SIA ISSUE BACKGROUNDERS

CHINA

Issue: SIA supports China's transition to a market economy as outlined in China's WTO (World Trade Organization) accession agreement. In particular, we believe China must live up to its commitments to provide national treatment to imported products and services, and protect intellectual property.

Importance: China is the world's fastest growing market for semiconductors and ranks as the world's third largest market, with $19 billion in annual sales, and it is expected to become the world's second largest market by 2010. SIA believes China can and should have a vibrant semiconductor industry, and this will best be achieved through full implementation of its World Trade Organization (WTO) commitments to fully open its market and protect intellectual property. China's domestic semiconductor industry is rapidly building production capacity, as outlined in the Chinese government's 10th Five-Year Plan, which aims specifically to increase Chinese semiconductor output from $2 billion in 2000 to $24 billion in 2010, representing an annual growth rate of over 25%. By way of comparison, the worldwide industry is experiencing annual growth of approximately 8-10%. In order to build a healthy industry, China must fully implement the commitment to end its discriminatory application of its Value Added Tax (VAT) rebate system; provide full protection for IP by increasing its enforcement of its laws; avoid proprietary standards that impede market access and infringe on IP rights; and eliminate local content requirements that are intended to favor domestically produced components.

Intellectual Property Protection
SIA has worked to ensure that semiconductor layout designs are protected worldwide. In 2001 China passed a maskwork protection law as required by the WTO. SIA was instrumental in drafting the model maskwork protection law as part of the Uruguay Round. While China has updated its legal framework to meet these requirements, it must improve enforcement. An effective enforcement policy would include the imposition of civil damages and criminal penalties in IP cases that provide a meaningful deterrent to prevent IP violations in the first place.

Proprietary Standards
Also in 2003, the Chinese Government considered implementation of proprietary standards for wireless encryption. Implementation of this standard would have severely harmed both foreign and Chinese companies, and the Government ultimately decided against implementing it. The semiconductor industry today is truly global, and any use of proprietary national standards is likely to cause more harm than good for both domestic and foreign firms.

VAT Rebate Policy
China applies a nominal VAT of 17% on sales of imported and domestically-produced semiconductors. In July 2004, the Chinese Government committed - as part of a settlement of a WTO case - to end the practice of rebating a large portion of the VAT for domestic semiconductor production and design. We applaud the efforts of the Chinese Government to bring all laws into compliance with its WTO commitments, and look forward to the opportunity to review the replacement incentive program the Government has pledged to put in place, such as a recently announced targeted semiconductor R&D fund and other temporary measures, including tax incentives.

SIA Position: SIA has been impressed by the genuine commitment expressed by Chinese officials to implement the WTO agreement, and is hopeful that these outstanding issues can be resolved. We applaud the efforts of the U.S. Trade Representative and U.S. Department of Commerce to continue to encourage China to live up to its commitments in these areas.