U.S.-China Trade Talks Stall Over Copyrights : Piracy: Washington warns of sanctions, citing growing number of counterfeit CD factories. Beijing threatens countermeasures.

Two weeks before a Dec. 30 deadline, Washington broke off key trade talks with Beijing, warning that trade sanctions are inevitable if China doesn’t make “serious offers” to improve intellectual property rights enforcement soon.

American trade officials declared the latest round of talks at a dead end after three days of intense wrangling in Beijing.

At issue is China’s treatment of international copyrights, patents and trademarks. Piracy of compact discs, software, movies, pharmaceutical products and even food has become rampant in China’s free-for-all economy--even though Beijing promised two years ago to curb such violations.

A senior U.S. trade official said China has not only failed to live up to those promises but permitted the number of factories making pirate CDs to jump from 15 to 29 in the 18 months since America and China began negotiations on the issue.

The capacity of those factories is about 75 million discs, the official said, 15 times China’s legitimate domestic demand for CDs. The remainder are smuggled abroad.

The United States has demanded that those plants be shut as a sign of China’s commitment to protect intellectual property.

In June, Washington gave Beijing six months to demonstrate its commitment or face sanctions under the Special 301 provision of U.S. trade law. That provision permits Washington to impose sanctions commensurate with damage done to American producers by illicit trade practices in another country.

Industry groups estimate their annual lost sales from copyright infringement in China alone at $827 million, the U.S. official said.

At the Dec. 30 deadline, U.S. Trade Representative Mickey Kantor can extend the talks for 30 days, if a resolution seems near, or he must order retaliatory sanctions.

China responded angrily to Friday’s threat of retaliation. Wu Yi, the country’s trade minister, said sanctions would provoke a counter-strike.

“The big-stick policy can only lead to a trade war,” the official China Daily quoted Wu as saying. “In that case, the feeling and economic benefits of both sides will be hurt.”

The timing of the intellectual-property rights dispute is awkward for China, which is seeking to re-enter the General Agreement on Tariffs and Trade.

It wants to become a founding member of the new World Trade Organization, which replaces the GATT on Jan. 1, 1995. China considers it a matter of prestige to be a founding member of the WTO and accuses the United States of trying to scuttle its chances.

In Geneva next week, GATT members will consider a draft protocol offering concessions to China, which has requested special exemptions as a developing nation.

America and other members, however, have argued that China, one of the world’s fastest-growing economies, should be considered a developed trading power and held to higher standards.

If denied founding member status, China has threatened to disregard bilateral trade agreements. “If the U.S. should block our re-entry by way of pressure, it’s not China that will bear the consequent responsibility,” Wu was quoted as saying.

U.S. officials have said they support China’s membership, just as they say they believe some Chinese officials want to correct intellectual-property rights violations.

“China has laws on the books to fight these practices, but has failed to enforce them,” one official said.

During the last round of talks in Beijing, hawkers sold bootleg CDs on the sidewalk in front of the American negotiators’ hotel.

This time, officials brought representatives from the U.S. Justice Department, the Customs Service and the FBI to offer seminars on enforcement to their Chinese counterparts. America is asking China to create a customs service to seize and destroy contraband, to modify its court structure to prosecute offenders and to open the market to legitimate American products to satisfy consumer demand.

But China has offered American officials a few lessons in capitalism, Chinese style: Some of the factories are owned by local governments and military organizations in politically and economically powerful southern China; they are resisting their shutdown.

“It’s a question of will,” said one official. “It suggests (the government) can’t do anything.”