U.S. Takes Piracy Pushback to WTO

Intellectual-property rights violations in China cost the U.S. billions each year, leading to complaints to the World Trade Organization

For years Washington has been pounding on the table to try to get Beijing to clamp down on rampant piracy and counterfeiting. But now the U.S. has decided that talking tough just isn't enough. On Apr. 10 it took the fight to the next level by filing a pair of formal complaints with the World Trade Organization.

"Inadequate protection of intellectual-property rights in China costs U.S. firms and workers billions of dollars each year," said U.S. Trade Representative (USTR) Susan Schwab. Predictably, Beijing is peeved. A statement posted on the Chinese Ministry of Commerce's Web site warned that the WTO action will "bring an unfavorable impact on bilateral trade."

In fact, it's the lopsided nature of that commercial relationship that compelled the U.S. to act. Congress has been pressuring the White House to take steps to narrow the U.S. trade deficit with China, which swelled to $233 billion last year. According to an American trade official, the USTR was about to haul China into WTO arbitration last fall, but Beijing secured a temporary reprieve. In the end, it boiled down to an issue of "face"—something the Chinese understand well. "It was important for our integrity and credibility for us to follow through," says the official.

U.S. film studios, record companies, and book publishers have long complained that Chinese piracy translates into billions in lost sales: The Motion Picture Association of America estimates that the industry was cheated out of $2.7 billion in 2005.

A Question of Availability

But piracy isn't Hollywood's only beef with Beijing. The film companies, along with the music and publishing industries, also chafe at the mainland's restrictions on the sale of their products, an issue addressed by the WTO complaint. Chinese authorities currently limit imports of U.S. films to a couple dozen new releases a year. But the of tens of thousands of different titles of bootlegged DVDs, which sell for less than a dollar apiece, is evidence that demand for U.S. films and music far outstrips supply.

"It's not a question of price, but availability," says Anthony C. Chen, an intellectual-property rights lawyer with Jones Day in Shanghai. "The market wants to watch all the movies from Hollywood." Just ask Fei Meng, a 30-year-old editor of an online site who picked up a genuine copy of Casino Royale in Beijing for $3.20—nearly three times what a fake would have cost her. "The image is much clearer, the color is great, and the sound is better," she says.

The USTR acknowledges China has made improvements in the area of copyright protections since joining the WTO in December, 2001. In fact, on Apr. 9, Beijing announced that individuals caught with 500 or more CDs or DVDs in a raid would be subject to criminal charges. (The previous ceiling was 1,000 CDs and DVDs). However, foreign companies say such laws are no match for China's savvy pirates, who now will make sure they never get caught with any more than 499 items in a single location.

Global Solution Needed

Indeed, the entire mainland enforcement effort could use a serious overhaul. In other countries, police launch investigations and conduct raids based on weeks or months of surveillance and evidence-gathering. In China, cops make their bust, then decide whether the seizure is big enough to justify criminal charges, which, thanks to advance tip-offs to the counterfeiters, it rarely is. "They start the investigation process at the wrong end," says Alex Theil, director of investigations at General Motors China, which has had to contend with counterfeit auto parts. "With a one-off raid you only have a one-second shot at seeing what the picture is."

Invariably, the picture is more complex than what meets the eye, and therein lies the biggest challenge in the fight to stamp out fakes. Though China may be ground zero in the production of fake DVDs, pharmaceuticals, phone batteries, and luxury handbags, counterfeiting is a global business that requires a global solution.

Cross-Border Traffic

"It's an international problem, so we need to work not just on the producers and exporters in China, but also on the importers and buyers outside China," says Jack Chang, Shanghai-based chairman of the Quality Brands Protection Committee, a grouping of 170 companies pressing for greater intellectual-property protections in China.

In fact, the counterfeit goods trade is increasingly cross-border, just like the drug trade. An executive in charge of investigations at a major cigarette manufacturer—who requested anonymity—notes that as Beijing has ratcheted up penalties and enforcement, Chinese pirates have started to move offshore to safer havens in Burma, Cambodia, and Indonesia.

North Korea, meanwhile, has long been a center for state-sanctioned counterfeiting, while Russia and India are also emerging as new production centers. What's needed, says the cigarette company official, is greater coordination between countries' police and customs departments. "Nobody is going after the transnational syndicates," he says.

No More Distractions

One worrying trend is that almost no product is immune to copycats these days. In a recent raid on a printing factory in the southern Chinese province of Guangdong, police seized bogus packaging and labels for Coca-Cola (KO) bottles, Wrigley's (WWY) chewing gum, Trix (GIS) breakfast cereal, and Purina cat food. And it's not just unsuspecting consumers who are at risk. Executives on the ground in China say counterfeiters are moving up the value chain, turning out sophisticated electrical components and machinery aimed at industrial users.

Whether the U.S. and China find a way to fight this problem together in the name of better trade relations remains to be seen. Last year Beijing announced a multibillion-dollar deal to purchase Boeing (BA) aircraft, and there are reports out now that China will make $12.5 billion worth of additional purchases of U.S. soybeans, cotton, machinery, and electronics this year. Still, it looks as if the U.S. won't be bought off so easily this time around.

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