March 7, 2001

Remarks of James R. Meenan
Global Business Associate and Member/Past Chair ISAC 14
Before the U.S. Senate Committee on Small Business
On the Topic: PNTR/WTO – A Good Deal for U.S. Small Business in China

Summary
Small and medium enterprises (SMEs) are dominant economic forces in both the U.S. and China economies and both groups stand to gain with China’s adoption of the new commercial regimes that come with Accession to full World Trade Organization membership.  Establishing long term business relations in China is also based upon developing good inter-personal relations amongst the business parties, a fact that works to the benefit of SMEs whose principal officers are most engaged in trade transactions.

While the China road to WTO membership will be winding and lengthy, the U.S. government can directly assist its SMEs through accelerating the market opening reform processes by working through third parties, i.e., multilateral development and financing institutions such as the World Bank, Asia Development Bank and United Nations. These institutions are in a unique position to provide China’s middle managers with the needed technical assistance and training required to better understand the reforms that will be required and to initiate action plans for making the appropriate adjustments in the government institutions’ policies, regulations and practices. 

The U.S. Trade Representative (USTR) in collaboration with the Departments of Commerce, Treasury and State, should explore with the U.S. representatives at these multilateral institutions, the best approaches that these bodies could take to provide China, at this time, with the needed mid-manager technical assistance and training, including best practices models, for the array of reforms that will be required to facilitate implementation of WTO Accession accords. These measures should not await formal Accession, but commence as early as possible, to help develop a better understanding of what China is agreeing to undertake and smooth the road to an improved commercial environment in which SMEs from both countries can flourish. 

Observations
China is rich in contradictions for U.S. firms. The world's most populous nation, China covers an area larger than the United States. Yet its market is small and concentrated in a few regions along the eastern seaboard. China is one of the world's oldest civilizations, with thousands of years of history, literature and culture, yet the People's Republic is a mere 50 years old. Most of its laws and regulations governing business and trade have been only written in the past twenty years. Over these past twenty years, China has moved from a planned to a market economy and is now in many ways more capitalist than communist.

Most Chinese firms remain relatively small and under-capitalized with pockets of excellence in selective industry. These have competed successfully with world leaders in the white goods and home electronics markets. Chinese personal computer manufacturers have won back market share from such giants as Compaq and IBM. 

For over two hundred years foreign firms have been entranced by the enormous potential of the China market, a potential that remains largely untapped. U.S. exports to China were only slightly more than $13 billion in 1999, only 2% of our global exports, and less than U.S. exports to China's smaller neighbors, South Korea ($23.0 billion), Singapore ($16.2 billion), and even to Taiwan ($19.1 billion).

China is a market with vast potential. The trick is realizing that potential. China's pending accession to the WTO will make it easier for U.S. firms to do this, but it is false to believe that WTO entry provides an end-all solution. Opportunities are available in China, but companies must address the many obstacles.

Since the beginning of reform in 1980, the role of the government in the economy has been strong. Although government revenue has been falling as a share of gross domestic product (GDP), off-budget revenues and expenditures are equal to official allocations in many sectors. As the ultimate owner of state enterprises, the government continues to control roughly two-thirds of GDP and employment. The long-term plan is to sell the government share in most corporations to the public, with the exception of those industries deemed essential to national security. However, the definition of national security is currently quite broad, including telecommunications, mass media, and other areas not so defined in other countries.

Personal relationships in business are critical. The Chinese feel more comfortable dealing with "old friends," and it is important for exporters, importers, and investors to establish and maintain close relationships with their Chinese counterparts and relevant government agencies. It is equally important that American exporters encourage strong personal relationships between their Chinese agents or distributors and the buyers and end-users. A network of strong personal relationships will help ensure smoother development of business in China.

The signing of the U.S.-China Bilateral Market Access Agreement on China's Accession to the WTO on November 15, 1999, represents a major victory in the United States' ongoing effort to open China's market to U.S. goods and services. By encouraging structural reform and the rule of law, the Agreement will also support China's own domestic reform process.

The Bilateral Agreement on China's WTO Accession is only the latest of fourteen trade agreements negotiated between the United States and China since 1979. These agreements cover everything from civil aviation and satellite exports to agriculture and intellectual property rights protection. Each of these agreements has played a role in China's gradual process of trade liberalization, and created new opportunities for U.S. exporters.

The Chinese government has recognized for a number of years that economic reform and market opening are cornerstones of sustainable economic growth. Nonetheless, these reforms have been difficult and often painful for certain constituencies, particularly in the aging industrial sector and heavily protected agricultural sector. Thus, while China today has a vastly more open and competitive economy than 15 years ago, there are still many significant barriers in place.

Some of the current trade barriers that U.S. firms face are:

High tariffs: At present high tariffs constitute an effective import barrier.

Import Quotas & Licensing: WTO rules bar quotas and other quantitative restrictions. China has been gradually eliminating them and will continue this process after Accession over a several year phase-in period.

Transparency: It is increasingly easy to find information about economic and trade regulations in the print and electronic media. However, despite this progress, access is still a problem. Chinese officials routinely implement policies based on "guidance" or "opinions" not available to foreign firms and they have not always been willing to consult with Chinese and foreign industry representatives before new regulations are implemented.

Legal Framework: Laws and regulations in China tend to be far more general than in most Organization for Economic Cooperation and Development (OECD) countries

Local Agents: The ability of foreign firms to distribute directly their products in China is subject to strict limitations.

Anti-Competitive Practices: These operations in China exist in the form of monopolistic practices designed to protect the state-owned sector.

The foregoing provides a good illustrative example of the areas in which third party technical assistance and training could be focused to greatly assist China’s assimilation as a full member of the global economy and key trading party for SMEs.

Recommendation
In the written question and answer portion of Ambassador Robert B. Zoellick’s confirmation process for U.S. Trade Representative, Sen. Max Baucus asked that in view of the widening gap of understanding that is growing with Less Developed Countries (LDCs) in the area of trade negotiations and agreement implementation, would USTR work to integrate development funding organizations, such as the World Bank and regional banks, in a constructive technical assistance and training effort to aid LDCs to better understand the trade reforms being negotiated and enhance implementation of the accords reached. Amb. Zoellick responded in part that he thought the idea of technical assistance by the international financial institutions related to trade is a very good one.

Accordingly, given the importance of China to U.S. SMEs it would be most appropriate to test this Aid for Trade approach at this time. Recognizing that China, in many ways, is not a LDC, the USTR should initiate discussions amongst the concerned federal departments, i.e., Commerce, Treasury and State to have the U.S. representatives at these multilateral funding institutions explore how best to proceed to directly support, through the provision of technical assistance and training, China’s adoption of the agreed WTO Accession reforms.

Note: Data contained in these remarks come from unclassified U.S. government sources.

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