China’s Communist leaders, hoping to join the World Trade Organization this year, need to appear serious about cracking down on counterfeits. Raids and orchestrated “destruction parties,” in which the seized imitation goods are steamrolled or burnt, regularly grace the front pages of the China Daily – China’s official state English language paper. But such publicity stunts barely scratch the surface of the problem.

Counterfeiting – estimated by Chinese officials to be a US$16 billion-a-year industry and costing foreign firms tens of billions of dollars annually in lost sales – is endemic. It is unclear how much of China’s manufacturing economy is dependant on fakes or trademark infringements, but estimates range between ten and 15 percent. Some local economies have come to be identified with the production of fakes of certain brands: Yunxiao in the southern province of Fujian is known as ‘Marlboro Country’ while the Kaihua district in Zhejiang province is synonymous with bogus Philips light bulbs. If the government were to seriously crack down it would decimate the economy.

The Beijing government is caught on the horns of a dilemma. To balance the economic benefits of cheap rip-offs with the growing need to protect both foreign and domestic brands and intellectual property. The problem is nowhere clearer than in the world of computer software. China’s government is keen to nurture a homegrown software industry – going so far as to launch its own Silicon Valley in northwest Beijing – but Chinese companies cannot profit from developing proprietary software with pirating as rampant as it currently is. This correspondent (strictly for the purposes of this story), acquired Microsoft Office 2000, Adobe Photoshop, Illustrator and Reader, and Internet design programs Dreamweaver and Fireworks. In the U.S., these programs would have totaled over US$2000; In Beijing it cost just seven renminbi or 80 cents per disk.

Rip-offs on the Chinese market hurt both domestic and foreign companies. Some foreign companies accept sales of a certain amount of counterfeit goods in China as the inevitable price of doing business in a developing country, and in China in particularly. Others are not so laid back.

Of growing concern to foreign firms is the increasing number of fakes being exported. Seventy-two percent of the counterfeit Beanie Babes seized in the United States were from China. American tourists in Beijing flock to the counterfeit markets – staggering back to their hotels hot-and-sweaty under the weight of bags full of pirated music CDs, Armani shirts, Hugo Boss leather jackets, and Rolex watches. At the ports of southern China, container loads of fakes depart right under the nose of customs officials. Nearly half the world’s 14 billion batteries are made in China; most of them fake versions of Panasonic, Gillette and other big brand names. In August last year, the Brazilian authorities shredded 45,000 pairs of fake Nike sneakers imported from China.

The country’s accession to the World Trade Organization – and the wave of foreign investment expected to follow – will bring even more counterfeiting. And with it, more IP work for law firms. As restrictions on trade and markets are eased, there will be an upswing in the production and sale of counterfeit goods – at least in the short term. The Chinese legal system is still in its infancy. Although China’s intellectual property laws are already essentially compliant with international agreements, including TRIPS (the GATT agreement on Trade Related aspects of Intellectual Property), anti-counterfeit enforcement remains weak. Local protectionism and low administrative penalties hinder enforcement.

Chinese law also places restrictions on what foreign law firms can do to prevent counterfeiting. Foreign law firms are banned from litigating and cannot file for trademark, patent or copyright protection, instead having to delegate the work to local law firms or semi-government trademark and patent agencies. International private investigation firms, operating to track down pirating, are forced to work with local Chinese enforcement agencies, to bust the counterfeiters. This relationship is not always good.

The relationship between the local law firm, trademark or enforcement agency doing the leg work and the international law firms that coordinate the IP strategy for their clients is fundamental to the success of defending a company’s brands. Big consumer product firms such as Coca-Cola and Proctor & Gamble – who have lots riding on brand protection – employ active in-house lawyers to coordinate work between local and international law firms.

Foreign law firms must focus on their clients’ overall IP strategies, making the most of their global experience. "Foreign firms are being forced up-market as local law firms get better," says Douglas Clark, a partner at Lovells, Hong Kong, who leads the IP group. As more Chinese lawyers get experience abroad international clients become attracted to them. "Ninety percent of our clients are foreign companies," says Tang Yongchung at King & Wood, a leading Beijing-based Chinese law practice. Jianyang Yu, a partner at Liu, Shen Associates another leading firm, counsels such clients as General Electric, Microsoft and Proctor & Gamble.

But some multinational corporations still have reservations about hiring Chinese law firms. According to one in-house counsel, finding a good local firm is like finding "a jade in the sand." Many companies believe that multinational law firms can better guarantee a certain standard of service.

Edward Young is the Beijing correspondent for the China Economic Quarterly, China's premier independent English-language economic and policy journal. He has written on a variety of topics including China's macro economy, the Internet, and China's intellectual property rights.