The Diminishing Returns of Slapping China for Piracy of U.S. Copyrights

The Clinton administration’s threat to impose sanctions on selected Chinese goods unless Beijing halts the piracy of U.S. intellectual property in its provinces is the latest twist in an increasingly strained trade relationship between China and the United States. The cheers heard in Hollywood and in the Silicon Valley for the tough response are well-deserved. The entertainment industry is now the nation’s most successful exporter, and the United States has a huge competitive advantage in innovative software and high technology that must be preserved.

In the past, trade-sanction threats have proved successful in deterring piracy, and they may work again with China. But, in the long run, the fight against piracy is likely to require a new approach to protecting U.S. copyrights, patents and trademarks. Raising tariffs on the exports of countries that fail to control piracy is likely to be increasingly ineffective and self-defeating, especially when the foreign markets are potentially lucrative, where corruption is rampant and where defying the West is relished. Moreover, the widespread availability of technologies that facilitate piracy--the Internet and new, cheaper means of copying original materials--require more innovative methods to combat counterfeiting. Finally, standard international business practices, such as subcontracting and technology transfers, may have to be modified because they sometimes hand pirates the very tools they need to ply their trade.

Piracy of U.S. intellectual property is substantial. In 1995, the United States lost an estimated $6.9 billion in exports because of foreign counterfeiting of movies, records, books and software, according to the International Intellectual Property Alliance, a trade association supported by the record and motion-picture industry. The Pharmaceutical Manufacturers’ Assn. estimates that lost revenue from pirating of drug patents exceeds $3 billion. Tens of millions more is lost from the counterfeiting of auto parts, athletic shoes and apparel.

The Clinton administration’s get-tough approach with China is thus long overdue. China has some of the best intellectual-property laws in Asia. Beijing just doesn’t enforce them.

But the value of imposing punitive tariffs in this and future confrontations is debatable. China exports more than $40 billion in goods to the United States. Making less than 5% of these exports prohibitively expensive offers only marginal leverage, at best, over Beijing. Moreover, if U.S. action leads to Chinese retaliation, as Beijing has threatened, the cost to the U.S. economy will not only be the continuing losses due to piracy, but also the lost exports. To the extent that European and Japanese companies are willing to tolerate piracy in China, they will reap the benefits of a U.S. withdrawal from the Chinese market.

China is not alone in its seeming immunity from pressure to deal with its piracy. Argentina continues to allow its major pharmaceutical makers, not just back-street pirates, to produce and market patented drugs without permission of the patent holders. Washington has long included Buenos Aires on a “watch list” because of such abuses, but has never imposed sanctions. Argentina, which deployed forces to the Persian Gulf and has supported the United States in the United Nations, is too valued a U.S. ally.

Complicating matters with China, Argentina and other nations where piracy is rampant is widespread corruption linked to counterfeiting. With so much money to be made from piracy, there are limitless funds to corrupt even the most sincere anti-piracy efforts. It seems evident that Beijing has scant ability to enforce its own intellectual-property laws when doing so collides with the economic interests of local Communist Party bosses and military officials engaged in making illicit products. In Argentina, local pharmaceutical companies openly bought members of the national Congress last year in order to override an effort by Argentine President Carlos Menem to strengthen intellectual-property protection.

In any case, the proliferation of information technologies will make it increasingly difficult to police piracy. Already, video pirates cable together dozens of VCR’s in garages in Taipei’s suburbs and churn out thousands of copies of the latest releases in Hollywood even before they hit the big screen in the United States. Soon, consumers will have the technology to record information directly to their discs, enabling them to become their own pirate music producer.

With the Internet, pirates can use the World Wide Web as a transmission belt for their products. No longer will Chinese pirates have to pay the high costs and risk interception of smuggling products into Russia, their principal export market for illicit goods. Nor will the Italians have to set up clandestine factories in Naples, where police must be bribed and there is always the chance of a crackdown by authorities under pressure from the United States. In a network world, pirates will be able to set up in the Cayman Islands or some similar remote location, constrained only by access to international telephone lines. Once connected, their confederates, even their customers, can download bootleg software and eventually music and movies from a distant computer terminal. Tracing the pirates would be quite difficult.

Trade wars won’t mitigate such problems. Other initiatives are needed. Too often economic concerns play second fiddle to diplomatic and security interests. That has to change. Washington needs greater international cooperation in combating counterfeiting. This may mean:

* Licensing some U.S. technologies to European and Japanese companies in order to give them a stake in protecting all intellectual property;

* More coordinated international efforts to crack down on corruption, which makes bribery pay;

* Use of various encryption technologies, not blocked by the Pentagon, to protect items on the Internet from piracy;

* Businesses “recruiting” potential pirates overseas by making them joint partners;

* Movie and recording companies may need to lower their prices to cut the financial incentives for piracy.

Experience in Singapore and, to some extent, in Korea and Taiwan suggests that as economies mature, interest in policing piracy increases. Local business have their own intellectual-property rights to safeguard. Governments find that failure to protect patents and trademarks inhibits foreign investment. Over time, China will feel some of these same pressures.

But piracy in Korea and Taiwan remains prevalent. And far too much is at stake in China to take a wait-and-see approach. That’s why the Clinton administration needs to follow through on its threatened sanctions against China, if only to show Beijing that Washington is serious. But it will take more than tariffs to clean up piracy, especially in the age of new technologies and global business operations. That effort will require a whole new panoply of weapons.