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How China’s rampant intellectual property theft sparked trade war

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Imbi Plaza, a 1970s-era shopping mall on the fringe of the Bukit Bintang area of Kuala Lumpur, is a good place in which to start understanding how the United States and China came to be in a trade war in 2018. In its heyday, in the 1990s and early 2000s, Imbi was the Malaysian capital’s thriving bazaar of high-technology – a collection of shops selling computer hardware and accessories, and the software needed to run them, reported South China Morning Post (Hong Kong).

The hardware was mostly real, though rumours hovered in the complex’s dank air of proprietors switching original personal computer (PC) components for cheaper ones, to make a little extra on the side.

Nobody worried about that with the software, though. It was all fake, and everybody knew it. If you wanted to drop US$200 on real software, go buy it somewhere else, sucker. Stores with rack after rack of poorly printed package covers on display offered pirated copies of virtually every program available. Need the latest Windows operating system? “Ten ringgit.” MS Office? “Ten ringgit.” Adobe Acrobat? “Why not get the multi-program Adobe suite?”

“Really? How much?”
“Ten ringgit. All three for twenty five.”

Every big city in Asia seemed to have an Imbi Plaza or two. And nobody did much about them.

I asked a lawyer friend, who worked for a large US soft­ware company in the region back then, why these places were not shut down. They were a nuisance, came the answer, and they were raided occasionally. But the indus­try’s real problem was the factories in China, where the production took place. The Chinese were not just making the pirated stuff sold at the Imbi Plazas of the region; they were knocking off discs, manuals and packaging, right down to the security holograms, pallets at a time, and selling this original looking software to government and corporate customers as the real thing. Suckers.

The same problem existed with music CDs and Holly­wood videos. To Americans who had paid three times for the same Beatles albums over 20 years – vinyl, cassette and CD – and hundreds of dollars for a single PC application, the thought that others were stealing these was galling.

In the mid-90s, US president Bill Clinton’s administra­tion made a lot of noise about stamping out Chinese piracy. A 1992 agreement between the US and China, negotiated by the previous administration, of George H.W. Bush, had been hailed as a major step forward, with Beijing agree­ing to put new intellectual property (IP) protection laws on the books.

Testifying in March 1992 before the US Senate, the head of the Business Software Alliance (BSA), an industry group that includes most of the major software companies, said, “The commit­ments that China made [to IP protection] greatly exceeded any assurances that had been offered in our prior bilateral negotiations.” He estimated that US$225 million in software sales had been lost the previous year in China through piracy. Music and videos totalled hundreds of millions more.

But the pirates were just warming up. The next year, estimated software piracy jumped by about US$100 mil­lion; the BSA estimated that 94 per cent of all the packaged software in use in China was pirated. In 1994, the Office of the United States Trade Representative identified 29 factories, most in southern China, that were producing pirated software, music and video CDs. They helpfully gave their Chinese counterparts the addresses.

The following year, the number of factories had grown to 34.

Missing from the 1992 agreement had been mechanisms to ensure China’s new laws were enforced. After long nego­ti­ations, these were added to a new and improved bilateral agreement in 1995. When it was signed, Clinton’s lead negotiator, Charlene Barshefsky, said, “This is the single most comprehensive and detailed [IP rights] enforce­ment agreement the US has ever concluded. The US is very pleased […] and our industries are very pleased.”

But still nothing happened on the ground. Over the next year, US negotiators made nine trips to China and held 40 meetings with their Chinese counterparts. And, to show that this time they really meant business, Clinton threatened to impose 100 per cent tariffs on US$2 billion of imports from China if Beijing didn’t enforce its new laws.

Like US President Donald Trump’s today, Clinton’s tariff threat displeased many. Beijing expressed outrage, of course, but also unhappy were the US security community, who didn’t want sanctions to keep Beijing from cooperating on security matters; human rights groups, who didn’t want to give Beijing another reason not to free their dissident of the day; and environ­mental groups, who sought Beijing’s cooperation with their own issues.

The most vociferous opponents, however, were the same as they are now: Wall Street, big-business executives and other members of the US “elite”, who made good money trading with China. Trade friction would rock that boat.

“Surprise! An IPR Deal!”, The Wall Street Journal wrote on the eve of the sanc­tions deadline, in June 1996. The US and China has reached yet another agreement to fix the problem of IP theft in China, their third in four years. At a press conference announcing the breakthrough, the US team sounded like ingénues, using such terms as “that’s an abso­lute commitment”, referring to Beijing’s agree­­ment to close underground CD factories, and “the situation has changed”, when asked by a reporter why the US wouldn’t be back dealing with the same issue a year hence.

Clinton accepted a promise from Beijing that few Americans believed would be kept. Paraphrasing Vladimir Lenin, Beijing always knew that capitalists would sell you the hardware to hang them with. Now they knew the software would be thrown in for free.

IP theft in China continued to grow, yet the Clinton team pushed hard to bring the country fully into the world’s trading system, telling some whoppers to get Congress to pass a bill giving Beijing permanent normal trade relations status in 2000. Motherhood, apple pie and the holy grail of demo­cracy, Americans were told, would follow from more trade with China. “They” were going to be like “us”. It had to happen! The New York Times called the trade deal with China “a major part of Clinton’s foreign policy legacy”.

After China’s accession to the World Trade Organisation, in December 2001, with the rapid growth of the internet and PC use, pirated software grew as China’s economy grew. The BSA estimated that 70 per cent of new PC software installed in China during 2015 was unlicensed, its value totalling almost US$9 billion.

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