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China: Open For Business (Int'l Edition)


International -- Asian Cover Story

China: Open for Business (int'l edition)

But how serious is Beijing about respecting free trade?

By the time China's Trade Minister Shi Guangsheng and America's Trade Representative Charlene Barshefsky signed a World Trade Organization deal on Nov. 15, it was clear that Beijing had little choice. Chinese reformers needed WTO to force through needed changes. Worse, China's economy was looking shaky, with growth slowing and unemployment rising into double digits. Foreign investors, weary of bureaucratic obstacles, were souring on China. Outside investment fell 17% in the first nine months of this year. "People were losing patience," says Ken Wang, chief representative of Sprint Corp. in China.

China's agreement paving the way for entry into the WTO won't produce an overnight miracle. But it is a significant step for China on its path to open markets after decades of halting progress. It's a milestone in the economic reform process begun 20 years ago by former paramount leader Deng Xiaoping. And for President Clinton and U.S. negotiators, it's the culmination of a process of integrating China into the world community that began with Richard M. Nixon's visit to Beijing in 1972.

The deal clearly signals that China's reformers have for the moment gained the upper hand over conservatives. Despite the pain that will accompany reform, Chinese leaders recognized that the potential gains were too great to ignore. Estimates are that entry into the WTO could bring China $100 billion of new investment annually, compared to $45 billion last year, and add one percentage point to its economic growth.

But grabbing that growth depends on China following through on its new pledges, and on investors feeling confident in China's resolve. Says Barshefsky, "Investment dollars will flow elsewhere if China remains mired in rules and inefficiencies." Overcoming those inefficiencies will take time. The deal calls for China to open sectors ranging from telecom and the Internet, to banking, securities, and distribution. But many of those openings won't happen for a few years. Also to be phased in are tariff cuts on goods ranging from agricultural products to autos, from an average of 22% to 17%. Beijing also promised to end all export subsidies. Overall, the terms come close to those offered by Premier Zhu Rongji in his April trip to the U.S. (table, page 26).

In those areas where the U.S. side had to concede, negotiators realized that even limited market openings were better than none. They gave up on their goals of majority equity shares in telecommunications and insurance in return for protecting import-sensitive sectors of the U.S. economy from a surge of Chinese imports. "We felt that was very important in eventually getting approval from Congress," says White House economic adviser Gene Sperling. To get the deal through, Clinton must also mollify forces within his own party who object to Chinese labor and environmental practices, and Republicans who are wary of Chinese military ambitions and its record on human rights."DEVIL IN THE DETAILS." Much now depends on how China implements the terms. Beijing, for example, could use tight licensing requirements to limit the number of foreign telecom companies allowed in. Financial services and Internet-related ventures likely would face similar challenges. Investing in China has always been a minefield, and the WTO agreement is unlikely to clear it--certainly not at first, and perhaps not ever. For the whole agreement "the devil is in the details," says Jeanette Chan, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison in Hong Kong.

But everyone recognizes the pluses. Disputes over import restrictions or investment limitations can now be appealed to Geneva instead of to Beijing bureaucrats. "There will still be problems, but now there'll be a system to complain to," says Calman J. Cohen, president of the Emergency Committee for American Trade, a group of America's 50 largest exporters.

And even though companies in such areas as telecommunications won't be allowed majority ownership, a 49% stake means seats on the board, closer financial oversight, and more input in operations. China has yet to sign its own agreement with the European Union--a condition for entering the WTO--but right now, that looks like a mere formality. In the longer term, says Nokia CEO Jorma Ollila, China is now unlikely to impose quotas on how much foreign companies like his can sell in the Chinese market--something he feared if there was no deal. "U.S. companies will benefit and we will benefit," he says.

For the first time, Western companies will be able to sell products directly to Chinese consumers. Currently, computer manufacturers like IBM and Hewlett-Packard face headaches in China, including quotas and tariffs on imported components, requirements to localize content, and restrictions on distribution. With the WTO, they now can consider expanding. These companies "can build up their businesses purely on market considerations," says Jay Hu, managing director of the U.S. Information Technology Office in Beijing, an American industry association. The WTO "certainly would make it a more favorable environment for us to invest," says Texas Instruments exec Cynthia A. Johnson. Beyond the agreement itself, an improved political climate will help as well. Boeing Co., for example, has lost China sales when tensions with the U.S. have flared up. Now, Boeing hopes the WTO will help minimize future political fallout.DRAMATIC SPLIT. American farmers have hopes, too. China is now supposed to drop export subsidies for farm products and sharply cut tariffs on agricultural products. Midwestern food giant Cargill Inc., which exports $700 million worth of fertilizer, oil seeds, and other commodities to China annually, expects a substantial boost. Says Chairman Ernest S. Micek, "WTO is a win-win for everyone, not just for Cargill, but for all agricultural business and the American farmer."

But it is hardly a win for the Chinese farmer. Or for many Chinese manufacturers. Entry into the WTO will force a dramatic split, creating winners and losers throughout that vast country. Scores of companies in noncompetitive heavy industries such as steel and petrochemicals will go bankrupt as they lose the trade barriers that propped them up.

