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Tech Industry

Tech's China syndrome

CNET News.com's Declan McCullagh explains why Silicon Valley fears a meltdown if trade and geopolitical frictions with Asia's emerging superpower escalate.

Washington's newfound ire toward China is not a good sign for technology companies.

Until recently, the Bush administration has sought to avoid direct confrontation with Asia's emerging superpower, instead stressing cooperation against terrorists and North Korea and veering in a generally free-trade direction.

That may be about to change. China's decision to keep its currency tied to the American dollar, which ensures that its products stay relatively inexpensive, is wildly unpopular with U.S. government officials. Tension is mounting over China's possessiveness toward Taiwan and its alleged arms sales to Iran, and a new crop of Bush appointees seems less inclined toward amicability.

Those are the necessary ingredients for an ugly trade dispute that's starting to simmer. By a 67 to 33 vote this month, the U.S. Senate effectively endorsed a bill that would impose 27.5 percent tariffs on all Chinese products.

Reading the political tea leaves offers little hope for optimism.

"We would be among the first to feel the pinch of tariff barriers," says Rhett Dawson, president of the Information Technology Industry Council. "We don't believe in tariffs. We're free traders. We think that the United States is uniquely and philosophically pro-free trade...We'd much rather have Congress pushing a free-trade agenda. We think we can compete."

The ITIC, which represents companies such as Apple Computer, Cisco Systems, Dell, eBay, IBM, Intel, Microsoft and Oracle, estimates that overseas sales account for 60 percent of the revenue of U.S. technology companies. That's why "we hope things will work themselves out," Dawson says, adding that ITIC has concerns about China's currency and its commitment to stopping software piracy.

It's true that the United States is running a massive trade deficit and Chinese exports have skyrocketed (up 6.5 times from 1993 to 2004). But what tends to be overlooked is that around 62 percent of the growth has been driven by Chinese outposts of U.S., European and Asian firms. In other words, reality is a bit more complicated than just us vs. them.

For one thing, global tech companies are moving quickly to set up manufacturing plants in China. Dell said in March that it would build a new plant in Xiamen; LG.Philips is manufacturing thin CRTs in Nanjing; Cisco has opened a research center in China; and Advanced Micro Devices has created a Chinese manufacturing subsidiary. Suffice it to say that these companies wouldn't be delighted by tariffs.

Unfortunately, reading the political tea leaves offers little hope for optimism. China pointedly snubbed the United States by skipping a meeting last weekend of the International Monetary Fund and the World Bank in Washington, D.C. The reason? Bush administration officials had hoped to use the confab to pressure Beijing to revise the value of its currency.

China's currency, the yuan, has been linked to the U.S. dollar at a ratio of 8.3 to 1 since 1995. As the dollar has fallen in the last few years, American products have become cheaper for consumers holding currencies such as the euro or yen. But the yuan-dollar connection means shoppers can still buy relatively inexpensive Chinese goods at Wal-Mart--and are therefore less likely to buy American.

That's what prompted the unexpected Senate vote on April 6. "This is a shot across your bow," warned Sen. Chuck Schumer, a New York Democrat and one of the measure's sponsors. "Reform--because, if you don't, there are going to be dramatic consequences throughout the world, in our country, and in your country as well."

Perhaps Schumer means well, but his prescription would be worse than the disease. A primary reason for the government's external deficit is that Americans simply are saving less and spending more. China and other governments feed our appetite for consumption by lending us money--Beijing alone holds nearly $200 billion in greenbacks.

Were Schumer's tariff to be enacted, the United States would still be running a deficit. So we'd still be borrowing money from some other nation, but paying more for the privilege. It would amount to a whopping tax hike on Americans.

If Schumer and his allies in Congress were serious about repairing the U.S.-China trade imbalance, they'd keep federal spending under control by not adding to the national debt, and they'd encourage the Federal Reserve to raise interest rates to encourage saving over spending. But they're not.

Congressional worrywarts might be better served by taking a long-term view. It wasn't too long ago that Japan was viewed as an "imperialist menace" because of its purported economic prowess, and the Nikkei 225 Index reached an astounding 38,915 points at the end of 1989. Since then, the Nikkei index has fallen to 11,370, Japan's economy has stagnated and protectionists have found something new to complain about.