Despite shelving WAPI, China stands firm on chip tax

IDG News Service |  Mobile & Wireless

The fuss over China's plans to implement a national standard for wireless LANs (WLANs) came to a quiet end Wednesday during bilateral trade talks between U.S. and Chinese officials in Washington, D.C. But the outcome of the talks was far from being a complete victory for the U.S. side, which had raised several areas of concern.

The announcement that implementation of WAPI (WLAN Authentication and Privacy Infrastructure) will be delayed indefinitely was generally hailed as a victory for U.S. companies that had opposed the measure. However, the Chinese side yielded no ground during the talks on a value-added tax (VAT) rebate given to some domestically produced semiconductors.

The VAT rebate, which is not offered for chips produced outside of China, lies at the heart of a lingering trade dispute between the two sides. U.S. firms exported about US$2 billion worth of chips to China in 2003, according to the Office of the U.S. Trade Representative. China's tax policy cost the purchasers of those chips an additional $344 million, it said.

"The Chinese have more to gain from the VAT on chips than they do from WAPI," said Duncan Clark, managing director of market analyst BDA China Ltd. in Beijing. Clark noted that the Chinese government has made the development of the company's semiconductor manufacturing industry a strategic priority.

Bilateral discussions on the chip VAT will continue next week in Geneva, Switzerland, U.S. Trade Representative Robert Zoellick said.

Although no agreement was reached on the chip VAT, China agreed to shelve indefinitely plans to require all WLAN equipment sold in the country after June 1 to support WAPI, a homegrown security protocol. WAPI is not compatible with the security protocol used by the 802.11 wireless networking standard developed by the Institute of Electrical and Electronics Engineers Inc. (IEEE).

If the Chinese WLAN standard had been implemented, sales of 802.11-based WLAN equipment would not have been permitted in China after June 1. To licence WAPI, foreign vendors would have been forced to share their technology with Chinese companies under a provision that required foreign vendors to license through coproduction agreements with one of more than 20 designated Chinese companies.

In addition to shelving plans to implement WAPI, Chinese officials agreed during the talks to step up their enforcement efforts against intellectual property piracy and said they support technology neutrality in the adoption of 3G (third-generation) standards for mobile phones.

The move to shelve WAPI was not completely unexpected. Analysts in China had been predicting for months that China would find a way to back down from requiring vendors to support WAPI.

"I'm not surprised. WAPI was ultimately an indefensible policy," Clark said.

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