U.S. to file WTO cases against China over music and software piracy

The U.S. will file two complaints against China at the World Trade Organization aimed at stopping what it said is piracy of copyrighted movies, music, software and books.

U.S. Trade Representative Susan Schwab announced that cases will be filed tomorrow at the Geneva-based trade arbiter. One case argues that China sets too high a value on pirated movie or music disks before prosecuting violators. The second objects to Chinese restrictions on the sale of foreign books and movies.

"This is something our industry has been frustrated about for a very long time," Dan Glickman, president of the Motion Picture Association of America, said in an interview. The WTO complaints "are long overdue."

The cases escalate trade tensions between the economic powerhouses. They represent the second time this year the U.S. will have gone to the WTO to protest grievances against China, which ran up a record trade surplus of $232.5 billion with the U.S. last year. In February, the U.S. filed a WTO complaint aimed at what it called illegal subsidies to exporters.

"There is no trade war between China and the United States. We have a strong and growing trade relationship," Schwab said at a news conference in Washington today. "But it should not surprise anyone that there are frictions."

The complaints about widespread sale of pirated disks dates back at least a decade with China. In 1996, the U.S. was set to levy billions of dollars of sanctions against China before the Chinese agreed at the last minute to new measures to curb the export of pirated recordings and computer software.

Duties on subsidies

Over the past three years, U.S. officials have argued often and loudly about what they say is the scale of theft of trademarked and copyrighted goods. The administration was set to file similar complaints before, only to delay at the last minute as the Chinese government and some companies urged patience.

China's copying of movies, music and software cost companies $2.2 billion in 2006 sales, according to an estimate by lobby groups representing Microsoft Corp., Walt Disney Co., and Vivendi SA. The WTO complaints will be the first by the U.S. against China for breaching intellectual property rights in a country where copying has extended to handbags, golf clubs and even pharmaceuticals.

Last month, the Bush administration decided to levy duties on imports of coated paper from China to compensate for what it said were Chinese subsidies to exporters. The move was a reversal of two decades of policy that exempted non-market economies such as China from tariffs to compensate for subsidies.

February case

In February, the U.S. went to the WTO to protest subsidies such as loan write-offs and tax rebates provided to Chinese exporters. The commercial tensions may only increase: lawmakers in both houses of Congress are preparing legislation aimed at getting China to raise the value of its currency and import more U.S. products and services.

U.S. lawmakers have criticized China and the administration about this issue for years, and today they praised the move.

"Rampant and large-scale piracy and counterfeiting in China have persisted too long, and China is not penalizing pirates and counterfeiters," Max Baucus, the Democratic chairman of the Senate Finance Committee, said in a statement. "It's high time the U.S. did more to protect Americans hurt by these offenses."

U.S. business groups, which had worried that a trade complaint might undermine hard-earned progress made with China in negotiations, applauded what they called a targeted WTO complaint. The administration had earlier considered a broader legal case that said China wasn't enforcing its rules to crackdown on counterfeiting.

Consultations requested

"These cases are well-focused and should be viewed as a normal part of WTO membership," said John Frisbie, president of the U.S.-China Business Council. "We encourage the two sides to continue their dialogue and resolve this important issue as quickly as possible."

Under WTO procedures, the U.S. will formally ask for consultations with China about the issues of intellectual property rights tomorrow. Only after 60 days can the U.S. ask for an independent panel to adjudicate the dispute.

Pirated DVDs including Time Warner Inc.'s Academy Award- winning movie "The Departed" sell for less than $1 on the streets of Chinese cities including Beijing and Shanghai. Schwab got 500 copies of copyrighted movies and compact disks sent over from China, and displayed them at her news conference.

Limits on books, movies

The movie, record and publishing companies argue that a reason for piracy stems in part from the limits placed on U.S. publishers and movie companies. Overseas publishers are only allowed to sell non-Chinese books, magazines and newspapers through five-star hotels while movie studios can show only a limited number of overseas films every year in China.

"The legal obstacles standing between these legitimate products and the consumers in China give IPR pirates the upper hand in the Chinese market," Schwab said.

China last week announced a crackdown on hawkers of counterfeit goods and halved the criminal thresholds for prosecuting pirates. Possession of 500 pirated DVDs, rather than 1,000, would lead to criminal prosecution, the Supreme People's Court said, according to the Chinese Embassy in Washington.

Not enough

That was a step in the right direction, but doesn't go far enough, Schwab said.

"The thresholds create a safe harbor for pirates," she said. A vendor need only make sure he has only 499 illegal videos or CDs on hand, and "the most Chinese authorities could do would be to seize the goods and impose an administrative fine," she said. "The proprietor could resume business in a short period of time without fear of prosecution."

The U.S. wants the thresholds eliminated, and seeks new rules on the disposal of pirated items seized by Chinese customs authorities.

Analysts said the case was filed in much out of frustration with China as it was to head off anger in Congress.

"The U.S. government has been trying to work with China, but the problem hasn't gotten any better. It has probably gotten worse," said Lyle Vander Schaaf, an attorney at Bryan Cave LLP who works on intellectual property issues. The U.S. and China now have a new chance to negotiate, as the U.S. has something to offer China: dropping the WTO case.

"They could use that as an olive branch," Vander Schaaf said.

Chu Maoming, a spokesman for the Chinese Embassy in Washington, didn't return a telephone message seeking a comment.