China, U.S. to hold high-level trade meeting

Several simmering trade issues between the U.S. and China, including the latter’s plans to adopt a proprietary national standard for wireless LANs, are up for discussion this week at a bilateral high-level government meeting due to begin on Wednesday in Washington, D.C.

The 2004 U.S.-China Joint Commission on Commerce and Trade (JCCT) will be chaired by U.S. Secretary of Commerce Donald Evans, U.S. Trade Representative (USTR) Robert Zoellick and Chinese Vice-Premier Wu Yi. A spectrum of issues are likely to be covered at the talks and the U.S. Department of Commerce has signalled that issues will include intellectual property rights, trade expansion initiatives and export controls.

More specifically, the USTR said in a recently published annual report on trade barriers in telecommunications, that it intends to bring up China’s national wireless LAN standard.

The standard, called Wireless LAN Authentication and Privacy Infrastructure (WAPI), is very similar to the Institute of Electrical and Electronics Engineers Inc.’s (IEEE) 802.11 standard except that it uses a different security protocol. It was officially adopted on Dec. 1 last year and the government has said that all wireless LAN products sold in China from June 1 must support WAPI.

This has caused concern at international electronics companies because details of the standard have only been shared with a handful of Chinese equipment makers leaving foreign companies the option of licensing the technology though a coproduction agreement or staying out of the Chinese market. They are worried both that WAPI could fracture the WLAN equipment market and also that any co-production agreement could lead to the loss of proprietary technology.

“There’s some concern over WAPI and the sort of interaction that the Chinese were suggesting (that) we needed to bring our intellectual property to the table to play in the marketplace,” said Craig Barrett, CEO of Intel Corp. said recently in Taipei. Intel has said that it won’t be able to meet China’s compliance deadline.

In its telecommunication trade report the USTR said WAPI, “appears to be an example of mandating a locally developed standard for protectionist purposes.”

The Washington meeting won’t be the first time that Wu has heard from Evans and Zoellick on WAPI. The two, along with U.S. Secretary of State Colin Powell, sent a letter to Wu and Vice-Premier Zeng Peiyan earlier this year regarding their concerns with WAPI and the USTR says the issue has been raised at different levels at least a dozen times since late 2003.

Another issue that is expected to come up for discussion is the taxation of semiconductors in China. A value-added tax (VAT) of 17 per cent is levied on sales of all semiconductors in China but Chinese policy gives a rebate of the VAT in excess of 3 percent for certain chips that are manufactured in China. The resulting effect is a 17 per cent tax on imported semiconductors and a three per cent tax on domestically-made chips.

The U.S. has filed a complaint with the World Trade Organization (WTO) regarding the issue. The USTR said, “China’s current VAT rebate policy not only discriminates against U.S. products directly, but also distorts international investment in the integrated circuit sector.”

Dorothy Lai, a semiconductor analyst at Gartner Inc. in Hong Kong, says she expects to see some concessions from the Chinese. “It’s not the U.S. going to China, it’s the other way around so in some way I think China is willing to compromise in some ways but not all,” she said.

The three main subjects that Lai expects Wu will bring up during her Washington talks are WAPI, VAT and a recent announcement by the U.S. government that it intends to slap anti-dumping tariffs of between 28 per cent to 78 per cent on Chinese-made television sets.

In those areas, Lai said China could offer concessions on WAPI, perhaps delaying the June implementation deadline, in return for a softening of the U.S.’s stance on the semiconductor tax rebate.

“WAPI came from out of the blue. They didn’t talk about it until late last year and suddenly they want to push the deadline to June. They need to make some concession on June. Then they will be able to avoid eliminating the whole VAT rebate for local production but can make it smaller,” she said.

The tax rebate, which encourages local production, might be too important to China’s plan to build a successful local semiconductor industry to totally scrap, she said, and besides, it is not apparently illegal. China’s WTO agreement is understood to have specified the tariff should be eliminated by 2006 so while it may be against the spirit of free trade, the U.S. may find it difficult to insist on its removal.

The anti-dumping tax on Chinese televisions may see the least discussion, Lai said. “TVs may not be a big deal because if there is no U.S. market then they can still go to the Middle East or Europe.”

The meeting comes as pressure rises in Washington over the size of China’s trade surplus with the U.S., which was US$124 billion last year according to U.S. estimates.

To cope with the increase in trade issues between the two countries, the U.S. government said two weeks ago that it plans to establish a dedicated Office of China Affairs. The office, which will be part of the Office of the U.S. Trade Representative, will handle trade issues related to China, Taiwan, Hong Kong, Macau and Mongolia.

It’s not just Washington where U.S.-China intellectual property rights will be up for discussion this week. Two events sponsored by the Paris-based Organization for Economic Cooperation and Development (OECD) are also taking place in Beijing this week.

The first began on Tuesday and is a two-day workshop on intellectual property rights and economic development in China, cosponsored by China’s State Intellectual Property Office (SIPO) and Development Center of the State Council. The main theme of the meeting is China’s intellectual property rights policies and how they might be adapted to keep pace with ongoing modernization that has come as a result of the country’s membership of the World Trade Organization.

A number of high-level Chinese officials are scheduled to speak at the workshop including Wang Jingchuan, commissioner of the SIPO, according to the meeting agenda. Foreign representatives scheduled to speak include Herwig Schlogl, deputy secretary general of the OECD; John Barton, chair of the UK Commission on Intellectual Property Rights; and Ruud Peters, CEO of Philips Intellectual Property & Standards.

A second two-day meeting, this time organized by the OECD and China’s Ministry of Science and Technology, will begin on Thursday and concentrate on intellectual property rights in public research institutions.

It is scheduled to hear from officials including Zhang Jingan, China’s Vice Minister for Science and Technology, and representatives from organizations including the European Commission, U.S. Department of Commerce, U.S. National Institutes of Health, U.K.’s Department of Trade and Industry and France’s Institut National de Recherche en Informatique et en Automatique (INRIA).