"Indigenous Innovation Products Accreditation Program" Excludes Foreign Firms from Chinese Government Procurement Market

China's recently introduced Indigenous Innovation Products Accreditation Program ("IIPAP") is proving to be increasingly controversial (See Circular 618 of November 15, 2009).  On December 10, 2009, thirty-four industry associations with members in North America, Europe and Asia, sent a joint letter to the Chinese government expressing concern about the impact of the IIPAP.  The following month, on January 26, 2010, 19 U.S. business groups raised similar concerns in a joint letter to top U.S. officials, including Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Commerce Secretary Gary Locke and Trade Representative Ron Kirk.  The concerns center around one key issue—China's IIPAP imposes protectionist measures that exclude "a wide array of U.S. firms from a market that is vital to their future growth and ability to create jobs here at home." 

On November 15, 2009, the Ministry of Science and Technology, the National Development and Reform Commission and the Ministry of Finance jointly issued Circular 618 with the purpose of organizing the application and accreditation of indigenous innovation products and further establishing the catalog of indigenous innovation products, on which the catalog for government procurement ("Catalog") will be based.  According to Circular 618, products listed in the Catalog will enjoy preferential treatment in government procurement.  This provision accords with what is prescribed in the Provisional Measures for the Administration of the Accreditation of National Indigenous Innovation Products ("Measures")—that accredited indigenous innovation products will be given priority in government procurement.  Further, this point was reaffirmed in the PRC Government Procurement Law Implementation Rule (draft for public comment) published on January 11, 2010.

Circular 618 designates six high-and-new technology fields that qualify for indigenous innovation products accreditation:

1. Computers and application devices;
2. Communication products;
3. Modern office equipment;
4. Software;
5. New energy and devices; and
6. Highly energy-efficient products.

In addition, Circular 618 lists seven criteria to be considered for accreditation as national indigenous innovation products.  Of these, two have raised particular concerns with foreign industry groups:

1. Products must bear domestically owned intellectual property rights, which require that the applicant's use, disposal and redevelopment of the related intellectual property should not be subject to foreign restrictions.
2. The applicant must own the trademark originally registered in China, and such trademark should not be restricted by related foreign brands.

In addition, the Measures make it clear that only legal entities and institutions registered in China can qualify for an application of accreditation.

In practice, these criteria make it nearly impossible for foreign firms to have products listed in the Catalog.  As a result, foreign products will likely be excluded from China's government procurement market in the six designated technology fields.  If the proposed measures are adopted, it is conceivable that the Chinese government may extend their scope to products in other industries.