Others--particularly in the partially protected high-tech and biotech fields--will thrive. That's by design. China's leaders are aware that huge parts of their state-run economy have to change. The lumbering state-owned sector eats up billions from China's budget and produces little to show for it. China simply can't afford it anymore.

In some industries, Beijing's policymakers feel ready to carry out painful restructuring--and see WTO as a useful means to do it. Take the domestic auto industry, where more than 120 companies, most of which only produce a few thousand vehicles a year, fight for sales. Beijing knows it must radically trim the number of players, and is confident that more car imports will make for a more competitive local industry.

It may work. General Motors Corp., one of many foreign auto makers in China, is seeing sales of its new Shanghai-produced, joint-venture Buick exceed expectations, and welcomes China's decision to open auto financing to foreign companies like its GMAC unit. "This gives individuals a way to go out and purchase cars that they can't afford right now," says Lawrence Zahner, president of GM China Group. GM also claims it isn't worried that tariffs are falling, requiring its own car and truck plants to compete with imports. "What we lose in terms of protection we gain by far in terms of more rapid growth," says GM Chief Economist G. Mustafa Mohatarem. "In almost every country where auto sales have taken off, the availability of financing plays a key role."

China's emerging entrepreneurs are hopeful, too. Shanghai-based Fortune Group, which makes biotech products and Chinese medicine, is looking forward to foreign financing--a provision of the WTO deal two years down the road. Loans from state banks have long been hard to come by for private companies in China. The WTO agreement "means a more fair and more open system," says Fortune Chairman Guo Guangchang, who is already talking to foreign bankers.

There's a spillover effect into Hong Kong and Taiwan too. For Hong Kong companies, with an estimated 50,000 factories employing five million workers in China, an agreement is expected to be a boon. "Hong Kong-owned factories will be great beneficiaries," says Victor Fung, chairman of the Hong Kong Trade Development Council and chairman of Li & Fung, one of the region's biggest trading companies. He predicts that light manufacturing, which Hong Kong and other entrepreneurs have spread around the region, will move into China as concerns about U.S. trade sanctions evaporate. The trading, distribution, and investment rights have Hong Kong businessmen like Fung--who holds the Toys `R' Us franchise--looking to expand in China.

Yet for China, using the WTO to enact such broad change carries the potential for social explosion. China already has millions of young people out of work, and will add another 10 million workers to urban unemployment rolls over the next few years. "Unemployment is the highest price China will pay for WTO membership," says Hu Angang of the Chinese Academy of Sciences.DOMESTIC UPHEAVAL. This comes at a time when China is in the midst of a sweeping crackdown against the religious cult Falun Gong as well as stepped-up jailings of political dissidents. If the pressure were to build and China erupted in domestic upheaval, or in pro-democracy uprisings like that which led to the 1989 crackdown in Tiananmen Square, business interest in China might again close off.

Chinese conservatives who now seem ready to accept WTO could also backtrack. China's Information Industry Ministry and the Foreign Trade Ministry have already been cooperating with companies like Novato, Calif.-based MeetChina.com, which focuses on business-to-business e-commerce. That could help China's enterprises find buyers overseas. But until the eve of the WTO deal, top officials in the Information Industry Ministry were stout opponents of Internet-related investment from abroad. The WTO deal means "more money will certainly come to the Internet," says Joshua Cherin, executive vice-president at MeetChina.com. But that doesn't mean Beijing will let "money flood in without restraint," he says.

There's potential for backlash in the U.S., too. Since the pact requires Congress to permanently grant China Normal Trade Relations (formerly Most Favored Nation) status, it's far from a done deal. Already, opposition is gathering. AFL-CIO President John J. Sweeney blasted the deal as "a grave mistake," based on estimates that it will eliminate 150,000 U.S. jobs.

But groups favoring the agreement have picked up strength. In April, Republican opposition and a hesitant response by business convinced the White House to hold off, even if it meant sending Zhu home empty-handed. To make amends, business this past summer formed a massive coalition to presell the deal on Capitol Hill, budgeting up to $10 million to target recalcitrants.

After extensive hearings when Congress returns in late January, the Republican leadership promises to take up legislation to grant permanent NTR status for China. Congress will have a strong incentive: Unless Congress approves it, the U.S. will get none of the market-opening benefits that the other 134 WTO members will enjoy. China currently has NTR status, but only after acrimonious annual battles over its renewal.

Washington is hoping for other benefits. With China's entry into WTO's international rulemaking body offering more contact with the outside world, Beijing may be more willing to take up tough issues like human rights and nuclear nonproliferation. "A WTO deal will create a better environment for other difficult issues" with the U.S., says Wang Yong, an associate professor at Beijing University. "The momentum of U.S.-China relations will be resumed."

Of course, relations with China will be far from smooth, treaty or no. Whenever the Chinese reach an agreement, it's the start of a new process, not the end of one. The saga of China's opening is only half complete. Let the next chapter begin.By Dexter Roberts in Beijing and Paul Magnusson in Washington, with Mark L. Clifford in Hong Kong and Bureau ReportsReturn to top


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