Enforceable property rights are the basis of any functioning market economy. Manufacturers and sellers, whether of appliances, books, clothing, software, films or prescription drugs, must have confidence that their merchandise won't be stolen outright or subject to unauthorized copying. The latter possibility is the reason for patent and copyright laws.
But maintaining a high level of confidence has become more difficult in an era of economic globalization. The easing of barriers to trade and information-sharing, despite its many benefits, has resulted in the rise of piracy rings specializing in making copies of merchandise, often of inferior quality, and passing them off as the real thing.
The maypole of this criminality is mainland China, an issue certain to recur in forthcoming U.S.-Chinese trade talks in Washington on May 23-24. As well it should. Store and street vendors in Shanghai, Beijing and other Chinese cities now teem with counterfeit merchandise, much of it made in America. It's one reason why our trade deficit with their country in 2006 reached $232.5 billion. Last month, the U.S. government responded by filing two complaints with the World Trade Organization. The first alleges that the People's Republic of China has failed to modify its legal framework to ensure a sufficient crackdown on piracy; the second charges that China has not removed certain market barriers, a prerequisite for membership in the Geneva, Switzerland-based WTO. If WTO negotiators can't resolve the dispute during a 60-day consultation phase, then the case would be referred to a WTO dispute-settlement panel for a formal ruling.
"Piracy and counterfeiting in China remain unacceptably high," announced U.S. Trade Representative Susan Schwab. "Inadequate protection of intellectual-property rights in China costs U.S. firms and workers billions of dollars each year, and in the case of many products, it also poses a serious risk of harm to consumers in China, the United States, and around the world."
The Senate Finance Committee's ranking members, Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), issued similar statements. Given the mood of their colleagues, it's a good thing the administration for now prefers mediation. The Senate in April 2005 voted 67-33 to refuse to table an amendment imposing a 27.5 percent tariff on all Chinese imports until Beijing revalued its currency to our liking. We could have triggered a real trade war had the bill become law. For good measure, the European Union and Mexico each have announced plans to join our WTO complaint. EU Trade Commissioner Peter Mandelson has visited China several times since taking office two and a half years ago, discussing the matter with Chinese officials to little effect.
Action would seem overdue. Pirated goods made in China now cost legitimate producers an estimated $50 billion in potential sales worldwide, with about half that figure representing losses to U.S. companies. Theft of copyrighted movies is a scandal all in itself. In 2005, our film industry lost an estimated $2.3 billion in revenue to worldwide Internet piracy and another $3.8 billion to bootlegged DVDs and other "hard goods." That many unauthorized copies are low-grade knockoffs, both in visual and sound quality, adds insult to injury.
Though piracy is also rampant in Vietnam, Malaysia and the Philippines, the Chinese are the leaders. Virtually all DVDs sold in China are illegal, notes the Washington, D.C.-based International Intellectual Property Alliance. In Beijing, unauthorized copies of such recent releases as "Capote," "Crash" and "Pride and Prejudice" openly sell for $1 each. Chinese ethnics here in America likewise practice their trade, though the possibility of getting caught is higher. In 2005, nearly 40 members of New York City's Yi Ging crime syndicate were indicted for operating a massive bootleg-DVD factory along with their other rackets.
Motion Picture Association of America Chairman and CEO Dan Glickman, a driving force behind our WTO complaints, thinks such action is long overdue. "Fair market access and respect for intellectual property of other countries," he remarked, "are basic conditions of membership in the global community which China committed to live by when it sought acceptance into the WTO." Copyright infringement of high-ticket consumer items is additional cause for concern. In late 2004, GM Daewoo, a U.S.-South Korean consortium, sued Chinese automaker Chery in China, alleging that the design of Chery's "QQ minicar" was virtually identical to that of the Chevrolet Spark. A year later, the parties reached an undisclosed settlement, the Chinese government reportedly having "encouraged" GM to resolve the matter quickly.
Piracy is endemic to the software industry as well. A report issued last summer by the Business Software Alliance, a U.S.-based industry group, estimated that 86 percent of software used in China in 2005 had been pirated. That was an improvement, believe it or not, over the 2004 figure of 90 percent. Catching the culprits, of course, requires the full cooperation of the Chinese government. Their officials point to progress. Two months ago, while China was establishing March 15 as "anti-piracy day," Chinese agents were seizing more than 1.8 million pirated CDs and DVDs from a makeshift facility in the city of Guangzhou. Last year, Chinese President Hu Jintao announced, "We should strengthen our law enforcement and...severely crack down on and effectively curb law-breaking and criminal acts of violating intellectual property rights." The Chinese government thinks our appeal to the WTO is an attempt to discourage behavior over which it has little control. Its legal system is relatively new, officials explain, and progress can occur only in measured steps. But broadening the scope of punishable offenses is one thing; enforcing the law is another. Common sense dictates that because prices of bogus DVDs have continued to decline, the Chinese government barely has made a dent in supply chains. Nor does it have much of an incentive to do so.
"They (the Chinese) are not going to change their ways," says Peter Morici, a business professor at the University of Maryland and former chief economist with the U.S. International Trade Commission. "This is all part of a political smokescreen." Zhou Fu-kuan, manager of a Shanghai DVD stand, similarly explains to Time magazine, "The government says they'll crack down on piracy. It usually lasts a few days..."
If tacit approval is unofficial policy, then China may be its own worst enemy, a possibility even some Chinese acknowledge. Musicians in that country, for example, say piracy has made producing new CDs so unprofitable that they view their releases as mere promotional material for concerts. And Chinese software company officials complain that they can't grow if thieves continue to churn out cheap imitations.
"Piracy has had a big impact on us, making it so we can't get powerful and compete with Microsoft," says former Microsoft manager Ren Jian, now chief operating officer of China-based Kingsoft Corp. About 90 percent of the company's English-Chinese dictionary sales are pirated copies costing a tenth of the real thing. The Business Software Alliance estimated about a year and a half ago that China's information-technology sector could triple, while creating 1.8 million new jobs if it were to cut its piracy rate by just 10 percentage points over four years.
Here in America, our main concern is defending American interests. And that means making sure our companies are immunized from and compensated for pilferage, regardless of the thieves' nationality. Seeking a brokered compromise or sanctions through the World Trade Organization appears a sensible way to convince foreign governments, most of all China, to step up their pursuit of infringement.
There is also a larger issue. Piracy is not some act of heroic renegade entrepreneurship that reaches emerging markets at affordable prices. It's an act of diverting revenues from businesses whose talent and energy are what brought "unaffordable" goods and services to the market in the first place.
That's called theft.
Over the next few decades, our economy may be in store for a lot more of this unless we take decisive action. Appealing to the WTO looks like a smart move.