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DE RUEHBJ #0360/01 0420311
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O 110311Z FEB 10
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8075
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
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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