asia-pacific
CHINA PUTS ON A GLOBAL FACE Entry into the World Trade Organization will alter the way business is done, but obstacles abound along the way Jean-Francis Tremblay C&EN Hong Kong
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Analysis
fter much drama and 13 years of negotiations, last November China signed a bilateral accord with the U.S. over the terms of its entry into the World Trade Organization (WTO) (C&EN, Nov. 22, 1999, page 12). Although the move will almost certainly enhance business conditions in China over the next decade, foreign executives active in the country's chemical sector expect improvements to be very gradual and full of temporary setbacks. China is potentially an extremely important market for the world chemical industry. It is already the world's largest importer of polyolefins. Its booming industrial sector is an important importer and producer of specialty chemicals. Moreover, foreign chemical companies such as Shell, BASF, and Dow Chemical have been planning for some years to invest in projects valued at several billion dollars. China's trading regime has been abnormal for many years. On the one hand, since 1974, the U.S. government has reviewed China's most favored nation (now called normal trade relations) status each year, linking the renewal to the country's human rights performance. Meanwhile, the laws governing China's trade regime have been ignored or toyed with by crafty importers and smugglers. Until a crackdown began in 1998, a substantial portion of China's imported chemicals was smuggled into the country. A major enforcement effort is under way in Xiamen, which was one of the country's most corrupt ports. The signing of a deal between China and the U.S. has been hailed as a landmark event, but the exact terms have yet to be disclosed. As a result, foreign businesspeople in China are at a loss to de-
scribe how the deal will affect them. Bill Valentino, a Beijing- and Hong Kongbased Bayer executive negotiating the siting of a polycarbonate plant in China, comments that for now, the China-U.S. deal has not impacted the rules of the game. He notes that the process through which companies get government approval to build new plants has not changed. But China's joining WTO will have profound ramifications over time. At a conference on China's business laws held in Hong Kong in January, Charles J. Conroy, international partner in the New York City office of law firm Baker & McKenzie, said it's already possible to discern the outline of what will change once China actually enters the world trade body. "We are operating in an environment where we don't know everything, but we know more than before," he commented. The conference was organized by business consulting firm Asia Information Associates and Baker & McKenzie. Of particular interest to the chemical
industry, Conroy said, is that import tariffs are expected to go down substantially. The duties on chemicals, which are currently as high as 40%, are to be gradually lowered to between 0 and 6.5%, he said. This will occur over three years, starting from when China actually becomes a member of WTO, Conroy said. Perhaps more important, China will have to lift restrictions on who is allowed to import into the country. At present, only those firms and agencies that have obtained import licenses can do so. The liberalization of imports will allow foreign firms to fully integrate their distribution network and to sell, deliver, repair, and provide technical advice directly. Restrictions on advertising, freight forwarding, and warehousing will also be phased out within less than three years of China's entry into WTO, Conroy said. One advantage is that foreign companies will no longer have to make in China the products they intend to directly distribute there. But for the time being, Guilford S. Ide, Shanghai-based business manager of agricultural products for DuPont, is underwhelmed. He explains that foreign companies in China have somehow managed to develop distribution networks in spite of the restrictions. He would prefer that companies be allowed to invoice their Chinese customers in renminbi, China's money, rather than in foreign currency. But he believes that China will continue to maintain tight controls on foreign exchange. In fact, in recent months, China has shown little evidence that it intends to further liberalize its foreign-exchange regulations.
Shanghai's harbor likely will be busier after China joins WTO.
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Conroy: WTO is a turning point for China
As a member of WTO, China will also have to step up protection of intellectual property rights. For example, among the situations that need to be corrected, according to Clifford Borg-Marks, an international partner in the Hong Kong office
of Baker & McKenzie, is Chinese TV and radio stations' current exemption from paying to use copyrighted material. DuPont's Ide adds that China's market for crop protection products is plagued by a proliferation of counterfeit products. Market research firm Chem Systems believes that China's entry in WTO will increase opportunities in China's textile sector. As part of WTO, the country will have increased access to the clothing markets in developed countries where customers demand high-quality products. Richard C. Warburton, Hong Kong-based executive consultant for Chem Systems, says China's demand for high-quality synthetic fiber intermediates will increase as a result. This will expand market and investment opportunities for foreign companies, he says. But all will not be positive. In coming years, entry into WTO will force a deep transformation within China's indigenous chemical industry. Most state-owned enterprises—as they are organized now— cannot compete directly with foreign firms. Their productivity is low, marketing is ineffective, and technology is lagging.
