China's new role in world trade
China
By -- Logistics Management, 8/1/2000
One of the most popular martial arts movies of all time was Bruce Lee's Enter the Dragon. That phrase—with its images of invincible skill, power, and domination—is on many a tongue these days as the People's Republic of China prepares to enter the ranks of the world's great trading nations.
China is now in the process of joining the World Trade Organization, the international body that sets the rules of international trade for more than 100 member countries. When China becomes a full WTO member, it will be obligated to abide by the organization's protocols, which promote equal access to trade by requiring tariff reductions, elimination of import quotas and non-tariff barriers, and reducing restrictions on foreign investments. The WTO's rules also govern the settlement of trade disputes and the enforcement of related penalties.
As part of the accession process, China must negotiate bilateral agreements that bring its existing trading relationships in line with the WTO's rules. In the United States, legislation authorizing "permanent normal trade relations" (PNTR) with China has passed the House of Representatives and is now fighting its way through the Senate. If the bill passes, the commercial benefits to U.S. businesses, including manufacturers, agricultural producers, and service providers, would be enormous. If it does not pass, China could still enter the WTO but would not be obligated to liberalize trade with the United States.
Long-Term Benefits
Congress probably will approve the bilateral U.S.-China accession agreement, but there are still some potential roadblocks, says international trade attorney and Logistics columnist Matthew T. McGrath of the Washington law firm Barnes, Richardson and Colburn. A statement by the White House China Trade Relations Working Group hails the agreement as a "one-way deal" that will open China's largely closed markets to U.S. exports and provide strong protections against import surges and losses of jobs and technology. But some congressmen in this presidential election year are threatening to block permanent normal trade relations because of concerns over China's record on nuclear weapons proliferation and human rights, he notes. Despite these threats, he says, "Everyone seems to feel that it has to happen, given the size of the market."
U.S. Trade Representative Charlene Barshefsky, in announcing the successful negotiation of the bilateral agreement late last year, said that approval of the pact would provide long-term benefits for both countries. She cited a host of important protections for U.S. businesses, including new rules covering subsidies, import restrictions, state trading enterprises, investments, technology transfers, and dumping. For China, the stakes may be even greater, she said. Opening up markets to foreign suppliers will make Chinese companies more efficient and competitive while supporting economic reforms that already are under way, she said. WTO entry facilitated by the bilateral agreement, moreover, will strengthen the rule of law in China by requiring that country to adhere to rules on "transparency, discrimination, judicial review, [and] administrative independence [that are] absolutely critical to the functioning of the modern economy," she added.
Just as important as the opening of Chinese markets, McGrath believes, will be China's adherence to WTO dispute-resolution protocols. So far, trade disputes with China have been handled bilaterally—an often frustrating process that may drag on for years without satisfactory conclusion, he says. "Under the WTO, we'll have specific criteria that are covered by a dispute-resolution protocol with a timetable for compliance, rather than being subjected to endless and sometimes pointless bilateral talks," he says. If China fails to comply with WTO rules, he adds, then it will be subject to a defined mechanism for retaliation that includes compensation for the plaintiff country.
Fundamental Change
Once China enters the WTO, exporters and importers around the world will be able to make fundamental changes in the way they conduct business with China. Most policy changes will be phased in according to a schedule that is predicated on China's WTO accession date. Among the most important in a long list of promised reforms are:
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Tariff reductions. Over the next five years, China will either eliminate or drastically reduce tariffs on most imports, some of which are as high as 100 percent today. The current 17-percent value-added tax on imports will remain in force, however.
That will make foreign products more affordable for Chinese manufacturers and consumers, leading most observers to forecast a significant rise in North American exports to China but relatively little increase in the already heavy volume of trade in the other direction.
Given that China's monthly trade surplus with the United States has risen as high as $6.5 billion, the benefits to the U.S. economy of boosting exports to China are clear, says M.K. Wong, director of marketing for OOCL (USA) Inc., the U.S. subsidiary of the Hong Kong-based ocean carrier. A direct benefit to U.S. shippers of this change in trade flows, he points out, will be an improvement in the chronic shortage of containers in Asia. "For every five containers that come from China to the United States, only one goes back loaded," he says. "When export volumes rise, it will ease the long-standing problem of equipment imbalances."
