US exporter concerns temper their enthusiasm about China Despite all the headlines about growing political friction with China, U.S. business activity in Asia’s largest market has grown at an exceptional pace over the past decade. In July, bilateral U.S.-China commodity trade amounted to $49.4 billion, more than twice the $20.2 billion recorded in July 2004. U.S. exports over that same period more than tripled, from $2.6 billion in July 2004 to $9.3 billion this past July. The huge U.S. trade deficit with China has flattened in recent months, reaching $30.8 billion this July, barely higher than the $30.1 billion recorded in the same month last year. Meanwhile, U.S. commodity exports to China grew nearly 7 percent year-over-year, to $68 billion, up from $63.6 billion during the same period last year. This surge of trade has been profitable for many U.S. exporters. Nearly 50 percent of respondents to US-China Business Council’s 2014 member-company survey reported double-digit revenue expansion in China over the past 12 months. Overall, 83 percent of companies that responded were profitable in China, a figure consistent with prior years, and 70 percent reported that their China operations were preforming better or the same as their overall global operations. In 2013, almost three-quarters of U.S. companies increased their revenues in China, while only 15 percent of those companies reported a decrease in those revenues. So what’s wrong with this picture? Although most U.S. companies view China as one of their top-five markets globally, there has been a steady 30 percentage point shift over the past four years regarding how U.S. firms view their prospects in China’s market, said Erin Ennis, vice president of the USCBC. That shift has been in the direction from “optimistic” to “somewhat optimistic,” she explained. And, although 50 percent of companies surveyed said they plan to increase resources in China during the next 12 months, that’s down from almost 75 percent of companies just three years ago. On the other hand, only 2 percent of U.S. companies said they would reduce their resources in China. The remaining respondents plan to neither increase nor reduce their resources. Why have feelings cooled even a bit? Beyond such factors as rising costs and competition — from fast-growing operations in Southeast Asia and elsewhere — there is widespread insecurity about the policy directions the new Chinese government will take. U.S. companies “are particularly concerned with a lot of uncertainties in China,” Ennis said. Key issues include rising costs; competition with emerging markets, increasingly productive Chinese companies within China; China’s spotty enforcement of intellectual property rights; local restrictions on foreign investment; and the uneven enforcement and implementation of Chinese laws. Susan Kohn Ross, an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles, said that among her clients, concerns often focus on the Chinese government’s preferences for domestic industry, along with corruption and cybersecurity. Many U.S. companies believe the conclusion of a Binational Investment Treaty between the two countries would help by establishing “rules of the road” for foreign investment in each other’s countries. The U.S. has such treaties with 42 countries, but none with China, and talks with the Asian giant are in the early stages. If China’s new leadership makes significant progress in implementing its market-based reforms and concludes a U.S.-China treaty that has a “strong outcome,” both countries will be reap significant benefits, Ennis said. In the absence of a treaty, U.S. companies aren’t permitted to operate in many industries and sectors in China. In some others, Chinese regulations require that U.S. companies partner with domestic firms to operate. “If there is a strong outcome to these negotiations, that is a game changer,” Ennis said. A successful treaty would level the playing field for U.S. and Chinese companies and provide meaningful market access for U.S. companies into China, she added. It also would remove many of the restrictions the Chinese government places on foreign companies, and would give stronger protections for U.S. companies that invest there. The success of the upcoming treaty largely will be judged on the number and range of sectors China is willing to open to foreign companies. In a key move, China in 2013 agreed to use a “negative list” approach in which the terms of the treaty would apply to all sectors except those expressly excluded. That approach contrasts with China’s current investment approval framework, set up in the Catalogue Guiding Foreign Investment, which restricts foreign companies from participating in more than 100 industries and sectors throughout China, based on a “positive list.” For all that, the success of the upcoming treaty remains uncertain. If the resulting negative list merely codifies existing restrictions, or it reduces the list of restricted sectors to an