China Fuels Trade Tension

China Fuels Trade Tension With Policies, Report Says

ANDREW BATSON JASON DEAN

BEIJING—China's drive to support domestic technologies—which has already resulted in high-profile complaints by foreign businesses over government purchasing policies—is likely to continue to cause trade disputes and political tensions with the U.S., says a new report from the U.S. Chamber of Commerce.

European Pressphoto Agency

Beijing workers assemble antennas for mobile devices earlier this year.

"Indigenous innovation is a massive and complicated plan to turn the Chinese economy into a technology powerhouse by 2020 and a global leader by 2050," says the report, to be released this week. "What is worrisome for the business community is that these indigenous innovation industrial policies are headed toward triggering contentious trade disputes and inflamed political rhetoric on both sides."

The report, which was commissioned by the U.S. Chamber and written by James McGregor, a longtime journalist and executive in China who is now senior counselor for APCO Worldwide, says China is becoming increasingly aggressive in using its vast market to push foreign companies to transfer leading-edge technologies. That tactic, it says, is "forcing foreign technology companies to anguish over balancing today's profits with tomorrow's survival."

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The report, from one of the world's biggest business groups, adds to the increasingly vocal concerns of foreign companies and governments about the business environment in China, including top executives from firms such as Siemens AG, General Electric Co., and Microsoft Corp.

Executives and officials have raised particular complaint about indigenous-innovation policies that they fear are designed to discriminate against foreign companies or to force them to transfer their intellectual property to China.

Beijing's handling of those concerns "has become a litmus test for many companies, particularly in the IT sector, for how China is currently treating investment and how it might treat investment in these sectors going forward," Myron Brilliant, the U.S. Chamber's senior vice president for international affairs, said in an interview.

Chinese officials have strongly defended the indigenous-innovation policies, saying they don't discriminate against foreign companies and noting that investment continues to pour into the country.

"Currently, there is an allegation that China's investment environment is worsening. I think it is untrue," Premier Wen Jiabao said this month in a meeting with German executives and officials.

China's leaders began emphasizing what they call "indigenous innovation" in 2006, but it emerged as a major issue for foreign businesses after the publication in November of rules for creating a national list of products containing indigenous innovation. Foreign companies feared that would shut them out of tens of billions of dollars in government procurement contracts.

The Chamber report says that concerns over the indigenous innovation policies aren't limited to government procurement. It cites recent revisions to patent legislation that it says make it easier for Chinese companies to use domestic patents to block foreign competitors, as well as a standard-setting process that it says is tilted toward domestic products.

Another example is China's push to develop a homegrown passenger jet through a state-owned company. Major U.S. firms including GE and Eaton Corp. have been selected to supply systems for the jet project but are doing so through Chinese partnerships.

Once their key technologies have been transferred to China, "the foreign aerospace firms may find themselves sidelined and competing globally against the Chinese companies they are now creating," the Chamber report says.

To address the multiple issues arising from China's innovation drive, the U.S. has started a broader dialogue with China on the issue. John Holdren, director of the White House Office of Science and Technology Policy, met with China's Minister of Science and Technology Wan Gang and other officials last week in Washington to open those talks. U.S. officials also raised their concerns about the innovation policies at talks in Beijing in May.

"The Obama administration and Congress should understand this is not just another run-of-the-mill China policy dispute that can be addressed through new rounds of bilateral diplomatic discussions and bombastic legislative initiatives," the Chamber report says.

The Chamber report says that, given China's rapidly aging population and the erosion of its low labor-cost advantage, "the pursuit of a high-tech economy and genuine homegrown science and technology breakthroughs is understandable and laudable." But it says that aspects of the policy are "increasingly perceived as anti-foreign and regressive." As a result, it says, the 2006 document that initiated the indigenous-innovation policy is "considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before."