S&ED and done

The renminbi is, by any standard, a political football. And it was being thrown around with customary vigor ahead of the first installment of the twice-yearly US-China Strategic and Economic Dialogue (S&ED) in late May.

Currency talks – and the simmering trade disputes that lurk in the background – are seen as central to addressing the US trade deficit: Renminbi appreciation would make US goods more price competitive, encourage exports and revitalize domestic industry. The extent to which this theory would play out in practice – particularly given Beijing’s commitment to gradual appreciation – has been and will continue to be widely debated.

There are other issues on which US trade negotiators should engage the Chinese government. Chief among them is market access for foreign companies that feel increasingly sidelined by protectionist policies in areas ranging from government procurement to indigenous innovation rules. If allowed to germinate, these policies could cost many US firms a foothold in one of the world’s fastest-growing markets and hold back the development of domestic players due to a dearth of competition.

US Commerce Secretary Gary Locke’s comments in the run up to the S&ED summed up the feelings of US industry rather aptly when he said: "If innovative companies perceive an unfriendly investment environment, one of two things will happen – they’ll either stop inventing or they’ll decide to innovate someplace else."

China’s government procurement policies are wide open to criticism. Under the WTO’s Government Procurement Agreement (GPA), the 28 signatories agreed to waive preferences for domestically sourced goods and services and to make transparent all bids and contracts. China has not signed the GPA, saying that it will do so "as soon as possible" and continues to operate under its own Government Procurement Law, the mechanisms of which are at best a paler shade of opaque.

Such regulations understandably stand accused of fostering domestic firms at the expense of foreign commercial interests – and the laying of a level playing field, despite Beijing’s continuous harping on about the "spirit" of the WTO, seems as far off as ever. The problem with regulatory barriers is that it is very easy to identify them, but slightly more difficult to prove injury to industry.

The US-China Business Council aired its concerns over Beijing’s equally arbitrary indigenous innovation rules, which use "a mix of product catalogues, unique standards requirements, government procurement preferences, and tax incentives that include requirements for domestic intellectual property ownership," to protect local industry.

It is understandable that China wants to incubate its own technological advancements, but such a regimen flies in the face of international standards. It also acts as a barrier to foreign technology and R&D efforts that rely heavily on protection of intellectual property, sectors that China has learned and profited from.

Most disturbingly, closing off government tenders under the guise of stimulating domestic technological innovation could have exactly the opposite effect and end up hindering China. To take one of many examples, the government has said it will "openly welcome" investment from foreign green energy companies as part of the nation’s drive to live up to its climate change responsibilities. Limiting the inflow of foreign technology and capabilities will not help its case.

Despite earlier moves moderating draft procurement guidelines, Beijing continues to erect barriers preventing foreign invested enterprises from partaking in China’s growth story. A recent announcement that manufacturers of certain technologies will have to disclose to the government encryption codes in order to be eligible for procurement programs again illustrates the fact that, in many respects, China’s "open door" policy could well be a thing of the past.

Until China signs the WTO’s Government Procurement Agreement and opens its some US$80 billion in government procurement contracts to public tender, foreign companies will continue to find themselves locked out by rule of regulation. So far, Beijing is happy to let the US and others gripe about currency while constantly shifting its investment goal posts, but there could be a price to pay for this new form of protectionism.