On 9 April 2007, the US issued two World Trade Organization ("WTO") complaints against China. This month's newsletter summarises those two complaints, explains the likely procedure for their resolution and briefly highlights the potential sanctions which could be imposed if they are upheld.

The nature of the complaints

The first (and perhaps most widely reported) of the two complaints relates to the protection and enforcement of intellectual property rights ("IPR") in China. Whilst the US publicly acknowledged that China has taken active steps to improve IPR protection and enforcement in China, the complaint alleges that the Chinese legal regime (as it is understood by the US) remains inconsistent with China's WTO obligations because:

  • acts of trademark counterfeiting and copyright piracy occurring on a commercial scale in China are only criminalised if they reach certain thresholds (for example, if the amount of sales is "relatively large" or the amount of illegal gains is "huge"); 
  • the Chinese customs authorities are sometimes required to dispose of confiscated IPR infringing goods using methods which would lead to the goods entering the commercial sector after the IPR infringing features have been removed; 
  • it does not provide copyright protection for goods which have not been authorised for publication or distribution in China (including goods which are in the process of obtaining that authorisation by, for example, submitting to a censorship review); and
  • criminal sanctions apply to the unauthorised reproduction and distribution of copyrighted works, but not to unauthorised reproduction, or unauthorised distribution, alone

The second complaint concerns the restrictions imposed on importing and distributing American books, music, videos, DVDs and films (the "Products"). The essence of this complaint is the US' understanding that the Chinese legal regime treats Chinese companies more favourably than foreign companies because: 

  • it reserves the right to import the Products to certain Chinese state-designated and wholly or partially state-owned enterprises. The complaint also notes that any measures imposing prohibitions or restrictions on import other than duties, taxes or other charges would appear to be inconsistent with China's WTO obligations; and
  • it restricts(or imposes discriminatory requirements in relation to) the ability of foreign service suppliers (including wholly or partially foreign owned or invested enterprises) to distribute publications, videos and DVDs and to engage in wholesale trading of electronic publications.

Unsurprisingly, the US' complaints prompted a swift response from the Chinese government, which strongly refuted the complaints and stressed China's efforts to improve IPR protection over recent years. It also said that the US' actions undermined the co-operative relationship between the US and China and would seriously damage bilateral trade between the two countries.

WTO procedure – what happens next?

The complaints made by the US were contained in two "requests for consultations", which represent the first step for a country wishing to bring a WTO claim against another country pursuant to the WTO Understanding on Rules and Procedures governing the Settlement of Disputes (the "DSU"). The DSU provide for a 60 day period for the parties to consult in relation to the complaints: the WTO emphasises that "the preferred solution is for the countries concerned to discuss their problems and settle the dispute by themselves".

At the end of the 60 day period (i.e. on or around 11 June 2007), if no amicable settlement has been reached, the US may request the establishment of a panel. Absent agreement to the contrary, the panel would consist of three well-qualified governmental or non-governmental individuals.

As a general rule, the panel is required to issue its final ruling to the parties within 6 months of its constitution and the agreement of its terms of reference (which is a much simpler process than in, say, ICC arbitration as the DSU contain standard form wording which will be adopted absent agreement to the contrary within 20 days of establishment of the panel). The DSU provides a proposed timetable for the conduct of the case after the appointment of the panel, which sets out a procedure along the following lines:

  • sequential service of written submissions by each party (complaining party first after 3-6 weeks, and then the other party within 2-3 weeks2).
  • 1-2 weeks later, a first substantive hearing at which the parties present their cases (and at which any WTO member having a substantial interest in the matter has the opportunity to be heard and to provide written submissions). 
  • each party submits written rebuttals within 2-3 weeks of the hearing. 
  • 1-2 weeks later, a second substantive hearing at which the parties present their rebuttal arguments. 
  • 4 weeks later, the panel issues the descriptive sections of its report (i.e. the factual and argument sections) to the parties, and allows them a certain period (say two weeks) to comment upon it.
  • 2-4 weeks later, the panel issues an interim report, including its findings and conclusions, to the parties and allows the parties a certain period (say a week) to submit a written request to the panel asking it to review certain sections of its report and to request a further hearing to discuss any such sections.
  • 4 weeks later (and, as noted above, generally within 6 months of the constitution of the panel and agreement of the terms of reference), the panel issues its final report to the parties. If the panel upholds the complaint, its report should contain recommendations as to how the offending measure(s) should be amended to comply with WTO rules.
  • 3 weeks later, the report is circulated to all WTO members.
  • Within 60 days, the Dispute Settlement Body ("DSB") will adopt the panel's report as a ruling unless one of parties notifies the DSB of its decision to appeal or the DSB elects by a consensus not to adopt the report.
  • As a general rule, any appeal process should be completed within 60 days (subject to extension to a maximum of 90 days) of notification of the decision to appeal. The appeals report will be adopted by the DSB as a ruling unless the DSB elects by a consensus not to adopt it.

The possible sanctions

If the DSB ruling found the China had breached its WTO commitments, China would be obliged to follow the recommendations set out in the ruling. If it failed to do so, it would be required to enter into negotiations with the US to seek to agree mutually acceptable compensation. Failing such agreement, the US would be entitled to ask the DSB for permission to impose limited trade sanctions against China, which should (if practical and provided the sanctions would be effective) take effect in the same sector as the dispute.