europe where they posed a serious challenge to legitimate products. Chinese pirating of CDs and tapes reportedly cost the U.S. sound recording industry $345 million in losses. 13 In light of these tangible losses, the IFPI requested that the U.S. government closely monitor China's CD exports.

Computer software industries were similarly concerned about rampant software piracy in China. The Business Software Association (BSA), a trade group in Washington representing large U.S. software publishers, together with organizations such as the Computer and Communications Industry Association and the Software Publishers Association (SPA), supported strong government action to ensure adequate IPR protection in China that would provide U.S. finns with genuine access to the huge China market. 14 In May 1996, eight top software industry executives, including companies such as Microsoft, Lotus, and Novell, held a meet-

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ing with USTR Charlene Barshefsky to underscore the industry's frustra- tion with Chinese companies' illegal practices. 15

Concerted efforts by the U.S. IPR industry thus played an important role in the USTR's decision to launch Section 301 investigations and in its subsequent aggressive negotiation stance. Analysts have tended to portray the IPR dispute as one in which industry groups stood unani- mously behind government negotiators. Often obscured from this view is the fact that import-using and, to some extent, exporters less concerned with IPR issues, have voiced opposing views in the policy process. Ameri- can importers and retailers of cheap Chinese manufacturing products lob- bied against sanction threats that would severely limit their supply. Coupled with opposition from other exporters interested in maintaining continued access to the Chinese market, these domestic divisions in effect limited the USTR's maneuverability.

Opposition from Import-Using Interests

Although the motion-picture, recording, and software industries waged an impressive lobbying campaign to punish China for its IPR infringement, a greater number of industries protested the United States' proposed sanctions that threatened to cut off one of their most important sources of imports. Since the Chinese products targeted for sanctions included almost all of the most popular U.S. imports from China such as textiles, toys, and electronics, American importers and retailers who have become dependent on the Chinese market opposed the imposition of sanctions. In January 1995, major U.S. importers, retailers, and manufacturers complained in public hearings that they would be unfairly harmed by Washington's use of punitive tariffs to force China to crack down on infringement of intellectual property fights. For example, the National Re- tail Federation, which represents the largest U.S. retail chains, argued that Washington's pursuit of fair trade should not come at the expense of Ameri- can consumers. 16 The Federation asserted that the punitive tariffs, if imposed, would force U.S. retailers to raise prices to make up for the costs of purchasing the goods from elsewhere. Because some Chinese goods were so inexpensive, or because they were unavailable elsewhere, U.S. retailers would have to bear the costs of stiff tariffs in order to replenish their s tocks . 17 The Federation further complained that textiles and apparel had


been targeted "for the benefit of Hollywood moguls" and that sanctions would add $100 million to America's clothing bill.

The American Association of Exporters and Importers agreed that USTR Mickey Kantor's proposed sanctions would negatively affect various U.S. business interests, including retailers. The Association warned that it would be difficult to reverse trade retaliation once it was started and suggested that Washington should give Beijing more time to develop an effective system for IPR protection/8 In a similar vein, the International Mass Retail Association argued that since the punitive tariffs targeted kitchenware, lighting supplies, sporting goods and consumer electronics products for which China was a major supplier, the threatened sanctions, if implemented, would inflict severe pains on U.S. retailers. 19

Besides the retailing community, American toy makers, who sourced most of their products from China, actively opposed the sanction threats. The Toy Manufacturers of America asserted that since virtually the entire toy industry was based in China, it would be very difficult to replace toy imports from China. In 1995, Chinese toy production accounted for half of the world's total and Chinese toy exports to the United States reached $5.4 billion. Toy makers thus remained apprehensive that sanctions would invite Chinese retaliation and shut offAmerica's toy imports from China. 2~

U.S. shoe manufacturers were concerned about the effects of retaliatory measures as well. Since China was the top supplier of footwear imports to the United States, shoe manufacturers had been campaigning to make sure that footwear would not be included in the U.S. hit list. A group of shoe manufacturers submitted a letter to the White House warning that higher tariffs on footwear imported from China would lead to a steep price hike for U.S. consumers.

