PRIORITY FOREIGN COUNTRY

By Hansa Sinha

Understanding the Special 301 Reports with special emphasis on China and India

  1. Introduction:

i. Inception

On 25thMay 1989 in a bid to improve the ability to negotiate improvements in foreign intellectual property regime USTR (“United States Trade Representative”)introduced or a policy titled “Special 301” on Intellectual property. Subsequently in 1984, an amendment to Section 301 expanded the policy into intellectual property at the behest of pharmaceutical and copyright industries. And finally in 1988 the statute was amended to introduce “Special 301”.[1] This ‘factsheet’[2] began a system of keeping a watch list, specifically for those countries whose intellectual property regimes deny protection of IP rights and market access to US firms. When Watch List and Priority Watch List were first created, India was placed on the latter. Twenty-six years later, in the 2015 Special 301 Report[3], India has still retained its position on that List.

This article aims to delve into the concept of the priority foreign country, which is touted as the worst possible treatment by USA to a foreign regime. It aims to examine some examples of such countries in the past, the legal implications of such a practice before WTO obligations and also analyze the threat to India in being categorized as a priority foreign country by USA in future.

ii. Criteria

The Special 301 report is prepared every year by the Office of the USTR. Through this program the USA possesses unilateral power of sanctioning foreign countries for their domestic IPR laws if they restrict United States Commerce or “violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any agreement”.[4]This annual report also referred by some as the ‘carrot and stick’ of USA, indicates through its lists  those countries where they feel some problems exist with respect to IPR protection,enforcement or market access for persons relying on IPR.[5] This list is followed by a 30-day period, during which the said countries have the option to resolve matters through good faith negotiations or bilateral/multilateral negotiations. Otherwise, they face an investigation under Section 301 for determining unilateral sanctions against the country.

There are primarily three categories of lists that exist. The first is the priority foreign country list, which includes those countries that have the most onerous or egregious acts, policies, or practices and whose acts, policies or practices have the greatest adverse impact (actual or potential) on the relevant U.S. products.[6] These are the worst violators and are subject to USTR investigations and possible US Trade sanctions. Those countries that are considered to have serious deficiencies in their IPR regimes but do not currently warrant an investigation are categorized into the Priority Watch List. Finally, the countries, which have been identified because they maintained IPR practices or barriers to market access that are of particular concern, but do not yet warrant higher level designations are categorized into the Watch List.[7] These three lists have existed since 1989.

This Special 301 program came into being at a point in time when USA had growing trade deficits, increasing flight of manufacturing activities abroad. Japan was emerging as an Industrial giant. Further the dependency on foreign oil imports also added fuel to fire.[8] Considering that the World Trade Organization did not exist at the time, it was arguably the sole methodology that USA could adopt to ensure fair trade treatment.

B. Pre and Post WTO Scenario: Treatment of China and India

i. China PR

China was not a founding member of WTO. Further it didn’t become a member until 2001 December. Therefore, it was already a vulnerable target for such unilateral measures at the hands of a super economic power such as USA. It was categorized a number of times as Priority Foreign Country by the Special 301 report. Currently it features on the Priority Watch List.[9] The long tussle has existed primarily due to the sectors such as computer software, CD’s and audio-visual products. USTR has time and again pressed China to substantially reform its IPR enforcement regime and improve market access.[10]On the basis of the 1979 U.S. – China Trade Agreement, the USA expressed concerns over the IPR protection in China. Talks were held between the two countries through US-Chinese Joint Commission on Commerce and Trade (JCCT) and other negotiations on market access. However, these negotiations didn’t bear fruit as China was placed on Special 301 priority watch list in 1989 and 1990.

The first instance on China being categorized as priority foreign country was in April, 1991. The USTR report that year provided that China didn’t offer product patent protection for pharmaceuticals and other chemicals and also did not grant any protection for US works. It was also a matter of concern to USTR that in China trademarks are granted to the first registrant in China, regardless of the original owner. They concluded that trade secrets were not adequately protected in China which acted as an encouraging force for the widespread piracy in China resulting in significant losses to US industries.[11] Subsequent to this USTR identified four deficiencies in China’s IPR policies and practices and launched an investigation to address them. These were as follows:

  1. Failure to provide product patent protection for chemicals, pharmaceuticals, and agrichemicals;
  2. Lack of copyright protection for U.S. works not first published in China;
  3. Deficient levels of protection under Chinese copyright law and regulations;
  4. Inadequate protection of trade secrets.[12]

