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China Poses Trade Worry as It Gains in Technology
By STEVE LOHR
Published: January 13, 2004
o high-technology companies, China has been a land of seemingly pure promise in recent years. Not only is it a fast-growing consumer market, but it has also become a low-cost workshop for assembling technology products for American, European and Japanese concerns.
But as China moves to expand its own technology industries, the government has taken unusual steps that are leading to new trade tensions with the United States, according to Silicon Valley executives, trade experts and United States officials. These measures include efforts to develop Chinese software standards for wireless computers, the introduction of exclusive technology formats for future generations of cellphones and DVD players - even tax policies that favor computer chips made in China and sold in the Chinese market.
"The issue here is what path will China take as it develops its technology industries," said Bruce P. Mehlman, a former technology policy official in the Bush administration who is the executive director of the Computer Systems Policy Project, an industry group. "Will it take a more global, market-based approach, or will it try to change the rules and disadvantage others?"
Concerns over China's strategies intensified last month when it announced that foreign computer and chip makers that want to sell certain kinds of wireless devices in the country would have to use Chinese encryption software and co-produce their goods with a designated list of Chinese companies.
Foreign computer makers, led by American companies, have protested the decision. In addition to their concern about the separate standard, foreign companies are worried about the possible loss of intellectual property if they are forced to work with Chinese companies that have the potential to become competitors.
The quarrel over technical standards compounds the friction over a longer-standing dispute on tax policies. The semiconductor industry is protesting a Chinese tax that is as much as 14 percent higher on imported computer chips than on those designed or manufactured in China, whether by domestic or foreign companies. The higher tax rate applies to chips used in products sold into the Chinese market but not to exported products.
The American chip industry contends that the tax is discriminatory and will force companies to do more advanced manufacturing and design work in China, skewing investment and trade patterns. It also argues that the differential tax on imports violates World Trade Organization rules that a nation's tax policies must not discriminate against imports. The industry is pressing the Bush administration to file a complaint with the W.T.O. by March unless China modifies its policy.
"This tax is one of the measures that is underpinning China's semiconductor strategy, but we think it violates the W.T.O. rules," said George M. Scalise, president of the Semiconductor Industry Association.
Chinese officials insist that they are firmly and irrevocably committed to developing an outward-looking market economy, particularly since China joined the W.T.O. in November 2001. "We want to introduce foreign competition to help release the potential of our people and our economy," said Tian Jun, counselor for economic affairs at the Chinese Embassy in Washington. "It's a pretty open market in China."
Mr. Tian said that American concerns on technology issues were mostly misunderstandings, matters that could be resolved with further discussions - or actions China had every right to take as a sovereign nation. "Chinese companies are working on their own technology and their own standards,'' he said, "but we are targeting the world market."
Some Chinese practices may not conform yet to world trading rules, he added, but those will eventually fall away as China moves toward openness. "We don't focus on short-term trade quarrels," Mr. Tian said.
So far, China has shown little interest in addressing the grievances of American technology companies, according to industry executives and government officials. It responded to complaints about the wireless encryption standard by giving companies until June to comply, and has offered no indication that it plans to back off on enforcing its own standard.
The impact is likely to be greatest on devices that permit short-range wireless, or Wi-Fi, connections to the Internet, which have become popular for use in homes, offices and coffee shops. The need for improved security for such data communications is widely recognized, and a group from the Institute of Electrical and Electronics Engineers is working on it.
"Having a different standard from the rest of the world fractures the market," said Ann Rollins, director of technology and trade policy at the Information Technology Industry Council, whose members include Dell, Hewlett-Packard, I.B.M., Intel, Microsoft and others. "The implications of this are dangerous going forward."
The wireless encryption step, according to industry executives and government officials, is part of a broader trend of China going its own way in developing technology standards. It is a movement that promises to increase trade tensions beyond Bush administration complaints about China's surging trade surplus and its tactic of keeping its currency fixed against the dollar, giving it a competitive advantage in selling to the United States.
"Standards have become the new battleground, unfortunately," said Phillip J. Bond, under secretary of commerce for technology policy. How the issues of standards will play out is uncertain. The wireless encryption standard, if unchanged and mandatory, could prompt a trade challenge from Washington. "That is both a trade concern and standards issue," Mr. Bond said. "This looks much more like a government regulation than a standard."
Encryption codes for communications have often been regarded as a matter of national security and thus rightfully determined by governments. Over the years, the United States has also tried to control computer cryptography standards.
But the American critics of China's wireless encryption standard contend that Wi-Fi communications, which typically extend no more than a few hundred feet, are a purely commercial use and not a national security concern.
