America's Chip Crusade

The U.S. government has finally had enough. Yesterday, the Office of the U.S. Trade Representative filed a complaint with the World Trade Organization (WTO) over China's policy of adding a 17% value-added tax (VAT) to chips that are made here but sold in China. Local Chinese makers pay no more than 6% in VAT fees.

The U.S. claims the policy discriminates against American chip makers. The Semiconductor Industry Association (SIA) agreed, saying in a statement issued Thursday that competition with China must take place on a "fair playing field."

Yesterday's announcement brings what appears to be lingering tension to a head. Reached for an interview this morning, an SIA spokesperson cited how American semiconductor designers and makers are also steamed about WAPI. Yep, you read that right. Otherwise known as Wired Authentication and Privacy Infrastructure, WAPI is a standard endorsed by the Chinese government for making chips for wireless Internet devices.

Unfortunately, the documentation for making WAPI-compliant chips is only available to Chinese companies, all but forcing U.S. communications chip suppliers such as Agere Systems (NYSE: AGR.A  ) , Broadcom (Nasdaq: BRCM  ) , Motorola (NYSE: MOT  ) , and PMC-Sierra (Nasdaq: PMCS  ) to share their intellectual property with local firms to get a cut of the business. Intel (Nasdaq: INTC  ) has threatened to stop shipping wireless chips to China if WAPI rules aren't changed.

There's much at stake in keeping China open for American chip makers. For one, it is the world's third-largest semiconductor market, at $19 billion annually. U.S. firms exported roughly $2 billion worth of chips during 2003, according to government reports. Fools might also remember that the SIA reported big annual gains in semiconductor sales during January, due in large part to increased production in China and throughout Asia. Perhaps that's why large firms such as Texas Instruments (NYSE: TXN  ) appear committed to China in spite of the trade barriers.

To be sure, the U.S.-China brouhaha over chips is only in round one, but recent history suggests China may lose the bout. (Similar tariffs imposed by the Bush administration over steel were ruled illegal by the WTO in December.) Investors should hope so. There's little chance of American chip makers abandoning China wholesale; the market is just too large. But if the cover charge for playing in the Sino sandbox remains this high, growth and long-term profits could suffer.

Is China being shortsighted with tariffs? Should the U.S. back off? What will the WTO do? And just what the heck is WAPI anyway? All this and more, on the Semiconductor Industry discussion board. Only at Fool.com.

Motley Fool contributor Tim Beyers thinks WAPI sounds way too much like processed food to be a wireless Internet standard. He has no stake in any of the companies mentioned, and you can view his Fool profile here.


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