E-COMMERCE: Washington, Beijing Send Strong Signal to Alibaba on Fakes

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Bottom line: The recent case involving criticism of Alibaba by Washington and Beijing over piracy should form a template for how the 2 governments can collaborate on commercial issues where they have common interests.

US warns Alibaba over fake goods

Washington and Beijing showed a rare sign of collaboration on commercial issues last week when the US sternly rebuked e-commerce giant Alibaba (NYSE: BABA) for widespread trafficking of pirated goods on its websites, reinforcing a similar message delivered by China at the start of this year. While it’s doubtful the US Trade Representative’s (USTR) office and China’s State Administration for Industry and Commerce (SAIC) consulted each other in their separate actions, the parallel moves showed just how effective the 2 governments can be when they work together in some of the many areas where their interests overlap.

That contrasts sharply with a more clashing style on many other issues like high-tech hardware security and new energy products, where both sides have similarly common interests but more often take actions that result in trade wars and angry verbal exchanges.

The 2 sides should take advantage of this new common ground in the Alibaba case to establish formal communications on the piracy issue, as part of a broader effort to tackle the problem in a more holistic way. They could then use the case as a starting point to revive the stalled process of improving broader cooperation on the many specific commercial issues where both sides have similar goals.

Combating piracy has been one of Washington’s biggest priorities over the last 2 decades in its trade relations with developing countries. The issue has also climbed to the top of Beijing’s agenda over the last decade, as it realizes the importance of protecting intellectual property and trademark rights to China’s sustained economic development.

As part of its bid to tackle the problem, the SAIC conducted an investigation into piracy in China’s thriving e-commerce sector, which has produced homegrown titans like Alibaba and JD.com (Nasdaq: JD) and attracted global names like Amazon (Nasdaq: AMZN) and Wal-Mart (NYSE: WMT). The agency’s own survey revealed widespread trafficking in fake goods on most of China’s homegrown sites, led by a piracy rate of nearly two-thirds on Alibaba’s popular Taobao C2C marketplace.

Release of that report early this year sparked a heated exchange of words between the SAIC and Alibaba, which questioned the government’s methodology and accuracy of the results. But now Washington has put its own clout behind the Beijing findings by issuing a stern warning to Alibaba in its annual “Notorious Markets” report on online and offline piracy around the world.

Lobbying Success

Alibaba was removed from the USTR’s list in 2012 after a strong lobbying effort, and some trade groups were pushing for its return this year in light of the Beijing report’s findings and their own dissatisfaction with the company’s anti-piracy efforts. While the USTR didn’t put Alibaba back on the list, it took the unusual step of including a lengthy discussion of its concerns about the case in the report’s introduction.

That discussion included specific mention of the SAIC’s report, and also noted that Alibaba had appeared in 3 of the top 10 cases in the “Sword Net Action Campaign” conducted by China’s National Copyright Administration. That section of the “Notorious Markets” report concluded by noting the USTR’s concerns, based on complaints by some copyright holders, that anti-piracy measures in Alibaba’s system may be too slow, difficult to use and lacking in transparency.

The report, combined with the earlier one from the SAIC, sent a clear and consistent signal to a sector-leader like Alibaba, acting as a unified warning to the entire industry from both the US and China.

The 2 sides sent a similar signal in 2013 in a case involving the now-defunct New York-listed financial services company Longtop Financial. In that instance, the US securities regulator initially requested documents from Longtop’s China-based auditor as part of a fraud investigation, but was denied access due to the auditor’s concerns over jurisdiction.

In the end the US Securities and Exchange Commission (SEC) signed a landmark deal with the China Securities Regulatory Commission (CSRC) formally facilitating exchange of such documents, marking a major advance in cross-border law enforcement.

Such cases of cooperation are a welcome development, but are still far outnumbered by a much larger volume of combative exchanges between Beijing and Washington on issues like subsidies for new energy products and security of high-tech equipment. The 2 sides have common interests in both of those areas and many others, and should use cases like the ones with Alibaba and Longtop as more constructive templates for future cooperation for addressing their shared concerns.

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