Tech Issues Undermining U.S.-China Trade

WASHINGTON — The trade relationship between China and the United States is growing but its pace is being threatened by some of Beijing’s current policies, particularly in the area of technology, a U.S. trade representative told a congressional subcommittee Wednesday morning.

With the U.S.-China Joint Commission on Trade scheduled to meet April 21-22, the House Subcommittee on Commerce, Trade and Consumer Protection convened the Wednesday hearing to focus on some troubling trade issues between the U.S. and China.

“One area where collaboration has not been successful affects key U.S. technology products, namely integrated circuits,” Deputy U.S. Trade Representative Charles W. Freeman said. “China provides preferential value-added tax treatment to integrated circuits produced or designed in China, thereby disadvantaging U.S. and other imports and distorting international investment.”

U.S. chipmakers like Intel , AMD , Texas Instruments and Motorola have led the American technology rush into China. According to the U.S. Trade Office statistics, companies spent $2.02 billion in 2003 exporting processors into China.

The U.S. chipmakers are subject to a 17 percent value added tax (VAT). In contrast, China taxes its own companies only a fraction of what it charges the rest of the world through the use of a partial refund. As a result of the refund policy, Chinese chip companies may pay as low as 3 percent in taxes.

“The United States believes that this discriminatory tax policy is inconsistent with the national treatment obligations that China assumed when it joined the World Trade Organization (WTO),” Freeman said. “The United States repeatedly pressed its concerns with China, but it recently became clear that China was not prepared to address our concerns in any meaningful way.”

Earlier this month, the U.S. filed a formal WTO complaint against China over the integrated circuit VAT. The complaint begins a 60-day consultation period required by WTO rules. If a resolution cannot be reached reached within the 60 days, the U.S. can then request that a WTO panel rule on whether China’s policy is consistent with its WTO obligations.

“There are forces in China, as elsewhere, that resistant to changes wrought by WTO implementation,” Freeman said. “Despite the best of intentions of many Chinese trade officials, these forces have not been unsuccessful in limiting China’s progress toward the goals the United States and other WTO members foresaw though China’s WTO ascension.”

As a result, Freeman said, “Some markets in China are not as open as they should be, and our engagement with China has not always been as useful as it should be.”

With trade Chinese trade relations beginning to flag, the Bush administration last year stepped up its efforts to engage senior Beijing leaders. President Bush met Hu Jintao, the president of China, and emphasized the importance of China’s WTO obligations. U.S. Trade Representative Robert Zoellick made two separate visits to China to press for trade reform.

Still, China resisted changing its circuit board import VAT and further frustrated the U.S. technology industry by imposing its own encryption scheme for for wireless local area networks (WLAN) within Chinese borders, effective June 1. Known as Wired Authentication and Privacy Infrastructure (WAPI), the scheme is incompatible with the open global wireless security standard (IEEE 802.11 and 802.11b) used by chipmakers and electronics manufacturers.

“We acknowledge that China’s WTO implementation efforts have taken place against a challenging political and social backdrop,” Freeman said. “In 2003, China underwent a major leadership change, passed through a harrowing SARS epidemic, undertook a sizeable restructuring of the government’s economic and trade functions and confronted a host of dislocations inherent in its transition from a planned economy to a more market oriented economy.”

Freeman added, “These factors may have presented challenges, but they are not grounds for foot dragging or other incomplete WTO implementation efforts.”

China joined the World Trade Organization in December of 2001, after 15 years of negotiations with the U.S. and other WTO members. Two years later, total U.S.-China trade topped $180 billion, with imports from China exceeding U.S. exports by $124 billion.

China’s integrated circuit market is valued at approximately $19 billion, the world’s third largest. Although imports currently represent approximately 80 percent of China’s market, its semiconductor industry is expanding rapidly, with substantial investment from foreign firms.

In its latest survey, the San Jose, Calif.-based Semiconductor Industry Association SIA said chip sales in January 2004 were up strongly over January 2003 levels, including a 34 percent rise in the Asia Pacific market, propelled by growth in China. In comparison, the Americas grew 14.8 percent, Europe 19.5 percent, and Japan 32 percent.