The RCEP and Risk for New Brands in China

Fast Facts:

  • Several countries that have ratified the RCEP have major IPR infringement related brand issues in China
  • This trade deal will cause a flood of new brands into the Chinese market and brands are not prepared to fight brand predation in China
  • The RCEP guidelines for protecting IP do not go far enough to protect new entries to the Chinese market

The RCEP (Regional Comprehensive Economic Partnership) is a landmark trade agreement that unites several of the world’s largest economies and nearly half of the population of the world. Just from the size it exceeds NAFTA and several similar trade blocs. Based in the APAC region it includes Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. India was considering joining, but opted out.

While this presents massive opportunities for increased trade and new economic opportunities, it is not without risk. Import surge due to decreasing trade barriers is a major issue, especially in China. This article will address how the import surge is likely to occur, examine the risk it poses to those companies most vulnerable, and conclude with a brief examination of chapter 11 of the RCEP, concerning IP protection.

As trade barriers decrease and trade volume increases brands of lower levels of quality, or smaller brands (which did not have the capital requirements to overcome trade barriers) will naturally enter new markets. China, being the largest economy in the RCEP and becoming increasingly friendly to imports (the 3rd CIIE was just last week), will logically be a recipient of many new brands from the APAC region. These new brands will struggle to develop their market share in the highly competitive Chinese consumer market, and many of them will fall to brand predation.

            Brand predation – IP squatting, counterfeiters, OEM overproduction and distribution, malicious partnerships, IP theft by employees or outside actors, etc.

These new brands will not be prepared to handle the highly competitive infringement heavy e-commerce market. Despite its rapid growth, e-commerce in China is still in its infancy compared to other developed economies, and regulatory development and enforcement is far behind the size of the market. A quick search on Taobao for “Gucci” or any other luxury brand will show how endemic the issue is.

The companies at greatest risk of brand predation are those that have a strong domestic or regional performance, but have been unable to break into the Chinese market due to previous trade barriers. Especially those from Japan, Australia and Korea, which may already be known in China but not widely distributed.

According to the 2019 WestPac Australia-China Business Sentiment Survey published by the Australian Chamber of Commerce in Shanghai, ~30% of Australian companies list brand positioning in China as a key info gap that undermines decision making.

What protections does the RCEP lay out to protect these SMEs and newly internationalizing brands that are most vulnerable to brand predation? For that we turn to Chapter 11 of the RCEP – Intellectual Property. In particular there are 7 bylaws that are of interest. I will include the reference number for convenience.

11.4 – 2

This seems to imply that trade and technology transfer supersede the rights of individual rights holders. It may be of particular concern to those high tech or pharmaceutical companies that trade in technology sought after in China.

11.7 – 1

States that IP protection favoritism is not allowed by the confines of the RCEP. The implication here is that foreign companies in China should have the same rights and IP protections as a domestic firm enjoys. This does not mention asymmetrical information, which is one of the largest enterprise risks foreign firms in China face. No provisions have been made to encourage RCEP signatories to create a system of IP protection information, to arm firms with the knowledge necessary to defend their brands.

11.23

Confirms rights of trademarks against identical or similar trademarks where such a case would cause “confusion”. The use of the term confusion here is quite vague and subjective. Very few wealthy Chinese would be confused by an imitation Gucci, but the same can’t be said for the entire country.

11.40

This covers experimental use. Patent infringement is acceptable for “experimental purposes”. “Each Party shall provide that any person may do an act that would otherwise infringe a patent if the act is done for experimental purposes relating to the subject matter of a patented invention.” The wording on this is vague, again for pharmaceuticals or artificial intelligence research, does this mean that patents can be infringed, “experimented” on, and then a new permutation used? It seems unsuitable protection for the most vulnerable firms.

11.62 – 3

Removal of unlawful trademarks is not sufficient to allow the stock to be sold on the market. This is very positive for brands entering China. By blocking infringing products from being sold, even if the unlawful trademark is removed, it in essence increases the cost of being an infringer. Infringers are unable to recoup losses by quickly liquidating goods at cost to cover legal fees or other costs.

11.75

This single article is the whole subsection about digital platforms. As stated previously, the e-commerce industry is light years ahead of the relevant regulations, and here is no exception. It is not sufficient to apply the existing IPR laws to e-commerce platforms; a new set of international laws specifically for e-commerce must be drafted, especially in an increasingly digital post – Covid world.

The RCEP provides massive opportunities to APAC brands that were previously limited by trade barriers. This increase in trade will generate new jobs, higher GDPs, and economic development; however, it does not come without risks, and no international trade agreement is perfect. This article was not meant as a critique of the RCEP by any measure, but there is no opportunity without risks, and no growth without someone looking to take advantage. Identifying, analyzing and assessing those risks is simple due diligence that ensures the safety of brands and markets.

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