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China's Chip Designs Concern U.S.

Restrictive taxes and technical standards may elicit a formal protest of trade rule violations.

March 11, 2004|Tyler Marshall and Evelyn Iritani | Times Staff Writers

SHANGHAI — China's drive to become a leading global supplier of semiconductors within a decade is rapidly propelling that nation up the technology ladder -- and creating new trade tensions with the United States.

U.S. high-tech industry executives contend that China has an arsenal of unfair tactics at its disposal, including complicated, China-only technical standards that are in the works and a tax they say discriminates against foreign chip makers.

At the urging of U.S. producers, the Bush administration is considering filing its first complaint against China with the World Trade Organization, arguing that the tax violates world trade rules. Nicholas Lardy, a China specialist at the Institute for International Economics in Washington, called the tax "a fairly straightforward" WTO violation having "great economic significance" to the United States.

The unbalanced trade across the Pacific has been a thorn in the bilateral relationship. Expanding imports from China contributed to a record U.S. trade deficit of $43.1 billion in January, according to data released Wednesday by the Commerce Department. Overall U.S. imports were down slightly to $132.1 billion, but exports also declined to $89.05 billion despite the weaker dollar, which makes U.S. products cheaper overseas. The U.S. trade deficit with China widened to $11.5 billion in January, a 6.6% gain.

As further evidence of the growing tensions, Secretary of State Colin L. Powell, Commerce Secretary Don Evans and U.S. Trade Representative Robert B. Zoellick took the unusual step of sending a letter this month to Chinese Vice Premiers Wu Yi and Zeng Peiyan urging Beijing to repeal a proposed encryption standard for wireless communications products set to take effect June 1. The U.S. officials said the new security standard violated world trade rules.

Industry leader Intel Corp. said Wednesday that it had warned customers that it would quit shipping its wireless chips to China in May because it could not comply with the proposed new standard. Intel spokesman Chuck Mulloy said the Santa Clara, Calif.-based company had determined that it could not find a way to comply without compromising the quality of its products.

"These are both very serious issues that need to be resolved quickly," said Patrick Powers, director of China operations for the U.S.-China Business Council, referring to the tax and wireless standard. The stakes in the dispute are high.

Semiconductors, which are small yet highly sophisticated devices also known as microchips, are at the heart of modern industrial economies. Chips power everything from personal computers and airplane navigation systems to ballistic missile defenses. Chip production has become, in many ways, as vital to a nation's economic and military strength as oil.

Industry executives in the U.S. say China could pose a serious competitive threat in the not-too-distant future. They fear that rapid growth in China's semiconductor industry could produce a global glut and cause prices to plummet. And some executives and defense experts worry about security implications, considering that semiconductors are essential components of military hardware.

This conflict is heating up just as the ballooning U.S. trade deficit and loss of manufacturing jobs to lower-cost countries including China are sparking heated debate in the presidential campaign. The chip issue is expected to figure prominently in U.S.-China trade talks next month in Washington, with Commerce Secretary Evans arguing that Beijing's tax policies and its drive to create China-only technical standards are thinly veiled forms of protectionism.

The Semiconductor Industry Assn., the leading U.S. industry group, believes that China's growing "gravitational pull" will draw capital, talented people and, ultimately, leading-edge research and development away from the United States.

For trade war veterans, many of these concerns contain an echo of the 1980s, when the American semiconductor industry sought protection from Japanese chip makers accused of illegally dumping into the U.S. market. In 1986, Japan reluctantly agreed to restrict sales of its semiconductors to the United States and open its market further to U.S. imports.

Semiconductors are the second-largest U.S. export to China, behind aircraft and spacecraft, including satellites.

Chinese officials play down worries about the growth of its semiconductor industry.

"Don't be afraid of China," said Jiang Shoulei, secretary general of the Shanghai Integrated Circuit Industry Assn., an arm of the Shanghai municipal government. "It's a long way from being a threat. Our growth is fast, but it's from a very small base."

As with so much of China's economic transformation, the scale of the country's push into this crucial sector is staggering.

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