After serving for at least two decades as the world’s favourite manufacturer of cheap goods, China is struggling to upgrade itself into an “innovation society”. But innovation does not always lead to profits. In a country where low prices matter more to consumers than brands or quality, counterfeiting runs rampant and enforcement of intellectual property rights is toothless.

Some enterprising counterfeiters in China refill brand-name perfume or liquor bottles. Others make extra, unauthorised batches of products at contract manufacturing facilities and sell them on the side. China has pledged to enforce its loose piracy laws more aggressively and it is cracking down ahead of the 2008 Olympics. But in a complaint filed with the World Trade Organisation (and backed by Japan, the European Union, Mexico and Australia), the US says China’s inaction costs its businesses billions of dollars a year.