Cablegate: China Sidesteps S&Ed/Jcct Commitments -

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OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3209/01 3351037
ZNR UUUUU ZZH
O 011037Z DEC 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6998
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 7415
RUEHKO/AMEMBASSY TOKYO 0125
RUEHUL/AMEMBASSY SEOUL 1416
RUEHGV/USMISSION GENEVA 2555
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 03 BEIJING 003209

SENSITIVE
SIPDIS

State for EAP/CM - WKlein, SFlatt
State for EEB/CIP - SFlynn, FSaeed
USTR for Awinter, JMcHale, TWineland, JGrier
Commerce for ITA - IKasoff, NMelcher, ATing
DOJ for CCIPS - MDubose and SChemtob
FBI for LBryant
State for White House OSTP Ambassador Richard Russell
NSC for Melissa Hathaway

E.O. 12958: N/A
TAGS: ETRD PGOV PHUM SOCI SCUL ECON CH
SUBJECT: CHINA SIDESTEPS S&ED/JCCT COMMITMENTS -
INDIGENOUS INNOVATION IN GOVERNMENT PROCUREMENT RANKLES
U.S. FIRMS

REF: BEIJING 590

SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE ACCORDINGLY.

1. (SBU) Summary. Rules providing preference in
government procurement for Chinese companies with
accredited indigenous innovation appear to contravene
China's S&ED and JCCT commitments to consider products
produced by foreign-invested enterprises in China as
domestic. A recent joint Ministry of Science and
Technology, National Development and Reform Commission,
and Ministry of Finance circular creating an accreditation
system (catalogue) for national indigenous innovation
products has alarmed U.S. high-tech firms who believe the
new system will further block their access to Chinese
government contracts. The deadline for applying to
qualify for national indigenous innovation product status
is December 10, 2009. We recommend a coordinated USG
response to industry request for assistance in countering
implementation of this circular. End Summary.

NEW INDIGENOUS INNOVATION ACCREDITATION SYSTEM CODIFIES
BIAS FOR CHINESE IP IN GOVERNMENT PROCUREMENT
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2. (SBU) Despite commitments by China at the July 2009
S&ED and the October 2009 U.S.-China Joint Commission on
Commerce and Trade to treat products produced in China by
foreign invested enterprises (FIEs) the same as products
by Chinese enterprises for the purposes of Government
procurement and to issue rules in this regard, U.S. high-
tech firms here report a growing threat to their interests
due to preferential policies favoring indigenous
innovation products in government procurement.

3. (SBU) China's Ministry of Science and Technology (MOST),
National Development and Reform Commission (NDRC), and
Ministry of Finance (MOF) on November 6, 2009 issued
circular G.K.F.J. No. 618 creating an accreditation system
for national indigenous innovation products. Accredited
products will enjoy preferential policies in government
procurement. The circular is the most concrete proof of a
previously-rumored catalogue of products promoting
indigenous innovation issued by MOST.

4. (SBU) China's promotion of homegrown innovation
includes an array of policies and programs and is
complicated by a lack of transparency in government
procurement. Conflicts between the Government Procurement
and Tender and Bidding laws create inconsistent
definitions and allow for discriminatory application of
rules. While these broader concerns remain part of USG's
longer-term objective of bringing China into the WTO
Government Procurement Agreement, this new measure may
have an enormous and immediate impact on U.S. industry.
It also raises questions about China's trade commitments,
including its G-20 pledges to avoid trade protectionism.

5. (SBU) Representatives from Microsoft, IBM, Oracle, HP,
Dell, and Texas Instruments, led by industry association
U.S. Information Technology Office (USITO), met with
Emboffs November 23 to voice frustration over the joint
MOST/NDRC/MOF circular and requested USG engagement to
help counter the latest salvo in the PRC's offensive
against foreign high-tech firms. According to one U.S.
company's estimates, it has lost at least USD 100 million
in business volume due to restrictive government
procurement practices against it as an FIE. Other U.S.
FIEs expect significantly larger long-term impact should
the new system be fully implemented.

