State's trade with China gets even tougher

Doing business with China was never a simple proposition, but Washington state companies and officials have been among the most optimistic supporters of close trade ties.

Lately, economic frictions with China are clouding even their views of the future.

The recent flare-up with Google, in which the search giant threatened to leave China over censorship, may be the tip of the iceberg.

More challenging, say software companies and makers of clean-energy products, is a new policy encouraging "indigenous innovation." That policy requires the intellectual property behind a host of technology products sold in China to be developed and owned by Chinese companies.

"The U.S. should fully expect to be battling Chinese policy to get into these sectors," said U.S. Rep. Rick Larsen, D-Lake Stevens, co-chairman of the bipartisan U.S.-China Working Group, which works to educate Congress about relations with China. Beijing's new measure takes the growing "tit-for-tat" trade disputes over steel and poultry to a new level.

"When it comes to protectionism, we're minor-league players when you look at what China is doing," Larsen said.

Whether the two countries can mend the rift makes a big difference to the state. China has become the largest overseas market for Washington goods, and Chinese buyers are reaching for more than Boeing planes — their $10 billion annual shopping list includes salmon, cherries, potatoes, ultrasound devices, video games and forklifts.

From 2000 to 2007, Washington state exports to China grew more than 400 percent, while exports to the rest of the world grew just 87 percent, according to the US-China Business Council.

But many of the products the U.S. hopes to sell China in the future involve ideas, not commodities.

"China ought to be a source of growth," Microsoft Chief Executive Steve Ballmer said in a recent appearance on CNBC. "Intellectual-property protection in China is very, very bad — abysmal. It's almost not fair. We're buying a lot of goods from China, but the things that U.S. companies can sell — pharmaceutical products, media, software — it's all intellectual property and design, and that stuff is not getting paid for in China. China is now the second-largest market in the world, and that's got to change."

Promising industries

Washington state has bet on clean energy and environmental technology as especially promising industries for selling products to China.

A few years ago, the prospect of China's massive environmental problems solved by Western innovation excited U.S. leaders as a win-win formula.

But now, that formula isn't so clear as China aims to exert its own technological leadership and is pouring $9 billion a month into the effort. The country is already the biggest producer of solar panels and plans to build the largest solar plant in the world.

"It is beyond belief, the investments the Chinese are making to be dominant in those industries," said U.S. Rep. Jay Inslee, D-Bainbridge Island. "We are up against an investor who is totally committed to a singular plan to dominate these industries. We have to raise our game."

Green technology is among 10 sectors protected by the Chinese indigenous-innovation directive, published in November.

The new policy will make it virtually impossible for foreign companies to win Chinese government contracts, worth an estimated $85 billion annually, U.S. Commerce Secretary Gary Locke said Thursday. The policy violates pledges Beijing made last year to open its market, he said.

It's inevitable that China would seek to move up the ladder from the world's factory to an advanced technology powerhouse, following the pattern of Japan and other industrialized countries, says former U.S. Ambassador Darryl Johnson.

"Of course, they're going to want to expand what they have," Johnson said. "The question is under what terms."

China's high rates of piracy persist in many industries despite the country's growing economic might.

"They don't see how abiding by intellectual-property rights benefits them," Johnson said. "In the long run it does — it makes them a fair and open competitor."

The policy isn't set in stone and the government could still decide to change its approach, said Microsoft General Counsel Brad Smith.

"If you really want to encourage innovation, the best way is to give everyone everywhere a chance to compete for new business," he said. "We remain very hopeful that the government will think long and hard and recognize a better approach is to take a different path."

Google threatened to leave China after a sophisticated cyberattack on its network, combined with continuing attempts to limit free speech. Hackers traced to China were trying to access e-mail accounts of Chinese human-rights activists.

Microsoft has made it clear it has no plans to follow Google's lead if the search giant does leave.

Deep pessimism

Mark Anderson, a technology consultant in Friday Harbor and author of the influential technology newsletter Strategic News Service, expressed deep pessimism about China.

This month, even before the attack on Google, Anderson called for a reassessment of China, saying the government's behavior goes against internationally accepted standards and business laws.

"In politics, thought and business, China remains a police state," he wrote.

"Our optimism in having China joining world commerce should never be confused with bad acting, illegal behavior, IP (intellectual property) theft, structural barriers, or other current practices which need to be dissolved before China is a trusted member of the trading community," Anderson wrote.

He advised companies not to disclose their intellectual property in China "under any circumstances."

On the other end of the spectrum is Dennis Bracy, chief executive of the US-China Clean Energy Forum, who remains optimistic that the two countries can find a way forward that brings new opportunities for Washington companies.

The key is to look at common interests, he said. China and the U.S. have nearly identical energy situations — the top two carbon emitters both have huge energy demands and are captive to imported oil. Bracy and other Clean Energy Forum members have suggested creating a joint research center, based in this state, with intellectual property held equally by both sides.

Any global progress on climate change will depend on the U.S. and China figuring out how to cooperate despite the new trade challenges.

"If you don't get the two big guys to agree, nothing can happen," Bracy said.

Kristi Heim: 206-464-2718 or kheim@seattletimes.com