Counterfeiting in the People's Republic of China

Contents

List of Tables

List of Figures

List of Abbreviations

1 Introduction and Preliminary Remarks

2 Definition and Delimitation of Relevant Terminology

3 Impact of China’s Counterfeiting Problem
3.1 Negative Impacts of Counterfeiting in China
3.1.1 Introductory Remarks
3.1.2 Costs to the Right Holder
3.1.3 Costs to Consumers and Potential Users
3.1.4 Social Costs
3.2 Positive Impacts of Counterfeiting
3.2.1 Positive Impacts to Consumers and Local Economies
3.2.2 Positive Impacts for Development and Innovation
3.2.3 Positive Impacts for China’s Political Environment
3.3 Summary of Main Impacts and Evaluation

4 Analysis of economic, legal and political environment
4.1 Insights of Contemporary China
4.2 Drivers for Counterfeiting
4.2.1 China’s Transition Process and Economic Framework
4.2.2 China’s Enforcement Institutions and Legal framework
4.2.2.1 Enforcement Institutions
4.2.2.2 Legal Framework
4.2.3 China’s Political Framework
4.2.3.1 Attitudes of the People’s Government of PRC
4.2.3.2 Local Protectionism and Development
4.2.4 Summary
4.3 Containment Options concerning Environmental Determinants
4.3.1 Extensive Legal Protection
4.3.2 Reforming China’s IPR Enforcement System
4.3.3 Improving China’s IPR Legislation
4.3.4 Lobbying and Encouraging Political Commitment
4.3.5 Summary

5 Analysis of Suppliers on the Counterfeiting Market
5.1 Attributes of China’s Counterfeiters
5.2 Drivers for Counterfeiting
5.2.1 Unawareness of Statutory Provisions
5.2.2 Financial Incentives
5.2.3 Enabling Resources and Technical Knowledge
5.2.4 Historic Insights and their Influence on the Perception of IPRs
5.2.4.1 Attitude towards the “West”
5.2.4.2 The Communist Era and the Perception of IPR
5.2.5 Cultural Traits and their Impact on Contemporary Counterfeiting
5.2.5.1 Confucianism
5.2.5.2 Collectivism and other Cultural Dimensions
5.2.6 Summary
5.3 Containment Options
5.3.1 Innovation and Constant Change of Product Attributes
5.3.2 Anti-Counterfeiting Technologies
5.3.3 Education and Deterrence of Counterfeiters
5.3.4 Securing the Value Chain
5.3.5 Co-Opting Preeminent Offenders
5.3.6 Passive Measures
5.3.7 Summary

6 Analysis of Consumers on the Counterfeiting Market
6.1 The Consumer of Counterfeited Goods
6.1.1 Introductory Remarks
6.1.2 Attributes of Chinese Consumers who Buy Counterfeits
6.2 Drivers for Counterfeiting
6.2.1 Increased Consumer Rent
6.2.2 Impact of Availability of Counterfeits on Purchase Intention
6.2.3 Cultural Traits and Consumer Behaviour
6.2.4 Sophistication of Chinese Consumers
6.2.5 Perception of Wrongdoing and Unethical Behavior
6.2.6 Anti-Big-Business Attitude
6.2.7 Novelty Seeking and Risk Avoidance
6.2.8 Summary
6.3 Containment Options
6.3.1 Matching Consumers’ Needs
6.3.2 Communication and Education
6.3.3 Summary

7 Conclusions and Outlook
7.1 Conclusions
7.1.1 Recommendations for Companies
7.1.2 Recommendations for the People’s Government of PRC
7.1.3 Recommendations for Chinese Consumers
7.2 Outlook
7.3 Concluding Remark

8 Bibliography

9 Appendix
A - Tables
B - Figures
D - Short interview concerning counterfeiting in the PRC
E - Table of Chinese terms used in the paper

List of Tables

Tab. 1: Overview of counterfeiting concepts

Tab. 2: Estimated trade losses due to piracy (in millions of U.S. dollars) and levels of piracy in the PRC (1999-2002)

Tab. 3: China’s IPR legislation

Tab. 4: Famous distribution and manufacturing centers of counterfeit goods in China

Tab. 5: Overview about anti-counterfeiting technologies

Tab. 6: Frequency of buying pirated or counterfeit goods – bivariate analysis

Tab. 7: Methods for identifying pirated clothing and accessories

Tab. 8-A: Trademark enforcement activity, 1997 – 2000

Tab. 9-A: Domestic and global anti-Counterfeiting organizations

Tab. 10-A: List of industrial organizations engaged in anti-counterfeiting work

Tab. 11-A: Foreign Direct Investment in Selected Non-Member Countries in billion

Tab. 12-A: Gender and attitude toward piracy

Tab. 13-A: Seizures of counterfeits of Chinese origin by U.S. costumes from 2001 to 2004 (excluding Hong Kong)

Tab. 14-A: Seizures of counterfeits of Chinese origin by U.S. costumes from 2001 to 2004 (including Hong Kong)

Tab. 15-A: Results of regressing intention to buy pirated CDs on attitude toward piracy and demographics

Tab. 16-A: Evaluation of government actions and market environment changes

Tab. 17-A: Overview of affected industries and losses due to counterfeiting in China and the World

Tab. 18-A: Overview of China’s anti-counterfeiting enforcement institutions and its competencies

List of Figures

Fig. 1: Methodological structure of the present study

Fig. 2: Drivers for counterfeiting within the political, economic and legal environment

Fig. 3: Drivers and containment options within the political, economic and legal environment

Fig. 4: Drivers for supply based counterfeiting

Fig. 5: Drivers and containment options for supply based counterfeiting

Fig. 6: Drivers for demand based counterfeiting

Fig. 7: Drivers and containment options for demand based counterfeiting

Fig. 8: Corporate strategies against counterfeiting

Fig. 9-A: Relationship between Software piracy and Income

Fig. 10-A: Relationship between Software piracy and Education

Fig. 11-A: Geographical position of counterfeiting hot-spots in China

List of Abbreviations

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1 Introduction and Preliminary Remarks

Since the proclamation of the opening up policy (gaige kaifang) in the 1980’s by Deng Xiaoping and the present economic growth, Chinas economy is expected to become the world’s number one within the next 20 years. With the focus on surpassing growth rates, trade surpluses and an increasing domestic demand from 1.3 billion consumers, many decision makers ignore the fact that China has already become one of the worlds leading country: China is the number one of global counterfeiting.

Observers and researchers agree upon the fact that the scope, magnitude and impact of Chinas counterfeiting is unique in world history. The range of imitated products has no limits; China’s counterfeiters copy everything from sunglasses and sport shoes to elevators and aircraft parts. At a visit in February 2006, Germany’s foreign minister Steinmeier broached the issue of German maglev technology which is assumed to be used in the new Chinese maglev train (Wetzel, Muscat, 2006). This and other examples show that there is scarcely any industry or technology which is not threatened by China’s counterfeiters.

The impact is alarming. Chinese official sources estimate the damages due to Chinas counterfeiting to exceed 16 billion U.S. Dollars a year. They admit that in the Chinese market, three genuine products oppose seven counterfeits (Mocek, 2005, p. 30). Eight percent of China’s gross domestic resort to counterfeiting (Chow, 2004, p.1).

The negative consequences are concerning: tax revenues vanquish, legal businesses are disrupted, consumer safety is threatened, genuine producers are confronted with loss and shrinking credibility, innovation and investments are constricted and organized crime is promoted.

