U.S.

-CHINA TRADE RELATIONS: INTEGRATING COMMON INTERESTS THROUGH

COMPREHENSIVE NEGOTIATIONS
USTR Charlene Barshefskys Negotiation with China over its Enforcement of IP Rights

In December of 1995, an American delegation under USTR Mickey Kantor travelled to the
Peoples Republic of China to continue negotiations with regard to the lack of enforcement of
American intellectual property rights in China. While staying in Beijing, one of the U.S.
negotiators visited a Chinese store to buy some shampoo. After purchasing what he thought
was a bottle of Procter & Gamble shampoo, he later discovered that the bottle contained a
high concentration of lye and was not a Procter & Gamble product at all, but simply a bottle
with a pirated label.

To say in 1993 that manufacturers and markets in the Peoples Republic of China were
infringing intellectual property rights would be an understatement. The development of
increasingly sophisticated counterfeiting techniques combined with the growth of the Chinese
economy and international trade fueled piracy on a scale never before witnessed. Despite
previous efforts going as far back as 1980 by the Office of the United States Trade
Representative (USTR) to negotiate an agreement on IP rights, blatant violations continued in
the PRC not because the Chinese statute books lacked the laws to protect such rights, but
rather because the government was unwilling to carry out any enforcement of those laws.

Confronted by this growing problem, the Clinton Administration in 1993 appointed Charlene
Barshefsky as a new Deputy USTR to develop a negotiating strategy that would reach a
bilateral agreement on piracy of intellectual property in the PRC with more success than her
predecessors efforts. Such an assignment presented Barshefsky with several multi-faceted
challenges to overcome, and despite the need for an IP rights enforcement agreement, many
contemporary observers feared that Barshefsky would make little progress by reaching an
agreement on paper that would then fail to induce significant action on the part of Chinese to
stop the counterfeiting of American goods.

Nevertheless, Barshefsky did manage to reach two separate agreements in 1995 and 1996, and
although the first agreement did suffer from some of the same enforcement issues as ones
prior, the second agreement yielded tangible results in the form of actual enforcement,
specifically through closed factories and the near elimination of pirated exports within two
years. Barshefskys utilization of a comprehensive negotiation strategy enabled her to find
and integrate common interests that ultimately proved effective in reaching a historic
negotiated outcome.

Prior to 1949, Chinese IP law was near non-existent, having little regard for such rights and
providing few legal remedies for foreigners with IP-related complaints. With the Communist
Revolution in 1949, any laws protecting IP rights that had emerged were repealed along with
all other laws that had existed under the nationalist Kuomintang government. As a result, the
general lack of IP rights (along with many other rights) continued in the legal void of the
Maoist era, as Barshefsky herself described it. The Communist Party under Mao Zedong
considered IP rights to be part of a bourgeois and capitalist conception of rights held by
foreigners and intellectuals who were not part of the proletariat.

When the U.S. and the PRC reestablished diplomatic relations in the late 1970s, the U.S. put
pressure on the Chinese to ensure the protection of American IP rights, which the reforming
Chinese government was eager to do in order to attract foreign capital investments and
technological transfers to support domestic growth and innovation. In accordance with this
outlook, both countries reached the 1980 U.S.-China Trade Agreement, which secured Most
Favored Nation treatment for each countrys exports, and in which both the U.S. and the PRC
promised to offer IP rights protection equal to the protection correspondingly according in
the other country. However, as trade between the U.S. and the PRC increased in the 1980s,
so too did piracy of American goods, in spite of the Trade Agreement. The U.S. began
negotiations in 1986 to bring the PRC in line with international standards.

