Q & A: China piracy

Counterfeiting has become deeply entrenched in China's economy as a source of income for both small-time hawkers and powerful local tycoons.

Experts debate whether Chinese authorities are unwilling or unable to move quickly on the problem. Meanwhile, many companies are adapting their business tactics to fit conditions in China or are learning to live with some level of piracy.

Seattle Times business reporter Kristi Heim traveled to China for a first-hand look at counterfeit goods and the impact of piracy on China's economy. She answered your questions from noon to 1 p.m. today.

For more, read her stories:
• Part One: Inside China's teeming world of fake goods
• Part Two: Businesses scramble to outfox the fakes

The transcript of today's discussion is below. Thanks to everyone who participated.

Who are the people who ultimately buy these goods? Are they foreign tourists or Chinese?
— Willis Tuttle, Seattle

Kristi Heim: I think it's a mix of both. Each day we visited Xiangyang market, we met people from at least a dozen countries. The sea of people, the range of dress, languages and shopping behaviors made this place a giant global flea market. Most buyers we met were tourists, but others were living in China and working for foreign companies - or even embassies. We also met Chinese people returning from studying abroad, Chinese Americans and Chinese-speaking visitors from places like Singapore. Locals do visit the market, but my impression, and the view of the sellers, was that more sales go to people who aren't local Chinese.

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If a foreigner buys an item which turns out to be fake, does the customs confiscate it?
— Disma, Shoreline

K.H.: Not necessarily. Counterfeit articles are on the US Customs list of prohibited and restricted items. You can view the whole list and the rules here.

But, interestingly, Customs says that travelers may be permitted one exemption for personal use (not for sale or distribution) every 30 days. Customs gives an example of permitting one purse with an infringing trademark.

I have heard of people who have brought back entire suitcases of fake items, but I certainly wouldn't recommend this. Also, a note of caution about quality: the fake goods might not work at all. See this "Princess Diaries" demo. One person who bought a fake DVD movie in China recently said it played two-thirds of the way and then simply stopped.

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Luxury retailers estimate the "annual losses" due to fakes amount in the billions. However, their method of calculating such a number is rather sketchy - number of fakes sold multiplied by the retail price. This is highly inaccurate because of the number of assumptions associated in coming up with the supposed "losses"these retailers suffer. What would be a better way to estimate the "losses" or perhaps even benefits of buying and selling counterfeit goods?
— Phi Kwan, Salt Lake City, Utah

K.H.: This is a good question because the method of calculating losses is subject to debate. Many people I interviewed said they would not buy the real product because of the higher price, so in effect there are two different markets at work: one for the genuine article and one for the cheaper knock-off. I'm curious to what extent the marketing of a brand name is helped by the presence of the fakes. How much would that marketing have cost? Does it help or hurt the brand image? And how many consumers migrate from fake products to the real ones when they can afford to?

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Is it right for the U.S to insist on cracking down on counterfeiting in China, when it helps so many people?
— Kim, Shoreline

K.H.: People can debate the moral question, but the United States and other countries have a legal right to insist that China live up to the promises it made when it joined the World Trade Organization in 2001.

If you are interested in those documents, they can be found here (not exactly light reading).

The main agreement is the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Basically China promised to improve its IP protection and enforcement, and the United States doesn't believe it has fulfilled its commitments.

Besides the WTO, China is also a member of the World Intellectual Property Organization, the Paris Convention for the Protection of Industrial Property and a number of other international agreements that attempt to protect various forms of intellectual property.

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Why do the Asian countries get away with so much illegal piracy? For example, movies.
— Dan A., Kirkland

K.H.: I think the main reason may be because Asia, and especially China, is now the world's center for manufacturing. If manufacturing is concentrated in one area, it's easy for a factory to divert goods made for a Western brand name to the black market. In some cases they are the same goods.

When the United States was first building its manufacturing economy, it could be accused of stealing intellectual property from Europe.

Now that the United States derives more of its jobs and economic growth from fields outside basic manufacturing, it has a vital interest in protecting intellectual property.

But Asia is changing, too. Japan and Korea started out copying products invented elsewhere, but now they have become more innovative than derivative. I'm not sure how relevant this still is today, but some argue that Asia, where Confucian values are deeply rooted, tends to value shared rights rather than individual rights and this influences the notion of intellectual property.

Here is some good information that I just received from a reader in Canada detailing products and countries that reported piracy problems last year.

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Kristi, Do you get the impression that Chinese courts are setting any judicial precedents that will help US companies enforce their IP rights more effectively? Thanks.
— Lew McMurran, Seattle

K.H.: Hi Lew, I do get the impression that important progress is being made, especially in the court system. The two cases I wrote about, the 2004 court ruling that effectively criminalizes copyright violations, and the ruling last year in Beijing that holds owners responsible for what their vendors do, bring Chinese law closer to international law when it comes to IP. In fact, some trademark holders have used the Beijing ruling to go after the sellers. But these are only two cases, and I understand that the Chinese legal system is still a work in progress. What seems clear is that at least some levels of the Chinese government understand that better IP protection will benefit the country's development and its trade relations with other countries.

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What's the most absurd knockoff item you saw for sale?
— Robert, Seattle

K.H.: Probably the fake hairy crabs, the popular delicacy from the Shanghai area's Yangcheng Lake. The genuine hairy crabs are expensive, and spawned copies. The sellers of authentic crabs went so far as to carve the crab's origin into its shell, and then the carvings were copied, too.

There was a story of a farmer who unwittingly bought fake grain and became so despondent that he tried to kill himself. But he couldn't even do that because the pesticide he ate was fake, too. That one is probably just an urban legend.

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Other countries also trade in counterfeit goods. Why does China seem to get all the attention (and blame) when it comes to piracy?
— Kim, Seattle

K.H.: Probably because its vast size and incredible pace of economic growth make a lot of people uncomfortable. But it is a genuine problem in China and has already changed the game for almost all of the companies that do business there.

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Piracy seems to flow from every industry including pharmaceuticals, can you address cases like Taiwan infringing on the Tamiflu patent, I remember reading about this in the fall?
— Marilee Veniegas, Bellevue

K.H.: I don't know anything very specific on this case, but for pharmaceuticals in general, people in China and in other developing countries felt strongly that if Tamiflu turns out to be the medicine needed urgently to save lives, it should not be restricted by a patent, and they were quite willing to see one violated.

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