Problem Formulation and Delimitation

Although Chinas counterfeiting issue makes headlines in the economic world, only few research examined the problem in a comprehensive way. Many journalists focus on legal issues and thus mainly on the supply side of counterfeiting. Other researchers simply blame Chinas cultural heritage to be the main cause. Most papers lack a broad approach, which is inadequate regarding the magnitude and scope of Chinas counterfeiting.

The objective of the present paper is to give a comprehensive overview about counterfeiting in the People’s Republic of China. Comprehensive shall mean that all aspects of counterfeiting are subject to analysis. In the following, supportive drivers for counterfeiting and possible enforcement strategies against counterfeiting are identified and discussed. Since, the paper focuses on China, cross border counterfeiting, impacts in other countries or global approaches are only mentioned in few cases to highlight similar issues in China. The final objective is, to introduce possible strategies against: Counterfeiting in China.

A closer definition for the term “counterfeiting” is given in chapter two. “China” in this case refers to “Mainland China”, which excludes Taiwan as well as the former colonies Hong Kong and Macau. The expressions: “China” and “People’s Republic of China” are used interchangeable although there is no question that Hong Kong and Macau are part of the PRC. The reasons for this introductory delimitation are legal and economic differences^[1] with the former colonies as well as the political debates and differences with Taiwan.

Methodology and Structure

Since counterfeiting is an illicit business, quantitative approaches are limited. Additionally comprehensive quantitative research faces problems such as the high level of heterogeneity within the Chinese environment or political restrictions. Most counterfeiting research is based on personal interviews, observations, official records and data as well as publications of interest groups. Qualitative evaluation therefore seems the more effective methodological approach. Although the present study shows the results of quantitative research, the general methodology follows qualitative trajectories.

The structure is divided into five main parts (Chapter 3 to Chapter 7) which combine descriptive and in the following, normative research. Chapter three introduces the impact of counterfeiting to highlight the up-to-date facts and importance of the issue. Chapter 4 to 6 represent the common market structure. They systematize the study into three main categories of research: environmental (economical, legal, political), supply side (“the counterfeiter”) and the demand side (“consumers”). Each research category is examined towards: relevant drivers, attributes, and containment options. Chapter seven gives a final summary and analyses future prospects.

Fig. 1: Methodological structure of the present study

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Introductory remarks concerning data

Although many authors mention detailed numbers on counterfeiting, the basis of their calculations stays often unclear. One crucial example is the share of counterfeiting in world trade. The share is estimated to be “somewhere between 4% and 8%”. Since official sources cite these numbers, many researchers transfer these assumptions and consequently they became common sense. Similar problems are the notations by newspapers, enforcement groups and industrial speakers concerning the amount of lost revenues (cf. IACC, 2005; Balfour et al., 2005; ACG, 2003). It is outstanding that most authors mention “estimated” losses. Due to the illicit nature of counterfeiting there is no scientific data to deal with. Chow (2000, p. 12) states that:

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Also OECD sources doubt the existence of accurate statistics (OECD, 1998, p. 3). A possible solution may be to examine statistics of custom authorities, but they are also random samples and may not be appropriate. Summarizing, all numbers, cited in this study are understood as relative approximate values and are used in a descriptive way.

2 Definition and Delimitation of Relevant Terminology

Defining and delimitation of counterfeiting (weizao) is complex, because terms and definitions are often used interchangeably. Most authors divide into four different counterfeit categories: (1) Counterfeiting, (2) Product piracy, (3) Imitation, (4) a grey area (McDonald, Roberts, 1994; Lay, Zaichkowsky, 1999; Hung, 2003; Cheung, Prendergast, 2004a).

(1) Counterfeiting: Originally counterfeiting is restricted to trademark infringement (OECD, 1998). Usually counterfeiting is defined as unauthorized imitating of a products appearance in a way the consumer can not recognize if the product is an original one (OECD, 1998, p. 5; Hung, 2003, p. 59). Relatively speaking, it is an infringement of intellectual property rights of another party, like the infringement upon copyrights and trademarks (OECD, 1998, p. 5; Hung, 2003, p. 76; Bloch, Bush, Campbell, 1993, p. 27). One main attribute is the intension to deceive the customers (Bamossy, Scammon, 1985, p. 334; Kay, Zaichkowsky, 1999, p. 180).

The process of counterfeiting includes the replication of brand names and trademarks as well as imitation of packaging, labelling and other product characteristics (Hung, 2003; OECD, 1998, p. 5).

(2) Product piracy: Product piracy is often used substitutional with counterfeiting which shows that the concepts are hard to differentiate. In the TRIPS agreement pirated products are defined as:

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In principle, the act of pirating products is similar to the act of counterfeiting. A copy or imitation is made of the genuine product. But in contrast to counterfeiting, pirated products are not necessarily sold as genuine ones (Cheung, Prendergast, 2004a, p. 5; McDonald, Roberts, 1994, p. 58; Chow, 2000, p. 9). The costumer is aware that a pirated, non-genuine product is offered.

Pirating often refers to the act of copying content from books, films and software. The content or the main utilizable product attribute of a pirated good is often similar to the genuine product. The packaging and labelling may differ (Chow, 2000, p. 9). Main affected industries are Software, Film, Music, and Publishing industries as well as arts-and-crafts (Chow, 2000, p. 9; Lay, Zaichkowsky, 1999, p. 180).

(3) Imitation: Imitation refers to the manufacturing of a product which has a very similar appearance compared to the genuine product (McDonald, Roberts, 1994, p. 58). The main peculiarity is that the product is not advertised and distributed as the genuine one. Imitated products are also known as “knock-offs” (Bamossy, Scammon, 1985, p. 334; McDonald, Roberts, 1994, p. 58). Bamossy and Scammon (1985, p. 334) introduce a fine example:

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The appearance of imitated products is very similar to that of genuine products, and for the consumer hard to distinguish between the both (McDonald, Roberts, 1994, p. 58). Lay and Zaichkowsky (1995, p. 180) state, that substance, name, shape and form look alike but through closer inspection differences are visible. Imitated products mask their origin and try to deceive the costumer but they are not sold as genuine products (Bamossy, Scammon, 1985, p. 334; McDonald, Roberts, 1994, p. 58).

(4) Grey area activities: The grey area includes all other forms of counterfeiting like “parallel trading” and “over-runs”.

Parallel trading as explained by an OECD sources refer to situations where products are legally bought in one country and diverted for sale to another country. The right holders restrictions are evaded (OECD, 1998, p. 6). In general it means that original goods are distributed in markets which are not authorized by the right holder.

“Over-runs” are goods which are unauthorised and manufactured by legitimate suppliers (Bamossy, Scammon, 1985, p. 335). The other contracting party manufactures more goods than stipulated in contract and sells it on own account on the black market (OECD, 1998, p. 6). Also low-quality and second choice productions do refer to “over-runs” problem. Especially in China “over-runs” is a practise used by Chinese Joint Venture partners and contractors (Hung, 2003, p. 63; Sieren, Kamp, 2004, S. 58; Roberts et al., 2000, p. 20f.; Uchatius, 1999, p. 24). The product sold to the costumer is a genuine product which has no limitations apart from lacking after sales service and lacking warranty. In the case of second choice productions, the quality level is substandard. Enforcement institutions often do not take forms of the “grey area” for serious counterfeiting. In consequence right holders need to find own strategies for prevention (OECD, 1998, p. 6).

All four concepts are only slightly different and are often used substitutive. They all have in common that they infringe another party’s intellectual property rights^[2] (zhishi chanquan). Table 1 gives an overview of the discussed concepts and highlights its differences.

