High-Tech Pushes Hard for China Trade Deal

WASHINGTON (05/12/2000) - Processors packaged at an Intel Corp. plant in the Pudong district of Shanghai, China, have a long journey ahead when they come off the assembly line, even though their destination might be a Chinese company nearby.

Under current trade restrictions the chips must be shipped to Hong Kong and sold to a Chinese government-certified distribution company, which sends them back to Intel's Mainland customers, who, in many cases, are situated only a short distance from the Pudong plant. When the processors cross from Hong Kong into China, Intel pays a 6 percent tariff. That's in addition to the cost of shipping and the middleman's fees.

This is just one example of a Chinese trade policy that U.S. information technology companies will bid adieu to if the U.S. Congress approves permanent normal trade relations (PNTR) with China next week (May 22) when the most heavily anticipated vote in years for U.S. high-technology companies is due to go to the floor of the U.S. House of Representatives.

"The U.S. high-tech sector has been unified in identifying (PNTR) as its single most import policy decision this year," said Tim Bennett, senior vice president of international affairs for the American Electronics Association (AEA). All leading IT companies are passionately in favor of PNTR, and they've expressed their sentiments in full-page newspaper advertisements in major U.S. daily newspapers, in testimony before Congress, and by aggressively lobbying Congress and officials in U.S. President Bill Clinton's administration.

Bennett is one of the IT industry's key lobbyists on the legislation. Over the last several months he has spent countless hours with members of Congress, arguing in favor of PNTR passage. The measure requires 218 votes in the House.

The most recent tally indicated the number of supporters is within 10 of that simple majority, but Bennett said there is still some nail biting over some 50 members who are undecided.

All eyes are on the House for two reasons -- passage in the Senate will not be as challenging, officials say, and Clinton has already said he supports PNTR.

Despite the drama over PNTR, the stage is set for China to join the World Trade Organization (WTO) later this year, regardless of which way Congress votes.

Most of the nuts and bolts behind China's accession to the WTO were hammered out by Chinese and U.S. officials during a bilateral trade agreement under the WTO process late last year.

The vote on PNTR technically would remove China from a list of countries whose immigration laws must be reviewed annually as a condition of granting most favored nation (MFN) trade status. Immigration laws are evaluated as a measure of how China and the other countries allow for the free movement of people and by extension politicians have included the issue of human rights in the debate.

The provision is part of the Trade Act of 1974, and every year since that time the U.S. has approved MFN status for China, but the process has often involved a contentious fight among U.S. lawmakers.

This year, however, the U.S. must consider making a change in China's status from MFN to PNTR, because a cornerstone of the WTO is that its members approve permanent normal trade relations with each other.

The annual MFN vote has traditionally provided the U.S. with leverage, but it's never been constructive for U.S. business, said Greg Garcia, manager of corporate government relations for U.S. network equipment maker 3Com Corp.

"The annual process was a way for political leaders to voice their opinions. It has always passed, even after Tiananmen Square," Garcia said, referring to the June 1989, crackdown by the Chinese government on a student demonstration in the nation's capital city of Beijing. "It isn't constructive... to have an annual China-bashing party."

The benefits that high-technology companies will enjoy after China, the world's most populous nation with one of the fastest growing economies among the emerging markets, enters the WTO are numerous and go beyond what American business had hoped to achieve, AEA's Bennett said. But there's a catch for U.S. companies: they will not be able to take advantage of any of the new rules if PNTR fails.

John Chen, chairman, chief executive officer and president of U.S. database and tools vendor Sybase Inc., said the possibility that U.S. companies could be shut out of China is one of industry's biggest concerns. Sybase is the second-largest database provider in China after market leader Oracle Corp., and holds about 21 percent of the market, according to Chen. Sales of Sybase products in China are US$25 million to $30 million annually, he added.

"Although right now, we in the U.S. software industry... have the lion's share of the market, if we do not grant PNTR to China, China will start buying from our allies," Chen said. "It's a very scary thought if you think about losing our leadership positions that everyone worked so hard for."

Under terms of its entry into the WTO, China plans to eliminate tariffs on semiconductors, currently ranging from 6 percent to 10 percent, by 2002.

Tariffs on semiconductor manufacturing equipment, currently at 35 percent, should be eliminated by 2005, and tariffs on computers and peripherals, currently 10 percent to 15 percent, should be eliminated by 2003.

