Clear Sailing for Pirates

For now, the WTO can't stop mainland counterfeiters

Gillette razors, Budweiser beer, Bosch fuel filters, Microsoft software. If it's a famous international brand, you can bet Chinese "entrepreneurs" are busy trying to copy it. When Beijing joined the World Trade Organization in December, it agreed to crack down on the scourge. But in the ensuing six months, the pirates have become even more audacious, making more phony foreign-branded products than ever--and shipping more of them overseas. So Washington will plead the multinationals' case before the WTO and force Beijing to honor its pledge, right?

Not so fast. Trade experts say it isn't so easy to accuse Beijing of breaking its agreements. That's because the wording of the Agreement on Trade-Related Aspects of Intellectual Property, or TRIPs, is ambiguous. While it calls for governments to create an "effective deterrent" against counterfeiting, it's vague on what that means, says Joseph T. Simone, a partner with law firm Baker & McKenzie in Hong Kong and a vice-chairman of the Beijing-based Quality Brands Protection Committee. That's a fake-fighting group that includes multinationals Compaq (CPQ ), Anheuser-Busch (BUD ), Johnson & Johnson (JNJ ), Philip Morris (MO ), and Prada, among others.

So despite the howls of the multinationals, the U.S. and other WTO members may not have the legal ammunition they need to nail Beijing on the counterfeiting issue. Politics plays a role, too: Washington knows that serious pressure on the pirates from Beijing would vaporize thousands of jobs at a time when China faces rising unemployment. As a result, it's unlikely anyone will take action for the time being.

Foreign firms can only hope Beijing will impose stiffer penalties, as promised. The latest word from the government is that new rules will be issued in July, providing for fines up to 10 times the meager amounts now levied on counterfeiters who are actually caught.

Will that make any difference? Enforcement, as always, is the key. While local branches of such regulatory bodies as the Administration for Industry and Commerce and the Quality and Technical Supervisory Bureaus are willing to get tough--particularly when paid "case handling fees" by the multinationals filing the complaints--they are loath to turn over captured counterfeiters for criminal prosecution. Why? "They don't want to pass the case on to the police," says Procter & Gamble Co. spokesman John Yam, "because they lose money." Translation: The bureaucrats won't be able to extract bribes from the pirates.

While the multinationals search for a way to curb counterfeiting, the practice is costing foreign businesses tens of billions of dollars a year, says Timothy P. Trainer, president of the International AntiCounterfeiting Coalition. And the products are becoming increasingly sophisticated. Witness the growing market in China-made fakes: Gillette says bogus Duracell batteries and Oral-B toothbrushes are being sold in the U.S., while pretend Prestobarba disposable razors are on sale in South America, and Sputnik-brand blades stock the shelves in Russia (Prestobarba and Sputnik are Gillette brands). Similarly, P&G's Head & Shoulders shampoo and Safeguard soap are showing up in the Philippines, the Middle East, and Eastern Europe.

The reality is that China's entry into the WTO isn't going to stop the wave of ersatz consumables. That will require rule of law and a serious crackdown on corruption. Still, with Chinese brands themselves starting to suffer, Beijing may one day have sufficient reason to put the copy kings out of business.

By Dexter Roberts in Beijing

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