Sunday, May 12, 1996

Whether it is better to sanction...

The trade sanction debacle with China is a consequence of Clinton Administration's preference for confrontation over diplomacy and the need to appease a China-bashing Congress by trumpeting concessions wrestled from China. Unfortunately, while badgering the Beijing government may play well back home, a real solution is not that simple.

Today's China is no longer the police state with a central government that sees all, knows all and controls all. Microsoft, with much to lose over unauthorized copying of their software, has discovered that external pressure applied at the local level can be more effective. In a recent case, company representatives reported the pirating facility to the local authorities and participated in the subsequent raid to halt production.

The plant fingered by Microsoft turned out to be a joint venture with Hongkong investors. Indeed, piracy of intellectual properties is instigated by those trafficking in the bogus products. They know which products are hot and where to sell them. Disrespect for intellectual properties is endemic in Asia. These intermediaries can come from Hongkong, Taiwan and even the U.S., and putting them out of business is a complicated but essential part of the solution.

Microsoft's overall approach to China will contribute to accelerating the acceptance of intellectual property as real property. While pursuing pirating plants, Microsoft also invested 100,000 staff hours completing a Chinese version of Windows 95. The core of its strategy is to help China develop an industry based on respect for software products and the rule of law. China's own software developers have the same objective. At the rate China's economy is developing, it won't take as long as elsewhere in Asia to see the illegal practices taper off-- bearing in mind that even today, faux Rolex watches are still available in Taipei, just not in open markets.

Even though the U.S. is China's most important export market, the pain of a trade war works both ways as hinted by the recent $1.5 billion aircraft order that China placed with Airbus instead of Boeing. The $3.1 billion that Americans invested in China in 1995, though 25% higher than in 1994, represented only 8% of the total foreign direct investment China received last year. Clearly the economic clout that U.S. has over China is much less than is imagined in the U.S. American businesses like Microsoft have recognized China to be a major market that requires a long term strategy. It's time the political leaders understand the importance of working with China on the basis of common interests.

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