Although USA, dissatisfied with the progress in China disclosed a draft list of products imported from China that would be subject to US trade sanctions, an agreement was reached on January 16, 1992. China agreed to comply and bring its provisions related to patent, copyright and trade secret laws in conformity. Thereafter through 1992 and 1993 China only featured on the Priority Watch List. The situation worsened in 1994 due to the pirated CDs industries in China. US had successfully established and concluded that there were at least 26 factories in China which were producing pirated CDs. USA was convinced that the trade barriers in China restricted access for US movies, videos and sound recordings in China’s market. After a warning, USTR designated China as a priority foreign country. The talks that followed the 1994 designation culminated into China’s agreement to “Special Enforcement Period”. During this period, they were to firstly take stringent actions against manufacturers and producers of pirated CDs in China, secondly, establishing long lasting enforcement of proper IPR regime and thirdly, providing greater market access to USA products by removing import quotas. Some mechanisms of ensuring long term enforcement of IPR laws included, banning of use of pirated materials by the Chinese government, establishing a title verification system in China to ensure that US audio visual works are protected against unauthorized use and reforming the judicial system of China to ensure effective judicial relief for US firms.[13]

Situation again worsened in 1996 as China was once again categorized as a priority foreign country.[14]US officials wanted China to close factories that were mass producing and exporting pirated products and prosecute the violators. It demanded destruction of the equipment used by such factories in the production too. The high tariffs, quotas and regulatory restrictions on joint ventures were also of a major concern. Finally USTR was satisfied when the Chinese government closed down 15 plants producing illegal CDs including 12 in Guangdong Province,which was believed to be a region of rampant piracy. Chinese government also promised to improve the monitoring and verification of CD plants and publishing houses in China.[15]

Presently, USA has given a appreciation to the continuous developments in the IPR regime of China. There were many high-level planning documents issued by the Chinese government, which reaffirmed the commitment to the protection and enforcement of IPR regimes.[16] However, it is also to be noted that China is now a part of WTO thereby making it difficult for a unilateral measure to be taken against China.

ii. Threat to India

In the year 1991, India was identified for the first time as a priority foreign country. India was accompanied in this list by China and Thailand. USTR cited inadequate patent protection and overly broad compulsory licensing provisions. India was believed to be a ground for piracy of US patented products and copyrighted materials such as books, videos, sound recording and computer software. The quotas, fees and other barriers were perceived to restrain the market access for motion pictures in India.[17] This position remained unchanged till 1993.After the 1991 designation USTR self-initiated an investigation to examine its intellectual property regime. Following consultations, the investigation came to an end however, India’s GSP benefits for certain pharmaceuticals, chemicals and related products were removed in 1992.[18]

India’s Status in General Transition period:

As per TRIPS India along with other developing countries was granted a general transition period as per which it was supposed to bring its IPR provisions in conformity with TRIPS by 2005. Therefore, prior to 2005 India was free to not grant patents on pharmaceutical products as per the International law governing IPR. This development saw the escalation of India’s status as a key producer of more affordable life saving medicines, which were and continue to be widelyspread across many developing countries. More than 80 percent of the donor-funded HIV treatments in the developing countries are sourced from Indian generic manufacturers.[19]

India’s issuance of compulsory license on sorafenibtosylate is what escalated the brewing tension with regard to India’s IPR regime. A compulsory license was issued to an Indian generic manufacturer. The Indian Government perceived the prices offered by German pharmaceutical company Bayer to be unaffordable. The latter was charging $5,500 per person per month in India for a kidney and liver cancer medicine i.e. sorafenibtosylate which was marketed as Nexavar. This created hue and cry as the generic version of the medicine became 97% cheaper.[20]

Novartis 2013

The company has filed a patent application for a leukaemia drug in 2006. After several years of legal battle the Supreme Court of India ruled against the pharmaceutical giant. The application was for patent on a salt form of imatinib and it was denied on the ground that imatinib had already been disclosed in a 1992 patent and the salt form did not fulfill the requirements of Indian law’s patentability.[21]This decision did not go down well with the US authorities. It found a mention in the 2013 Special 301 Report. The United States concluded that India’s law tends to create a special, additional criterion for technologies like pharmaceuticals, which could preclude issuance of a patent even if the applicant demonstrates that the invention is new, involves an inventive step and is capable of industrial application.[22]

Other concerns

In case of Copyright, USTR has been particularly worried about Internet piracy. In its 2013 report the USTR expressed certain measures that should be taken by India to redress the situation. These included enactment of anti-camcording legislation, providing further protections against online copyright piracy, signal theft and circumvention of technological protection measures. Like China, judicial inefficiencies of India are also an area that US seeks to redress. The above-mentioned concerns have led US to commit to strict and continuous monitoring of India’s IPR regime in times to come. [23]

