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Monday, September 27, 2010

China - not playing by international rules could ignite trade war with the west.

Siemens Velaro China (Velaro CN / CRH3Image via Wikipedia
China's home-grown innovation drive stirs unease
Sept 27-2010 by Thomson Reuters

By Alan Wheatley, China Economics Editor
BEIJING, Sept 27 (Reuters) - In the 1860s, Chinese labourers laid track over the treacherous terrain of California's high Sierras to help complete America's first transcontinental railroad.
Fast forward, and California wants Chinese technology and capital to construct the country's first high-speed rail system.

"We look to China to build our high-speed rail, to be part of the bidding process that we are going to go through," the state's governor, Arnold Schwarzenegger, said on a visit to Shanghai this month.
Acceleration of the industrial upgrading that puts China on par with the likes of France and Japan to compete for the Californian contract will be a centrepiece of the country's five-year plan for 2011-2016 now being finalised.

As well as introducing more automation into traditional industries, the government has identified a cluster of strategic sectors that it wants to develop, including nanotechnology and new materials.
China already has in place five of a planned array of 35 satellites that will provide a navigation alternative to the U.S. Global Positioning System by 2020.

By the same date, China expects to be converting more coal into oil, gas and chemicals than any other country, according to industry officials quoted by the official Xinhua news agency.
Embracing cutting-edge technologies will help further raise living standards in a country where 150 million people still live below the poverty line.

But there is growing criticism in the West that China owes its rapid ascent to a mercantilist strategy of coercing foreign firms to transfer technology; favouring local companies in its domestic market; and now launching a new breed of national champions overseas to undercut foreign rivals who gave them a technological leg-up to start with.

Feelings are running so high that the heads of German industrial giants Siemens and BASF publicly complained about an uneven playing field in China in the presence of Premier Wen Jiabao back in July.

General Electric <GE.N> Chief Executive Jeffrey Immelt made similar comments in private that found their way into the press.

"I don't condemn China. It's very smart policy to look out for yourself. However, China has joined the world's rules-based system, and these things are not acceptable in this system," said James McGregor, a senior counselor in Beijing for APCO Worldwide, a public affairs and communications firm.

China is no different from many countries that set product standards tilted to their own firms or promote home-grown innovation. But Beijing is striking a combative stance at a time when the West, especially the United States, has a sinking feeling that power is leaking away to Asia in the wake of the global financial crisis. Unemployment is high, confidence is low.

"All we're asking China to do is play by the rules. Get your thumb off the scales. Let us go in and compete equally," U.S. Trade Representative Ron Kirk said last week. While Congress is preoccupied with America's big bilateral trade deficit with China, which it blames on the yuan's exchange rate, many Western investors are more exercised by the difficulty of doing business in China. Rules drafted last November that in effect barred Western firms -- even those with long-established operations in China -- from competing for government contracts badly undermined goodwill in sections of the international business community.

Beijing has since withdrawn the offending regulations, and Wen, the premier, has repeatedly reassured foreign firms that they will be treated equally. But the damage has been done. "I talk to a lot of foreign technology executives and they may come to Beijing smiling, but behind closed doors they are rethinking their China plans. This has woken them up," said McGregor, author of a critical study of the array of industrial policies underpinning China's drive for 'indigenous innovation'.

Duncan Clark, chairman of BDA China, an investment consultancy, said China was displaying "high IQ, low EQ" on the issue. The natural rise of domestic competitors was psychologically threatening to foreign companies that have prospered in China.But he said Beijing needed to acknowledge that Western complaints were genuine in many cases; protectionism was a reality in sectors from wind turbines to smart cards.
"We're just not seeing many people queuing up to enter into the market given the perceived barriers," Clark said.

The danger for the world economy is that attitudes are hardening even though China is just setting out on its high-tech odyssey. Without mutual trust, the potential for friction is vast as Chinese firms make inroads into high-end Western markets.China, for instance, exported medical equipment worth $6.6 billion in the first half of 2010, up 27 percent from a year earlier.A recent study by Deutsche Bank said China's technical competence in the equipment manufacturing sector was now at a "golden stage" that would enable it to grab export market share from Japan, South Korea and Germany.

China was likely to undergo an upgrading of its export industries in the next decade similar to that seen in Japan 30-40 years ago -- but on a scale three times larger, the bank said. "The huge domestic market and localisation policy mean that China is best placed to enjoy economies of scale, which will likely offer growing cost advantages to domestic producers against global competitors," Deutsche said. In short, the tinder is dry and nationalist winds in both the United States and China risk fanning any fires that break out.

The need to strike a new balance is urgent, McGregor said. "At the end of the day China has to find a way to build its own innovation system to create its own strong companies. But it's going to have to play by global rules, otherwise we're going to have trade wars," he said. (Editing by Mathew Veedon)
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