CHINA DEFINES ITS TERMS ON INDIGENOUS INNOVATION:

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 000360 SIPDIS STATE FOR EAP/CM - WKLEIN, SFLATT STATE FOR EEB - SFLYNN, CHAYS STATE PASS USTR FOR TSTRATFORD, HSMITH DOC FOR IKASOFF, NMELCHER TREASURY FOR MEALE NSC FOR JLOI E.O. 12958: DECL: 02/08/2030 TAGS: ECON ETRD EINV PREL CH SUBJECT: CHINA DEFINES ITS TERMS ON INDIGENOUS INNOVATION: IT AIN'T GOING AWAY REF: A. 09 BEIJING 3209 ¶B. 09 BEIJING 3296 ¶C. 09 BEIJING 3379 ¶D. 09 BEIJING 3395 ¶E. 09 STATE 124680 Classified By: Economic Minister Counselor William Weinstein for reason s: 1.4(B),(D). ¶1. (C) Summary. Chinese interlocutors made it clear to a visiting interagency team the week of January 24 that China intends to keep giving their home-grown innovators an edge, including preferences under government procurement. The Ministry of Science and Technology (MOST) advised it would revise the controversial new indigenous innovation accreditation system (IIAS) annually, and reduce trademark origin requirements. Chinese interlocutors continued to insist the new system is not discriminatory and does not undermine China's SnED and JCCT commitments. The indigenous innovation accreditation system is but one piece of a broad Chinese government policy on multiple fronts to promote domestic innovation and national "champions" in ways that often discriminate against foreign-invested enterprises (FIEs). End Summary. MOST Defines its Role: Determining What Qualifies as Indigenous Innovation -------------- -------------- ¶2. (C) AUSTR Tim Stratford and DOC DAS Ira Kasoff headed an interagency team that visited Beijing January 25-29 for a program that included several meetings to raise controversial Chinese measures promoting indigenous innovation. A meeting with MOST focused on the qualifying criteria in the new Indigenous Innovation Accreditation System (IIAS) established November 2009 through "Circular 618". Key controversial provisions require: accredited products to contain only locally-owned intellectual property; certification of the nationality of company's ownership; and original trademark registration (TM) in China. (See REFs A-D for background.) Stratford reaffirmed to MOST the USG's serious concerns that the new accreditation system: discriminates against foreign-invested enterprises (FIEs) in China; is inconsistent with GATT/TRIPs tenets; undermines recent SnED and JCCT commitments; and moves China in the wrong direction vis--vis its commitment to work on accession 
to the WTO Government Procurement Agreement (GPA). ¶3. (C) Stratford observed that companies around the world are complaining about the new accreditation standards and questioning China's credibility in meeting its international commitments. He said no other country uses intellectual property as a criterion for determining government procurement because doing so does not encourage innovation. Stratford highlighted that the IIAS' requirement for Chinese ownership of intellectual property and original TM registration in China would effectively exclude most FIE products since FIEs rely on globally-originated intellectual property. DAS Kasoff raised a number of specific questions posed by industry on Circular 618, noting that the questions' level of detail reflected how deep industry's concerns went and how intensely they were studying China's indigenous innovation policies. ¶4. (C) MOST's tone was conciliatory and sought to downplay the linkage between its role in defining indigenous innovation and the Finance Ministry's (MOF) determination of government procurement eligibility. Deputy Director General Qin of the Development Planning Department advised that the local trademark provisions would be eased as they did not promote innovation. Qin reiterated MOST's familiar argument that indigenous innovation accreditation standards were not related to the approval of "product categories" under MOF government procurement framework. International Cooperation DDG Ma added that the IIAS catalog would be separate from the MOF's own government procurement catalog. Qin said the IIAS standards were meant to "guide innovation" in China and bolster intellectual property protection and development. Qin portrayed as a potential for positive movement the news that the Chinese government had made Circular 618 applicable only to 2009 calendar year after hearing the deep concerns of the USG and industry. A new accreditation system would be announced in 2010 and revised annually. Qin recalled that BEIJING 00000360 002 OF 003 MOST had met with a number of FIEs on December 25, 2009, and said that the Ministry continued to welcome comments and criticisms. He asked that the United States submit in writing the questions raised by Kasoff on behalf of industry, and pledged to respond. ¶5. On February 2, Ambassador Huntsman received a letter from MOST Minister Wan responding to the Ambassador's initial demarches on this issue early December 2009 (Ref E). Wan's letter (transmitted via email to State EAP/CM, EEB, USTR, and DOC) again averred that the system did not discriminate against FIEs, but broke no new ground on U.S. concerns