China Restricting Entry by U.S. Firms
Foreign companies are finding the atmosphere in China chilly -- and it’s only going to get worse.
Doing business in China will keep getting harder for foreign companies. Beijing is leveraging its huge government purchasing power to encourage homegrown firms to develop import substitutes, with the aim of creating national champions to compete against multinationals both in China and worldwide.
“Japanese, European and American companies … used to think that China welcomes foreign technology, welcomes our presence to help develop,” says Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. “Increasingly, they don’t feel that way anymore. They feel they are being discriminated against, being shut out of certain market segments.”
A growing number of procurement rules from central government ministries insist that foreign firms hand over sensitive technology to Chinese partners or government regulators. Those that comply run the risk of having their intellectual property compromised and used to compete against them. Companies that refuse risk the loss not only of sales to Beijing but also to state owned enterprises, which still make up one-third of the economy, as well as to provincial and local governments.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
One rule that has serious potential to disrupt U.S. business in China is Beijing’s National Indigenous Innovation Product Accreditation Work for 2010. The regulation restricts government procurement in six key areas of high technology: computing and application hardware, software, telecommunications equipment, modern office equipment, renewable energy technology and energy saving products. That list is certain to expand to cover other industries.
As originally framed in November, the rule mandated that foreign manufacturers seeking to do business in China would have to transfer their patents and trademarks to Chinese firms. Beijing softened the language in response to vigorous protests by the U.S., Japan and the European Union. But even before the rule is implemented, it is having a chilling effect. According to an April 2010 survey conducted by the American Chamber of Commerce in China, 28% of U.S. companies said the rule has already cost them business. More than 40% said they expect to suffer, a number that jumped to 57% for companies in the six targeted high-tech sectors.
A related rule, announced in December, encourages Chinese firms to develop import substitutes for heavy equipment, the demand for which has escalated along with China’s growing infrastructure needs. As a prime example, Beijing singles out Caterpillar’s diesel engines for high efficiency electric drills.
Adding to the problem is that China insists firms meet its unique technical standards, distinct from internationally recognized ones, before they can sell certain products to government agencies. One recent variation of this affects encryption technology used in telecommunications and information technology. It will require makers of network routers, firewall software and smart cards to hand over source codes, encryption algorithms and design specifications to the government controlled testing labs that dole out certification. This transfer of intellectual property poses a high theft risk.
Washington’s options are limited because China has yet to sign the World Trade Organization’s (WTO) Government Procurement Agreement. It pledged to do so when it joined the WTO but did not even begin talks on the subject until December 2007. The two-plus years of negotiations since have been disappointing, with Beijing unwilling to provide the same level of access as do current parties to the pact.
Unless China does sign, the only tool the U.S. has at its disposal is diplomacy. It will continue to argue that Beijing’s policies will discourage the sharing of valuable research, stifling Chinese innovation rather than stimulating it. So far, though, that approach isn’t working. Beijing still resents Washington’s decision to block its participation in U.S. government procurement of iron and steel products under the Buy American rules of last year’s stimulus.
The bottom line is that U.S. companies will damp down hopes for the potential of the Chinese market. They won’t pull out precipitously or entirely. The sheer size of the market makes it impossible to ignore. U.S. direct investment rose to $45 billion in 2008, the last year for which figures are available. And income of U.S. affiliates in China hit $6.9 billion in 2009, a hundredfold increase from 15 years earlier. China still falls short of other leading U.S. investment destinations -- the Netherlands, Ireland, Switzerland, the U.K. and Canada. But the potential for growth in China is unmatched, and rivals Brazil, India and Russia offer even less hospitable business climates.
Still, look for U.S. firms to grow more wary of new investments in China. Much as they may regret the lost business, they know they’ll regret it even more if the trade secrets they share today create unbeatable competitors tomorrow.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Four Surprising Signs You’ll Never Retire (and How to Fix Them)
Gearing up to retire? If any of these four signs ring true, you may want to make some changes before you do.
-
Stocks Rise After Trump-Powell Fed Tour: Stock Market Today
Nvidia hit a new all-time high intraday, but another renowned semiconductor name and some less iconic stocks were bigger movers Friday.
-
AI-Powered Smart Glasses Set to Make a Bigger Splash
The Kiplinger Letter Meta leads the way with its sleek, fashionable smart glasses, but Apple reportedly plans to join the fray by late 2026. Improved AI will lure more customers.
-
Breaking China's Stranglehold on Rare Earth Elements
The Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
Things that Surprise Business Owners When It’s Time to Sell
The Kiplinger Letter When it’s time to retire and enjoy the fruits of growing their business, owners are often surprised by how tough it is to give up their baby!
-
What New Tariffs Mean for Car Shoppers
The Kiplinger Letter Car deals are growing scarcer. Meanwhile, tax credits for EVs are on the way out, but tax breaks for car loans are coming.
-
AI’s Rapid Rise Sparks New Cyber Threats
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
Blue Collar Workers Add AI to Their Toolboxes
The Kiplinger Letter AI can’t fix a leak or install lighting, but more and more tradespeople are adopting artificial intelligence for back-office work and other tasks.
-
Will State Laws Hurt AI’s Future?
The Kiplinger Letter Republicans in Congress are considering a moratorium on state AI laws. But it’s likely a growing patchwork of state AI regulations will be here for a while.
-
The New AI Agents Will Tackle Your To-Do List
The Kiplinger Letter Autonomous AI agents “see” your computer screen, then complete a task, from buying a concert ticket to organizing email. This opens up a world of possibilities.