To 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 global workshop for assembling technology products for American, European and Japanese companies.
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 US, according to Silicon Valley executives, trade experts and US government officials. These measures include efforts to develop Chinese software standards for wireless computers, the introduction of exclusive technology formats for future generations of cell phones 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 Mehlman, a former technology policy official in the Bush administration who is 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 China would have to use Chinese encryption software and co-produce their goods with a designated list of Chinese companies.
intellectual property concerns
Foreign computer makers, led by American companies, have protested the decision by Beijing. 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 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 WTO 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 WTO 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 WTO rules," said George Scalise, president of the Semiconductor Industry Association.
Chinese officials have insisted that they are firmly and irrevocably committed to developing an outward-looking market economy, particularly since China joined the WTO in November 2001.
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 enforcing its own standard.
impact on Wi-fi applications
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 for the Information Technology Industry Council, whose members include IBM Intel, Microsoft, Hewlett-Packard, Dell 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 US.
"Standards have become the new battleground, unfor-tunately," said Phillip Bond, undersecretary of commerce for technology policy.
How the issues with China 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," Bond said. "This looks much more like a government regulation than a standard."
Bond characterized the standards issues with China as "points of friction in a growing economic relationship."
Encryption codes for communications have often been regarded as a matter of national security and thus rightfully determined by governments. Over the years, the US has also tried to control computer cryptography standards.
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