Chinese Rules Said to Threaten Proprietary Information

By MICHAEL WINES

Published: April 30, 2010

BEIJING — China is expected to issue regulations on Saturday requiring technology companies to disclose proprietary information like data-encryption keys and underlying software code to sell a range of security-related digital technology products to government agencies, American industry officials said on Friday.

But they said it remained unclear how vigorously Chinese officials would enforce the new rules, which already are watered down from a sweeping proposal first raised in 2007. Both the American and European technology industries have contended that the rules are unworkable and that they amount to trade protectionism.

One concern is that the rules will allow the leak of crucial foreign technologies to Chinese competitors who are seeking to build a technology industry on a par with the West.

The European Union’s chief trade official, Karel De Gucht, said in a visit to Beijing this week that the rules had “no real base in reality,” and urged the Beijing government to overhaul them.

The regulations, set to take effect on Friday, largely affect sales of network routers, smart cards, firewall software and other products involved in protecting digital data. They would require software and equipment from both Chinese and foreign companies to meet new technology standards before being certified for sale to government agencies.

To be certified, companies apparently would have to give government-connected testing laboratories encryption algorithms, software source code and design specifications that, for many of the products, are regarded as sensitive trade secrets.

In interviews, American industry officials argued that the rules not only sought details well beyond what was needed to certify the products, but that there were few safeguards to protect the proprietary information from outsiders.

“Even if you’re not talking about the really sensitive stuff, it’s not clear yet how product information will be protected or secured while it is running through the testing process,” John Neuffer, a vice president at the Information Technology Industry Council, a trade group based in Washington, said in a telephone interview.

“China asks for companies to go through testing labs that are essentially state-owned, government-owned,” he said. “That’s the sensitive part.”

The regulations are part of a long-running argument between Western technology companies and the Chinese government over the West’s access to Chinese markets. In the last month, China averted another dispute by rolling back a second plan aimed at giving Chinese companies an advantage in government technology purchases.

But foreign companies still contend that the latest regulations will grant Chinese companies an unfair edge in government sales, a comparatively small but growing part of the market here.

They also worry that the disclosure rules will enable Chinese competitors to copy Western technology. When the 2007 certification proposal was first introduced, some Chinese officials cast it as part of a broader campaign to help the nation’s computer-technology companies gain ground against more advanced Western competitors.

In negotiations, Chinese officials have argued that the United States imposes similar disclosure requirements on many advanced technologies. Mr. Neuffer and others said, however, that except for some military and national security technologies, American certification procedures are far less rigorous and are conducted in testing labs independent from the government.

Other foreign critics have called the regulations an example of trade protectionism, in that they would set standards for selling goods to Chinese governments that Western companies find difficult to meet. Many Chinese technology companies have agreed to abide by the rules.

In Beijing, an American industry expert who has negotiated with the Chinese government on the issue said that most American companies were likely to abandon sales to the Chinese government rather than turn over trade secrets. That expert declined to be named because of the sensitivity of the talks with the Chinese.

American industry officials also have argued that the new rules would gut their technology exports, because few other nations would purchase technology whose essential security secrets had been shared with the Chinese government.

Publicly, the United States government has taken a muted stance on the dispute. Nkenge Harmon, a spokeswoman for the United States trade representative in Washington, noted in a statement that the Chinese first planned to apply the rules to all technology purchases, but later scaled them back to apply only to purchases by local, provincial and national governments.

“We were pleased with that decision,” her statement said. “Since then, the U.S. has continued to ask China to follow global norms in this area, and we are continuing those discussions.”