UCA an elephant in the room that needs addressing

By Michael Mudd*

December 12, 2011

“There is an opportunity for Vietnam to increase exports to the US – to seize this opportunity and encourage companies to make sure they are in compliance with the UCA”

Usually when a law has a title like ‘The Unfair Competition Act’, (UCA) most exporters from Vietnam are uncomfortable. When that comes from the United States, a major trading partner, they shudder.

On April 4, 2011, the Washington State legislature passed a bill making it a violation of the state’s unfair competition laws for any business to sell products in Washington “while using stolen or misappropriated information technology in its business operations.”

Although this is not a US Federal law, the UCA does matter, simply because of the fact that Seattle is a major port of entry in Washington State for goods from Asia. Seattle ranks as the seventh largest US port by trade volume, it ranks second for goods imported from Asia and therefore this law will apply to many imports from Vietnam.

Even if the goods are imported into the US via another state other Washington, they may still find their way into Washington State and thus be subject to the law. In addition, a similar law has been adopted in Louisiana and other states may be considering similar laws. This may portend a global trend for greater compliance with Intellectual Property (IP) enforcement by other major importers such as the EU.

Four of the top 10 trading partners of the US are in Asia, all four are from North Asia. Of these China has grown over the last 30 years to be the largest by far, and ASEAN is the US’ fourth largest trading partner in aggregate with over $150 billion in two way trade, in ASEAN’s favour. But this pales to the $456 billion in two way trade with China, vastly in favour of China by some $365 billion.

Vietnam’s export value to the US was some $18.6 billion (in 2010) with a balance of trade $11.2 billion in Vietnam’s favour, US trade is clearly beneficial to Vietnam. Washington State is often referred to as the most trade dependent of all the US states, this is why the UCA matters.

So is this law really negative for the region? Perhaps not, a better way to look at it is to look at what the law is intended to achieve and then examine any competitive opportunities, especially in relation to the giant in the north, China. Although US exports to China are up year-on-year for the first three months of 2011, so are imports, so the imbalance remains almost the same.

Right now inflation is skyrocketing in China, this is causing companies, such as the US-based luxury brand Coach, to reassess its manufacturing operations in China. They are actively looking at Vietnam, the Philippines and Indonesia according to a Financial Times report in early May. Labour unrest and 20 per cent+ salary increases are becoming more common in China.

Foxconn, the contract manufacturer for Apples popular iPhone and iPad, amongst others, has seen its wage increase by a third in 2010 alone. Another Pearl River Delta factory that exports 90 per cent of its output to the US has seen its wage bill increase twice in 2010 – by 25 per cent each time. These are just some factors as to why for an increasing number of exporters, China’s role as the ‘factory of the world’, is being reexamined.

There are other factors, and for exports to the US – China’s largest single market – the UCA is now one of them. The intention is clear; level the playing field so that all companies that are using IT software in their production or back office processes pay for it, as they would any other raw materials or machines used.

According to a recent report from the research firm IDC, the use of illegal software cost the copyright owners some $59 billion in 2010. For commercial or business software, the value of illegal software was interestingly highest in the US, but second was China at $7.78 billion.

It should be noted that Japan, Germany, the UK and Brazil all rank higher in value than most Southeast Asian countries, in terms of unpaid for or copied software. In Vietnam the report cites the figure at some $412 million, with percentages dropping 2 per cent over 2009, but still at 83 per cent there is plenty of room for improvement.

Although the law does not explicitly target any particular country, given the trade numbers, it will naturally mean that imports will be looked at closer by Washington State authorities for compliance from major trading partners that are known or suspected of having used unpaid commercial software in the process of an exported product.

It could be argued, based on the IDC study that a greater proportion of these exports are not in compliance with the UCA, which gives a clear opportunity for exporters from Vietnam that are in compliance.

With “non-UCA compliant” imports being higher from China on an absolute dollar basis, this gives exporting companies a significant incentive to seek independent certification of their software assets by working within the UCA, by satisfying their customers concerns and gaining a competitive advantage. Forward thinking business organisations may also actively participate in the certification process.

This is perhaps where there is an opportunity for Vietnam to increase exports to the US – to seize this opportunity and encourage companies to make sure they are in compliance with the UCA. Indeed, this should be addressed as a matter of some urgency to develop global standards and certification, similar for example to what has been done in the field of safety and environmental sustainability.

Vietnam’s knit and woven apparel industry was the largest export sector at $5.8 billion (in 2010) to the US. Imagine the benefit to a medium-sized Vietnamese woven apparel company for example, being able to prove – through certification – to his customers in the US that they can reduce their compliance risk! This is in fact already done by ensuring the products comply with certifications.

The exporter could also certify that their customers will not have any risk of costly litigation – a clear advantage from the customer’s perspective – who are only too aware of the cost of a lawsuit in the US. Governments, industry associations and business chambers therefore have a direct interest in ensuring their members are aware of this law – and what they can do about it – as its effect goes beyond just the borders of Washington State and the Port of Seattle.

(*) Mudd is the senior partner of Asia Policy Partners, a Hong Kong-based technology consultancy firm specialising in trade related business. He has represented SMEs at APEC SME Working Group events for over five years with the US delegation. He is also the representative of the Open Computing Alliance in the Asia-Pacific region. He may be contacted at mmudd@asiapolicypartners.com.