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DE RUEHBJ #0433/01 0501007
ZNR UUUUU ZZH
O 191007Z FEB 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2415
INFO RUCPDOC/USDOC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 2375
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 1062
RUEHGH/AMCONSUL SHANGHAI 9639
RUEHCN/AMCONSUL CHENGDU 9637
RUEHGZ/AMCONSUL GUANGZHOU 0143
RUEHSH/AMCONSUL SHENYANG 9302

UNCLAS SECTION 01 OF 05 BEIJING 000433 
 
SIPDIS 
SENSITIVE 
 
FOR EAP/CM PAM PARK; FOR EEB ERIK MAGDANZ 
STATE PASS USTR 
USTR FOR STRATFORD/MAIN 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EIND CH
SUBJECT: IS CHINA COMPLYING WITH THE G-20 PROMISE ON 
"PROTECTIONISM"? 
 
REF:  A)08 BEIJING 1567; B) 08 BEIJING 4178; C)08 
BEIJING 4293; D)GUANGZHOU 43 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR 
INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY: Chinese officials have been quoted 
broadly both in domestic and international press 
criticizing "buy American" provisions in the U.S. 
stimulus package legislation.  At the same time, 
they have pledged that China will not adopt "buy 
China" provisions and will meet its G-20 Summit 
pledge of "no new protectionist measures."  In 
reality, however, Chinese law and practice on 
government procurement mandates procurement of 
domestic goods and services except in very narrow 
special circumstances.  China also maintains a broad 
set of industrial and innovation policies designed 
to promote indigenous technologies, products and 
industries.  In addition, the lack of transparency 
in Chinese government policies, including the 
recently announced RMB 4 trillion (USD 596 billion) 
economic stimulus program, makes it impossible to 
know to what extent China may impose de facto "buy 
China" requirements on related procurements, in 
practice.  Finally, a broad range of industry 
specific adjustments to Chinese tax and other 
regulations China adopted in recent months, 
especially with regard to the trade sector, have the 
effect of promoting domestic goods over imports.  In 
short, China's assertions that it has avoided resort 
to protectionism in its recent policies, even if 
true, must be viewed in the context of China's long- 
standing policy bias toward protecting domestic 
industries, goods and services, especially in 
China's state-owned industries.  END SUMMARY. 
 
Chinese Officials Criticize "Buy American" 
Provisions 
 
¶2. (SBU) As Secretary Clinton prepares to travel to 
China just after the new U.S. "Buy American" 
provision has sparked a wave of criticism from the 
Chinese press and jibes from the government, a fresh 
look at the trade/market access environment here is 
warranted.  Certainly, the specter of global 
protectionism is a frightening one for this export- 
dependent economy.  Honoring the maxim that the best 
defense is an offense, Premier Wen Jiabao used the 
European stage last week to criticize protectionist 
sentiments and sought to deflect them by promising 
new Chinese purchases of European equipment and 
technology.  Closer to home, Vice Commerce Minister 
Jiang Zenwei called a press conference February 9 to 
announce China "won't practice Buy China", noting 
"we will treat domestic and foreign products equally 
as long as they are needed". 
 
¶3. (SBU) The reality behind the curtain, of course, 
is not so tidy.  Longstanding trade and market 
access issues naturally tarnish that sought-after 
free-trading image.  Moreover, with this winter's 
roughly 600 billion USD Chinese stimulus package in 
the wings, the stakes are growing.  A retrospective 
confined to the period after last November's G-20 
Summit Statement, however, would be misleading. 
China's anti-competitive behaviors long predate the 
current economic downturn. 
 
Chinese Government Procurement Mandates "Buy China" 
 
¶4. (SBU) Whatever "new" protectionist measures might 
be foresworn by the Chinese leadership, the 2003 
Government Procurement Law (GPL) and associated 
administrative measures and regulations on the books 
make it clear there is already a "buy China" policy 
in effect that applies to nearly all of China's 
government procurement.  While the GPL does have 
 
BEIJING 00000433  002 OF 005 
 
 
some internationally consistent provisions for 
transparency and challenge mechanisms, public works 
projects are excluded.  This financially vital 
sector, critical to the stimulus package, is instead 
covered by what the EU and American Chambers (please 
protect) in Beijing, respectively, have seen as "a 
partial and arbitrary application" of the "non- 
transparent and discriminatory" Bidding and 
Tendering Law (BTL). It is widely believed that 
while the BTL does not explicitly require buying 
from Chinese entities, Chinese government agencies 
instruct state-owned enterprises (SOEs) to purchase 
domestic products.  Furthermore, according to large 
US design/construction firm HOK, Chinese tendering 
firms say stimulus-related projects will require 
firms that bid to have a Chinese "construction 
documents license" -- a license which the government 
has thus far refused to issue to foreign firms.  Per 
HOK, this continues an unfair, but pre-existing, 
practice that forces it to partner with Chinese 
firms, driving up costs and lowering quality control. 
 