The IP Rights Memorandum of Understanding reached in January 1992 focused primarily on
reforms to the PRC legal system to match international standards. Although by the end of that
year, Chinese statute books contained IP protections similar to the laws of many advanced
nations, the change in the law resulted in very little advances on the ground where piracy and
counterfeiting continued unhindered by its newly created illegality. When this issue came to
the recently-appointed Barshefskys attention in 1993, the widespread Chinese indifference to
violations of American IP rights was well-recognized, particularly in the southern province of
Guangdong, one of the most capitalist-oriented of the PRC provinces. Specific to that
province were twenty-nine factories producing approximately seventy-five million CDs per
year containing pirated software and stolen audiovisual works, of which the vast majority
(about seventy million) were not consumed in China but rather were exported.

Although cautious of being too confrontational with the Chinese to the endangerment of
cooperation in issues of trade and nuclear non-proliferation, the Clinton Administration
sought to take a tougher position than the previous administration. President Clinton signed an
Executive Order in May 1993 to place conditions on the renewal of the PRCs Most Favored
Nation status based on six related areas including human rights, freedom of immigration, and
nuclear non-proliferation. Such a revocation of Most Favored Nation status, reserved only for
pariah states, would have resulted in sharply higher tariffs on Chinese exports to the U.S.
Soon after the Executive Order announcement, however, the PRC responded with contempt,
threatening tens of thousands of trade-dependent American jobs as well as stepping up human
rights abuses in defiance of American human rights imperialism. As a result of the PRCs
reaction coupled with calculated indifference from other U.S. trading partners and strong
domestic opposition from the business community, a deeply embarrassed [President]
Clinton] ultimately felt forced to revoke the order...[in] a politically humiliating about-face.

Against this backdrop entered Barshefsky. Her appointed position did not entitle Barshefsky
to the support of the nation in her pursuit of a trade agreement, mainly because of the many
parties with diverging interests both inside of as well as outside of (but still aligned in general
with) the U.S. Although the USTRs negotiations enjoyed strong support from IP-related
industries such as film, music recording, and software industries (who were often considered
favored by and inclined toward the Democratic Party), other industries dependent on free,
unhindered trade with China were as actively opposed to efforts that might sour Sino-
American business relations. A similar attitude prevailed among other U.S. trading partners,
who were also unwilling to risk a direct confrontation with the PRC that might disrupt their
own economic interests. Finally, there were some industries such as domestic manufacturers
that opposed maintaining trade relations with the PRC because the cheaper Chinese labor
market was driving them out of business.

At the same time, other American constituencies opposed wasting negotiating time and capital
on the low-level commercial consideration when there were more pressing issues on the
agenda, such as human rights abuses, environmental concerns, and PRC cooperation in
leveraging North Korea. Within the federal government itself, Barshefsky faced lukewarm
support from the White House, who was cautious to avoid the same business community
backlash and political embarrassment that resulted from the Most Favored Nation debacle.

Just as the U.S. was not a monolithic entity, so too was Barshefskys opponent across the
Pacific Ocean not a unified party (despite the One Party System). Although the main
negotiations took place between the Barshefsky and her counterpart in the PRCs State
Council in Beijing, Barshefsky and her team also reached out to the provincial-level
government officials in the province Guangdong where much of the illegal production was
taking place. Although both the national and provincial governments opposed further
American interference in the internal Chinese matter of rights (IP or otherwise) enforcement,
the Guangdong officials had both more control over as well as a direct economic interest in
the piracy and counterfeiting occurring under their (most likely fake Rolex) watches.

Although the positions of the Chinese government and the UTSR seemed diametrically
opposed, there were still a number of shared interests between the two sides. Both the U.S.
and the PRC had a strong common interest in free trade and access to each others markets
uninterrupted by a trade war. Specifically, the PRC wanted to acquire American technology to
develop its own domestic industries while the U.S. wanted to invest its capital in those
growing industries. As Barshefsky herself described, China knew it needed to accelerate its
development, and that to do so it would need to jump over many of the stages of
development. In addition, both countries had an interest in the PRCs eventual accession into
the World Trade Organization.

