SCUTTLING HIGH-TECH PIRACY
MAY 8, 1996
The White House said it may impose restrictive trade restrictions on China. The restrictions would be in response to China's failure to live up to a trade agreement signed last year meant to protect intellectual property, U.S. trade officials said. China's piracy cost's American businesses $2 billion annually, industry officials estimate. The U.S.'s salvo of trade sanctions, though, could be the opening shots of a trade war that could also hurt American businesses. This discussion was proceeded by background information provided by Elizabeth Farnsworth.
ELIZABETH FARNSWORTH: Now for two perspectives on possibly U.S. sanctions against China, we turn to Robert Kapp, President of the U.S./China Business Council, an organization of American companies doing business with China, and Robert Holleyman, President of the Business Software Association, a group that represents major computer software companies. Thank you both for being with us. Mr.Holleyman, let's get specific. What are we talking about here? What is pirated and how?
ROBERT HOLLEYMAN, Business Software Alliance: Well, we're talking about a staggering problem. U.S. computer software companies estimate that only one out of every fifty computer programs in use in China today is a legal copy. The rest are counterfeits or illegal copies. It's a staggering loss to the industry.
ELIZABETH FARNSWORTH: And we're talking about many, many millions?
ROBERT HOLLEYMAN: Many, many millions of dollars. We estimate that there are losses approaching $500 million a year to the U.S. business software industry alone. Chinese factories have a production capacity of more than 100 million units of CD's and CD-ROM's each year, the vast majority of which are counterfeit.
ELIZABETH FARNSWORTH: How is this done? How is the pirating accomplished?
ROBERT HOLLEYMAN: The pirating is done quite simply by taking a master of a legal product, setting up a factory that simply duplicates, on a 24-hour basis, counterfeit products. We have nearly twice as many counterfeit factories operating in China today as we had simply two years ago.
ELIZABETH FARNSWORTH: Who owns these factories?
ROBERT HOLLEYMAN: A variety of ownership. Some, it's been alleged, are joint ventures with foreign entities; some, it has been alleged, have affiliations with government officials. It varies from case to case. What we do know, however, is that the production capacity in those factories far exceeds any legitimate need for computer programs within China.
ELIZABETH FARNSWORTH: So you're -- in other words, they're being exported too?
ROBERT HOLLEYMAN: Absolutely. The difference today from where we were a year ago is that the piracy problem of computer software has grown, and it is no longer simply a domestic problem within China, but, indeed, these factories are putting out a tidal wave of counterfeit products that are being exported around the world.They're displacing the otherwise legal sale of U.S. computer programs in places like Hong Kong. Indeed, we picked this up on the streets of Moscow. Some of it's coming into the U.S.. It is an export industry for China at this point in time.
ELIZABETH FARNSWORTH: And what do you see if you're on the streets? What do you see? You have something there that you got in China, right?
ROBERT HOLLEYMAN: I did. When I was last in Beijing, I went to one of the software shops that was advertised quite openly in the press there. What I purchased was a compilation CD-ROM. It is a CD-ROM that contains roughly 40 computer programs, most of which are major U.S. computer programs like Adobe Photo Shop, like Lotus Notes, Microsoft Windows, plus some Chinese programs. These are 100 percent counterfeit. We estimate that the commercial value of these products alone is $20,000 U.S. roughly. I bought these on the streets of Beijing for less than $10 U.S.
ELIZABETH FARNSWORTH: And because of all this you think that threatening sanctions is warranted now?
ROBERT HOLLEYMAN: I think that the U.S. has no alternative but to threaten the imposition of sanctions to offset the losses to U.S.companies in China.
ELIZABETH FARNSWORTH: Mr. Kapp, what do you think about this?
ROBERT A. KAPP, U.S./China Business Council: Well, Robert's pointed out a very very serious problem in international business. Counterfeiting is easy. It's technologically relatively simple. The problem is not confined to China, but, as he says, the problem with china is huge. American law provides the administration, any administration, with a series of mandates and tool with which to try to, to negotiate an end to such practices in other countries and the very end of that process provided in American law, if everything else fails, is the imposition of sanctions. American businesses generally understand ,whether in Robert's field or not, that intellectual property protection is the central component of modern international and global trade and commerce and understands that very, very well. It is important, however, to note that if and when you get to the point of actually imposing sanctions and,remember, we're not there yet.
ELIZABETH FARNSWORTH: Are you worried that we're threatening a bit too soon?
