Dreams, Dread of China Trade

TIMES STAFF WRITER

Marjorie Yang is ready for Asia's future.

As head of a high-end textiles business strung across China and four other countries, she will save time and money once Beijing loosens its grip and allows entrepreneurs like her to freely move goods around the country.

"It's going to benefit everyone doing business in China," she said.

She will be able to pass her lower costs down the economic chain, where others may benefit as well, including Americans who buy labels such as Nordstrom, Brooks Brothers and Tommy Hilfiger.

The ripple effect of breaking the government monopoly on shipping textiles and thousands of other products within China is just one small part of a sea change that is about to sweep the Asia-Pacific region.

China's entry into the World Trade Organization--the 142-member club that sets the rules of global trade--will open an increasingly unfettered flow of commerce, investment and ideas. For better or worse, it will reshape Asia's economies, and in some cases, its societies. It also is a huge political gamble for the Communist Party leaders who rule over one-fifth of the world's population, carrying the risk of implosion if the strains of suddenly opening so much of the economy prove too great.

For these leaders, the payoff is greater economic growth and global clout.

"In terms of importance, China's admission to the WTO is equivalent to exploding its first nuclear device," said Claude Smadja, principal advisor to the Geneva-based World Economic Forum. "It is the next step to China's accession to the club of world rule-setters."

At a more mundane level, it will touch the lives of consumers on both sides of the Pacific and beyond, transforming the way business is done with China and the way China does business with the world.

For people such as Hong Kong-based Yang and California businessman Steve Sanett, who can see the obstacles about to fall, it can't happen soon enough. In Bangkok, Thailand, agro-products export manager Vivat Ansavanop sees an open Chinese market as the challenge of his young career.

Others are less enthusiastic.

Worried farmers in China's rural Hubei province consider the WTO little more than a dark, three-letter cloud. For them, the prospect of contending with competitively priced, good-quality imports is just one more piece of depressing news in a life that barely rises above subsistence levels.

In Shanghai, Bank of China middle manager Zhang Tao's job may not survive foreign competition, while in New Delhi, social activist Vandana Shiva warns that cheap Chinese imports could decimate India's small-scale manufacturing sector.

Finalizing the terms of China's WTO entry dragged well beyond the expected date of early this year, in part because of the complexity of the task. More than 14 years after Beijing first applied for membership and after 63 separate, protracted negotiations, agreement was announced early this month on the last major issues. China is expected to become a full member by early next year.

The view from Sanett's company, Chatsworth-based Penta Laboratories, is just one example of the ripple effect of China's entry.

Penta already takes advantage of China's lower labor costs to produce large vacuum tubes for industry for about 40% less than it could in the United States. But if Beijing honors its WTO commitment to reduce red tape and cut duties by nearly two-thirds on the raw materials Penta must import into China to have the tubes made, the company's costs will drop further.

Even more critical to Penta is increased access for its Chinese-made tubes in global markets. While the company already sells its products in 50 nations, countries such as Mexico and India have traditionally maintained tariffs as high as 100% on thousands of Chinese-made products, including vacuum tubes. These barriers have already begun to fall, and once China joins the WTO, they will have to go completely.

Consumers Likely to Be Big Winners

With such savings, consumers in many countries, including the United States, are likely to be among the big winners.

"If the WTO promotes distribution of Chinese products throughout the world by lowering tariffs, then it will help us everywhere," Sanett said.

That's exactly what worries Shiva in New Delhi.

An ardent defender of India's small-scale farming and cottage industries, Shiva argues that low-cost Chinese imports have already put thousands of village enterprises out of business, driving workers into squalid urban areas to cut bricks or sort garbage.

The end of remaining import controls, she insists, could mean the demise of a way of life at the heart of India's identity--the idea promoted by Mohandas K. Gandhi that some domestic industries, including spinning, weaving and some farming, be protected as small-scale endeavors to preserve tradition and guarantee employment for the rural poor.

"Silks, textiles, toys, small electronic goods--all are threatened," she said in an interview.

"Globalization and the end of [trade] restrictions are celebrated as freedom for the individual, but these are rules that put societies at odds with themselves, that put consumers against producers," Shiva said. "We have to write new rules for a wholesome, sustainable society."

