Increased Piracy Puts More Heat on China

The entertainment industry hoped the counterfeiting of movies, music, software and books would plummet after China agreed in 2002 to abide by the World Trade Organization's (WTO) standards for global intellectual property rights.

Instead, the industry says piracy has increased dramatically, leading some American companies to view the Chinese government as unable ' or unwilling ' to curb it. And industry lobbyists are now helping the U.S. government prepare a case that could be brought against China in the WTO's Dispute Settlement Body.

Earlier this month, Assistant U.S. Trade Representative (USTR) Timothy Stratford told the American Industries U.S.-China Economic and Security Review Commission that the United States could launch a WTO case if China doesn't crack down on IP offenders.

But experts suggest that while both the industry and the government talk tough when it comes to taking on China, America may be reluctant to actually bring a complaint against the Asian superpower.

Pushing the industry's case is Washington's Smith & Metalitz, a deceptively small lobbying firm specializing in intellectual property. Although the firm employs just four partners, an associate and a consultant, its list of clients reads like an all-star roster of influential entertainment trade groups. The firm's secret: Smith & Metalitz plays Clark Kent to the International Intellectual Property Alliance's Superman.

Both share the same leader, Eric Smith, who serves as both the association's president and Smith & Metalitz's managing partner. In 1995, Smith and intellectual property lawyer Steven Metalitz formed Smith & Metalitz, and today the firm represents all seven of the association's member groups, including the Motion Picture Association of America, the Recording Industry Association of America, the Association of American Publishers, the Business Software Alliance, and the Entertainment Software Association.

Smith & Metalitz recently made it a greater priority to work with the Office of the U.S. Trade Representative to build a case against China, according to lobbying registrations released last month by the Senate Office of Public Records.

Smith declined to comment on the details of the case. 'It's a little premature to support a case actively,' he says. 'We're still in the evidence-gathering stage with USTR.' Records also show that Smith & Metalitz received about $400,000 from its clients for 2005.

Also lobbying is the National Association of Manufacturers (NAM), the largest industrial trade group in the United States, whose $8.3 million in-house lobbying practice works extensively on Chinese trade issues.

NAM has seen an upswing in piracy across many sectors of industry, says Bill Primosch, the organization's director for international business policy.

'Anything that has a high markup is being counterfeited,' Primosch says. 'It's all kinds of products: pharmaceuticals, personal-care products, auto parts, medical-testing equipment. And it's starting to flow into the international marketplace.'

In 2000, the year before China joined the WTO, the International Intellectual Property Alliance claimed losses of more than $1 billion to Chinese copyright piracy in the film, music, video-game, publishing and business-software industries.

Since then, China's economy has boomed, with an annual increase in gross domestic product of about 10 percent. Piracy industries have grown too. The association has estimated losses of $2.69 billion for 2005. Those figures don't include illegal Internet file sharing, which has increased as more and more Chinese gain access to the Internet.

But the USTR's threat of a WTO suit against China might be little more than saber rattling, experts say.

An Empty Threat?

Trade groups remain reluctant to support a WTO case, Primosch says. Many of NAM's member companies fear China's government will identify them as troublemakers and blackball them, he explains. 'They don't want to burn their bridges,' he explains.

Although trade groups fear becoming foes of the Chinese government, they say they would support a case against China if there were adequate evidence to prove it. 'The worst thing that could happen is you lodge a complaint, a WTO panel reviews the material and says, 'Well, you just haven't proven your case,” Primosch says.

American industry has reason to worry, as experts say it's unclear whether a case against China would be effective. The Chinese government, they say, has already implemented significant legal reforms since joining the WTO.

'The formal legal regime governing [intellectual property rights] protection in China has improved, and that improvement is ongoing,' says Kenneth Lieberthal, a professor of political science and international business at the University of Michigan. 'The national leadership is gradually developing some institutional capacity, particularly in the eastern cities, to enforce the rules.'

Piracy continues, in part, because many Chinese officials protect illegal enterprises to boost their local economy, Lieberthal says. In many cases, a region's economic performance influences whether an official will be promoted, creating a powerful incentive for administrators to ignore the legal status of the industries under their jurisdiction.

That poses a problem for the United States because the WTO can only determine whether a national government is meeting its obligations and has no authority over corrupt officials. In this case the WTO would have to determine whether Chinese law meets the trade body's requirements regarding copyright and patent enforcement. To win a case, the United States would need to prove that Chinese law enables corruption, and given China's recent efforts to improve its copyright laws, that would be a much more difficult case than simply proving the existence of piracy.