The principle divergent interest of the U.S. was stopping both the manufacture and export of
counterfeited goods. Another American interest, particularly for the USTR, was to induce the
Chinese to enforce the agreements that the USTR had negotiated in the past that had looked
promising on paper but had resulted in minimal to no enforcement. The U.S. also had an
interest in not disrupting the American jobs linked to trade with the PRC and the domestic
markets that had become dependent on cheaper Chinese imports.

As the party more interested in changing the status quo, Barshefsky and her team needed a
strong but tempered alternative to simply hoping that this time the Chinese would carry out
any agreed enforcement of IP rights. The first potential alternative, which enjoyed some
support both domestically and internationally, was to do nothing in the hope that continued
trade and regular business engagement would eventually lead to more enforcement of IP
rights in the PRC. Barshefsky determined quickly that this was not a viable alternative
because American interests were being harmed far too much to justify waiting. A second
alternative was to halt technology transfer that had to pass through the Department of
Commerce, which would have limited some of the IP rights damages but at a high economic
cost and with little stoppage of the piracy already in progress. A final alternative was to amass
international support from other U.S. trading partners such as Japan and European Union
countries to seek a multilateral agreement, or at the very least to put multilateral pressure on
the PRC from countries affected by piracy and who had power over the PRCs accession to
the WTO. Although this option was not exclusive of pursuing directed negotiations,
Barshefsky decided that it would be insufficient to resolve the problem due to the reluctance
of such states to rock the boat with the PRC.

For these negotiations, Barshefsky judged that real results would require a multi-pronged
approach, underpinned by a threat to initiate [unilateral] Section 301 sanctions. As a result,
Barshefsky and her teams Best Alternative to a Negotiated Agreement (BATNA) was to
pursue Section 301 sanctions tailored to fit the violation. Disclosing this alternative to the
Chinese in the form of declaring the PRC a Priority Foreign Country under Section 301 as
the USTR had done in 1991 served to strengthen the USTR negotiating power because the
Chinese realized that unlike the Most Favored Nation threat, the U.S. would follow through
with this alternative if no agreement was reached.

Revealing her BATNA of Section 301 sanctions was only the beginning of Barshefskys
negotiating strategy as the power of that alternative depended on presenting as credible the
threatened sanctions. Barshefsky bolstered the credibility of the Section 301 sanctions while
overcoming opposition by arguing that unlike the Most Favored Nation revocation, this
alternative matched trade sanctions to trade violations with tariffs designed to compensate the
U.S. in direct proportion for losses due to piracy. The USTR also promoted the impact of
Chinese piracy as wide-spread across the U.S., and indeed the world, thus framing the issue as
broader than the narrow conception of a few stolen movies and software.

In order to gain the support of resistant parts of the U.S. business community, Barshefsky
argued that IP violations would threaten other industries as Chinese imports and exports
increased, and as more patented and copyrighted materials found themselves in the hands of
potential exploiters in the PRC. Additionally, she framed the USTRs goal of enforcement of
PRC law as not limited to the realm of intellectual property, but as an issue of the rule of law
that could result in the Chinese living up to their fungible and often ignored human and civil
rights laws, thus making IP rights a test case for broader U.S. concerns in the PRC.

Although Barshefsky had no control over with whom she would be negotiating, she took
notice that one of her counterparts was a scientist by trade, and adjusted her strategy to
negotiate with that person from his individual background. As a scientist, her counterpart
understood perfectly that the lack of [IP] enforcement was dampening indigenous scientific
progress in China, and as a result, was more receptive to the argument that technological
transfers from the U.S. to the PRC would be severely hindered if the rights to them were not
protected. Even still, after months of negotiation in 1994, Barshefskys Chinese counterparts
were still unwilling to accept the full range of demands that the USTR presented. Renewing
her threat of Section 301 sanctions, the Chinese responded to Barshefsky with threats of
countersanctions and cancelling several important U.S. contracts with PRC companies.

