Pirates on the Loose

China's Stealing of Intellectual Property Illustrates Need for 
1) International Rules and 2) the Means to Enforce Them,
Claims of National Sovereignty Notwithstanding

(This article in a slightly shorter form appeared in the May 5, 1995, issue of Commonweal magazine under the title "Will China Kick the Habit?--Lessons from Piracy.")
By Robert A. Senser

The activities of the U.S. federal government may soon start shrinking, but you wouldn't know it from all the human and material resources that Washington is pouring into the promotion of American business interests in foreign lands. Nowhere is there more at stake (commercially and otherwise) than in the People's Republic of China. There the most high-profile and onerous task of the administration's whole campaign, first called "commercial engagement" and later upgraded to "constructive engagement," is to break China of a lucrative bad habit: massively exploiting copyrights, patents, and other intellectual property without reimbursing the owners, who are largely Americans.

 Over the years, Washington has repeatedly denounced China's "rampant piracy." Its estimated cost to American intellectual property owners in 1994 was more than $1 billion in lost sales and revenue, about two-thirds in music and software products, the rest in movies, books, and miscellaneous knockoffs ranging from Gillette blades to Chrysler Jeeps. Most of this output is exported to East Asia, where properly licensed work from the United States or Japan must compete at a price disadvantage.

 Private investigators of the victimized U.S. industries, banded together in the Washington-based International Intellectual Property Alliance, focused on the largest center for counterfeit production, southern China, widely hailed as the country's model for modernization. There they found 29 factories, most of them owned by military or civilian government agencies, running a booming industry using stolen masters to copy compact- and laser disks on a mass basis, estimated at 75 million copies in 1994.

 A visit to Beijing in January 1995 by seven heavyweights from the U.S. movie, music, and software industries, including Jack Valenti of the Motion Picture Association of America, turned into an unusual sight for the capital of the world's largest Communist country -- private business executives publicly lobbying the Chinese government and feeding the media with incriminating information and criticism. "The group called China the world's worst pirate nation," Reuter reported from Beijing (1/20/95).

 The showdown over piracy was--and is--a highly sensitive subject for U.S.-China relations, because the finger of guilt clearly points not just to bands of rogue operators but to various arms of the Beijing government itself. The U.S. Omnibus Trade and Competitiveness of 1988 was supposed to "strengthen the ability of U.S. firms to protect their patented, copyrighted, or trademarked goods and ideas from international thievery," as President Reagan declared when he signed the legislation. Yet even the giants of Hollywood and Silicon Valley can't always protect their rights abroad on their own. They must turn periodically to the U.S. government, especially for its ability to impose sanctions as a last resort.

 After years of talking with Beijing about the issue, Washington finally flexed its muscles. When nine rounds of negotiations stretching over 20 months yielded no results, U.S. Trade Representative Mickey Kantor on February 4, 1995, announced plans to impose the largest trade sanctions in U.S. history--punitive tariffs on more than $1 billion of Chinese goods--to go into effect in three weeks. The threat of huge sanctions, credible because U.S. industry supported them, focused the minds of senior officials in Beijing. After further intensive negotiations, the two sides endorsed a 20-page, singled-spaced agreement on February 26, just at or a little after the deadline set by Kantor.

Among Beijing's commitments were to launch an intensive campaign against piracy and to give market access to legitimate U.S. products to replace counterfeit goods. As a sign of good faith, Beijing announced that it would force the closure of several southern Chinese factories notorious for piracy, including one that churned out movie hits like "The Lion King" and "Jurassic Park" before they were available on the U.S. market.

Would Beijing carry out this new commitment? Consider the precedents. After all, the United States went toe to toe with Beijing this time only because of China's failure to enforce the copyright and patent laws that it adopted after signing a "memorandum of understanding" with the United States more than three years ago. Besides, two formal U.S.-China agreements in 1992 and 1994 have failed to staunch the flow of exports made with prison labor, according to the Laogai Research Foundation (headed by Harry Wu), which with tiny resources monitors this violation of U.S. law more closely than does the U.S. government.

[1/96 Update: Among seven bootlegging factories that were closed last spring, all but one have reopened. The London-based International Federation of the Phonographic Industry said that China now has a total of 30 plants devoted to CD piracy, with a combined capacity of 75 million compact disks, whereas the demand in China is for about five million. The U.S. Trade Representatives is once again threatening sanctions if Beijing does not live up to its agreement.]

Rule of Party/State Bureaucrats Vs. Rule of Law

The problem lies much deeper than getting China to halt illegal activities. It lies in the nature of China's system. Despite a drive toward modernization, China remains "sometimes totalitarian, sometimes authoritarian, always unpredictable," as the Far Eastern Economic Review put it in 1994. The recurrent dreams of doing land-office business with a country of so many potential customers--now 1.2 billion--blinds many foreigners to the fact that China's people are twice poor: among the poorest people in the world and also deprived of the rule of law. Instead, the rule of the Communist Party reaches everywhere, even into factories of the numerous new joint ventures, where Party functionaries look over the shoulders of managers or are themselves the managers.

