PAUL SOLMAN: Piracy of intellectual property is everywhere in China. Some logos like the Lacoste alligator even come in multiple knockoffs. And on the street, the pirates come to you, selling the hottest DVD's, for instance, at $1 to $2 each. Bootleg designer watches at an even greater discount.
PAUL SOLMAN: Rolex?
STREET VENDOR: Yeah.
PAUL SOLMAN: How much are those? The answer, $12 apiece, not a bad starting piece for an item that retails for thousands. So maybe these weren't actual Rolexes any more than these were the real McCoys, these copyrighted originals, this authentication of a designer wallet, authentic. As former Wall Street Journal Beijing Bureau Chief James McGregor puts it --
JIM McGREGOR: You can buy Callaway golf clubs here for the price of hordeurves. I mean, come on, I can walk you down the street to a five places to buy fake Callaways that are just like real or to buy DVD's and movies or any product.
PAUL SOLMAN: But so what? Why are intellectual property rights -- IPR -- such a bone of contention between the first world and China? Well, for starters, Chinese fakes cost western companies billions of dollars a year in lost revenue and aren't just peddled on the streets of Beijing, but just about everywhere, including the sidewalks of New York.
ANDREW OBERFELDT: That's the original like watch for the Navy Seals of Italy. It goes for around $7,000.
PAUL SOLMAN: Many of the fakes here, says ex-New York cop Andrew Oberfeldt, now a private investigator, are made in China. So they're especially easy to find in New York's Chinatown, if not that easy to shoot.
That's because intellectual property theft is a crime in the U.S., usually ignored in China.
ANDREW OBERFELDT: They don't really care whether it's the news or law enforcement or which division of law enforcement or private eyes, they just know that something is up and the alarm goes up and down the street.
PAUL SOLMAN: Now, in an advanced economy like ours, "intellectual property" is all-important. It's what Americans have to sell to the rest of the world: The ideas we copyright, the inventions we patent, the brands we create. And it's not just fashion and entertainment.
Drug companies, for instance, invest billions in research and development, and in safety, as here at Pfizer's plant in Dalian, China. That's why exclusive patents are granted on drugs the world over: To give companies time for a payoff on their investments, and thus an incentive to make them. And at the center of the most important IPR case in China is the product Pfizer's invested in here: Viagra, the sex drug.
Now, China doesn't allow any chemicals, including the active ingredient in a drug, to be patented. Instead, it requires patent applications to specify what a product promises to do. You wouldn't think that'd be too tough in the case of Viagra, which is already used so widely in China it's been given to pandas to arouse them in captivity. But the government made the rules more stringent after Pfizer had filed, then rejected Pfizer's application.
GEORGE EVANS: They moved the goal posts.
PAUL SOLMAN: Pfizer Lawyer George Evans.
GEORGE EVANS: There's a standard that's well-accepted throughout the world. We think we met that standard. Certainly, it was enough in the U.S., It was enough in Japan and all of a sudden, after the rules were changed, it wasn't enough in China.
PAUL SOLMAN: Pfizer is appealing; a dozen or more Chinese companies are waiting for the verdict. If the appeal is denied, they'll be able to sell Viagra, Wei-ge in Chinese, indistinguishable from the original. It turns out some companies are already doing just that.
With an American who works for Chinese TV, David Moser, as our guide, we went on a Viagra- buying expedition in Beijing. A good bet, we were told: A sex shop called the G-Spot.
PAUL SOLMAN: Viagra?
DAVID MOSER INTERPRETING: She says it sells very well and it's very effective.
PAUL SOLMAN: Also selling well, an herbal look-alike.
DAVID MOSER: Here we have the same blue pill, the same shape, but this is a different name.
PAUL SOLMAN: We also bought some Viagra in a shopping mall pharmacy. We even tried a traditional Chinese medicine vendor. But here, they specialize in natural ingredients: Herbs, mostly, but also pickled sea horse, to be stewed for a potency potion, and some other items we'll leave unnamed.
Back at Pfizer's plant, we presented the G-Spot's Viagra to Pfizer's Dr. Gao Jifu.
GAO JIFU: It's difficult for me to judge and we at Pfizer we have a group we call global security.
PAUL SOLMAN: And what about the very Viagra-looking herbal knock-offs?
GAO JIFU: It say that these consist of five major Chinese medicines. Herbs and, and also you know some animal organs.
PAUL SOLMAN: Some animal organs?
GAO JIFU: Animal organs and the herbs.
PAUL SOLMAN: The same ingredients, it so happens, that we got at the traditional Chinese medicine establishment, which Dr. GAO himself, as it happens, actually prefers.
GAO JIFU: Because this cure you from you know, make your body stronger and not just for one function.
JIM McGREGOR: Viagra is even a little more complicated because the Chinese think that that line of business is theirs. I mean, the Chinese have been studying the ultimate aphrodisiac for 2,000 years. They've been eating deer horn and beetle feet so when Viagra came in here, they kind of said, hey, this is our line of work.
