China is rapidly changing. It is emerging as a global economic powerhouse, and with the new generation of leadership who recently took office, China’s geopolitical position in the world is likely to become more dynamic. Is China part of your 2003 strategic plan?

Chinese Leadership in Transition

In November 2002, during the 16th Chinese Party Congress, Chinese leaders announced the country’s most historic transition of power. Hu Jintao, 59, has officially succeeded Jiang Zemin to become the new Chinese Communist party chief. Jiang Zemin, however, will retain the position of Chairman of the Military Commission, a position now considered symbolic, since the military is no longer a major power broker.

The new nine-member Standing Committee of the Politburo will have a difficult job ahead. Social unrest is feared if economic growth does not function on all cylinders, while rising unemployment, deflation, mounting government debt and a weak banking system all will take their toll. Plus, as China continues to open its markets as part of its World Trade Organization accession commitments, unrestrained competition from abroad is expected to put heat on inefficient Chinese sectors, including agriculture and state-owned enterprises.

The 143rd Member of the WTO

After 15 years of negotiations, China officially became the 143rd member of the WTO on December 11, 2001. As part of its accession agreement, China will significantly reduce its trade barriers. This is anticipated to boost U.S. exports by $13 billion annually by 2005, according to Congressional Research Service. And, the U.S. Department of Agriculture projects agricultural exports to increase by $2.2 billion annually.

Foreign Investment Continues To Flow

As?a result of slower economic growth, world foreign direct investment flows decreased to $735 billion in 2001, less than half of 2000’s figures. Of this, $503 billion flowed into developed countries, $205 billion was invested in developing countries and $27 billion went into transition economies, according to the United Nation’s 2002 World Investment Report.

China, however, was one of the few countries that experienced an increase in inflows, taking in $47 billion in 2001. In fact, China regained its position, previously lost to Hong Kong, as the largest recipient in both the region and developing world. On a historical-cost basis, U.S. direct investment in China reached almost $10.5 billion in 2001, more than doubling since 1997. And with China now a member of the WTO, inward investment is anticipated to accelerate. Estimates suggest the doubling of China’s annual FDI inflows in the medium term. And this may happen at the expense of Asian developing countries, who will compete even more with China for lucrative export markets.

Commitments To Reduce Trade Barriers

China’s industrial tariffs are anticipated to decline from a 1997 average of 25% to 8.9%, according to the U.S. Department of Commerce. Nearly all reductions will be in force by January 1, 2005, with the remainder done by 2010. Some specific examples of average duty reductions include:

 

  • 6.4% on IT products to 0%,
  • 6.5% on medical equipment to 3.9%,
  • 8.8% on chemicals to 6.9%,
  • 7% on pharmaceuticals to 4.2%,
  • 8.2% on scientific equipment to 5.4%,
  • 22% on agricultural tariffs to 17.5% and 31% to 14% on U.S. priority agricultural goods.

Furthermore, China is expected to eliminate non-tariff barriers and use a tariff-rate quota system for wheat, corn, rice, cotton, and soybean oil. Plus, it has agreed to improve intellectual property protection, as well as allow foreign banks to deal in the renminbi, the Chinese currency. As a result, increased pressure for interest rate liberalization and an accelerated movement toward full currency convertibility are expected.

Strong Economic Growth Expected To Continue

From 1980 through 1990, China’s gross domestic product (GDP) averaged 10.1% annually. Over the following decade, 1990 through 1999, China’s annual growth slightly increased to 10.7%, the highest in the world. Over the last two years, China’s economic growth has been in the mid 7% range; this growth is expected to continue through 2003. Although its economy is isolated from the effects of global slowdowns to a degree, approximately one-fifth of China’s GDP now depends on international trade.

China’s GDP per capita has increased 865% from a still low $102 in 1970 to $985 in 2002. However, the country’s population of almost 1.3 billion is estimated to include 100 million middle class consumers with increasingly strong purchasing power. And, the middle class is likely to double in just a few years.

Exports and Imports To Rise

China is the world’s sixth largest merchandise exporter. However, if Hong Kong’s figures are added, China moves into third place after Germany and ahead of Japan. In terms of imports, China is sixth. Combined with Hong Kong, China moves into third place, again after Germany and ahead of Japan. In regard to commercial services, China is the world’s 12th largest exporter and 10th largest importer. With the addition of Hong Kong, China becomes the world’s fifth biggest exporter. As for imports, China also moves into fifth place.

Since 1993, U.S. exports to China have increased 120%, reaching more than $19 billion in 2001. The leading Chinese sectors for U.S. exports include:

  • Telecommunications equipment
  • Oil and gas equipment
  • Medical equipment
  • Pharmaceuticals
  • Pollution-control equipment
  • Airport and ground support equipment
  • Building/decorations materials
  • Automotive parts
  • Agricultural chemicals
  • Plastic materials and resins, and
  • Food packaging equipment.

What Is Causing the U.S. Trade Deficit With China?

U.S. imports from China, which rose by 225% from 1993 through 2001, exceeded $102 billion. This created a U.S. trade deficit of $83 billion, $14 billion more than the U.S. deficit with Japan. Why is this happening? It is due to China’s growing competitiveness in many of the same industries as other Asian countries, which has made China an increasing threat in the region, especially in textile and electrical appliance sectors.

The U.S. trade deficit with China reflects a shift of U.S. labor-intensive imports away from higher-wage Asian countries to lower-wage China. As a result, low-tech products the U.S. previously imported from other Asian countries are now being imported from mainland China. Consequently, the U.S. trade deficit with China has increased, while the deficit with other Asian countries has decreased.

Are You Doing Business in China?

China understands that to reap the full benefits of further integration in the world economy, and to comply with its WTO accession commitments, it must undergo fundamental adjustments. These changes will, no doubt, be difficult. However, as China continues its reform process, trade and investment opportunities will increase. Yet, risks also will rise. As such, it’s important to assess areas of opportunity and consider doing business in China.

This article appeared in October 2002. (CB)
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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, emerging risks, and the latest economic trends. He's also founder of both 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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