fires opening salvo in trade war with China
By Peter Morris
The administration of US President George W Bush has just ratcheted up the
pressure on what it calls discriminatory Chinese trade practices that favor
China's burgeoning high-tech industry. Secretary of State Colin L Powell,
Commerce Secretary Don Evans and US Trade Representative Robert Zoellick spelled
out their concerns in a letter addressed to Chinese Vice Premiers Wu Yi and Zeng
Peiyan, urging Beijing to repeal a proposed encryption standard for
wireless-fidelity (wi-fi) communications products set to take effect on June 1.
The letter said the new security standard violates World Trade Organization
rules under which governments are not allowed to treat foreign firms differently
from domestic companies. China has asked for more time to study the issue, but
Washington is ready to file a WTO complaint if Beijing does not take steps to
address US concerns, according to a New York Times report.
The report cited a US trade official - who asked to remain anonymous - as saying
that Washington's goal was to have the dispute settled before mid-April, when Wu
Yi is scheduled to attend a meeting of the US-China Joint Commission on Commerce
and Trade in Washington.
Tax break will also top agenda
The Bush administration, never slow to pick up on the concerns of corporate
America, has also pressured Beijing to reconsider a law giving Chinese chip
makers unfair tax advantages. China currently levies a 17 percent value-added
tax on imported semiconductors, while domestic producers qualify for tax rebates
of as much as 14 percent off of the value-added tax. Americans claim that in an
industry where profit margins are thin and money is made by selling in high
volumes, this difference amounts to big savings for Chinese companies, giving
them a leg up on foreign competitors.
The issue is expected to figure prominently in the US-China trade talks next
month, and Commerce Secretary Evans has argued that Beijing's tax policies and
its drive to promote Chinese standards are unacceptable forms of protectionism.
It is no secret that China intends to be the world's largest chip producer
within the next few years. Indeed, it may have no choice; China is the world's
fastest-growing chip market and, according to McKinsey & Co, this market is
expected to reach US$30 billion by 2006. Nevertheless, US firms admit that China
does not pose a significant threat in the short term, as the Middle Kingdom
still imports more than 80 percent of its chips because of insufficient domestic
production and high demand.
But microchip-industry executives in the United States say China could be a
serious threat in the near future, producing a global glut and causing prices to
drop. They fear China will draw capital, talent and cutting-edge research and
development away from US firms.
Ancient Chinese campaign gets a new look
China's determination to establish its own standards for high-tech products is
reminiscent of campaigns launched in ancient China by Qin Shihuang - the
country's first emperor - to standardize systems of measurement. Beijing has
been pouring massive amounts of capital and resources into developing new
technology standards in recent years, and has even created a government organ to
promote Chinese standards. The goal is to free the country from being beholden
to foreign products and their accompanying royalty payments.
The promise of hefty profits and the ability to have more control over the
market for wi-fi wireless-technology products led Beijing to announce last May
that foreign makers of computers and microprocessors intending to sell wi-fi
systems in China would have to use a different (ie Chinese) standard for
encrypting signals and work closely with Chinese computer makers to produce
goods for the lucrative Chinese domestic market. Chinese officials had
originally set December 1, 2003, as the deadline, but late last year extended it
to June 1.
The Chinese regulation has sparked outrage among foreign technology companies,
some of which have decided either not to comply or to stall for time. Last
Thursday, the New York Times reported that Intel would not be able to meet the
June 1 deadline, saying the Chinese standard presented substantial technical
challenges that would prevent it from meeting Beijing's deadline.
The world's leading chip maker has already informed its Chinese customers they
might have to look elsewhere for microprocessors and Centrino chips if they want
to keep selling wireless products in China after that date. All the same, China
is still one of Intel's largest markets, and "Intel Inside"
advertisements can be seen in all of China's big cities. And despite Intel's
opposition to Beijing's trade policies, the company plans to follow through with
its $375 million investment in a new test and assembly plant in Chengdu, its
second in China.
Intel galvanizes corporate America
Bolstered by political support from Washington and Intel's decision to take a
hard line on issue, the United States' largest high-tech companies have joined
hands in an effort to pressure China to change course. Broadcom, another US
supplier of wireless chip sets for personal computers (PCs) sold in China, also
said last week that it would not make the deadline. Based in Irvine, California,
Broadcom is the world's leading provider of integrated circuits for broadband
communications and was one of the highest of the high-flying tech stocks during
the bubble years.
The fear is that conforming to Chinese wi-fi standards will embolden China to
demand foreign companies adhere to a string of future standards and eventually
be able to pick and choose which companies are successful in selling their wares
to China's vast middle class.
To be fair, however, analysts point out that in the past, the US has been the
one setting the technological standards by virtue of its role as the world's
sole superpower. But now that China has emerged as a global power with the
advantage of housing 1.3 billion potential consumers, its leaders contend that
Chinese standards should rightly take precedence over foreign standards,
especially if foreigners want to sell products in China - now the second-largest
market for PCs behind the United States and the world's No 1 market for cellular
phones. Chinese officials are also quick to point out that wi-fi standards are a
matter of national security because wireless products have the potential to be
tracked via satellite.
On the other hand, China's push on product standards threatens to fragment the
global electronics market, which has made strides recently in terms of realizing
unified global high-tech standards. Not to the mention the fact that many
companies stand to lose out financially because they will be forced to rejig
their products and development strategies. WorldPeace.
In addition, foreign companies are worried about losing valuable intellectual
property if they are forced to work with local partners to sell chips,
computers, scanners and other wireless products in China. Several US executives
have refused to sign co-production agreements because they would be required to
turn over sensitive technology, including chip designs, to potential Chinese
Powell and Co's letter promises to be the opening salvo in a trade war carrying
heavy political overtones - particularly as this year's US presidential election
will focus attention on the economy, outsourcing and allegedly unfair Chinese
trade practices. For their part, Chinese leaders have been reluctant to pick a
fight with the US because they need foreign investment, and insist that trade
tensions can be resolved through negotiations. But this trade skirmish is more
like a major battle, affecting not only America's business community, but also
Washington, Capitol Hill, and Main Street.
(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact email@example.com
for information on our sales and syndication policies.)
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