House Hearing Finds Standards and Procurement Biggest Concerns with China's Indigenous Innovation
On March 9, 2011, a subcommittee1 of the House Committee on Foreign Affairs held a hearing entitled, “China's Indigenous Innovation Trade and Investment Policies: How Great a Threat?”
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Policies Aim to Replace Foreign with China IP, to Add More Local Value
Karen Laney, Acting Director of Operations at the U.S. International Trade Commission, stated that indigenous innovation policies can be broadly described as “the collection of Chinese policies aimed at increasing domestic innovation and, where possible, replacing foreign intellectual property (IP) with domestic IP in Chinese production” in order to increase the domestic value added in goods produced in Chinese factories.
Several others described China’s intent with these policies as moving from a prolific, but low-end producer of manufactures to a position of technological leadership.
Some Say Indigenous Innovation Poses Greater Threat than IPR, Currency
According to the ITC official, some U.S. industry representatives have described indigenous innovation policies as posing a greater potential threat to their business in China than intellectual property infringement or currency related issues. They describe a “web” of interrelated policies that work together to help build domestic Chinese companies into “national champions” capable of competing with foreign companies both inside China and elsewhere.
Trade Worried About Indigenous Innovation Policy in Standards & Procurement
Laney stated that in its November 2010 report2 on intellectual property infringement and indigenous innovation in China, if found that the following two areas are of particular concern to U.S. industry:
Chinese standards that limit market access. Chinese-developed technical standards reportedly affect U.S. companies in two ways. First, by favoring Chinese standards over internationally accepted foreign standards, market access is limited for foreign companies because such requirements force adoption of Chinese technology and standards in order to conduct business in China. According to U.S. firms, Chinese standards-setting bodies frequently take an existing standard and change the technology only slightly, just enough to add costs and make it more difficult for foreign manufacturers trying to sell their products in China. They also complain that the Chinese approach to standard setting is top-down, non-transparent, and excludes foreign company input.
Laney adds that a second notable effect is that requiring Chinese technical standards may increase the royalty payments that foreign firms must pay to Chinese IP holders while reducing the royalties that Chinese manufacturers pay to foreign companies for intellectual property included in global standards.
Gov’t procurement that excludes foreign products. The ITC also found that Chinese Government procurement (GP) policies promoting indigenous innovation were another area of great concern for U.S. firms, especially since the annual market for Chinese government procurement is estimated to be $88 - $200 billion annually. Of particular concern during its November 2010 investigation were draft national GP policies issued in April 2010, which would apply to six high tech sectors: (1) computer and application equipment; (2) telecommunications products; (3) modern office equipment; (4) software; (5) new energy and equipment; and (6) high-efficiency energy-saving products.
The April 2010 draft had several requirements. One was that products approved for inclusion in a national procurement “catalogue” must be locally developed with the R&D led by a Chinese entity and with intellectual property licensed in China. It is unclear whether this would exclude foreign-owned firms and joint ventures in China. Another requirement was that approved products must also be free from “intellectual property disputes” (which were not defined in the regulations). Firms expressed concern that an unsubstantiated allegation raised by a third party, perhaps a competitor, could be used as a reason to exclude a foreign-made product from government procurement.
According to the ITC official, although no national procurement catalogue has been released, a number of provincial indigenous innovation catalogues are actively in use for government procurement decisions within each province. These catalogues include very few products made by foreign companies or joint ventures.
(Note that China agreed to certain initiatives involving indigenous innovation and government procurement policies during the December 2010 session of the U.S.-China Joint Commission on Commerce and Trade (JCCT). See ITT’s Online Archives or 12/16/10 news, 10121638, for BP summary.)
1Subcommittee on Terrorism, Nonproliferation, and Trade
2See ITT’s Online Archives or 12/14/10 news, 10121419, for BP summary of ITC’s report, "China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy."
Testimony is available here.