A wide implementation of the promised reforms called for in the 1995 agreement would involve a step toward the rule of law, since it would mean whittling away at the monopoly power of the Party. But no bureaucracy willingly surrenders the power it has won. The ability of China's Party to avoid that fate is enhanced by the absence of three preconditions for the rule of law: an independent judiciary, an independent press, and a network of organizations independent of government, such as a group representing the rights of China's own authors, inventors, and other intellectual property owners. Fundamentally, then, what is at stake in this struggle is not just the rights of U.S. property owners, mostly quite rich, but also the rights of the Chinese people, mostly very poor.

"What U.S. media moguls [potentially the major beneficiaries of the new agreement] should have the courage to say is that there is virtually no way to have a legal system that respects property rights and simultaneously ignores the civil rights of individuals," Michael Schrage, research associate at the Massachusetts Institute of Technology, recently wrote in his business column (Washington Post, 2/10/95). In the same vein, Thomas L. Friedman wrote in the New York Times (1/8/95): "China's trade abuses and human rights abuses are just flip sides of the same coin--the absence of the rule of law."
Friedman found sympathy for that position among some U.S. business executives he met in Hong Kong and Beijing, but so far it has little support from the leaders of organized business in the United States. In 1994, when President Clinton delinked human rights from China's entitlement to trade privileges as a "Most Favored Nation" (MFN), he announced a "new and vigorous American program" to promote human rights in China, including "the development, with American business leaders, of a voluntary set of principles for business activity in China." Such a code would, for example, rule out contracting for goods made by prison or child labor and require recognition of the right to unionize. But the promulgation of this code of principles has been stymied by strong opposition from the American business community.

The dominant thinking currently within the administration is that a code should apply world-wide rather than singling out China. Whatever its geographical scope, the challenge is to make it more than a public relations exercise. Yet in China, as under similar but smaller regimes, any code for private business poses a special problem. If the code omits a commitment to respecting freedom of association for workers, it would ignore a fundamental principle. If it includes that principle, employers who conscientiously implement it might find some of their workers landing in jail. Such are the dilemmas of operations in China.

The vast U.S. public and private "engagement" with a Communist superpower, half totalitarian, half authoritarian, is a pioneering journey through uncharted waters. China's most famous human rights advocate, Wei Jingsheng, has publicly alerted the United States to the risks posed by navigating without a human rights compass. In an article published in English and Chinese in Hong Kong before Beijing ordered his rearrest in March 1994, Wei criticized China's policy of allowing foreigners many rights not accorded to Chinese citizens and warned that it could cause a backlash (a "deep popular emotion of revenge") against foreigners, including business people.

Twin Ideologies, Both Outmoded

Under its traditional ideology, Beijing insists on the principle of national sovereignty as an argument against any outside intervention in its "internal affairs." This argument came up briefly in early 1995 in an interview with Xu Jie, a professor at the China University of Political Science and Law, commenting on U.S. pressure for intellectual property reforms: "It is our own affair as to how we should act in legislation and law enforcement." But in this instance, Beijing did not press that argument, perhaps because of its eagerness to join the World Trade Organization, whose major function is to write and enforce trade rules that supersede those of individual states.

On the other side of the controversy, American economic and business people, under their own traditional ideologies, often appeal to the principle of free trade as an argument against any governmental intervention in the international marketplace. While confronting Beijing on the need to reform a system of piracy, however, U.S. government and business leaders recognize that, because of realities created by the new global economy, the U.S. should not be prisoners of a principle born of another age. Human rights concerns deserve the same recognition. They belong high on the agenda of the trade policies that the U.S. pursues bilaterally with China and multilaterally within the powerful World Trade Organization.

Meanwhile, there's an important way to tell how far China is moving toward real reforms, such as toward the rule of law. It is not so much whether Barbra Streisand and Bill Gates get paid their royalties, but whether Beijing starts treating Nobel Prize nominee Wei Jingsheng as a citizen of China having at least as many rights, economic and otherwise, as Hollywood mogul Jack Valenti and other visiting American business leaders.

[4/98 Update: At a press conference in Beijing in October 1995 a team of lobbyists for the U.S. film, music, and other industries gave foreign reporters details on China's failure to enforce its written agreement, and hinted that, in the absence of progress, the U.S. government might need to apply trade sanctions in 1996. In December 1995 Wei Jingsheng began serving a 14-year-prison term, after a People's Court convicted him of "sedition," among other reasons because he gave foreign reporters information critical of government policies and urged U.S. trade sanctions. In November 1997 Wei was released on "medical parole" and is now residing in the United States.]

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Copyright 1996 Robert A. Senser
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