HOW HE SEES IT U.S. sends a pair of warnings to China

By DANIEL SNEIDER
KNIGHT RIDDER NEWSPAPERS
The Bush administration sent two warning shots across China's economic bow in recent weeks -- with possibly more to come.
In early March it sent a letter calling on China to back off on plans to impose a software encryption standard for wireless computers that would discriminate against foreign firms. A couple of weeks later the United States filed the first case against China at the World Trade Organization, charging that it uses tax rebates to favor domestic semiconductor producers.
These moves are welcome. It is long past time to go beyond polite talk and take actions to ensure that China plays by international rules. The administration also seems poised to back an AFL-CIO complaint about China's abusive labor conditions. Sure, election-year politics may have something to do with this attention to China. But the motive is less important than the deed.
Right target
For Silicon Valley, the focus on technology hits the right target. The key problem is not China's undervalued currency or even its huge trade surplus but rather its policy of industrial protectionism.
China is following the tried and true path of Japan -- using trade barriers to build up its own industry. The aim is to not only dominate the Chinese market but also to use that dominance to become global competitors.
China, like Japan before it, takes advantage of the hunger of American and foreign firms to grab a slice of what seems to be an unbounded market. But if you want to sell power turbines to China, for example, then the Chinese insist you teach them how to make the turbines and hand over your most advanced materials technology.
The Bush trade actions go right to these core issues. In the semiconductor case, the Chinese government imposed a discriminatory tax on the import of chips to give their own domestically produced chips a clear price advantage.
In the wireless case, China set a unique standard that must be incorporated into any wireless device used after June 1. Crucially, China demanded that foreign firms partner with a Chinese company to produce the devices. Manufacturers such as Intel, which makes the Centrino wireless chip, balked at this.
The use of unique standards to aid domestic manufacturers is a game the Japanese also played. And China is developing a whole set of these -- for video compression, digital television signals and high-speed mobile phone networks -- to promote its own high-tech companies.
Chinese tech executives whom I talked to recently in Beijing were unanimous in endorsing this approach. I suggested they were making the same mistake as the Japanese by setting standards that only isolate them from new waves of innovation.
Too small
The Japanese problem was that their market was too small, responded Wang Yan, CEO of Sina.com, China's biggest Internet portal. If Europe follows China, two-thirds of the world will be following the same wireless standard, he said. "It will be America's turn to convert its thinking," Wang boasted.
The next step will be for China's tech companies to go global. Some are already well down that road. Telecom equipment makers such as Huawei Technologies are laying fiber-optic networks in Russia, Pakistan, India and Indonesia, using low bids and soft loans provided by the Chinese government to grab new markets. At the same time, Huawei is investing in American start-ups such as San Diego's LightPointe Communications, gaining access to the most advanced wireless optical technologies.
U.S. Trade Representative Robert Zoellick argued in a February speech that China is "not another 'Japan Inc.' -- an export-driven machine that shunned imports and the participation of foreign businesses. China sells but it also buys," he said.
This is a bad reading of both China and Japan. At a comparable stage in its history, Japan also bought from the United States, particularly machinery, and sought foreign investment in key areas. It did not run huge trade surpluses until the early 1980s, when its global firms had established their competitiveness.
The United States fought these issues out with Japan, with mixed success. Managing the competition with China will be an even more difficult challenge, given its economic ambitions. But facing the truth is a good place to start.
XSneider is foreign affairs columnist for the San Jose Mercury News. Distributed by Knight Ridder/Tribune Information Services.