Will the US-China trade war improve access for American firms seeking to tap 1.4 billion people?

27-Feb-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

US President Donald Trump has delayed the application of additional tariffs on Chinese imports citing “substantial progress” in addressing the US demands for structural reform in the Chinese economy. This is the second article in a five-part series looking into these demands, which are the conditions for ending the trade war.

1. The US demand: market access

The Office of US Trade Representative (USTR) said in its Section 301 investigation report, which provided the legal grounds for Washington to start the trade war, that China has been discriminating against US businesses, limiting investment and trade flows.

The US business community also complained about numerous non-tariff barriers, from bureaucratic licensing procedures to selective law enforcement, as obstacles that hold back the growth of their businesses in China.

For Beijing, however, China has already done enough to give US businesses access as it has been rolling out the red carpet for foreign investors, offering tax breaks and cheap land.

In a white paper reviewing its own performance after its entry into the World Trade Organisation (WTO) in 2001, China said it had comprehensively delivered what it had promised, including opening up the domestic market to foreign competition.

The dispute is now part of the negotiations between Beijing and Washington to put an end to the trade war, with China and the US expected to sign a slew of memorandums of understanding, including one on the issue of non-tariff barriers.

However, despite Beijing’s promises of cutting obstacles for US businesses, China is still expected to maintain protective measures, especially in areas that Beijing sees as vital for the country’s economic security and social stability such as finance and cyberspace.

“China is not afraid of opening up, but it wants to do it on its own pace and based upon its own needs,” said Tang Jianwei, an economist with Bank of Communications, the country’s fifth largest lender.

At the same time, even when US businesses are granted full access to the Chinese market, they have to face new realities such as less enthusiasm for American brands and fierce competition from local players Huawei and Xiaomi, for instance, are eroding the market share of Apple in China.

2. Case study: China Food and Drug Administration

The Chinese government’s intent to develop its own standards for certain product categories has created frustrating obstacles for foreign firms trying to sell their products and services in China.

For instance, in the aftermath of the 2018 vaccine scandal, when one of China’s major vaccine makers was found to have produced substandard products, consumers had difficulty obtaining vaccines made by foreign companies, including effective products in wide use overseas, thanks to China’s strict vetting system for imported vaccines.

The Chinese market share of imported vaccines has declined in recent years despite growing consumer demand.

In one case, the US Food and Drug Administration approved the first human papillomavirus (HPV) vaccine, effective against cervical cancer, in 2006, but it took a decade for the China Food and Drug Administration to approve the first vaccine of its kind for use in China.

Before the approval, Chinese citizens in need of the potentially life-saving vaccine crossed the border into Hong Kong.

It remains unclear how the US will press China to lower non-tariff barriers, but the USTR has its own broader definition of non-tariff trade barriers compared to the WTO, with a focus on the obstacles that undermine US business interests and run counter to “fair and reciprocal” bilateral trade relations.

China is also dragging its feet on approving the business plans of US firms that are desperately trying to get a foothold in the Chinese financial market.

Bank card service providers Mastercard and Visa have been pushing unsuccessfully to start yuan payment services even though the World Trade Organisation ruled in 2012 that China must allow them in.

However, they are still waiting for approval from the People’s Bank of China, China’s central bank, to start operations, while China’s state-backed giant, China Union Pay, has established a near monopoly position in the years since the WTO ruling.

China’s central bank, which has close ties with China Union Pay, has denied that it is delaying market opening to Mastercard and Visa.

It was reported over the weekend that Mastercard will form a joint venture in China.

3. What is China doing to address this?

There has been only marginal progress in addressing the extent of non-tariff barriers in China, in part because the barriers set by Beijing are often intended to safeguard the vested interests of state-owned enterprises.

China’s telecommunications sector is monopolised by state firms, its banking system is in hands of firms owned by various levels of government, and its electricity and oil sectors are dominated by state players.

These barriers and restrictions, which are not directly aimed at US firms, are increasingly hurting China’s own interests, critics charge, as weaker competition stifles innovation and keeps prices high.

The US demand that China lower non-tariff barriers, therefore, could find sympathy among Chinese consumers, private investors and liberal analysts who believe in the value of competition.

Jin Keyu, an associate economics professor at the London School of Economics, said that it would be in China’s own interest to allow in more foreign competition.

“China is no longer in a state where you really need to heavily protect the domestic industries, the moment has arrived where they actually need a lot more competition,” Jin said.

She said that China’s financial service market, which is largely closed to foreign competition and is generating risks for the country, is a typical example that China must open the sector up to foreign institutions to “inject new blood”.

Beijing is gradually changing its laws and regulations so that the business environment will be more transparent and predictable for US investors.

For instance, China released a nationwide “negative list” at the end of last year making clear the sectors in which foreigners are not allowed to invest, promising that all sectors not on that list were open for business.

However, the USTR viewed the new list as merely an “incremental” improvement.

4. Chances of meeting US demands

The demand from Washington for wider access to the Chinese market echoes Beijing’s own pledges to open up its economy further.

China has been on a public-relations campaign to woo foreign investors, especially those from the US, promising fair treatment and a rosy business future.

In April 2018, two months before the trade war started, President Xi Jinping promised that ownership restrictions for foreign investors would be phased out, a move designed to please big international banks and those on Wall Street in particular.

When speculation was rampant that Beijing would target US businesses in China in retaliation for trade tariffs, Xi gathered dozens of US and European business executives in Beijing and assured them that they would be welcomed in China.

The Chinese government is expected to continue to cut market entrance thresholds to reduce red tape, and remove ownership restrictions for US firms as part of its promise to reduce non-tariff barriers.

However, the situation on the ground could be much more complicated for US operations in China, as the market, in general, is becoming less friendly to US products or businesses due to a long list of domestic issues, such as slowing growth, rising costs, intensifying competition and continue intrusive state intervention.

“China is not the hot investment destination any more,” said Christopher Balding, an associate professor at Fulbright University Vietnam who previously taught at the HSBC Business School at Peking University in Shenzhen.

China’s role in the global value chain is changing as it is no longer a low-cost production centre and the US political sentiment towards China has turned hostile, he noted.

Firms will still want to build factories in China to serve the huge domestic market, but fewer and fewer businesses will consider China an ideal place to produce goods and then to sell to other parts of the world, Balding said.

“Even if China and US come to an agreement, I don’t think there is going to be any type of flood of investments into China,” he said.

Part three in the series will look at US demands concerning cyber intrusion and cybertheft.



Category: China

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