Given its huge consumer market and an economy in rapid ascent, trade experts say, China will increasingly have the power to influence standards in technology, just as Britain set standards in the 19th century and the United States in the 20th century.
Today, the principal international standard-setting organizations have representation from many countries, including China, but American interests often carry the greatest influence.
"We are accustomed to the United States being the biggest market and the technology leader, so the standards have largely been American standards," said Clyde V. Prestowitz, president of the Economic Strategy Institute in Washington and a former trade negotiator. "But China is going to be the biggest in the world for a lot of things. If the Chinese have the biggest market for cellphones, DVD players, computers and other things, they will have a lot of power to set technology standards."
China's effort to develop its own technical standards for the next generation of DVD's appears to be an effort to avoid hefty royalty payments to patent-holding corporations in Japan, the United States and Europe. About half of the world's DVD players are now made in China.
The new discs will hold four to five times the digital video and audio data of those currently on the market. The next-generation discs and their players will not be widely available until at least 2005, but the world's largest electronics, computer and entertainment companies are already battling over whose technology will become part of an industry standard.
The Chinese standard, called EVD, appears to be "more an escape hatch around the patent pools of the established companies than a technology breakthrough," said Richard Doherty, president of the Envisioneering Group, a technology consulting firm.
Yet the Chinese standard is less than completely indigenous. For example, the video compression software for the standard comes from On2 Technologies, a company based in New York. After more than a year of negotiations, it won out over software offerings from larger rivals like Microsoft, Douglas A. McIntyre, On2's president, said.
Indeed, a significant restraint on China's freedom to set standards is that it is not yet a wellspring of technological innovation. To become a leader in innovation, analysts say, China needs to work closely with and learn from the leading American companies - and that would suggest cooperation on standards as well.
The Chinese have, in fact, adopted roughly 8,000 international product standards, but they have also created 20,000 national product standards. "China has national standards that are basically what we would say are regulations," said Oliver R. Smoot, president of the International Organization for Standardization, a federation of national standards bodies based in Geneva. "It's totally different from the U.S. approach, which is for producers to write a document and call it a standard. Then, people are free to adopt it or not."
The question, Mr. Smoot said, is how China will proceed as it becomes an increasingly prominent player in the global economy. "What most people would like,'' Mr. Smoot said, "is for China to join in and we all roll forward together."
By STEVE LOHR
Published: January 13, 2004
o high-technology companies, China has been a land of seemingly pure promise in recent years. Not only is it a fast-growing consumer market, but it has also become a low-cost workshop for assembling technology products for American, European and Japanese concerns.
But as China moves to expand its own technology industries, the government has taken unusual steps that are leading to new trade tensions with the United States, according to Silicon Valley executives, trade experts and United States officials. These measures include efforts to develop Chinese software standards for wireless computers, the introduction of exclusive technology formats for future generations of cellphones and DVD players - even tax policies that favor computer chips made in China and sold in the Chinese market.
"The issue here is what path will China take as it develops its technology industries," said Bruce P. Mehlman, a former technology policy official in the Bush administration who is the executive director of the Computer Systems Policy Project, an industry group. "Will it take a more global, market-based approach, or will it try to change the rules and disadvantage others?"
Concerns over China's strategies intensified last month when it announced that foreign computer and chip makers that want to sell certain kinds of wireless devices in the country would have to use Chinese encryption software and co-produce their goods with a designated list of Chinese companies.
Foreign computer makers, led by American companies, have protested the decision. In addition to their concern about the separate standard, foreign companies are worried about the possible loss of intellectual property if they are forced to work with Chinese companies that have the potential to become competitors.
The quarrel over technical standards compounds the friction over a longer-standing dispute on tax policies. The semiconductor industry is protesting a Chinese tax that is as much as 14 percent higher on imported computer chips than on those designed or manufactured in China, whether by domestic or foreign companies. The higher tax rate applies to chips used in products sold into the Chinese market but not to exported products.
The American chip industry contends that the tax is discriminatory and will force companies to do more advanced manufacturing and design work in China, skewing investment and trade patterns. It also argues that the differential tax on imports violates World Trade Organization rules that a nation's tax policies must not discriminate against imports. The industry is pressing the Bush administration to file a complaint with the W.T.O. by March unless China modifies its policy.
"This tax is one of the measures that is underpinning China's semiconductor strategy, but we think it violates the W.T.O. rules," said George M. Scalise, president of the Semiconductor Industry Association.
