The United States is urging China to initiate negotiations as soon as possible to join the Government Procurement Agreement of the World Trade Organization (WTO), says Assistant U. S. Trade Representative (USTR) Charles Freeman.

In testimony before the Committee on Government Reform of the US House of Representatives on May 13, Freeman said the United States is concerned about language in China's proposed implementing regulations for the procurement of computer software by government offices.

"The proposed regulations would put U.S. firms at a significant disadvantage in the Chinese market," Freeman told the committee.

The draft rules would support general provisions enacted in China's framework Government Procurement Law of 2002, which states that the government shall procure "domestic" goods and services. The software sector is the first for which implementing language has been written.

According to Freeman, the proposed language released by the Chinese Ministry of Information and Industry and the Ministry of Finance defines "domestic software" very narrowly. Qualified products would have to be made in China, intellectual property rights would have to be held by a Chinese citizen, and China-based development costs would have to comprise at least half of total development costs.

"If domestic products or services are not available, the draft regulations would permit foreign software to be considered," Freeman said, "but only if the foreign firm conducts certain yet-to-be-defined levels of China-based research and development, investment, subcontracting, or taxable transactions."

Government procurement standards in China are particularly important to U.S. suppliers, Freeman said, because the government is one of the few organizations in China that does not engage in piracy. He noted that China had made a commitment at the April 2004 meeting of the bilateral U.S.-China Joint Commission on Commerce and Trade that all government offices would use only legitimately purchased software.

"While China has taken steps to follow through on that pledge, the procurement policy threatens to undercut its value to the United States," he said. "We have made clear to China — including at senior levels — our serious concern with the draft measures. This is the wrong policy for China to implement, given the $160 billion-plus trade deficit in goods with China. We continue to raise this issue with Chinese officials at every opportunity, and it is a major element of our bilateral engagement."

China made a commitment to start negotiations to join the WTO Government Procurement Agreement as soon as possible after it completed an accession agreement in December 2001, Freeman told the committee.

"We have urged China to honor that commitment by beginning those negotiations now to open its procurement market, to ensure that all U.S. firms can compete in China's vast procurement market on the same basis as Chinese firms," he said. "This move would not only honor China's WTO commitment; it would also serve China's interests to have competitive procurement markets."

Freeman cautioned that the restrictions in China's proposed procurement regulations would result in reduced investment in China by foreign companies and limit the Chinese software industry's capacity for growth and development.

"A software industry cannot develop behind a wall," he said. "Silicon Valley succeeded because of conditions that encourage the free flow of ideas and robust competition, as well as strong IPR protection and enforcement."

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