Finally, after a marathon negotiations session, a Memorandum of Understanding agreement
was signed on February 26, 1995, a full ten hours after the sanctions imposition deadline.
Such last-minute deals were typical in Sino-American trade negotiations due to a Chinese
strategy of holding out in order to give the impression that the maximum possible concessions
had been extracted from the opposing side. Barshefsky acknowledged that the Chinese
interest in avoiding a perception of caving to the demands of American imperialists was part
of the broader problem of lack of IP rights enforcement. Thus, she adjusted her negotiating
strategy to match the Chineses by meeting their impatience and insistence with patience and
flexibility that avoided a contest of wills. For example, when her counterpart aggressively
leaned over the table and insisted that his current proposal was a take-it-or-leave-it deal,
Barshefsky surprised her counterpart by sitting quietly [and waiting thirty to forty]
seconds...[before replying:] If the choice is take it or leave it, of course Ill leave it, [but] I
cant imagine thats what you meant. After they reconvened to negotiate the next day, much
more progress was made as the Chinese discovered that no amount of intransience was going
to break Barshefsky.

Barshefsky argued that the 1995 MOU agreement was the single most comprehensive and
detailed [IP rights] enforcement agreement that the [U.S.] had ever concluded. While prior
USTR agreements with the Chinese had focused on the PRC laws, Barshefsky shifted the
focus to enforcement with an action plan for specific enforcement measures. These included a
six-month special enforcement period from March through August of 1995, during which
the PRC was to increase enforcement of its IP rights laws while the two countries consulted
regularly, giving the USTR a direct mechanism to evaluate the progress made under the
agreement. Such a mechanism proved necessary as after seven months of being in force, the
Chinese attempts at compliance with the 1995 MOU were not having the intended effect.

With very little decrease in the production of pirated goods, Barshefsky and her team in early
1996 attempted repeated consultations with the Chinese to enforce the previous years
agreement with little success. As a result, the USTR started the Section 301 provisions
process and negotiations with the Chinese all over again, this time on the topic of continued
non-compliance. Deciding that a different approach was required, Barshefsky and her team
broke with diplomatic protocol by going to Guangdong Province to engage with local
businessmen and government officials in order to learn more about the pirated production and
to engage with those in direct control over it.

Despite the fury of Chinese negotiators in Beijing, Barshefsky was able to gain valuable
information about the illegal factories and brought even more precise demands that the PRC
government shut down fifteen specific factories. Although Barshefskys counterpart initially
denied the existence of the factories and later argued that they could not take action due to
involvement by Peoples Liberation Army officials, an Implementation Agreement for the
1995 MOU was reached in June 1996. Now facing two agreements and a very persistent
USTR, the Chinese followed through not only closing those fifteen factories, but also closing
an additional 55 over the following two years. As a result, the export of pirated goods from
the PRC to the outside world was reduced to virtually nil.

Barshefsky was able to realize U.S. interests by articulating specific points that the U.S.
wanted to address in this agreement beyond some vague notion of respecting IR rights.
Adhering to a very precise list of demands, Barshefsky knew exactly what the U.S. wanted
and was prepared to articulate it to her counterpart. She also carefully planned her multi-
pronged approach by building a domestic coalition that supported engagement and using
trade sanctions against the PRC, which strengthened the U.S.s BATNA while decreasing the
appeal of the PRCs alternative of maintaining the status quo ante.

Although Charlene Barshefskys efforts took two separate agreements, her negotiating
strategy worked, securing a deal that advanced the common interests of both nations.
Barshefskys comprehensive approach enabled her to overcome diverging parties and
interests on both sides of the dispute to reach an effective agreement. Despite the success that
followed the 1996 Agreement, Barshefsky acknowledged that this agreement had only
scratched the surface and that she was by no means satisfied that piracy [had] been
eradicated. However, Barshefsky was given the opportunity to continue her work when she
became the twelfth United States Trade Representative in 1997 and negotiated more trade
agreements with the PRC, including its accession to the WTO in 1999, which was in no small
part facilitated by Barshefskys earlier success.