6. (SBU) According to related application instructions,
MOF will prepare a catalogue of indigenous innovation

BEIJING 00003209 002 OF 003

products for government procurement on the basis of the
needs of government procurement policies as well as actual
conditions. Products should be of great significance,
contribute much to or produce vital influence on economic
and social development, be proprietary, and include
Chinese intellectual property and Chinese proprietary
brands. Six high-tech fields have been selected,
including: computer and application devices; communication
products; modernized office equipment; software; new
energy and equipment; highly energy-efficient products.
The products should also be symbolic and reflect China's
indigenous innovation capabilities. The current deadline
for submission is December 10, 2009.

7. (SBU) FIEs have already encountered roadblocks despite
meeting all previously understood conditions to qualify as
an indigenous innovation product. According to U.S.
industry, the application of a U.S.-invested enterprise
that did try to qualify for national indigenous innovation
product status - by handing over their intellectual
property and registering their trademark in China was
denied.

8. (SBU) U.S. industry representatives have requested USG
support, and are preparing to campaign various government
agencies to reverse or defer indefinitely such an
accreditation system. Industry representatives are also
requesting formal clarification of discriminatory
practices by local governments, urging them to issue rules
to ensure that government procurement is conducted in a
transparent and non-discriminatory manner and to prevent
the recurrence of such discrimination.

LOCAL GOVERNMENTS GO EVEN FURTHER TO BLOCK FOREIGN
PRODUCTS FROM PROCUREMENT
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9. (SBU) Similar policies are taking root at the local
level. In August 2009, local media reported a Beijing
government official's claim that 51 Beijing products had
been accredited as "indigenous innovation products",
accounting for 21 percent of MOST's first batch of 243
products. According to that report, the Beijing
government procurement market in 2008 stood at RMB 7.1
billion (USD 1.04 billion), among which RMB 2.7 billion,
or 38 percent, was spent on indigenous innovation
products.

10. (SBU) To date, MOST has refused to publicize the
original catalogue of indigenous innovation products,
claiming it is for internal use only. Industry contacts
report that MOST has notified the accredited product
companies individually, as well as having issued a press
release which briefly states the catalogue is now
available. Lack of transparency has inhibited FIEs and
other stakeholders from effective engagement with the
Chinese authorities.

11. (SBU) Additional discriminatory practices occur at the
provincial level (see Reftel for background), most
recently by the government of Hubei Province. Hubei's
Director for Government Procurement Wei Chengyu has stated
on various occasions that the Hubei provincial government
had decided to exclude all foreign brand products from
government procurement, regardless of their manufactured
location. As stressed by Wei in a recent media report,
defining whether a product is domestic or not should be
based on whether the product contains indigenous
intellectual property and only those controlled by
enterprises of Chinese majority equity should be qualified
as domestic products. The Hubei government, moreover,
issued Document E'Cai'Han [2009] 21 on November 12,
explaining that Hubei would maintain its government

BEIJING 00003209 003 OF 003

procurement policies into 2010, and continue to exclude
products of foreign companies from government procurement,
including those made by FIEs in China. Post's local IBM
contacts report Hubei's practices may have already
resulted in USD 1 million sales losses for its low-end X-
series servers.

12. (SBU) Given that these immediate economic effects come
on the heels of recent Chinese government S&ED and JCCT
commitments to the contrary, and U.S. industry beliefs
that these and other actions constitute significant
obstacles and are inconsistent with fair competition,
transparency, and with commitments to avoid trade
protectionism, U.S. industry have requested USG
intervention. Although further rule-issuing by the
central government consistent with S&ED/JCCT commitments
may not eliminate further misinterpretations by local
governments, it would be a step in the right direction,
according to U.S. industry.

COMMENT AND ACTION REQUEST
--------------------------
13. (SBU) China's unhurried progress toward accession to
the WTO Government Procurement Agreement and its expanding
efforts to use its rapidly growing government procurement
budget to support domestic firms and promote domestic
innovation in key industries does not bode well for U.S.
high-tech firms that hold competitive technical advantage
and have heavily invested in the Chinese market. While
long-standing practices at both the central and local
levels in China have suggested strong bias in government
procurement for Chinese domestic intellectual property,
the newly announced system makes it an explicit policy.
We recommend a coordinated USG response to the new policy
to respond to U.S. industry concerns and press for China
to fulfill the commitments it made at both the S&ED and
JCCT. End comment.

HUNTSMAN

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