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, hungry for computer equipment, compare prices in the neighborhood's many small shops selling gear made by Compaq, IBM, Epson, and Hewlett-Packard as well as local companies. This is China's Silicon Valley, home to the country's best universities and many high-tech research institutes.

But on a street 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. The Lion King, Forrest Gump, Disclosure, Speed, and Jurassic Park are going for six bucks, while Madonna's latest CD costs four. "You better buy now before the next crackdown," says one dealer. Someone whispers "police," and the dealers stuff catalogs in pockets, toss their CDs into bags, and quickly disperse.

Such scenes speak volumes about the enormous difficulties the U.S. faces in getting China to enforce a six-month-old accord aimed at stamping out rampant 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." There are even signs the bootleg boom will get worse.

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 in the Presidential campaign.

The toll on U.S. business is high--and it shows no sign of abating. 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. And Beijing's practice of demanding that foreign auto and semiconductor companies transfer manufacturing knowhow also creates opportunities for pirating and costs U.S. companies billions more.

JAIL TIME. China has taken some steps in the right direction. Since the intellectual-property accord was struck in February, authorities have conducted more than 3,000 raids and confiscated millions of illicit items (table). Convicted peddlers of counterfeit goods now face stiff fines and time in jail. In one landmark case, Guangzhou CD wholesaler Su Qiuchun was slapped with a nine-month prison sentence and a $6,024 fine.

But profit margins as high as 40% continue to lure dealers onto the streets. Despite its crackdown on retailers of pirated goods, China has failed to shut down the factories that churn out ripoff products. Beijing has not yet insured that all CD plants install devices that stamp an identifying code on each disk produced. 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."

Plunging prices throughout Asia of pirated "compilation" CD-ROMs indicate that China's counterfeiters are going strong. A year ago, these disks, each of which contains several popular business programs, fetched $100 in Hong Kong. Today, they run about $6.50, a sign, Mitchell says, of the "vast oversupply" of such goods. Just as worrying: Chinese-made bootleg CDs are now eating into sales as far away as South America.

As to official crackdowns on illicit factories, Chinese sellers and buyers all are skeptical. "Yes, the government will shut them down," a seller says. "They'll do an inspection, see that the production is stopped, and fine them. As soon as they leave, the factories start up again."

Authorities in Beijing say they want to combat the piracy. But their clout in the booming coastal provinces has greatly diminished as local officials increasingly 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.

The U.S. could turn up the heat. American trade negotiators hint that Washington will block China's admission to the World Trade Organization until the Chinese do a better job of combating all the piracy. And China depends on easy access to the U.S. market, which snaps up fully a third of its exports.

Washington 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. The intellectual-property accord with China was one of the rare trade deals that the Administration can cite as an example of how the big stick approach gets results. In an election year, it can't afford to let that victory turn into defeat.

China Is Cracking DOwn on the Pirates...But Some Gaps Are Still Unplugged

-- Raided 3,177 shops peddling pirated products and stamped out

illegal compact-disk manufacture at the notorious Shenfei factory

-- Confiscated piles of illegal goods, including 1.9 million CDs, 752,000

audio- and videotapes, 45,000 books, and 37,000 software programs

-- Set up 18 enforcement strike teams

-- Factories continue to churn out illicit CDs, especially pirated CD-ROMs

-- Few CD plants have equipped their molds with devices that stamp a factory

identification code on each disk

-- China still lacks an effective customs regime to halt exports of pirated

videotapes and software


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