Quotes of the Day

Silk Alley in Beijing was probably the world's most infamous market for fake consumer goods. Located within sight of the U.S. embassy, the noisy outdoor warren of stalls became such a magnet for foreign tourists that Lonely Planet's guidebook to Beijing suggests backpackers shop there for Gucci handbags, Nike sneakers and a host of other designer products, few of them authentic but most so meticulously duplicated by Chinese manufacturers that no one could tell the difference. "Silk Alley" was also the bane of trademark lawyer Joe Simone. As the top foreign anticounterfeiting lobbyist in China, Simone had for years urged senior Communist Party members, commerce officials, and local bureaucrats who collected rent from the stall owners, to close the market. Finally, in January, the government tore it down. "If the silk market cannot flourish without counterfeits, we prefer that it not flourish," said a government official. Simone's reaction: "I was psyched."

The victory was short-lived. From the rubble of the old market has risen a five-floor department store packed with four times as many vendors selling fakes as there were in the old alley. About the only brand that's not counterfeit is that of the market itself, which has erected signs on every floor welcoming shoppers to "Silk Street." To add to the irony, a notice at the main entrance lists a dozen luxury brands that must not be sold on the premises; nearly all are available within, able to be bought with major international credit cards. "Somebody must have sent a message to vendors saying, 'Don't worry, you can sell counterfeits,'" Simone says.

Simone's frustration at China's failure to effectively protect intellectual property (IP) now reverberates through Washington. American companies complain that Chinese piracy of virtually anything valuable—brands, software, films, music, business processes, ideas—threatens legitimate enterprises everywhere. And it's not like China just popped onto the radar screen. The country is on track to record a $200 billion trade surplus with the U.S. this year, and American politicians are dyspeptic. In recent weeks, the U.S. has erected quotas on textile imports from China and hectored Beijing over its refusal to revalue its currency, while members of Congress have threatened blanket tariffs on imports from China. In Beijing last week for a meeting with his Chinese counterpart, U.S. Commerce Secretary Carlos Gutierrez challenged China's leaders to rein in copycat factories and rogue retailers. "Violating intellectual-property rights is no different from counterfeiting money," he told reporters. "We would like it to be treated that way."

Plenty of other countries are used as safe harbors by commercial pirates, but China is perhaps one of the worst offenders. Chinese copycats cost the U.S., Europe and Japan more than $60 billion in retail sales last year, according to U.S. Commerce Department estimates, and Chinese fakes are increasingly being exported worldwide. U.S. Customs reports that 63% of all counterfeit goods it seized last year came from China, up from 16% five years earlier. It's estimated that half of all shipments of fake products stopped by Chinese customs at export points are sneakers bearing Nike and Adidas brands. Even Chinese companies are being damaged by the trade, with everyone from the State Tobacco Monopoly Administration to the Inner Mongolian-based Little Sheep chain of Mongolian hot-pot restaurants complaining that their brands have been hijacked.

As the U.S. has grown irate, China has dug in. A delegation of Chinese commerce officials visited Washington at the end of last month to meet with U.S. Trade Department officials and groups like the U.S.-China Business Council. Stunned listeners heard Vice Commerce Minister Ma Xiuhong blame foreign companies for encouraging counterfeits by placing orders with Chinese factories that churn out fakes on the side. "China is aggressively defending its position," says an executive who attended the meetings. "It's going to be a real fight."

Leading that battle on the ground is Simone, the lawyer who targeted "Silk Alley." As a Beijing-based partner in the American law firm Baker & McKenzie, Simone's clients include more than 30 firms that own household-name brands (which he declines to name, citing confidentiality agreements). He meets often with Chinese officials as a member of two antipiracy business groups—the International Trademark Association and the Quality Brands Protection Committee. During his 15 years in China, he has worked with local officials to organize more than 500 raids on factories across the country.

Although his job occasionally calls for hardball tactics, Simone, who once studied acting at Penn State, prefers to play a more diplomatic role as the business community's ambassador of brands. Unlike some other foreign lobbyists, he is careful not to accuse the Chinese government of condoning IP theft. For example, Simone recently met with officials from the Ministry of Finance to explore how foreign companies might help tackle the problem of tax revenue lost to piracy. In a conference room overlooking the new "Silk Street" market, Simone emphasized in fluent Chinese that he is "100% friendly," adding that "people in Washington are complaining loudly, but they often don't know the facts." Then he notes, almost in passing, that police have arrested more than 10,000 people in a six-month crackdown on gambling. Why, he asks officials, don't they arrest more counterfeiters?

It's a rhetorical question that Simone answers himself. Chinese state enforcement agencies barely work together, he informs the finance officials, who are unfamiliar with how crackdowns are launched. He explains that the government body that investigates fake goods, the State Administration of Industry and Commerce (SAIC), can only impose fines and close factories, and that's not enough. "Factory owners aren't afraid of fines" because they're too low. "What people are afraid of is the police," he says. But in a country with rising rates of violent crime, busting counterfeiters of, say, fake Hello Kitty notebooks is a low priority. Simone explains that to increase the number of criminal arrests that could lead to jail time, local SAIC offices must build cases, often with the help of foreign firms, and then hand them off to the police. But that rarely happens. In the first half of last year, he says, the SAIC passed only 14 investigations to the police.

