Chinese Fakes: Tough to Police

 

The country is being told to crack down on piracy of products and intellectual property, but the problem is a global one that will be tough to stamp out

 

On Apr. 6, Beijing announced that it would lower the threshold for the number of bootleg copies seized that would trigger criminal charges. The move is part of an effort to prosecute sellers of pirated CDs and DVDs. But it probably won't impress U.S. motion picture and recording industry executives, who have been lobbying Washington to put more pressure on China to combat rampant piracy and counterfeiting. U.S. Trade Representative Susan Schwab said the U.S. will file two formal complaints with the World Trade Organization on Apr. 10 alleging that China is not doing enough to protect intellectual property. The second case concerns market barriers that the U.S. contends keep American books, films, and music out of China. "Piracy and counterfeiting levels in China remain unacceptably high," Schwab said Apr. 9 in announcing the new cases: "Inadequate protection of intellectual property rights in China costs U.S. firms and workers billions of dollars each year."

Here's a quick guide to the central issues involved:

Is the problem of counterfeiting getting better or worse in China?

Chinese authorities have made honest efforts in recent years to improve enforcement, stepping up police raids on rogue manufacturers, tightening controls at customs to prevent exports, and making it easier to prosecute counterfeit producers and distributors. But counterfeiters are growing more sophisticated about how they manufacture and distribute knockoffs, especially exploiting extensive global supply networks. There's also evidence that as China clamps down, production of the knockoffs is shifting to India and Russia.

Have foreign companies successfully used Chinese courts to protect their brands?

The Quality Brands Protection Committee (QBPC), a coalition of foreign and domestic companies seeking intellectual-property rights protection, says that it has received 22 submissions from members detailing successful criminal prosecutions against counterfeiters. A few years ago, there were none. Lawyers also say that foreign companies are now using Chinese courts to fight each other over patents that they have registered with China, which is strong evidence of their faith in the Chinese legal system.

Would the problem of piracy in China improve if the foreign copyright owners had greater access to the Chinese market?

The U.S. will probably call for greater market access under the WTO as well. China only allows the legal importation of 20 foreign movie titles a year, and has restrictions on musical recordings, too. Yet the prevalence of tens of thousands of different titles of bootlegged DVDs and CDs, which sell for less than a dollar, is evidence there is enormous demand. "The market wants to watch all the movies from Hollywood," says Anthony Chen, an intellectual-property rights lawyer with Jones Day in Shanghai. "There is no alternative for customers; it's not a question of price but availability."

If counterfeiting is a global problem, is targeting China alone a sufficient approach?

Law enforcers and brand owners say that only a multilateral approach will be effective. Though China is ground zero for much of global product piracy, worldwide distribution is controlled by international syndicates. Thanks to the Internet, a foreign buyer can now send specifications for a counterfeit Calloway golf club, a Nokia ( NOK) mobile-phone battery, or a pair of Nike ( NKE) sports shoes to a Chinese manufacturer without having to set foot in the country. Still, as one member of the QBPC who requested anonymity puts it, "The bad guys develop skills much faster than law enforcement, so while there are stronger and stronger efforts, the collaboration is lagging behind the counterfeiters."

What is the likely outcome of a U.S. complaint filed with the WTO?

The U.S. has only filed three complaints with the WTO against Beijing since China joined the organization in December, 2001. First, the U.S. must formally ask for consultations with China before asking the WTO to make a judgment, a process that could take several months. Still, trade tensions with China are continuing to escalate in the face of a yawning gap with the U.S. and other major trading partners. So Washington may also appeal to the WTO to ensure greater access to China's market for foreign music and movies (see BusinessWeek.com, 4/4/07, "Rough Road Ahead for U.S.-China Trade").

Is the nature of counterfeiting changing?

It is no longer confined to imitation watches, handbags, and auto parts. Executives on the ground in China say that as mainland manufacturers move up the value chain in legitimate goods, so do counterfeiters who are making sophisticated electrical components and machinery aimed at the industry, not at the end consumer.

Will the new, stiffer laws imposed on sellers of pirated products help solve the problem?

Probably not. Many retailers no longer display their wares openly. They now resort to the use of catalogs. And despite several high-profile crackdowns at Silk Street Market, Beijing's best-known counterfeiting locale, this practice continues unabated.