Tab. 1: Overview of counterfeiting concepts

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Source: compiled by the author

In practice a clear distinction is difficult. Cases of property right infringement often include several forms of counterfeiting (OECD, 1998, p. 5). McDonald and Roberts (1994, p. 57) argue that the different concepts of counterfeiting are all illicit actions and that the differences arise from the intention to deceive the costumer. Consequently they highlight the ethical question of counterfeiting. Other authors like Wee, Tan and Cheok (1995, p. 19) use broader definitions, because the substantial impact of all forms are quite similar and enforcement strategies never focus solely on one of the explained forms (cf. Shultz, Saporito, 1996; Chaudhry, Walsh, 1996; OECD, 1998).

Literature review gives evidence, that counterfeiting in China has various forms and often includes several forms of infringement. To achieve a comprehensive overview about all aspects of China’s counterfeiting, a broader definition of counterfeiting will be used. Based on OECD (1998, p. 5) terminology counterfeiting will be explained as:

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Consequently, the present paper the term “counterfeiting” will include all additional concepts like product piracy, imitation and the grey area.

The product manufactured through the action of counterfeiting is named: “counterfeit” (jiahuo). The terms: counterfeit, counterfeited good, fake, fake product are used interchangeable, they are replaceable.

Additionally, the term “counterfeiter” (weizaozhe) stands for the originator of counterfeiting. This can be an individual or an organizational structure such as a company or a crime syndicate. Since, some counterfeiters are legal companies and other counterfeiters are private, illegal operating groups, a sharp delimitation is impossible. Beside the term counterfeiter is the term “infringer” is used substitutional.

3 Impact of China’s Counterfeiting Problem

3.1 Negative Impacts of Counterfeiting in China

3.1.1 Introductory Remarks

The following chapter deals with negative impacts caused by Chinas counterfeiting. Even though the present paper mainly focuses on counterfeiting in China, the impacts must be evaluated on a cross-border perspective. The problems caused by Chinese counterfeiting do not only affect China. Through export and transnational trade the problems are also present in other countries and economies. Consequently, it is necessary to leave the regional level and embrace non-Chinese subjects as well. As a result, the following chapter will also include a few examples, numbers and problems from other affected countries to highlight the broad range of negative impacts.

3.1.2 Costs to the Right Holder

All industries and all types of products even in markets outside China may be affected by China based counterfeiting (cf. Tab. 17-A and Appendix D). Consequently the range of right holders is various. Every company in the market is a potential target for counterfeiters this includes domestic Chinese companies as well (Balfour et al., 2005, p. 1; Sisci, 1997, p. 1.; Chow, 2000, p. 16). There is clear evidence from literature that some industries are more affected, than others. The Green Paper on counterfeiting in the EU (1999, p. 5) states:

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The specific costs to right holders vary greatly. There are financial losses, brand erosion or decreasing goodwill as well as additional enforcement costs or lawsuits initiated by consumers concerning product liability (IHK, 2004, p. 2).

(1) Direct pecuniary losses: Pecuniary loses have various reasons. The first, sales of genuine products decrease and returns drop. The scale of losses is various and hard to verify^[3]. Some spokesmen of certain industries and promoters even exaggerate their losses. In general, most losses cited by experts are substantial. The following examples give an impression about the variety and magnitude of the financial losses:

Foreign companies estimate a loss of 20 percent of their overall sales due to counterfeited products (Porteous, 2001, p. 28). Hung (2003, p. 59) cites Chinese government sources, who conservatively estimate the total value of counterfeited goods in 1998 to about 16.2 billion U.S. dollars. Wölfel (2003, p. 37) also defines Chinese counterfeiting a: “16-billion-Dollar-industry”. Ho (1995, p. 2) says that the software industry lost half a billion U.S. dollars in China in 1994. OECD (1998, p. 12) states a number of 120 million U.S. dollars lost sales for U.S. motion picture industry in 1997 in China.

Tab. 2 : Estimated trade losses due to piracy (in millions of U.S. dollars) and levels of piracy in the PRC (1999-2002)

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Source: Wang, Zhu, (2003, p. 103)

Numbers form the automotive industry come from Daimler-Chrysler which claims a damage of more than ten million U.S. dollars from counterfeiting. In 2001, over 4,000 windshields and 60,000 brake pads were confiscated by corporate investigators (Wölfel, 2003, p. 46). In 1998, Unilever has detected over 100 factories which have produced fake Unilever products. In 1999 they mentioned 213 fake factories (Wölfel, 2003, p. 38). The Germany based, chemical company Henkel estimates that over 30 % of all soaps and creams in Chinese supermarkets are faked (Wölfel, 2003, p. 38). In 1989, even before the tremendous distribution of easy copying technology and private computers, Lotus Development Corporation assumed a loss of 200 million U.S. dollars annually from Taiwanese counterfeiters alone (Swinyard, Rinne, Kau, 1990, p. 655). Ang et al. (2001, p. 221) mention that in urban areas of China, over 90% of daily-use products are counterfeits. Bottenschein (2005, p. 121) assumes that 15 % to 20 % of all marketed brands are counterfeited.

All these examples, give evidence that genuine manufactures face substantial losses due to counterfeiting. Additionally, the lost sales and revenues^[4] which were mentioned, lead to social costs which are discussed in 3.1.4.

(2) Brand Erosion: Another basic problem for genuine manufactures is the loss of goodwill and reputation (INTA, 2004, p. 2; Chow, 2000, p. 10; Wee, Tan, Cheok, 1995, p. 19). Basically brand owners are more affected than copyright owners (Chow, 2000, p. 11). In this case, there are three main concerns.

Consumers are worried about buying a product if they can not be sure that it is a genuine one. Brand acceptance shrinks which lead to brand switching. Also the value of status goods will drop if too many people wear the same brand, which was explained by the Rolex example (Wölfel, 2003, p. 43; Grossman, Shapiro, 1988, p. 98). Consequently sales and return will decrease.

The other problem arises from low product quality. If a consumer buys a counterfeit for a genuine and the product is flawed, he/she will think the genuine producer is accountable. (Bloch, Bush, Campbell, 1993, p. 27; OECD, 1998, p. 27). Especially in China this is a problem because the ability to identify authentic brands is low (Lay, Zaichkowsky, 1999, p. 180). If costumers are not satisfied with a new brand, brand loyalty may not evolve. In early and developing markets like in China, this may have strong influences on long-term sales (Lay, Zaichkowsky, 1999, p. 181). In contrast, one may not forget that the scope of brand erosion is lower throughout consumers who knowingly buy a counterfeit. They do not expect a high level of quality so the distance between expected product attribute and real product attribute is not that high. Dissatisfaction thus does not arise.

A last issue is that the consumer gets the impression that the genuine product is much too expensive. If the genuine product is for example ten times more expensive, the consumers get the impression that the genuine producer is cheating on costumers because they do not perceive the high price as a fair offer. This may lead to the consumer’s attitude being put off big businesses (see 6.2.4) and a shrinking product loyalty (Wölfel, 2003, p. 43).

(3) Other costs: There are several other negative impacts for genuine manufacturers.

First of all, a market undermined by counterfeiters is less attractive for foreign and local companies. Growth or entry strategies need to be reviewed (OECD, 1998, p. 22). A high scope of counterfeiting may even led to market exit.

Increased counterfeiting requires enforcement strategies which bind capital and other resources (OECD, 1998, p. 22). Chinese and foreign SMEs often lack the resources to fend an attack by aggressive counterfeiters (Chow, 2000, p. 16). Additionally, transaction costs increase.