PAUL SOLMAN: If the Chinese don't genuflect to western medicine, you can see why they might not fully buy the concept of "intellectual property." All private property was banned in China for decades under communism. For centuries before that, all ideas were owned by the state and China came up with so many of the world's great inventions without the help of patent protection at all.
RICHARD CHENG: For example, the compass. Tell the direction of south and north.
PAUL SOLMAN: The compass?
RICHARD CHENG: The compass.
PAUL SOLMAN: Richard Cheng runs the country's biggest microchip firm.
RICHARD CHENG: Gunpowder.
PAUL SOLMAN: Gunpowder, yeah.
RICHARD CHENG: And even the way of making papers. And also China invented the textile industry like silk and this kind of thing.
PAUL SOLMAN: Pfizer world headquarters back in New York where we've arranged for our Chinese Viagra samples to be tested. We get to discuss the result with Pfizer's head of global security, ex-FBI Agent John Theriault.
JOHN THERIAULT: We look at China the same way the DEA might look at Colombia, as a source country for illicit drugs.
PAUL SOLMAN: First, the package from the department store pharmacy, one tablet that cost 20 bucks. It turned out to be genuine Viagra, made by Pfizer. The G-Spot's Viagra? Counterfeit -- something we might have known had we bothered to read the fine print. But though it was phony, the G-Spot's Viagra wasn't exactly a dud. It contained the same active ingredient that gives Viagra its oomph, sildenafil citrate; as to our amazement did the herbal look-a-like.
So if all of these might actually work, why shouldn't a consumer buy the cheapest one?
JOHN THERIAULT: First of all, you have no idea of the conditions under which it was manufactured, who's handled it, whether it works or not, you have no recourse if there's something wrong with the product, who do you go to?
PAUL SOLMAN: Pfizer has raided counterfeit drug labs in Asia where toxic ingredients were mixed in less than hygienic ways.
JOHN THERIAULT: We're talking about medicines right now. There is a huge market in counterfeit engine parts, counterfeit automobile parts. Do you want to be in an airliner with counterfeit parts that go bad at 35,000 feet, or in a car whose brakes fail when you're traveling down the freeway at 70 miles an hour? I don't think so.
PAUL SOLMAN: Having done his darndest to frighten us away from counterfeit pharmaceuticals and nearly all forms of transportation, Theriault then made the economic case.
JOHN THERIAULT: When we're talking about a knowledge economy and we're talking about knowledge jobs being based in the United States, buying counterfeit products destroys the incentive for companies to do the research and development to discover and market the cures of the future.
PAUL SOLMAN: So, why aren't the Chinese government doing anything about it? Communist Party official Cheng Siwei says that, actually, they are.
CHENG SIWEI: We are very serious to provide intellectual property's protection. You know, we have our laws, patent laws, trademark laws, and copyright laws.
PAUL SOLMAN: And many agree China is getting more serious about IPR, but, says Emory Williams, president of the American Chamber of Commerce in Beijing, only when China's got a stake in the outcome.
EMORY WILLIAMS: One thing you certainly won't see in the markets, as an example, is counterfeit items with the Chinese Olympic logo on it. So it's very clear that when people understand that there are penalties, that things can be stopped.
PAUL SOLMAN: With so much riding on the 2008 Olympics. China's showing it can enforce intellectual property laws if it's China's property. In fact, Chinese companies with something to protect, like the one that sells the technology of Tsinghua University, are also pressing for protection.
RONG YONGLIN: Many companies either pretend they are Tsinghua-related or steal some basic technology from us, develop it and then claim they're working with our technology. We've set up an office to protect our copyrights and intellectual property.
PAUL SOLMAN: That's what companies do in an advanced economy, which China has to become.
GEORGE EVANS: You can only be the low-cost producer for so long. Then there's going to be somebody else that's the low-cost producer and the only way that you're going to be able to compete then is by innovating and relying on intellectual property to protect that innovation.
PAUL SOLMAN: But since U.S. firms can't yet rely on protection in China, some are trying a different strategy - cutting the price. Wal-Mart Asia's Joe Hatfield.
JOE HATFIELD: You're looking at 22 Renminbi --21.90.
PAUL SOLMAN: That's less than $3.
JOE HATFIELD: Yeah, it's $2.50.
PAUL SOLMAN: Bringing us right back where we started: The hottest DVD's at a couple of bucks each down near what they cost on the street, suggesting that, like so many other suggesting that, like so many other vestiges of underdevelopment in China, piracy's very best days may be behind it.
DIGITAL TV AND THE WORLD reporter Kim Perry contributed a segment of his work for this report.
DIGITAL TV AND THE WORLD is a special project of the Graduate School of Journalism, University of California, Berkeley.