'You can't just haul China into court on the basis that there is piracy in China,' Lieberthal says.

But some have said problems with the way Chinese law is written could be used to bolster a WTO case.

For example, Chinese copyright law sets the minimum amount of piracy needed for prosecution far too high, according to the U.S. trade representative's 2006 Special 301 Report on China.

'The mandated thresholds remain so high that they make it impossible as a matter of law to prosecute many commercial infringers, especially at the retail level,' the report says.

If China doesn't take steps to improve intellectual property protection, America could impose sanctions, which could force the nation to bring its IP enforcement into line. But the United States would be unlikely to impose economic barriers against China because sanctions could damage a U.S. economy increasingly dependent on inexpensive Chinese-manufactured goods, says Marc Busch, an international business professor at Georgetown University.

Busch cites a hypothetical situation: The United States could put a tariff in place if it won a WTO case against the European Union, for example. 'We're hurting EU companies so that they'll turn around and ask Brussels to fix the problem,' Busch says. 'At the same time, we're kind of punishing ourselves by making it harder to buy Fendi bags or Roquefort cheese.'

Since the WTO formed in 1995, it has given member countries permission to seek retaliation fewer than 10 times, and half the countries with permission to create sanctions have been too scared of economic backlash to implement them, Busch says.

Financially, American companies have little to gain from a case against China: The WTO's Dispute Settlement Body cannot award compensatory damages, so a decision in the United States' favor wouldn't yield a settlement for companies whose intellectual property has been infringed. 'If you want damages, you should be suing in a Chinese court,' Busch says.

He adds that companies may be waiting for the possibility of suing for damages in Chinese courts, and their pressure on China's government is meant to hasten that day. Even if the United States has only a tenuous case against China, American criticisms of the Chinese legal system ought to remind China of the importance of IP protection in an innovation-based economy, he says.

And Lieberthal says that to a great degree, China is only hurting itself, since much of the piracy in the nation has victimized Chinese-owned companies. 'If China is serious about creating an innovation-based society, then it needs to do a better job of protecting intellectual property,' he says.

The entertainment industry hoped the counterfeiting of movies, music, software and books would plummet after China agreed in 2002 to abide by the World Trade Organization's (WTO) standards for global intellectual property rights.

Instead, the industry says piracy has increased dramatically, leading some American companies to view the Chinese government as unable ' or unwilling ' to curb it. And industry lobbyists are now helping the U.S. government prepare a case that could be brought against China in the WTO's Dispute Settlement Body.

Earlier this month, Assistant U.S. Trade Representative (USTR) Timothy Stratford told the American Industries U.S.-China Economic and Security Review Commission that the United States could launch a WTO case if China doesn't crack down on IP offenders.

But experts suggest that while both the industry and the government talk tough when it comes to taking on China, America may be reluctant to actually bring a complaint against the Asian superpower.

Pushing the industry's case is Washington's Smith & Metalitz, a deceptively small lobbying firm specializing in intellectual property. Although the firm employs just four partners, an associate and a consultant, its list of clients reads like an all-star roster of influential entertainment trade groups. The firm's secret: Smith & Metalitz plays Clark Kent to the International Intellectual Property Alliance's Superman.

Both share the same leader, Eric Smith, who serves as both the association's president and Smith & Metalitz's managing partner. In 1995, Smith and intellectual property lawyer Steven Metalitz formed Smith & Metalitz, and today the firm represents all seven of the association's member groups, including the Motion Picture Association of America, the Recording Industry Association of America, the Association of American Publishers, the Business Software Alliance, and the Entertainment Software Association.

Smith & Metalitz recently made it a greater priority to work with the Office of the U.S. Trade Representative to build a case against China, according to lobbying registrations released last month by the Senate Office of Public Records.

Smith declined to comment on the details of the case. 'It's a little premature to support a case actively,' he says. 'We're still in the evidence-gathering stage with USTR.' Records also show that Smith & Metalitz received about $400,000 from its clients for 2005.

Also lobbying is the National Association of Manufacturers (NAM), the largest industrial trade group in the United States, whose $8.3 million in-house lobbying practice works extensively on Chinese trade issues.

NAM has seen an upswing in piracy across many sectors of industry, says Bill Primosch, the organization's director for international business policy.