Research and development as well as production costs may increase because anti-counterfeiting technologies need to be developed and implemented (OECD, 1998, p. 22).

If the call for legal and administrative support is too hard to deal with, companies may suffer from resentments from local or national authorities in China (Chow, 2000, p. 47).

Faked and phony products may danger consumers and consequently led to lawsuits initiated by consumers (IHK, 2004, p. 2).

3.1.3 Costs to Consumers and Potential Users

There are two main problems caused by counterfeiting.

(1) The consumer surplus shrinks when an inferior product is bought at a comparatively high price (OECD, 1998, p. 23; Bamossy, Scammon, 1985; p. 335). If the customer is not aware, that the bought good is counterfeited, he or she pays a price which is far too unjustifiable. This is a form of asymmetrical information and leads to market failure (cf. Arrow, 1963). A more simple fact is that; conscious cheating leads to dissatisfaction of the buyer. Additional, a decrease in consumer surplus arises in an increased price level for genuine products caused by enforcement costs of the original manufacturer (Bamossy, Scammon, 1985, p. 335).

(2) The other and most problematic impact of counterfeiting towards consumers is the threat of consumer’s health and safety caused by low-quality products (OECD, 1998, p. 23; CIB, 2004, p. 8; Wölfel, 2003, p. 41). This affects the conscious and unconscious buyer. He/she faces the risk that ingredients and preliminary products are not identifiable and may face safety risks. Counterfeits are not only cheaper because of savings for brand management and R&D. Counterfeiters usually use unskilled labor, child labor, inferior materials, cheap machinery and they usually do not have safety inspections or a quality management. The aim of counterfeiters is to produce merchandise and commodities as cheap as possible. In consequence, the products are often of poor quality and thus a risk to consumer’s health (Wölfel, 2003, p. 42). The number and the scope of casualties and accidents caused by unsafe counterfeit products are distressing. The following examples highlight some recent cases which can be seen as the tip of the iceberg.

In 2004 by the province of Anhui, 12 infants died after being fed with fake milk powder. More than 229 other babies were injured (cf. Li, 2004). In 2001, a China based factory was discovered which had produced and distributed fake windshields, lacking safety elements like shatterproof features (“GM, Ford, and DaimlerChrysler”, 2001). Oster (cf. 2000) cites Chinese officials who state that every year dozens of people die from unsafe bottles and “lead-tainted” beverages. The last source indicates that in 2001, 192,000 people died by taking fake drugs in the whole of China, which shows the magnitude of the problem (Godman, 2002).

Although, these examples are outstanding in terms of impact it can be assumed that “smaller” impacts such as toxicities in faked clothing, malfunctions of fake electronics or hazardous toys are a threat to consumer’s health and thus cause substantial losses to consumers.

3.1.4 Social Costs

Social costs are negative impacts on the society and the economy of a country. The character of counterfeiting and IPR infringement supports various negative aspects like: unemployment, substandard working conditions, dropping tax revenues, organized crime and decreased ability for innovation and national growth.

(1) Unemployment is a direct outcome of dropping revenues of original producers (OECD, 1998, p. 22; Bamossy, Scammon, 1985, p. 335). There are few concrete numbers in literature. The Anti-Counterfeiting Group estimates annual job losses of 4,100 in Great Britain (ACG, 2003, p. 2). The European commission published an estimated number of 200,000 annually lost jobs worldwide (EC, 1999, p. 4). Numbers about counterfeit based unemployment in the PRC are not available, but it is estimated that unemployment is a concern in China as well.

In contrast to the argument that counterfeiting supports unemployment, one may also argue that counterfeiting creates jobs as well. The problem is that these jobs are often based on substandard working conditions or child labour (OECD, 1999, p. 2).

(2) Tax revenues are lost if illicit businesses displace tax paying companies. There are few concrete numbers in literature, but most authors mention lost tax revenues as one of the main problems (OECD, 1998, p. 23; Cohen, 2003, p. 5; IACC, 2005, p. 8). Chinese authorities estimate that they lose three billion U.S. dollars in tax revenues each year (“Une coalition internationale contre”, 2003). Other financial damages arise from increased costs for investigation and enforcement against counterfeiters (OECD, 1998, p. 23).

(3) Organized crime and terrorism are a disturbing and unpleasant concern of politicians worldwide. Counterfeiting has been identified as one of the easiest way for criminal syndicates and terror groups to finance their operations (cf. “Une coalition internationale contre”, 2003; INTA, 2004, p. 11; Roberts et al., 2000, p. 20f.; Wölfel, 2003, p. 21f.). Counterfeiting is less risky than smuggling, prostitution or drug trafficking. In other words, profit is higher and penalties lower (IHK, 2004, p. 3). Especially in China, a change from smuggling to counterfeiting is visible. In 1999 China’s central government launched a campaign against smuggling. (Ostrov, 2000, p. 44f.). Penalties became much higher. Even death penalties were imposed in the last few years (Ostrov, 2000, p. 47). Consequently many criminals switched to counterfeiting businesses.

The problem of terrorism is published in several papers (Union des Fabricants, 2003, p. 1f., IACC, 2003, 20f.; Wölfel, 2003, p. 21; Hudson 2003, p. 30ff.). The most famous example is the first bomb attack on the World Trade Center in 1993. In this particular case, the FBI found evidence that the activities of Sheik Omar Abdel Rahman and his henchmen were financed by counterfeited T-Shirts (IACC, 2003, 20.f). Baguioro (2003) cites EU authorities who report that the Muslim extremist group Hizbollah is involved in the distribution of counterfeit goods. The origin of the seized goods was China (Baguioro, 2003, p. 1). Wölfel (2003, p. 21ff.) mentions several international terror groups being involved in counterfeiting, such as the: BTK, IRA, Italian Mafia and Islamic fundamentalists.

(4) Innovation and national growth is an important and crucial factor for China as a developing country. Counterfeiting inhibits the capability to innovate and consequently the development of national growth. Furthermore it diminishes the competitive advantage of the economy and leads to a negative reputation as location for investments.

In general, innovation is crucial for economic growth and prosperity (cf. Sodipo, 1997, p. 51ff.; Rapp, Rozek, 1990, p.77). Many authors found that there is a strong link between economic development and IPR protection (cf. Marron, Steel, 2000; Ginarte, Park, 1997; Rapp, Rozek, 1990). Rapp and Rozek (1990, p. 77ff.) state, that strong patent protection has a positive influence on economic development. Fink and Braga (2000, p. 3) describe the role of IPR protection as an:

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IPR assures that an innovator has incentives to innovate. Without an IPR regime, invested resources are not refunded. Consequently rational actors will not innovate and contribute to the welfare of an economy or society^[5]. Practically, the rampant infringement of intellectual property rights in China restrains potential investors and entrepreneurs (OECD, 1998, p. 23; Shultz, Saporito, 1996, p. 20; Arayama, Mourdoukoutas, 1999, p. 63f.). With a stable IPR regime the inflow of FDI, latest technology and knowledge the process of transition and thus the growth of Chinas welfare is expected to be much faster and more extensive.

3.2 Positive Impacts of Counterfeiting

Most authors, institutions and lobbyist groups see counterfeiting basically as negative. Even in scientific literature there are no comprehensive discussions in a moral or economic way if counterfeiting may have positive aspects. Basically this seems coherent as the magnitude of negative aspects discussed in chapter 3.1 shows. Nevertheless positive aspects may exist. This paper has the aim to give a comprehensive overview on counterfeiting. Consequently, the following paragraph will provide an introducing excursus on positive aspects of counterfeiting.

