Counterfeit Disks, Suspect Enforcement

It's back-to-school time in Beijing's Zhong Guan Cun district, and students, teachers, and others are out for a last Saturday of shopping. Bargain hunters compare prices in the neighborhood's many small computer shops selling gear made by Compaq, IBM, Epson, and Hewlett-Packard.

But on a corner just minutes away, throngs of people are eagerly jostling for some illicit bargains. Pirated copies of Microsoft Corp.'s Bookshelf 95 multimedia reference library and Art Gallery, London's National Gallery collection, each sell for $6, while Windows 95 copies are selling for just $4. "You better buy now before the next crackdown," says one dealer.

Such scenes speak volumes about the difficulties the U.S. faces in getting China to enforce a six-month-old accord aimed at stamping out piracy of intellectual property. While there has been "a significant change in the Chinese government's attitude," says a senior U.S. Administration official, "on the ground, the picture is mixed."

Trouble on the trade front is the last thing the Clinton Administration wants as it tries to mend the badly frayed Sino-U.S. relationship. But counterfeiting of U.S. software, movies, books, and music recordings feeds America's bulging trade deficit with China. With the trade gap heading for $40 billion this year, Beijing's failure to halt intellectual-property theft makes for tempting political fodder at home.

JAIL TIME. The toll on U.S. business is high. Trade groups estimate that bootlegging in China cost almost $870 million in lost sales in 1994. This year's losses could match or surpass that level, thanks to an apparent surge in Chinese production of pirated CD-ROMs.

China has taken some steps in the right direction. Since the accord was struck in February, authorities have conducted more than 3,000 raids and confiscated millions of illicit items. Convicted peddlers of bootleg goods now face stiff fines and time in jail.

But profit margins as high as 40% continue to lure dealers onto the streets. Despite its crackdown on retailers, China has failed to shut down the factories that churn out ripoff products. Says Stephanie Mitchell, a Hong Kong-based vice-president of the Business Software Alliance: "We're on the one-yard line--with 99 yards to go."

Authorities in Beijing say they want to combat the piracy. But their clout in the booming coastal provinces has diminished as local officials manage their own economic affairs. "It's not a matter of lacking will but lacking the ability to enforce," says Greg Mastel, senior fellow at the Economic Strategy Institute in Washington.

Trade negotiators hint that the U.S. will block China's admission to the World Trade Organization until the Chinese do a better job of combating piracy. Washington also intends to ratchet up the pressure quietly through a series of visits by U.S. negotiators, starting in October. If that doesn't do the trick, the Americans may threaten sanctions again. In a Presidential election year, the Administration can't afford to let this potential trade victory turn into defeat.