The Joys of Permanent Normal Trade Relations According to the Fortune 500

by Charlie Cray

U.S. businesses want two things from China: access to its markets, and the  right to exploit its cheap labor, or at least to import goods made in China with cheap labor.

The U.S. business push for granting China permanent normal trade relations  status (PNTR, formerly known as permanent most favored nation) and  corporations' eagerness for China to join the World Trade Organization (WTO), reflects this dual desire. The U.S. Congress is set to vote on  granting PNTR to China in late May.

In interviews with Multinational Monitor and in their policy papers which  are swamping Capitol Hill, multinational corporations are open -- and sometimes hyperbolic -- about what they hope a pro-PNTR vote will accomplish. Depending on the corporation or  industry sector, they cite various political factors or provisions in the November 1999 U.S.-China bilateral deal as critical factors which will benefit their business. The bilateral agreement includes Chinese trade concessions related to China's WTO accession and the U.S. grant of PNTR.

Among the top goals of the U.S. businesses frothing at the possibility of ripping down Chinese trade and investment barriers:

• Elimination of the Congressional review of Chinese human rights practices in connection with the annual vote on providing most favored nation status to China. Ending the annual certification process will provide more certainty to U.S. investors and importers.
  
  
• Removal of investment regulations that place limits on the ability of U.S. corporations to invest in China, whether for manufacture of goods for the Chinese market or for export back to the United States;
  
  
• Lower tariffs that will enable them to increase exports to China;
  
  
• Removal of retailing and distribution regulations that limit the effective ability of many U.S. businesses to sell their goods and especially services in China.

Here is what the trade associations themselves say they hope to get from PNTR and Chinese accession to the World Trade Organization:

American Insurance Association

From the insurance industry point of view, China is massively underinsured. Zimbabweans spend more per capita on insurance than the Chinese, according to the American Insurance Association (AIA). Since there is no governmental social security program -- and old-age protections were connected to state enterprises, many of which are now shedding old responsibilities, downsizing and/or facing bankruptcy -- life insurance is most popular among Chinese consumers.

There is also enormous potential in corporate and property insurance. "China is particularly in need of property-casualty insurer expertise as its infrastructure and economy expands," says John Savercool, vice president of federal affairs at AIA. "Currently most Chinese are uninsured and our companies can meet their needs so individuals and families are not left destitute when faced with an accident or natural disaster."

Current Chinese regulations limit U.S. insurance companies to selling in two cities only -- Shanghai and Guangzhou.  All geographic restrictions will be phased-out within three years of granting of PNTR. Reinsurance, master policy insurance and large-scale commercial risk insurance can be provided nationwide immediately upon the grant of PNTR and WTO accession.

Current regulations impose arduous licensing requirements on U.S. companies, according to the AIA. U.S. multinationals must sell through Chinese companies. Under the U.S.-China agreement, they will be permitted to have 50 percent equity-shared branches and wholly-owned subsidiaries within two years. U.S. multinational insurers especially hope to sell to companies going into China who want multi-peril commercial insurance coverage from providers they know.

If PNTR is granted, U.S. companies will be able to obtain a license if they have more than 30 years of experience in a WTO member country, a representative office established in China for two consecutive years, and global assets of more than $5 billion.

National Retail Federation

The PNTR agreement will affect U.S. retailers which are looking to open stores in China. "But I don't know who, beyond Wal-Mart and some of the direct retailers, are really interested in going into China at this juncture," says Eric Autor of the National Retail Federation.

Retailers' overriding interest is in removing the annual Congressional review of the Chinese human rights record and guaranteeing a stable flow of goods with minimal tariffs from China to the United States.

"Our interest in the bill is primarily as importers of textiles, apparel, footwear, consumer electronics and toys," says Autor. "This agreement doesn't affect trade that directly, but what it does do is eliminate the uncertainty and difficulty of the annual review and vote on NTR, which we think will stabilize the trading relationship and make China an even more reliable supplier of those products for U.S. retailers."

Electronic Industries Alliance

For the electronics industry, "China is the key market: 1.3 billion people who are just entering the information age," an Electronic Industries Alliance (EIA) spokesperson told Multinational Monitor.

U.S. electronics exports to China grew from $1.3 to $2.5 billion between 1994 and 1998, according to the EIA. The country adds 15.1 million fixed telephone lines annually, and the Chinese personal computer market is expected to double by 2005 and "could even rival the U.S. market in 10 years," claims the trade association spokesperson.

By 2000, China had nearly 40 million mobile phone subscribers, with an annual growth rate of 58.8 percent. The number of Internet users more than doubled between June and December of 1999, from 4 million to 8.9 million.

By 2005, the U.S.-China information technology agreement will eliminate tariffs on a wide range of high tech products. (In 1998, tariffs averaged 18 percent, and 40 to 60 percent for consumer products).

The EIA acknowledges that there might be some companies interested in manufacturing equipment in China, but claims that China will be a much bigger market for exports as a result of PNTR. High-tech exports to China grew 500 percent between 1990 and 1998, and will continue to grow, the spokesperson says.

Auto Trade Policy Council

U.S. industry sales to China totaled 1.8 million vehicles in 2000, according to the Auto Trade Policy Council. The trade association expects that number to increase to 4.6 million vehicles by 2010. 

As the industry has in Latin America and elsewhere, it will invest and produce in China. But it claims that a lot of parts will come from North America.

"None of our companies have any plans to export Chinese-built vehicles to the United States," adds the Auto Trade Policy Council's Steve Collins.

Current barriers to exporting to China include high tariffs (80 to 100 percent) and industrial policies governing investment. The policies dictate specific levels of technical transfer and local content thresholds --requirements that would be phased out after China enters the WTO. Tariffs would go down to an estimated 25 percent by 2006.

Grocery Manufacturers Association

Due to "prohibitively high tariffs," there is currently limited access to the Chinese market for U.S. food companies, says Sarah Fogarty of the Grocery Manufacturers Association (GMA). If PNTR is granted, the tariffs are expected to come down from an average of 40 percent to 17 percent.

Products with good potential to benefit from the Chinese market are snack foods (chips, crackers, cookies), ready-packaged noodles, biscuits, chocolate and even pet food, which is a "major growth market," according to Fogarty.

Many companies are looking to sell to the middle class and younger age groups who tend to eat non-traditional foods, she says.

Fogarty says that while some GMA members already manufacture in China, many are poised to expand their brand range. 

American Farm Bureau

China is as "our number one growth market in the world," says American Farm Bureau (AFB) spokesperson Alex Jackson. The big market gainers in the future are expected to be wheat, corn, soybeans and meat. Citrus is already being exported to China.

Without the agreement, sales barriers include high applied tariffs and strict controls on distribution rights.

The market was $2 billion in 1999, Jackson says, and is expected to grow to $3 billion in 2000, assuming China's entry into the WTO. Jackson claims that by 2020 China could account for a quarter of all U.S. agricultural exports.

What about China's own farmers? [See "Doomed Harvest," on page 16.] "There will be structural changes as in all industrializing nations, but we don't think there will be massive relocation," Jackson says. "Other developing countries have entered the WTO at different times where we've heard the same thing, but it hasn't happened."