3.2.1 Positive Impacts to Consumers and Local Economies

(1) A main argument results from the price advantage. If a consumer consciously buys a counterfeit good, he or she can satisfy their own individual personal need; they also pay the price willingly and without reluctance (cf. Slive, Bernhardt, 1998). If the consumer is aware that the bought good is counterfeit, there will be no dissatisfaction after the purchase since the buyer did not anticipate a high standard and quality product. In a simple way: The consumer seeks a cheap product and gets it.

The counterfeited product offered fits the needs of the consumer, the genuine does not. From consumer’s point of view, there is thus a clear positive attitude towards counterfeited goods (cf. Slive, Bernhardt, 1998; Bloch, Bush, Campbell, 1993, p. 28). Counterfeit are seen as an extension of the product choice and legitimate buying options.

Also the argument of reduced goodwill and shrinking brand awareness losses its impact, if one assumes that the buyer knows that the product is counterfeited. If the buyer does not expect a high level of quality he/she will not be unsatisfied with a lower standard. A negative effect on the genuine brand will not take place.

(2) Another aspect is mentioned by Schultz and Saporito (1996, p. 22). They state that a certain level of counterfeiting may arise by promotional influences. Throughout so called “wannabe” consumers, a demand and supply is created. This leads to higher brand awareness for the genuine brand, and may result in a broader range of potential consumers in the future (when the purchase power has increased).

Another argument comes from Slive and Bernhardt (1998) who recommend selling software without cost for private use, to promote sales to commercial users. McDonald and Roberts (1994, p. 63) argue the same way. They say:

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Especially in under developed economies this process is traceable (Shultz, Saporito 1996, p. 22). But also in China, as a developing country this may fit because the Chinese market is still nascent (Lay, Zaichkowsky, 1999, p. 181).

(3) In paragraph 3.1.4 social costs of counterfeiting like unemployment were mentioned. Of course these arguments can also be seen the other way round. It is known that in some local economies counterfeiting is the dominant business. Some villages or townships depend substantially on the returns generated by counterfeiting^[6] (cf. CIB, 2004; Roberts et al., 2000, p. 20f.; Chow, 2004, p. 6). On a global perspective this is a major problem (cf. 3.1.4). On a local level, counterfeiting business fosters development, provides jobs and tax for local administration (Chow, 2004, p. 6). For the people in those regions counterfeiting has a positive impact. As a result, local authorities will protect counterfeiters and local people will protest or even demonstrate against enforcement measures to protect their jobs (see 4.2.3.2).

3.2.2 Positive Impacts for Development and Innovation

(1) History has shown, that counterfeiting and imitation was prevalent at a certain stage of development in nearly all developed countries (McDonald, Roberts, 1994, p. 61). McDonald and Roberts (McDonald, Roberts, 1994, p. 61) state that:

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They argue, that the experience and the gained skills from producing counterfeits have supported or were even necessary constituents for the emergence of their own developments and innovations. Imitation is seen as a learning process.

The Commission on Intellectual Property Rights (CIPR, 2003, p. 6) introduces similar aspects. They cite the view of the developing world, which sees IPR as an obstacle for the development of their local industry and technology. In their view, the concept of property rights, only benefits the interests of the developed world and its MNC (cf. CIPR, 2003 and Steidlmeier, 1993). One of the main arguments is that innovation would not increase even with a sophisticated IPR regime, because fundamental human and technical capacity is absent (CIPR, 2003, p. 8). Zhang, G. (2005, p. 21) also mentions the problem of a missing scientific community, which makes innovation driven development difficult.

(2) Another point is that certain limitations of use, such as patents, increase the costs of medicine or fertilizers which are urgently needed by patients or farmers (CIPR, 2003, p. 8; cf. Steidlmeier, 1993). The CIPR comes to the conclusion that the protection of IPRs need to be adjusted to the specific circumstances and development level of a country. An IPR protection regime thus needs to be subordinated to fundamental human rights. Especially in the case of drugs and medicine preventative IPRs are problematic (CIPR, 2003, p. 10).

The remarks gathered have shown that the accumulation of knowledge by imitating products can be important to certain countries. Also the counterfeit e.g. the product itself may help to decrease certain problems. Since these findings may be an argument to ignore IPR infringement, they need to be examined towards transferability into the Chinese context. One main question is, if imitation and counterfeiting a necessary basis for development in China? On the one hand, other Asian countries like Japan, South Korea or Singapore had a period of increased imitation (McDonald, Roberts, 1994, p. 61). Consequently, one may suggest that China is currently at this stage.

On the other hand, if a country is able to develop an own space program and has around 1.9 million college and university graduates^[7] annually, one hardly can state an absent scientific community. In China, fundamental human and technical capacity is available. Domestic development without counterfeiting and imitation thus is possible.

To draw a conclusion, counterfeiting and imitation are not basically necessary for a “scientifically-sophisticated” developing nation, such as China (cf. Zhang, Z., 2005, p. 21). The positive aspects discussed above are much more relevant in least developed nations such as Burkina Faso, Bhutan or Liberia.

3.2.3 Positive Impacts for China ’s Political Environment

Sisci (1997, p. 1) mentions the variety of counterfeited media to be an advantage for the political attitude in China. He argues that the distribution of cheap media like Western movies, music and books spread Western ideas like democracy, human rights and other values. This softens the ideological hegemony of China’s Communist Party which may be seen as positive (depending on each individual’s point of view).

3.3 Summary of Main Impacts and Evaluation

The remarks made in this chapter are manifold. Paragraph 3.1 has shown that the negative impact of counterfeiting is alarming. It is undoubted that China is the biggest counterfeiter in the world. The magnitude and distribution of Chinese counterfeiting affects genuine manufacturers, consumers and societies at a large global scale. The given remarks supported that counterfeiting is a serious problem and causes tremendous negative impacts.

On the other hand, there was also evidence that counterfeiting has positive effects. Since the positive outweigh the negative effects, the final result is that counterfeiting in and from China needs to be diminished to ensure stable and fair market conditions on a global and domestic level.

4 Analysis of economic, legal and political environment

4.1 Insights of Contemporary China

China recently experiences a process of radical changes. Tremendous economic and social changes shape the present situation of China. The present transformation process was initiated in the 1980’s. With the so called opening up policy (gaige kaifang) and the implementation of market-oriented reforms, China’s economic power has increased remarkably.

Four main fields for modernisation (sige xiandaihua) were appointed to improve the: industry, agricultural sector, national defence as well as science and technology (Bosch et al., 2003, p. 17). The main objective was to establish a form of Socialist Market Economy (juyou zhongguo tese de shehuizhuyi). Competitive structures are designated and only limited on a macro-sphere by the government and its authorities (Hu, 2000, p. 1).

This process had, and continues to have positive and negative impacts. On the one hand, Special Economic Zones (jingji teou) were successfully promoted (cf. McKenney, 1993), foreign companies import knowledge and capital and the GDP per capita^[8] has grown steadily. China is expected to generate a powerful economy.

On the other hand, a considerable gap between the costal area and the inland or the urban and rural population has lead to social discontent. Further more, many state owned companies were pushed into a new competitive environment which led to mass dismissals and an increasing dissatisfaction among broad levels of population (Qian, 2000, p. 31). Throughout the process of rapid economic development, the central government still plays an important role and has substantial influence. Bureaucracy and a high corruption^[9] rate among (local) officials are also obstacles for a more effective economy.