Simone concludes the meeting with a recitation of other obstacles to IP enforcement, such as bureaucrats he suspects are shielding factories engaged in piracy since they provide local jobs. Simone also suggests to the Finance Ministry officials that China's current leaders aren't aggressive enough about the issue. He recalls that former Premier Zhu Rongji complained after personally buying fake, shoddy products, but Simone thinks that level of attention is lacking now. "We hear a lot of talk from other officials, and in the end, improvement is way too slow," he concludes. After two hours the meeting adjourns with handshakes and promises of cooperation. As Simone steps into a taxi outside, a woman offers him a pair of fake Boss socks.

That afternoon, Simone meets one of his Chinese investigators at "Silk Street." The fourth floor is crammed with watch vendors pitching "Super-A" fakes—a designation that counterfeit vendors in China use to mean near-perfect quality. About half the shoppers are foreign, but Simone is by far the biggest and loudest. "Fakes are good!" he yells in Chinese, playing the dopey consumer. "Fakes are cheap!" His old acting classes are paying off—vendors gather to laugh at his display of astonishment as a salesgirl proves with a screwdriver that the glass on her fake Omega watch is scratchproof. The sheer quantity of contraband overwhelms him, and this time he's not acting. "When I came here, I expected the worst," he says on the way out. "But I never thought it would be this well organized and financed."

The government doesn't wholly ignore the problem. The minister now in charge of policy on intellectual-property rights (IPR), Vice Premier Wu Yi, promised to crack down on abuse more than a year ago. China inaugurated an annual "IPR Protection Week," with billboards in Beijing urging passersby to "Sternly Beat Down Counterfeits." Steamrollers across China crushed truckloads of pirated CDs and DVDs seized by authorities, the destruction broadcast on prime-time TV. Police launched "Operation Mountain Hawk," which helped push the number of criminal prosecutions involving IP theft to 385 last year, up 75% from 2002. Censors even allowed a hundred Chinese pop singers, led by aging rock star Cui Jian, to hold a concert that encouraged fans to buy authentic CDs. Most important, the nation's highest court issued a "judicial interpretation" last December that carries the weight of law and purports to make it easier to launch criminal proceedings in IP cases. Wu Yi said in January that China was making "new headway" against counterfeiters.

But Simone and others say the steps are insufficient. A few years ago, pirated DVDs were peddled on the street by furtive migrants from the hinterland. These days they're sold openly in shops and often hit the market before first-run films arrive in cinemas. The Motion Picture Association (MPA) says factories in China use machines costing hundreds of thousands of dollars with a capacity to stamp at least 3.5 million discs a year. They retail in Beijing for about $1 apiece. Hollywood studios lose the market not just for DVDs but also for viewers who might otherwise visit theaters—a problem compounded by a state-imposed limit of 20 first-run foreign films each year. Says Mike Ellis, head of Asia operations for the MPA: "China has not made substantial progress toward a reduction in copyright-infringement levels."

Foreign firms face great difficulty prodding police into action. In February, General Motors received complaints that faulty spark plugs bearing its AC Delco brand were damaging engine cylinders in North America. GM traced the counterfeit plugs through a Canadian importer to the Chinese plant that made them. But the factory owners were careful, GM says. According to the new judicial regulations issued in December, police must find $18,000 worth of counterfeit goods to launch a criminal investigation. Because the spark-plug factory produced to order and shipped its goods out immediately, it had no contraband in its warehouse. "We couldn't persuade the police to seize goods or arrest the owners" because there wasn't enough merchandise to make a case, says Alex Theil, director of investigations for GM in Asia. "Proof should be the outcome of a criminal investigation, but here, proof must come at the start."

Other investigations are stymied by the officials charged with leading them. Last week, Michael Feng, an enforcement officer for sneaker maker Puma, led a delegation from a local SAIC on a raid of a factory in a part of Fujian province notorious for knocking off footwear. The factory, Feng says, was a "pure Puma counterfeiter" that made nothing else. In fact, it had been raided weeks earlier and was supposed to have been closed down. When Feng and his team arrived, however, the SAIC seals over the door were broken and the plant was operating as before. The official whose order had been flouted didn't seem to care. "I said, 'Hey! What are you going to do?'" Feng says. "He just laughed at me."

Yet the biggest problem might not lie in the provinces but in the capital. Last week, Simone met with Liu Juntian, an expert on IP law at People's University, to sound him out on the mood of China's political leaders regarding counterfeiting. "It's a matter of political will," Liu said. "The [Communist] Party is concerned with stability over everything else. It sees people at the bottom of society selling cheap goods to poor people, and thinks that is stabilizing." The abstract concept of IP rights barely factors in the calculations, according to Liu.

In the end, it seems, China's counterfeiters consistently stay a step ahead of those who would shut them down. One of Simone's great successes was cleaning up an indoor market next to Beijing's Temple of Heaven. Vendors at the market stopped displaying most of their fakes a few months ago after Simone threatened a lawsuit. That's nice—but now they instead display catalogs of items like the latest Louis Vuitton handbags. Buyers choose a bag and are then led down an alley to a warehouse stuffed with "Super-A" fakes. One is a knock-off of a Louis Vuitton wallet bearing a cherry design that isn't yet officially available in Beijing. "Look how the design on the leather cuts off at the edge, just like the real one," says a salesgirl, comparing her product with the catalog photo. She offers the bag at one-eighth the price of the genuine item. "It's regrettable that we consider that progress, but it is progress," Simone says. "They're not that afraid on 'Silk Street.'"

• Matthew Forney | Beijing
• Beijing's inability to curb rampant intellectual-property theft is infuriating its trading partners