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Getting tough with China?

Worker advocates want a tariff on Chinese imports to protect American jobs, but others warn the move could hurt U.S. tech companies.

As a trade dispute escalates between the United States and China, the U.S. tech industry is keen to see changes by the Asian giant--but opinions vary on how hard to push.

U.S. business and labor leaders agree that China ought to adjust the value of its currency and do a better job of protecting intellectual property rights. But while industry leaders favor milder steps, worker advocates want more aggressive action. They argue a sweeping tariff on Chinese goods may be needed to stop job losses and level the playing field.

Critics, though, warn such a move could trigger a trade war that hurts U.S. tech companies, many of which have operations in China.


What's new:
Worker advocates want a tariff on Chinese goods to protect American jobs and even the playing field with the country's manufacturers.

Bottom line:
Critics warn such a move could trigger a trade war that hurts U.S. tech companies, many of which have operations in China.

More stories on China

There's still more at stake, said Richard Suttmeier, a political science professor at the University of Oregon. If the involvement of U.S.-based tech companies in China declines, Beijing's ambitious plans for technological advancement could wind up threatening America economically and on the geopolitical stage, Suttmeier said.

"We're better off if we keep China integrated into this global system whereby their technological progress is co-evolving, if you will, with the technological progress of multinational companies," he said.

China and the United States have been butting heads on trade matters for years. A key flash point is the U.S. goods trade deficit with China, which rose from $29.5 billion in 1994 to $162 billion last year.

The countries have grown more combative in the past week or so. The U.S. has moved to impose quotas on certain Chinese textiles and apparel products, and U.S. Treasury Secretary John Snow chided China publicly over its currency policy.

Many observers claim China effectively subsidizes its exports by pegging its yuan to the dollar, resulting in a currency value that is artificially low. In a report to Congress on Tuesday, Snow did not go as far as to claim that China manipulates the currency exchange rate to gain an unfair trade advantage. Still, he warned the country should change its ways.

"Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and global economic growth," Snow said in the report.

Although China has said it aims to reform its currency policy, this week its stance on the issue seemed to stiffen. According to official news service Xinhua, Chinese Premier Wen Jiabao said China will not yield to outside pressure in exchange rate reform. "The reform of (yuan) exchange rates is of China's own sovereignty," he said, according to Xinhua. "Any pressure or media play-up, or to politicize an economic matter, will not help solve problems."

Trade deficit with China

A stronger yuan could affect the tech industry in a number of ways. Products and services coming from China--which run the gamut from consumer electronics to software coding--would likely increase in price. If the price rises are significant, global companies could decide to locate operations elsewhere and U.S. operations could become more competitive. Consumers, meanwhile, would likely pay more at their local Wal-Marts, Gartner analyst Martin Reynolds said.

Given that such a pocketbook pinch could translate into public displeasure, Reynolds expects the U.S. government to back down on the currency issue. "By and large, it's saber-rattling," he said.

The U.S. technology industry has other concerns about trade with China. One is the still-rampant software piracy in the country. Losses from software piracy in China totaled $3.6 billion in 2004, making it second only to the United States in piracy damages, according to a study from research firm IDC and the Business Software Alliance trade group.

Another issue is market access. Particularly worrisome to some are draft regulations in China on software procurement by government entities. The proposed rules "essentially block international companies from competing for (Chinese) government procurement contracts," the head of the U.S.-China Business Council, a group that includes Microsoft, IBM and Hewlett-Packard, said in Congressional testimony this month.

China's efforts to develop its own technology standards also have been a cause for concern to U.S. companies. In a challenge to Microsoft in particular, China has worked with South Korea and Japan to develop an open-source alternative to Windows software. And last year, China planned to force equipment makers to include its Wireless Authentication and Privacy Infrastructure, or WAPI, standard in products sold in China. China later agreed to indefinitely postpone enforcement of the WAPI directive.

There may be problems in China, but Gartner's Reynolds is wary of the U.S. government getting involved. To him, a more promising way to bring about Chinese reforms is for U.S. companies to make their suppliers in China abide by codes of conduct, such as banning child labor. Some tech companies already follow this approach, he said, which encourages Chinese businesses to move to global standards.

Relying on such self-regulation is too tepid for some tech industry leaders. The U.S.-China Business Council, for example, recommended that the Bush administration intervene with Beijing on the proposed software procurement rules.

Harris Miller, president of the Information Technology Association of America trade group, also thinks U.S. officials should be making more noise on China. Miller cites piracy and the proposed procurement rules as particular concerns, and argues that behind-the-scenes efforts by U.S. officials to bring about change in China have not proven effective.

He applauded action taken by the administration on textiles and Snow's recent scolding of China on currency policy. "The U.S. needs to step up the pressure," he said.

At the same time, Miller warned against pressing Beijing too much. "No one wants a situation where you have a trade war," he said.

Thea Lee, the chief international economist at the AFL-CIO, has a different view: "The war started--and the newsflash is, 'We're losing.'"

According to Lee, China is guilty of intellectual property rights violations, currency manipulation and worker rights violations. "We're hemorrhaging jobs to China because they aren't playing by the rules," she said.

The Chinese embassy in the United States did not respond to a request for comment for this story.

A January report from the Economic Policy Institute concluded that the U.S. trade deficit with China increased twentyfold between 1989 and 2003, displacing 1.5 million jobs. Among those were nearly 53,350 jobs in computer and office equipment manufacturing and more than 46,200 positions in semiconductor manufacturing.

Stinging response?
The AFL-CIO backs a bill introduced earlier this year by New York Democratic Sen. Charles Schumer that threatens to slap a 27.5 percent tariff on Chinese products, if negotiations regarding the value of the yuan "are not successful."

Such a tariff could sting many tech companies with operations in China. Microsoft, IBM and Intel are among the businesses with facilities in the country. A tariff "would be costly to American companies, I assume," Suttmeier said. He also argued the Chinese government would probably retaliate against a U.S. tariff. "There are a variety of ways China could make things less comfortable for American firms," he said.

Among the companies that could be caught in trade-war crossfire is San Francisco-based . The company, which provides software development services, has about 400 employees in Shenzhen, China, and roughly 100 in the United States. Ramsey Walker, Freeborders' co-chief executive officer, is hopeful tariffs won't interfere with his growing business and the global trade he views as beneficial, on the whole. "We're not concerned that America is going to become isolationist," he said.

The AFL-CIO's Lee counters that a tariff would not prevent trade, but rather put the countries on an equal footing. She also dismisses the concern that playing hardball with China risks dividing the countries with grim long-term economic and political consequences. "I don't think there's any guarantee that if we let China walk all over us on the trade front, they'll be our friend," she said.