Competitive Companions -- Beijing Review

After a weeklong visit to China last month, U.S. Senators Charles Schumer and Lindsey Graham postponed a vote on a bill they sponsored that aims to impose a 27.5 percent tariff on China's exports to the United States if China fails to further reform its currency.

The vote was originally scheduled for March 31, but the senators announced March 28 that they would delay bringing the bill to the Senate floor at least until September, saying they had seen signs of currency reform during their trip.

"We welcome the delay. This reflects our desire to find constructive solutions to complex problems," Charles Martin, President of the American Chamber of Commerce in China (AmCham-China), told Beijing Review.

Martin said he opposed the bill, which was introduced by the two senators in February in response to what they deemed as China's undervaluation of its currency, leading to a soaring U.S. trade deficit with the country and costing U.S. workers jobs. In a meeting with Senators Schumer, Graham and Tom Coburn during their visit to China, Martin said he believed that "a tariff on Chinese goods would move production to other low-cost [countries], rather than to the United States."

Representatives from AmCham-China, the U.S.-China Business Council and the U.S. Embassy met with the three senators to discuss U.S.-China trade issues on March 22.

According to information provided by AmCham-China, Schumer said at the meeting that there is growing resentment in the United States toward Chinese business practices, including the value of the yuan and a lack of intellectual property rights enforcement.

But Martin pointed out that China was the fastest-growing export market for U.S. goods, with a nearly 100 percent boost since China joined the World Trade Organization (WTO) in late 2001. He suggested viewing the U.S.-China trade deficit in the context of a decreasing U.S. trade deficit with the whole Asian region.

Martin told Beijing Review that there have been dramatic changes in China's business climate in the past several years. He noted that many new sectors, most importantly the financial sector, including banking and insurance, and the retail sector, including distribution, have been opened up to foreign companies since China's WTO entry. These changes are very significant, he said, because the service sector is one of the most important business sectors for the United States.

Earlier this year, AmCham-China and AmCham Shanghai released a report on American companies' experience of the changing business climate in China from 1999 to 2005. The report uses seven years of annual AmCham member survey data to show the medium-term business trends that have emerged in China. According to the report, AmCham members are offering an increasing range of products and services in the local market and expanding investment beyond the largest cities. They are also seeing competition-based issues join regulatory barriers as their key challenges to doing business in China.

Since 1999, China has increased its market growth and improved the regulatory environment, the report said. In 2000, 38 percent of respondents cited market access restrictions as one of the top three barriers to profitability, while 66 percent reported negative effects from restrictions on the scope of their business. But from 2002 to 2005, two thirds of respondents said they were successful in expanding their product and business offerings.

It also indicates that regulatory issues, such as unclear, non-transparent and inconsistently interpreted rules, continue to rank among the top challenges, although members are seeing improvement in these areas.

According to the report, in terms of investment plans, 79 percent of respondents said that China was a top destination for foreign direct investment in 2005 and 82 percent expanded their overall business activities in 2004. Companies in the survey said they were increasing investment beyond such first-tier cities as Beijing, Shanghai and Guangzhou. In 2004, over 60 percent of respondents indicated that they planned to expand to smaller cities.

China's trade surplus with the United States has been a source of controversy for quite some time, casting a shadow on Sino-U.S. trade relations. Some U.S. lawmakers, including Schumer and Graham, believe that China's currency practices should be held accountable for the trade imbalance, and they have called on the White House to take a harder line with China over the issue.

In Martin's view, the bilateral trade issue is "a big political problem in the United States, mainly because Americans do not understand it very well." According to him, the trade imbalance was created when many Asian countries moved manufacturing facilities to China. As a result, "the trade deficit with all of Asia became concentrated in China."

He suggested the right way to look at the trade deficit is "to ask what the United States' overall trade deficit with Asia is and how that has changed. So if you look back to 1994, Asia accounted for 64 percent of the total U.S. trade deficit; now Asia accounts for 44 percent." Thus, the proportion of the deficit attributed to Asia, including China, has gone down, he added.

Martin also pointed out that Latin America, Europe and the Middle East have increased their surpluses with the United States. "There are a lot of reasons, and one of the biggest reasons is the oil imports from the Middle East," Martin said, adding that "the trade deficit is not a very reliable way of measuring economic relations any more."

Actually, there have been dramatic changes in Sino-U.S. trade over the past several years, according to Martin. "U.S. exports to China since 2001 have increased by 100 percent. And if you compare U.S. exports today with what they were in 1999, the increase is about 265 percent."

He said China and the United States are "very important customers" for each other. "China right now is the fastest growing export market for the United States, and represents the fourth largest export market for our country," Martin said, adding, "I think the fit between the two economies is quite good indeed."

Martin said he was optimistic about the further development of Sino-U.S. trade, but he admitted that there is room for improvement. The first task for the two countries should be "to make trade as free as possible," which means overcoming market barriers on both sides.

The violation of intellectual property rights (IPR) is one of the current market barriers Martin said he is most concerned about, since many U.S. exports are IPR-based. "Piracy of movies, music and [other products] hurts exports," he said, suggesting that enforcement of intellectual property rights in China is very important.

Martin cited the "concurrent license" as another example of a market barrier." For instance, if a foreign insurance company wants to open branches in China, it must apply for a license from individual provinces consecutively. That means, if a company has licenses in Beijing and Shanghai and wants to open offices in other provinces or cities, such as Zhejiang, Jilin and Heilongjiang, it must obtain the Zhejiang license first, then apply for a license from Jilin and then from Heilongjiang.

"That's a typical barrier, but it should not be," Martin said. "It should be that you can apply for licenses in Zhejiang, Jilin and wherever else you want to expand your insurance business at the same time." He noted that Chinese insurance companies are subject to the concurrent licensing procedure as well, but said the system should be changed to the Western pattern.

Although this type of market barrier is not a violation of any law and is not mentioned in the WTO rules, it is very important to the business, Martin argued, adding that a change in the regulations would be beneficial since it would boost competition.

Martin also contended that the country is not spending enough. "China has developed the largest foreign currency reserves in the world. It has a positive current account balance, which means its trade balance is positive, not by a large amount, but by some amount," Martin said. In his view, it doesn't make sense that China has $15 billion in foreign direct investment coming in, plus a current account surplus, which directly flows into the country's reserve account.

"China is sitting on money that could be invested in developing the country," Martin said. "China could easily take the $15 billion a year in FDI and buy more things that allow the country to develop much faster."

Martin suggested China needed to become an even bigger purchaser internationally, while conceding that the country "already is the leader" in that regard.

"There are very few countries that spend as much as they take in or buy as much as they export. China has really done that," he said. His point, however, was that China can afford to do even more, saying that it will " be beneficial to the country and will also ease some of the trade tensions if China becomes a bigger purchaser."

Martin said one thing he would love to see is "China go out and buy legal software for every province and every government ministry in the country," which in his view would "send a very strong message that China is abiding by IPR standards, and it will win China a lot of friends very easily."

Martin said the United States also has to do a lot more in terms of export promotion. "The United States has not invested in the way it needs in this area," he said.

According to Martin, AmCham member companies are reinvesting in China. But the reinvestment is less now because of overcapacity in many sectors, especially in manufacturing. He said that about 90 percent of manufacturing industries, such as steel, automobiles and chemicals, suffer from such overcapacity in China.

But other types of businesses, such as marketing, market research and logistics companies, are coming to China. Martin predicted, however, that U.S. investment in China would decline over the next two or three years.