U.S. Plans China Trade Sanctions : Commerce: Punitive tariffs on $1 billion in imports will begin Feb. 26 if piracy of films, compact discs and other products continues. Beijing says it will retaliate in kind.

By RONALD BROWNSTEIN and RONE TEMPEST

Feb. 5, 1995 12 AM PT

TIMES STAFF WRITERS

WASHINGTON —

Raising the stakes in an escalating trade showdown, the Clinton Administration announced Saturday that it will impose punitive tariffs on more than $1 billion in Chinese imports if Beijing does not crack down on widespread piracy of American movies, compact discs, computer software and other copyrighted products.

U.S. Trade Representative Mickey Kantor said the Administration will levy duties Feb. 26 that would effectively double domestic prices of Chinese products in 35 categories--from picture frames to answering machines to surfboards--if an agreement cannot be reached by then to stop the “rampant” duplication of American goods in China.

“We cannot stand by while the interests of our fastest-growing, most competitive industries are sacrificed in China,” Kantor said.

He described the potential sanctions, which would affect goods that generate $1.08 billion in annual revenue for China, as “the largest retaliation ever undertaken by the U.S. government.”

Minutes after Kantor’s news conference in Washington, the Chinese government said it will impose retaliatory measures if the United States goes ahead with the sanctions. The potential Chinese actions include a ban on imports of U.S. films, suspension of talks with U.S. auto makers for large joint-venture projects and 100% tariffs on such American products as cigarettes, cosmetics, camera film, computer switchboards and alcoholic beverages.

In an official statement, a spokesman for the Chinese Foreign Trade Ministry accused the United States of making “unreasonable demands” on China.

Despite the bristling rhetoric on both sides, many trade specialists believe that both governments are anxious to reach a deal before the deadline in three weeks. Indeed, senior Clinton Administration officials said negotiations are expected to resume as soon as this week.

“The odds of reaching an agreement are very high,” said Greg Mastel, a senior fellow at the Economic Strategy Institute in Washington. “Both sides need the cover of sanctions, and both sides need the agreement.”

The Administration’s announcement drew wide support from representatives of the entertainment and software industries, who say Chinese piracy has cost them a fortune in lost business.

“All of the copyright (related) industries are united behind this action,” said Hilary B. Rosen, president of the Recording Industry Assn. of America.

“You can’t go on with one of the great economic powers in the world stealing 100% of intellectual property,” said Jack Valenti, chairman of the Motion Picture Assn. of America.

The growing trade tensions symbolize the pervasive gloom infecting U.S.-Chinese relations just eight months after the Clinton Administration moved to strengthen ties by severing the link between China’s human rights record and its status as a most-favored-nation trading partner.

The showdown over product piracy comes only days after the State Department sharply criticized China in its annual assessment of human rights practices around the world and amid U.S. efforts to block China’s admission into the new World Trade Organization--partly because of its refusal to protect such “intellectual property” as movies and computer programs.

“When you couple these potential sanctions with the new human rights report and the argument over WTO, there could be a further dip in relations,” said Nancy Bernkopf Tucker, a professor of American diplomatic history at Georgetown University.

In announcing the potential trade sanctions, Kantor displayed dozens of American products allegedly pirated in China--from laser discs of movies such as “Jurassic Park” and “True Lies” to compact discs for popular rock bands such as Aerosmith and Nirvana to ubiquitous computer software programs such as Microsoft’s MS-DOS. Kantor said that laser discs of American films typically are available in China before they can be released for home distribution in the United States.

Beyond computer and entertainment products, the United States has also accused China of pirating pharmaceuticals, agricultural goods, chemical products and books and of violating trademarks. At his news conference, Kantor displayed the label from a box of “Kongalu Corn Strips”--an unauthorized virtual replica of Kellogg’s Corn Flakes.

With China now running a roughly $30-billion annual trade surplus with the United States, the proposed sanctions would threaten many of its most profitable exports. Included are bicycles, plastic articles such as picture frames and baseball card holders, electronic goods such as answering machines and cellular telephones, sporting equipment such as fishing rods and wooden articles such as jewelry boxes. The tariffs would equal the declared value of the imports--effectively doubling the price of any of these products imported from China.

Faced with price hikes of that magnitude, importers are expected to abandon Chinese products and shift to other foreign or domestic suppliers, officials said. Since the Administration tried to target products for which substitutes are available, Kantor claimed that the tariffs would not “have any impact whatsoever on consumer prices.”

The $1.08 billion in prospective sanctions is based on the government’s estimate of the lost business that piracy and lack of market access in China cost American firms annually. Kantor said the Administration also believes that piracy is depriving American firms of substantial sales elsewhere in Asia and in other markets, as China exports the copied products. U.S. officials estimate that China exports as many as 70 million CDs and laser discs a year from 29 factories in the central and southern part of the country.

Entertainment industry officials argue that those exports undermine the progress American negotiators have made in recent years to control piracy elsewhere in Asia.

“We are making substantial progress with governments of Taiwan, Korea, Singapore, Hong Kong, even India,” Valenti said. “Then this stolen property comes avalanching into those countries from China.”

To avoid sanctions, Kantor said, China must not only reach a negotiated agreement to protect intellectual property but also take “significant action” against the factories that are manufacturing pirated products.

“We know where they are,” he said. “The Chinese government knows where they are. They could be easily shut down.”

But in recent meetings with U.S. industry officials in Beijing, Chinese officials privately asserted that the central government is having difficulty controlling manufacturing operations.

While the Chinese government has no trouble tracking and detaining political dissidents across the country, maintaining control is more difficult in areas that involve vast economic interests that sometimes touch the pocketbooks of local officials.

Most of the targeted 29 “pirate factories” that Washington wants Beijing to shut down have some link with local governments or state-owned institutions.

The issue also has political ramifications in China. With 90-year-old senior leader Deng Xiaoping in failing health and a political succession battle looming, any admission of weakness in central control would be considered more serious by Beijing than a potential trade dispute with its biggest market, the United States.

But some American analysts, such as Mastel of the Economic Strategy Institute, maintain that the Chinese government may be exaggerating its weakness in order to avoid disrupting the profitable pirating industries.

“In China, the central government needs a clear and present danger of U.S. sanctions to prod the provinces into line,” he said.

The parallel threats of trade sanctions constitute the latest skirmish in a long-running dispute that underscores the increased importance of intellectual property to the U.S. economy.

Amid similar threats, the United States and China reached an agreement to control pirating in January, 1992. But China’s failure to enforce the measure led Washington to demand renewed negotiations in 1993. After more than 20 meetings, the talks broke off last weekend, precipitating Saturday’s threat of sanctions.

“There is no question China wanted to see how serious America was,” said a senior Administration official involved in the talks.

Brownstein reported from Washington and Tempest from Beijing.

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Targeted Products

Here are some of the Chinese products whose prices would double if U.S. sanctions take effect:

* Cellular telephones

* Picture frames

* Baseball card holders

* Fishing rods

* Candy

* Jewelry boxes

* Bicycles