In August, the United States requested the World Trade Organization Dispute Settlement Body to establish a panel to resolve its dispute with China over the lack of protection and enforcement of intellectual property rights. Although the WTO rules allowed China to block the United States’ first request, the international trade body automatically granted the second request at the end of last month.

The present dispute concerns three remaining issues: the high thresholds for criminal procedures and penalties in the IP area; the failure of the Chinese authorities to properly dispose of confiscated infringing goods; and the denial of copyright protection to works that have not been authorized for publication or distribution within the country. Although these issues seem straightforward, resolving the dispute is likely to be challenging. The outcome of the dispute may also surprise many in the U.S. administration and IP industries.

Since the reopening of the Chinese market to foreign trade in the late 1970s, the lack of IP protection has become a recurring dispute between China and the United States. Although the WTO court-like dispute settlement process seems to provide a more effective international enforcement tool than the trade threats the United States used repeatedly in the late 1980s and early 1990s, the process is less effective than assumed. Many of the words in the WTO IP agreement, such as “effective” and “deterrent,” are undefined or ambiguous. Because IP enforcement has never been the subject of a dispute settlement panel decision, the first-impression nature of the case has greatly increased the burden of the complaining party.

The case against China is also weakened by the agreement’s public policy objectives and technology-transfer requirements. Given the limited resources and divergent conditions in China, it would be no surprise if the WTO panel finds acceptable for this fast-growing, yet developing country what was unacceptable to a developed country like the United States.

Moreover, the agreement does not require countries to enforce IP rights to a greater extent than it does in other areas of law enforcement. If China has major problems with, say, tax collection, which are very serious, it need not devote more resources to reduce piracy and counterfeiting. It is simply unrealistic to expect any country, regardless of its political will, to consider IP protection its highest priority. Even within the United States, most government officials consider IP protection a less important item in the U.S.-China bilateral agenda than nuclear nonproliferation, currency exchange and, at the moment, health and safety standards.

To complicate matters, IP enforcement problems are not limited to China. As the ongoing lawsuits against Internet file-sharers have shown, the intangible nature of IP rights and the increasingly global business environment have made enforcement particularly difficult. If the United States and the European Union cannot meet their enforcement challenges, it is very unlikely that China will be able to do a much better job.

Legal reforms have just begun

Like a house under construction, effective enforcement requires foundational support, which includes a consciousness of legal rights, respect for the rule of law, an effective and independent judiciary, a well-functioning innovation and competition system and a sufficient critical mass of local stakeholders. Although China has undertaken extensive legal reforms since its accession to the WTO more than five years ago, it simply cannot provide what has taken other countries decades or even centuries to build.

Finally, how the dispute is resolved will depend on whether the two countries can successfully manage their bilateral relationship and work out mutually beneficial solutions. A cordial relationship is important because these countries perceive the WTO dispute settlement process differently. While the United States may consider the dispute a precursor to broader and more aggressive complaints it will later file in the IP area, China may see this dispute as an ultimate showdown that was intentionally staged to slow down its rise as an emerging power. Some Chinese leaders thus may want to use the dispute to demonstrate their toughness and ability to resist foreign pressure. Others who are more willing to strike compromises may also find their options constrained by the growing nationalism in the country and the complex internal politics surrounding the 17th National Congress of the Chinese Communist Party.

It is time that the WTO rules provide clarity and certainty in the area of IP enforcement. A satisfactory resolution of the present dispute will benefit not only China and the United States, but also the entire WTO community. Nevertheless, it is na�ve to assume that a single WTO dispute will lead to stronger IP protection in China. In fact, if the dispute is not properly handled, it may even backfire by harming U.S. businesses in China while creating unnecessary bilateral tension in the run-up to the 2008 presidential election.

Peter K. Yu is the Kern Family Chair in Intellectual Property Law and the founding director of the Intellectual Property Law Center at Drake University Law School. His publications are available at www.peteryu.com.