Chinese Piracy of U.S. Intellectual Property: Causes and Impact

Overview of U.S.-China Trade and Intellectual Property

China, with a population of more than 1.3 billion, represents the largest consumer market in the world. Business interests in this market and the opening of China in the 1970s led to China's membership in the World Trade Organization as well as increased cooperation and interaction between the Chinese government, Chinese businesses, and the international political and business community. This engagement has focused attention on China's intellectual property rights and has spawned increasing pressure for China to conform its laws and regulations to global standards and to actively enforce them. The motivation has been the flagrant Chinese piracy of intellectual property, which has produced vast losses in potential revenue to many firms throughout the world, particularly in the United States.

Estimated Losses from Chinese Piracy

In 1995, U.S. copyright industries estimated that losses stemming from China's production, distribution, and export of pirated products amounted to $2.3 billion. At that time, this figure broke down as follows:

$1.3 billion in losses in the entertainment software industry; $488 million in losses in the business software industry; $300 million in losses in the music industry; $125 million in losses in the book industry; and $124 million in losses to the motion picture industry.

According to the International Intellectual Property Alliance (IIPA), the U.S. economy lost over $15 billion due to Chinese piracy of its intellectual property from 1995 through 2001. The IIPA's 2001 report documented that piracy rates in China continued to hover at the ninety percent level and reported an alarming increase in the production of pirated optical media products — including DVDs — by both licensed and underground compact disc plants. The IIPA also expressed concern about the increasing sophistication of the pirate market, noting a rise in Internet piracy, the production of higher-quality counterfeit products, and the piracy of computer software by business enterprises, government agencies, and ministries.

U.S.-China Intellectual Property Agreements

The U.S.-China Intellectual Property Rights Enforcement Agreement, signed in February 1995, was the first measure taken by the U.S. government to protect U.S. corporate copyrights. Among other things, this agreement established the State Council Working Conference on Intellectual Property Rights, created requirements for title registration of foreign audiovisual products and computer software in CD-ROM format, and provided for a six-month enforcement period during which intensive efforts would be made to crack down on major infringers of intellectual property rights.

The 1995 agreement was further strengthened with a 1996 accord that included the closing of pirate plants, criminal prosecution for those who violate intellectual property regulations, improved border surveillance by customs officers, and a registration system for compact disc manufacturers.

Unfortunately, intellectual property rights agreements with China do not appear to be working. By the end of 2001, China had virtually eliminated export piracy but had made only minor dents in its domestic market. The percentage of products appearing on the domestic market that were illegal remained very high across all sectors of the copyright industries — above ninety percent.

Why Enforcement Has Failed

Analysts cite multiple reasons to explain why intellectual property agreements with China have not succeeded. Some believe piracy prevails because the theft of intellectual property has not been solely the province of street-level criminals. The families of leading Chinese officials, provincial leaders, and even the Chinese military have been involved in the theft of intellectual property. In one reported case, pirates set up facilities to manufacture illegal compact discs on People's Liberation Army bases as a means of evading the internal security police charged with shutting down pirate operations.

Others blame China's lack of commitment to protecting intellectual property, emphasizing that government ministries routinely participate in piracy by illegally copying computer software for their own use. Still others attribute China's piracy problem to unstoppable consumer demand. They argue, for instance, that pirated compact discs sell in China because genuine products are too expensive for most local consumers:

"If the prices can be lowered significantly, then there's no need for a pirated goods market… Maybe that gives us another good reason to look forward to China's entry into the World Trade Organization, which is expected to bring us more affordable and copyrighted audio and video products."

One thing is certain: although Chinese authorities sometimes make a show of cracking down on piracy by crushing mountains of DVDs and compact discs with steamrollers, the problem has only grown worse. According to the American Chamber of Commerce, "The number of infringement cases handled on a criminal basis is still too low to create the required level of deterrence."

Understanding the structural and cultural dimensions of intellectual property enforcement in China is essential to grasping why bilateral agreements have so consistently fallen short of their goals.