Firms See Opportunity, Threat in WTO Meeting
Lee Potts, an executive at a medical products firm in Chico, didn’t even know the World Trade Organization existed until a couple weeks ago, but he is hoping for the best when the powerful trade group meets this week in Seattle.
Peter Hsu, a Los Angeles sweater maker, is bracing for the worst.
No one really knows what will happen when negotiators from 135 countries gather Tuesday in Seattle with the hope of winning the best deals for their countries and their companies. But there is little question the WTO’s effort to bolster trade in farm products, goods and services will have ramifications for California, from Silicon Valley to the Central Valley and industrial parks on the outskirts of Los Angeles.
A look at the stakes for two California companies--representing the state’s high-technology future and its manufacturing-based past--provides some insight into the lucrative, or painful, changes that could be launched in this week’s “Millennium Round” of trade talks.
U.S. trade negotiators are particularly interested in boosting the global reach of this country’s most competitive industries, including technology-based companies such as Prowess Systems in Chico. The company designs computer systems that allow physicians to create computer-simulated patient treatment and surgery plans.
“By using our system, a physician can shape the [radiation] beam and see how much of a dose they’re giving a tumor so they can minimize the damage to healthy tissue,” explained Potts, the company’s chief operating officer.
Prowess Systems recently signed a joint venture agreement with the Beijing Medical Equipment Institute, China’s largest producer of linear accelerators, to design and market its products in China. That includes development of a Chinese-language version of its software.
With China likely to join the WTO soon, it is expected to slash tariffs on technology products such as computer hardware and telecommunications equipment. And the WTO is considering a separate deal that would reduce global tariffs on medical products, which run as high as 70% in China.
That will be good news in Chico.
“The [medical-devices] market in China is projected to grow 15% to 20% a year over the next three years,” said Ed Rozynski, executive vice president for the Health Industry Manufacturers Assn.
Under WTO rules, the Chinese government also would be required to strengthen its intellectual protection laws, a big boost for U.S. companies like Prowess eager to keep China’s skillful software pirates at bay.
WTO members are also expected in Seattle to extend a moratorium on taxes and duties on electronic commerce, an arena Prowess is eyeing.
“We eventually want to deliver our software through the Internet, which would be a pretty big change for the conservative medical community,” Potts said.
Because Prowess and other U.S. firms enjoy a technical edge over foreign competition, Potts said he isn’t worried about imports cutting into his domestic sales if global barriers fall.
Last year, 20% of Prowess’ $4 million in sales came from overseas, and this year the company hopes to double that figure. But the company has been hindered by high tariffs in countries such as Brazil and South Korea. And getting its equipment approved for sale overseas is costly and time-consuming because of the different government approval processes.
“One set of rules would certainly be helpful to everybody who’s doing business internationally,” Potts said.
Globalization presents a far less rosy picture to Hsu, the founder of Edan Products, a Los Angeles apparel company.
Hsu has watched many domestic competitors fold their tents or move south since the passage of the North American Free Trade Agreement in 1993 and the emergence of China as the world’s leading clothing producer.
Employment in Southern California’s apparel and textile industries has declined for the last two years, although the industries’ 124,200 employees still represent the single largest manufacturing base in Los Angeles County, according to Jack Kyser, chief economist at the Los Angeles Economic Development Corp.
This week’s WTO talks are likely to swing the door to the lucrative U.S. market much wider to low-cost imports. The U.S. has already agreed to lift its apparel and textile restrictions on China by 2005, when the rest of the world goes quota-free.
India, Pakistan and other textile and apparel exporters also are pushing the WTO for greater access to the U.S. and European markets--in exchange for opening their doors to high-tech goods and services.
Hsu, who began his career making clothes, shoes and electronic goods in Taiwan, understands the frustrations of the developing world. It was costly U.S. restrictions on apparel imports from Taiwan that prompted him to move his business to Southern California in 1992.
But now that Hsu is on this side of the Pacific, he is not inclined to compete against foreign firms that don’t pay competitive wages or provide safe working conditions.
Personally, Hsu is torn. As a Chinese American eager to see his homeland prosper, he thinks China’s entry into the WTO is good because it encourages the economic reforms that are turning Communist cadres into entrepreneurs.
But he agrees that for much of the U.S. apparel industry, it spells disaster.
To survive the stepped-up competition from Mexico and Asia, Hsu has begun to specialize, after concentrating for years on producing sweaters for major retailers such as Nordstrom, Abercrombie & Fitch and Victoria’s Secret.
He has hired two designers to develop his own line of sweaters using expensive European yarns--sold under the Posheposhe and Twobytwo brands--that are sold to high-end boutiques. He now has about 4,000 customers for private labels, which have increased from 10% to 40% of his business over the last six years.
By purchasing 40 computerized knitting machines, at $100,000 to $200,000 apiece, Hsu also has been able to cut back on workers and shorten production time. His factory now employs 150 and produces around 600,000 sweaters a year. Last year, the company’s sales were $7 million.
From Los Angeles, Hsu can deliver products to U.S. stores at least two weeks faster than his Asian competitors, allowing him to fill the more expensive rush orders placed by retailers anxious to replace popular items. During the pre-Christmas season, his factory is running seven days a week, 24 hours a day.
“The traditional apparel business can’t survive; you either have to have special material, a special style or a special sales force,” he said. “Otherwise, there’s no way you can compete with things made overseas, especially China.”
