Washington Post / By Clay Chandler, Washington Post Foreign Service / Thursday, May 25, 2000
SHANGHAI, May 24 -- After the long battle over trade with China, now comes the hard part--figuring out how to make money in the Chinese market.
In scrapping its contentious annual review of China's human rights record, Congress is removing a source of long-standing friction from the U.S.-China trade relationship and assuring American firms a chance to compete on roughly equal footing with rivals from Japan and Europe once China is admitted to the World Trade Organization. But, China experts warn, that does not guarantee U.S. companies immediate access to China's market, or even ensure that China will comply fully with the spirit of the deal it struck with the Clinton administration last November to win U.S. support for its bid to join the WTO.
Firms and farmers who lobbied for normal trade with China should not be "under the illusion that now they can pop the champagne corks and watch the money roll in," said Richard Margolis, senior economist with the investment firm of Merrill Lynch in Hong Kong.
"American companies have to be realistic," cautioned Dong Tao, senior Asia economist at Credit Suisse First Boston. "Genuine market access in China will take years--probably decades."
The November deal with the United States, which was slightly expanded by a similar bilateral accord reached last week with the 15-member European Union, commits Beijing to far-reaching liberalization that would increase global competition in virtually every significant segment of China's economy. Beijing promised to cut tariffs on U.S. industrial goods to 9 percent by 2005 from the current 25 percent, scrap most of its import quotas and ease restrictions on foreign investment.
But China's compliance record on other international accords is mixed, and a host of domestic factors could delay, or even block, implementation of commitments proffered as the price of admission to the WTO.
In some cases, U.S. goods and services will face resistance from regulators within China's central government, who have broad discretionary authority. In telecommunications, for example, such U.S. companies as Motorola and Qualcomm will be up against Wu Jichuan, the powerful head of China's Information Ministry. Wu, who sparred openly with China's reform-minded Premier Zhu Rongji over the U.S. accord, has made no secret of his determination to protect domestic companies--many of which his ministry owns.
In other sectors, such as autos, the battle lines may be drawn between central and local governments. The November pact with Washington would lower tariffs on finished automobiles imported to China to 25 percent, down from 80 to 100 percent now.
But reduced prices for imported autos are sure to squeeze China's woefully inefficient domestic producers. China has 120 domestic auto-assembly companies. Thirteen account for as much as 98 percent of the country's annual 1.8 million vehicle sales. Only one--Shanghai Automotive Industry Corp.'s joint venture with Volkswagen--is producing at a scale sufficient to be globally competitive.
Phil Murtaugh, executive vice president of General Motors' joint venture in Shanghai, estimates the proposed tariff reductions, if strictly implemented, would consolidate the industry to three manufacturers. But job losses from such a shakeout would be severe, and it is unclear that local governments, which heavily subsidize these unprofitable factories now, will just let hometown plants go bust.
A number of foreign businesses already have found that making it in China is more difficult than they thought, contributing to a drop in foreign investment last year. Even when they do not face active official opposition, U.S. firms could be hindered by de facto barriers that put them at a disadvantage relative to domestic players. Credit Suisse's Tao warns of the perils China's fragmented distribution system poses for U.S. consumer goods makers.
"American companies may have better products, more capital, superior technology and management skills, but they can't reach consumers if they don't have access to a distribution network," Tao said. "In China, acquiring that access won't be easy."
American farmers were among the biggest supporters of normal trade relations with China. Under the agreement, China pledged to impose much lower tariffs on set amounts of corn, wheat, soybeans, rice and cotton imports. The U.S. Department of Agriculture projects that American farm exports to China under the new quota system will increase U.S. farm sales to $2 billion a year over the next five years.
But enforcement provisions in the WTO deal are vague, and China's promises to import more American farm products must be reconciled with long-standing fears that China might become too dependent on foreign countries for its food supply and with the already precarious economic circumstances of China's farmers.
In some sectors, such as entertainment and the Internet, concerns about preserving political control could put the brakes on liberalization. Beijing has sought to limit the exposure of China's residents to Western pop culture and media coverage, while U.S. trade negotiators have secured permission for American film studios to double exports of movies to China to 20 a year. And the government's policy on foreign ownership of content-focused Internet ventures remains as murky as the currents of Shanghai's Huangpu River.
Even if China adheres strictly to provisions of the November agreement, few economists expect a significant reduction in China's trade deficit with the United States, which last year reached $70 billion. The International Trade Commission projected that the U.S. trade deficit with China would have widened by $1.7 billion had the terms of the November accord been in effect in 1998.
Most experts, though, think China's increased share in the U.S. market would come at the expense of other exporting nations and therefore would not add substantially to the U.S. trade deficit with the rest of the world.
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