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IBM'S PC Diplomacy

Since IBM's announcement last month that it would sell its PC division to China's PC maker Lenovo for $1.75 billion, we've heard little about how it might impact China's relations with the United States. Perhaps a closer look is in order.

Because IBM is also taking an 18 percent stake in Lenovo as part of the sale, a quintessential American technology company is poised to go into business with a company that also counts the Chinese government among its owners.

Given some of the simmering trade disputes involving China, such as rampant software piracy and worker conditions in the country, could the new, strategic relationship IBM is building with the Chinese government help ease trade issues?

"It's long been understood that the best way to ensure that conflicts are minimized is to entwine your economic interests," said Mark Stahlman, managing director of investment advisory firm Caris & Company. "So when the word strategic comes up in relationship to this particular transaction, I think it has to be considered."

Not everyone's so sure IBM's arrangement with Lenovo will help trade relations between the United States and China in any meaningful way. Bill Reinsch, president of the National Foreign Trade Council, said the deal strikes him as rather ordinary. Even an expected review by the Department of Commerce, as well as other divisions, such as a national security review within the Treasury Department, seem pretty routine.

"We have a lot of trade issues with China," he pointed out. "This acquisition does not make those better or worse, it's just another issue."

In cases like this, he said, you have to ask if technology is being transferred that the United States would be concerned about. In this case, the products being exported are PCs, which really have become a commodity product. "It's the chips and the software that are important. It's hard to find a security issue to focus on in the IBM/Lenovo deal," Reinsch said.

Although a spokesman at the Department of Commerce declined to comment on whether it is reviewing the transaction, an IBM spokesman said as a matter of routine, Commerce is reviewing the transaction as is the case when assets are sold to a company in another government. Officials at the Federal Trade Commission have already signed off.

Since the transfer of assets doesn't involve high-performance computing systems that might be used in China's military systems, it's unlikely that the deal will run into objections from foreign policy or defense reviews. However, the deal is unique enough that it is also getting a look by the bureau of industry and security in Commerce, and is expected to be reviewed by a committee on foreign investment within the U.S. Department of Treasury.

John Bukovinsky, vice president of media relations for IBM, said Lenovo would not be manufacturing any of IBM's pSeries servers. IBM's pSeries computers are usually used in High Performance Computing systems that involve military systems, which means they are subject to some restrictions on exports, as explained in a report by a report from the House of Representatives.

Bukinovsky said the pure business reason for the deal is that it frees IBM to invest in other areas. Plus, IBM recently revealed that the division lost $965 million over the last three years.

China is considered the fastest growing IT market in the world, Bukinovsky pointed out, especially in strategic growth areas such as services and software. And now, China's presence in the U.S. and as a PC maker is clearly on the rise as it builds out its presence in the United States.

To some extent, Lenovo also is trying to protect is brand back home in the face of competition from Dell and HP. Already, HP is trying to entice worried IBM customers over to its camp, or pick up some customers who choose not to make the transition to Lenovo during the course of the five-year honeymoon the two have squared up.

What has struck some people as more interesting than the trade implications is that Lenovo is now taking on a strong presence in the U.S. with its PC manufacturing designs. The headquarters of the company will be in New York. The management team will have a number of former IBM executives on board as well, as Lenovo seeks to build its presence in the U.S. as a volley back to Dell and HP, whose operations in Asia are giving Lenovo plenty of competition.

For those in the camp that thinks that engagement with China -- and tightening economic ties between the two countries -- is not only good economically but also politically, the deal is likely to give folks heart.

Erin Joyce is executive editor of internetnews.com and internet.com's news channel