Even the electronics industry was split about the USTR's choice of trade weapons. Some members of the Electronic Industries Association (EIA) were high-technology companies whose products were being pirated in China. But other companies such as AT&T and Motorola Corp., while having a large presence in China, also regularly imported consumer electronics products such as telephone-answering machines, microphones, and magnetic-tape recorders from the country. For instance, in 1995, the United States imported $91 million worth of cellular telephones from China. 21 The EIA, together with the Consumer Electronics Manufactur-

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ers Association and the Telecommunications Industry Association, which represented American equipment manufacturers, therefore complained that such products had been "disproportionately, if not unfairly, targeted for retaliation?' It warned that a sharp increase in duties on these products could cause "severe business disruption" and negatively impact U.S. production. 22

The American Forest and Paper Association and power-tool manufacturers, who make extensive use of raw materials from China, voiced similar concerns. For example, power-tool manufacturers argued that the threatened sanctions would sharply raise the price of one of its most important inputs, thus giving Japanese competitors an advantage in world markets. Importers of electronic gear from China also opposed sanctions. They argued that while they could find alternative sources to build their products, the cost would be significant and it would have a major impact on U.S. sales.

In addition, some small U.S. businesses, which were the intended targets of the USTR's sanction threats in 1995, felt particularly vulnerable to a trade war. A number of U.S. greeting card companies and bicycle importers, for example, pleaded with U.S. negotiators to withdraw the sanction threats, arguing that businesses dependent on low-cost imports from China would be hit hardest by a trade war and would have to bear the brunt of the costs of the dispute in such an event . 23

To be sure, sanction threats did generate mixed feedback from the American textile and apparel industry. While textile and apparel retailers opposed sanction threats, textile manufacturers and labor unions, less tied to Chinese production, took the opposite position. On the one hand, some locally based companies which relied heavily on imports from China to fill out their lines pointed out that since China is the United States' largest source of apparel imports, followed by Hong Kong, the threatened sanctions would lead to higher prices and to scarcity of some goods for which China is a leading supplier. Although apparel manufacturers were not the primary victims of China's widespread IPR violations, they expressed fear that the escalation of hostilities would have a very negative effect on U.S.- China textile trade. According to the American Apparel Manufacturers Association, the United States imported $3.5 billion of clothing made in China, or roughly l0 percent of all imported apparel. Certain items could be found only in China. Silk distributors, for example, were almost 100


percent dependent on China. These groups therefore argued that the implementation of trade sanctions against Beijing for its failure to protect Ameri- can copyrights and trademarks would have devastated "hundreds of small American companies and thousands of workers "'24 The National Apparel and Textile Association commented that the association had no interests in waging a battle with China over IPR. 25 The U.S. Association of Im- porters of Textiles and Apparel also voiced concerns that the threat would be very disruptive to people doing business in China and would make life more uncertain for importers. The Association urged the administration to look more carefully at the impact of trade sanctions on the American manufacturing, retailing, and consuming community when making its final de- cisions. 26

On the other hand, another segment of the American textile industry, less dependent on Chinese imports, supported retaliation. Trade groups such as the American Textile Manufacturers Institute or the California Fashion Association, whose members' products competed with cheap, Chinese-made goods on which the punitive tariffs would be applied, wel- comed the action which could help them boost their sales by forcing price increases on imports. 27 Textile manufacturers in the American south, including those in key electoral states, have been hurt by imported goods produced in low-income countries. As potential beneficiaries of the threatened sanctions, they adopted a position in favor of the sanction threats.28

But, despite these textile manufacturers' support for sanction threats, the U.S.-China IPR dispute has exposed a fundamental dilemma for U.S. trade relations with China. While the United States would like to ensure more adequate protection for American intellectual property rights through aggressive market-opening actions, it was not willing to expose the labor- intensive manufacturing sectors to the effects of counter-sanctions. More- over, due to the high level of trade complementarity between the United States and China, there was a particularly large constituency reluctant to see sanctions imposed on China. This import-using constituency's active opposition to sanction threats only served to diminish the credibility of American threats in the eyes of the Chinese.