US on its own accord conducted an OCR i.e Out of Cycle Review for India to evaluate the bilateral relationship on IPR areas between India and US.[24]This seems to be threatening call for the future trade sanctions that might follow. US has welcomed the efforts of New Delhi in drafting a new IPR policy whereby India intends to strengthen its position and ensure a better enforcement of its IPR regime as per the international standards. In the most recent report US has requested that India continue the finalization of the said draft by inviting further inputs and comments by the various stakeholders. It is widely believed that India’s internet users are projected to be second largest in the world very soon. Therefore, India is being urged to take simultaneous steps to counter online piracy. Majority of the issues that existed such as compulsory licensing, online piracy etc continues to exist and in some cases have grown to become much bigger problems. In recent times as in the UNFCC negotiations even climate change has featured in the debate of patent protection and competitiveness conditions.[25]Therefore it doesn’t seem that India will be taken of the Priority Watch List of USTR any time soon. However, India needs to take a stand on how far can it sacrifice the public health and well being to satisfy or better the bilateral relations with USA.

C. Legal Implications

i. US-Sections 301-310 of the Trade Act of 1974

When the Section 301 continued to exist in the Post-Uruguay Round it became a matter of concern for all the other WTO members. This was specifically with respect to Article 23 of the Dispute Settlement Understanding (DSU). Article 23 (Strengthening of the Multilateral System) provides in its relevant part as follows:

  1. When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.
  2. In such cases, Members shall:
  • Not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in this panel or Appellate Body report adopted by the DSB or an arbitration award rendered under this Understanding;[26]

Therefore, in the light of the above, a unilateral measure by USA without the guidance and aegis of DSU seems to violate the provisions of the WTO Agreements.This was the concern with which the EC first requested consultations at WTO. The Panel found the legislation of USA inconsistent. They agreed that the mere existence of such a legislation was enough to scare, threaten and coerce and WTO member into conforming to the US trade obligations in the first place. The Panel recognized the implications of such a condition existing in the legislation of an economic super power and pointed out the damage to the market place itself.[27] The panel stated:

“…..Economic operators may be afraid, say, to continue ongoing trade with, or investment in, the industries or products threatened by unilateral measures. Existing trade may also be distorted because economic operators may feel a need to take out extra insurance to allow for the illegal possibility that the legislation contemplates….”[28]

After examining all these reasons the Panel definitively concluded the violation of Article III of GATT. Even after the inconsistencies, the Panel did not hold any violation. One of the reason was that the legislation governed US relations with all the countries and not just the members of WTO.[29]Further it noted that because the Statement of Administrative Action (SAA) had been authorized by both the President and Congress, bound USTR as an executive agency, and was expected to be followed by future administrations unless repealed, it was reliable statement to third parties that USTR would not make use of Section 301 remedies without exhausting the DSU procedures.[30] Since the Panel had been called to examine the legislation for prima facie inconsistencies and not for a specific dispute, it only considered the violation to be in a hypothetical caseviolation. This panel decision mostly excluded the Special 301. Therefore, although the decision upheld the legality of Section 301, it had miniscule effect on the legality of Special 301.

D.CONCLUSION

The Special 301 provision has existed since a long time. However, its stringent use against WTO members has reduced in the Post-Uruguay round period.The Priority Foreign Country categorization has been used against China and Paraguay when they were not WTO members. This definitely shows that USA is trying to abide by its WTO obligations.

Indian media in the present scenario is full of reports on why compulsory license issue expressed by the USA is expressing double standards. There are reports whichsuggest that while India has thus far given one compulsory license, USA has issued a large and possibly largest number of compulsory licenses on record. The Ciprofloxacin was the most prominent cases where compulsory license was granted. The background to this was the outbreak of Anthrax in 2001.[31]

However, without prejudice to above, the USA must respect the public health standards of the developing countries and not just champion the cause of corporate interests. It has to appreciate the plight of countries that have many mouths to feed and dwindling resources to do so. For a country like India its people are its strength and its weakness. India’s stand may be believed to be the political agenda of the ruling party, but if public health is the concern of every ruling party, year after year, then it is a need that the economic super powers of the world need to understand. The situation is not different in Africa as well.India is not deriving profits out of these policies and in the interest of public health it should be allowed to maintain them. Legally speaking, India is well placed and should not succumb to the international pressures.Provisions pertaining to strengthening multilateral system, the MFN treatment and TRIPS + strengthen the stand and cause of the developing countries.India must continue to negotiate with USA and not change its laws due to Priority Foreign Country category. After all, the spirit of the multilateral framework is at stake.

