Chinese policies put foreign firms at disadvantage, U.S. report concludes

In order to boost local Chinese companies and thwart foreign-based firms, the Chinese government has shown strong favoritism toward Chinese-owned manufacturers in the telecommunications and software markets, according to a U.S. government agency report.

The United States International Trade Commission (USITC) report slams China for what it says are practices that hurt non-Chinese firms, while also saying U.S. firms have lost billions due to wrongful use of intellectual property, such as pirated software.

BACKGROUND: U.S. government report blasts China over trade policies

The report says losses to U.S.-based companies from IP infringement -- defined as "misappropriation of trade secrets" as well as illegal use of copyright and trade patents -- amounted to $26.7 billion in 2009 for the information technology industry. For high-tech and heavy manufacturing, that figure was $18.5 billion.

The USITC report, which also delves into other industries such as apparel, aerospace and industrial wind-farm equipment, draws its analysis from a survey of over 5,000 companies doing business with China. These firms are said to represent 16.3% of the U.S. economy.

Regarding software, the Chinese government's requirement for certification testing for certain products, including antispam and operating systems that are imported and marketed in China, is seen as putting the proprietary intellectual property (IP) of foreign firms at risk of having it stolen.

The USITC is also objecting to China's security rules known as the "Multi-Level Protection Scheme" that says IT products used in banking, energy, telecommunications, education and transportation must be considered sensitive and the security should be designed and built only by Chinese firms and workers and contain no foreign IP.

"Procurement preferences potentially restrict opportunities for U.S. firms at the central government level," the report says. "Restrictions on government procurement opportunities in software are already in place on the provincial level."

China began introducing these types of restrictions a number of years ago under the term "indigenous innovation" to boost Chinese firms specifically. The U.S. has raised objections several times, saying the policies in China constitute unfair trade practices. That's why the U.S. Senate asked the USITC to undertake an analysis of the situation working with U.S. industry. The first report was completed late last year, and this week's report delves into the losses due to IP theft.

The report notes that at a U.S.-China summit meeting in January, "China agreed to delink its innovation policies for government procurement preferences and made other changes to its indigenous innovation policies, but these changes postdate the Commission's survey and are not reflected in it."

In the area of telecommunications, the report claims the Chinese government's effort to push China's TD-SCDMA (Time Division Synchronous Code Division Multiple Access) standard as the national home-grown wireless telecom standard, as well as "preferential lending and generous lines of credit" to China-based firms Huawei and ZTE, put non-Chinese firms at a disadvantage.

"One of the most visible manifestations of Chinese indigenous innovation aspirations in the telecommunications equipment industry has been the development of a homegrown standard for third generation (3G) mobile technology, which affects the global players in both the networking infrastructure and wireless handset components of the industry," the USITC report states.

The report maintains, "The Chinese government spearheaded the development of the TD-SCDMA 3G wireless standard in an effort to reduce reliance on foreign technologies and the corresponding costs to Chinese manufacturers in the form of royalties and license fees. In addition to reducing dependence on foreign technology in a sector important for economic development and national security, it has been suggested that development of the Chinese standard would improve China's bargaining position in future licensing arrangements, as China would be armed with its own patents."

According to the report, China last year had 850 million mobile phone subscribers, up from 393 million in 2005, making it the largest market in the world. Although a decade ago foreign multinationals dominated the Chinese handset market with an estimated 90% of handset sales, last year that number, which includes U.S.-based Motorola and Apple, had dropped to 50%. The dominant handset firms today are ZTE and Huawei, "joined by dozens of small manufacturers of lower-tier phones, some involved in the blatant counterfeiting and production of knockoffs and unbranded phones that Chinese refer to as 'shanzai,'" according to the report.

The report concludes, "Although it is difficult to quantify a direct impact on U.S. jobs, Chinese wireless handset makers have altered the global competitive landscape and become rivals of their U.S. counterparts in markets around the world."

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