Faking It

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?