[1] Flynn Sean What is Special 301 ? A Historical Primer (May 1, 2013), http://infojustice.org/archives/29465  [Hereinafter Flynn, Historical Primer]

[2] United States Trade Representative, Factsheet: “Special301” on Intellectual Property,(May, 25, 1989) http://keionline.org/sites/default/files/ustr_special301_1989.pdf  [Hereinafter USTR 1989 Report]

[3] United States Trade Representative, 2015 Special 301 Report, (April 2015) http://keionline.org/sites/default/files/2015-Special-301-Report-FINAL.pdf [Hereinafter USTR 2015 Report]

[4] Actions by United States Trade Representative,19 U.S. Code§ 2411 (a)(1)(B)(i)

[5] Flynn Sean, Inside Views: How Listing Ukraine As A Priority Foreign Country in Special 301 Violates WTO Agreements, Intellectual Property Watch, (May 13, 2013), http://www.ip-watch.org/2013/05/13/how-listing-ukraine-as-a-priority-foreign-country-in-special-301-violates-wto-agreements/

[6] USTR 2015 Report pg.1

[7]M.E. Sharpe, Studies on Contemporary China, CHINA’S ECONOMIC FUTURE: Challenges to US policy, Edited by the Joint Economic Committee, Congress of the United States 479 (1997)

[8] Flynn Historical Primer, supra note  1

[9] USTR 2015 Report 32

[10] Wayne M. Morrison, The China-US Trade Agreement on Intellectual Property Rights: Implications for China-US Trade Relations, CRS Report for Congress, Congressional Research Service, (April 5, 1995), http://www.ipmall.info/hosted_resources/crs/95-463_950405.pdf

[11] United States Trade Representative, Factsheet, “Special 301” on Intellectual Property (April 26, 1991), http://keionline.org/sites/default/files/ustr_special301_1991.pdf [Hereinafter USTR 1991 Report]

[12]Supra note 10 at 479

[13] Ibid

[14] United States Trade Representative, Title VII and Special 301, (April 30,1996), http://keionline.org/sites/default/files/ustr_special301_1996.pdf [Hereinafter USTR 1996 Report]

[15] Supra note 10 at 481

[16] USTR 2015 Report 6

[17] USTR 1991 Report 2

[18] US Trade Rep., 1994 National Trade Estimate Report on Foreign Barriers 23 (1994) at 122-23 [Hereinafter 1994 Foreign Trade Barrier Report]

[19] Waning, Brenda, Ellen Diedrichsen and Suerie Moon, A lifeline to treatment: the role of Indian generic manufacturers in supplying antiretroviral medicines to developing countries, Journal of International AIDS Society, (September 14, 2010), http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2944814/

[20] Access Campaign, A Timeline of U.S Attacks on India’s Patent Law and Generic Competition, (January 2015) https://www.msfaccess.org/sites/default/files/MSF_assets/IP/Docs/IP_factsheet_TimelineUSPressureIndia_ENG_2014.pdf

[21] Ibid at 4

[22] USTR 2013 report

[23] USTR 2013 Report

[24] Biswajit Dhar, TC James, Inside Views: USTR’s Investigations on IP Rights Against India: Is There A Tenable Case? Intellectual Property Watch (October 20,2014) http://www.ip-watch.org/2014/10/20/ustrs-investigations-on-ip-rights-against-india-is-there-a-tenable-case/

[25] USTR 2015 Report

[26] Understanding on Rules and Procedures Governing the Settlement of Disputes, Article 23 (1994)

[27] Panel Report, United States- Sections 301-310 of the Trade Act of 1974, WT/DS 152/R (Dec.22, 1999) ,7.88- 7.89 [Hereinafter Section 301 Panel Report]

[28] Section 301 Panel Report, 7.90

[29] Section 301 Panel Reports, 7.105

[30]Section 301 Panel Report, 7.111- 7.112. Also see, Zhou, Suzanne, Challenging the Use of the US Special 301 Procedures against Developing Country Access to Medicines Policies – Indian Pharmaceutical Patents and the WTO (September 1, 2015). Available at SSRN:http://ssrn.com/abstract=2675990

[31] Santosh Tiwari, Special 301 investigations are in violation of WTO norms (May 07.2014) http://archive.financialexpress.com/news/special-301-investigations-are-in-violation-of-wto-norms/1247798/2

*** This article first appeared on Just Lex Talk Journal Volume 1 Issue 2 and can be accessed here.

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