A wave of anti-globalization protest during the past 18 months on the streets of Seattle; Prague, Czech Republic; Melbourne, Australia; Quebec City; and Gothenburg, Sweden, underscores that Shiva has company.

For all its significance, trade specialists caution that China's WTO entry will trigger no "big bang." The impact will be great but gradual, with the full effect measurable only years after Beijing first takes its seat at WTO headquarters in Geneva. Many of those who know China best predict that the early years will be punctuated by disputes about the exact meaning of the terms of Beijing's accession.

"In both China and Taiwan, the tactic is to sign a contract first, then negotiate," said Richard Vuylsteke, executive director of the American Chamber of Commerce in Taipei, the Taiwanese capital.

Any resulting social unrest in China would only increase Beijing's efforts to hedge, analysts believe.

For all involved, the event is filled with risks and dazzling opportunities.

China's agreement to reduce tariff barriers and take other market-opening measures will help the United States redress its largest single trade deficit--one that last year exceeded $83 billion.

"You will see an increase in U.S. exports, which means more American jobs," summed up Frank Martin, president of the American Chamber of Commerce in Hong Kong.

More trade also will be a stabilizing factor in a trouble-plagued relationship between the United States and China that many believe holds the key to Asia's long-term destiny. Many China specialists believe that the weight of Sino-U.S. commercial ties helped restrain responses to April's midair collision of a Chinese fighter and an American reconnaissance plane off China's Hainan island.

At the same time, WTO membership will probably strengthen the economic base and political influence of China--a country the Bush administration calls America's strategic competitor. World Economic Forum advisor Smadja argues that few in the West have grasped the challenge China could pose to transatlantic dominance in setting the rules of global trade.

He cited agricultural subsidies and anti-dumping rules as two areas where groups of disenchanted nations could quickly coalesce around China.

"When that challenge comes, some coalition of forces-- India, Brazil, others--may stand up and say, 'Hey, this isn't fair,' " Smadja said. "We're talking about a tremendous shift in terms of setting the rules of the game. The white man's monopoly over key decisions is dead, and not many people understand what that means."

For China's aging political leadership, the jaw-dropping concessions it made for WTO membership are part of a huge gamble. For the first time in its long history, China is opening itself up voluntarily to outsiders and committing itself to treating them as near-equals across a broad spectrum of economic life.

The result will carry far greater impact than the gunboat diplomacy Western powers used in the late 19th and early 20th centuries to force open small pockets of the Middle Kingdom.

The terms of China's WTO accession offer unprecedented foreign access in agriculture and an array of other essential sectors including banking, automobiles and telecommunications.

While these concessions provide new investment opportunities, they also constitute part of Beijing's game plan to sustain an economic reform process now in its third decade. China desperately needs the gains in investment, trade and efficiency that WTO membership promises.

Outside analysts predict that only radical restructuring can enable China's inefficient state banking sector to hold its own once foreign lenders start conducting local currency business two years after Beijing's WTO entry.

China's banks currently labor under more than $230 billion in bad loans, massive over-employment and a system of transaction that still relies largely on fountain pens and carbon paper. Experts believe that only a major overhaul with huge job losses can guarantee survival.

A report issued in September by the American investment bank Salomon Smith Barney Inc. predicted that 40 million people would lose their jobs in China during its first five years of WTO membership. Some experts predict that China will need 5% annual growth merely to reabsorb the jobless back into the work force.

Another study produced by a research group within the Communist Party Central Committee warned that WTO entry could increase friction between the party and the masses as the reform process divides the country into winners and losers.

Outsiders see the same dangers.

"It remains highly uncertain whether the Chinese regime is resilient enough to withstand such shocks in the short term and whether the same shocks will contribute to long-term political liberalization," noted Pei Minxin, a respected China scholar at the Carnegie Endowment for International Peace in Washington.

Nowhere is the issue more sensitive politically than in agriculture. Precisely because of this, the level of farm subsidies permitted China under WTO rules was one of the last issues to be resolved.

For Beijing, those subsidies are all that keeps meager rural income at levels high enough to prevent a huge migration into already overcrowded cities, particularly along the more affluent east coast.

