On October 10, 2000, Permanent Normal Trade Relations (PNTR) status for China was signed into law. This was necessary for U.S. companies and farmers to benefit from China’s commitment to reduce or eliminate tariff and non-tariff barriers as a prerequisite to joining the World Trade Organization (WTO).

As a result, U.S. exports to China are estimated to increase by $13 billion annually by 2005, according to Congressional Research Service. And, the U.S. Department of Agriculture projects an increase of $2.2 billion annually in agricultural exports alone. How will this affect your business?

Upon China’s accession to the WTO, its duties and quotas are scheduled to be reduced at different rates. The phase-out period could be rapid or stretched out over several years. Consequently, the impact on your business will vary depending on the product or service you export to China, or the industry you choose to invest in. Below are sectors we believe will be significantly impacted.

The Computer Industry

According to the U.S. High-Tech Coalition on China, a group of leading U.S. technology associations, U.S. exports of computers to China increased more than 500% from 1990 through 1998. The Chinese computer market is growing by 20% to 30% each year, and the PC market is growing twice as fast as the world average. By the end of 2000, China is projected to become the second-largest PC market. Plus, China has agreed to adopt the Information Technology Agreement (ITA), which eliminates China’s 10% - 15% duties on computers and peripherals by 2003.

Additionally, China is expected to extend full trading and distribution rights to foreign firms within two years of WTO accession. This means U.S. computer companies, and others, can import and export without going through a Chinese middleman, and can provide direct after-sales service and support. As a result, U.S. producers and distributors of computers could benefit significantly.

e-Commerce and the Internet

The number of Chinese internet users jumped from 1.1 million in May 1998 to 9 million by December 1999, according to the U.S. High-Tech Industry Coalition on China. And, it is anticipated to climb to 20 million by December 2000.

As part of China’s commitment to join the WTO, it also has agreed to open its information technology sector. Consequently, it is expected to reduce tariffs from 13.3% to 0% by 2005 on a wide range of information technology products — laying the groundwork for e-commerce. Importantly, the Chinese liberalization of financial services, express delivery, air courier, and freight forwarding services will help support e-commerce growth.

The Telecommunications Sector

U.S. exports of telecommunications equipment to China rose more than 900% from 1990 through 1998, according to the U.S. High-Tech Coalition on China. This includes optical fiber, telephone and cellular equipment, satellite services, and networking equipment that ties communications devices together.

By December 1999, China claimed to have 40 million cellular subscribers, one of the world’s largest markets. As cellular use increases, the number of fixed telephone lines also is anticipated to rise from 100 million to 175 million, while the number of wired households is predicted to climb from 12% to 22% by 2003.

According to the WTO accession agreement, China is expected to open its telecom market by eliminating duties on most telecom imports within three years. Additionally, it is anticipated to phase-in: foreign participation in paging and other value-added services, allowing up to 50% foreign ownership; mobile/cellular services, allowing up to 50% foreign ownership; and fixed line/international long-distance services, allowing up to 49% foreign ownership. China also signed onto the WTO Agreement of Basic Telecommunications Services. This grants public telecom networks access on a nondiscriminatory basis. Plus, technology choices are to be made as commercial decisions, rather than government mandate.

The Software Industry

The software sector is one of the fastest growing and largest job creating industries worldwide. In fact, according to the U.S. High-Tech Industry Coalition on China, the U.S. industry has grown 18% annually, and is projected to contribute more to the economy than any manufacturing industry, including the automobile sector.

In 1998, China’s packaged software industry market was valued at $756 million. It is expected to grow to $5 billion by 2003. And, as part of its decision to join the WTO, China has agreed to abide by the Agreement on Trade Related Aspects of Intellectual Property (TRIPs), the best vehicle available to combat software piracy. This is essential, since in 1998 it was estimated that 95% of business software used in China was pirated.

The Medical Industry

China is anticipated to eliminate its quotas on medical equipment upon WTO accession and reduce tariffs on medical equipment from its current rate of 9.9% to 4.7% over a three-year period. Due to China’s agreement to allow foreign firms to import, export, distribute, and provide after-sales service, its medical imports are anticipated to increase.

The Chemical and Pharmaceuticals Sector

As part of its WTO commitment, China has agreed to reduce tariffs on chemicals from an average rate of 14.74% to 6.9%, and eliminate almost all chemical quotas upon accession. Additionally, it is expected not to enforce export performance, local content requirements, or similar requirements as a condition of importation or investment approval.

China agreed to reduce its average tariff on pharmaceuticals from current levels of 9.6% to 4.2% over a three-year period.

The Agricultural Industry

Based on the WTO accession agreement, China should reduce agricultural tariffs from an average of 22% to 17.5%. Duties on “U.S. priority” agricultural goods are anticipated to fall from 31% to 14% over a four-year period.

China is committed to eliminating non-tariff barriers and will use a tariff-rate quota (TRQ) system for wheat, corn, rice, cotton, and soybean oil, thus expanding market access. Chinese imports above the quota level will be subject to a higher duty rate. China said it will not use agricultural export subsidies and will reduce domestic subsidies.

The Emerging Economic Power

“China will increasingly become a regional economic power and trading hub after its WTO entry,” said Frank Gong, Bank of America Vice President and Senior Research Analyst for Asia. “As its trade barriers fall, China’s labor-intensive exports will become more competitive. This will put pressure on China to reduce prices, especially on agricultural products, which are 15% to 20% higher than world prices, and could worsen its unemployment rate leading to social instability.”

“Due to greater competition for foreign direct investment, China will increase its competitiveness in value-added exports in the medium to long-term,” Gong added.

Currency Convertibility

Within five years of WTO accession, Beijing’s commitment to allow foreign banks to deal in the Chinese currency, the renminbi, will increase pressure for interest rate liberalization and accelerate movement toward full currency convertibility. According to Gong, “A free-floating foreign exchange system is the only feasible alternative.”

Chinese Economic Growth

China’s gross domestic product growth rate is projected to reach 8% in 2000, and 8.5% in 2001, one of the world’s highest. As growth continues, and as China liberalizes its economy, demand for your products and services is likely to rise.

This article appeared in December 2000. (BA)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is chair of the Upstate New York District Export Council and founder of the ManzellaReport.com and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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