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CIAO DATE: 03/01
Foreign Policy
Chinese Fake-Out
Andrew B. Loewenstein
If you go to Yiwu, China, day or night, you will find an endless stream of trucks disgorging cargo for market at the sprawling China Small Commodities City, where every day 200,000 buyers descend on the market's 30,000 wholesale stalls and 3,500 stores. The selection is immense and the pace frenetic. Buyers have their pick of 100,000 different products; 2,000 tons of goods change hands daily. In 1997, the last year for which data is available, sales totaled $2.4 billion, a 24-fold increase over the previous six years. Testament to China's success at morphing into a market-based economy? Not quite. Yiwu is China's largest wholesale market for counterfeit goods.
As long as products have been manufactured for sale, the less scrupulous have counterfeited them. What is unprecedented about counterfeiting in China, argues Daniel C.K. Chow, a law professor at Ohio State University, is its staggering scale. Drawing on two years of work and research in Guangzhou, China, Chow shows in the Washington University Law Quarterly how Chinese counterfeiting has developed into a fully integrated and diversified industry–and why China's accession to the World Trade Organization (WTO) may make the problem worse.
Counterfeit goods range from televisions and washing machines to baby food and instant noodles. China's industry is, Chow declares, "the most serious counterfeiting problem in the history of the world." The scale of counterfeiting in China threatens both foreign investors and legitimate domestic manufacturers. If quality brands are routinely undersold by their faked counterparts, there is little incentive to innovate or nurture brand recognition, critical features of the free market. Chow documents the extent of Chinese counterfeiting, which, according to his calculations, costs the Chinese economy tens of billions of dollars annually. He attributes this rise in counterfeiting to China's rapid economic development, the development of widely recognized brand names, and the creation of a commercial advertising industry.
Chow traces the journey of counterfeit goods from their manufacture in small, scattered factories in the southern coastal provinces, to huge wholesale distribution centers, like the one in Yiwu, and then on to retail outlets throughout China. Investors, having pumped more than $216 billion in foreign direct investment into China over the last 20 years, watch as their profits are whittled away by loss of market share to counterfeit competitors. And increasingly, those counterfeit goods are leaving the country. In 1998 alone the U.S. Customs Service seized almost $29 million worth of counterfeit goods from China, nearly a 100 percent increase over the previous year. China is now the leading country of origin of goods seized by the U.S. Customs Service, accounting for 27 percent of the total in 1997 and 38 percent in 1998. Distributors in Yiwu, no enemies of globalization, have established offices in Brazil and South Africa and plan to expand into Nigeria, Uruguay, Pakistan, South Korea, and Thailand.
Although the Chinese government has proven itself quite capable of halting other forms of economic mischief, as the remarkably successful campaign against smuggling demonstrates, counterfeiters are likely to face little impediment. Chow expands upon the familiar litany of problems plaguing transition states–bureaucratic rivalries, entrenched local interests, the intertwining of the black market with legitimate business–to document how both the current state of Sino-American relations and the internal dynamics of Chinese society will keep the counterfeiting business booming. Domestically, the millions of less affluent Chinese who have come to rely on cheap knockoffs make reforms tricky. Internationally, Washington may have lost its chance to pressure Beijing on the counterfeiting issue. Although U.S. insistence during negotiations over China's admission to the WTO led to genuine efforts to combat copyright piracy (the unauthorized copying of content from films, musical recordings, computer programs, and the like) the counterfeiting issue was never on the table. The window of opportunity, Chow argues, has now closed: Former U.S. Trade Representative Charlene Barshefsky has referred to the U.S.-China agreement on WTO accession as "absolutely comprehensive."
The best one can hope for, Chow thinks, are slow, incremental improvements; yet those would be contingent on wholesale reform of the legal system. After all, how can China stop the counterfeiters when there is no definition of counterfeiting in Chinese law?
Andrew B. Loewenstein is law clerk to the Hon. William J. Holloway Jr., U.S. Court of Appeals for the Tenth Circuit.