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Cablegate: Indigenous Innovation - Key Ministry Claims to Be

VZCZCXRO9973
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3395/01 3520856
ZNR UUUUU ZZH
O 180856Z DEC 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7291
RHEHNSC/NSC WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEAWJA/DEPT OF JUSTICE WASHDC IMMEDIATE
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC IMMEDIATE
RUEHIN/AIT TAIPEI IMMEDIATE 7441
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 1441
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 0156

UNCLAS SECTION 01 OF 02 BEIJING 003395

SENSITIVE
SIPDIS

STATE FOR EAP/CM - WKELIN, SFLATT
STATE FOR EEB/CIP - SFLYNN, FSAEED
USTR FOR AWINTER, TWINELAND, JGRIER, JMCHALE
COMMERCE FOR ITA - IKASOFF, NMELCHER, JWU
DOJ FOR CCIPS - MDUBOSE, SCHEMTOB
FBI FOR LBYRANT
STATE FOR WHITE HOUSE OSTP AMBASSADOR RICHARD RUSSEL
NSC FOR MHATHAWAY

E.O. 12958: N/A
TAGS: ECON ETRD PGOV EINV CH
SUBJECT: INDIGENOUS INNOVATION - KEY MINISTRY CLAIMS TO BE
PREPARING PUBLIC RESPONSE

REF: A. SECSTATE 124680
B. BEIJING 3379
C. BEIJING 3296
D. BEIJING 3209

1. (SBU) Summary. Embassy delivered Ref A demarche to
Ministry of Science and Technology (MOST), December 18,
regarding the joint MOST, Ministry of Finance, and National
Development and Reform Commission Circular 618 creating a
national accreditation system for indigenous innovation.
MOST officials echoed earlier arguments that promoting
"indigenous innovation" did not equate to discrimination
against foreign companies or products, but stressed that the
catalogue system was still being developed and they were open
to adjusting it based on input from foreign companies and
other concerned parties. (Comment: Despite this seemingly
positive tone, the fact that MOST has to date denied industry
associations' requests for meetings casts doubt on MOST's
openness to industry input. End comment.) MOST also noted
it is preparing a public response to international pressure
brought by industry and governments, but did not offer
timing. End Summary.

2. (SBU) December 18, Acting Econ Minister Counselor Forden
and MAC Director Howes delivered Ref A demarche to Ministry
of Science and Technology (MOST) Director Americas Division
Wang and Department of Development and Planning Director Liu.
MOST has been the most recalcitrant of ministries in our
attempt to deliver and discuss the joint MOST, Ministry of
Finance (MOF), and National Development and Reform Commission
(NDRC) Circular 618 (dated November 17, 2009) creating an
accreditation system for national indigenous innovation.
(Please see Refs B and C for additional demarche reports and
Ref D for originating reporting on the China's National
Indigenous Innovation Accrediation system.) Explaining the
demarche had already been passed from Ambassador Huntsman to
the Ministers of MOST, NDRC, and MOF, Forden and Howes noted
strong concern evidenced by the escalating interest in this
issue from international industry and foreign missions and
noted additional increased high-level governmental pressure
would follow unless a workable solution is found to address
concerns over the accreditation system.

3. (SBU) Wang and Liu offered a number of shifting arguments
in an attempt to justify the system. While calling the
system "nondiscriminatory" because it allows entities of any
national background to apply, they did not address the fact
that criteria de facto exclude products, including those
based on foreign-derived intellectual property from receiving
accreditationQWang stated that MOST's budget to promote
innovative collaboration had increased several-fold since
2007's Rmb 27 million (USD 4 million), and sought to justify
the accreditation system by claiming many other MOST measures
to promote indigenous innovation did not raise discriminatory
national treatment concerns. Wang and Liu also sought to
justify the accreditation system by claiming it was in a
"trial phase" that is still in development and offered to
remain open to input and consultation regarding how to modify
the accreditation system. (Comment: today's meeting with
MOST took inordinate amounts of effort to obtain and was
originally scheduled at the Director General-level. The last
minute switch to a lower-level suggests MOST's claims to
desire engagement on resolution is disingenous. End
comment.) Director Wang noted MOST is preparing a public
response to the numerous letters and demarches that the PRC
has received recently on this issue, but did not offer
specific timing.

4. (SBU) On another tack, ECON and FCS met December 17 with
more than 30 reps from companies and industry associations
(USCBC, AmCham, USITO) to discuss next steps on Circular 618.
We heard strong consensus in support of continuing a
broad-based effort to suspend implementation of the
indigenous innovation accreditation system. Firms that may

BEIJING 00003395 002 OF 002


be directly affected, such as Cummins, GE, and Microsoft were
on board, as were component supplier firms such as Tyco, ABB,
and Dow Chemical. All of them expressed deep concern that if
indigenous innovation policies move forward as currently
understood, their business here would be severely affected.

5. (SBU) There is also growing realization that two of the
core high-tech fields eligible for accreditation (1. new
energy and equipment and 2. highly-energy efficient products)
will increase difficulties for major energy players, such as
GE and the automobile industry, given clear trends to promote
green technology and energy-efficient vehicles by the Chinese
government. All members said FIEs here are defacto excluded
from the indigenous innovation system as currently
understood, given the IP and Trademark local origin
requirements. They also questioned how "innovation" is
supported by the "TM" requirement, given that is a branding
tool with little or no relation to innovation. Industry also
raised concern over negative local media reporting attempting
portraying the system as a "David v Goliath" battle with the
U.S. and noted local citizen interest has not percolated up
in support of international concerns, remaining sympathetic
thus far with the PRC's efforts on behalf of China.

6. (SBU) Our foreign mission colleagues additionally have
recently reported the following developments: EU Commission
Head of Delegation Serge Abou sent a letter to MOST/MOF/NDRC
Ministers on December 15. Then Japanese Embassy in Beijing's
Econ MC sent letters to MOST/NDRC/MOF expressing concern and
requesting meetings, but has yet to receive appointments.
The UK Ambassador is writing to MOFCOM this week on market
access issues, and has been requested by his Econ Team to
include points on indigenous innovation. The Canadian
Embassy reported they are still reviewng the issue. The EU
Chamber also sent a letter this week to the three relevant
ministers, raising a number of clarifying questions, with
language protesting such an accreditation system as "sullying
China,s existing image as a highly attractive trade and
investment destination."

7. (SBU) Comment. Mission China will continue to push U.S.
industry stakeholders to engage with relevant PRC agencies to
address concerns over the accreditation system, in hope of a
suspension of the system before longer-term practical
consequences ensue for concerned industry groups. We also
will continue to seek opportunities to press the message with
key government agencies. Signals to date still indicate
possible room for the Chinese to finesse a solution and we
support crafting forward messaging to facilitate face-saving
room for manuever. End comment.
GOLDBERG

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