Beijing's 'Buy China' policy alarms trade partners

BEIJING - Beijing says it wants to spur Chinese inventions with a "Buy China" policy that gives preference to domestic technology companies.

But the tactic has provoked an outcry from Washington and business groups that say it will choke off access to the massive market for goods from software to clean power equipment.

Foreign companies have been alarmed by the government's announcement it will favor technology developed in China when buying computers and other goods on which it spends billions each year.

The plan, part of a decade-old effort to promote "indigenous innovation," would channel money to Chinese companies and add to pressure on foreign technology creators to shift research work to China and know-how to local partners.

The move reflects Beijing's growing assertiveness as it tries to make Chinese industry more autonomous after depending on foreign money, markets and technology for three decades to drive its economic boom.

Trade groups say it violates the spirit of China's World Trade Organisation free-trade commitments and its pledges to avoid protectionism that might harm the global recovery.

Washington and the European Union have complained, but Beijing retorts that it has yet to sign a treaty that would apply WTO rules to government purchasing.

The impact on companies is unclear because no details of how it will work have been released. But the government is China's biggest software buyer and a key customer for other technology.

Losing that market might hurt companies including Microsoft, Intel and Motorola. Suppliers worry the rules could be extended to purchasing by major state-owned companies in power, telecoms and other fields.

Some companies would consider pulling out of China if they conclude the loss in sales will be too great, US and European trade groups say.

"It's going to have a direct impact on their expansion plans," said Richard Vuyrsteke, president of the American Chamber of Commerce in Hong Kong. "When you have strictures that restrict growth, you can ride it out for a while but then you have to consider, is it worth it? Is it absolutely necessary to stay in this market?"

The anxiety comes amid a string of incidents that have rattled foreign companies - Google's dispute with Beijing over censorship and email hacking, last year's arrest of four Rio Tinto employees on commercial spying charges and a government threat in January to punish US companies for Washington's approval of a $10 billion arms sale to Taiwan, the self-ruled island claimed by the mainland as its territory.

US companies are appealing to Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner to make the procurement plan a priority in their annual Strategic and Economic Dialogue with Beijing, due in June.

Beijing's policy will create "barriers to competition in the Chinese market for our most innovative companies," said a coalition of 19 American groups including the US Chamber of Commerce and the Business Software Alliance in a letter to Clinton and Geithner.

A separate coalition of 34 groups for technology companies and manufacturers in Europe, Japan, South Korea and Canada also has appealed to Beijing to reconsider.

Beijing has launched "Buy China" campaigns previously to favour local suppliers in construction and other projects. But the tech procurement rules are unusually explicit in rejecting a foreign role on such a large scale.

"It's the first time foreigners were singled out," said Joerg Wuttke, chairman of the European Union Chamber of Commerce in China.

The wave of alarm stems from Beijing's surprise announcement in November that procurement will favor Chinese producers in six technology areas - computers, clean power, communication, office equipment, software and energy-efficient products.

Companies were given just three weeks to apply to be treated as domestic suppliers, a status trade groups say few are likely to qualify for, even those such as General Electric and Microsoft that have research and development centers in China. There has been no word on whether any were accepted.

A second announcement in December listed a wider array of 18 technologies to receive tax breaks and other support. They covered most Chinese industries, including oil and gas, power construction equipment and aircraft, which sparked concern that companies might come under pressure to favor domestic suppliers.

All of China's major banks, airlines and steel, oil, power and telecoms companies are state-owned and have Communist Party secretaries who have the last word on major decisions and see that they obey official development plans.

The procurement plan may be a desperation move by planners whose efforts to transform China from a low-cost factory into a technology leader by rewarding innovators with tax breaks and grants have failed to produce breakthroughs.

A 15-year government plan issued in 2006 promises help for research in 11 areas from nuclear power to lasers and genetics. But communist leaders fret that China's telecoms, computer and other tech outfits have failed to establish themselves abroad.

The innovation strategy coincides with an effort to reserve large segments of the economy for state companies the government hopes will grow into national champions in fields from banking and energy to telecoms and aerospace.

"What these guys are doing is trying to wall off the Chinese economy and keep out the foreigners," said Duncan Clark, chairman of BDA China Ltd, a technology market research firm in Beijing. "There is a very vociferous camp here that says, We'll never beat the multinationals unless we get economies of scale at home."

A key sticking point is that Beijing has yet to sign onto the Government Procurement Agreement, a treaty that extends WTO free-trade rules to official purchases and would require it to treat foreign and Chinese suppliers equally.

Beijing promised at last year's dialogue with Washington to treat products made in China by foreign companies the same as those made by Chinese enterprises.

The procurement rules "would exclude the possibility for such equal treatment," said a US Embassy spokeswoman, Susan Stevenson.

A stumbling block for companies that want to be treated as domestic suppliers is Beijing's insistence that they obtain patents and register trademarks in China before any other country.

Many global companies are reluctant to apply for patents in China first because its system is slow to respond and they fear technology might be leaked to local rivals.

They also worry about restrictions that China imposes on its patent holders. Chinese law allows the government to force them to license technology to rivals and requires companies to seek Beijing's permission to patent the same technology abroad.

Trade groups hope Beijing decides its development depends on exposing Chinese companies to foreign technology and competition, not shutting them out.

"I want to think that the more vigorous the discussion becomes, that there will be some reconsideration by the government," said Vuyrsteke. "They have to, or they will be shooting themselves in the foot."

-AP