A DARK thundercloud is gathering over US-Chinese relations as a long-running dispute about the protection of intellectual property rights threatens to escalate into a full trade war. But there is a silver lining to this latest controversy which justifies the dangerous brinkmanship, companies and trade officials say. Although a trade war would cause billions of dollars of damage to trade between the US and China, not to mention hurting the economies of Hong Kong, Taiwan, South Korea, Vietnam and other nations, the recent focus on piracy has led many companies to rethink their business strategy and forced governments to beef up protection of copyrights. 'In the unfortunate event that the trade retaliation materialises, of course in terms of immediate impact jobs may be lost,' said Regina Ip, Deputy Secretary for Trade and Industry in Hong Kong. 'But over the long term, if the protection of intellectual property rights could result in more trade and technology transfer, that would be to the benefit of everyone.' The Hong Kong government has predicted that a trade war would cost the territory $3.7 billion in re-exports. The US has imposed a February 26 deadline on all talks, after which 100 per cent tariffs on US$1.08 billion worth of Chinese imports would take effect, a move which would lead to powerful retaliation by the Chinese. Last-ditch negotiations are expected to begin next week, with US Trade Representative Mickey Kantor announcing that a delegation of US officials will arrive on Monday to resume talks. Of course, no one welcomes the prospect of a trade war, but more and more multinationals are insisting on better protection of intellectual property as a prerequisite to deepening their investments. American music, film, publishing and computer software companies, have estimated annual losses to piracy on the mainland at about US$1 billion. The Business Software Alliance, which represents leading computer software companies, believes that software piracy in China exceeds 98 per cent. 'The bottom line is that anyone doing business in China has nothing left to lose. We have to fight for intellectual property rights, and China's own industries are beginning to feel that way too,' said Stephanie Mitchell, vice-president of the alliance. Fears of a trade war have led some American and Hong Kong companies to prudently consider diversifying their interests after a bout of euphoria over China's investment potential in 1992 and 1993 encouraged foreign companies to sign contracts worth more than US$100 billion. Now some manufacturers say they are preparing to shift some production out of China to other Asian nations to avoid being victimised by volatile US-China relations. 'We're not letting all our eggs be in the same basket. If we have to we could shift production to Indonesia - of course not overnight,' said Alain Ronc, president of Nashville, Tennessee-based Mitre Sports International, a leading producer of football equipment. Converse Inc, which assembles 30 per cent of its sneakers in China, said it plans to shift some, if not all, of that work to Indonesia, Thailand and Taiwan if the tariffs take effect. Though the Chinese may still meet US demands before the tariffs take effect, 'we have to pursue these alternatives', Converse chief executive Gilbert Ford said. The international focus on rampant mainland piracy has also led both China and Hong Kong to step up efforts to enforce laws protecting intellectual property. Although China has expressed its 'deep regret and strong resentment' at the US decision to announce sanctions on February 4, the government has also recently launched a crackdown aimed at bringing copyright infringement under control in six months. Shen Rengan, deputy director-general of the China's National Copyright Administration, said compact disc factories which did not register with the government by the end of January would be investigated and shut down. New legislation currently under review would tighten up existing anti-piracy laws, while a blitz of education campaigns would raise awareness of the seriousness of copyright infringements among judges, Customs officials and ordinary citizens. In Hong Kong, Ms Ip of the Trade and Industry Department announced this week that a new team of 23 Customs officers would be assigned to tackle piracy in the territories later this year. Her department is also in the process of drafting amendments to the copyright ordinance to stiffen penalties for hawking and producing illegal goods, which she hoped would be passed by the Legislative Council this summer. 'We share the same concerns as the US and we likewise condemn the violation of intellectual property rights,' Ms Ip said. The trouble is that the tough US stance on intellectual property rights protection in China, which enjoys bipartisan Congressional support and the backing of much of the international business community, has pushed the mainland government into a corner. Conceding to US demands that China crack down on piracy and close 29 compact disc factories which American investigators say are responsible for producing 75 million illegal copies a year would amount to a loss of face for mainland officials. The irony is that despite the war of words over copyright protection, the actual impact of even a real trade war is expected to be minimal because both sides have carefully applied sanctions to avoid damaging their own industries. 'There are countless markets abroad for Chinese products,' China's Foreign Trade Minister Wu Yi said this week when asked about whether Chinese exporters would suffer under US sanctions. 'Other countries are happier about this,' she said. Ms Ip said the US decision to remove cordless handset telephones, electric cables and wires, and certain kinds of ceramics and furniture from the list of sanctioned products meant that the potential impact of a trade war on Hong Kong would be lessened. The Hong Kong stock market has also largely dismissed the possibility of a trade war for now. The Hang Seng Index broke through 8,000 points on Tuesday as investor confidence grew that American and Chinese negotiators would be able to reach an agreement when they resume talks in Beijing next Tuesday. 'Everyone seems to believe that the issue will be resolved eventually,' said Gilbert Choy, an economist with W I Carr. The US initially targeted US$2.8 billion worth of Chinese goods, but ultimately slashed that list to US$1.01 billion when it decided to impose sanctions last Saturday. The US hit-list includes bicycles, gift stationery, plastic items and sporting goods. The Chinese list slaps tariffs on American cigarettes, alcohol, cassettes and computer games, and suspends talks with US car manufacturers on large vehicle joint ventures. Laurence Brahm, director of the consulting firm Naga Group, said the intellectual property rights dispute boiled down to a negotiating tool for righting the US's US$30 billion trade deficit with China. 'Half the piracy problem is awareness and half the problem is education. But the fact that the issue is highlighted so strongly with regard to China as opposed to other countries in the region is probably accentuated by the recent trade deficit,' Mr Brahm said. 'At the diplomatic level it gains enough publicity and enough momentum to become a major issue in the minds of foreign investors and a major cause for hesitation in investing in China. But investing in any market you'll have the same problems.'