Powell 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.
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 competitors.
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.
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Mar 16, 2004
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