· In summary, China’s present situation thus has various facets and attributes and a clear statement seems difficult. The authors view is, that today’s China is basically a market economy in a developing country environment. The influence of governmental officials is present but shrinking. China faces a complete transformation process with all the positive and negative impacts one can imagine. A new form of “Turbo-capitalism” exists along side an old steady communist structure. It remains an unanswered question whether or not people can benefit from this development.

4.2 Drivers for Counterfeiting

4.2.1 China ’s Transition Process and Economic Framework

Experts see the economical transformation process in China as one enabler for counterfeiting activities (OECD, 1998, p. 26; Chow, 2004, p. 2; Wee, Tan, Cheok, 1995, p. 19). Past research examined a relationship between the development-stage “transformations” and increased counterfeiting, which is not just visible in China, but also in Eastern Europe and former Soviet Union (OECD, 1998, p. 26). Since China is still a developing country, it seems likely that counterfeiting is more prevalent than in developed countries which have, by definition a more sophisticated regulative framework and a sophisticated legislative regime. The conclusive results from past research show that IPR protection is superior in countries with high per capita income or that piracy is conditioned by socio-economic factors (Marron, Steel, 2000, p. 1; Proserpio, Salvemini, Ghiringhelli, 2005, p. 5 and p. 16) and therefore are traceable.

Within the fast economic transition process, regulative institutions and regulative frameworks do not match market and social circumstances anymore (OECD, 1998, p. 26). The result is, that economic trajectories are barely controlled which lead to phenomenon’s such as increased counterfeiting. It is hypothesized that China’s counterfeiting is partly rooted in its current transition process. The following paragraph discusses this assumption and examines which factors within the process may foster counterfeiting and IPR infringement.

(1) A first and rather logical impact is caused by the increased inflow of foreign capital and knowledge into China which, in other words is an import of potential endangered IPR’s. If protected IPR’s increase it is likely that IPR infringement increases as well. The positive correlation between increasing counterfeiting and increasing FDI seems obvious.

China is the largest recipient of FDI in the World. In 2004 China’s economy gained 54.9 billion U.S. dollars (see Tab. 11-A), which includes a tremendous inflow of advanced technology and intellectual property (Chow, 2004, p. 2). Furthermore, since Chinas legal economy is booming, it is likely that also the illegal economy is growing if it is not limited by legal or social barriers. The CIB (1995, p. 12f.) see the emerging “spirit of commercialism” and the development of a widely distributed light industry as main reasons for the skyrocketing of counterfeiting within the present economic environment.

(2) Chow (2000, p. 7) also sees the counterfeiting problem within “Chinas unprecedented economic development”. He argues that the rise of consumer wealth and spending power as well as the development of new brands fosters a demand for counterfeited goods (Chow, 2000, p. 7; also see chapter 6). Throughout the emergence of a new scale of commercial advertisement industry, the consumer demand for brands is growing. Furthermore Chow mentions other contributing factors, such as unemployment and the Asian economic crises^[10] (Chow, 2000, p. 8). Both issues, he argues may drive people into illegal businesses such as counterfeiting.

(3) Another issue, which is important, is the removal of trade barriers which has supported the export of counterfeit goods and in consequence the attractiveness of the whole industry (Wee, Tan, Cheok, 1995, p. 19). The exchange of goods became easier and the surveillance of trade flows much more complex. Consequently, internationalisation and export of illicit goods were less restricted. Like other industries, China’s counterfeiters have entered new markets on a global sphere and have taken advantage of a worldwide distribution (OECD, 1998, p. 26).

· Summarizing one can say that the opening up policy and the recent economic development in China created a supportive environment for counterfeiting.

4.2.2 China ’s Enforcement Institutions and Legal framework

4.2.2.1 Enforcement Institutions

The number of enforcement institutions in China regarding quantity is manifold. Differentiations can be distinguished between administrative enforcement, civil or criminal enforcement institutions and customs authorities. Most enforcement is based on administrative enforcement which is caused by China’s historic legal philosophy. It is also mentioned that it fits current Chinese market environment^[11] the best (Cohen, 2003, p. 6; Qu, 2002; Bottenschein, 2005, p. 122f.). The following paragraph will introduce the main institutions and its problems. A comprehensive overview about all enforcement institutions and its competencies is given in Tab. 18-A.

Administrative institutions

(1) The State Administration of Industry and Commerce (SAIC) (gong shanghangzheng guanli zong ju) is a part of the local government and its main task is the promotion and regulation of local commercial activities. SAIC has the authority to “confiscate products and issue a preliminary injunction and award damages” (Zu, Yu, 2005, p. 59).

Furthermore, it has the legal power to order an end to the infringing act and to impose penalties (Zu, Yu, 2005, p. 59; Khoon, 1994, p. 1f.). The SAIC has no executive powers in terms of criminal prosecution (CIB, 2004, p. 22). Main legal sources for the action of SAIC are the Trademark Law (zhonghua renmin gongheguo shangbiao fa) and the Anti-Unfair Competition Law (fanbu zhengdang jing zhengfa) which means, that it is responsible for all kinds of trademark infringement (Chow, 2000, p. 22). SAIC and other administrative organisations are the main enforcement institutions in China. In 2003, 26,488 cases were issued. 5,745 tons^[12] of counterfeits were destroyed and damages of 242 million U.S. dollars were imposed (numbers from Chinese official sources, cited by Bottenschein, 2005, p. 123, for further information see SIPO, 2004).

(2) The Bureau of Copyright Administrative Authorities (BCAA) (zhonghua renmin gongheguo guojia banquanju) is an institution established to fight copyright piracy. It is structured into national, provincial and prefecture levels (cf. SCIO, 2005, p. 1). Like SAIC, the BCAA is authorized to confiscate counterfeits and impose fines but cannot award damages or shut down enterprises (Chen, 2005, p. 8).

According to Chinese sources the achievements of the BCAA are notable. In 2004, about 9,500 cases of infringement were solved (cf. SCIO, 2005, p. 1). Furthermore from 1995 to 2004, 350 million pirated copies were confiscated which approximately leads to the number of 35 million a year. If compared to the number of legally sold DVDs, Singles and CDs which is 123.6 million in 2004, the result of the BCAA seems impressive (cf. IFPI, 2005a). If compared to the assumed counterfeit sales one finds that the BCAA confiscated around 10% of all pirated copies which is a remarkably high number^[13].

(3) The Technical Supervision Bureau (TSB) (guojia zhiliang jishu jianduju) is responsible for all issues concerning product quality and consumer protection. It covers all problems of consumer safety and consumer protection. The main legal bases are the Consumer Protection Law (xiaofei zhe baohu fa) and the Product Quality Law (zhonghua renmin gongheguo chanpin zhiliang fa) (Chow, 2000, p. 22). Together with the SAIC the TSB is one of the most important administrative enforcement institutions (Trainer, 2003, p. 22; Chow 2000, p. 23). TSB can confiscate counterfeits and close involved stores but can not make arrests or issue criminal prosecution (CIB, 2004, p. 22).

