Last weekend, the Clinton administration fired the first shot in what could become a trade war over “intellectual property,” as recorded or printed information products are known. Washington slapped 100 percent tariffs on $1.08 billion worth of Chinese imports (chart). “We cannot stand by while the interests of our fastest-growing, most competitive industries are sacrificed in China,” said Mickey Kantor, the U.S. trade representative. The sanctions won’t take effect until Feb. 26, giving the Chinese a grace period in which to work out a settlement. But Beijing immediately retaliated. “To safeguard China’s sovereignty and national dignity,” it imposed counter-tariffs on electronic games, cigarettes and other American products. And Beijing suspended negotiations with the Big Three U.S. automakers over joint manufacturing ventures in China. Japanese sources said the Chinese were already talking to Toyota about a substitute joint venture.
Washington has been complaining for years about Chinese theft. Among other things, the United States wants the Chinese government to close 29 compact-disc reproduction houses, which use relatively cheap digital equipment to pirate music CDs, ranging from classics like the Beatles and Pink Floyd to the recent Nirvana hit, “Nevermind.” The factories turned out 75 million unlicensed CDs last year. Some were sold in Chinese cities for less than $2 each. But most were exported to other countries, where they undersell legitimate American products. The same relatively cheap digital equipment that copies music CDs can be adapted to reproducing computer programs. The university area in Beijing swarms with peddlers of bootleg programs, which sell for incredibly low prices. Recently the magazine China Infoworld ran an ad for the “Subsidy CD,” a bundle of 70 Chinese and Western programs. Experts say legal versions of the software would cost $6,000 or more; the aptly named “Subsidy” sells for $105.
Chinese government action against the counterfeiters is inhibited by many factors, including the deathwatch on the regime’s paramount leader, 90-year-old Deng Xiao-ping. “Nobody on the Chinese side wants to be seen accommodating the barbarians, even if compromise is in China’s best interest,” says an American lawyer close to the talks. “It’s typical end-of-dynasty behavior.” And the Chinese have little experience with true give-and-take in negotiation. Through most of their long history, they were either overlords or prostrate victims. “They aren’t used to dealing with other countries as equals,” says Winston Lord, assistant secretary of state for Asian affairs.
There’s no reason to think Beijing wants a trade war. The United States is China’s most important market, earning the Chinese a $80 billion annual trade surplus. “Today they need us much more than we need them,” says Jeffrey E. Garten, under secretary of commerce for international trade. “It’s inconceivable that they can continue to grow at this rate without access to our market.” Three years ago, Beijing defused a similar crisis by passing a law extending copyright protection to foreign works. But the law was never enforced. “To date, not a single Chinese citizen has been prosecuted for copyright violations under [criminal] law,” says Eric Smith, executive director of the International Intellectual Property Alliance, an industry umbrella group. Corruption and a biased legal system protect the counterfeiters, many of whom have connections to high-ranking officials of the government or the military.
Last May Bill Clinton thought he saw a way to increase U.S. trade with China and, at the same time, improve Beijing’s treatment of its own people. Clinton said he would “delink human rights from the annual extension of most-favored-nation trading status for China.” No longer using the heavy-handed threat of higher U.S. tariffs as a weapon to promote human rights “gives us the best chance of success on all fronts,” he insisted. So far, it hasn’t worked. As Chinese pirates continued to steal American intellectual property, Beijing actually stepped up the abuse of individual liberties. Last week the State Department’s annual human-rights report accused China of backsliding, citing “widespread and well-documented” abuses.
Deng’s impending death and a disinclination to take criticism from foreigners also help to explain China’s latest roundup of dissidents. Facing an uncertain transition,his potential successors are trying to stifle all opposition. Even foreign businessmen have suffered human-rights abuses. Last year an American citizen, Philip Cheng, was released after seven months of detention over a commercial dispute. His chief jailer turned out to be the brother-in-law of a disgruntled Chinese partner. Other ethnic Chinese businessmen, holding Australian or British passports, are still under questionable detention.
U.S. officials think there’s a chance to reach agreement on intellectual property before Feb. 26. The Chinese have a strong incentive to avoid a showdown: they want to join the new World Trade Organization, which would guarantee their goods the lowest possible tariffs worldwide. Washington can keep China out of the club as long as the intellectual-property dispute drags on. In any case, U.S. exports to China won’t be hurt much by the new sanctions, since Chinese markets already are dosed to many of the products targeted. And Beijing doesn’t plan to approve any new joint ventures on autos until next year, which gives the Big Three time to work with.
“Both sides have too much at stake to go over the brink,” says Garten. “China is the geopolitical and geoeconomic issue of the 21st century. We can’t afford to let any one issue totally color the overall relationship.” But there are other problems, apart from human rights, that won’t go away. House Speaker Newt Gingrich aggravated one of them last week when he declared that the inhabitants of Taiwan “are a free people with the right of self-determination [and] every right to be in the United Nations.” That put Gingrich at odds with his own country’s longstanding position that Taiwan is part of “one China.” Perhaps inadvertently, it was also a slap at President Jiang Zemin, who had just given a major speech once again opposing any separate identity for Taiwan, which was forced to give up China’s U.N. seat in 1971. With Deng dying and Clinton swimming against a Republican tide, both China and the United States face political uncertainty. That leaves all too much room for disputes and misunderstandings between them in the months ahead.
PHOTO: ‘To the brink’: Pirated music on sale in Shenzhen, trade representative Kantor
New tariffs will double the price of some Chinese imports, including:
Baseball-card holders, picture frames; worth $465 million
Answering machines, cellular units; $108 million
Surfboards, bicycles, fishing rods; $143 million
Jewelry boxes, ornaments; $70 million
Silk gloves, mushrooms, citric acid: $294 million
