"QBPC Forum on Improving Innovation Environment for the Creation of An Innovation-Oriented Country"

March 25, 2010

Prepared Remarks of Myron Brilliant

Introduction

Good morning. I'm very pleased to be here on behalf of the U.S. Chamber of Commerce and our member companies.

We are delighted to be a part of today's Improving Innovation Environment Forum.

Let me begin by recognizing MOFCOM Vice Minister MA; a possible VM from MOST; and The Honorable Robert Goldberg, U.S. Embassy Charge d'Affaires.

I want to acknowledge as well the American and Chinese executives from top innovative companies and offer congratulations to the QBPC for organizing today's event and for celebrating your 10-year anniversary. We at the Chamber have enjoyed working closely with QBPC, Jack in particular, and we look forward to many more years of cooperation. Congratulations to Jack and the entire QBPC team.

The Role of the U.S. Chamber of Commerce

The U.S. Chamber of Commerce is the world's largest business federation. From our offices across the street from the White House, we represent the interests of more than 3 million businesses and organizations of every size, sector, and region.

We are affiliated with 113 American Chambers of Commerce (AmChams) in 100 countries around the world, including three in China, one in Hong Kong, and one in Taipei.

The U.S. Chamber has a long history in the United States of advancing private enterprise, open and competitive markets, and responsible regulation that provides the foundation for innovation, job creation and economic growth.

In recent years, we have substantially increased our cooperative efforts and engagement in China, working with the government, our association partners, and the private sector to advance mutually beneficial outcomes and expand understanding in areas where we have different views.

The Importance of the U.S.-China Relationship

As we can all agree, the U.S.-China economic and commercial relationship is the most important relationship of its kind in the world today.

Our companies are major investors in China, employing tens of thousands of Chinese citizens in manufacturing, services and research and development.

We are therefore strong and long-standing advocates for enhanced cooperation among our governments and private sector stakeholders in the fields of information technology, energy and environment, and life sciences to advance human progress and the welfare of our two peoples.

We have promoted these objectives by enhancing cooperation with NDRC, MOFCOM, MOST, and SIPO as well as with leading Chinese science and technology and business organizations.

These efforts culminated in numerous high-level innovation and intellectual property fora, including two under the U.S.-China Strategic Dialogue in 2007 and 2008.

These programs provided an important platform for our governments and industry to discuss global innovation trends, effective mechanisms for fostering innovation, and the importance of protecting and enforcing the intellectual property that drives it.

Underlying these efforts is our firm belief that the private sector on both sides has an essential role in ensuring that our governments continue to move forward to bring real solutions to bilateral and global challenges, and these solutions can only be developed by protecting the ideas and technology that can solve collective problems.

We believe that China should play a critical role in developing the ideas and technologies that will be at the forefront of solving some of these shared challenges.

Regrettably, however, China's intensifying regulatory approach of shielding domestic companies from competition and restricting the market access of foreign companies is calling into serious question the long-term place of foreign investors in many sectors of its economy as well as the role of market competition in promoting innovation.

These developments have the potential to seriously erode the foundations of China's relationship with its largest trading partners, which have been rooted historically in a shared commitment to resist protectionism, promote free and open competition, and strive for win-win opportunities.

Global Innovation Best Practices & Infrastructure

At the center of this concern is the web of policies underlying China's drive for "indigenous innovation," a term which the foreign business community has consistently noted since it was first used in the 15-Year Science and Technology Plan, which suggests opposition to open, collaborative, transnational innovation.

In the United States and around the world, innovation has come from less government direction attempting to engineer specific innovation outcomes, not more.

The strength of global innovation networks is a reality today as many products, especially high-tech products, incorporate technologies from many different companies and countries. Such complex products are rarely based solely on the intellectual property of a single company, or even a single country.

The shrinking life cycle of technology products requires companies to innovate faster.

Therefore companies increasingly partner with customers, suppliers, competitors, and academia around the world with complimentary expertise.

These new partnerships or "innovation networks" as they are called are spread out across the globe and require interoperability of standards, secure networks, and market oriented regulations and policies to ensure companies have the flexibility to quickly innovate and meet consumer demands globally.

It is the use of technology throughout an economy, not just the creation of technology that brings the real benefit to society and consumers.

