Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade
”Sustaining Innovation in the Global Economy:
The Role of Markets and Foreign Investment”
U.S. Chamber of Commerce-CCPIT Conference
March 28, 2007
As Prepared (English Only)
I’d like to thank the Chamber and The China Council for the Promotion of Trade for hosting this event on the important and timely topic of innovation and the role of foreign investment in its promotion.
The title of my remarks today is “Sustaining Innovation in the Global Economy: The Role of Markets and Foreign Investment.” My theme is that the same market principles that have helped China to become a manufacturing powerhouse will be even more important as China seeks to foster innovation and globally competitive companies. These principles are openness, competition, rewarding private investment, and respecting private property.
The challenge, however, will be to apply these principles to areas like intellectual property and standards. These important areas of economic growth will be of growing importance to China and they will increasingly support China’s traditional manufacturing base.
Good News in the Sino-U.S. Relationship
But before I develop those themes, let me take a step back and offer some general comments about the state of the Sino-American relationship. Although there are areas of disagreement, there is also much good news to report in the growing ties between our two countries.
The United States and China cooperate across a range of areas, most recently in the Six Party talks, which should remind all of us that our two nations can work together on issues of mutual concern. I had the privilege last year of participating in the meetings between President Bush and President Hu and I could see that both leaders were committed to a positive relationship.
The economic relationship also has many positive aspects. China’s economy is booming, and China is now our second largest trading partner in the world and our largest in Asia, with bilateral trade last year of over $330 billion.
Although U.S. firms face a range of trade barriers in the Chinese market, we should not overlook the fact that U.S. exports to China grew last year by more than 30 percent. Still, with Chinese products enjoying wide access in the United States, it is difficult to understand why China maintains so many unfair barriers against U.S. products. Indeed President Hu has called for more balance in the trade relationship, and it is our hope that Chinese leadership will listen to President Hu. We want to avoid a situation in which economic issues spill over and become political issues.
With regard to innovation, China’s economy has prospered because of its respect for market forces. Indeed over the past few decades, China has maintained the fastest growing economy in the world, driven by a reduction of a government role in the economy and the role of foreign investment.
The question is how can this model be adapted for the 21st century. As the Chinese economy transitions from manufacturing based on low-cost labor to one based on more sophisticated and higher value added production, China will need to take the same market principles and apply them to areas like intellectual property and standards.
Unless intangible property is protected in the same way real property is, investors are less likely to help turn ideas into products and services that benefit Chinese consumers and society.
We have seen some positive signs in this regard. Recent court cases involving the protection of brands intellectual property such as Starbucks, New Balance, and Pfizer’s Viagra patent show us the courts are increasingly serious about this point. However there is much more that needs to be done.
Let me give you three examples:
Third Generation Telecommunications Standards
China deserves the finest telecommunications technology in the world, whether it is home-grown or developed overseas. Nowadays, technology is frequently an amalgam of international work adapted to a local market. You could call it 3G with Chinese characteristics. However we see signals that China intends to tilt the playing field toward a nationalist technology, even if the customer would prefer a widely used international standard.
China has not yet promulgated 3G standards or a timetable, nor has its decision process been transparent. Favoring one standard can add to the cost and difficulty of doing business in China, and a lack of transparency in the decisionmaking process often does not produced the best results from those deliberations.
Our hope is that China continues its leadership role in wireless technology through a policy of “technology neutrality.” This means relying on market forces rather than governments to determine the appropriate technology. This principle holds with 3G, with RFID, and with other new technologies.
Interestingly, China has already been a significant beneficiary from the international standards in communications, because it has been able to manufacture products based upon these widely adopted standards. That advantage will be eroded if China were to develop a nationalist 3G standard different from those already available.
Let service providers put up towers, let hardware companies sell their handsets, and let consumers and businesses decide what works for them. Over time, the market will gravitate toward two or three standards that work and seem to offer the best combination of technology and value.
We see a range of IPR issues when we look at pharmaceuticals. China is seeking to build a pharmaceutical industry that is innovative, responsive to patients needs, and provides real solutions that improve the lives of patients. In my view, however, it will have difficulty doing so without legal protection for its innovative products. Significant up front investments in private research and development only happen if those investments are protected.
One such protection is the enforcement of data exclusivity, which is part of China’s WTO agreement. Data exclusivity provides innovators with a period of exclusivity during which others are not allowed to rely on the data generated during the drug development process to obtain a marketing approval. Although Chinese authorities have adopted the basic TRIPS language into its regulations, implementation has been inconsistent.
Second, we believe China will be better off if it moves towards market pricing. Market pricing enhances incentives, producing more innovation. When markets determine price, a balance is struck between innovation, profit and public interest that provide the greatest benefit to society.
Third, all Governments have an important role to play in regulating the manufacture and distribution of drugs. The development and enforcement of regulations designed to protect the public should transparent and consistent. This is particularly true concerning the production and export of Active Pharmaceutical Ingredients (API). This point is an important health and safety issue in China, and is part of the JCCT and the SED agenda. We are disappointed that we have not seen a response so far from the Chinese side.
Chinese authorities have begun to take positive steps, however without enforcement to stop fake products, counterfeits will continue to erode the confidence of consumers, decrease incentives for investment and innovation, and cause irreparable harm to China’s reputation.
Entertainment and Software Development
China holds the dubious distinction of being the worst offender in the world when it comes to pirated movies, music, and software, according to U.S. customs statistics.
Part of the reason that piracy flourishes in China is that legal distribution channels are highly restricted. In our view, this is unfair to Chinese consumers and it is unfair to the inventors and producers of these products. Developing innovative ideas in the software and entertainment industries involves significant investments of time and resources. Investors deserve the right to profit and not have their products pirated. It is therefore critical that rules established to protect those innovators and investors are enforced.
To my friends in China who are concerned about some of the themes and tones in foreign movies, concerned in other words about “cultural pollution,” I say it is the black market that promotes this pollution. If the product could be sold legitimately in the market, it could be customized for Chinese audiences, and a ratings system adopted to control access to mature materials, much like what is done in other countries, be it Japan or Korea, for example.
This practice of piracy has a damaging impact in China because it reduces the ability to create a culture of innovation. China needs a legal framework that respects ideas if it wants to see ideas flourish.
One example where a lack of adequate protection and distribution networks is harming China is in the development of a domestic Chinese film industry. Because of wide-spread piracy, the Chinese film industry, which at one time was so vibrant, is now tiny, with less than 20% the box office revenue of India. And because of lack of market access for foreign films, almost all of the revenue that China could earn from the import and distribution of films goes to the pirates.
Pharmaceuticals, telecommunications, and entertainment products are just three examples of where China has the opportunity to take its system and help China become more innovative and competitive.
All we seek is for American companies to have the same ability to operate in China as Chinese companies do in the U.S. This pertains to market access as well as intellectual property and innovative ideas.
You never know where good ideas will come from. They may come from young men fiddling around in their garage, much like the young Bill Hewlett and Dave Packard who went on to found HP, or from someone experimenting in their kitchen, much like a young Henry Ford did after a hard days work at Edison Electric in Detroit. Or it might be from well-established laboratories at Lenovo or Merck or EMI. But the one thing that is certain is that these ideas and inventions would not take place unless the market was there to drive them, and that there was a way for the inventors to profit from their ideas.
I’m optimistic about opportunities for innovation in China. And I am confident that leaders will see the value in protecting and promoting innovation through free markets as a way to achieve their vision for a prosperous China. Through applying these principles I believe the business environment in China will continue to improve, and we will be able to avoid trade friction.