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The People's Republic of China has discovered Monopoly, the most capitalist of board games. The Parker Brothers game has become popular in China both for entertainment and for teaching budding entrepreneurs the rudiments of capitalism. However, the two Chinese companies that make the game are passing go, collecting more than $200 and staying out of jail despite breaking a number of copyright and trademark laws.1

The pirating of Monopoly is an example of a larger problem in China involving different kinds of monopolies-those created by intellectual property laws. Intellectual property rights (IPR) are still a fuzzy concept in China. Communism's rejection of individual property ownership, coupled with a legal history not steeped in IPR, has given intellectual property an insecure place in China's legal scheme.

As described below, the groundwork for expanded protection of intellectual property rights in China has been laid, but there remains a gap between the formal promise of recognition and the fulfillment of that promise. Specific, practical steps need to be taken to educate the emerging Chinese entrepreneurial class, and to provide meaningful enforcement mechanisms for the victims of trademark, copyright and patent infringement.

U.S. industry has an important role to play in this process. Internationally acceptable levels of intellectual property protection in China must be one of the prices exacted for the promise of foreign investment which will bring coveted economic development to the PRC. U.S. industry must educate their trade counterparts in China on the importance of protecting intellectual property rights. U.S. industry must insist on the

In January 1992, United States Trade Representative (USTR) Carla Hills negotiated a Memorandum of Understanding (MOU) with China that will tighten Beijing's intellectual property laws. China agreed to the Memorandum after a seven-month investigation by the USTR under the "Special 301" provision of the Trade Act of 1988. Special 301 requires the USTR to identify, investigate and if necessary, retaliate against countries that fail to provide adequate protection for U.S. intellectual property owners.

Since the MOU was signed, China has made steady progress toward fulfilling its obligations. The PRC has joined the Universal Copyright Convention and published its Implementation Rules for International Copyright Treaties. Meeting these commitments will be a giant step for China, and one in the right direction. However, prospects for success under the MOU are still uncertain.

The agreement contains only a vague enforcement clause calling for the Chinese to use "effective procedurcs" to stop IPR violations. Given that China paid little attention to IPR until the last decade, significant protection may not be immediatc. To declare the MOU already incffective, though, would be a premature indictment of the Chinese officials responsible for implementing and enforcing the agreement. So far, these officials have at wn every intention of following through with their obligations. But the MOU instantly transformed China's IP laws and there is bound to be lag time between when the

Chinese implement MOU standards and when they actually figure out how to make them work.

In the interim, even if the Chinese make a good faith effort to enforce the MOU, there will still be obstacles to meaningful protection. China could help overcome these obstacles by implementing a broad, three-step approach.

First, China must help American companies find intellectual property infringers. In the past, U.S. firms have often been left to find the violators themselves. This is nearly impossible in a country where factories and sm ́`ll businesses are as hard to count as the population

Many U.S. companies who have been successful in curbing IPR violations in China have resorted to hiring local legal counsel and investigators to trace the infringing goods or processes back to their sources. Often these are small factories in the backwaters of China with no knowledge that their activity is illegal.

The problem is fueled by middlemen from Hong Kong who subcontract with factories and businesses in China to produce a limited number of copies within a certain time period. This makes the timing of the investigation critical. By the time company investigators trace the goods to their origin, the factory is often manufacturing something else and the damage is done.

Furthermore, only limited technology is needed to counterfeit or pirate certain kinds of goods. This gives infringers a wide variety of locales from which to operate. When one location is discovered, violators simply find another site and continue to break the law.

Investigations are an expensive and timeconsuming process that few companies can afford and even fewer are willing to engage in. Some large firms that could afford to bankroll such extended investigations choose not to because they feel the occasional success is not worth the expenditure. One U.S. executive res nded that losses from intellectual property vi ations in China are simply a cost of doing business.

Second, China should create a simple, inexpensive and binding forum to solve

intellectual property disputes. The body should also have the authority to dole out sentences stiff enough to deter larger, Hong Kong influenced violators.

