US Message to China: Punish Patent Pirates

Frustrated by Chinese inaction, some firms head to court

WITH United States trade relations on the line, Beijing officials insist they are doing all they can to eliminate rampant patent and copyright piracy in China. But US executives say protecting brand names and icons, such as the Nike swoosh, from illegal knockoffs in the vast, chaotic Chinese market is a quixotic battle. Calls for government reinforcements go largely unanswered.

``This is a big problem, not just for Nike but for a lot of other companies as well,'' says Dan Loeb, general manager of Nike China, the Beijing-based marketing arm of Nike Inc., a US footwear and apparel manufacturer. ``And it's not just a problem today, it's a potentially huge problem for the future.'' It's not unusual, for example, to find Beijing street vendors selling cheaply made sneakers sporting the name Nike, Adidas, or Reebok. Mr. Loeb says the full range of Nike products is being illegally copied.

Threats, but few answers

Nike has threatened legal action and has appealed to government trademark, industry, and police officials to stop Chinese pirates, Loeb says. But little has been done. ``China has the highest copyright piracy rates in the world,'' says Eric Smith, executive director of the International Intellectual Property Alliance, a Washington-based trade group. Pirated records, software, books, and movies from China cost US manufacturers $827 million in lost revenues yearly, the group says.

Trade experts estimate that US manufacturers are losing a similar amount to Chinese counterfeiters of clothing, toys, sunglasses, and other brand-name products. Chinese-made pirated goods also are exported to the US market - where $120 million in counterfeit products were seized last year - and other nations.

Global trade in counterfeit goods nets $80 billion in revenues annually, according to the US International Trade Commission in Washington. Since President Clinton stopped linking human-rights abuses with renewal of China's most-favored-nation trade status in June, infringement of intellectual property rights has emerged as perhaps the most intractable obstacle to better ties between China and the US.

The US says until Chinese laws protecting patents and copyrights are tougher and more strictly enforced, the US will block Chinese efforts to reenter the General Agreement on Tariffs and Trade (GATT) this year. In June, the US began a trade investigation, Special 301, into Chinese piracy that could last up to nine months and trigger the imposition of trade sanctions.

US Deputy Trade Representative Charlene Barshefsky recently called on China to speed up efforts to lower trade barriers. Ending a negotiating round in Beijing, Ms. Barshefsky acknowledged at a press conference that China had taken steps to increase market access and toughen enforcement of copyright laws, but warned that China must ``put its foot on the gas pedal'' to rejoin GATT.

Eager to become a founding member of the new World Trade Organization when it evolves from GATT in 1995, China recognizes the growing danger the piracy confrontation poses to its crucial $40 billion trade with the US and insists that it is trying to clamp down.

Stepping up enforcement

In recent months, officials have conducted high-profile raids on illicit producers of compact discs; it also has shut down a Chinese bookstore, printer, and distributor that the Walt Disney Company sued for producing illegal books using Disney characters. In September, a special watchdog agency, the China United Intellectual Property Protection Center, was created to investigate complaints and boost enforcement. Wu Yi, China's minister of foreign trade and economic cooperation, said recently that authorities were doing all they could to counter the abuses, but that ``China is a large country and enforcement is not always easy.''

US executives say local protection of pirate companies is the biggest roadblock to solving the problem. Western lawyers working on patent and copyright cases urge foreign executives to appeal directly to Beijing authorities before resorting to China's nascent and slow-moving legal system. But these executives hold that Chinese counterfeiters who bribe government officials or the military often remain outside Beijing's ambit of enforcement.

``Local authorities protect the manufacturers of counterfeit products because it's good for the local economy - and good for them,'' a US producer of name-brand clothing says.

Still, US companies increasingly are turning to the courts for action. Last summer, software producers Microsoft Corporation and Lotus Development Corporation sued five Chinese retailers, accusing them of marketing pirated programs. The case was filed after Bill Gates, chairman of Microsoft, the US company most affected by the wave of pirated goods, complained about counterfeiting directly to senior leaders during a visit to China. US music producers, who lost an estimated $345 million yearly to fake Chinese-made CDs, also have filed lawsuits.

The piracy problem is overflowing into other key export markets for US producers such as Hong Kong, where industry officials estimate that illegal copies of video games, electronic reference materials, and application programs account for more than 70 percent of the colony's market.

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