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Last Updated: Tuesday, 20 April, 2004, 22:47 GMT 23:47 UK
China in US technology trade rows
By Mary Hennock
BBC News Online business reporter

Spats over computer chips and wireless encryption codes will top the agenda at joint China-US trade talks in Washington due to start on Wednesday.

Chinese camera factory
Cameras, phones and consumer goods use lots of chips

There are other tensions too - about US quotas on Chinese bras and knitwear, colour TVs, and the simmering row over China's exchange rate.

But the biggest frictions are in the technology sector. They centre on semiconductors - vital tools in any developed economy, and on one of the tech sector's future growth hopes, wireless local area networks, or Wi-Fi.

In March, US anger over Beijing's higher sales tax on imported semiconductors boiled over into the first formal complaint brought against China at the World Trade Organisation.

And Beijing has told foreign IT companies that from 1 June they must adopt a separate encryption standard in China for Wi-Fi, the system that uses short range radio signals to connect laptops and handheld PDAs to the internet.

Turning up the heat

"We support government escalation to the highest levels necessary to resolve this problem," the US-based Information Technology Industry (ITI) Council said in a February statement.

Vice-President Dick Cheney took that message to Beijing last week, says ITI director of technology and trade Ann Rollins.

Chinese Vice Premier Wu Yi, right, meets with US trade representative Robert Zoellick
China's negotiator is Vice-Premier Wu Yi (right)

The US government has moved fast on both issues. Many industrial lobbyists in Washington would be delighted to score a WTO filing after a year of sparring between governments.

About 85% of chips used in China are imported, and it has few players in Wi-Fi. Foreign firms are not about to be squeezed out of the Chinese market. So what are they frightened of?

US tech firms complain China's chip tax breaks WTO rules by discriminating against imports, and that shotgun marriages to China's wireless lan (wireless local area network) firms would jeopardise their intellectual property.

Too much fuss?

But China's chip making industry remains small, weak and low tech, though it is growing fast.

Motorola billboards in Beijing
Motorola is among US firms investing in China

"It's primarily low end semiconductors, because it's primarily low end electronics" such as consumer items, says James Hexter, an IT specialist at global consultancy McKinsey in Beijing.

US investment has been mainly in plants that test finished chips and pack them, far away from glamorous design work. China has 16% of the world's semiconductor packing market, says research firm iSuppli.

Made-in-China chips accounted for 7% of global semiconductor sales in 2000, but 15% in 2002, says Daryl Hatano, Vice President of Public Policy at the California based Semiconductor Industry Association (SIA).

Such speedy expansion makes US firms wary of being caught napping. "When do we complain?" asks Mr Hatano.

Taiwan sets the precedent. There, semiconductor sales were $440m in 1990 and $16bn a decade later, according to McKinsey's research.

Tax clause with claws

China maybe a minnow now, but US firms see teeth in the chip tax that could help it rule the pond in the end.

Beijing sets sales tax at 17% on imported computer chips, but exemptions can cut the rate to 3% for locally designed and made chips.

That results in pressure to shift production to China "to avoid the effects of the tax and grow the China market", says Mr Hatano. SIA reckons the tax has cost foreign chip makers about $2bn (1.1bn) since 2000.

The US bans exports of top-speed chips to China on national security grounds. Beijing wants this eased.

Technology transfer

Corporate America feels it is being bullied into transferring know-how to China, whether the topic is the chip tax or Wapi, as Beijing calls its rival encryption standard.

Businessmen using wi-fi technology
Wireless internet is popular with travelling businessmen

"Wapi is technically compelling a transfer of technology," says Mr Hatano.

US tech firms particularly object to being forced to pick Chinese co-producers from a list of 24 state-picked Chinese firms, who would need commercially sensitive codes to retool imports, adding Wapi.

Beijing argues that Wi-Fi's encryption system has been breached, posing a threat to its national security and Wapi is safer.

The two rows bundle together several issues which are becoming recurring themes in discussions of China's trade.

First, China's immense size means can have a far bigger impact in shaping a single industry than is typical for one country.

Wi-Fi, for instance, is a nascent technology. China is already the world's second biggest wireless lan market on the basis of a Wi-Fi market worth a paltry $17.2m in 2002, says research group IDC.

"You're locking companies into that standard. You will really see distortion in the market if they go ahead with this," says Ms Rollins.

Test of intentions

US tech firms fear that China is using this muscle to gain advantage for its domestic industry by forcing technology transfer.

"If the Chinese do this in the 'wireless-lan' area what is next?" asks Ms Rollins.

"Certainly we want to make sure that a pattern does not get set," says Mr Hatano.

Computer chip
US chip makers say the unequal tax breaks WTO rules

Second, US tech firms see these issues as a test of China's willingness to play by - and frame - international rules, or push others behind its decisions.

"A lot of questions exist about to what extent some parts of the Chinese government want to promote domestic interests over foreign ones," said Jim Gradoville of the US Chamber of Commerce in Beijing.

US industry groups say they want a rapid solution, not a long drawn-out battle.

They hope for a deal at the Joint Commission on Commerce and Trade talks, which have been raised to ministerial level for the first time. Deadlines are looming on both issues as the WTO has given China till mid-May to respond.


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