China's rapid economic transformation over the past three decades has presented bothopportunities and challenges to many U.S. businesses. Despite broad success in the Chinamarket, many U.S. companies have reported that two major factors-the infringement oftheir intellectual property rights (IPR) in China and China's indigenous innovationpolicies-have undermined their competitive positions. In response to a U.S.International Trade Commission (Commission) survey, many U.S. firms reported lossesassociated with IPR infringement in China, including losses in sales, profits, and licenseand royalty fees, as well as damage to brand names and product reputation. U.S. firmshave reported losses associated with China's indigenous innovation policies as well, buthave been mostly concerned about the future implications of these evolving policies insuch areas as technical standards and preferential support to Chinese firms. In this secondof two interconnected reports requested by the U.S. Senate Committee on Finance, theCommission was asked to estimate the effect of reported IPR infringement in China andChina's indigenous innovation policies on the U.S. economy and employment, to theextent feasible. This report provides such estimates, on both an economy-wide andsectoral basis, using a combination of analytic tools and qualitative information.

Intellectual property rights (IPR) infringement in China reduces market opportunities and undermines the profitability of U.S. firms when sales of products and technologies are undercut by competition from illegal, lower-cost imitations. Intellectual property (IP) is often the most valuable asset that a company holds, but many companies, particularly smaller ones, lack the resources and expertise necessary to protect their IP in China. 'Indigenous innovation' policies, which promote the development, commercialization, and purchase of Chinese products and technologies, may also be disadvantaging U.S. and other foreign firms and creating new barriers to foreign direct investment (FDI) and exports to China. This is the first of two reports requested by the U.S. Senate Committee on Finance (Committee) on the effects of IPR infringement and indigenous innovation policies in China on U.S. jobs and the U.S. economy. In this report, the U.S. International Trade Commission (Commission or USITC) was requested to describe the principal types of reported IPR infringement in China, describe Chinese indigenous innovation policies, and outline an analytic framework for determining the effects of both IPR infringement and indigenous innovation policies on the U.S.

Today's hearing of the U.S.-China Commission focuses on two broad areas in the U.S.-China relationship: the treatment of intellectual property rights, including business software, computers, Internet streaming, recent WTO actions brought by the U.S. against China in this area; and second, the Chinese policy of indigenous innovation, so-called ININ, and its wide-ranging implications for our economic and strategic relationship. The question is, where do we stand on these matters ten years after China's accession to the WTO and assumptions of obligations in WTO, and the U.S. granting China Permanent Most Favored Nation treatment?