Eyeball To Eyeball With China

Chrysler Corp. is no Johnny-come-lately to China, having spent the past 10 years building a presence in the fast-growing economic superpower's market. With a Jeep assembly plant in Beijing and a shot at a $1.2 billion deal to build minivans in Guangdong province, the No.3 U.S. auto maker has a lot to lose if Washington's dispute with Beijing over copyright piracy erupts into a full-blown trade war.

But Chrysler doesn't want American negotiators to go easy on China. The reason: company officials' stunning discovery last year that a Chinese factory a few miles down the road from its Jeep operation was turning out Jeep knockoffs. When Chrysler complained, recalls an outraged President Robert A. Lutz, "the Chinese response was `Well, we're developing an auto industry, and you should help us."' To top it off, Chinese officials proposed that, as a condition of winning the minivan contract, the company allow China to market worldwide the Chrysler minivan parts it would produce.

SIGNS OF HOPE. Lutz's fury goes a long way toward explaining why a clutch of industry leaders flanked U.S. Trade Representative Mickey Kantor on Feb. 4, when he announced $1.1 billion in sanctions against Beijing. Rampant Chinese piracy of American intellectual property isn't just about bootlegged copies of Microsoft Windows and bogus Mickey Mouse logos. While U.S. software companies, moviemakers, book publishers, and the music-recording industry estimate illicit Chinese goods cost them almost $830 million in lost sales in 1993, the problem is a potential threat to all U.S. industries--everything from prescription drugs to cornflakes. "Everyone operating in China has a baseline fear that once the technology and management knowhow are transferred, the Chinese will try to squeeze you out," says Richard A. Brecher, an official with the U.S.-China Business Council in Washington.

The penalties Kantor imposed take effect on Feb. 26 unless talks that resume on Feb. 13 produce a settlement--as is now expected. Without a detente, Beijing will retaliate with tariffs on American-made cigarettes, videotapes, compact disks, and alcohol and will formally suspend joint-venture talks with U.S. auto makers.

There are reasons to hope a deal can be cut. Despite the saber-rattling, many normal trade exchanges continue. For instance, Energy Secretary Hazel O'Leary plans to lead a group of 50 U.S. executives to China Feb. 19-24 to pursue energy deals. And Chinese TV has been showing officials destroying illegal knockoffs of U.S. products. There are even reports that some counterfeiters have been executed. Both are signs the government may be cracking down on ripoffs.

But even if the current impasse is resolved, continued friction between the two nations is inevitable. Human rights in China have deteriorated, U.S. initiatives to curb Chinese missile-trafficking have hit a wall, and the Chinese have balked at a U.S.-led effort to get it to adopt global commercial practices as a condition of membership in the World Trade Organization. One key reason is that the imminent death of Deng Xiaoping has paralyzed China's leaders. They don't want to be seen caving in to Washington lest that jeopardize their chances for advancement.

HARMONY. What's more, China's mercantilist industrial policies dramatically add to the potential for friction. To cultivate its own industries, Beijing limits foreign participation in key sectors such as autos, power generation, and telecommunications. And it maintains tariffs and other barriers that shut out foreign goods ranging from citrus fruits to movies.

Little wonder, then, that U.S. business leaders decided they had to go along with a hard-line policy toward China. In late December, Administration negotiators quietly began asking U.S. trade groups if they would send representatives to Beijing to make their case directly. "We were concerned that the Chinese leadership would miscalculate," based on last year's battle over renewal of China's most-favored-nation (MFN) trade status, says a senior U.S. trade official. Back then, a revolt by business forced President Clinton to abandon his policy of linking China's MFN status to its human-rights record.

At a Jan. 12 meeting with Kantor and three top aides, leaders of a half-dozen intellectual-property associations formally agreed to make the trip. The group, led by Jack A. Valenti, the president of the Motion Picture Association of America, arrived in Beijing on Jan. 20 for two days of meetings with officials of three ministries. In between, they exchanged notes with USTR negotiators. "It deprived the Chinese of the opportunity to divide and conquer," says Kenneth Wasch, executive director of the Software Publishers Assn. "We were all singing from the same songbook."

Close coordination with business paid off in other ways. Companies supplied U.S. negotiators with a catalog of piracy horror stories that embarrassed Beijing. From Microsoft Corp., they learned that Shenzhen Reflective Materials Institute, an industrial lab at state-run Shenzhen University, was churning out counterfeit holographs like those the software giant affixes to its program packages. Microsoft says it has lost $26 million in sales of counterfeit software--but a Chinese court awarded it only $2,600 in compensation. Record companies identified 29 rogue factories cranking out 75 million counterfeit compact disks annually. And the MPAA passed along taped copies of The Lion King and other movies sold in Beijing before their official videotape release.

"GOOD SOLDIERS." When such blatant examples of illicit products failed to get China to budge, the Administration crafted retaliatory sanctions in a way that minimized the damage to U.S. industry and consumers by penalizing Chinese products that are available from other sources. Footwear, ahich U.S. companies produce in large quantities in China, was targeted, but only children's and women's shoes are affected. Because shoes for men were excluded, the proposed sanctions represent "a very, very small percentage of what we make in China," says a spokesman for Nike Inc.

Given the Administration's considerable leverage, the odds are good that Beijing will move to resolve the dispute. In 1993, Americans snapped up more than a third of China's $100 billion in exports. Without easy access to the U.S., China's global trade surplus would turn into a net deficit, says Kenneth DeWoskin, a University of Michigan professor.

Many executives remain edgy about the prospect `f a trade war. But for now, even those with megadeals at stake are putting their interests aside. "We have to be good soldiers and back [Kantor]," says Lawrence W. Clarkson, a senior vice-president at Boeing Co., which sold one of every seven planes it produced in the past two years to China. Now it's up to the Clintonites, who in the past have talked tough on trade but carried a wet noodle, to show that this time they're prepared to fight.


Rampant piracy of American products cost business about $830 million in lost sales in 1993.

The breakdown: Music, $345 million; software, $322 million; books, $110 million; movies, $50 million.


If the dispute isn't settled, Beijing could hike tariffs

on $1.1 billion worth of U.S.-manufactured compact disks, video games, Hollywood movies, cigarettes, and

alcohol. It also may suspend joint-

venture talks with

Detroit carmakers.

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