Special Market Focus: A Reflection on China’s One-Year WTO Anniversary
December, 2003
December 12, 2002 marked the first anniversary of China's entry into the World Trade Organization ("WTO"). On the topic of China's impact on the WTO, supporters and critics alike made numerous predictions ranging from wild optimism to a downright disaster of global proportions. Now that China has been a full member of the WTO for one year, we wanted to look back at the last year and look ahead to the future.
THE MARKETS OF CHINA POST-WTO
If you walk through Shanghai, Beijing, or most Chinese cities, you will see the effects of the booming economic growth in China. Young people walk down the street in Western clothes, the malls boom with Western music and movies, and something is for sale at nearly every doorstep. It is anticipated that China's economic growth will register around eight percent (8%) this year. Government's spending in infrastructure continues to fuel growth in construction, construction materials, real estate, and household appliances. Encouraged by supportive government policies, China's private sector is leading the economic boom in virtually all areas. Foreign investment continues to be very strong—China draws in a quarter of all foreign investment in Asia. As the country gears up for the 2008 Olympic Summer Games in Beijing and the 2010 World Expo in Shanghai, spending in all areas from construction to telecommunication is expected to explode.
The international community appears to have benefited from China's growth as well. China is expected to have a double-digit increase in both export and import trade ratios. Consistent trade surplus has built China one of the largest foreign reserves in the world. For the first time in history, China overtook the U.S. in the volume of trade with Japan.
One of the unforeseen benefits of China's accession to WTO is the sense of assuredness foreign investors feel in approaching China as a market in which local production and manufacturing are warranted. For example, despite the substantial reduction on automobile tariffs, car manufacturers such as Ford, Honda, and Toyota are investing in joint ventures with major Chinese auto builders to make cars for China's domestic market. The same holds true for research and development. China's engineers and scientists are cheap but talented, and the technology market is huge. Companies like Alcatel, GE, Intel, Matsushita, Siemens, and Microsoft are building R&D facilities across China.
Despite the impressive economic record, deep-rooted problems exist in China's transition to a market economy. Beneath the well-dressed teenagers, American fast-food restaurants and ATMs, problems with social instability and a defective banking system loom. For the time being, there seems to be no immediate cure for these problems.
INDUSTRY OVERVIEW
A company's success in doing business in China, or as part of a joint-venture, largely depends on the industry:
- Agriculture
China's entry into the WTO seems to have had a negative impact on China's agricultural industry. China's duties on agricultural products fell from 5% to 16%, and sometimes up to 60%, causing the resentment of many farmers. China's interim biotech regulations threaten to seriously limit U.S. export of soybeans to China.
- Telecommunications
The telecommunications industry is one of the hottest markets in China, and WTO membership seems to have fueled its growth. With companies such as AT&T Wireless and Nortel leading the charge, China took steps to rearrange its monopolist telecom industry by essentially splitting the market between two giant companies, China Telecom and Unicom. In general, China has lived up to its promise of allowing foreigners substantial ownership (up to 49% ownership in three years) of telecom companies. One high-profile example is AT&T's joint venture with Shanghai Telecom to provide broadband internet services to business users in Shanghai. Lower tariffs on telecom equipment appear to be in place because domestic production of such equipment is limited.
- Textile and Apparel
The textile and apparel industry is so far the clearest beneficiary of China's entry into WTO due to the lifting of many foreign-imposed quotas and product limitations. This is evident by merely strolling through any market from Wuhan to the markets outside the Forbidden City in Beijing.
- Distribution and Retail
The distribution and retail industry has been in a slow-growth mode within China, but growth is on the upswing. China has said that it will eventually allow foreign owners to have a controlling stake of up to 65% in retail stores, which should be good news to U.S. retailers with operations in China.
CHALLENGES IN DOING BUSINESS IN CHINA
Prospective companies hoping to break into or continue their growth in the Chinese marketplace must wrestle with five main concerns.
Political and Social Unrest
China's political and social problems are not that unique from those problems in other developing countries, but they are magnified due to China's tumultuous past. Presently, the most significant concern seems to be the protests of disgruntled, unemployed workers. Violence by farmers protesting taxes and the actions of local authorities is frequent and can be unsettling.
Politically, China recently completed its first uneventful transition of power --from Jiang Zeming to Hu Jingtao. This calm transition indicates China's leadership is being transformed from a single, dominant leader to a collective, more stable governing structure, which is important for the stability of business interests.
Working in this volatile environment, foreign companies should maintain good governmental and employee relations. It may take time and effort in the beginning, but will pay off in the long run.
Corruption
Despite China's vigorous attacks on corruption, it is unlikely that corruption will be completely eradicated from the Chinese system. There will continue to be illegal acts of bribery and fraud. It will be quite some time before China can have a clean, efficient, and effective government. U.S. companies are often put between a rock and a hard place in a society where "greasing" of relationships is often considered a prerequisite to conducting business. But, the U.S. Foreign Corrupt Practices Act prohibits U.S. companies from any act of "bribery," and for violators of the statute, the criminal and civil ramifications can be substantial.
Non-transparency of Rules and Regulations
China's rules and regulations are still mysterious and perplexing to foreign companies. This is caused, in large part, by China's imperfect legal system and the lack of a clear division of authority among governmental agencies. In addition, local protectionism is widespread. Local governments may interpret rules more favorably to local companies or adopt protectionist policies to take advantage of the loopholes or ambiguities in poorly drafted laws.
The Chinese government and legislature are attempting to bridge the legal gaps and are furiously turning out laws and regulations. In October, 2001, the State Council announced the abolition of 180 laws and provisions that were incompatible with WTO membership. These new laws include an electronic communications law, a foreign investment banking law, and a trade secret law.
Intellectual Property Protection
Protection of intellectual property is improving in China, but is still far short of the standard accustomed to by Western companies. The government is taking this matter seriously; however, for a country of China's size, protection of intellectual property will come only slowly.
For some companies, intellectual property is their most important asset. Chinese consumers consider American brand name products as high quality and, sometimes, as status symbols. Some U.S. companies have been shut out of the Chinese market because their trademarks and trade names were registered by Chinese companies that were sometimes their agents or distributors.
Preferential Treatment
Having been a major recipient of foreign investment for years, China is no longer content with being a low-tech manufacturing base for foreign companies. In joint ventures, Chinese partners increasingly demand foreign partners to put up technology as a condition to the venture. There is evidence that local governments are giving technology-based companies priority and preferential treatment. Companies like Intel, Matsushita, and Motorola are often the darlings of the governors and mayors of China. In the meantime, China has issued a national policy of "opening up the west" – luring companies to invest in the inland region by offering favorable policies.
CONCLUSIONS
Reflecting on the past indicates that the future is bright for business in China, and the WTO appears to have helped open the door. For many foreign companies eager to benefit from the opportunity, China's compliance with WTO cannot come fast enough. However, this single-minded wish may turn into a double-edged sword: the large number of laws hurriedly enacted are not time-tested and may not be well thought out. There will certainly be confusions in interpretation and application of these laws. For the immediate future, foreign companies will face rapidly changing and often inconsistent regulations and laws. This is a frustrating and bewildering (to some) situation, which can only improve with time, and every company considering doing business in China would be wise to select competent legal counsel with experience in the Chinese legal and business climate. With Bullivant's depth of experience and expertise in handling China-related transactions, we are well-positioned to advise and assist U.S. companies on a wide range of matters, such as forming joint ventures and other business entities in China, trademark and copyright registration, technology transfer, manufacturing agreements, purchase and sale of assets, leasing and real property, and business negotiations.