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US assails great wall of protectionism

Rules favouring local companies and products over foreign competitors are at the centre of the latest American trade row with Beijing. At the heart of the matter is what is known as 'indigenous innovation'. Daniel Bardsley, foreign correspondent, reports from Beijing.

Washington and Beijing will square up to each other this week on trade issues and two words - indigenous innovation - are likely to be tossed across the conference table like prized bargaining chips.

While the Google and Rio Tinto affairs have grabbed the headlines this year, the issue of perhaps greatest concern for foreign companies operating in China centres on indigenous innovation: rules and practices that overseas firms complain favour Chinese companies, particularly with respect to lucrative government procurement contracts in promising sectors such as clean energy technology, information technology and telecommunications equipment.

The US will have some of its most senior officials in the Chinese capital to press their case. The secretary of state Hillary Clinton and the Treasury secretary Timothy Geithner will meet the Chinese state councillor Dai Bingguo and the vice premier Wang Qishan for the annual US-China Strategic Economic Dialogue tomorrow and Tuesday. If comments made by Mr Geithner last week are anything to go by, the talk could be tough.

"American companies are very concerned that this approach has the potential to discriminate against foreign-made products and could disadvantage American exporters and investors as they compete with Chinese firms. We share these concerns," he said. "We want China to give American firms the same opportunities to compete in China that Chinese firms face in the United States. This is a simple principle of fairness."

Other issues such as subsidies and China's perceived lack of respect for intellectual property rights were also raised by Mr Geithner last week. Following pressure from outside, as well as concerns it could be missing out on cutting-edge technology, Beijing already has moved to loosen indigenous innovation regulations. Last month, draft regulations from China's ministry of science and technology said that to be considered for government contracts, the patents and trademarks for hi-tech products must be registered in China. The current rules require patents to be developed solely in China, or the first registration of the product's trademark had to be in the country.

But the US does not believe the issue has been solved, since Mr Geithner said last week that "we have some more work to do in this area". The US has said American companies are missing out on the chance to compete for contracts worth billions of dollars. The seriousness with which the US is taking the issue was shown by the fact that its trade representative, Ron Kirk, last week called on China to "step back" from its "flawed and troubling" industrial policies, such as those relating to indigenous innovation.

And Gary Locke, the US commerce secretary, said foreign companies were suffering a "significant disadvantage" in China, even though the country has been a member of the World Trade Organisation since 2001. Speaking in Hong Kong, Mr Locke warned the indigenous innovation rules could limit foreign direct investment that could yield new products and services within China and stimulate innovation among Chinese companies.

The US administration's concern is shared by some in China, among them Ted Dean, the president and managing director of BDA, a consultancy that assists foreign companies to operate in China. He says there is a bias in favour of Chinese companies through "an umbrella" of policies, not just rules on government procurement. "The challenge is that, in some of the policies that have been adopted, there's clearly a goal to promote domestic champions, [to help] Chinese companies to take leadership positions in domestic markets and this is stated in some of the policies of import substitution," he says.

There is, he says, "no question" that foreign firms are being impacted by the policies, which create a "shielded domestic market". "China has benefited enormously from openness to trade and from the global trading system, from its ability to have export-driven growth and from foreign direct investment in the last 20 to 30 years," he says. "Chinese suppliers to foreign companies have become better managed and innovative because these foreign companies were willing to come here and work with staff.

"The bargain was that these companies would have some fair opportunity to compete in this market." It was not "sustainable", he suggests, for China to maintain a policy that did not adhere to this "bargain". Others have said China's vast stimulus package spending shuts out foreign companies. One argument sometimes advanced against China's indigenous innovation rules is that research and development is often an international collaborative exercise that spans national borders. This is a view Mr Dean shares.

"It's a misunderstanding of how innovation happens to say you're going to cut off research and development here from what happens in other countries," he says. "Having the government pick particular winners may mean there are government-backed technologies that win market share, but it doesn't necessarily create a more innovative economy." Critics of China have also said the country must improve its enforcement of intellectual property rules if it is to promote innovation in its own economy.

There are experts who take the view that Chinese companies, at this stage in their country's development, deserve extra protection of the kind the government's policies have provided. Among them is Dr Bala Ramasamy, a professor of economics at the China Europe International Business School in Shanghai whose research interests include foreign direct investment (FDI). A key change in terms of FDI, he says, is that previously it tended to be linked to producing exports, whereas now much investment was tied to attempts to access the Chinese market. He says it is understandable that in this context the Chinese government feels "the domestic market" needs to be protected.

"The question is, are local Chinese companies able to take on the large multinationals," he says. "Maybe what the Chinese government is trying to do is to create a level playing field, because China is still a developing country." While acknowledging that the greater competition that foreign companies would provide could improve efficiency, Dr Ramasamy says the danger is that it could also "kill young companies".

It was understandable, he says, that the Chinese government should want domestic companies to benefit most from its US$586 billion (Dh2.15 trillion) economic stimulus package. "You would want to keep as much of the money as possible within the country, so not much is leaked out," he says. However, there are risks of the system being abused, Dr Ramasamy says, since multinationals hoping to secure contracts were often required to provide detailed and often commercially confidential information about their products.

And those who have reservations about the indigenous innovation policies consider them just part of a wider swathe of protectionist rules in China. "China Inc is able to buy 100 per cent of Volvo, but foreign companies aren't allowed to do that in China," says Mr Dean. "As Chinese companies do expand overseas and continue to look at international acquisitions and build up their global presence, an element of reciprocity is required in terms of investment."

Published: May 22, 2010 04:00 AM

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