To be sure, the broad characterization of U.S.-China trade relations as complementary does not mean that there exists no import-competing interest in the United States. For example, the textile and apparel industry has long complained about the competitive challenge from low-cost Chi-

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nese manufacturers and was therefore in favor of sanction threats that might help to reduce Chinese competition. The apparel industry was even one of the larger ones in the United States in terms of employment. But other than the textile and apparel industry, industries that competed with Chinese imports were minimal. Even the footwear and toy industries, having shifted most of their production overseas, did not emerge as strong advocates of the sanctions strategy. Furthermore, the preceding analysis makes clear that even though the textile and apparel industries were sym- pathetic with the demands of the IPR industries, the existence of an increasingly large and vocal import-using constituency constrained the ability of the IPR-related industries and import-competing interests in the textile industry to make their threats credible to the Chinese. In the absence of such domestic opposition, the pro-sanctions interests probably would have had greater success in realizing their policy objectives.

Opposition from Non-Directly Involved Exporting Interests

Opposition from American exporters and investors further diminished the credibility of American threats in the IPR case. The three largest automobile manufacturers, for example, were strongly opposed to any measures that would upset the U.S.-China trade relationship. They were worried that sanctions, if carried out, would curtail their investments in joint ventures in the short run and would reduce their access to a potentially lucrative market in the long run. Both Ford Motor Co. and General Motors expressed the concem that a trade war might jeopardize both cur- rent and future investments and urged the administration to undertake high- level negotiations with China to find a solution to piracy that would avert sanctions. ~9 Fearing that they would be frozen out of one of the highest- potential markets in the world, the big three auto manufacturers thus became outspoken opponents of sanctions threats in the IPR dispute.

Aerospace companies, whose main goal was to capture a bigger share of an aerospace market that ranked third behind the United States and Japan, did not want to see sanctions imposed on China either. Aero- space giants such as Boeing argued that in the event sanctions were carried out, China could easily turn to competitive European companies, causing a major setback to these aerospace companies' attempt to gain a greater share of the Chinese market. Concerned that they might become


the target of counterretaliation in a trade row, the aerospace companies vigorously opposed the Clinton administration's sanction threats. 3~

More generally, executives of major U.S. industries sought to drive home the point that the administration's tough approach over Chinese piracy could lead to a wider trade conflict and endanger their ability to compete in the vast Chinese market, especially in view of the Chinese government's threat to suspend U.S. investment projects in China.

The Business Council, an organization of chief executives from 100 of the country's largest companies, warned the administration that it should not allow differences with Beijing over piracy to poison the broader political and economic relationship between the two countries. Since most American companies saw China as one of their most promising foreign markets, they were worded that a trade confrontation with China would yield market share to European and Japanese competitors and cost the United States high-wage jobs at home. Many company executives further argued that imposing sanctions on China could backfire by making it harder for the United States to use its economic influence to bring about commercial, social, and political change in China. 31 The prevailing view was that the United States, in fighting for Hollywood and Silicon Valley, would be putting the U.S.-China commercial relationship in jeopardy for a nar- row and limited segment of U.S. business in China.

States and regions with heavy trade with China were likewise leery of the sanction threats. In 1992, when the United States threatened to impose sanctions for China's IPR infringement, the Washington State China Relations Council, representing more than 100 companies in the Northwest that export to China, wrote a letter to USTR Carla Hills warning that "punitive measures imposed by the U.S. government and subsequent Chinese counter-retaliation would cost American companies hundreds of dollars in one fell swoop "'32 The Council stated that Ameri- can companies would emerge as the major victim of trade retaliation as the Chinese would not find it too difficult to replace exports from Wash- ington state with products from other countries. The Council urged Ameri- can negotiators to reach a compromise settlement with the Chinese through negotiations.

