The pirates of South China

You don’t have to travel far into China to discover the depths of its fake goods industry. Alight from the train linking Hong Kong with Shenzhen – the southern China border crossing cited as the busiest in the nation – and you are bombarded with offers of ‘DVD’, ‘sunglasses’ and ‘Louis Vuitton’ when you have barely left the station.

Counterfeiting has been dubbed ‘the crime of the 21st century’, accounting for an estimated 5%–7% of world trade annually. While China by no means has a monopoly on fake goods, ‘no other country compares’, according to Canada-based piracy watchdog Gieschen Consultancy, which says that in the 12 months to November 2005, 39 countries accused China of exporting 346 million items of counterfeit and pirated goods. It has also been reported that China produces 70% of the world’s counterfeit goods, and that over 90% of DVD movies sold in the mainland are pirated.

The sheer size and population of China makes tackling piracy a gargantuan task, but it is one the Central Government is pursuing both actively and vocally. ‘For a developing nation like China, IPR [intellectual property rights] protection is a process,’ says Yan Xiaohong, deputy chief of the National Copyright Administration of China. ‘We hope to shorten this process as much as possible, but it’s difficult to eliminate it overnight.’

Many periodic campaigns have been conducted over the past few years, but the comprehensive two-year IPR Action Plan, launched last year, is considered the most significant. Starting at the top, the Action Plan requires governments to assume greater responsibility and accountability, warning that if severe offences are uncovered, ‘relevant officials must be held responsible’, with ‘severe punishment meted out to those who are involved or cover up infringements’.

Illegal production lines would be smashed, and those involved in transporting pirated goods dealt with ‘harshly’, the Action Plan states. The streets should be cleared of vendors who sell pirated goods, with authorities offering up to 300,000 yuan (US$37,000) for tips leading to the exposure of underground DVD operations. It is a mind-boggling reward in a country where at least 200 million people earn less than U$1 per day, but ‘necessary to encourage innovation in the nation’, the Government says.

Survey

Yet despite these efforts, the American Chamber of Commerce (AmCham) says IPR is ‘still a huge and growing problem’. AmCham’s latest survey of US companies in China showed that 41% believe counterfeiting of their products increased in 2005, and 55% were hurt by violations of IPR. While the legal situation is improving, AmCham says, there is ‘nowhere near the required enforcement’.

Similar findings were reported in the European Chamber of Commerce in China’s annual survey, which cited IPR as one of the main obstacles for European companies doing business in China. ‘A large majority of the Chamber’s members would hope for better enforcement of IPR law and regulations,’ says its President, Serge Janssens de Varebeke.

Conceding that the Chinese Government does recognise IP rights, the key concern is that it cannot keep up, says James Zimmerman, AmCham vice chairman. World demand for China’s exports has proven rich fodder for counterfeiters, despite additional enforcement resources being allocated by the Government. ‘We have been told that the Trademark Office has a backlog of cases going back five years,’ Zimmerman says. ‘The courts, too, have been overwhelmed with a significant increase in intellectual property related cases. The Supreme People’s Court statistics indicate a 40% increase in IP related cases in 2006 over 2005, and growing.’

AmCham is buoyed by the Action Plan which ‘reflects China is aware that they are being watched and subject to possible WTO complaints’. Most foreign firms doing business in China are confident, in time, that the system will improve, Zimmerman says.

However, Steve Dickinson, who heads the China practice of international law firm Harris & Moure, says a certain period of ‘free riding’ off the intellectual achievements of more developed countries is almost a rite of passage. A case in point is the US, he says. ‘In the 19th century, the US was the major IPR violator in the world, especially in the copyright area. It did not seem to hurt the development of the US, so why would it hurt the development of China or India, or any other developing country?’

He also sees the Action Plan as ‘a strategic mistake’. China has done very well at creating a first class legal system that works well in dealing with patent, trademark and trade secrecy issues, Dickinson explains. The system has not worked well with regards to copyright violations (the copying of films, books, TV shows and software) because the Government does not have the resources or political power to do anything significant about it, he adds.

‘For example, it is well known that most of the copying of DVDs and CDs is done in large factories in south-east China. Yet there have been no press reports of any major actions taken in those areas. Instead, the reports are of action taken in the north against small, two-bit players. This will have no impact whatsoever on the DVD/CD copying business in China. Therefore, I am sticking with my earlier prediction that the Action Plan will fail completely. This is a problem for the Chinese Government, since it reveals a real weakness.’

Dickinson concedes that IP piracy damages China’s relations with its major trading partners and impedes its development of a market economy. With these factors as motivation, China has made enormous progress in the area of IP enforcement, he says, citing its ‘complete and effective IP laws’. The IP court system is ‘probably the most advanced in the Chinese legal system’, and its powers for dealing with infringement are also thorough and effective, Dickinson adds. ‘China has strong internal reasons to want its IP system to work.’

To change foreign perceptions and convince inward investors that their investment is ‘safe’, China should publicise the state of its legal system, Dickinson says. And it ‘should not engage in doomed projects like the Action Plan’.

Other than that, China ‘doesn’t need to do anything’, he says. Investors ‘love and are flocking to’ China which, economically, is doing very well, thank you.

Of course, there would be no supply without demand, so does responsibility also rest with consumers by refusing to buy those so-called ‘A quality’ copies? Absolutely not, says Dickinson. ‘I do not see this as a moral issue. I personally see buying [fake branded products] as vulgar and low class. My Chinese friends feel the same way. They watch foreigners purchase the obvious fakes and just laugh at their lack of breeding.’

The reason no action is taken against hawkers at the border crossing is that it ‘does not make any economic difference to anyone’, Dickinson says.

‘If the manufacturers whose goods are being sold believe this activity is economically damaging to them, there are many actions they can take in China to shut it down. If they do not take action, it is because they have made the decision that it is not worth the expense. If that is their decision, then that is the end of the analysis.’

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.