China Averts U.S. Sanctions by Going After CD Pirates

After a two-week crackdown by Chinese officials that resulted in the closing of 15 notorious pirate compact disc factories, the United States on Monday withdrew threatened sanctions against $2 billion worth of products made in China, averting a trade war between the two countries.

“We have determined that important actions have been taken” by the Chinese government, acting U.S. Trade Representative Charlene Barshefsky said in Beijing. “As a result, sanctions will not be imposed.”

But despite 14 months of wrangling with the Beijing regime over rampant piracy of music CDs, laser discs and computer software, the United States broke no new ground in its negotiations beyond the provisions it obtained in a 1995 Intellectual Property Rights Enforcement Agreement.

In fact, the threat of sanctions, along with high-profile negotiations and last-minute plant closings by the Chinese government, was a virtual replay of the February 1995 talks that resulted in the property rights accord. On the eve of that agreement, the Chinese government announced the closing of two plants, at least one of which subsequently reopened.

One of the patterns of U.S.-China talks on copyright piracy has been a last-minute flurry of enforcement activity by Beijing authorities as negotiators arrive in the Chinese capital for a final round of talks.

But Barshefsky said the U.S. officials came away from this year’s talks convinced that China has very recently taken “concrete and tangible actions” to comply with the previous, comprehensive agreement. Moreover, she said China was much more receptive this go-round to providing market access to U.S. entertainment companies hoping to create joint ventures with Chinese partners to develop the entertainment industry here.

“U.S. record firms can co-produce music here, and U.S. film companies can co-produce films . . . and television dramas in China with Chinese firms,” she said.

In Washington, President Clinton praised the settlement of the latest in a series of trade flaps between China and the United States. In brief remarks at the Oval Office, Clinton said the results of the talks will be “good for American jobs and American businesses.”

U.S. industry officials who participated in a news conference held late Monday night by Barshefsky at the U.S. Embassy in Beijing cautiously praised the results. They especially praised provisions strengthening title verification procedures and giving enforcement powers to Chinese police rather than to regional agencies with ownership interests in the offending plants.

“What we have achieved is an important first step,” said Jay Berman, chairman of the Recording Industry Assn. of America. “Consider it a down payment on the 1995 agreement.”

Reaction to the announcement was positive across the business world, from such U.S. industrial giants as General Motors Corp. and Boeing Co.--whose current and pending deals in China are vulnerable to trade cross-currents between the two countries--to the world’s six major record conglomerates.

Officials at Thorn-EMI, Sony Inc., Time Warner, Bertelsmann, PolyGram and MCA all voiced cautious optimism.

“I’m pleased that we avoided a trade war, but I’m [also] glad our government stood its ground in the interest of intellectual properties,” said James Fifield, the chairman of EMI Music, a subsidiary of British conglomerate Thorn-EMI. “I believe that the word ‘progress’ is the right word to use here. My colleagues and I agree that China is very important in terms of a future market. We will all be watching how things turns out.”

Thomas D. Mottola, president and chief operating officer of Sony Music Entertainment, particularly applauded China’s new pledge, cited by Barshefsky, to permit foreign firms to enter into joint ventures in China.

“We think that the agreement reached today was very positive and that clear steps were taken to increase market access,” Mottola said. “This will allow us to follow our plan to open a company in China in the very near future.”

But a U.S. official in Beijing cautioned against overestimating the effect of the agreement. “We are not trying to oversell this thing,” he said. “It is one step along a long road.”

Despite obvious relief at avoiding an exchange of punitive trade sanctions between the two countries, Barshefsky said China is still far from ridding itself of the copyright piracy culture.

For example, U.S. officials learned only four months ago of an important web of underground, unlicensed CD plants producing pirated wares. Three of the 15 plants shut down by the Chinese government in the last two weeks were in the underground category.

Going into the weekend trade talks, U.S. officials said they had identified 30 plants licensed by local governments that were producing pirate CDs. Fewer than half of these plants were closed in the recent raids.

“We believe, in terms of authorized factories, there are another 15 in operation,” Barshefsky said.

Among those factories is a notorious plant in Guilin, in Guangxi province, where Microsoft executives who had been invited by local officials to witness a raid discovered an assembly line making 20,000 CD-ROMs a day, including Microsoft products. While they were visiting the plant, the executives spotted another assembly line producing pirated laser discs.

Of Monday’s agreement, Microsoft Chairman Bill Gates said: “We appreciate the efforts of the [U.S. trade representative] and are pleased that the two governments were able to come to an agreement addressing the serious problem of intellectual property piracy in China.”

Besides closing the pirate CD factories, most of which were located in the southern province of Guangdong, Barshefsky said Chinese authorities also closed six major pirated CD distribution centers and shut 5,000 “laser disc showing rooms” that have replaced movie theaters in many smaller cities.

*

Barshefsky, who met Monday afternoon with Chinese President Jiang Zemin and Vice Premier Li Lanqing, also said Chinese customs authorities have recently been more aggressive in halting pirated products at the borders and at airports.

Staff writer Chuck Philips in Los Angeles contributed to this report.

* MORE HELP NEEDED

Fight against Chinese piracy seen as far from over. D2