Although shipments of most Chinese export products won't increase significantly, one likely exception is textiles, says Stephen Lee, director of network development for USF Asia Group, a subsidiary of Chicago-based global logistics company USF Worldwide. Chinese quotas on textiles that now protect domestic manufacturers will be phased out; a reciprocal action by the United States will follow, with some protections for U.S. industry remaining until 2008. Once that happens, Lee predicts, much of the textile production that moved to India, Bangladesh, and neighboring countries will return to China. "Those countries have less-developed infrastructure, a less stable political climate, and their cost of labor is higher," he observes. "Without quotas, manufacturers will move production back into China, and China will completely dominate U.S. imports of garments."
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Elimination of subsidies and reduction of local-content requirements. China has agreed to comply with the WTO's anti-subsidy rules, which should make foreign goods more price-competitive. China also will reduce its local-content requirements, eliminating them for some industries but retaining a reduced level in a few sectors, such as telecommunications. The People's Republic also has agreed not to enforce contract provisions that include such requirements after accession.
That will be difficult to enforce, McGrath believes. "It's hard to say with great certainty exactly what's a subsidy and what isn't," he says. Still, the elimination of overt subsidies will help exporters because they'll be dealing mostly with "more natural" economic distinctions like different regulatory standards and lower labor costs, he explains.
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Liberalization of foreign investment rules. China has established timetables for an increase in the allowable percentage of foreign investment in a wide range of service industries, including banking, telecommunications, insurance, financial services, retailing, legal services, and freight forwarding/logistics services. In most of these sectors, foreign businesses will eventually be allowed to take majority ownership of joint ventures or establish wholly owned subsidiaries, both of which generally are prohibited now.
This will open up new opportunities for providers of international logistics services, says John Fitzpatrick, president and CEO of Dynasty International, a Boston-based forwarder and customs broker that specializes in business with Asia. China's current regulations require freight forwarders to have a "Class A" license in order to issue bills of lading and invoices and to collect payment. Chinese companies are legally prohibited from directly paying forwarders that don't have the proper license, he notes. This system essentially forces freight forwarders into minority stakes in joint ventures or fee-for-service arrangements with Chinese forwarders that have Class A licenses, he says. Lee of USF Asia says such complex arrangements are rarely satisfactory.
China recently began issuing Class A licenses to foreign forwarders, but those licenses probably represent the culmination of 10 years or more of negotiations that were hampered by the lack of a standardized application process, says Fitzpatrick. After China joins the WTO, the licensing requirements will be phased out and freight forwarders will be able to establish wholly owned, full-service operations. Adds Lee, whose company expects to soon receive a Class A license through a venture with a local partner: "When we are permitted to take ownership and control, that will allow us to implement our own information technology and reduce our costs." He expects that full liberalization of freight forwarding will take three to five years.
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Opening of direct trading and distribution rights. Right now, foreign companies doing business in China are prohibited from selling or distributing products except through a joint venture or agency agreement with a state-owned partner, wholesaling products other than those they produce in China themselves, selling or distributing other companies' products, and owning or managing distribution networks or warehouses. Virtually all of those restrictions will go away, eventually giving foreign manufacturers and distributors full control over the storage and distribution of their products in China.
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Liberalization of rules regarding transportation and distribution-related services. The many restrictions on ownership and operation of freight transportation, third-party logistics, and freight-forwarding concerns by foreign companies will be lifted, albeit more slowly than in most other business sectors. Current rules that require foreign companies to obtain separate operating licenses for each type of service they provide also will be eliminated. Many Chinese carriers and forwarders are likely to suffer because they lack the modern equipment and information technology that would allow them to keep up with foreign competitors.
Like freight forwarders, ocean carriers have been restricted in the types of business transactions they can conduct, says OOCL's Wong. (Interestingly, under China's "one country, two systems" policy, OOCL is subject to the same restrictions as are carriers from other countries, even though Hong Kong now is under China's administrative control.) Ocean carriers must get permission from the Ministry of Communications to offer new services; may issue bills of lading and invoices and collect payments only at a limited number of licensed "branch" offices; and may not operate container terminals, warehouses, trucking and intermodal services, or other shoreside services except through joint ventures. They also must obtain separate licenses for each type of service they offer. Under WTO rules, carriers will be free to offer the single-source logistics management services that are not possible under current regulations. OOCL, for example, is preparing for that day by establishing a supply chain management organization and an extensive intermodal transportation network to the extent allowable under existing law.
Although having complete control over services and operations has obvious benefits, there will continue to be advantages to joint ventures, including better access to local marketing expertise and closer relations with government decision makers. For that reason, OOCL will continue to work with local partners to build and operate freight terminals. Tad Segal, director of government relations for United Parcel Service, says UPS intends to maintain the status quo when it comes to joint operations. "We currently operate a joint venture with state-owned Sinotrans. It's a very, very good working relationship that we don't foresee changing anytime soon," he says. Still, Segal does not rule out the possibility of change in the future: "As the rules change, we'll look at all available avenues," he says. He adds that his company's quest to obtain authorization for direct flights to China will be determined by the U.S. Department of Transportation and will not be affected by China's WTO status.
