A trade showdown is looming between the U.S. and Chinese governments, and the flashpoint is semiconductors. American chipmakers are deeply unsettled by a recent Chinese mandate that they must link up with Chinese companies by June 1 if they want to sell Wi-Fi, or wireless local area networking, chips into the local market. The kicker: China wants the U.S. firms to share technological know-how with the local outfits, in a country renowned for theft of intellectual property. If that weren't enough to raise hackles on both sides of the Pacific, late last week the U.S. government filed a World Trade Organization complaint on a separate front, objecting to the heavy tax imposed on semiconductors imported into China. That the chip trade disputes have become so heated and public shows that China will be anything but a passive customer for advanced American technology. Indeed, the wrangling speaks to Beijing's own ambitions to push the Chinese economy further along into high-tech areas like semiconductors. Though the WTO complaint garnered more press, chip leaders say they're more worried by the Beijing mandate on Wi-Fi chips, which requires them to join forces with one of two dozen Chinese companies versed in a domestic Wi-Fi security standard known as WAPI, or wired authentication and privacy infrastructure. To get access to the WAPI protocol, U.S. chipmakers say they are being asked to divulge details of their own technology to Chinese counterparts. "The way in which the Wi-Fi encryption technology has surfaced has been more disconcerting
than the tax dispute and portends a future standards issue," said Debbie Leilani Shon, a former assistant U.S. trade representative in the Clinton administration who currently teaches international trade policy at the University of Southern California. "This is a technical barrier to trade, and the way it has evolved is very blatant." The situation has aroused consternation among U.S. chipmakers angling for a share of the fast-expanding China semiconductor market. China is expected to become the second-biggest chip market in the world by 2010, according to IDC, up from its current third-place ranking. Last year, Intel ( INTC) claimed $3.7 billion worth of sales into the market, amounting to a sizable 12% of its total revenue and making it the lead chip supplier into China.
China still imports about 80% of the chips it needs, but the country's own semiconductor supplier base is growing quickly with help from both its government and overseas partners. U.S. companies are therefore wary of handing over details of their chip technology that emerging Chinese competitors could adapt and use to sell their own semiconductors. "It's clear China must be viewing
Wi-Fi as a very large market and therefore they want to establish their own market, which in and of itself is not an issue," said George Scalise, president of the Semiconductor Industry Association, the trade group leading the opposition to the rule. "Where the violation comes in is in requiring foreign companies to provide intellectual property to a limited set of local Chinese companies." The WTO says countries can't require technology transfers in exchange for allowing access to their markets, trade experts say.
Shifts Behind the WallIn fact, Beijing's stance on Wi-Fi chips marks a striking shift. Over the past few years, the Chinese government has sought technical input from the likes of Texas Instruments ( TXN) and Nokia ( NOK) to help develop China's own cell-phone standard, known as TD-SCDMA, or time division synchronous code division multiple access. The recent change of tone thus comes as an unwelcome surprise. Intel has publicly balked at Beijing's demands, no doubt a source of frustration after the chip giant has already spent some of last year's $300 million Centrino ad budget in China. Visitors to a Shanghai computer mall in December saw corridors bedecked with hanging promotional posters for Centrino. Meanwhile, the WTO dispute over taxes filed by the Bush administration last week centers on the fact that China slaps a tax of 17% on imported semiconductors but, after rebates, only 3% on domestically designed and produced chips. The U.S. Trade Representative Robert Zoellick reckons that the import tax cost U.S. chipmakers $344 million last year. "It certainly looks illegal," said J. David Richardson, professor of economics in the Maxwell School of Syracuse University. "But subsidies like these are a gray area."
Beijing argues that the tax doesn't discriminate, since foreign companies can become eligible for the full tax rebates if they agree to design and manufacture chips in China. Yet many chipmakers remain leery of moving advanced work to China, given that country's spotty record on intellectual property protection. In any case, the SIA maintains that China's tax policy violates its commitments as a member of the WTO, which prohibits countries from favoring domestic business. U.S.-based trade experts and tech officials seem taken aback by the surge of protectionist feeling from China, given that many had believed the new generation of Beijing leaders was more supportive of open trade. Yet the political situation in Beijing is far from straightforward, given apparent differences of opinion within China's sprawling bureaucracy. Last summer the Chinese seemed to be leaning toward quietly resolving the U.S. complaint over taxes, according to Scalise. One of China's government agencies had concluded that the higher tax in imported chips was unfair, he said. But in an unexpected shift, the government then backed off a decision that would have favored U.S. chipmakers. Talks to resolve the chip trade dispute will get under way as early as this week, when the SIA meets with Chinese officials in Geneva. More formal government discussions will take place in Washington on April 21. At least U.S. chipmakers are in a much better bargaining position with Beijing than their counterparts in more commodity markets, say trade experts. Intel and other Wi-Fi purveyors have something the Chinese want: advanced technology. That's not true for U.S. companies in the textile industry, for example, where trade tensions have also surfaced. Textile makers have already lost substantial business to China but can only compete on cost, where they operate at a disadvantage to low-cost Chinese rivals. In contrast, "high-tech issues are ripe for diplomatic resolutions, because technology is an expanding pie," said Richardson. "There are enough gains in high-tech trade to spread between both parties and make everyone into a winner." For Intel and other U.S. chipmakers that see China as a huge market for high-end fare like Wi-Fi, a resolution to the trade disputes can't come fast enough.