Beijing's `Blatant Piracy' Could Slash Its U.S. Trade

It might lose `favored' status over software copying and import curbs

President Bush's devotion to wider ties between the U. S. and China is so strong that it survived both the 1989 Tiananmen Square massacre and the subsequent crackdown on dissent. But now, even Bush's patience may no longer be enough to prevent a U. S. crackdown on China's tradingpractices.

At the heart of the dispute is a virulent brand of Chinese mercantilism that has given the People's Republic the third-largest trade surplus with the U. S.--just behind Japan and Taiwan. The Chinese "are doing whatever they have to do to sell abroad," charges Thomas J. Duesterberg, Assistant Commerce Secretary for international economic policy. That includes "subsidizing production, protecting their own markets through quotas and licenses, and limiting the use of foreign currencies." And the charges that China is using prisoners to manufacture products for export to the U. S. will make matters even more explosive.

Thanks to its trade stance, China is the only major U. S. trading partner to register a decline in merchandise imports last year. Purchases of American goods fell by $1 billion, or 17.2%, from 1989. Meanwhile, skyrocketing exports to the U. S.--mainly footwear, textiles, toys, and sports equipment--helped the trade deficit jump 67%, to $10.4 bil-lion over the same period (chart).

The immediate source of friction is Beijing's failure to deliver on promises to safeguard American software, movies, and books. The Chinese government itself is one of the world's biggest software pirates, U. S. publishers charge. "We are talking about blatant, government-sponsored and -condoned piracy," says Eric H. Smith, general counsel of the International Intellectual Property Alliance, a group of U. S. industry associations. The organization estimates that illegal copying in China cost U. S. companies $400 million last year, a figure the U. S. Trade Representative's office says is reasonably accurate. Striking back, the U. S. this month may formally cite China as an international trade pirate, clearing the way for sanctions.

But the big test will come in June, when China is counting on the U. S. to renew its most-favored-nation privileges, which grant lower tariffs. Despite strains in the relationship, Bush is expected to recommend extension of MFN on June 1. But Congress, which is showing renewed concern about the U. S. trade deficit, could reverse the decision or lay on restrictions. Prime Minister Li Peng warned Apr. 10 that diplomatic relations would be seriously damaged if MFN were withheld.

'REGRESSING.' Washington has tried to restore the trade balance through quiet talks with top Chinese leaders, but to no avail. For nearly three years, Beijing has held to a restrictive trade policy that rigidly controls credit, government spending, and imports.

"We are quite concerned because it looks like China is regressing and their market is becoming closed," says U. S. Trade Representative Carla A. Hills. On Apr. 13, she is scheduled to meet with Tong Zhiguang, Beijing's vice-minister for trade, in Washington, but few in the Administration expect a breakthrough.

Instead, the Administration faces an Apr. 26 deadline to name countries that are violating U. S. intellectual-property laws. Senator Max Baucus (D-Mont.), chairman of a key trade subcommittee, says targeting Beijing would go a long way "toward bringing China back into the world trading community." But even that threat may hold little sway with China's leaders.

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