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

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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