China's cumbersome dispute resolution system has made it difficult for U.S. firms to stop intellectual property thieves. Because China's legal system developed along different lines, there is a shortage of Chinese lawyers trained in intellectual property law. As a result, legal processes that look effective on paper don't work in reality. Actions are rarely brought in People's Court, and arbitration boards have also been ineffectivc.

The complicated and tedious nature of dispute settlement make formal proceedings an option reserved for corporations with vast reserves of patience. Levi-Strauss, which has been comparatively successful in obtaining relief in China, prefers to avoid formal proceedings all together, opting instead to deal directly with the infringer. To do this, Levi-Strauss has spent considerable time and resources cultivating good relationships with Chinese officials. However, developing such ties can take years, and many small U.S. interests have only a short time before infringement significantly reduces their profitmaking ability.

The profusion of new intellectual property laws may initially overload China's legal system, exacerbating its ineffectiveness and leaving American companies in the lurch. A streamlined resolution process with cooperation from Chinese officials would open the door to hundreds of U.S. companics that currently do no business in China because they cannot protect their intellectual property there.

Third, China needs to continue to educate its masses about intellectual property. On a recent trip to China, an American observer watched an old Chinese woman pull small and ugly oranges from a garbage bag, stamp them with the "Sunkist" trademark and repack them in a Sunkist box. When asked, the woman replied that although she didn't know what the word "Sunkist" mcant, she did know that the oranges marked with it sold much better than those without it.

This example is not unusual. Because of China's size and isolation, many Chinese people do not understand intellectual property, much less the laws protecting it. The MOU and China's efforts to implement it are already helping to educate the Chinese. Even still, if the MOU is to have any practical effect, Beijing must step up efforts to promote respect for IPR in business, schools and among the general public.

These small steps could be easily undertaken and their positive effects would be substantial not only for the United States, but for China as well. China has clear incentives to make the MOU work.

First adequate levels of IP protection would bring to China a flood of new industries and products. The Chinese crave foreign investment. particularly from high-tech industries that often rely on intellectual property protection. Already such companies are prepared to enter China if they believe that their IP interests will be adequately protected by the MOU. If these enterprises enjoy initial success, many others arc sure to follow. Both manufacturing and marketing would prosper under solid IPR protection.

Second, enforcing the MOU will help China expand its role in international trade. In the last, 102nd Congress, China faced much resistance to the renewal of the Most Favored Nation trading status. It is unlikely that China's quest for renewal in the new Congress will be any easier. Certainly. a good enforcement and compliance record with the terms of the MOU will help. And, American firms will be exercising close surveillance of China's legal climate before making investment commitments.

China also wants to join the General Agreement on Tariffs and Trade (GATT). Given the importance IPR played in the GATT's Uruguay Round of multilateral trade talks, any effort by China to address IPR problems will help •hem accomplish this goal.

Finally, if China fails to enforce the MOU they face the threat of being returned to the Special 301 Priority List. Special 301' is a valuable tool for dealing with stubborn countries and its use should never be ruled out. However, it should be a weapon of last resort.

Negotiations leading up to the MOU illustrated the potential drawbacks of indiscriminate use of Special 301 against China. Special 301 is potentially a dangerous proposition for American businesses. If the United States and China fail to reach an understanding over enfrrer vent, the USTR would could slap sanctions aillions of dollars worth of Chinese exports. China would undoubtedly retaliate with commensurate tariffs of its own, setting of an all-out trade war. Not only would U.S. companies lose millions of dollars in China, but, foreign countries would fill the void left by American exports—thereby gaining control of what is now an American market share.

In addition, resorting to retaliation may actually harm U.S. intellectual property owners. The tension and resentment created by a trade war would the leave the Chinese with little desire to protect U.S. intellectual property, or cooperate with U.S. IP owners causing violations to go unchecked.

The United States asked China to rewrite its domestic IPR laws for the benefit of American companies, and they agreed to do so. For that, China should be commended. The Chinese must now live up to their commitment to protect American IP interests. Both the United States and China have large economic consequences at stake and both will benefit from meaningful protection of U.S. intellectual property rights in China.

'U.S. Has No Monopoly on Monopoly' in China, Journal of Commerce, Monday June 8, 1992 (Reuter).