Reasons include lack of effective deterrents, loosely worded laws, lack of political will and industry's reluctance to confront the Chinese government, said other experts who spoke Monday at a roundtable organized by the Congressional-Executive Commission on China.
"In terms of size, scope and magnitude, counterfeiting in China is considered by many to be the most serious counterfeiting problem in world history," said Daniel C.K. Chow, professor at the Ohio State University Michael E. Moritz College of Law.
Chinese estimates, usually considered conservative, put counterfeit trade at $19 billion-$24 billion per year and 8 percent of its gross national product.
Analyzing the situation from the view of trademark violations, Chow said the problem was difficult to solve because the Chinese economy was dependent on the counterfeiting industry.
"It is no exaggeration to say that it supports the entire local economy and legitimate businesses such as restaurants nightclubs, warehouses, transportation companies, hotels," Chow said.
The roundtable was organized to understand the scope of the problem, analyze its sources, and assess strategies that would advance intellectual property protection in China.
Chow said local governments in China supported these counterfeiting industries.
"Many of these wholesale markets are established by local governments, specifically the administration's ministry of commerce," said Chow, who specializes in international trade law, business transactions, intellectual property, and legal issues concerning China.
"You shut down the trade in counterfeit goods, you shut down the local economy," he said.
Chow said some 15 percent of products in China were counterfeit, noting the direct financial loss sustained by a company was far less than the damage its trademark suffered. The losses are no less for the copyright industry that operates in a market with 90 percent piracy rates, which have hovered at that level for some time.
"China is a particular problem to us because the levels of piracy are the highest in the world," said Eric Smith, president of International Intellectual Property Alliance.
He said that with more than 90 percent piracy levels it was difficult for industry to make a profit. He added the problem was compounded because of a lack of market access to many of the copyright products such as films that China considers propaganda tools. These are then exclusively sold as pirated copies.
Smith blamed the lack of political will in China for the continuing problem.
Chow said the Chinese government did little to control the situation. According to annual statistics of Chinese State Administration of Industry and Commerce, of the 22,001 cases registered in 2000, there were 45 criminal prosecutions and the average fine was $794.
"With this kind of penalty structure there is simply no disincentive to continue in this business," Smith said.
He added the money involved was so high that without criminal enforcement and potential prison terms there was going to be no possibility of "getting a handle on this problem."
James Zimmerman, a lawyer who represents multinational companies on various issues and who is on the panel of arbitrators for the International Court of Arbitration disagreed about the extent of the problem. He said there had been significant progress since China joined the World Trade Organization but added "much, much, much more needs to be done."
He said the way Chinese law was written was an impediment to solving the issue, adding laws were too general, leaving much "wriggle room."
According to him, the problem lay in the lack of resources and poor coordination among various enforcement agencies.
"We have been told by the trademark staff that they are understaffed and they are still dealing with cases filed in 1999," he said explaining how rare it was for Chinese agencies to complain in this way.
John Frisbie, president of the U.S. China Business Council, said intellectual property needed to be tackled urgently.
"They need to improve their regulatory framework," he said.
However, Zimmerman said part of the blame fell on the businesses because they were afraid to confront the Chinese government.
He also suggested that if the Chinese realized the loss of tax revenues from counterfeit goods, they might take greater steps to promote enforcement. Giving the example of the crackdown on pornography by the Chinese government, Smith argued political will rather than civil litigation be used to resolve the problem. He said he would like to see the Chinese deal with the piracy problem with similar zeal.
Chow said he had doubts about a clear solution, citing the significant increase in piracy in 2004 after China enforced its WTO commitment and eliminated the export monopoly that was enjoyed by state trading companies. Before 2004, he said, a counterfeiter had to get the cooperation of the state trading companies, but now any counterfeiter can export because there are no penalties specifically targeting counterfeit exports.
Chow said China was unique because despite such high levels of piracy and counterfeiting, the economy was soaring. He said this went against conventional wisdom and added China's accelerated growth was disproving the widely held belief about the necessity of legitimate businesses for a healthy economy.