China Piracy of U.S. Products Surges Despite Accord

HONG KONG —  Six months after Beijing agreed to U.S. demands that it clamp down on pirated trademarks, copyrights and patents, China’s production of illegal compact discs has actually doubled and six of the seven major counterfeit CD factories shut down at the time by authorities have reopened, top U.S. officials say.

China’s early failure to abide by the agreement is yet another threat to the troubled U.S.-China trade relationship, and prompted a warning Monday from U.S. Trade Representative Mickey Kantor that the Clinton Administration “will take very strong action” if China is not adhering to the pact by the end of the year.

The assessment of China’s track record since the agreement narrowly averted a U.S.-China trade war in March was made here by Assistant U.S. Trade Representative Lee Sands, who was en route to Beijing for further talks on intellectual property rights and other market-opening measures agreed to in earlier negotiations.

Sands, who led the U.S. negotiating team that forged the trade agreement, said production of both music and software compact discs has doubled over the past six months and could double again in a year.

The increase comes despite a “special enforcement period” in China punctuated by dramatic raids on rogue retailers, a landmark court judgment against a counterfeiter and the creation of strike forces in 18 cities.

Despite the apparent flouting of the agreement, Kantor defended the pact and said in an interview in Washington that the United States will tolerate noncompliance for only so long before pressuring China to enforce the accord.

“The agreement is a very tough, detailed, comprehensive agreement,” Kantor said. He said there had been “inconsistencies” in its enforcement, with some jurisdictions ignoring it--allowing piracy to increase--and other areas cracking down on the illegal trade.

“Much depends on the provincial politicians and whether they’re holding to Beijing’s dictates,” Kantor said.

With Sands on his second trip to China since the agreement was completed, Kantor said, “We are making it clear to China that enforcement of the agreement is critical.

“We are not going to stand by and not take action and not enforce our trade laws if they don’t adhere” to the terms of the pact, he said, using the sort of barely veiled threats that suggest a willingness to eventually impose trade sanctions.

Sands was careful to give credit to Beijing, which a year ago would scarcely acknowledge that piracy was a problem, for beefing up anti-infringement legislation and cracking down on vendors. Authorities have announced 3,117 actions against peddlers and distributors since the accord. But he said China is failing to attack the heart of the system: well-connected manufacturers.

“I have no doubt that the biggest problem is the guanxi [political relationships] of the owners of factories,” Sands said. “These factories obviously are solidly entrenched and have powerful supporters. . . . The question is whether the Chinese have the political will to shut them down.”

David Buxbaum, an attorney who helps U.S. manufacturers protect their copyrights in China, praised Beijing’s “action plan” but said that China doesn’t have the organization or trained specialists to live up to it.

“It could be an excellent device for [enforcement], but it doesn’t work,” he said. The legal system lacks trained judges and prosecutors, the fines for offenders are “unmeaningful,” and enforcement agents are often loath to crack down in their own territories, he said.

Intellectual property rights are key to U.S. trade relations with China, where counterfeiters are known to copy everything from Kellogg’s Corn Flakes to compact discs. U.S. companies such as Procter & Gamble face as much competition from ersatz versions of their own products as they do from other companies’ legitimate brands. Bootleg videos of “Waterworld” and “Apollo 13” made the films big hits in Hong Kong before they ever hit the theaters.

“There are entire villages in China devoted to making bootleg products,” Buxbaum said. “How can the policemen who live in the village close down the industry that the whole place depends on for its livelihood? They’re very protective of local interests.”

It’s the lucrative business of bootleg software, however, that boasts protection from the highest levels and causes the U.S. government the greatest concern. Nearly 95% of computer software used in China--including by government offices--is illegally copied, leading to roughly $351 million in lost software sales last year, say U.S. industry representatives in the Business Software Alliance. And Chinese fakes are being exported across Europe and Southeast Asia.

But even in Hong Kong, where there is much more political will to eradicate the underground industry, enforcement is difficult. On Wednesday, Hong Kong customs officials raided the notorious Golden Arcade, a subterranean labyrinth of pirated software and computers. Two hours after authorities left, vendors had churned out new stacks of copied discs, and business continued as usual.

If ordinary criminal crackdowns alone won’t work, U.S. software makers hope that civil charges will be another way to bring bootleggers to court. The Business Software Alliance served 22 illegal software manufacturers with injunctions last week, and their Golden Arcade stalls have stayed closed. So far.

“We’re not the police,” said BSA Vice President Stephanie Mitchell. “We shouldn’t be the ones responsible for upholding the law. It cost [$128,000] just to serve those notices. But it costs us half a million a month in lost sales if we do nothing.”

The battle to halt piracy is bound to intensify as the U.S. trade deficit with China grows. The trade gap is likely to be nearly $40 billion by year’s end and could reach $50 billion in 1996, overtaking Japan’s within a few years if current trends continue, Sands said.

“China is replacing Japan as America’s trade nightmare,” said David Lampton, the president of the National Committee on U.S.-China Relations.

Kantor noted that China sends 40% of its exports to the United States, adding: “We have ways we can exact a measure--ways we can respond.” He stopped short of threatening the use of sanctions, which often take the form of elevated tariffs on imported goods to price them out of the U.S. market.

Kantor said he is likely to address the problem when he meets with China’s foreign trade minister, Wu Yi, in Osaka, Japan, next month at the meeting of the Asia Pacific Economic Cooperation forum.

Farley reported from Hong Kong and Gerstenzang from Washington.