Trade War Looms For China, US

Who defines world trade rules? China wants to bend GATT rules for its peculiar economy. The US says no. With a Dec. 30 deadline looming, two giants face off.

WASHINGTON and Beijing are staring each other down in a high-stakes, year-end battle over trade.

Last week, the United States toughened its line on demands for better patent and copyright protection in China. US negotiators broke off talks with Beijing and threatened to impose sanctions after Dec. 30 if China did not improve its enforcement of laws on intellectual property rights.

Growing US frustration over rampant copyright piracy parallels China's own impatience with US objections to the Chinese bid to rejoin the world trade mainstream by early 1995.

Earlier this month, China threatened to close its market to the West if the US continued to block its bid for reentry into the General Agreement on Tariffs and Trade (GATT) and to become a founding member of the new World Trade Organization (WTO) to be set up in January. China, which has been waging an aggressive campaign to rejoin GATT, has not been a member since the Communist victory in 1949.

But, unlike earlier this year when China used threats of cutting off access to its booming economy to turn American government policy its way, the US is not budging. In May, President Clinton reversed US policy linking low-tariff trade privileges with improvements in human rights but has so far withstood Chinese demands for quick action on GATT.

Nor does China appear ready to clamp down on rampant piracy of films, videos, compact discs, and computer software to satisfy US demands. At the end of the month, the US could either extend the Dec. 30 deadline by three months if the sides are close to a resolution or im-pose sanctions on $800 million of Chinese goods, the estimate placed on piracy losses by US companies yearly. Washington began an investigation into intellectual property-rights infringement in June.

But a compromise appears unattainable before the deadline, since US officials contend that piracy has worsened during the 18-month-long negotiations on intellectual property rights. ``The Chinese did not make serious offers,'' said a senior US negotiator in Hong Kong on Friday, announcing a suspension of talks.

``The day when the US produces its list for retaliation will be the day when China produces hers,'' Chinese trade minister Wu Yi was quoted as saying in People's Daily, the official party newspaper.

The low ebb in commercial relations between Beijing and Washington contrast sharply with the mood this summer after Clinton renewed China's preferential trade privileges known as most-favored-nation (MFN) status. In August, Commerce Secretary Ron Brown led a corps of US business executives to China, trumpeting warming economic ties between the frequent adversaries and securing Chinese pledges of lucrative business deals.

But US insistence that China open its markets and honor international trade principles of publishing quotas and other trade restrictions, ending discrimination favoring Chinese companies and protecting foreign intellectual property, has soured Beijing. China, which withdrew from GATT in 1951 and has been trying to rejoin since 1986, places great importance on becoming a founding WTO member.

The two trade rivals are also gridlocked over the issue of whether to list China as a developing country in WTO. That would give Beijing more time and greater leeway than developed countries in implementing economic reforms.

Under a face-saving compromise proposed by the European Union, China would postpone its reentry into the world trade mainstream until next summer if it still can be considered a founding member of WTO. The plan is reported to be under consideration in Washington.

``The two sides are still far apart on the issues of agriculture and the services sector,'' says a Western economist in Beijing, explaining that the US and other Western countries want more access to China for agricultural products and sectors such as insurance and banking. ``This will push negotiations into next year.''

The parallel dispute over intellectual property rights is stiffening US resolve. China has tried to sway the US in its GATT application by courting US business support with business promises, a strategy that worked during the MFN debate.

But this time, the appeal has failed as many businessmen worry about patent and copyright security in China. US and government business leaders alike are concerned over the growing US trade deficit with China. During the first seven months of 1994, the deficit widened to $14 billion compared to $11 billion a year ago.

IN a recent contract that has given the US an important foothold in the Chinese software market, giant producer Microsoft Corporation last week signed a deal to design and launch the Chinese version of its Windows-95 software.

The pact clears away a major sticking point by allowing the faster, more powerful Windows to be rewritten with mainland Chinese characters and type style in contrast to the original Chinese version, which was developed in collaboration with Japan and Taiwan to different standards. The English version is due out in early 1995 with the Chinese software expected to be unveiled by the end of the year.

Microsoft ruffled mainland Chinese feathers by relying on managers and software developers from rival Taiwan to adapt Windows 95 and produce software that did not comply with mainland standards.

But Microsoft's ambitions to invest $100 million and become market leader in China pivot on a tougher government crackdown on rampant software piracy, company officials admit.

Unlike the rest of the world where most of Microsoft's revenues come from software applications, in China the firm makes money strictly on database products because ``98 percent of the software is pirated,'' admits Charles Stevens, the Far East vice president.

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