Even Japan Wants to Take China to the WTO

There has been much ado as of late about China's efforts to use government procurement as a way to help local firms at the expense of foreign ones. Call it the backdoor revenge of import substitution industrialization or, to paraphrase Friedrich List, taking back the ladder. For instance, the American Chamber of Commerce in China has issued warnings about more aggressive use of government mandates promoting so-called "indigenous innovation" that may limit the access of foreign firms to Chinese markets. You can download the entire 2010 China Business Climate Survey where a poll of members suggests that government restrictions are increasingly curtailing their business opportunities. There's also a summary of this report. What follows, though, is an Associated Press clipping:

Foreign companies say China is increasingly using discriminatory rules to reduce access to previously open areas of its economy and promote its technology industries, a U.S. business group said Friday, adding to rising complaints of worsening conditions for foreign investors. The report by the American Chamber of Commerce in China comes as companies say Beijing is violating the spirit of market-opening commitments by trying to reserve segments of its economy for domestic companies in an effort to build up Chinese global competitors.

The chamber highlighted complaints about efforts to nurture China's computer and other technology companies — a policy dubbed "indigenous innovation" — by favoring them in government procurement and other areas. [Again, note that the PRC is not a party to the Government Procurement Agreement or GPA in the WTO mandating, among other things, non-discrimination to foreign producers.]

American companies are "troubled by a mounting number of policy challenges ranging from the inconsistent enforcement of laws, to China's discriminatory domestic innovation policies and regulations that limit market access into sectors that had been increasingly open to foreign investment for the past 30 years," the group said in an annual report on business conditions.

The report said a survey of 388 companies found for the first time that inconsistent regulation has become the most significant challenge faced by American companies in China. Previously they cited trouble finding enough Chinese managers as their biggest problem. These policies appear to be diminishing the ability of foreign companies to access the Chinese domestic market," chamber chairman John D. Watkins said in a statement. The chamber represents 1,200 companies...

The Chamber of Commerce report emphasized concern about "indigenous innovation," which many businesspeople say is the biggest obstacle right now for foreign companies in industries from computers to factory equipment. The chamber said 28 percent of companies surveyed said they already are losing business due to "indigenous innovation" and 40 percent expect to be hurt once the policies are fully implemented.

Beijing caused alarm among foreign companies with a November announcement that it would favor technology developed in China when buying computers and other goods on which the government spends billions of dollars each year. The government is the biggest customer for many types of computer and other technology, and companies worry the restrictions might be extended to state-owned companies as well.

The government has spent a decade promoting "indigenous innovation" and is using increasingly intrusive policies to try to protect and support Chinese developers. The chamber said seven of eight top challenges cited by companies in its survey related to obstacles raised by the Chinese government, including concern over obtaining required licenses, favoritism for domestic companies, bureaucracy and unclear regulations. The survey found 74 percent of companies this year found China's enforcement of intellectual property rights ineffective.

Well surprise, surprise. It appears that the Japanese are not too happy with this state of affairs either and are thinking of taking China to the WTO Dispute Settlement Mechanism (DSM). From Dow Jones Newsires:

The Japanese government said Thursday it could bring key trading partner China before the World Trade Organization if Beijing sticks to a proposed policy that critics say could make it more difficult for foreign firms to do business in China. A Chinese initiative publicized last fall encouraging government agencies to buy technology products from domestic companies amounts to "discrimination" against foreign firms, Japan said in its latest annual report on unfair global trade practices.

The criticism follows similar objections raised Wednesday in a report by the United States Trade Representative...Japan's report, issued Thursday by the Ministry of Economy, Trade and Industry, says that the government has "expressed concerns in concert with the U.S. and E.U. [European Union]" over China's proposed policy. Tokyo has also " urged China to improve the new measures," the report said.

Those measures require products, such as software and computers, listed in a government procurement catalog to first receive accreditation for "indigenous innovation." The system could mean that China's many government agencies may shun products produced with intellectual property not registered in China, complicating foreign companies' efforts to expand in the country, analysts said.

Japan is now in consultation with China over its objections to the policy, said Naoko Munakata, director of policy planning in the multilateral trade department of METI [Ministry of Trade, Economy, and Industry]. Tokyo would prefer to resolve the issue through talks, as a legal procedure would be "costly and time-consuming," Munakata said. But if the consultations don't produce results, "then we have to think about other measures that may include bringing it to the WTO," she said.

Perhaps even Ha-Joon Chang would be proud. In any event, perhaps being slagged by any and all in the trade arena is a sign that you've arrived.

UPDATE 1: Once more, here's the letter from AmCham China and other concerned parties to the government on the now-infamous Circular 618.

UPDATE 2: China has now softened this law. So the pressure worked, eh?