insignificant degree, or it removes only low-priority sectors, such a list — while “negative” — won’t be well-received by U.S. companies and will significantly reduce the chances of the treaty securing passage by the U.S. Senate, the USCBC argues in a recent report. Another major area of concern is China’s growing level of competition enforcement. Is the country using legislation that is nominally aimed at eliminating monopolies to pursue goals that are essentially protectionist? According to a recent report by the U.S. Chamber of Commerce, China’s growing enforcement of its own 2008 Anti-Monopoly Law may violate World Trade Organization rules. Although the law was intended to encourage competition, in compliance with China’s WTO commitments, a Chamber report warns that “if China applies the AML in a manner inconsistent with its WTO obligations, this would arguably constitute a violation of WTO law despite being imposed under the guise of competition law.” In a letter, Jeremie Waterman, the U.S. Chamber’s executive director for China, and Sean Heather, vice president for its Center for Global Regulatory Cooperation, noted that “implementation of the AML provides an enormous opportunity for China to accelerate its economic transition by boosting competition and reducing the prominence of monopolies and oligopolies in its economy; increasing consumer welfare, choice and consumption; and stimulating market-driven innovation. In short, the AML has the potential to stimulate a new round of dynamic growth and efficiencies across all aspects of the Chinese economy — an outcome that would also contribute positively to U.S.-China relations.” However, China’s enforcement of the AML “is not yet living up to this ideal,” they wrote. As the chamber report goes on to explain, “AML remedies often appear designed to advance (China’s) industrial policy and boost national champions.” China’s anti-monopoly law enforcement authorities — the National Development and Reform Commission, the Ministry of Commerce and the State Administration for Industry and Commerce — “rely insufficiently on sound analysis,” the report says. It argues, for example, that MOFCOM has established Anti-Monopoly Law remedies that create greater market concentration both within China and abroad, as well as “negotiate down prices on goods and IP (intellectual property) for domestic consumers/licenses,” in some cases to protect famous domestic brands. Intellectual property rights, a major concern of foreign companies in China, “have been curtailed in the name of competition law, and AML enforcement suffers from procedural and due process shortcomings,” Waterman and Heather noted. The results have led to “growing concern about the quality and fairness of enforcement” of anti-monopoly law. John Frisbie, president of the US-China Business Council, questioned whether the Chinese government is using the Anti-Monopoly Law to force lower prices rather than letting the “market play the decisive role,” a goal outlined in China’s new economic reform program. “The answers are not fully determined yet, but in at least some cases, USCBC sees reasons for concern,” he said. Eighty-six percent of companies responding to the USCBC survey indicated they are at least somewhat concerned about the way the Anti-Monopoly Law has been implemented. China’s domestic media reporting, which has played up foreign-related investigations versus those of domestic companies, also is fueling the perception that foreign companies are being targeted disproportionately. Targeted or not, foreign companies have well-founded concerns about how investigations are conducted and decided. Widespread concerns include fair treatment and nondiscrimination, a lack of due process and regulatory transparency, lengthy time periods for merger reviews, and the process through which remedies and fines are determined. According to the U.S. Chamber of Commerce report, some foreign companies accused of violating the AML have been pressured to “admit their guilt,” even though they weren’t allowed to view or respond to the evidence against them. Company representatives aren’t told why they’re under investigation or on what grounds an investigation has been launched, but that they will face a reduced penalty if they cooperate. Many U.S. companies worry about whether China will use the Anti-Monopoly Law to protect domestic industry rather than to promote fair competition. Will the Chinese government use the AML to force lower prices, rather than let the “market play the decisive role” as enshrined in the new economic reform program? If MOFCOM’s rejection of the P3 shipping network among Maersk Line, Mediterranean Shipping Co. and CMA CGM is an indication, it could be a troubling precedent. Ross, for one, wonders whether the Chinese government would have rejected the alliance had a Chinese carrier been one of its members. JOC NEWS - OCT 14 2014
Posted on: Tue, 14 Oct 2014 22:42:35 +0000
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