Google, IP struggles fuel U.S. business concerns in China

Recent spotlight on tough regulations faced by U.S. companies in China leads U.S. Commerce to call for more transparency and predictability

U.S. Commerce Secretary Gary Locke on Thursday warned that China must become more transparent and predictable, as a row between Google and China drew concern about the business environment there for foreign companies.

Recent intellectual property rules that could block foreign companies from winning Chinese government contracts, followed by Google's threat this month to leave China due to hacking and censorship, have put a spotlight on the tough regulations often faced by U.S. companies in China.

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"China needs to continue making strides to be more transparent, predictable and committed to the rule of law," Locke said in a speech, according to a copy of his prepared remarks. "If there is backsliding on these issues, it will affect the appetite of U.S. companies to enter the Chinese market and ultimately that will be bad for both the people of China and the United States."

U.S. business associations this week wrote a letter to the Obama administration requesting its help on China's recent intellectual property rules, which the letter said give significant preference for Chinese government procurement to products whose intellectual property is developed and owned in China. The rules run counter to Chinese pledges to avoid protectionism and mark "an unprecedented use of domestic intellectual property as a market-access condition," said the letter, which was posted on the Web site of the Business Software Alliance.

The new requirements would make it virtually impossible for foreign companies to win Chinese government contracts, said Xiang Wang, a Beijing-based intellectual-property partner at law firm Orrick, Herrington & Sutcliffe. To comply with them, multinational companies would have to change their global model for managing intellectual property rights, transferring ownership of the rights to their Chinese subsidiaries rather than just licensing rights to them, he said.

Tough regulatory issues are likely to increase for foreign companies in China as the country keeps rising economically, Wang said.

"China has taken a very strong stance because of its economy," he said.

Google this month also raised concern by saying it had been hit by recent hacking attacks from China that caused the loss of intellectual property, and that also aimed to access the Gmail accounts of Chinese human rights activists. Google cited the attacks as one reason it plans to stop censoring its China-based search engine, something it has done since 2006 to comply with government regulations.

Google's allegation of cyberattacks echoed long-standing concern among foreign companies about data security in China. A survey by the American Chamber of Commerce in China, a business association, found its members were concerned about the security of commercial correspondence, data and networks despite being optimistic about China in the long term, the group said after Google's announcement. U.S. Secretary of State Hillary Clinton called on China to investigate Google's allegations.

But China so far has appeared inflexible toward Google. Officials have emphasized that foreign companies in China must follow Chinese laws, which include rules about online censorship. State-run newspapers have defended China's Internet censorship and accused Google of being used by the U.S. government in efforts to control the Internet globally.

"Don't become a tool of hegemony, Google!" read one opinion piece on the Web site of the People's Daily, the official paper of the Communist Party.

Copyright © 2010 IDG Communications, Inc.