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U.S. Increasing Trade Pressure on China, India

WASHINGTON -- The United States is devoting more enforcement resources to pressure China and India into rescinding their "discriminatory" technology trade policies, U.S. Trade Representative Robert Zoellick told a Senate panel Tuesday.

Zoellick addressed the panel at a time when both countries' technology policies have come under increasing criticism -- India for benefiting from offshoring of U.S. service industry and some IT jobs and China over what many in the wireless industry call technology policies designed to transfer sensitive trade secrets.

Last month, the wireless technology industry asked the Bush Administration and congressional global trade leaders to take a tougher stance with China over Beijing's December decision to impose a proprietary encryption scheme for wireless local area networks (WLAN) within Chinese borders.

In addition, Beijing currently applies a controversial 17 percent value added tax (VAT) on sales of imported and domestically-produced semiconductors, but grants an approximate 6 percent rebate for integrated circuits both designed and built in China.

India is under increasing U.S. criticism for benefiting from offshoring of U.S. service industry jobs while returning little in trade incentives to America. Democrats hope to make offshoring a presidential election year issue.

Zoellick said China's VAT policy is a violation of World Trade Organization (WTO) rules prohibiting a member country from treating domestic producers and products more favorably than imported products.

"The Chinese tax policy with semiconductors is discriminatory and if they don't stop it, we're going to take action," Zoellick told the Senate Finance Committee. "With India, its got to be a two-way street. Historically, India has had very closed markets."

Zoellick cautioned, however, that Congress needs to be "very careful about bureaucratic steps to stifle" international free trade.

Last week, Senate Democrats attached an amendment to a corporate tax bill prohibiting federal contractors from moving government-funded IT contracts overseas.

The Democrats' anti-offshoring amendment won approval but carried so many exemptions it was reduced to a symbolic gesture. What it did do, though, was to delay Senate consideration of legislation aimed at addressing European Union trade sanctions that went into effect March 1, when the EU began collecting a five percent penalty tariff on a wide variety of U.S. goods. The penalty increases by one percent per month over the next year.

The WTO ruled last year the annual $5 billion tax break given to U.S. exporters amounts to an illegal export subsidy. It set a March 1 deadline for Washington to change its tax code or be penalized.

"Some of today's opponents of trade, like those of yesteryear, want to retreat, to cut America off from the world," Zoellick said. "But we need to remember that what goes around, comes around: If we close America's markets, others will close their markets to America."

In his opening statement, Sen. Charles Grassley (R-Iowa), chairman of the Finance Committee, accused Democrats of playing on voters' fears about offshoring.

"After all, this an election year, and it appears that some of our presidential aspirants are determined to make trade and trade agreements our economic whipping boy," Grassley said. "While this may be good politics in some areas of the country, it is disastrous economic policy."

Grassley said Congress should not "discount workers' concerns about trade and their role in the world economy. But at the same time, we should not pander to those fears for short-term political gain."

Sen. Max Baucus (D-Mont.), the ranking member of the committee, argued the offshoring issue is not as simple as Republicans portray it.

"There has been a lot debate on whether this is a good or bad thing in the big economic picture. But let's face it: offshoring of jobs has people worried," Baucus said. "The legitimate worries of the American public cannot be dismissed."

Baucus also said Bush Administration foreign policy considerations now dominate the country's choice of trading partners.

"First, we need to re-examine how we choose partners for free trade agreements," he said. "I remember when we were debating fast track and the Trade Act of 2002. All of us -- here in the Congress, in the business community and at the White House -- we were all talking about exports, competitiveness and economic growth. In short, we were talking about jobs. But somewhere along the line, that goal got hijacked."

Specifically, Baucus pointed to India.

"We all know India is benefiting enormously from the offshoring of service-sector jobs from the United States," Baucus said. "But the United States is not getting anything in return. Why? Because India has such a closed market. And India is certainly one of the leading countries holding back greater market access in the WTO."

In addition, Baucus questioned the Bush Administration's enforcement of trade agreements, claiming the U.S. lost $342 million in retail revenues from Indian software piracy.

"India has made commitments under the WTO Trade-Related Aspects of Intellectual Property Rights to protect intellectual property rights," Baucus said. "What are we doing about enforcement? How can we spur innovation and create jobs at home if we let people overseas steal our intellectual property? Wouldn't our limited resources be better spent combating piracy than negotiating agreements with tiny countries [referring to a proposed free trade agreement with Sri Lanka]?"