Major Transformation
The dizzying array of trade policy reforms undoubtedly will lead to increased business between China and its major trading partners. The possibilities are exciting, but veteran China observers note that it will take five or more years for foreign companies to realize the full benefits of China's entry into the WTO. Even after that point, traders still will have to contend with such issues as the low level of disposable income and Chinese consumers' unique tastes and preferences. "[China's WTO entry is] no guarantee that everybody will be able to sell there," McGrath cautions. "It facilitates the opportunity, but it's still a developing country and the market has limitations."
Another concern for shippers is that increased trade may strain China's transportation infrastructure beyond its limited capacity. China's national and regional governments recognize this and therefore have been investing in improvements to physical infrastructure. Dynasty International's Fitzpatrick, who travels to China regularly, reports that the pace of change is swift.
One example is the ongoing construction at the booming Port of Yantian in Shenzhen, the special economic region just up the coast from Hong Kong. "They're tearing down hills and filling in [the coastline] with earth," he says. The seaport's container traffic is rapidly increasing thanks to the development of efficient connecting rail service, barge services that call at manufacturing centers on nearby rivers, and road improvements, he adds. To ensure that Yantian will be efficient enough to handle expected growth, the Chinese government granted the concession for building, managing, and operating the port to a consortium that includes Hutchison Whampoa Co., which operates the world's most efficient container terminal in Hong Kong.
Another example is Shanghai, which boasts a new airport, numerous improvements to its thriving seaport, and fast-developing financial and information technology infrastructure. "Compared with eight or 10 years ago, Shanghai looks almost as if it's been rebuilt, it's been transformed so dramatically," Fitzpatrick observes. The transformation of Shanghai into a Hong Kong- or Singapore-style financial, telecommunications, and freight-transportation center appears to be so certain, says Lee, that USF Asia plans to eventually move its Asia headquarters from Hong Kong to Shanghai.
China's government also is targeting its infant intermodal system for development. Although that effort is moving slowly, there are signs of progress. The country's emphasis on developing manufacturing capabilities in its western regions is benefiting both the rail and river freight transportation systems, reports Wong. On a recent trip to Xian in Northwest China, for example, he visited a rail-cargo facility that just four years ago had consisted of a dirt road with no platform or container-handling equipment. Now, it has a paved road and marshaling yard, an organized container-storage area, a platform, and a movable crane-type container handler. "Those are direct investments by the national railway ministry," he says.
Developments like these, together with trade policy reforms, indicate that China is on the verge of explosive economic growth. Clearly, though, the challenges are enormous and it will take years to reach the country's growth objectives. But instead of sitting back and waiting for things to happen down the road, shippers should be preparing right now to change the way they do business in China, advises Fitzpatrick. "China needs pushing and prompting, but [the Chinese] are brilliant people. When they're ready to move ... no one moves faster or more efficiently. Things could happen overnight."
Where to Learn More About Trade With China
There's a wealth of information available about trade relations with China. Some of the most detailed and useful sources can be found on the Internet. They include the following:
www.wto.org. The World Trade Organization's Web site is a gold mine of details about the WTO's mission, structure, rules, and procedures. Anyone whose business is affected by international trade policy would benefit from a visit to this site.
www.tdctrade.com. The Web site of the Hong Kong Trade Development Council is one of the most authoritative sources of information on China trade. The council's researchers and economists have posted detailed but very readable analyses of the expected impact of China's membership in the WTO. The site includes links to the council's Business Alert—China publication, including a sector-by-sector analysis of the benefits of China's accession to the WTO (www.tdctrade.com/alert/chwto4.htm). Links to analyses by Asian financial and economic institutions also offer useful data.
web3.asia.com.sg. This Singapore-based portal provides access to a variety of Asian business publications, including Cargonews Asia and its bilingual sister publication Cargonews China (a worthwhile investment at just US $40 per year).
www.ustr.gov. News of the latest developments in U.S. trade relations and historical material are available at the Office of the U.S. Trade Representative's Web site.
www.chinapntr.gov. Because this site was established by the White House to push passage of permanent normal trade relations with China, the information is necessarily biased. Still, it contains useful facts and figures as well as details of the Clinton administration's analysis of the potential benefits of normalized trade relations to U.S. businesses.
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