On July 27, 1999, the U.S. House of Representatives voted to extend Normal Trade Relations (NTR) status to China for another year. This signaled good will to China.

But, next on the agenda are two more issues that could further improve or harm U.S.-China relations. These include: granting China permanent NTR status, and allowing it to join the World Trade Organization (WTO). Both issues could have a major impact on the United States and your business.

Permanent NTR Status

By granting China NTR (formerly known as Most Favored Nation trade status), Chinese products will enter the U.S. at the same normal duty rates offered to most other trade partners, except for Afghanistan, Cuba, Laos, North Korea, Serbia/Montenegro, and Vietnam. In turn, U.S. products will continue to be allowed access to the Chinese market.

However, Congress soon will decide whether or not to grant China permanent NTR status. If approved, this will eliminate the current annual vote for NTR which has made planning difficult for U.S. companies.

China and the WTO

In order to be admitted to the WTO, China must agree to abide by a broad set of WTO rules. As of July, the office of the U.S. Trade Representative (USTR) indicated that China agreed to reduce its average tariff from 35% to 10%. In addition, the USTR said China appears to be willing to improve transparency, eliminate discriminatory taxes and regulations, and abolish export subsidies, as well as phase out protectionist quotas and import substitution requirements.

According to the USTR, China also agreed to eliminate unscientific food safety barriers, plus adopt judicial review procedures for administrative decisions. If accepted into the WTO, China will be subject to trade sanctions under the WTO’s dispute settlement procedures if these commitments are not carried out.

Chinese Agricultural Markets to Open

China’s commitments regarding agricultural market access address trading rights, distribution, high tariffs, quotas, the application of unscientific standards, reliance on state trading companies, and export subsidies.

As a result, China will move toward a system based almost entirely on tariffs. And on most bulk commodities, tariffs will fall to 1%-3%, reducing China’s duties to levels below most American trading partners.

Industrial Product Commitments

Under the WTO, China has agreed to allow U.S. firms to import, export and distribute industrial products within its borders. Additionally, China will reduce tariffs on industrial products to levels comparable with major U.S. trading partners and below those of most developing countries. And, China will bind all tariff concessions and phase out all quantitative restrictions on imports.

Chinese tariffs on high technology products, including semiconductors, computers and equipment, telecommunications equipment, and other information technology, will drop from present levels averaging 13.3% to 0% over a period of several years.

Tariffs on U.S. automobiles will decrease from 80% and 100% to 25% in 2005. Auto parts tariffs will fall to an average of 10%. Furthermore, China’s commitments in the chemical sectors will result in duty reductions to levels similar to other WTO members.

Service Sector Commitments

Chinese commitments on services are comparable to those of most WTO members. Nevertheless, according to the USTR, further negotiations are required. Services included in the agreement cover distribution, telecommunications, insurance, banking, securities, professional services, audiovisual, and travel and tourism.

In China today, foreign firms have no rights to distribute products other than those made in China, or to own or manage distribution networks. China also frequently issues business licenses which limit the ability of American firms to conduct marketing, after-sales service, maintenance and repair, and transportation. China’s commitment significantly liberalizes these restrictions.

Telecommunications and Banking Services

China severely restricts sales of telecommunications services and bars foreign investment. Under the WTO agreement, China will, to a large extent, lift these restrictions. In the insurance sector, China limits foreign participation to Shanghai and Guangzhou. This, too, will be lifted.

In the banking sector, China imposes severe geographical restrictions. For example, only nine foreign banks can conduct business in local currency and are limited to the Shanghai Pudong area. WTO negotiations seek full rights for foreign banks to handle both local and foreign currency business transactions, to serve Chinese as well as foreign customers, and to liberalize investment.

However, as of this writing, no WTO agreement has been signed. And with additional negotiations ahead, China’s commitments to reduce its trade barriers may change.

Importance of U.S.-China Trade

The United States, which accounts for only 4 percent of the world’s population, needs to sell to the other 96 percent. Passing permanent NTR legislation and admitting China to the WTO will help to achieve this. And since the United States is already a WTO member, with a few exceptions, China must make all the concessions. This is good for U.S. exporters, importers and investors.

In 1998, U.S. exports to China, which now include Hong Kong, were $27 billion. If China is admitted to the WTO and anticipated trade concessions are implemented, U.S. exports likely will rise at a faster rate than in the past.

However, if the United States denies China permanent NTR status and prevents it from becoming a WTO member, this could lead to deteriorated U.S.-Chinese relations. In turn, trade relations could be weakened.

Follow U.S.-China Negotiations

In July 1999, China concluded favorable bilateral WTO negotiations with Japan and Australia. During the upcoming Asia-Pacific Economic Cooperation meeting in September, President Clinton and Chinese President Jiang Zemin are expected to meet. What will come of their meeting is speculative. As a result, it’s important to incorporate a great deal of flexibility in your China strategy.

This article appeared in July 1999. (CB)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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