When China was accepted as a member of the World Trade Organization (WTO) in 2001, hope ran high that the market for transportation and logistics services would soon be liberalized. Foreign-owned service providers—and their shipper customers—looked forward to the day when they would be free to offer customers in China the same seamless, single-source services they do elsewhere in the world.

That day may be further away than originally anticipated. Although the Chinese government is loosening restraints on some aspects of transportation and logistics, for the next few years at least, China will continue to restrict where, how and with whom foreign-owned providers can conduct business. China's WTO membership agreement, moreover, only partially deregulates transportation and logistics. That not only frustrates providers but it also limits options for shippers in this vast and growing market.

What follows is a progress report on some of the restraints on logistics and transportation services in China today.

Ocean Shipping: In December of 2001, China's Ministry of Communications (MOC) issued a law that was intended to ensure "fair competition" and "maintain order" in the maritime trades. The maritime industry was caught off guard as the law was proposed, signed by the prime minister, and put into effect in just 25 days.

The new law covers such typical regulatory requirements as licensing of service providers, filing of tariffs and service contracts, prohibitions against rebating and discriminatory pricing, notification of changes in service and pricing, and penalties for violations. Many of those provisions are similar to those in United States law, notes Peter Friedmann, a Washington-based trade and transportation attorney and counsel for the Coalition of New England Companies for Trade (CONECT). "We are not outside the glass house; they are trying to mimic the regulatory environment here that has constrained us for many years," he says.

Many observers are concerned about the law's failure to address confidentiality of service contracts. Another worry is its inclusion of language that allows MOC to set rate parameters and penalize carriers for undefined "harmful" behavior. Since MOC also has supervisory responsibility for China's state-owned ocean carriers, its oversight of contracts, rates and competition could constitute a conflict of interest, says a U.S. government official who has participated in U.S.-China maritime negotiations.

Ocean consolidators, commonly referred to as NVOCCs, also face daunting barriers under the new law, says Edward Greenberg, transportation counsel to the National Customs Brokers and Forwarders Association of America (NCBFAA). NVOCCs must deposit about $100,000 in cash in a Chinese bank, instead of posting performance bonds as they do in most countries. Registration requirements, moreover, are more cumbersome than they are in the United States. "It's a significant issue that effectively keeps all but the largest NVOCCs out of that market," Greenberg says. NCBFAA has asked both countries to mutually recognize each other's licensing and bonding requirements but neither has responded yet, he says.

The new law and China's WTO membership do not change some existing restrictions, such as the 49-percent limit on foreign investment in maritime joint-venture companies. Ocean carriers, moreover, may open their own offices only in ports where their ships make direct calls. Branch offices and agency arrangements must be joint ventures with Chinese companies. Those offices and agencies are subject to geographic restrictions and may not engage in soliciting cargo.

"These joint ventures are arranged marriages," says the U.S. government official, who asked not to be named. The partner must be approved, usually by the MOC. That also can be seen as a conflict of interest, since the approved partner often is Sinotrans, a government-owned transportation and logistics company that also is a competitor of its joint-venture partners.

Courier and express: When it joined the WTO, China agreed to increase foreign companies' ownership in express-delivery joint ventures over three years, and to allow wholly foreign-owned subsidiaries within four years of accession. Shortly thereafter, China unexpectedly issued rules that were designed to protect its postal monopoly against competition.

Those regulations would have required both Chinese and foreign-invested express companies, including those that already held licenses from China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC), to apply for operating authority from China Post. The rules also would have prohibited express carriers from handling shipments weighing less than 17 ounces, required their pricing to exceed China Post's rates, and prohibited them from making deliveries to Chinese government, military or Communist Party offices or to individual residences.

Express carriers were aghast. "It was like putting the fox in the hen house," says United Parcel Service spokesman John Wheeler. "It effectively made [China Post] the regulator of their competition." After intensive negotiations over several months by U.S., Japanese and European authorities and WTO officials, China eliminated the weight and rate restrictions.

