Signs of China embracing global market rules abound, from Beijing’s decision to loosen its currency’s peg to the dollar to the willingness of Chinese companies to pursue acquisitions abroad.
But one thing never seems to change, and it’s as obvious on street corners today as it was six years ago. In 1999, when “Star Wars Episode 1-The Phantom Menace” debuted, it was quickly pirated on DVDs that sold throughout China for next to nothing.
Fast forward to May 2005-four years after China joined the World Trade Organization and embraced its stringent rules on intellectual property rights. When “Star Wars: Episode III-Revenge of the Sith” opened in U.S. theaters, copies again hit the streets of Beijing within days. Sold out of bicycle baskets by roving vendors, available in mom-and-pop retail stores everywhere, the counterfeit DVDs retailed for about 75 cents each.
For movie executives, those DVDs drove home the fact that their ongoing fight against counterfeiters has basically made no headway. Frustrated, Motion Picture Association of America president Dan Glickman recently raised the prospect of a push for action at the World Trade Organization.
Indeed, the MPAA is part of a Washington, D.C.-based coalition of copyright companies now working with the U.S. Trade Representative to study the possibility of taking China before the WTO to compel a genuine crackdown. Given the tough sanctions provided by the WTO’s Trade-Related Intellectual Property Rights agreement, such a move would have major diplomatic implications-at a time when the U.S. urgently needs Chinese help on North Korea and other issues.
The new, harder line says much about the level of exasperation among foreign companies in China. They can’t afford to stay out of such a large and potentially lucrative market. They’re well aware they face IP theft there. But the extent of piracy-which continues to escalate, according to a 2004 white paper by the American Chamber of Commerce in China-still catches many off guard.
The problem affects virtually every industry, from films to software to drugs to auto parts. What’s more, as China’s exports have surged in recent years, so have counterfeit exports. About two-thirds of pirated goods seized by U.S. Customs come from China. Though it’s difficult to place a value on financial losses, the U.S. Trade Representative estimates that counterfeiting worldwide costs American companies around $200 billion to $250 billion per year, with China likely responsible for the majority of those losses.
What’s standing in the way of better intellectual property rights enforcement? “It’s not a plot,” says Bruce Lehman, former commissioner of the U.S. Patent and Trademark Office and the chairman of the International Intellectual Property Institute. “It’s the result of a system in transition.”
Lehman, who’s also senior counsel at Akin Gump Strauss Hauer and Feld, points out the contradictions: On the one hand, senior officials are earnestly discussing business-method patents. On the other, there are events such as the decision last year by the State Intellectual Property Office to invalidate Pfizer’s 2001 patent on Viagra after Chinese drugmakers had challenged it. “That was kind of mysterious,” says Lehman.
There isn’t a shortage of laws, or of high-level promises. The latest: In a visit to China in July, U.S. Commerce Secretary Carlos Gutierrez won a pledge from government officials to increase criminal prosecutions in cases of IP theft. But while the laws on the books in Beijing exceed WTO obligations, local authorities in this sprawling country usually lack the resources and motivation to enforce them.
“China is very fragmented, so even if there was a lot of political will behind this, you would see local protectionism get in the way,” says Clement Ngai, legal counsel in Asia-Pacific for software maker Autodesk.
The enforcement organizations are a bewildering hodgepodge of agencies and their divisions, some with overlapping authority. Among those involved are the Administrations for Industry and Commerce, with its Trademark Division and Economic Supervision Division; the Technical Supervision Bureau; Copyright Administration offices; the customs authorities; and the Public Security Bureau, with its Social Order Divisions and Economic Crimes Investigation Divisions.
There are cultural issues as well. Many Chinese see strict intellectual property-rights enforcement as a zero-sum game in which foreigners benefit and Chinese lose. Historically, the act of copying hasn’t necessarily had negative connotations: In painting and calligraphy, Chinese artists sought to mimic acknowledged masters. Too, under Communism people grew up believing assets should be shared resources. “The arguments we hear from the Chinese side are, ‘Please lower the prices and then we won’t pirate,’” says Thomas Pattloch, chairman of the European Union Chamber of Commerce Intellectual Property Rights working group and an attorney in the Shanghai office of Schulz, Noack and Barwinkel.
