Psst! Pirate CDs Are a Dime a Dozen in China

On a busy street corner less than a block from the U.S. Embassy here, the sidewalk was thick on a recent evening with aggressive peddlers selling pirate compact discs.

“Follow me. I have something to show you,” whispered a woman in her 20s. She led two potential customers to an off-duty taxi belonging to her husband. Inside were hundreds of CDs, ranging from early Beatles to the latest R.E.M. The Rolling Stones’ recent “Voodoo Lounge” was available. So was Madonna’s “Bedtime Stories.”

The price: $1.75 each, or three for $5.

Similar street-corner CD markets, consisting entirely of pirated discs manufactured in China, can be found all over the country, with minor variations. In poorer areas where few people have CD players, for example, the salespeople display the pirate CDs but instead sell cassette tapes made from the discs--thus creating pirated versions of pirated versions.

The pervasive, blatant manufacture and sale of pirated compact discs, laser discs and CD-ROM discs has caused U.S. Trade Representative Mickey Kantor to conclude that the Beijing government has failed to enforce its pledge to eradicate piracy of American intellectual property. The piracy is estimated to cost U.S. producers more than $1 billion a year.

The issue also has raised a broader set of questions about the Chinese government’s willingness or even ability to honor international copyright and patent agreements. Some contend that the same government that under Mao Tse-tung exercised rigid control over all aspects of Chinese life no longer has the power to control state-owned businesses in some provinces.

On Saturday, Kantor threatened to order trade sanctions against an array of Chinese products, ranging from toys to athletic shoes, unless “China demonstrates serious resolve to eradicate rampant piracy” by a Feb. 4 deadline.

Chinese trade officials immediately struck back with an even broader list of “counter-retaliatory” measures, which included a threat to exclude American auto makers from joint-venture deals to make a new Chinese family car. A trade war seems in the offing unless negotiators for the two countries can make progress when they meet in Washington later this month.

With pirate CDs for sale practically on the U.S. Embassy doorstep in Beijing, U.S. officials feel they have compelling proof that the Chinese have not honored their pledge to crack down on pirates. If anything, the officials contend, the piracy has grown worse since negotiations began 18 months ago.

“The most obvious symbol of this piracy is the 29 compact disc and laser disc factories in South and Central China that are now flooding Hong Kong, Southeast Asia and, increasingly, North America with pirated goods,” a senior U.S. trade official said in December after talks broke down with Chinese trade officials.

In the last year, the number of Chinese compact disc factories has increased from 15 to 29. U.S. trade officials say they produce more than 75 million CDs a year, although the Chinese domestic market consumes only 5 million annually.

The officials conclude that most of the discs are exported, some in novel packaging that combines the works of rival artists. For example, a recent visitor to Guangzhou (formerly Canton) found a CD that combined songs from Mariah Carey and Whitney Houston on the “Flying Records” label.

The Chinese factories also do a thriving business in pirated laser disc videos.

Four months ago, one investigator from the American video industry, posing as a buyer, visited the large Shenfei Factory in Shenzhen, across the border from Hong Kong. To his surprise, he was led to a warehouse full of laser discs of Disney’s “The Lion King,” which had not yet been released in the United States.

In recent months, American officials have claimed they have evidence that several Chinese factories are producing pirated CD-ROM discs, the latest and potentially most profitable form of piracy of intellectual property.

China claims that the United States has made unrealistic demands, ignored Chinese efforts to enforce protection of copyright and other intellectual property rights and used the issue in an attempt to scuttle China’s much-desired entry into the World Trade Organization.

In December, the Chinese accused the U.S. negotiator on intellectual property rights, Lee Sands, of walking out on talks, in the words of one Chinese official, “without even bothering to say goodby.”

In a front-page article, the official English-language China Daily newspaper attacked Sands as a “bogeyman” who single-handedly undermined negotiations. Two days later, the newspaper retracted the article, but the level of hostility felt by the Chinese has been reflected in a recent spate of anti-American articles in the press. A Sunday commentary for the official New China News Agency was titled “Washington’s Barbarous Action Against China.”

“Retaliation and trade sanctions are the old tricks often resorted to by Washington in settling its trade disputes with other countries,” commentator Yin Qian wrote. “The real motive behind the U.S. bluster is to exert pressure and force on the other side to make concessions. . . .”

But so far, at least, the Chinese have failed to address the Americans’ main allegation: that the Chinese government has done little or nothing to halt production of pirate discs at the 29 clearly identified factories.

“We cannot resolve this investigation,” said a senior U.S. trade official in December, “without action against these factories and other serious offenders.” China’s response has been to accuse the United States, and negotiator Sands in particular, of attempting to interfere in China’s legal system.

China’s failure to act against known manufacturers has prompted some observers to question the government’s ability or political will to crack down. “It’s a question of will,” one official said. “It suggests they can’t do anything.”

A number of the factories are state-owned industries, some of which are purportedly linked to high-ranking Chinese officials or their offspring. The Shenfei Factory in Shenzhen is owned by the Shenzhen municipal government.

This creates a situation in which the pirate laser discs of “The Lion King” are produced by the government itself.

On another level, the profitable pirate CD factories are an example of the Chinese “market economy” system run amok. State factories and institutions are under enormous pressure from the central government to branch into profitable enterprises. For many of the plants, ceasing pirate operations would mean taking away one of their most profitable enterprises.

Even the handful of indigenous Chinese computer software companies complain of piracy. SunTrendy, the Beijing-based company whose programs translate Microsoft Windows software into Chinese, estimated its losses to pirates at $9.3 million in 1994.

The much-publicized crackdowns that have taken place have mostly been limited to sweeps of street peddlers in the major cities.

In August, the New China News Agency announced the confiscation of 200,000 pirate compact discs and 750,000 videotapes and audiotapes. The agency reported that 56 illegal factories had been closed and “7,000 culprits captured.”

But the raids, if they actually occurred, have had little effect on the major producers.

“They’re going after the people on the street,” complained one U.S. trade official. “What we haven’t seen them do is go after major producers and distributors.”

Several of the pirate CD street peddlers, interviewed in Beijing this week, said they sometimes are harassed and fined by police. Many carry their wares in duffel bags that allow quick exits in back alleys.

But even at this low level, the new market fever that exists across China appears to dominate. The young woman selling pirate CDs from her husband’s taxi proudly explained to a reporter that it was a good way to supplement her meager income as a secretary in Beijing.

The money she and her husband make selling pirate CDs, she said, will help make a better life for their 5-year-old son. She pointed to the sun visor of the taxi, where several photographs of a child were attached.

Then she took out a Christmas CD by singer Mariah Carey, portrayed on the cover in a sexy Santa suit. “This one’s really good,” she said. “Christmas.”

Times special correspondent Maggie Farley in Hong Kong contributed to this report.