NEW EDIG

[cksla]

China's technology standards causing friction
Steve Lohr The New York Times
Tuesday, January 13, 2004

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 China has also become a low-cost global workshop for assembling high-tech goods for American, European and Japanese concerns.

But as China moves to expand its own technology sector, the government has taken unusual steps that have created new trade tensions with the United States, according to U.S. executives, trade experts and government officials.

The Chinese measures include efforts to develop the country's own software standards for wireless computers, introducing exclusive technology formats for future generations of mobile phones and DVD players, even tax policies that favor computer chips made in China.

"The issue here is what path will China take as it develops its technology industries," said Bruce Mehlman, a former technology policy official in President George W. Bush's administration. "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 mounted last month when Beijing 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 designated Chinese companies.

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 a loss of intellectual property if they are forced to work with Chinese companies that are 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 rate applies to chips used in products sold into the Chinese market but not to exported products. The American chip industry contends that the tax will force companies to do more advanced manufacturing and design work in China, skewing investment and trade patterns.

The American semiconductor industry also argues that the differential tax on imports violates World Trade Organization rules that a country'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.

Chinese officials say their country is firmly and irrevocably committed to developing an outward-looking market economy, particularly since China joined the WTO in November 2001.

"We want to introduce foreign competition to help release the potential of our people and our economy," said Tian Jun, counselor for economic affairs at the Chinese Embassy in Washington. "It's a pretty open market in China."

Tian said that American concerns over technology issues were mostly misunderstandings, matters that could be resolved with further discussions, or actions China had every right to take as a sovereign country. "Chinese companies are working on their own technology and their own standards," Tian said, "but we are targeting the world market."

Some Chinese practices may not yet conform to world trading rules, he added, but those will eventually fall away as China moves toward openness. "We don't focus on short-term trade quarrels," Tian said.

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 given no indication that it plans to back off on enforcing its own standard.

The impact will probably 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 task group of 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 well beyond the Bush administration's usual complaints about China's surging trade surplus and its tactic of keeping its currency fixed against the dollar, which gives it a competitive advantage in selling to the United States.

"Standards have become the new battleground, unfortunately," said Phillip Bond, undersecretary of commerce for technology policy.

How the standards issues with China 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."

Encryption codes for communications have often been regarded as a matter of national security and thus rightfully determined by governments. The United States has also, in the past, tried to control computer cryptography standards.

But American critics of China's wireless encryption standard contend that Wi-Fi communications, which extend a few hundred feet, are purely commercial and not a national security concern.

Given its huge consumer market and an economy in rapid ascent, trade experts say, China will increasingly have the power to sway standards in technology, just as England set standards in the 19th century and the United States in the 20th century.

Today, the principal international standard-setting organizations have representation from many countries, including China, but American interests often have the most influence.

"We are accustomed to the United States being the biggest market and the technology leader, so the standards have largely been American standards," said Clyde Prestowitz, president of the Economic Strategy Institute in Washington and a former trade negotiator. "But China is going to be the biggest in the world for a lot of things. If the Chinese have the biggest market for mobile phones, DVD players, computers and other things, they will have a lot of power to set technology standards."

China's effort to develop its own technical standards for the next generation of DVD's appears to be an effort to avoid hefty royalty payments to patent-holding corporations in Japan, the United States and Europe. About half of the world's DVD players are made in China.

The new discs will hold four to five times more digital video and audio data than those currently on the market. The next-generation discs and their players will not be widely available until at least 2005, but the world's largest electronics, computer and entertainment companies are already battling over whose technology will become part of an industry standard.

The Chinese standard, called EVD, appears to be "more an escape hatch around the patent pools of the established companies than a technology breakthrough," said Richard Doherty, president of the Envisioneering Group.

Yet the Chinese standard is not as indigenous as it might seem. The video compression software for the Chinese standard, for example, comes from a New York-based company, On2 Technologies. After more than a year of negotiations, On2 Technologies won out over software offerings from larger rivals like Microsoft, said Douglas McIntyre, the company president.

China has in fact adopted roughly 8,000 international product standards, but it also has created 20,000 national product standards. "China has national standards that are basically what we would say are regulations," said Oliver Smoot, president of the International Organization for Standardization, a federation of national standards bodies, based in Geneva. "It's totally different from the U.S. approach, which is for producers to write a document and call it a standard. Then people are free to adopt it or not."

S.

China Telecommunications, Legend Group and at least three other Chinese companies will buy $2 billion of technology equipment in the United States this week, helping to narrow a record trade gap between the two countries, according to a Chinese government official.

A delegation led by a deputy minister in the Ministry of Information Industry, Lou Qinjian, were to sign agreements in Washington on Tuesday to buy phone and computer equipment from companies including Motorola, Intel and Cisco Systems, Bloomberg News quoted Wu Xizeng, a ministry official, as saying.