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Vol 1, No. 2

JULY 9, 1996

A SITE LICENSE FOR CHINA?

INTELLECTUAL PROPERTY IN A "HAVE-NOT" WORLD

by Nathan Newman

The economic powerhouse of the world denounces a large developing nation across the Ocean to its West for its mass industries involved in blatant piracy of copyrighted works. Despite a few token royalties, the developing nation continues to mass produce cheap pirate versions in industrial cities.

China in 1996?

No, the United States in the second half of the 19th century.

Throughout the 19th century, the US publishing industry grew on mass-produced pirate versions of literary works produced in Great Britain. No less a "content provider" than Charles Dickens made it a cause celebre in leading an international battle condemning the United States for its refusal to protect copyrights and pay royalties to British publishers. In fact, the US government imposed a 25% tariff on imported books after 1864, further reinforcing the profits and dominance of pirate US publishers over British publishing firms. This was the period when books moved from the libraries of the well-off into the cheap "dime novels" of mass consumption. Frank Comparato, a scholar of the period, argues that without the US piracy of British books, "the American bookmaking industry might never have developed beyond the hardbound needs of rich collectors." It was not until 1891 that any formal copyright agreements with foreign countries were enacted in the US and even those were limited and aimed at forcing as much physical printing to occur in the US as possible.

This history highlights not only the hypocrisy of the US in puffing up its indignation over international copyright piracy in the dispute with China, but it also emphasizes why copyrights are a poor tool for mediating the economics of intellectual property between developed and developing nations.

Despite the present conflict with China being framed in terms of trade, copyright is not about the economic flow of commodity goods, but about whether one country--China-- chooses to use its police power to restrict the flow of ideas on behalf of firms from another country--the United States. Economics has been called the science of scarcity and the quantity of normal commodities are more or less scarce based on the marginal costs of producing each individual item. Government may play a strong role in supporting or impeding production, but government is not needed to keep the supply of any individual physical goods limited. Reality does that all by itself.

With ideas, scarcity and marginal cost only exists where government imposes scarcity through copyright and patent monopolies. Otherwise, while producing the original manuscript, musical recording or software code may take significant investment, the cost of each additional copy is close to or essentially zero. The only way to cut supply and thereby create a market for information goods is to increase state intervention to maintain monopoly control of distribution for the publisher of those information goods.

This is the rub in trade negotiations. In traditional trade agreements, the focus has traditionally been on reducing foreign state intervention against our country's commodity goods, whether cutting tariffs, easing inspections at the border, or reducing foreign government subsidies for competing goods. However, in the recent negotiations concluded with China, the US demanded and gained the following INCREASED state intervention by China:

** China will increase surveillence of all CD-ROM producers and shut down those deemed in violation of copyright laws with the US. ** China promised that no new CD factories would be authorized to open, and that unregistered factories would be closed. ** China agreed to continue a ban on importation of the presses that produce compact disks and increase penalties for unregistered ownership of such presses.

All of these conditions are about China increasing its police surveilance of its own people and banning the technology for the dissemination of ideas.

Is it just me or is giving the butchers of Tiananmen international sanction for repression a really bad idea?

Somewhere I have a faint suspicion that "registration" of technology is much more likely to restrict access by dissidents against Chinese dictatorial rule than to undermine copyright piracy. The reality is that the regime retains a high degree of self-interest in suppressing dissent while its economic self-interest, to the largest extent, lies in turning as much of a blind eye to copyright piracy as international sanctions will allow.

Like the US in the nineteenth century, China is unlikely to seriously enforce international copyright rules until the economic interest of promoting internal production of ideas outweighs the economic gains from piracy from developed nations.

For this reason, the current approach of threatened sanctions and brinkmanship by the US government to pursuade China to crack down on piracy promises more political repression than a long-term solution to the problem of intellectual piracy.

So how about an alternative that promises clear economic returns to US producers of intellectual property without putting the US in the position of cheerleaders for censorship in China?

Current estimates by the American computer, film and software companies claim that piracy in China costs them $2.3 billion in lost sales last year. So instead of asking for repressive measures by China that may or may not be enforced by local Chinese officials (who often are profitting from local pirated production), let's use our trade negotiations to demand just that: $2.3 billion annually, hard cash on the barrel by the Chinese government. No fuss, no games. If China chooses to enforce copyright laws internally, whatever is collected gets deducted from the straight cash payment to the US. In fact, reducing the direct payment to the US out of general revenues would build in an incentive for copyright enforcement. However, if China feels economic development and its own fiscal authority is better served by looser enforcement, it could choose to continue more of a blind eye to piracy.

In the US, the government would redistribute the direct payment based on the same surveys and estimates that created the $2.3 billion figure in the first place. Similar payments have already been developed in the US from a tax on certain blank cassettes to defray costs of piracy in the music industry. The idea can just be expanded more generally.

Of course, China would dispute the $2.3 billion number, but arguing and negotiating over the dollar amount of payments is a simpler and more straightforward bench-mark for negotiations than the current debate. Total payments annually would no doubt have to be renegotiated every few years as China's economy and use of information goods grows.

What is proposed is essentially a site license for China by the US for use of its information goods. And it is proposed for similar reasons that corporations offer site licenses in place of per-copy sales. Often lacking credible enforcement mechanisms against internal piracy by a corporate customer (and knowing that employees may copy software despite the best intentions of that customer), software companies often find it easier to make an estimate of probable use of its products by that customer and accept a fixed payment for all use of a program by a company or particular site. This proposal for a site license for China merely takes that economic logic to the nation-state level.

Of course, one might ask, once multi-billion payments began flowing from China to the US, whether some people in the world might find it unseemly for citizens of one of the poorest nations on earth to be forced to tranfer wealth to the richest nation on earth, all in the name of international copyright enforcement that the US itself flagrantly ignored when it was a poorer, developing nation.

So strictly from a PR position, encouraging state repression in China as the solution to copyright infringement may make better sense for the software, film and music industries. Average people can identify with an abstract violation of law and high-profile crackdowns on pirate factories, but they might gag if they saw the real flow of dollars transferred from the pockets of China's poor (or even emerging middle class) to the bank accounts of Bill Gates and Hollywood's moguls.

However, with the Internet threatening to make intellectual piracy even easier, a trade toolbox by US negotiators that only includes increasing government repression as a solution is a pretty limited one and a dangerous set of tools for all of us. In the end, what is needed is to step back and begin a real negotiations over the future of intellectual property in a world of information "haves" and "have-nots" that is aimed at encouraging the development of ideas, the economic development of poor nations AND democracy and intellectual freedom.

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