As in the debate over China's Most-Favored-Nation Status, the Clinton administration was learning that it could not punish China for its misbehavior without encountering opposition from other segments of the

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business community. Even though the USTR initiated the Special 301 investigations out of a genuine concern for the harm to American business interests caused by rampant piracy in China, highly mixed feedback from the business community weakened the position of American negotiators, making it more difficult for them to convince Chinese authorities of the U.S. determination to carry out the sanctions if China failed to satisfy U.S. demands.

Indeed, as various domestic constituencies raised their complaints about trade barriers and other anti-competitive actions they faced in China in the Special 301 petition process, the homogeneity of the U.S. negotiation position was compromised. The increase in the number of interested parties with differing views placed a larger set of constraints on the princi- pal negotiators of the United States, placing them in the uncomfortable position of having to find a compromise deal that could be ratified by all the major constituents involved in the dispute. Unwilling to expose importers and users of labor-intensive manufacturing products made in China to the effects of counter-sanctions or to see exporters losing out to Japa- nese and European competitors in the China market, the Clinton administration eventually had to put together a"package deal" that would advance the agendas of all the groups without satisfying any one completely. The results of the IPR negotiations reflected such a "package deal": the United States refrained from carrying out the threatened sanctions, much to the relief of the import-using interests in the United States; China modified its copyright laws, partly satisfying the copyright industries.

In each round of the IPR negotiations, the United States obtained concessions from China not large enough to fully satisfy the copyright industries, but sufficient both to show Congress and the general public that progress was being made and to avoid imposing sanctions. 33 As the next section will show, acting on the assumption that the USTR was reluctant to impose sanctions, the Chinese delayed most negotiations until the last moment. With the deadline approaching but no agreement in sight, the USTR was placed in the disadvantageous position of having to find a quick solution to the dispute. In other words, in the process of addressing different constituency demands, the American ne- gotiating team refrained from carrying out trade sanctions against China but had to accept only a partial solution to the problem of copyright enforcement in China.


Chinese Perceptions

Despite the substantial pressure exerted by American negotiators on the IPR issue, Beijing held out against the American demands in part because it was cognizant of its bargaining leverage vis-~t-vis the Ameri- cans. On the one hand, as the Chinese learned from media reports and congressional hearings about importers' staunch opposition to sanction threats, they became less apprehensive that the United States would actually impose sanctions and became more confident that a trade war would inflict significant damage on both American importing and exporting interests. For example, when the United States threatened to impose import tariffs worth $1.08 billion against Chinese production in 1995, the head of China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC), Wu Yi, responded that "There is nothing terrible [about this threat] .... China can simply turn elsewhere .... There are countless markets abroad for Chinese products. This is nothing that we cannot deal with." Referring to other partners' willingness to fill any void resulting from the possible disruption in U.S.-China trade, Wu Yi stated even further that "Other countries are happier about th is . ~'34 During the 1996 piracy dispute, Wu Yi again proclaimed that in the event that the United States imposed sanctions, China would not "be the only victim" and that the Americans "would also have to suffer. ''35

On the other hand, well aware of the importance of the China market for American exports and investments, Chinese negotiators regularly threatened American companies such as AT&T, Boeing, and Chrysler, and the Midwestern farmers with lost sales and investment ifU.S, demands for IPR protection became too stringent. As Zhou Shijian, of China's Interna- tional Trade Research Institute, explained, "The United States could gain nothing from retaliation" because by imposing sanctions "the United States is risking losing an emerging new market for both U.S. products and capital. ''36

The general perception in Beijing was that the U.S. industry was far more divided than what American negotiators portrayed and that Hol- lywood and Microsoft could be pitted both against importers eager to maintain their steady supply of labor-intensive products from China and against investors and exporters (such as Boeing, Ford, and GM) wanting to maintain expanded access to the Chinese market. These divisions in American industry were both real and palpable. They help to explain why

