[A-List] China-US tensions: goodbye Windows?

["Michael Keaney" <michael.keaney@xxxxxx>]

Continuing the thread begun by Henry's forwarding of the People's Daily
report on the development of a new Linux processor, here's the latest in
what promises to be one of the key battle-lines between China and the US.

----

Powell fires opening salvo in trade war with China
By Peter Morris
Asia Times, March 16 2004

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.