U.S., China Clash Again Over Tech

WASHINGTON — Beijing’s proposed government procurement policies are
threatening U.S. software sales in China, and Congress wants something done
about it.

Just exactly what, however, remains to be seen.

Although China joined the World Trade Organization (WTO) in 2001, it is not
a member of the WTO Agreement on Government Procurement. In order to gain
access to the worldwide government sales market, Beijing passed a government
procurement law and began drafting regulations.

Its first set of regulations involved software sales to the Chinese
government. According to U.S. officials, Beijing stacked the deck against
American software companies.

“We are concerned that the overly restrictive definition of domestic
software contained in the draft regulations has the potential to sharply
restrict the sales of U.S. software to the Chinese government,” Benjamin Wu,
assistant secretary for technology policy at the Department of Commerce, told a
House committee today.

The proposed rules require American companies seeking to do business with
the Chinese government to manufacture all their products in China and
register the copyrights in Beijing. In addition, at least 50 percent of the
product development must be done in China.

“These rules make participation in the Chinese government market nearly
impossible for U.S. firms,” Rep. Tom Davis (R-Va.), chairman of the House
Government Reform Committee said. “A ban against Chinese government
procurement of U.S. software would eliminate our nation’s best opportunity
to expand its legitimate exports to China.”

U.S. companies have invested billions of dollars to crack into China’s
booming information technology market. With the extraordinarily high rate of
software piracy in China, the government represents a significant slice of legitimate sales.

“In a country where piracyis rampant, the government is one of the few
organizations actually willing to purchase legitimate software,” Assistant
U.S. Trade Representative Charles Freeman III told the committee.

Last year, China publicly committed that all government offices would use
only legitimately purchased software. Freeman said the proposed procurement
policies threaten to “undercut” the value of that pledge.

“This is the wrong policy for China to implement, given the $160 billion
trade deficit in goods with China,” he said.

Davis said Congress is growing impatient with Beijing’s position.

“I am a strong supporter of free trade with China, but I’m not going to sit
here and let windows close without taking action,” Davis said. “I dont
think Congress is going to put up with it.”

Freeman and Wu assured Davis the Bush administration will use the “most
effective tools at our disposal, including our trade remedy laws.”

This is hardly the first time the U.S. and China have clashed over tech
trade policies. Last year Washington brought the first-ever WTO dispute
settlement against Beijing, protesting China’s tax policy that effectively
priced U.S. exporters of integrated circuits out of China’s $19 billion
integrated circuit market.

China ultimately agreed to halt its policy
of giving rebates to domestic producers of integrated circuit makers, while
levying a 17 percent Value Added Tax (VAT) on imported semiconductors.

Earlier in 2004, under U.S. pressure, Beijing suspended a
looming deadline to impose a proprietary wireless LAN encryption scheme
within its borders.

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