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 law, and where governments pursue market-oriented policies that encourage merit-based competition, entrepreneurship, commercialization of new technologies, and flexibility for users and producers in choosing among competing technologies. Both sides also confirmed the essential role of a robust intellectual property protection and enforcement regime in supporting an innovation ecosystem.

Despite anti-piracy campaigns in China and an increasing number of IPR cases in Chinese courts, overall piracy and counterfeiting levels in China remained unacceptably high in 2007. The U.S. copyright industries estimate that 85 percent to 95 percent of all of their members' copyrighted works sold in China was pirated, indicating no improvement over 2006. Internet piracy is increasing, as is piracy over closed networks such as those of universities, in addition to concerns over webcasting of various kinds. The rapid increase in the Internet to over 210 million users suggests that this challenge is likely to continue to grow, with many industry groups focused predominantly on Internet piracy. Notwithstanding these new challenges, trade in pirated optical discs continues to thrive, supplied by both licensed and unlicensed factories and by smugglers. A crackdown in Beijing and certain other cities by municipal management authorities appears to have reduced the incidence of "backpack" vendors. However, small retail shops continue to be the major commercial outlets for pirated movies and music and a wide variety of counterfeit goods. Piracy of books and journals and end-user piracy of business software also remain key concerns. In addition, the share of IPR infringing product seizures of Chinese origin at the U.S. border was 80 percent in 2007, virtually unchanged from 81 percent in 2006. Chinese counterfeits include many products, such as pharmaceuticals, electronics, batteries, auto parts, industrial equipment, toys, and many other products, that pose a direct threat to the health and safety of consumers in the United States, China and elsewhere.

Inadequate IPR enforcement is a key factor contributing to these shortcomings, with high criminal thresholds as well as difficulties in initiating or transferring cases for criminal prosecution resulting in limited deterrence. Civil damages are also low.

There have been some successful enforcement actions, most notably the joint "Summer Solstice" investigation between the FBI and China's Ministry of Public Security (MPS). In 2007, MPS engaged with U.S. law enforcement on IP law enforcement initiatives as part of the Intellectual Property Criminal Enforcement Working Group (IPCEWG) of the U.S.-China Joint Liaison Group for Law Enforcement Cooperation (JLG). The IPCEWG includes participation by Chinese law enforcement officials from the MPS as well as officials from the Justice Department, the FBI, and U.S. Immigration and Customs Enforcement. The IPCEWG focuses on the development of more U.S.-China joint operations to combat transnational IP crime, in particular crimes committed by organized criminal groups and crimes that threaten public health and safety. In July 2007, this collaboration resulted in the largest ever joint FBI-MPS piracy investigation and prosecution, code-named "Operation Summer Solstice," which involved seizures of more that 290,000 counterfeit software discs worth more than a half billion dollars and arrests of over 25 Chinese nationals, and eliminated numerous manufacturing plants in China. This joint operation is believed to have dismantled the largest piracy syndicate of its kind in the world, estimated to have distributed more than 2 billion copies of counterfeit Microsoft software. U.S. law enforcement authorities look forward to continuing this cooperative relationship as this and other investigations continue.