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Ukraine: U.S. Stands By Its Sanctions Over Piracy

Ukrainian President Leonid Kuchma says he expects his nation will be able to join the World Trade Organization next year and become a member of the European Union by 2011. But those hopes may be unrealistic as long as rampant piracy of entertainment products and computer software continues in Ukraine. In the meantime, the U.S. has moved to protect its own intellectual property by putting restrictions on imports from Ukraine that could cost that country tens of millions of dollars.

Washington, 14 February 2002 (RFE/RL) -- U.S. government officials told Congress this week they had no choice but to impose harsh trade sanctions on Ukraine because of what they called its weak laws against the counterfeiting of entertainment and computer software titles.

American economists interviewed by RFE/RL say the high tariffs put on Ukrainian imports are a valid and even essential way to protect American intellectual property. Otherwise, they say, Ukrainian counterfeiters will continue to steal software, music, and films without credible enforcement by Kyiv.

Ukrainian piracy of music compact discs alone costs the international music industry between $180 million and $250 million each year, according to industry estimates. Software manufacturers estimate their losses in the billions of dollars.

If this counterfeiting persists, Ukraine may not meet its goal of joining the World Trade Organization (WTO) or the European Union anytime soon. Ukrainian President Leonid Kuchma says he expects his country will join the WTO next year and the EU by 2011.

On 17 January, after years of negotiations with the U.S. government, the Verkhovna Rada, Ukraine's parliament, passed antipiracy legislation that Kuchma signed into law. But the measure falls short of American demands because it allows producers of CDs and other intellectual property to manufacture the material first, then apply for licenses that would make the products legitimate. The U.S. says this creates the potential to manufacture more products than are licensed, paving the way for further counterfeiting.

On 23 January, the U.S. government imposed 100 percent import tariffs on Ukrainian steel and 23 other goods that Washington says will cost Ukraine about $75 million in lost trade a year. Kyiv estimates the loss at $470 million.

The office of the U.S. Trade Representative rates countries that it says are violators of intellectual property rights in three categories: priority foreign countries, which it says are the worst violators; priority watch list countries, which it says are those that should be investigated; and watch list countries, whose violations are of concern but not flagrant. The countries are ranked not only by how much piracy occurs within their borders, but on the strictness of their law against counterfeiting.

Ukraine is the only country to be ranked as a priority -- the worst violator. Sixteen countries -- including Hungary and Russia -- are in the priority watch list group. And 32 countries are in the watch list group. They include Armenia, Azerbaijan, Belarus, Kazakhstan, Latvia, Lithuania, Poland, Romania, Slovakia, Turkmenistan, and Uzbekistan.

On 12 February, Peter Allgeier, the deputy U.S. trade representative, testified during a hearing of the Senate Foreign Relations Committee that Washington tries to work with other countries where the counterfeiting of intellectual property is widespread.

For example, Allgeier said, America helps these countries draft legislation to effectively outlaw such piracy. This is especially important for emerging democracies where -- a decade ago -- there was no such thing as private property.

But this did not work with Ukraine, according to another U.S. official who testified. He is Allan Larson, the undersecretary of state for economic, business, and agricultural affairs. Larson said the U.S. worked with Ukrainian government leaders on just such legislation, and for a while, he said, it appeared that Kyiv would adopt a strong antipiracy law.

But the Rada passed the less-effective measure, and Larson said the U.S. had no choice but to impose the import restrictions.

"We worked very hard, for example, on Ukraine. I pushed them several times, talked with their trade ministers, their finance ministers, and we thought for a time that we had begun to turn around this problem of piracy. But they (Ukrainian officials) didn't persist in turning around, and so we were quick to support the policy that Ambassador Allgeier discussed, which was really taking back a significant amount of trade benefits."

One reason that piracy flourishes in Ukraine is easy to understand. A legitimately produced music CD in Kyiv costs about $14 more than a counterfeit version. The difference represents about half the average monthly salary for most workers in Ukraine.

Ukrainians who support the legislation that the U.S. says is too weak say that if tighter restrictions are imposed now, their country will be denied its rightful share of a future legitimate market once Ukraine's economy grows enough to create demand for properly licensed CDs.

Gerald O'Driscoll specializes in international economics and trade at the Heritage Foundation, a private research institute in Washington. O'Driscoll told RFE/RL that Ukraine's apparent inability to break free from its socialist past, when private property was outlawed, may be influencing the U.S. government's view of Kyiv's capacity to enforce antipiracy laws.

"I think it gets down to whether you believe that Ukraine has the legal and political infrastructure to enforce a law the way it's written. That is, will they prevent this [rampant piracy] from happening? And I guess that what the U.S. government is saying is, they're not so sure."

O'Driscoll says he understands the desire for Ukrainians to have access to music and software at prices they can afford. But he says it is the responsibility of their government to act as many of their neighbors have since the demise of communism in Eastern Europe. That is, he says, Kyiv must move the country more quickly toward a market economy where legitimate goods are not prohibitively expensive.

"The ultimate solution to this is that countries grow, and as they become wealthier, the political support for enforcing intellectual property rights becomes stronger."

Until then, O'Driscoll says, Ukrainians will have to live with either high prices for legitimate music and software, or take their chances with counterfeit goods.

Claude Barfield is an analyst of international trade at the Carnegie Endowment for International Peace, another Washington think tank. He says it would be wrong for the U.S. and other Western nations to ask less of the Ukrainian government when other, poorer countries are faithfully following stricter rules.

"It's not something that's aimed at the Ukrainian. The thing to keep in mind is that this is a worldwide policy, and you can find countries that have lower per capita incomes than in Ukraine where this is being enforced."

Barfield also says he is not comfortable with the idea that somehow Ukrainians are not yet used to the idea of private property rights. He says there are plenty of entrepreneurs in Ukraine making money, and plenty of racketeers who steal from foreign companies, Ukrainian consumers, and even each other.

Barfield says that as long as that economic culture flourishes, Ukraine will remain economically immature.

"Living up to your intellectual property obligations is part of a package, and it betokens a frame of mind of the government that it wants to pull itself into the 21st century."

The focus of U.S. attention may be on Ukraine, but international counterfeiting is flourishing in Russia, too. Piracy operations also exist in Belarus and Bulgaria and -- to a lesser extent -- in the Czech Republic and Poland. And Lithuania is said to be a center for distributing illegal music and software.

Both Allgeier and Larson told the U.S. Senate committee that Bulgaria has taken credible steps to stop counterfeiting of intellectual property. But they expressed concern that piracy may be growing in Russia, which hopes to join the WTO. It has been negotiating to join the 144-nation trade group since June 1993.

Another witness before the committee was Hilary Rosen, the president of the Recording Industry Association of America, the private industry group that has been fighting the counterfeiting of music. She urged the senators to work with the administration of President George W. Bush to oppose Russia's admission to the WTO unless it takes a strong stand against piracy within its borders.