¶5.  (SBU) Further troubling aspects to government 
procurement exist.  Article 10 of the GPL requires 
the purchase of domestic goods and services unless 
they are not available in China, cannot be purchased 
on reasonable commercial terms, or are for use 
abroad.  In addition, administrative measures 
adopted in December 2007: a) created significant 
bureaucratic hurdles to government procurement of 
those few imported foreign products and technologies 
that qualify under the 2003 law, and b) restrict 
government procurement of "innovation" products to 
Chinese-developed products (Ref A).  For example, 
the AmCham draft 2009 White Paper on Government 
Procurement (please protect) notes that "certain 
procurement policies explicitly favor domestic 
providers and disadvantage foreign providers of 
energy-efficient or green technologies" including in 
the wind power sector. 
 
¶6.  (SBU) China is permitted to maintain such 
discriminatory policies in the area of government 
procurement because it is not yet a party to the 
Agreement on Government Procurement (GPA).  Though 
negotiations continue following its initial offer in 
December 2007, that offer disappointed on many 
counts, including its slow timeline (15 years) and 
extremely limited scope.  The EU Chamber goes so far 
as to say China's offer "neither adhered to 
previously established GPA norms nor was it made in 
the true WTO spirit of free trade". 
 
 
China's Economic Stimulus: The Devil is in the 
Details 
 
¶7.  (SBU) Many uncertainties linger in the wake of 
China's leadership's rollout of a 4 trillion RMB 
(USD 596 billion at current exchange rates) fiscal 
stimulus plan for 2009-2010 (Ref B) just days before 
the November 15th G-20 Summit.  Confirmed details of 
its implementation, however, including any potential 
bidding or tendering processes, are thin.  The heavy 
focus will be on large-scale infrastructure projects, 
and many provinces and ministries have rushed 
subsequently to announce over RMB 10 trillion in 
projects, although these latter projects surely 
double-count some projects and are not limited to 
the same two years of the formal central government 
stimulus plan. Further muddying the waters, the NDRC 
(National Development and Reform Commission) 
decision-making in this arena has not been 
transparent, sector allocations have been shifted at 
least once, and we believe the figures are still 
quite fluid.  For now, however, the central 
government stimulus targets a dozen priorities for 
2009-2010 spending, including rural infrastructure 
 
BEIJING 00000433  003 OF 005 
 
 
(315 billion RMB), transportation (1.210 trillion 
RMB), post-disaster reconstruction (700 billion RMB), 
and health care (600 billion RMB). 
 
¶8.  (SBU) MOF Assistant Minister Zhu Guangyao told 
Emboffs recently that the central government's 
stimulus plan would focus on five areas: low cost 
housing, infrastructure projects, disaster zone 
reconstruction, clean efficient energy and 
environment, and improving social welfare.  There 
will also be a significant tax relief component 
focused mainly on business, which has already been 
announced.  Zhu added that these five categories 
have been decided by the central government and will 
use funds from both central and local government 
sources.  Localities will be able to tap the 
proceeds of bonds issued on their behalf by MOF. 
Local governments have been separately pushing for 
other types of projects beyond what is in the 
central government plan, and this has been a subject 
of keen debate.  Zhu added that almost none of the 
projects under China's stimulus plan will be covered 
by the GPL which only applies to direct purchases of 
goods and services by government entities using the 
fiscal budget.  These "projects" will instead be 
covered by the BTL, which has no "buy China" 
requirement.  Whether foreign businesses will have a 
shot at competing for these projects and associated 
contracts remains to be seen, although past practice 
makes it unlikely, no matter what the current media 
message is. 
 
Broad Array of Measures to Promote Domestic Goods, 
Services and Industries 
 
¶9. (SBU) Even before the global financial crisis 
(GFC) elicited stimulus packages globally, China 
turned often in 2008 to tax adjustments to assist 
domestic export-oriented industries facing slowing 
growth, for example through successively increasing 
export value added tax (VAT) rebates during late 
2008 and early 2009.  Although perfectly legal under 
the WTO, such rapid changes in VAT rebates are 
clearly intended to reverse recent policy moves to 
shift production away from low value-added exports. 
Textile export VAT rebates have been raised three 
times since August 2008.  Tax rebates on labor- 
intensive exports of over 3,000 items were increased 
in December, also the third such increase in 2008. 
Beginning this month, import tariffs and VAT on 
1,730 tariff lines will be refunded if these items 
are bound for re-export, lifting restrictions on 
low-value added exports.  Manipulation of export 
quotas and taxes has also been used in the past to 
lower domestic prices of needed commodities, or 
correspondingly increase global ones. 
 
