Until 1999, Hong Kong appeared perennially - and with good reason - on the US Trade Representative's Watch List of countries and territories with intellectual property protection and enforcement problems. Hong Kong's reputation at the time was such that the counterfeit Rolex watch had become one of Hong Kong's unofficial symbols.

US companies were losing hundreds of millions of dollars to Hong Kong's optical disc pirates, who were producing and selling huge numbers of illicit CDs, CD-ROMs, and VCDs virtually unchecked. Voluminous quantities of counterfeit name-brand handbags and apparel were also openly marketed in the stores and stalls of Mongkok, Wanchai, and other shopping districts.

But in the late 1990s, the Hong Kong Government decided to make the protection of intellectual property rights a priority, and in a remarkably short period of time, the Government achieved a striking turnaround in the situation here.

The Legislative Council passed new copyright and trademark laws that empowered customs authorities to go after makers, distributors, and end-users of infringing products. Hong Kong Customs formed dedicated IP protection units to gather intelligence and conduct raids and began meeting regularly with affected industries to exchange information. The Government launched educational campaigns that raised awareness of and respect for intellectual property rights. Arrest numbers increased dramatically and the courts began handing down stiffer penalties for violators.

The Government's vigorous efforts have yielded impressive results. Today, almost all of Hong Kong's underground optical disc production lines have been closed down, forcing today's disc pirates to switch to smaller-scale operations using computers or CD-burners.

In 1998, there were more than a thousand retail outlets for pirated optical media in Hong Kong; the Customs & Excise Department estimates that the number has now dropped to less than 100. And the average amount of pirated product found in those outlets has plummeted from 5,000 discs to 300 over the same period.

However, the problem of optical disc piracy has not been eliminated so Hong Kong must remain vigilant. But Hong Kong has earned credit for making such great strides in such a short timeframe. Against this backdrop, it should come as no surprise that Hong Kong has been absent from USTR's IPR Watch List since 1999.

Hong Kong's decision to get serious about IPR enforcement was a welcome development. The Hong Kong Government's actions reflected more than anything else a sober calculation of Hong Kong's own best interests. At the same time, it reflected a responsiveness to representations from key trading partners, including the United States, to come to grips with IPR problems, as well as a determination to abide by Hong Kong's international commitments, including a WTO obligation to provide criminal procedures and penalties sufficient to deter trademark counterfeiting and copyright piracy on a commercial scale.

But the most important factor was that the Hong Kong people benefited as the government made IPR protection a priority. With the shift from a manufacturing-based economy to a services-based economy, Hong Kong had to move up the value-added chain and wanted to see its creative industries flourish. For that to happen, film-makers, software developers, musicians, inventors, and name-brand designers had to feel confident that they were the ones benefiting from their own hard work - not pirates, counterfeiters, and copycats.

There is far more such confidence now in Hong Kong than there was five years ago. Indeed, a recent report by Asia Intelligence ranked Hong Kong fourth in Asia on the overall protection of IPR among Asian economies, behind only Singapore, Japan, and Korea.

However, there are still crucial gaps in Hong Kong's IPR regime that leave no room for complacency. In the area of end-use piracy, for example, Hong Kong is poised to take a step backward. Since the promulgation of the Intellectual Property Ordinance in 2001, the work-related possession and use of pirated copyright materials has been a criminal offense here. Unfortunately, public controversy over this law prompted the government to suspend the provisions related to printed works. A draft bill now pending with LegCo would make that suspension permanent and weaken protections for other copyrighted works as well.

If end-use piracy were not a big problem in Hong Kong, there would be little reason to oppose a modest shift toward lighter penalties. Unfortunately, that is not yet the case. In the business software sector, for example, a recent industry-sponsored study reported that Hong Kong's business software piracy rate (the amount of business software installed without a license) rose from 53 per cent in 2001 to 56 per cent in 2002, putting it just over the regional average and far above the average for developed economies (the U.S. rate for 2002 was 23 per cent).

This level of piracy means big losses for software companies. To date, Hong Kong has not had success in prosecuting end-use pirates of software programs. Despite this, the Government is now proposing to weaken protections against end-use piracy. As currently drafted, the Copyright Amendment 2003 bill would, among other things, narrow the definition of the term "end-use piracy" and exempt employees who knowingly possess and use pirated software from criminal liability.

We believe Hong Kong should be moving in just the opposite direction: we would like to see Hong Kong redouble its efforts to prosecute and deter end-use piracy, and if this cannot be accomplished under the current law, our hope would be to see the government introduce provisions to make it easier, not tougher, to convict pirates.

Another problem relates to patents for pharmaceutical products. In most advanced countries, generic drug makers are not permitted to sell their generic version of a drug if the original is still under patent. In Hong Kong, however, the health authorities do not require generic manufacturers to provide any information regarding the patent status of the drugs they seek to register and routinely grant marketing permission for patent-infringing products, so long as they are safe and efficacious.

We understand that the Health Department is planning to change the wording of its registration certificates to clarify that these do not exempt the applicants from the requirements of Hong Kong's Patents Ordinance. This, however, still leaves Hong Kong well behind the curve in protecting the manufacturers of original pharmaceutical products from copycats. Given Hong Kong's recent experience with SARS, we would think the Government would actively seek to provide greater incentives for those working on new cures for deadly diseases. Establishing a patent link in the drug registration process is one way to advance toward this globally beneficial objective.

Just as we have witnessed tremendous improvement in Hong Kong's fight against optical disc pirates, I am very optimistic we will see progress on end-use piracy, patent protection, and other IPR fronts as well. The U.S. Consulate, like affected industry groups, has excellent working relations with Hong Kong Government officials involved in IPR matters. Even when we have disagreed about the details, we have found that local officials to be uniformly dedicated to enhancing the integrity of Hong Kong's IPR regime. And this commitment starts at the very top. The Chief Executive and his ministerial team are all forceful advocates of strong IPR protection. We agree with the Hong Kong Government that to foster world-class creative industries in Hong Kong it will be important to consolidate the impressive gains made to date and also move vigorously to address remaining vulnerabilities and new problems that arise due to rapidly changing technologies and market conditions. By doing this, Hong Kong will give the creative industries their best possible chance to flourish in the 21st century economy, to its benefit and to the benefit of U.S. firms doing business in the Hong Kong SAR.