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Beijing's position seemed to stiffen a bit more with each annual cycle of American threats and counter-threats. Indeed, with each Sino-American trade row, the Chinese were becoming increasingly adept in their counterretaliation threats. In 1996, when Washington issued threats of sanctions valued at $2 billion in 1996, followed swiftly by Beijing's vows to counter- retaliate, Beijing's official newspaper, the China Daily, boasted that China's sanctions would be of higher value than the U.S. list because they would affect U.S. imports as well as U.S. investment in China. 37 Confident that the United States would not go so far as to actually implement the threats due to conflicting domestic interests, Beijing has been less than enthusias- tic in complying with American demands.

Conclusion and Implications

In several rounds of U.S.-China trade negotiations over intellectual property rights, U.S. negotiators repeatedly failed to make good on threats to impose sanctions on Chinese products primarily because of opposition from the U.S. importing and retailing community. The IPR negotiations revealed to American negotiators that trade sanctions were essentially a double-edged sword that could not be imposed on Chinese producers without also inflicting pain on this side of the Pacific. While opposition interests were arguably far less vocal and prominent in the IPR case than in other U.S.-China trade confrontations such as the debate over Most- Favored-Nation status, they nevertheless exposed the inevitable divisions within American politics. Despite efforts by U.S./PR-related industries to penalize China for its trade infringements, active opposition from a large constituency dependent on low-cost, labor-intensive products made it far more difficult for the IPR industries to achieve their negotiation objectives. American importers and retailers of such products as footwear, toys, apparel, and consumer electronics made the familiar argument that they would suffer severely if restrictions were placed on these Chinese imports, in effect reducing the credibility of American threat and the likelihood of a more confrontational trade stance. Opposition from other exporters who were more interested in gaining continued access to the Chinese market than in IPR protection further bolstered the case of the import-using interests. Table 2 summarizes the positions and impact of each group of actors involved in U.S.-China intellectual property disputes.


Table 2 The Position and Impact of the Key Actors in U.S.-China IPR Disputes

Directly- affected Exporters

Exporters (Not- directly affected)

Import- competing interests

Import. using Interests

Companies and Position Impact Associations International Intellectual Property Alliance (IIPA); Business Software Association (BSA); Recording Industry Association of America (RIAA); Motion Picture Association of America (MPA); International Federation of the Phonographic Industry (IFPI) Automobile and aircraft manufacturers; Business Council; Washington State China Relations Council

Textile manufacturers, as represented by Textile Manufacturers Institute

National Retail Federation; American Association of Exporters and Importers; International Mass Retail Association; American Apparel Manufacturers Association; National Apparel and Textile Association; U.S. Association of Importers of Textiles and Apparel; Toy Manufacturers of America; footwear

i manufacturers; Electronic Industries Association (EIA); American Forest & Paper Association; power-tool manufacturers

Alleged that rampant piracy in China impeded American industry's attempt to gain genuine market access.

Concerned that sanctions would curtail American manufacturers' investments in the short run and reduce their access to a potentially lucrative market in the long run. Supported sanction threats "that would help to curtail competition from low-cost Chinese textile imports. Argued that Washington's pursuit of fair trade should not come at the expense of the American importing and retailing community. Sanctions will increase the price they pay for imports.

Successfully brought the issue of IPR protection to the policy agenda.

Joined import- using interests to oppose sanction threats; very influential. Provided some support to the IPR industries.

Very influential in opposing sanction threats; provided an important counterbalance to the IPR industries.