Ide: China's pesticides tax is protectionist
And it would be difficult for them to become competitive within just a few years. In a November article, the government-run magazine China Chemical Reporter opined that direct competition with foreign companies operating in
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China presents a bigger threat to the domestic chemical industry than lower tariffs. "Faced with multinationals' rich capital resources, advanced technologies, strong product advantages, and cheap domestic labor, plus favorable tax policies offered to them by the Chinese government, even large and medium domestic enterprises can hardly win." But the article also noted that closing the door to foreign competition would be worse for China. The author advocated that the domestic industry use the threeto five-year buffer period between now and full implementation of the accord to rationalize its costs and upgrade its facilities. Companies "should make more effort to reduce costs, readjust operation tactics, and keep abreast of market trends. Measures should be taken to reshape business processes, enforce staff reductions to retain only employees who can contribute to the enterprise value chain, further cut down production and management costs, peel off unprofitable business, and highlight core business." It will take at least another year for China to actually join WTO. Although critical because of the size of its market, the U.S. was only one among numerous countries with which China needed to sign a bilateral agreement. Countries including Canada and Japan have already signed similar accords with China. But the European Union still has not come to an agreement, causing a potential delay to China, which may have to make additional concessions in discussions with the EU. Because WTO is universal, these concessions will apply to the U.S. as well. Thus, the benefits to the U.S. of China's accession to WTO can only improve, Conroy said at the conference. The U.S., however, remains the biggest stumbling block and greatest source of potential delays in China's accession to WTO, Conroy said. He pointed out that, despite the bilateral accord, China still needs Congress to grant it permanent normal trade relations (PNTR) status, a move that would do away with the need for annual review of China's human rights performance. Although it's only February, there is little time left for Congress to consider PNTR for China within the current year. If the measure is not adopted before the U.S. congressional recess this summer, it won't be discussed in the fall. The reason, Conroy said, is that China is viewed with suspicion in the U.S. The AFL-CIO, for example, has taken a stand against granting PNTR status to China. Legislators will
therefore be opposed to adopting a controversial stance on China just before a presidential election. This would postpone the PNTR debate to 2001. Ultimately, however, the U.S. will vote in favor of China's joining WTO, Conroy said. His rationale is very similar to that used by President Bill Clinton in a Jan. 24 letter to Congress urging it to vote in favor of China's entry. Clinton wrote: 'The U.S. must grant China [PNTR] or risk losing the full benefits of the agreement we negotiated, including special import
protections and rights to enforce China's commitments through WTO dispute settlement. If Congress were to refuse to grant [PNTR], our Asian and European competitors will reap these benefits, but American farmers and businesses may well be left behind." Under such a situation, the series of bilateral agreements negotiated between China and other countries would remain, just as if China had entered WTO, Conroy further explained. But none of the benefits would accrue to the
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U.S. The cost to the U.S. economy would be excessive, he said. Over the past two decades, China has gradually improved its business cli mate, making it easier for foreign com panies to operate. The amelioration pro cess has not been linear, however. Gen erally, it has followed a three-stepsforward, two-steps-back model. Despite the historically significant signing of the U.S.-China accord, business conditions in China have deteriorated somewhat in recent months. One example is the imposition in Jan uary of a 13% value-added tax (VAT) on imported agrochemicals. "It is surely protectionist," DuPont's Ide says. 'They do not even disguise it." Ide is chairman of the Crop Protection Association of China (CPAC), a group formed by for eign firms manufacturing and selling crop protection products. He adds that foreign companies must make VAT pay ments whenever there is a Chinese equivalent to their product. The move is having an immediate im pact on foreign companies that sell pes ticides in China. Ide says he has contact ed 10 of the 16 members of CPAC. Due to the intense price competition in Chi na, it will be impossible to pass the 13% levy on to the end user, he explains. Four companies have therefore already decided that the new tax will force them to reduce the size of their agrochemical operations in China. Also in January, China announced new measures to control the Internet. Apparently fearing that the information superhighway would loosen the Com munist Party's grip on power, Beijing demanded the source codes of all encryp tion software currently in use in China. With the encryption codes, Beijing would be able to access any message routed through the Internet. This would allow Beijing not only to keep a tab on dissi dents, but also potentially to obtain com mercial secrets. So far, foreign software companies appear to prefer to withdraw from the Chinese market rather than to reveal their source codes. Beijing also appears intent on slowing down the advancement of e-commerce in China. At the conference, Nancy Leigh, a Hong Kong-based partner at Baker & McKenzie, said, 'The problems that are evident in Chinese business will be car ried to the electronic world." She noted that current legislation makes it seem as though the content of all web sites posted on Chinese hosts must be approved by Chinese authorities. This is a setback for
multinationals setting up Chinese-language corporate web sites, especially sites that need to be updated frequently. She also noted that current legislation calls for the government to approve business contracts before they can be legally enforceable. Such a requirement negates the advantages of e-commerce, where the establishment of sales contracts is instantaneous. As far as foreign-exchange controls are concerned, there has been an unusual trend developing in the past two years. The tightening of exchange controls in 1997 and 1998 has apparently had the effect of sheltering China from the worst effects of the Asian crisis. Now China is trying to use the same tools to improve tax collection. Since last summer, to remit money abroad, Chinese importers and users of foreign services have been required to provide documents to the banks in China certifying that they have paid their taxes, according to Winston K. T. Zee, an international partner with Baker & McKenzie in Hong Kong. But because of administrative inefficiencies, even companies with fully paid taxes are
new VAT on pesticides, for instance, would not be allowed to stand under WTO, Ide says. Borg-Marks says China's patent and trademark laws are constantly changing, generally in a direction that improves the business climate for foreign investors. Not only the laws, but also their enforcement will have to progress under WTO. In that regard, protection of intellectual property rights is improving. Ide notes that authorities have recently taken actions against pirates after foreign companies complained that their products or packaging was being copied. Beijing authorities have invited foreign firms to review specific cases, he says. These gradual improvements in the business climate in China eventually will become significant. The expected Zee: tighter foreign-exchange controls standards of compliance with WTO are quite strict, so China will likely have to having difficulty obtaining these tax live up to the terms of the international agreement. According to Conroy: certificates. Entry into WTO will require China to "WTO will not produce a miracle in how change many of its current laws and China is going to reform, but it is a turnstrengthen enforcement of others. ing point. WTO is the ultimate rule of Some regulations will have to go. The law in China."^
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