The IT Industry's Stake in China

By David Silverberg, Contributing Writer



When Marco Polo returned to his native Venice from China in 1295, he was ridiculed for constantly talking of "millions of this and millions of that." But even today it is difficult to speak of China in any smaller terms, especially when one looks at the information technology industry.

China creates a siren song that has never lost its allure in the minds of the West, leading every vendor to think: "If only each Chinese bought one (fill in the blank here: oil lamps, opium, autos, etc.), we'd be rich."

The prospect of the vast Chinese market keeps merchants coming back, and the latest prospect for enormous wealth is in computers and software.

It is for this reason — as well as opening up U.S.-Chinese trade generally — that an agreement that brings China into the World Trade Organization (WTO) is so crucial to the information technology industry.

By joining, China would agree to harmonize its tariffs and trade terms with the rest of the members and become part of the global trading system.

President Clinton and Chinese Premier Zhu Rongji are determined to reach an understanding that brings China into the WTO. They failed to reach agreement during Zhu's visit to the White House April 8 and 9, with Clinton balking at what he felt were insufficient Chinese concessions.

After the two parted, they continued trying. As of this writing, Clinton and Zhu had committed to reaching an agreement by the end of April, with negotiations taking place in Beijing.

The stakes are enormous. According to a November 1998 study by PricewaterhouseCoopers and the Business Software Alliance, the total market size for software in China reached $1.4 billion in 1997. It is projected to grow an annual rate of 28 percent between now and 2001. Some estimates have it growing at as much as 50 percent per year — and result in a total market size of $3.6 billion annually. The effects of normalized U.S.-Chinese trade would ripple through the industry and the entire economy.

But the obstacles are formidable as well, especially when it comes to technology transfer, trade terms and politics.

On the Chinese side, bringing down protectionist trade barriers could destroy or cripple enormous, inefficient industries that nonetheless employ thousands of people. Further, Zhu is negotiating his trade deals with the United States over the heads of the Chinese bureaucrats whose industries and ministries will be affected.

Speaking at the Massachusetts Institute of Technology, Zhu argued that, "In negotiations with the WTO, China made great concessions. I believe that such concessions are good for the Chinese people, [allowing them] to participate in the international economy, and also will promote market competition in China."

In the United States, the Republican Congress has seized on China as a presidential campaign issue and is pounding the nail hard. On the national security front, there are charges of Chinese nuclear espionage and diversion of civilian technology to military purposes. There are serious differences over the future of Taiwan which have taken the two countries to brink of war.

On the human rights front, there are ongoing charges of Chinese human rights abuses and oppression in Tibet. Then there are charges that China funneled illegal campaign contributions to Democratic coffers in 1996, corrupting the presidency and the political process.

Not least of all, when it comes to information technology, the Chinese are notorious technology pirates, an issue Zhu tried to defuse while in the United States by unveiling an anti-piracy decree.

Economically, though, "There is tremendous potential here," said Daniel Rosen, a research fellow at the Institute for International Economics. "The Chinese have been open to high-technology trade with the United States. The burden is on us to take them up with that and finish the debate over the export of high-tech products."

Rosen believes the agreement being negotiated opens the way for the United States to begin exporting relatively low technology and then graduate to higher technology. This was General Motors' experience in China. When it started doing business in China, GM was using 25-year-old technology, and then evolved to state-of-the-art production methods.

A trade agreement between the United States and China has been endorsed by numerous U.S. business organizations. In the IT arena, the Washington-based Information Technology Industry Council, an association of 28 large IT companies, has been cautiously positive.

"The proof will be in the details, but we're encouraged by reports that China has agreed to phase out tariffs on computers, printers and other U.S. IT equipment," said Rhett Dawson, president of the council, in a press statement.

The council actively pressed for the administration to ensure that if China was allowed to join the WTO, it would commit to implementing the international Information Technology Agreement and reduce import duties on the full range of IT products, achieving zero tariff levels by 2005. Reports out of the negotiations were positive.

For all the storm and stress of negotiating China's entry into the WTO, the hard part will begin once both parties initial the dotted line. At that juncture it becomes a domestic debate in the United States, and this time, such a debate will be especially hot and heavy given the political stakes involved.