US targets Chinese piracy of US goods

Liu Tong is polite to a fault, speaks perfect English, majored in American studies, has loads of American friends he loves to phone - and duplicates Japanese and American high-tech goods for a living.

Mr. Liu buys unusual, specialized technology - a machine to make film subtitles is a recent project, for example. He disassembles the machine, duplicates the parts, and rebuilds a Chinese version. The process, called "reverse engineering," is the more serious side of a long-running feud between the US and China over intellectual property rights violations - one that includes mass production of pirated DVDs of movies, music, and software.

Now, as Chinese president Hu Jintao prepares to visit the US next month to discuss what Bush administration officials term "our $250 billion relationship," Washington seems to be backing away from a trade war over currency valuation that would slap an epic 27.5 percent tariff on Chinese exports.

Instead, US Commerce Secretary Carlos Gutierrez indicated here Wednesday that the White House will focus on a more diffuse and difficult problem: intellectual property rights (IPR).

"Not currency valuation ... but intellectual property rights violations are the main threat to US industry" argues Stephen Green, senior economist for the London-based Standard Charter Bank in Shanghai, China. "It is the taking of emerging technology, the sophisticated technology that resides in the products of large Western firms, that can do the most harm in the long term."

For nearly a decade, complaints about IPR violations have been a mantra by US trade officials coming to China. Little is done, apart from occasional bonfires of illegal DVDs by Chinese police.

But as the US trade deficit with China climbed to $202 billion last year, protectionist sentiment has built in Washington. Talk of a lack of access to Chinese markets, unfair and obscure business rules that penalize foreign companies, and the recent bill, introduced by Sens. Lindsey Graham (R) of South Carolina and Charles Schumer (D) of New York, which would impose a 27.5 percent tariff on Chinese imports - have seized Beijing's attention. Some 67 senators agreed to pass the bill, despite opposition by the White House. After high-level meetings last week with Vice-Premier Wu Yi and Commerce Minister Bo Xilai, Sens. Schumer and Graham agreed to delay the vote.

Secretary Gutierrez says that while China is the world's No. 2 buyer of personal computers, it ranks No. 25 in software purchasing - a result of widespread use of "pirated software" in China. In a talk to an American business audience, he noted that if China cut the use of pirated software to 80 percent from 90 percent of all software, the country would gain $6.5 billion in tax revenue.

Just around the corner from where Gutierrez spoke, one major DVD shop had removed all current Hollywood movies from its shelves, leaving an odd assortment of Alfred Hitchcock, Charlie Chaplin, exercise videos, and Korean, Japanese, and Chinese films. But at the store counter, two huge folders of movie flyers were available - Capote, Crash, Pride and Prejudice. Buyers simply pulled the flyers, paid $1 each, and a young Chinese person left the store and returned with movies under his or her coat, already wrapped.

On Treasure Street, Ya Ba Lu, hundreds of vendors who front for factories outside Beijing tell reporters that they can have name-brand coats, shoes, and purses mass-produced for shipment to Moscow, Warsaw, Bangkok, and other destinations.

Economic relations between the US and China have arrived at something of a crucial juncture, US officials say. Gutierrez said that US firms have shifted from thinking of China as a "land of opportunity" to giving its business environment a more "mixed assessment." The secretary also adjusted his criticism of piracy practices and closed markets, shifting from a tone that Chinese see as one of self-interest to an argument that greater opening and fair trade was ultimately good for the Chinese.

IPR enforcement is highly problematic, requiring China to police deeply inside a corrupt system that sprawls over local provinces and cities.

The US isn't alone in showing greater worry over China's capability as a superb duplicator of innovative products. The European Union is preparing to file a WTO suit arguing that Chinese laws requiring European auto-parts makers to create joint ventures with Chinese firms will mainly allow Chinese firms to learn to duplicate European technology and then abandon the firms.

Beijing is showing signs that it understands the sentiment behind US protectionist feelings. Last week, five Chinese agencies held a rare joint press conference arguing that China has done, and will do, much more to police IPR violations. China has shut down more than a dozen factories making illegal DVDs in the past year. Moreover, in a development also praised by Gutierrez, China has shifted IPR violations from a civil to a criminal violation - though the fine print on this is unclear. That Vice Premier Wu is handling IPR violations inside the state structure is an affirmative fact, the commerce secretary said.

"They are closing down the DVD factories, but will they remain closed?" Gutierrez asked, adding that China may need to pay more attention to the concerns of "its No. 1 customer."

"In private business, the thought of my No. 1 customer preparing to change policy ... that would have a significant impact on my thinking," Gutierrez told reporters here.