regarding IP content and other criteria for accreditation. The EU Chamber of Commerce in Beijing received a nearly-identical letter the week of February 1, 2010 in response to its own interventions on this issue. MOF Defines its Role: Granting Preferences for Government Procurement -------------- -------------- ¶6. (C) Stratford stressed to MOF interlocutors that the IIAS was a growing bilateral trade concern, citing the January 26 letter from 19 industry associations to five Cabinet-level secretaries, including Secretary Clinton. MOF Director General Zou said MOF was "actively engaged" with NDRC and MOST on criteria for qualifying for IIAS and reconfirmed that the eventual IIAS catalog would be separate from a "government procurement of domestic products" catalog. Thus, Zou argued, the IIAS does not compromise China's SnED/JCCT commitments because China (as yet not a member of the GPA) can follow its own GP laws for identification of "domestic products," which must be approved by the State Council. Zou also noted that the State Council has not yet passed implementing regulations (presumably of the SnEd and JCCT commitments) as MOF is still considering a draft definition of "domestic products" for government procurement. ¶7. (C) Stratford pressed again to clarify the connection between IIAS catalog and preferences under government procurement. MOF Department of Treasury Division Director Wang said China was not yet a GPA member and is fully in compliance with its WTO commitments, and thus had the right to develop policies which he claimed were "similar to the U.S. 'Buy America' act." Wang stated unequivocally that once accredited as indigenous innovation, products would/would receive preferences in government procurement, excepting mandatory procurement. Stratford thanked her for her clear answer, but advised his Chinese counterparts that this would clearly be a matter of "very strong concern for the USG." ¶8. (C) MOF Assistant Minister Zhu Guangyao briefly joined the end of the meeting, noting the need for continued discussions on indigenous innovation, as well as on U.S. export controls and market economy status. NDRC Takes Hard Line on Indigenous Innovation but Admits Modifications Underway -------------- -------------- ¶9. (C) On January 27, NDRC's Department of National Economy Division Chief Xia Qing took a hard line on indigenous innovation with a visiting SnED Econ Track delegation. He said China's policy in this area was consistent with its international commitments, and claimed it had been "forced" to formulate this policy because other countries restricted China's ability to buy technologies and high-tech products overseas. NDRC International Affairs Office Director Wu Hailong complained bitterly about his office being bombarded by an "AmCham-led" letter writing campaign, accusing business of going public with the issue before the NDRC had a chance to "manage it." However, he continued, MOST was currently in discussions with NDRC, MOFCOM, the USG, and various multi-national companies, that should result in China issuing a new notice outlining a modified 2010 accreditation process. MOFCOM Meeting -------------- ¶10. (C) January 28, Stratford and Kasoff again raised indigenous innovation with MOFCOM DG He Ning during a session focused on JCCT preparation. Stratford noted the January 27 meetings with MOST and MOF had left them "very concerned" by MOF's confirmation that IIAS would be linked to government procurement. Stratford told He Ning the USG was less BEIJING 00000360 003 OF 003 concerned by the nature or focus of the accreditation standards themselves (noting the U.S. had its own measures to "award" innovation),but was very concerned by the linking of those standards to government procurement. Kasoff, however, stressed that the USG was equally concerned by the discriminatory nature of the indigenous innovation standards themselves and the fact that they undermine China's SnED and JCCT commitments to treat FIEs' products and Chinese domestic products equally for purposes of government procurement. He Ning said he and "everyone else in the room" (from MOFCOM) fully "got it," and claimed the real problem was with MOST. He Ning promised to convey USG concerns again to colleagues around the government. He Ning asked if de-linking the accreditation standards from government procurement would solve the U.S. problem. Kasoff emphasized that discrimination in accreditation standards must be eliminated as well. Comment -------------- ¶11. (C) Despite the small concession on trademark registration, and a promise to revise accreditation standards annually, it is clear China intends to keep a discriminatory indigenous innovation policy in place. The new indigenous innovation accreditation system is but one piece of a broad Chinese government policy on multiple fronts to promote domestic innovation and national "champions" in ways that clearly tilt the playing field in China not only against foreign companies and products, but even foreign-invested enterprises established in China. ¶12. (SBU) AUSTR Tim Stratford and DOC DAS Ira Kasoff's staff cleared this report. HUNTSMAN