Tariffs have hurt the development of the semiconductor market not only by increasing chip price and therefore computer prices, but also by encouraging the smuggling of components. China's entry into the WTO won't necessarily prevent smuggling, but the country will have to submit to a number of actions if it fails to comply with WTO rules, AEA's Bennett said.

WTO entry would provide China with a system of common business practices, which Sybase's Chen said is sorely lacking in the country now. Although some Chinese officials have been cooperative, their enforcement mechanisms are toothless, he explained. Under WTO rules, there will be a process that provides for arbitration, enforcement and penalties which amount to "a very powerful weapon for us," Chen said.

Under the new rules, Intel would not have to ship its processors from China to Hong Kong and back again and would be allowed to have direct contact with its Chinese customers. By eliminating the middleman from transactions -- an area where corruption has run rife in the past -- foreign companies should be able to ensure that their products are delivered on time to China and are not damaged during shipping. Foreign companies also should be able to offer service and support directly to their Chinese customers.

Michael Maibach, vice president of government affairs at Intel, said China's entry into WTO would make product distribution much more efficient.

"Right now, we don't know if (Intel processors) are stored overnight in the rain, incorrectly labeled or diverted to someone else," Maibach said. "We lose control at the border."

Under the new WTO rules, Intel will be able to deliver products directly to its customers in China, he said.

The issue of the distribution chain has been a major challenge for any company doing business in China, said Norman Sandler, director of global strategic issues for Motorola Inc. But it's not the biggest problem that potentially will be resolved when China joins the WTO, he added. From Motorola's perspective, allowing foreign companies to directly invest in China's telecommunications market is an even more significant matter.

Over the next five years, the Chinese government has said it will allow the percentage of foreign investment in Chinese mobile communications services to reach a maximum of 49 percent and, in six years, local companies that offer fixed-line and international long-distance services will be allowed to have up to 49 percent foreign ownership. Within two years, China will allow up to 50 percent foreign ownership in companies that provide paging and other value-added telecom services, including ISPs (Internet service providers).

"The notion of China's telecom market being open to additional foreign investment, therefore speeding China's telecom modernization, is something we view as having big potential," Motorola's Sandler said. "We are not a (service) provider, but companies that are will need our equipment."

Motorola has been in the Chinese market for 10 years operating under a wholly owned subsidiary and various joint ventures that make semiconductors, mobile phones and pagers. The company currently employs 10,000 staff in China. The U.S. vendor's investment in China is more than $1.5 billion, the largest of any U.S. company, according to Sandler. Motorola's sales in China were $3 billion last year, or 10 percent of its worldwide total, he added. Motorola also exports an average of about $500 million worth of goods to China annually.

"We have found commercial success in China, though it has not been without its challenges," Sandler said. "All our engagement there has been with eyes wide open."

Chief critics of granting PNTR for China, the most vocal of whom have been U.S. labor unions and human rights groups, say working-class Americans ultimately will pay the price of PNTR in lost manufacturing jobs. Furthermore, the critics say that China's human rights record is so appalling that the U.S. should not reward Beijing by supporting corrupt institutions.

But U.S. high-technology companies say granting PNTR is an endorsement of a policy of engagement with China, and that's proved historically to be a more productive course than a policy of isolation. They believe engagement is the best opportunity to encourage social change in China. They further deny that there will be an exodus of jobs from the U.S.

Labor unions ought to be cheering the agreement because it will result in an opening of China's market to goods made in the U.S., 3Com's Garcia said.

"Nothing is changing in terms of Chinese access to the American market," he added. "What changes is, China is opening up its market to U.S. goods, and there are a lot of jobs in the U.S. that are supported by exports."

Maibach said Intel has no plans to make processors in China because the country does not have the manufacturing experience to meet Intel's needs, especially since the U.S. chip giant's operations are moving to 0.18-micron manufacturing, while the best China's factories can offer currently is 0.75-micron technology.

Intel has between 800 and 900 staff in China, 80 percent of whom are employed at the company's Pudong chip packaging plant, while the rest work at Intel's Beijing research and development center and design operation, according to Maibach.

Sybase does not manufacture its software in China, but if the Chinese local market becomes big enough, it may do so, Chen said. The company hopes to double its business in China in the next three years and is eager to pursue government contracts, including one that would provide ID cards, an enormous opportunity in a country of 1.2 billion people.

Chen said whenever he has a chance to explain his views on the issue of China's accession to the WTO, he always stresses that he believes normal trade relations between the U.S. and China is not about China or the country's human rights policy.

"This is about the U.S. and our ability to stay competitive in one of the biggest markets in the world," Chen said.

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