This Is One Showdown The White House Can't Duck

Slapping piracy sanctions on Beijing may help save MFN status

With two American aircraft carriers streaming away from waters near Taiwan, tensions between the U.S. and China would seem to be easing. But even as Washington and Beijing grope for a rapprochement, trouble looms on the economic front. Time is running out for China to enforce a 22-month-old accord aimed at eliminating piracy of intellectual property. Barring dramatic, last-minute concessions by Beijing, the Clinton Administration is set to slap $2 billion in sanctions on Chinese goods come the end of April.

To minimize the impact on U.S. industry, trade officials are expected to target Chinese toys and apparel but not electronic components. If the sanctions are imposed, the higher tariffs would not go into effect for 60 to 90 days. Beijing will howl but probably make concessions before the stiffer levies kick in, China watchers predict. But for the White House, there's no avoiding this showdown. The February, 1995, agreement addressed the concerns of politically powerful U.S. industries: music recordings, movies, software, and book publishing. And the pact is now viewed in Washington as a test for trade relations.

"OUT OF CONTROL." What's more, enforcement of the agreement is critical to salvaging China's most-favored-nation (MFN) trade status. President Clinton plans to renew Beijing's trade privileges this spring. But a bipartisan coalition on Capitol Hill is readying an assault on MFN status for China, which the White House must review by June 3. "The politics are very clear," says one Administration official. To preserve MFN, "we have to demonstrate that we will force China to live up to trade agreements."

That's why the U.S. is increasing the pressure. Deputy U.S. Trade Representative Charlene Barshefsky will lead a team in early April for a final round of talks. She'll be joined by movie-industry lobbyist Jack J. Valenti and other trade group chieftains.

While China has cleaned up some intellectual property abuses, piracy remains rampant, and the toll on U.S. business is growing (table). Trade officials estimate that bootlegging in China cost U.S. business nearly $2.5 billion in lost sales last year, far exceeding the $866 million bite in 1994. The surge reflects a shift by pirate producers from music compact disks to more lucrative computer CD-ROMs. And as pirates flood the market in Hong Kong, gains in copyright protection there are in jeopardy. "It's devastating," says Jay Berman, chairman of the Recording Industry Association of America. "We spent 10 years cleaning up Hong Kong. Now the situation there is out of control."

Beijing officials insist they're making headway. According to Duan Ruichun, director of the State Council's working committee on intellectual property rights (IPR), authorities have destroyed 800,000 pirated audio- and videocassettes and more than 40,000 software programs. Some $3 million worth of fines have been levied in connection with 9,000 cases of trademark violation.

TIGHT FOREIGN QUOTAS. But while China has gone after retailers, it has failed to shutter or convert to legitimate production at least 29 known plants pirating computer and music CDs. Tight quotas on foreign films and music titles remain in force. And Beijing has yet to issue regulations for foreign joint ventures that would enable U.S. music and software companies to operate in China.

Lack of political will is a key reason for China's lackluster enforcement, China experts say. Pirate CD plants have politically connected backers, and generate employment and fat profits at a time when the state sector is faltering.

Top U.S. officials were reluctant to turn up the heat on intellectual piracy during the tense gunboat diplomacy surrounding Taiwan's elections. But with hostilities easing, trade hard-liners plan to press their case in future Cabinet deliberations. And the longer the Administration dithers over how to respond to evidence that China sold nuclear-weapons technology to Pakistan--a hot-button issue on Capitol Hill--the more likely sanctions over piracy become. "We need a downpayment" to justify renewal of MFN, says a Washington trade lobbyist, "and tough action on IPR looks like all there is."

In an election year, the Administration might be tempted to accept token moves and declare victory. But if it does, annual showdowns over trademarks and copyrights could become as routine as MFN debates. That's why Washington is jumping out of the frying pan--into a new fire.

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