January 28, 2010 / 6:39 PM / 9 years ago

UPDATE 2-US firms face too many 'headaches' in China - Locke

* Google illustrates challenges in China

* Domestic innovation favors Chinese firms

* Obama team studying new tactics and strategies (Adds quotes from Locke speech)

WASHINGTON, Jan 28 (Reuters) - Chinese policies that promote domestic firms and create barriers against foreign ones could cause American companies to lose interest in China, U.S.Commerce Secretary Gary Locke said on Thursday.

Locke’s warning to Beijing against backsliding on economic openness and the rule of law came amid rising complaints about trade from both partners in a bilateral trading relationship worth more than $330 billion last year.

“Recent events, specifically the well-publicized Google (GOOG.O) incident, have reminded us of the continued challenges faced by foreign and U.S. companies operating in China,” Locke said in a speech at the U.S.-China Business Council’s annual forecast conference.

Google, the world’s top search engine, said on Jan. 12 it would not abide by Beijing-mandated censorship of its Chinese-language search engine and might quit the Chinese market entirely because of cyber attacks from China.

“China needs to continue making strides to be more transparent, predictable and committed to the rule of law. If there is backsliding on these issues, it will affect the appetite of U.S. companies and other foreign companies to enter the Chinese market and ultimately that will be bad for both the people of China and the United States,” Locke said.

He also criticized a Chinese government plan to promote “indigenous innovation” by giving Chinese companies that use Chinese intellectual property an advantage in bidding on government procurement projects.

Major U.S. business groups wrote to Locke, Secretary of State Hillary Clinton and other administration officials this week to complain about the initiative.

The Chinese plan “significantly disadvantages” U.S. and foreign companies in bidding on contracts worth an estimated $85 billion annually and violates market-opening pledges Beijing made in 2009 commercial talks, Locke said.

“Moreover, we recognize that this issue is just one facet of a broader Chinese approach to industrial policy that is creating headaches for U.S. companies operating in and trying to export to China,” he said.

“Successfully dealing with this will require both tactical and strategic adjustments to our engagement with China, and I can assure you that the administration is diligently studying what steps might be necessary,” Locke added.

However, Locke began and ended his speech on more positive notes, saying he believed no country offered greater growth potential for U.S. exports than China.

Locke, a Chinese-American, said he would be leading a trade mission to China and Indonesia in May to promote exports of U.S. clean energy and energy efficiency products.

The United States has big trade imbalance with China, but “keeping Chinese goods from the U.S. market is not the answer to addressing our trade deficit,” Locke said.

“Instead, making sure the Chinese market is more open to U.S. companies is the most productive solution,” he said.

China has chafed at Obama administration decisions in 2009 and this year to slap tariffs on Chinese tires and steel products. (Reporting by Paul Eckert and Doug Palmer; editing by Alan Elsner and Todd Eastham)

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