A compromise was struck on other conditions. According to Wheeler, express carriers agreed to license their operations under China Post, providing that the license application would be a one-time requirement; the license would be of the same scope and duration as that issued by MOFTEC; and the regulatory arm of China Post eventually would become a separate, independent agency. China also agreed to automatically grant operating authority to any carrier that already held a MOFTEC license.

Although that issue has now been settled, it highlights the ongoing problem of various Chinese government agencies issuing contradictory regulations.

Freight forwarding: China currently allows foreign-owned international freight forwarders to operate only in joint ventures with Chinese companies. But it is opening up freight forwarding to majority foreign ownership much sooner than other transportation sectors. Just last month, China allowed a majority investment by foreign forwarders, and several companies already have taken advantage of that opportunity.

But there's a catch: Any joint venture must have a capitalization of at least US$1 million, and each branch office adds another $120,000 to that sum. "In effect, that eliminates all but the biggest companies" from the Chinese market, says Greenberg of the NCBFAA. Although capitalization requirements for foreign-invested and Chinese companies are supposed to be equalized within four years of accession, he questions whether that will actually happen.

Logistics services: Demand for logistics outsourcing in China is expected to grow, since only 15 percent of Chinese companies are now outsourcing their logistics operations, according to Diana Huang, a principal in Mercer Management Consulting's Beijing office. (About 70 percent of foreign companies in China use 3PLs.)

Shippers have many options, including logistics subsidiaries of state-owned COSCO, Sinotrans, and China Post as well as some recently-formed private Chinese companies. However, it's largely foreign third-party logistics companies (3PLs) and their local partners that are meeting that demand.

Although they may only operate full-service facilities with a joint-venture partner within government-specified geographic areas, many 3PLs are expanding at a furious pace. That expansion has been facilitated by a significant relaxation of controls on foreign logistics firms operating in China, according to Brian Lutt, president of APL Logistics Greater China, who expects that trend to continue.

The Chinese government, in fact, has made improving supply chain efficiency part of the strategic focus of China's 10^th Five-Year Plan, which covers 2001 through 2005. Says Lutt: "It is clear the government recognizes the impact on productivity and GDP that an efficient logistics sector would deliver to the country's economy."

That doesn't mean foreign 3PLs will have clear sailing from now on, though. Their outlook is clouded by apparent contradictions between government regulations issued last July and China's WTO agreement. MOFTEC's announcement of a pilot program that would allow the establishment of full-service "foreign-invested logistics companies" in certain cities states that foreign investment in those companies may not exceed 50 percent. Yet they will be allowed to offer many of the same services that freight forwarders do—services that are open to majority foreign ownership under the terms of the WTO agreement. That notice also requires capitalization of $5 million, five times the amount required for freight forwarders.

Foreign-owned transportation and logistics service providers have learned how to maintain a high level of service quality while working within the Chinese regulatory system—so high that most restrictions on their operations are not apparent to their customers, says Peter Friedmann.

It's not so much that regulatory restrictions constitute a total barrier to doing business in China, he believes, but rather that they add cost and dilute control. "Having to enter into an agency relationship ... instead of being able to develop a fully integrated, fully owned business is going to cost more," he says. If all restrictions were lifted and foreign service providers received the same treatment as their Chinese competitors, Friedmann adds, they would be able to create a seamless transportation network offering better service at a lower cost than is possible today.

That, in a nutshell, is the goal of the transportation and logistics provisions in China's WTO accession agreement. But the Chinese government appears to be torn between achieving that goal and protecting homegrown businesses, as evidenced by "one step forward, two steps back" regulatory regimes, ambiguities in Chinese law, and the inconsistencies between the WTO accession agreement and China's national and provincial laws and regulations.

In the end, the imperative to create a logistics infrastructure that can efficiently manage China's soaring manufacturing output will overcome protectionism. It just may take a lot longer than expected.