Tobacco Facts.

Since its accession to the World Trade Organization, China’s lackluster efforts to protect intellectual property rights have attracted sharp criticism. But with regard to tobacco, Beijing has waged a more aggressive war. All legal manufacture and distribution of cigarettes is state-owned, and in a nation of 400 million smokers, that’s big business. (Local governments are zealous about defending it, too: until this May, officials in Hubei were required to smoke a collective 230,000 packs of regional brands a year.) With cigarette sales accounting for nearly 8 percent of China’s budget in 2007, the state has a strong motive to keep its supply counterfeit-free.

Certainly the relevant authority, the State Tobacco Monopoly Administration, has spared no resources in trying. By 1995, long before multinational tobacco companies had seriously mobilized on the issue, the STMA had already dedicated $12 million to combating counterfeiters. The agency today fields 50,000 agents to fight the fakes, according to industry sources. Meanwhile, this year, according to a police officer in the Yunxiao region, the STMA has dispatched some 150 officers directly to the region for up to year-long postings.

Last year, officials say, the STMA raided 3,312 production sites throughout China, apprehending 7,128 people in the process and seizing 8.3 billion counterfeit cigarettes. The STMA also regularly holds public “destruction ceremonies” to demolish seized cigarette equipment, hoisting the machines up into the air by crane before dashing them onto concrete below.

“China devotes a huge amount to enforcement,” agrees Martin Dimitrov, a professor at Dartmouth College who has studied the issue. “The puzzle is that there seems to be little effect.”

It’s not that manufacturers don’t feel the pressure. One manufacturer reports that local counterfeiters are losing up to $300,000 a day in seized materials, and phone calls to a handful of different counterfeiters suggest a number are currently laying low, hesitant to expose themselves to new buyers.

But when it comes to Yunxiao’s factories, an old Chinese idiom seems particularly fitting: The mountains are high, and the emperor is far away. Yunxiao villagers, too, quote their own motto: “Any official can absolutely be bought within half a month.” In some cases, a gift of just $1,500 can buy a counterfeiter a license to operate and some official breathing room. Last year, 28 officials werereportedly detained in connection with cigarette counterfeiting on charges such as dereliction of duty, cover-ups, or actually participating in the trade.

From another perspective, the counterfeit industry is also a boon for local employment, which some officials are loath to suppress. “The question for authorities now, with the economic slowdown, is: Do you really want to shut these places down?” says Tim Trainer, who heads the Global Intellectual Property Strategy Center in Washington, D.C.

Last year, though China’s Administration of Industry and Commerce completed 13 percent more intellectual property raids than in 2007, the number of such cases transferred for criminal prosecution dropped 40 percent. This January, the Guangdong prosecutor’s office instructed prosecutors to “cautiously choose whether cases should be brought,” and with less serious criminal cases, “postpone enforcement where appropriate.” Likewise in December, the deputy minister of Shandong’s public security bureau (recently arrested for corruption) pressed police to avoid “aggravating” businesses’ production problems, for fear of “increas[ing] the likelihood of mass protests.”

No matter Beijing’s intentions, national priorities can only filter down so far. One police officer based just outside Yunxiao, who asks to remain anonymous, reports that his superiors deliberately downplay fighting those in the trade, and that an arrest is an anomaly. Most workers caught will “just pay some fines,” and even if arrested, their bosses will bribe or bail them out. As for catching production bosses, he says, it’s “impossible.” They’re too deeply insulated, he says, and too adept at hiding: some hold as many as 100 fake identity cards from China’s 22 different provinces.

Even if caught, the maximum sentence a cigarette counterfeiter can expect is just seven years. Three years is the minimum and more common sentence, says CAISP’s Tsang. To put someone in jail for even that long, authorities have to seize over $36,800 in contracts or goods, a threshold counterfeiters try to duck by scattering storage and production efforts.

“It’s impossible to root out this business,” says the police officer. “Even though there are crackdowns, I don’t see any long-term plan to eradicate the industry.” While the STMA pays any police division up to 15 percent of the retail price of any goods seized, those incentives, he explains, are useless in nabbing those involved. “When cars [with cigarettes] are stopped, the drivers run away, but the police don’t care, because they’ll get a reward anyway,” he says.

In the last five years, one multinational tobacco company has altered its tactics on the mainland, choosing to focus its efforts on seizing goods as they leave China, rather than on identifying production sites. “In an ideal world, we’d be able to go after them, but that became too hard,” says a tobacco industry official. There are simply too many—and besides, as he asks, “At the end of the day, are we really going to convince the provincial authorities in Fujian to crack down?”

Few in Yunxiao will talk openly about the village’s main industry. One knowledgeable resident, a 30-year-old woman and sometimes cigarette broker, tried to explain why the trade flourishes so well in her community. The counterfeiting industry, she told visitors, is more than just a business, it’s a brotherhood. Only those whose entire family tree can be traced to the area are permitted to work in production. Regional markets are divided by family, and once established, firmly respected — spurring others, in turn, to develop their own new markets. Unity is fierce, she says: that’s why Yunxiao is so well-protected.

Cigarette stalls like these are ubiquitous within China, where one third of the world’s smokers consume 2.2 trillion cigarettes a year. Te-Ping Chen/ICIJSurveillance is heavy in Yunxiao’s narrow side streets and in its hotels, and outsiders are frequently tailed. Though authorities offer rewards of up to several thousand dollars for information, few residents dare to take them, she says. “Even if you get the money, you won’t have any life left to enjoy it in afterwards.”

But when it comes to production, she adds, Yunxiao people are nothing less than business-minded “professionals.” She tells the story of one Shanghai chemistry professor, who manufacturers collectively enlisted five years ago to help them better mimic the popular Chinese cigarette brand Hongtashan. Counterfeiters paid him $15,000, and have rewarded him with royalties ever since. Similarly, in years past, she says, local counterfeiters have invited retired workers from the state-owned Shanghai Cigarette Factory — home to some of China’s top brands — to tour Yunxiao for a month, helping fine-tune local recipes.

As they battle with Beijing, Yunxiao’s manufacturers show no signs of backing down. Some have stepped up investment in new factories outside the area, including the cities of Pinghe and Zhangpu. Others are shifting production outside of China altogether, as far away as Vietnam and Burma. Meanwhile, overseas law enforcement facing the counterfeit influx is baffled by the trade: tracing a seized container to its producers, industry officials say. is “almost impossible,” given that the majority of company names used on accompanying records are also fake.

Yunxiao might someday change, but such a transition would take many years, says the broker. One manufacturer she knows invested $2.5 million to start another legitimate business elsewhere, but recently quit and returned — disappointed, she reports, because “the profits could never match counterfeit.”

Still, though, she hopes the industry will make a shift: “We locals hope we can work together to build up a real factory someday.”

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