China a Weak Ally on Piracy

Cheap counterfeit goods, such as these watches in Shanghai, are common in China's shopping districts. U.S. firms complain of lost billions.
Cheap counterfeit goods, such as these watches in Shanghai, are common in China's shopping districts. U.S. firms complain of lost billions. (By Claro Cortes Iv -- Reuters)
By Peter S. Goodman
Washington Post Foreign Service
Saturday, June 4, 2005

BEIJING, June 3 -- Commerce Secretary Carlos M. Gutierrez on Friday engaged in what has become a required ritual for U.S. trade officials visiting China's capital: He walked down the street and surveyed the plentiful supply of pirated Hollywood movies, finding a DVD copy of the new "Star Wars" film selling for a single dollar. Then, he told a room full of journalists that he was here to put a stop to this trade.

"We would like to see greater enforcement," Gutierrez said at an afternoon news conference, underlining that intellectual property is his major talking point on his first official trip to China. "I'll be speaking with Chinese officials. The time is now to see some results."

Most of the journalists in the room had sat through this more than once. By establishing as his primary goal delivering progress on the widespread theft of intellectual property, Gutierrez was taking on a task that has eluded many others and may be impossible, analysts said. From street vendors hawking fake Prada handbags to factories reverse-engineering designs for mobile phones, the brazen counterfeiting of goods and the stealing of patented ideas is part of the basic fiber of Chinese business.

Much like others who have held his post, Gutierrez described his Chinese government counterparts as "partners" in the effort to stamp out the theft of intellectual property, which Washington said costs U.S. companies tens of billions of dollars a year in lost sales. But the reality, say experts and foreign business leaders, is quite the opposite: Far from an ally in a joint undertaking, China's government actively tolerates and even rewards the stealing of ideas as its anointed development strategy. Local governments see the sales of pirated products as a way to keep people working.

"The goal of the government is to create an indigenous technological capacity, and the perception is that all of the technology is controlled by the United States, Europe and Japan," said Arthur Kroeber, managing editor of China Economic Quarterly. "They feel like they need to steal as much as they can for as long as they can until they produce their own technology. They have no incentive whatsoever to enforce, so most of these discussions are not very useful."

Two years ago, Cisco Systems Inc., the giant telecommunications equipment company, sued Huawei Technologies Co., a fast-growing Chinese competitor, accusing the firm of copying its software code and building it into some of its products. Last summer, Huawei settled the suit, which was widely seen as an admission of wrongdoing, though the company denied it. Only months later, the state-controlled China Development Bank extended a $1.25 billion line of credit to Huawei as the company aims to expand sales in markets around the globe.

"Huawei is a cheater, but they have the full faith and credit of the Chinese government behind them," Kroeber said.

General Motors Corp. is pressing Chinese authorities to enforce intellectual property laws in a case in which it says one of its designs was illegally copied by a Chinese upstart, Chery Automotive Co. Chery is making plans to export its cars to the United States by 2007.

Now that China is a member of the World Trade Organization, the United States cannot threaten to impose unilateral sanctions on Chinese products for intellectual property theft, as it did in the 1990s. It must pursue a lengthy case with the WTO first.

Gutierrez has declined to say whether he would support such an action.

The Chinese position is that these cases are an unavoidable part of the free-market system they are embracing as the country continues its transition from communism. Fang Xingdong, a high-technology policy expert at Tsinghua University in Beijing, argues that the government should simply allow domestic companies to develop as best they can, using whatever means available, and not shackle them with strict enforcement of intellectual property laws. Aggrieved parties can use civil courts to seek claims.

"The government should do very little and not interfere," Fang said. "They should let Microsoft and Hollywood file lawsuits against Chinese businesses."

The commonplace theft of intellectual property here is both a symptom and a cause of a dearth of spending on research and development by Chinese companies, which have typically sought fast returns by imitating successful products. Throughout the 1980s and 1990s, China's largest industrial firms devoted less than 2 percent of their sales revenue toward designing new goods and technologies, according to research by George J. Gilboy, a China expert at the Massachusetts Institute of Technology. That is less than one-tenth the level of funding for research and development typically spent by technology firms in the United States, Europe and Japan.

Chinese companies are reluctant to invest in research and development because they typically operate on very tight profit margins: A surplus of competition has driven prices for goods such as televisions and lawn mowers through the floor. Moreover, Chinese companies are intimately familiar with just how easily innovation can be stolen and imitated, with many competitors sharing the profits of whatever new development one company produces.

Tao Xingliang, dean of the school of intellectual property at Shanghai University, said the government has in recent years taken steps to stamp out violations by strengthening laws against counterfeiting. But as the U.S. commerce secretary saw on his visit here, a huge gap separates the existence of laws from real enforcement.

The most tangible area of piracy is the trade in counterfeit versions of branded goods and movies. Last year, the local government in Beijing shut down the open-air Silk Alley market, a city landmark that long nurtured a thriving trade in fakes, while opening a new, indoor market alongside the old site. Among the reasons given was that the new building would be easier to police, allowing authorities to better enforce anti-counterfeit laws.

But on Friday, the new Silk Alley market was abuzz with shoppers snapping up the same products as ever -- fake Armani blue jeans, North Face windbreakers and Louis Vuitton handbags. Merchants offered fake Samsonite suitcases and bogus Calloway golf clubs alongside counterfeit Gucci perfume. Vendors sold the fourth season of the hit television show "Seinfeld" on DVD for $10.

"The police come every now and again, but they let us keep selling," a cashier at the DVD place said.

Gutierrez noted that applications for patents by Chinese companies now exceed those filed by foreign firms, suggesting that this indicates that China is now developing its own innovations and will want to protect them.

"China is beginning to transition from a manufacturer of commodities to an innovator," he said.

But China, it is often noted, is neither simple nor small. Gutierrez is here meeting with central government officials. But their policies -- even were they to opt for stricter enforcement -- do not always filter down to the local level, where officials have their own interests in keeping trade going to keep money flowing.

"Partnership with the central government in Beijing is a good idea, but it has its limits," said Gilboy, the MIT researcher. "Due to the political strength of local interests, Beijing cannot enforce its preferred policies. Partnership has to be extended to the local level, and it has to include both sanctions and incentives to be effective."

Special correspondent Jason Cai contributed to this report from Shanghai.

© 2005 The Washington Post Company