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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.  World Peace

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 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.

(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)

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