'Anything that has a high markup is being counterfeited,' Primosch says. 'It's all kinds of products: pharmaceuticals, personal-care products, auto parts, medical-testing equipment. And it's starting to flow into the international marketplace.'

In 2000, the year before China joined the WTO, the International Intellectual Property Alliance claimed losses of more than $1 billion to Chinese copyright piracy in the film, music, video-game, publishing and business-software industries.

Since then, China's economy has boomed, with an annual increase in gross domestic product of about 10 percent. Piracy industries have grown too. The association has estimated losses of $2.69 billion for 2005. Those figures don't include illegal Internet file sharing, which has increased as more and more Chinese gain access to the Internet.

But the USTR's threat of a WTO suit against China might be little more than saber rattling, experts say.

An Empty Threat?

Trade groups remain reluctant to support a WTO case, Primosch says. Many of NAM's member companies fear China's government will identify them as troublemakers and blackball them, he explains. 'They don't want to burn their bridges,' he explains.

Although trade groups fear becoming foes of the Chinese government, they say they would support a case against China if there were adequate evidence to prove it. 'The worst thing that could happen is you lodge a complaint, a WTO panel reviews the material and says, 'Well, you just haven't proven your case,” Primosch says.

American industry has reason to worry, as experts say it's unclear whether a case against China would be effective. The Chinese government, they say, has already implemented significant legal reforms since joining the WTO.

'The formal legal regime governing [intellectual property rights] protection in China has improved, and that improvement is ongoing,' says Kenneth Lieberthal, a professor of political science and international business at the University of Michigan. 'The national leadership is gradually developing some institutional capacity, particularly in the eastern cities, to enforce the rules.'

Piracy continues, in part, because many Chinese officials protect illegal enterprises to boost their local economy, Lieberthal says. In many cases, a region's economic performance influences whether an official will be promoted, creating a powerful incentive for administrators to ignore the legal status of the industries under their jurisdiction.

That poses a problem for the United States because the WTO can only determine whether a national government is meeting its obligations and has no authority over corrupt officials. In this case the WTO would have to determine whether Chinese law meets the trade body's requirements regarding copyright and patent enforcement. To win a case, the United States would need to prove that Chinese law enables corruption, and given China's recent efforts to improve its copyright laws, that would be a much more difficult case than simply proving the existence of piracy.

'You can't just haul China into court on the basis that there is piracy in China,' Lieberthal says.

But some have said problems with the way Chinese law is written could be used to bolster a WTO case.

For example, Chinese copyright law sets the minimum amount of piracy needed for prosecution far too high, according to the U.S. trade representative's 2006 Special 301 Report on China.

'The mandated thresholds remain so high that they make it impossible as a matter of law to prosecute many commercial infringers, especially at the retail level,' the report says.

If China doesn't take steps to improve intellectual property protection, America could impose sanctions, which could force the nation to bring its IP enforcement into line. But the United States would be unlikely to impose economic barriers against China because sanctions could damage a U.S. economy increasingly dependent on inexpensive Chinese-manufactured goods, says Marc Busch, an international business professor at Georgetown University.

Busch cites a hypothetical situation: The United States could put a tariff in place if it won a WTO case against the European Union, for example. 'We're hurting EU companies so that they'll turn around and ask Brussels to fix the problem,' Busch says. 'At the same time, we're kind of punishing ourselves by making it harder to buy Fendi bags or Roquefort cheese.'

Since the WTO formed in 1995, it has given member countries permission to seek retaliation fewer than 10 times, and half the countries with permission to create sanctions have been too scared of economic backlash to implement them, Busch says.

Financially, American companies have little to gain from a case against China: The WTO's Dispute Settlement Body cannot award compensatory damages, so a decision in the United States' favor wouldn't yield a settlement for companies whose intellectual property has been infringed. 'If you want damages, you should be suing in a Chinese court,' Busch says.

He adds that companies may be waiting for the possibility of suing for damages in Chinese courts, and their pressure on China's government is meant to hasten that day. Even if the United States has only a tenuous case against China, American criticisms of the Chinese legal system ought to remind China of the importance of IP protection in an innovation-based economy, he says.

And Lieberthal says that to a great degree, China is only hurting itself, since much of the piracy in the nation has victimized Chinese-owned companies. 'If China is serious about creating an innovation-based society, then it needs to do a better job of protecting intellectual property,' he says.