Discriminatory Home-Grown Standards 
 
¶10. (SBU) The PRC's tool basket for encouraging the 
growth of domestic companies at the expense of 
foreign business is a full one.  One of the less 
subtle approaches is the creation of domestic 
standards in a variety of technologies where widely 
accepted international standards already exist. 
China relies on this method as a way to encourage 
"indigenous innovation" and increase domestic patent 
registration, but also to avoid paying royalty fees 
to foreign companies that own essential technology. 
A striking example was the birth by forceps of 
China's new 3G wireless standard, TD-SCDMA.  Though 
TDSCMA was widely regarded as a technological basket 
case, the government delayed for years the issuance 
of 3G licenses to two pre-existing and proven 
technologies developed in Europe and the United 
States while it incubated TD-SCDMA.  After those 
licenses were finally issued in all three standards 
in early 2009, the Chinese government has provided 
 
BEIJING 00000433  004 OF 005 
 
 
an array of policy support and advantages to TD- 
SCDMA alone.  In recent weeks, China has also 
announced the introduction of the Red-Ray DVD 
standard, its answer to the global Blu-Ray Disc 
standard.  Another lengthy incubation period is 
likely.  The new emphasis on promoting "indigenous 
innovation" in the intellectual property rights (IPR) 
sector prompts concerns over future developments. 
 
Selective Enforcement and Licensing 
 
¶11. (SBU) At times, uneven application of the law or 
regulations also helps advantage domestic companies 
over foreign-invested ones.  FedEx says it was the 
only express delivery firm in China against whom 
China is enforcing a the prohibition on domestic 
letter mail delivery, and quietly withdrew from this 
lucrative market in November 2008 in the wake of 
raids and fines.  In the insurance sector, many U.S. 
firms find that while they may be lucky to get one 
new branch approved by regulators in the course of a 
year, domestic competitors wait only a few months at 
most. 
 
New Anti-Competitive Provisions 
 
¶12. (SBU) At certain times, of course, the gloves 
come off and the blatancy of protectionism is 
startling.  The express delivery market as it would 
be affected by the draft new Postal Law (Ref C) is 
such a case.  With an article that expressly 
prohibits only foreign businesses in the delivery of 
documents, while allowing private domestic companies 
in, the law is clearly designed to nurture weak 
domestic competitors.  The fact that the foreign 
invested companies excluded employ significant 
amounts of Chinese nationals, interestingly, seems 
to have been discounted despite the current economic 
crisis.  These new provisions are to be reviewed 
again by the National Peoples' Congress (NPC), but 
their inclusion at a late stage in the State Council 
Legislative Affairs Office (SCLAO) draft is 
troubling.  Some other measures designed to keep 
foreign competitors out of domestic markets include: 
excessively high capitalization requirements for 
basic telecom operators, pricing policy for medical 
devices, legal services restrictions, and national 
champion policies. 
 
Whose Famous Brands Are Being Protected? 
 
¶13.  (SBU) China's "Famous Brands" programs present 
another obvious problem, for which we requested WTO 
dispute settlement consultations in December.  These 
programs appear designed to promote the development 
of global Chinese brand names and to increase sales 
of Chinese-branded merchandise around the world. 
They are of concern because they appear not only to 
incorporate export subsidies (which are generally 
prohibited by applicable WTO rules), but also 
because of the protectionist industrial policy 
apparently underlying them. 
 
Intellectual Property and Judicial Interpretation of 
Concern 
 
¶14. (SBU) These kinds of anti-competitive or 
protectionist measures are not news.  In general, 
even before the economic downturn it seemed that in 
many sectors the post- WTO-accession trend toward 
market opening and liberalization had already 
reversed.  That trend, however, may accelerate under 
the exigencies of the current situation.  One new 
aspect of particular concern underscores the care 
with which we will need to approach our bilateral 
dialogue in this arena.  Business and legal contacts 
in Guangdong have reported that legal resolution of 
commercial disputes, especially IPR civil cases, has 
 
BEIJING 00000433  005 OF 005 
 
 
measurably weakened as court officials express 
doubts about enforcing judgments that might cause 
defendant companies to go out of business and shed 
local workers (Ref D).  If China's economic picture 
continues to darken, a likely development, we are 
likely to hear an increasing number of similar 
anecdotes.  As Ref D notes, Guangzhou contacts note 
lax enforcement of labor, environmental, and other 
laws that were previously strengthened but now 
appear to be relaxed whenever a local violator 
claims they would go out of business if the laws 
were enforced. 
 
Comment: Chinese Criticism of "Buy American" 
Disingenuous 
 
¶15. (SBU) COMMENT: Given China's laws on government 
procurement and its long-standing and vast array of 
policies that favor domestic goods, services and 
industries, China's complaint about "buy America" 
provisions in the U.S. stimulus package legislation 
must be kept in perspective, especially if those 
provisions are implemented in a way consistent with 
U.S. WTO obligations.  China's concerted effort to 
portray, both domestically and internationally, its 
position otherwise, reflects the Chinese 
leadership's deep concern that China will suffer 
disproportionately should protectionist policies 
become prevalent in response to the globally 
economic crisis.  China's offensive in attacking the 
"buy American" provisions also is consistent with 
the Chinese leadership's strong interest in 
maintaining a public perception, both domestically 
and internationally, that the U.S. is to blame for 
the global economic crisis.  Faced with its own 
severe economic downturn, China's leadership hopes a 
perception that the U.S. is to blame will help it 
deflect domestic discontent as China's exports 
plunge and unemployment levels rise rapidly.  END 
COMMENT. 
 
PICCUTA