Civil and criminal enforcement institutions

(1) The Public Security Bureau (PSB) (gong an ju) is the principal police organization in China. It has the power to conduct investigations and raids on counterfeiters. Because the PSB has the overall police function, the enforcement against counterfeiting activities has less importance in every day’s business (AmCham, 2002, p. 36). The PSB is called in to arrest the suspect or to execute the ruling of another enforcement agency. PSB is one of the few authorities which have police powers (AmCham, 2002, p. 36).
(2) Intellectual property courts (IPC) (zhishi chanquan fayuan): In order to improve the counterfeiting problem, China has established special intellectual property courts which are subordinated to Intermediate People’s Courts and Higher People’s Courts (USDC, 2004, p. 1). Although most of the counterfeiting cases are solved by administrative authorities, there are a small percentage of criminal cases which are heard by courts (Trainer, 2003, p. 22). In 2002, less than one percent of all counterfeiting cases were heard by courts (Trainer, 2003, p. 22). Courts are mainly asked for more important cases such as industrial counterfeiting with high complexity and high demand for damages. An increasing activity of IPCs can be stated (Zhang, G., 2005, p. 22; Wölfel, 2003, p. 47).

Customs authority and other institutions

(1) The General Administration of Customs (GAC) (haiguan zong shu) seizes infringements which are related under Customs Law (zhonghua renmin gongheguo haiguanfa) (Chow, 2000, p. 22). It basically has the authority about all infringements which are made through cross boarder exchanges.
(2) Other Institutions are the Patent Administration Office (PAO) (zhuanli guanliju) e.g. the the authorities for Patent Affairs (AAPA) (IHK, 2004, p. 3). They deal with all infringements of patent laws (zhonghua renmin gongheguo zhuanlifa). The State Drug Administration (SDA) (guojia yaopin jiandu guanliju) has comparable responsibilities like the TSB and SAIC but only throughout the pharmaceutical industry (CIB, 2004, p. 20). Like the SDA the State Tobacco Monopoly Authority (STMA) (guojia yancao zhuanmaiju) only focuses its enforcements activities onto one industry (CIB, 2004, p. 20).

Problems

The problems of the current enforcement system are extensive. In the following, some basic problems are listed and discussed:

(1) First the system lacks transparency and a clear assignment of responsibilities. This problem has it roots in the socialist economic system which divided the economy in vertical segments (Chow, 2000, p. 22). Throughout this system, one authority controls all matters of the sector including all aspects of counterfeiting (Chow, 2000, p. 22). It is evident, that in the current economic environment of vertical, horizontal and lateral integrations as well as throughout the high number of affected industries, the system is not suitable to strengthen enforcement against counterfeiting. In addition, the growing rivalries between different enforcement institutions make this ineffective system more expensive which again reduces its overall performance (Chow, 2000, p. 31; IHK, 2004, p. 3)
(2) Another problem is the lacking awareness of counterfeiting issues and the insufficient knowledge of the enforcement institutions (also see Appendix D). Like others, Chow states, that many institutions do not have:
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(3) Apart from the advantages of being cheap and convenient, a basic critique on administrative enforcement is that it is vulnerable to local protectionism and lacks an adequate system to award damages (Zhang, Z., 2005, p. 22; Bottenschein, 2005, p. 123). Administrative institutions can not make arrests and do not have extensive powers to prosecute infringers. Consequently, harder and more deterring criminal enforcement is limited to criminal enforcement institutions which are barely used.
(4) But also criminal enforcement institutions are characterized as insufficiently equipped with resources and advanced training (Steffens, 2004, p. 330; Bottenschein, 2005, p. 122; OECD, 1998; p. 7; Ehlers,Wolffgang, Pünder, 2002, p. 100). Reisach, Tauber and Yuan, (2004, p. 154) mention that only 30% of all judges hold a university degree.

Additionally, enforcement through civil courts takes much longer and is much more expensive than administrative actions (see Appendix D). Besides, right holders have problems to transfer evidence form administrative authorities to the courts (Chow, 2000, p. 25; OECD, 1998; p. 7; Wölfel, 2003, p. 47). Other institutions often have no incentive to forward a case or the related evidence because after the case is solved, confiscated machinery and preliminary products are usually sold at an auction^[14]. In addition, some courts do not start hearings before administrative prosecution has finished (Chow, 2000, p. 25). The result is a clash of interests.

(5) Enforcement institutions are too passive. They only take into action if the right holder makes a report (Li, 2003, p. 964). Furthermore, right holders have to provide evidence, which means they have to do own investigation (IHK, 2004, p. 3; Bottenschein, 2005, p. 123). The presentation of documents, especially foreign documents need to be notarized, which often is too time consuming for fast actions or raids (Bottenschein, 2005, p. 123). Chow (2000, p. 35) mentions, that in practise trademark owners hire private investigation companies which prepare the action or raid against the infringer. This is complicated in China, because private investigation agencies are officially forbidden and furthermore the complexity and size of the country makes investigation expensive and time consuming (Hung, 2003, p. 69; Li, 2003, p. 964).
(6) Other difficulties arise, because many enforcement institutions (esp. SAIC and IPC) are subordinated to local authorities, which have an interest to support local counterfeiting, which provides jobs and local development (Chow, 2004, p. 5; see 4.2.3.2 “local protectionism”). Judges for example are not independent from local governments which may have an interest to support local counterfeiting (Hung, 2003, p. 69).
(7) An equal problem which especially the SAIC, as a main enforcement institution, is faced with arises from its range of different assignments. SAIC has the objective to promote and support local wholesales markets. They are in turn, the main distribution channel for counterfeit goods. If counterfeiting would decrease, the shop owners in the wholesale markets face losses and consequently the SAIC fails its goal to develop local commerce (Chow, 2000, p. 28; Bottenschein, 2005, p. 124).

· Many authors argue that the current enforcement system is the main driver for counterfeiting in China. This assumption is mostly supported by papers which do not take a closer look on other subjects like counterfeiters itself (Chapter 5) or consumers (Chapter 6). Although there are other influencing drivers, the problems of the present enforcement system are alarming. If evaluated towards the effectiveness to decrease counterfeiting, one must state, that the present administrative and criminal enforcement system are insufficient.

4.2.2.2 Legal Framework

There are many laws, regulations and international treaties which influence and shape the Chinese jurisprudence on IPR. The following paragraph gives a few insights into China’s legal framework and its problems.

Laws and regulations

Similar to the current IPR enforcement system, China’s IPR legislation is comparatively new. Before 1970 there was no awareness for IPR protection at all^[15] (Li, 2003, p. 954). Li says:

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Not until the 1980’s, China introduced several IPR laws and established a comprehensive legal basis for IPR enforcement (Ho, 1995, p. 4). Today the main judicial bases in China are the Trademark Law, Unfair Competition Law, Product Quality Law, and Consumer Protection Law. All these laws follow Western legislative traditions (Chow, 2000, p. 24; Li, 2003, p. 957; Zhang, Z., 2005, p. 7). Additionally, the Chinese supreme courts directives have a binding effect for legislative interpretations (Bottenschein, 2005, p. 122). Table 3 gives an overview of past and current laws, regulations and international agreements concerning IPR issues.

Tab. 3: China’s IPR legislation

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Source: compiled by the author

Reviewing the number and quality of laws and regulations one can state that China’s IPR legislation is sophisticated and matches global standards (Zhang, Z., 2005, p. 9; Porteous, 2001, p. 1f.; Qu, 2002, p. 393). Most authors including foreign experts agree with the opinion, that China has made many improvements throughout its IPR legislation (Wölfel, 2003, p. 39; Cohen, 2003, p. 1; Bhattacharya, 2001, p. 2; Bottenschein, 2005, p. 126; Zu, Yu, 2005, p. 1f.; Qu, 2002, p. 393).

Although the number of international agreements, national laws and the past legislative progress seems impressive, a closer look on the quality of national laws seems necessary. Various problems are known and need to be overcome.