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Using U.S.-China trade negotiations as an example, this paper has employed the two-level game concept to develop a more complete characterization of the domestic game in the sender of threats, the United States. While domestic politics in China has been treated as a black box, it would seem possible to develop additional hypotheses about the impact of competitive versus complementary trade structure on the target state based on a logic similar to the one above. As various reports suggest, the increase of piracy in China even when copyright laws proliferated could be traced to the central government's decreased ability to enforce copyright laws and regulations at the local level at a time when so much decision-making power had been delegated to the localities. 38 As the process of decentrali- zation deepened, Beijing's ability to discipline its own localities to obey international agreements and to abstain from opportunities for illegal gain subsequently eroded. In the fledgling free market environment in the southern provinces of China such as Guangdong, local governments ignored pirating activities that could generate handsome profits. 39 The interests of the local governments in China in maintaining the status quo and their ability to resist orders from above explains why the Chinese offered some concessions on paper, but did not go further to satisfy American demands on enforcement. A more systematic analysis of the domestic political structures and processes in China may help us to better capture the dynamics of U.S.-China trade negotiations.

The finding that trade structure matters for negotiation outcomes has broader implications for American trade policy. If the logic developed above is valid, then it may be possible to extend it to U.S. trade negotiations with its other trading partners. Based on the above logic, one would expect that the United States would be unlikely to obtain the same concessions from countries such as China, Brazil, and India as from countries such as Japan, the European Union, and Canada. Because the first group of countries produce commodities that are no longer manufactured on a large scale in the United States, American sanction threats against these countries ought to encounter strong domestic opposition and hence will tend to be less credible and effective. In attempts to resolve bilateral trade problems, American negotiators may need to take into account divergent interests at home and to look for effective measures to ameliorate these differences in order to come up with successful strategies for dealing with some of the most intractable U.S. trading partners.


Moreover, the above finding suggests certain potentially effective policy postures for U.S. trade policy toward China: if trade complementarity impedes the ability of American negotiators to secure unilateral concessions from Beijing, then the United States may find it more fruitful to integrate China into multilateral trade negotiation forums. Recent moves by the United States to integrate China into the World Trade Organization (WTO) have already produced some signs of change, per- haps encouraging the Chinese government to respond to American pressure with a series of unprecedented concessions in areas such as agriculture, services, and telecommunications. By shifting from "aggressively unilateral" bargaining tactics to a strategy of"aggressive multilateralism"4~ and by taking advantage of WTO dispute settlement mechanisms, American trade pressure may enjoy added legitimacy and be more credible with the Chinese.

Notes

1. Beijing's legislative efforts included the promulgation of the 1982 Trademark Law, the 1984 Patent Law, and the 1990 Copyright Law. Robert B. Frost, Jr., "Intellectual Property Rights Disputes in the 1990s Between the People's Re- public of China and the United States," Tulane Journal of International and Comparative Law, 4 (1), (Winter 1995), pp. 119-137.

2. Specifically, the Chinese government agreed to extend copyright protection to foreign owners of computer software, books, and sound recording, accede to two international copyright conventions, and to remove prohibition against patent- ing of pharmaceuticals to conform to international standards. Lee M. Sands and Deborah Lehr, "IPR Watchdogs," China Business Review 21(6), (November-De- cember 1994), pp. 16-18.

3. In adherence to its MOU promises, China joined both the Berne Convention and the Universal Copyright Convention. It also established a special court in Beijing to adjudicate copyright and trademark disputes.

4. For instance, American negotiators readily pointed out that in 1994 American businessmen lost up to US $1 billion in China due to piracy and that the piracy rate of U.S. audio-visual products amounted to almost 100 percent. Ibid.

5. Karl Huus, "Back to Normal: U.S.-China Trade War Looms Closer," Far Eastern Economic Review (19 January, 1995), p. 52.

6. Some of the most important Chinese commitments included cracking down on producers and retailers of pirated products, strengthening enforcement of existing rules and regulations, improving court procedures, and providing for greater market access for American intellectual property products. Lincoln Kaye, "Trad- ing Rights," Far Eastern Economic Review (9 March, 1995), p. 16.

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7. Krishna E Jayakar, "The United States-China Copyright Dispute: A Two-level Games Analysis," Communication Law and Policy 2 (1997), pp. 544-545.

