U.S. Takes Piracy Pushback to WTO

Intellectual-property rights violations in China cost the U.S. billions each year, leading to complaints to the World Trade Organization

by Frederik Balfour

For years Washington has been pounding on the table to try to get Beijing to clamp down on rampant piracy and counterfeiting. But now the U.S. has decided that talking tough just isn't enough. On Apr. 10 it took the fight to the next level by filing a pair of formal complaints with the World Trade Organization.

"Inadequate protection of intellectual-property rights in China costs U.S. firms and workers billions of dollars each year," said U.S. Trade Representative (USTR) Susan Schwab. Predictably, Beijing is peeved. A statement posted on the Chinese Ministry of Commerce's Web site warned that the WTO action will "bring an unfavorable impact on bilateral trade."

In fact, it's the lopsided nature of that commercial relationship that compelled the U.S. to act. Congress has been pressuring the White House to take steps to narrow the U.S. trade deficit with China, which swelled to $233 billion last year. According to an American trade official, the USTR was about to haul China into WTO arbitration last fall, but Beijing secured a temporary reprieve. In the end, it boiled down to an issue of "face"—something the Chinese understand well. "It was important for our integrity and credibility for us to follow through," says the official.

U.S. film studios, record companies, and book publishers have long complained that Chinese piracy translates into billions in lost sales: The Motion Picture Association of America estimates that the industry was cheated out of $2.7 billion in 2005.

A Question of Availability

But piracy isn't Hollywood's only beef with Beijing. The film companies, along with the music and publishing industries, also chafe at the mainland's restrictions on the sale of their products, an issue addressed by the WTO complaint. Chinese authorities currently limit imports of U.S. films to a couple dozen new releases a year. But the of tens of thousands of different titles of bootlegged DVDs, which sell for less than a dollar apiece, is evidence that demand for U.S. films and music far outstrips supply.

"It's not a question of price, but availability," says Anthony C. Chen, an intellectual-property rights lawyer with Jones Day in Shanghai. "The market wants to watch all the movies from Hollywood." Just ask Fei Meng, a 30-year-old editor of an online site who picked up a genuine copy of Casino Royale in Beijing for $3.20—nearly three times what a fake would have cost her. "The image is much clearer, the color is great, and the sound is better," she says.

The USTR acknowledges China has made improvements in the area of copyright protections since joining the WTO in December, 2001. In fact, on Apr. 9, Beijing announced that individuals caught with 500 or more CDs or DVDs in a raid would be subject to criminal charges. (The previous ceiling was 1,000 CDs and DVDs). However, foreign companies say such laws are no match for China's savvy pirates, who now will make sure they never get caught with any more than 499 items in a single location.

Global Solution Needed

Indeed, the entire mainland enforcement effort could use a serious overhaul. In other countries, police launch investigations and conduct raids based on weeks or months of surveillance and evidence-gathering. In China, cops make their bust, then decide whether the seizure is big enough to justify criminal charges, which, thanks to advance tip-offs to the counterfeiters, it rarely is. "They start the investigation process at the wrong end," says Alex Theil, director of investigations at General Motors China, which has had to contend with counterfeit auto parts. "With a one-off raid you only have a one-second shot at seeing what the picture is."

Invariably, the picture is more complex than what meets the eye, and therein lies the biggest challenge in the fight to stamp out fakes. Though China may be ground zero in the production of fake DVDs, pharmaceuticals, phone batteries, and luxury handbags, counterfeiting is a global business that requires a global solution.