Widespread application of technology across all industry sectors in manufacturing and services creates far greater economic growth than the initial development of the technology in a particular company or industry.

Government policies should promote the rapid adoption and diffusion of innovative technologies throughout the economy, regardless of the source of the innovation, especially since no single economy can produce the best innovations in every product and service.

Policies that block access to foreign innovations may provide limited benefits for an individual company or industry sector in the short-term, but these benefits come at a huge cost to the rest of the economy. Such policies amount to a self-imposed economic handicap that will reduce economic growth and diminish global competitiveness.

Indigenous Innovation Concerns

China's recent joint circular that would implement an Indigenous Innovation Product Accreditation system is but one of a series of policies that span an array of other substantive areas—for example, those related to standards setting, antitrust, information security, patent protection and tax—that have generated deep concern across the global business community over where China is headed generally.

The criteria currently laid out in the circular, combined with the preferences afforded to accredited products, would make it virtually impossible for any foreign invested enterprise to participate in China's government procurement market—even those that have made substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the Chinese government.

If implemented without change, this policy would essentially make local IP ownership and brand registration conditions for access to the government procurement market, amounting to an unprecedented step by the Chinese government and one that clearly contradicts the shared goal of combating protectionism and the government's commitment to rebalance trade flows.

Further, this approach would be counterproductive considering foreign invested enterprises' major contributions to the modernization of the Chinese economy and infrastructure.

A closed, discriminatory approach to indigenous innovation would also invite similar discriminatory policies in China's vital export markets, putting additional pressure on export job creation and growth.

Additionally, even as we recognize that China is negotiating to join the WTO's Government Procurement Agreement, these rules clearly move China further away from international practice and undermine its commitment to a more open government procurement market, a market which carries unique importance to business because of the large role occupied by the State and state-owned enterprises in China's economic system.

The Impact of Indigenous Innovation Policies on China's IP System

Moreover, we are concerned about the impact of these policies in the IP system.

First, we question whether the high quantity of low quality patents—subsidized by the State—threatens to burden the courts and innovative companies?

Second, we are anxiously awaiting the long-debated rules on the handling of IPR issues in antitrust matters and are growing increasingly concerned about the disproportional scrutiny given to mergers involving foreign companies.

Third, we are worried by the growing track record of high-damage claims and awards brought by Chinese frequently for patents that are not subject to substantive examination and seem to be biased against foreigners.

Fourth, we are concerned that the rights, choice and safety of Chinese consumers continue to be harmed by inadequate IP protection and enforcement, including with respect to fighting counterfeiting and piracy in both the physical and online environments. The challenges in protecting creative expressions on the Internet and in other mediums are a disincentive to artists to turn their ideas into new tools that connect, inform, protect our environment and entertain us.

In short, China's closed, discriminatory approach to indigenous innovation and inadequate IP protection threatens to:

• Impede innovation in China and reduce the competitiveness of Chinese companies;
• Cut off Chinese companies from vital global partnerships in collaborative innovation, placing these companies at a competitive disadvantage in global markets; and
• Reduce competition and limit access to advanced technology.

Taken together we see a variety of issues which undermine growth opportunities within China's economy, therefore the U.S. Chamber and QPBC will continue to work with Chinese authorities in an effort to better improve the overall environment for foreign and Chinese companies and for consumers.

The U.S. Chamber hopes going forward that the Chinese leadership will focus on reforms that result in increased competition that values equally the contributions of domestic and foreign companies to China's economy.

Conclusion

As an officer of an organization that has been at the forefront of strengthening this important relationship over many years, and as we approach the 10th anniversary of China obtaining permanent normal trading relations status by the U.S. Congress, I would be doing a disservice to both sides if I did not speak candidly about the risks before us.

Put simply, ongoing policy approaches by China are eroding the support of China's long-standing advocates in the United States, diminishing the many good arguments we have used historically in support of this relationship.

As we have always, the Chamber pledges to resist protectionist approaches in the United States.

But make no mistake; pressures are mounting, particularly in this election year.

Nevertheless, we will do everything in our power to ensure that both governments continue to work through challenges in a constructive manner.

We appreciate the generous invitation from the QBPC of the China Association of Enterprises with Foreign Invested to participate in this important forum, and I look forward to learning from one another over the discussion today.