Chinese officials insist that they are firmly and irrevocably committed to developing an outward-looking market economy, particularly since China joined the W.T.O. in November 2001. "We want to introduce foreign competition to help release the potential of our people and our economy," said Tian Jun, counselor for economic affairs at the Chinese Embassy in Washington. "It's a pretty open market in China."
Mr. Tian said that American concerns on technology issues were mostly misunderstandings, matters that could be resolved with further discussions - or actions China had every right to take as a sovereign nation. "Chinese companies are working on their own technology and their own standards,'' he said, "but we are targeting the world market."
Some Chinese practices may not conform yet to world trading rules, he added, but those will eventually fall away as China moves toward openness. "We don't focus on short-term trade quarrels," Mr. Tian said.
So far, China has shown little interest in addressing the grievances of American technology companies, according to industry executives and government officials. It responded to complaints about the wireless encryption standard by giving companies until June to comply, and has offered no indication that it plans to back off on enforcing its own standard.
The impact is likely to be greatest on devices that permit short-range wireless, or Wi-Fi, connections to the Internet, which have become popular for use in homes, offices and coffee shops. The need for improved security for such data communications is widely recognized, and a group from the Institute of Electrical and Electronics Engineers is working on it.
"Having a different standard from the rest of the world fractures the market," said Ann Rollins, director of technology and trade policy at the Information Technology Industry Council, whose members include Dell, Hewlett-Packard, I.B.M., Intel, Microsoft and others. "The implications of this are dangerous going forward."
The wireless encryption step, according to industry executives and government officials, is part of a broader trend of China going its own way in developing technology standards. It is a movement that promises to increase trade tensions beyond Bush administration complaints about China's surging trade surplus and its tactic of keeping its currency fixed against the dollar, giving it a competitive advantage in selling to the United States.
"Standards have become the new battleground, unfortunately," said Phillip J. Bond, under secretary of commerce for technology policy. How the issues of standards will play out is uncertain. The wireless encryption standard, if unchanged and mandatory, could prompt a trade challenge from Washington. "That is both a trade concern and standards issue," Mr. Bond said. "This looks much more like a government regulation than a standard."
Encryption codes for communications have often been regarded as a matter of national security and thus rightfully determined by governments. Over the years, the United States has also tried to control computer cryptography standards.
But the American critics of China's wireless encryption standard contend that Wi-Fi communications, which typically extend no more than a few hundred feet, are a purely commercial use and not a national security concern.
Given its huge consumer market and an economy in rapid ascent, trade experts say, China will increasingly have the power to influence standards in technology, just as Britain set standards in the 19th century and the United States in the 20th century.
Today, the principal international standard-setting organizations have representation from many countries, including China, but American interests often carry the greatest influence.
"We are accustomed to the United States being the biggest market and the technology leader, so the standards have largely been American standards," said Clyde V. Prestowitz, president of the Economic Strategy Institute in Washington and a former trade negotiator. "But China is going to be the biggest in the world for a lot of things. If the Chinese have the biggest market for cellphones, DVD players, computers and other things, they will have a lot of power to set technology standards."
China's effort to develop its own technical standards for the next generation of DVD's appears to be an effort to avoid hefty royalty payments to patent-holding corporations in Japan, the United States and Europe. About half of the world's DVD players are now made in China.
The new discs will hold four to five times the digital video and audio data of those currently on the market. The next-generation discs and their players will not be widely available until at least 2005, but the world's largest electronics, computer and entertainment companies are already battling over whose technology will become part of an industry standard.
The Chinese standard, called EVD, appears to be "more an escape hatch around the patent pools of the established companies than a technology breakthrough," said Richard Doherty, president of the Envisioneering Group, a technology consulting firm.
Yet the Chinese standard is less than completely indigenous. For example, the video compression software for the standard comes from On2 Technologies, a company based in New York. After more than a year of negotiations, it won out over software offerings from larger rivals like Microsoft, Douglas A. McIntyre, On2's president, said.
Indeed, a significant restraint on China's freedom to set standards is that it is not yet a wellspring of technological innovation. To become a leader in innovation, analysts say, China needs to work closely with and learn from the leading American companies - and that would suggest cooperation on standards as well.
The Chinese have, in fact, adopted roughly 8,000 international product standards, but they have also created 20,000 national product standards. "China has national standards that are basically what we would say are regulations," said Oliver R. Smoot, president of the International Organization for Standardization, a federation of national standards bodies based in Geneva. "It's totally different from the U.S. approach, which is for producers to write a document and call it a standard. Then, people are free to adopt it or not."
The question, Mr. Smoot said, is how China will proceed as it becomes an increasingly prominent player in the global economy. "What most people would like,'' Mr. Smoot said, "is for China to join in and we all roll forward together."
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