Making A Difference

Trade Drama: Act Two

Washington again threatens Beijing with sanctions over major copyright violations

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Trade Drama: Act Two
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ON May 8, the Clinton Administration announced that it would impose punitive trade tariffs on China, affecting exports worth $3 billion, unless Beijing agreed to step up enforcement of a bilateral copyright protection agreement signed in February 1995. The punitive tariffs will be effective from June 17 on a range of imports unless China cracks down on copyright piracy of US video and CD recordings, and computer software. Washington wants Beijing to close down the 30-odd pirate factories producing the counterfeit items in the southern province of Guangdong.

China responded by unveiling a list of counter-measures of its own on American imports and business interests. Nevertheless, Beijing insists it is committed to the February 1995 Sino-US agreement aimed at curbing piracy.

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A little over a year ago, the US and China were playing out the same drama on the same debate. Under the threat of sanctions, Beijing agreed to work on closing the most flagrant violators. Washington claims China did not follow it through, which is why the play is into its second act.

Can the two countries really afford a full-scale trade war? What is at stake for the two trading giants? According to the US Department of Commerce, China's trade surplus with the US at the end of last year was $33.8 billion, with China's exports at $45.5 billion and imports at $11.7 billion.

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Is the Sino-US brinkmanship meant to placate domestic interests? Analysts see advantages for both sides in what was termed a 30-day "phony war". The appearance of US toughness provides cover for President Clinton to renew China's Most Favoured Nation (MFN) status against Congressional opponents who accuse him of being soft on Beijing. In fact, the President's announcement of renewing the MFN status for China came on May 20.

The White House has taken great pains to separate the piracy issue from other US-China disputes (for instance, Chinese nuclear sales to Pakistan escaped both censure and sanctions earlier this month) and to send a clear message to Beijing that the US will respond to a specific problem without affecting broader relations. 

On the Chinese side, the threat of sanctions could add punch to Beijing's attempts to close down the pirate factories protected by local vested interests.

US companies claim they lose $2.3 billion annually to sales of pirated goods "The calculation of that number needs be seriously examined," said Robert Kapp, president of the US-China Business Council. "There are a lot of people who would buy a software program for $3 but would not buy it for $100. So to say that you are losing $97 in profit is wrong."

US officials are expressing guarded optimism about a satisfactory conclusion to the dispute, although they warn that political issues might derail agreement. Prickly relations between Beijing and Washington over Taiwan, coupled with the presidential elections in the US, are complicating factors.

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On May 10, Secretary of State Warren Christopher said that the US did not want a trade war with China but would protect its interests. How serious are Christopher's threats against China? Not very, said a Washington insider: "Sanctions are more likely to hurt the US consumer. I doubt that the Administration will take that risk in an election year." 

American business expressed mixed reactions to the US announcement of sanctions. General Motors Chairman John Smith, whose firm could be hard hit in any US-China trade war, said that while the company understood "the importance of effective international protection of intellectual property rights," it hoped the two sides would "find an appropriate solution prior to the actual implementation of sanctions."

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The US aircraft manufacturer, Boeing, which from 1992 to 1994 had orders from China valued at $5.3 billion, reacted with similar discretion. A far stronger statement came from Jack Valenti, chairman of the US Motion Picture Association. "The 1995 agreement was solemnly agreed to by both the Chinese and the US governments," Valenti said. "If there is an alternative to sanctions, I would be glad to hear about it." 

At Time Warner, the US media-entertainment giant, Chairman Gerald Levin applauded the decision, saying: "It is profoundly important to Time Warner and all those in the American creative community that China eliminate plants producing pirated products and establish a level playing field." 

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The Software Publishers Association too endorsed sanctions, denouncing "China's failure to implement long-promised actions to fight rampant piracy of entertainment and business software in China." The industry group estimated China's piracy rate in 1995 was 95 per cent, "the highest rate of software piracy in the world."

The American Textile Manufacturers' Association president Gary Shapiro, however, opposes sanctions. "While we support negotiations with China to enforce international copyright agreements, it is also important to keep China as a trading partner and to keep an open market," he said.

How will Chinese sanctions affect the US? Frozen chicken, beef, telecommunications equipment, tobacco, alcohol, cosmetics, and cotton were among items China listed for a 100 per cent tariff hike in response to US sanctions. The trade dispute has already hurt US cotton prices, which hit a 10-week low last week and kept falling on the New York Cotton Exchange. China is the main export destination for US cotton.

China is also a ready market for US poultry products. Richards Lobb of the trade group, the National Broiler Council, said: "We hope that the current trade dispute will be resolved without harm to agricultural trade, which is not involved in the intellectual property issue. We hope these issues can be separated. American broiler products are popular in China despite a stiff tariff (45 per cent) and value-added tax (17 per cent). Because of China's size and growing appetite for poultry and red meat, we see it as a significant growth market, provided unreasonable tariffs do not stifle growth."

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Analysts believe US sanctions will harm American consumers by raising prices. US exporters would also be hurt by Beijing's retaliatory sanctions. If China later punishes US auto and aircraft companies as well, the damage would be multiplied.

A Commerce Department official felt that China's compliance with critical trade agreements was "important enough to risk a limited confrontation". He argued that Washington has used restraint throughout the dispute and US officials have been negotiating with China on product piracy for over three years. The US could have imposed sanctions last year but settled for a negotiated solution, which had not been honoured. He said: "No one could accuse us of acting precipitously...not acting would have damaged our credibility."

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Washington's previous trade disputes with China have always ended short of sanctions. But even if sanctions are imposed in this instance, they are not likely to last long. Both countries have too much at stake to risk a lengthy and full-fledged trade war. 

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