ROBERT A. KAPP: No, not really. The White House is expected in the next few days to bring out a list of those Chinese products on which it plans to raise tariffs very high unless an agreement is reached.And by American law, a 30-day period of public discussion of that list must ensue during which time the list may be modified. Some American businesses may say "please, take this particular Chinese product off the list because if we can't get sources in China for that, our business will fold. " And there will be argument about which product should be kept on and which should be taken off the list. But if the negotiations in China do not go forward, a final list will be put out 30 days or so later, and ultimately, then tariffs would be raised. I think my point is that we all understand. The U.S. Trade Representative's Office and the president, we all understand, that if and when sanctions are levied and imposed, the United States wins but also loses because it is very, very predictable that the other side, no matter what country,that the other side will then levy sanctions of its own against American exports going into China. That's what the term "trade war" really comes down to, the kind of mutual heaving of punishments of one another. And when the sanctions come back to roost here, then,of course, other sectors of the American economy will take a hit as well. It's not, it's not a pleasant prospect I think for anybody in this entire dispute.
ELIZABETH FARNSWORTH: Have sanctions worked before?
ROBERT A. KAPP: Sanctions are a tough call. The general wisdom on sanctions is this: Unilateral sanctions are less effective than multilateral sanctions, after all, in many ways now, although ...
ELIZABETH FARNSWORTH: And this would be a unilateral sanction.
ROBERT A. KAPP: This would be unilateral, although this is a sector of the American economy where the Americans really do distinguish themselves. In many sectors of economic life, the fact that the united States refuses to sell a certain product to China, for example, would simply mean that the Chinese went and bought it from the Japanese or the Germans or the Dutch, the British, or somebody else. In the software and the -- I might say not only the software but the entertainment products field, which is also very much involved in this intellectual property dispute -- pirated videos of movies and so forth -- these are areas where the Americans are really very much distinguished from their other foreign competitors, so unilateral sanctions, in theory, might have a little more sticking power, but usually multilateral sanctions are seen as more effective.
ELIZABETH FARNSWORTH: So what do you think -- either of you -- what do youth ink is happening here? Is this Machiavellian moves and counter-moves trying to get something so that the administration doesn't have to impose sanctions? Is that what's happening?
ROBERT A. KAPP Forgive me, Robert, for starting, but I think that is the case. We're a long way from the end of this process. I laughingly say that in U.S./Chinese dispute resolution, it's the final taxi ride to the airport in which things really get done. A great deal of -- a great deal of work has already been done, of course, but we're not at the end of the line yet, and the listing of, of likely sanctions is a stage in a highly choreographed ballet which ultimately is designed to lead to resolution, although we certainly can't guarantee that outcome.
ROBERT HOLLEYMAN: But I would like to note that every day that we wait U.S. intellectual property owners continue to lose in China. Estimated losses for the copyright industries alone are more than $2 billion last year. Those losses mount and they continue to mount until the U.S. takes decisive action.
ELIZABETH FARNSWORTH: So you representing the software alliance would be less likely to be as patient as you representing many other kinds of companies too?
ROBERT A. KAPP Well, I think, I think that there comes a time when action needs to be taken. Ambassador Kantor, when he was U.S. trade representative, spoke to a meeting of our U.S./China Business Council in late January on this subject and said we're not setting date deadlines -- this was late January -- but we're not going to wait forever, and these negotiations need to move forward, and sometimes a date certain is the best way to impel a negotiation to a successful conclusion.
ELIZABETH FARNSWORTH: Do you think that this is being ex acerbated by politics?
ROBERT HOLLEYMAN: Well, I think it is being ex acerbated by politics within China because there the Chinese government has the capability, if it has the desire, to stop much of the counterfeiting that's occurring. We haven't seen the political willing China yet to deal with that issue. In the United States, I think that politicians in this country are rightly saying how much more of this can we take. There should be a point at which the U.S. is clear that an agreement was negotiated with China a year ago. It required China to do certain specific things, including shutting down the illegal factories, ensuring the Chinese government ministries were using legal software. They have not taken those steps. So I think political leaders in this country are rightly saying that the U.S. can no longer tolerate this sort of theft, this sort of piracy within China.
ROBERT A. KAPP: Well, Robert is right on all counts. I would only add to that that we are -- we've had a bad year with China,and they with us. A lot of things have gone wrong. The climate of trust between the two countries has largely evaporated. The sense that each country harbors ill intentions and motives towards the other is quite widespread now. Against that background, there isa certain tendency I think in each country to feel that, that accommodating the other side is politically risky at home. Unparticular, though, the thing that I think is of greatest concern is that we begin to lump all the different disputes that we have with China into one big mass and say, well, we have to do something. And it's important not to lose sight of the connection between action and effect. In the case at hand, one certainly can hope that if we keep focused on the IPR subject and not mix it up with everything else that we happen to disagree about that ultimately there will be response from China in the way that satisfies our requirements and our needs on IPR, intellectual property, but if we start saying, well, gee, we have to do something, never mind what the effect is, let's just take some action because we can't sit here and look weak, we could get ourselves into a real pickle.
ELIZABETH FARNSWORTH: Well, Mr. Kapp, Mr. Holleyman, thank you for being with us.