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By KC Swansons, 19 September 2005 15:30

COMMENT As western companies seek to capitalise on the huge and potentially lucrative Chinese market that is beginning to open up, they are finding concerns about copyright turning into frustrations over counterfeiting and the lack of protection afforded for intellectual property in China. KC Swansons investigates a system in transition.

Signs of China embracing global market rules abound, from Beijing's decision to loosen its currency's peg to the dollar to the willingness of Chinese companies to pursue acquisitions abroad. But one factor never seems to change: piracy.

In May 2005, four years after China joined the World Trade Organization (WTO) and embraced its stringent rules on intellectual property (IP) rights, Star Wars: Episode III - Revenge of the Sith opened in US cinemas. Copies hit the streets of Beijing within days. The counterfeit DVDs retailed for about 75 cents each.

Last year in China, roughly 95 per cent of films were pirated - a rate unchanged from 2003, according to Mike Ellis, the Motion Picture Association of America's regional director in Asia.

The problem affects virtually every industry, from films to software to drugs to car parts. What's more, as China's exports have surged in recent years, so have counterfeit exports. About two-thirds of pirated goods seized by US Customs come from China.

The US Trade Representative estimates that counterfeiting worldwide costs US companies around $200bn to $250bn per year, with China likely to be responsible for the majority of those losses. A coalition of copyright companies is working with the US Trade Representative to study the possibility of taking China before the WTO to compel a genuine crackdown.

This new, harder line says much about the level of exasperation among foreign companies in China. They can't afford to stay out of such a large and potentially lucrative market. They're well aware they face IP theft there. But the extent of piracy - which continues to escalate, according to a 2004 white paper by the American Chamber of Commerce in China - still catches many off guard.

What's standing in the way of better IP rights enforcement in China? "It's not a plot," says Bruce Lehman, former commissioner of the US, Patent and Trademark Office, and the chairman of the International Intellectual Property Institute, "it's the result of a system in transition."

There isn't a shortage of laws, or of high-level promises. In a visit to China in July, US commerce secretary Carlos Gutierrez won a pledge from government officials to increase criminal prosecutions in cases of IP theft. But while the laws on the books in Beijing exceed WTO obligations, local authorities in this sprawling country usually lack the resources and motivation to enforce them.

Clement Ngai, legal counsel in Asia-Pacific for software maker Autodesk, says: "China is very fragmented, so even if there was a lot of political will behind this, you would see local protectionism get in the way."

The enforcement organisations are a bewildering hodgepodge of agencies and their divisions, some with overlapping authority. There are cultural issues as well, and many Chinese see strict IP-rights enforcement as a zero-sum game in which foreigners benefit and Chinese lose.

Thomas Pattloch, chairman of the European Union Chamber of Commerce Intellectual Property Rights working group, says: "The arguments we hear from the Chinese side are, 'Please lower the prices and then we won't pirate'."

With no relief in sight, foreign companies in China are developing counterstrategies that aim at the very least to make life more difficult for wrongdoers, such as RFID tagging goods to make them harder to copy.

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