A silver disk may force Clinton to get tough with the Chinese Pirated CDs, software, even Jeeps, soar into many millions of dollars; American business is fed up; Untouchable military involved in producing some counterfeit goods

BEIJING — BEIJING -- Nuclear technology to Pakistan, missiles to Iran, a threatened invasion of Taiwan and consistent abuses of human rights -- all are irritants to China-U.S. relations.

But what may finally push the United States into getting tough with China is a silver disk that sells on Beijing's streets for only $3 but is filled with thousands of dollars worth of U.S. software.


Violations of intellectual property rights, the catch-all phrase that is often equated with pirated computer programs on CD-ROMs, is again pushing China and the United States toward a costly trade war.

U.S. officials spent last week trying to convince China that it had to make a dramatic effort to end the illegal trade in pirated music, videos and software. Chinese officials, however, maintained that their efforts, while not perfect, were adequate.


To be sure, the availability of some pirated goods has declined in the year since the United States and China signed a landmark treaty to protect intellectual property rights. Bootleg music compact disks are not as common as before, and a constant educational campaign aims to raise awareness of piracy's downside.

That is, some day technology of Chinese origin could be pirated, too.

Hundreds of factories

But these campaigns are the exception, with hundreds of factories around the country still producing counterfeit jeans, shirts, breakfast cereal, shoe polish and even Jeeps.

Video rental shops in Chinese cities seem to carry nothing but pirated movies, while only big companies bother to buy full-priced software; the rest of the country spends a few dollars for a CD-ROM crammed full of costly computer programs, such as Microsoft's Word and Windows 95, or countless games and movies.

"My sense is that China's compliance with the treaty is completely cosmetic," said James V. Feinerman, an expert on China's legal system at Georgetown University. "Enforcement comes in waves but doesn't systematically attack the problem."

So Washington is getting fed up again, and U.S. business wants the administration to get tough, having lost hundreds of millions of dollars.

The United States was on the verge of imposing the largest trade penalties in its history a year ago when the treaty was signed. Piracy had become such a problem that U.S. industry groups, primarily the music, software and movie industries, estimated they were losing $844 million a year to pirated Chinese goods.


More worrisome was that pirated goods manufactured in China were beginning to appear in more prosperous Asian countries, such as Taiwan, Hong Kong and Japan, where piracy had only recently been stamped out and affluent consumers had been buying full-priced U.S. products.

Today, all of these problems remain -- including the threat of a costly trade war.

Presidential campaign issue

Analysts say the United States might have been willing to let the issue of piracy die but for the presidential campaign, which invites Republican charges that last year's treaty was a hollow victory.

In addition, much of the software and entertainment industry is located in voter-rich California, where a trade victory could help President Clinton's re-election chances.

U.S. firms also say they are now losing three times the amount they lost last year, primarily because counterfeiters are now copying expensive CD-ROMs instead of cheaper music CDs. The U.S. business community, one of the most powerful influences on the administration's China policy, has usually warned against irritating Beijing but now it is demanding action.


U.S. officials remain tight-lipped about the results of the past week's negotiations in Beijing or whether they'll now push for sanctions.

Chinese officials, however, took a defiant tone.

"Some overseas people have criticized China of not living up to its promises on IPR [intellectual property rights] protection. Such attacks are totally groundless," said negotiator Zhang Yuejiao in the state-run press.

Other Chinese officials said this past week that if the United States imposes the threatened $1 billion in tariffs on Chinese goods, China would respond in kind, thus cutting U.S. exports to one of the world's booming economies.

In addition, Chinese officials say the United States is to blame for some of the pirating because it failed to deliver technological and financial aid promised under last year's treaty, a charge the United States rejects.

China also points out that some progress has been made. Compact disk factories, for example, have been registered and products are now stamped with codes so CDs can be traced back to the factory.


In addition, thousands of laser disk "parlors," where patrons can rent movies to watch, have been closed. The parlors are thought to be prime consumers of pirated products.

State television has also been airing the ritualistic crushing of CDs -- the government claims that millions have been destroyed. Another widely aired clip shows police bursting into a room and slamming a suspected counterfeiter against the wall.

But the raids have a tired look to them. With compact music, video disks and CD-ROMs copied by relatively small, inexpensive machines, experts say the raids are about as effective as busting street corner dope peddlers while letting the traffickers go free.

The CD-ROMs cost $1.25 to make and are sold for about $3. The dozens of hawkers in Beijing's computer district sell 50 to 100 of the disks each day, making them an irresistible product to sell.

Most peddlers are toughs from the countryside who can easily slip out of town when enforcement steps up. Those arrested are easily replaced.

Striking at the source of production makes more sense, but here Beijing runs up against limits to its authority.


Government itself involved

China's untouchable military, which runs many enterprises, itself produces some pirated goods. In addition, factories are often located in the headstrong coastal areas, where leaders are unwilling to see profitable local businesses closed down. Beijing-based diplomats also report that some businesses are run by the family of high-ranking leaders, making it doubly difficult to crack down on them.

Given such difficulties, the central government's promise to stop the theft of intellectual property rights may have been impossible to keep when it was made last year.

"Essentially, they held a gun to Beijing's head a year ago and said take action or we'll start a huge trade war," a Western diplomat said. "So, of course, China agreed to take action. But the Americans must have known that Beijing had no way of doing what it was promising."

In the long run, what will help protect U.S. intellectual property rights is the understanding among Chinese that piracy hurts them as well.

Slowly, such a consciousness seems to be growing.


The Chinese rock band Black Leopard, for example, recently went public with its travails: It had anticipated sales of 750,000 cassettes of its most recent album. In the end it sold 800,000, but over half were pirated copies of the tape, causing losses of $500,000.