(1) First, the ambiguity and vicissitude are one of the main problems. Penalties and laws are often remain vague and can be interpreted extensively (Trainer, 2003, p. 23; IHK, 2004, p. 2; Wee, Tan, Cheok, 1995, p. 19). Chinese IPR jurisprudence is highly interpretable (Chen, 2005, p. 8; Cohen, 2003, p. 6). Legal definitions such as the definition for “novelty” or the term “famous domestic trademark” (ming shangbiao) remain relatively unclear (Keßler, Qiao, 2003, p. 182; Blasek, 2004, p. 19). Opinions and perspectives change rapidly over time.

In contrast, it can be noticed that the Chinese legislature has shown action to improve criminal punishment. In December 2004, an interpretation was issued to support the judicature by setting clear parameters for certain types of counterfeiting (Chen, 2005, p. 10). Albeit, there is often a sophisticated legislation, it is only used in minor cases^[16]. The range of possible penalties is not exhausted.

Additionally, legislation is powerless, if counterfeiters hire a person who acts as legal owner and representative for a company. This person is a kind of “stooge” and paid to accept penalties or even imprisonment (Lam, Paltiel, Shannon, 1994, p. 213)

(2) Secondly, penalties and damages, are to low (see Appendix A; Hung, 2003, p. 68; IHK, 2004, p. 3; Ho, 1995, p. 11; Ehlers,Wolffgang, Pünder, 2002, p. 100). In 2000 for example, 22,001 cases concerning trademark infringement were solved (Tab. 8-A). The average fine was about 794 U.S. dollars. Since, one may expect much higher profits the fine seems relatively low. On the other hand, if compared to the per Capita Annual Net Income^[17] the fine seems quite high and consequently effective. Most experts argue that most counterfeiters, see fines as an additional cost of “doing business” (Chow, 2004, p. 8; Li, 2003, p. 965; Trainer, 2003, p. 22; Lam, Paltiel, Shannon, 1994, p. 213).

Similarly, the compensation for right holder is a problem. In 2000, the average damage paid was around 19 U.S. dollars (Tab. 8-A). The highest damage ever sentenced was 900,000 RMB (108,000 U.S. dollars)^[18]. The damage is calculated on the estimated net profit^[19] of the counterfeiter. Since, the counterfeiter keeps no records the estimation is relatively difficult and results in damages which are almost obsolete.

(3) Additionally, the local influence on legal practise is problematic (Chen, 2005, p. 8). In addition to national laws, provinces, cities and special economic zones can implement own conventions as long as they are not contradictory to national standards (Chen, 2005, p. 8). Consequently, the location of the infringement has an impact, which makes it more complex for right holders to enforce their rights.

(4) Another problem especially for foreign right holders is that foreign patent attorneys are not allowed and foreign companies are forced to contact special, official licensed Chinese patent lawyers. Foreign experts see here an unequal treatment of domestic and foreign right holders (see Appendix D; Keßler, Qiao, 2003, p. 182; Blasek, 2004, p. 19).

[...]

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^[1] “one country – two systems” (yiguo liangzhi) means, that Hong Kong and Macau stay capitalistic oriented market economies for 50 years after the reunification with Mainland China. China’s economic system remains socialistic oriented. Since, the IPR legislation of Hong Kong is based on British case law, this paper focuses on Chinese legislation.

^[2] “Intellectual property” refers to all creations of the mind: such as inventions, literary and artistic works, and symbols, names, images, and designs which are used in commerce (WIPO, 2005).

^[3] See chapter one, methodology restrictions concerning the possibility of measuring counterfeiting activities.

^[4] While discussing lost sales or lost revenues, it is important to distinguish between the conscious buyer and the unconscious one. When the consumer unconsciously buys a counterfeit the genuine manufacturer certainly faces lost sales. If the buyer is conscious, it may be possible that he/she would not have bought a genuine product anyway. People who knowingly buy a fake Rolex are usually no potential costumers for a genuine Rolex because prices are much too high. Consequently, dealing with numbers of potential losses, there is a need to keep in mind that sales of counterfeits would not consequently be potential genuine sales.

^[5] On the other hand, one can suggest other incentives for people to innovate. One example would be that innovators do not seek for financial success but for social status and prestige. Since, social status is important in some cultures, the innovator would have an interest to share his ideas for free just to enhance his/her reputation.

^[6] A colourful example is cited by CIB (2004, p. 19). A village near Shanghai is mentioned where over 10.000 people directly or indirectly work in the counterfeiting businesses, making handbags and leather goods.

^[7] in 2003, China Statistical Yearbook (NBS, 2004).

^[8] From 1978 until 2003, the GDP per capita has, inflation-adjusted grown seventh fold (NBS, 2004).

^[9] China ranks place 71 out of 146 in the Corruptions Perceptions Index in 2004 (Transparency International, 2004).

^[10] Also called the “Asian financial crisis”. It originated in 1997in the Asian economic area esp. throughout the East Asian economies. In contrast to Chow, most authors doubt that China was much affected (see Stiglitz, 2002)

^[11] Many IPR infringements evolve out of lacking awareness for IPR (Zhang, Z., 2005, p. 22).

^[12] It seems doubtful, that the administrative enforcement institutions have weighted all the seizures. This example shows that many Chinese statistics need to be requested, especially if Chinese officials present enforcement results.

^[13] In 2004, 123.6 million CDs, DVDs and Singles were sold in China which have a retail value of 211,8 million U.S. dollars (cf. IFPI, 2005a). Further the IFPI (2004b) states, that the market for counterfeited media is around 600 million U.S. dollars which would consequently count for 350,1 million units. If the BCAA confiscates 35 million of pirated copies a year, it makes 10 % of the total counterfeit sales. If one may argue that counterfeits are sold relatively cheaper than genuine ones, the number of units will shrink which leads to a decreasing percentage of confiscated media.

^[14] Raids are a source for revenues for the institution. The authorities confiscate cash, goods, machinery, and equipment, including cars, and then sell it at auctions (Chow, 2000, p. 31).

^[15] Qu (cf. 2002) describes in the fist chapter of his book “Copyright in China” the evolution of Chinese IPR legislation and its influencing determinants. Beside the general opinion, that China’s IPR legislation is only 30 years old, he mentions other authors who argue in a different way. They argue that the first attempts to protect IPR arise from book printing in the 11th century. Within a highly sophisticated feudal China they argue, early forms of IPR are visible. But since these findings stay relatively unclear, Qu names the 1970s as the initial point for IPR legislation in China.

^[16] A colourful example is the Santana case. Two infringers were convicted because they used the trademark Santana which is owned by the Volkswagen Company. Both defendants were found guilty and sentenced to prison (6 years and six months and three years and 6 month). Furthermore they had to pay a fine of total 4500 Euro (Li, 2003, p. 963). In general, Article 213 too 216 of Chinas Criminal Code (zhonghua renmin gongheguo xingfa) provide for prison terms up to 3 to 7 years if a counterfeiter’s acts extremely serious (see Appendix C and Zu, Yu, 2005, p.1f).

^[17] In 2000, the per capita annual net income was 279 U.S. dollars in rural households. The per capital annual disposable income of urban households in 2000 was 778 U.S. dollars (NBS, 2004). The avg. fine of 794 U.S. dollars thus exceeds the annual income.

^[18] The Gangtian Group was found to be guilty infringing IPR of Yamaha, a Japanese MNC (Kessler, Qiao, 2003, p. 181).

^[19] Total sales, after deducting all expenses. The numbers are presented by the infringer (Chow, 2004, p. 8).