8. USTR Press Release 96-53, "Statement by Ambassador Barshefsky," (17 June, 1996).

9. Robert D. Putnam, "Diplomacy and Domestic Politics: The Logic of Two-Level Games," International Organization 42 (Summer 1988), pp. 437-449; see also Andrew Moravcsik, "Introduction: Integrating International and Domestic Ex- planations of World Politics," in Peter B. Evans, Harold K. Jacobson, and Robert D. Putnam, eds., Double-Edged Diplomacy: International Bargaining and Do- mestic Politics (Berkeley: University of California Press, 1993).

10. John C. Conybeare, Trade Wars: The Theory and Practice of International Com- mercial Rivalry (New York: Columbia University Press, 1983).

11. Ellis S. Krauss, "U.S.-Japan Negotiations on Construction and Semiconductors, 1985-1988: Building Friction and Relations-Chips," in Evans et al., eds., Double- edged Diplomacy (1993), p. 278; Brian Woodall, Japan Under Construction: Corruption, Politics, and Public Works (Berkeley: University of California Press, 1996).

12. Business Week, (15 August, 1994), p. 40. 13. United States Trade Representative, Intellectual Property Rights Enforcement in

China (16 May, 1996). 14. China Business Review, 1994; Washington Post, (21 January, 1995), p. A10. 15. Graeme Browning, "Software's Harder Line," National Journal 28 (3), (June

1996). 16. Wall Street Journal (30 January, 1995), p. B6E. 17. For example, it was estimated that the sanctions, if carried out, would raise the

price of children's bicycles by 8 to 29 percent, increase the price of telephone answering machine by 31 percent, and nearly double the cost of a Chinese-made phone. The Christian Science Monitor (11 June, 1996), p. 4.

18. Milan Ruzicka, "U.S.-China Tension Building Over Piracy," Journal of Com- merce (1 February, 1995), p. 1A.

19. Ibid. 20. The Christian Science Monitor (11 June, 1996), p. 4. 21. Jeffrey Silva, "Wireless Would Feel Bite of Trade War with China," Business and

Industry 15 (21), (May 1996), p. 1. 22. Ibid. 23. Ibid. 24. Wall Street Journal (1 February, 1995). 25. Ruzicka, (1February 1995). 26. New York Times (4 February, 1995). 27. LosAngeles Times (15 May 15, 1996), p. A1. 28. The Strait Times (15 May, 1996), p. 13. It also should be noted that although

American apparel industries, along with toy and footwear manufacturers, had some interests in improved trademark protection in China, the focus of much of


the IPR negotiations was on copyright issues and so did not elicit the active involvement of the toy and footwear industries.

29. New York Times (11 May, 1996); Wall Street Journal (17 May, 1996), p. A10. 30. Wall Street Journal (30 May, 1996). 31. New York Times ( l l May, 1996). 32. Ibid. 33. Jayakar, "The United States-China Copyright Dispute," (1997), pp. 553-554. 34. Toronto Star, (6 February, 1995), p. B2. 35. Financial Times, (15 February, 1996), p. 4. 36. Toronto Star, (20 May, 1996), p. C6. 37. Agence France Presse, (19 May, 1996). 38. See, for example, Jayakar, "The United States-China Copyright Dispute," (1997),

p. 554. 39. Interview with USTR officials. 40. The term "aggressive unilateralism," coined by Bayard and Elliott, often refers to

the active pursuit of policies aimed at correcting other states' perceived unfair trade practices through such policy instruments as Section 301. See Bayard and Elliott Reciprocity and Retaliation in U.S. Trade Policy (Washington, D.C.: In- stitute for International Economics, 1994), p. 345; Jagdish Bhagwati, "Aggres- sive Unilateralism: An Overview," in Bhagwati and Hugh T. Patrick, eds., Aggressive Unilateralism: America's 301 Trade Policy and the World Trading System (Ann Arbor: University of Michigan Press, 1990). Aggressive multilateralism, in contrast, refers to the use of multilateral dispute settlement processes such as the GA'IT/WTO in order to achieve one's trade policy objectives.

complementary trade structure and u.s.-china negotiations over intellectual property rights

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