The specter of cheap and higher quality foreign agricultural imports has only accentuated the gloom that already hangs over China's rural landscape. Even in the poorest areas, farmers know what the acronym WTO means to them: more bad news.

"We're not worried about life getting worse after WTO--it is worse," summed up Xie Junxin, a 40-year-old farmer from Hubei province.

The Salomon Smith Barney report predicts that between 5 million and 10 million farmers will be driven out of agriculture during the first years after China's WTO entry.

Sitting in a 33rd-floor conference room in central Bangkok, export manager Vivat hopes that all this translates into big gains. His company, CP Group, is one of Thailand's biggest trading conglomerates and already a major investor in China. Vivat, who speaks Mandarin and English as well as Thai, sees an easing of restrictions on food imports coupled with rising living standards in China's large urban areas as ideal conditions to boost sales of Thailand's high quality long-grain jasmine rice.

He said he knows it won't be easy, especially with stiff competition from American and Australian producers, who also are fighting for a share of China's growing high-end market.

Still, he speaks with confidence.

"The rules are changing," he said. "It's going to be a big market for us."

Going After China's Markets

For Thailand's sake, it had better be.

The same growth that is creating new markets for CP Group in China is also diverting Western investment away from Thailand and other Southeast Asian countries. According to Fred Hu, director of Asian economic research at Goldman Sachs in Hong Kong, China's share of foreign direct investment flowing into Asia has risen from just over one-quarter in 1990 to three-quarters last year.

Beijing's WTO entry will only enhance this trend as investors view China not just as a huge and fast-growing domestic market but as a politically stable, low-wage industrial base open to the outside world. As if this wasn't enough, these same politically unsettled Southeast Asian countries will soon face tough head-to-head export competition with China in important third markets, including Europe and the United States.

Many see only one recourse: Go after China's open-as-never-before domestic markets. And so for smart, eager salesmen like Vivat, succeeding in China represents both the ultimate personal challenge and a test of his country's ability to survive in a new era. CP Group executives say they like the odds.

"Sure, there are risks, but the opportunities for us there are huge," insisted Sarasin Viraphol, CP Group executive vice president.

In Taiwan, Tim Juang's business card already shows the way to a future with fewer barriers.

The businessman's card conveniently ignores the political divide between Taiwan and mainland China that has been a potential flash point for more than 50 years. It lists three different addresses for the vice president of the Taipei-headquartered conglomerate, Grace THW Group--Shanghai, Guangzhou and Taipei.

"It's the future," Juang said.

It is a future likely to influence the island's existence as an independent entity, for once Beijing is in, there is nothing to stop Taiwan from joining too. Taiwan has been far ahead of mainland China in its own WTO negotiations but has been forced to wait under the terms of a formula that assured it membership only after the mainland's entry.

The WTO will be an important venue for politically isolated Taiwan to meet and work with representatives of other countries, including China.

At the same time, removal of trade restrictions with mainland China carries serious potential pitfalls for Taiwan. Investment and jobs are already being drawn to the mainland. In Taipei, planners worry that too much Taiwanese investment on the mainland could jeopardize the island's autonomy.

'Real Dangers' for Taiwan

"There are real dangers here," warned the chairman of Taiwan's Council for Economic Planning and Development, Po-chih Chen.

Most admit that they are unsure whether in five years they will regard the likes of Juang and his boss, entrepreneur Winston Wong, as visionaries or as sellouts.

Wong's Grace THW Group recently aligned with Jiang Mianheng, Chinese President Jiang Zemin's son, to plow $1.6 billion into a silicon chip foundry in Shanghai, where skilled labor is both available and cheaper than in Taiwan.

For Hong Kong too, China's WTO entry harbors big change. It will end the territory's near-monopoly as China's trading gateway--a monopoly that last year generated $154 billion in two-way trade to the mainland.

But the territory still hopes to come out ahead by strengthening its position as a "service center" for mainland business and by holding on to a significant share of China's trade. Goldman Sachs has projected China's global trade will double in value to $600 billion between 1999 and 2005.

Textiles executive Yang, who heads the Esquel Group, is just one example of Hong Kong's role. For her, Hong Kong is both home and the nerve center for a business empire that includes cotton fields in China's far western Xinjiang region, weaving mills in Guangdong and clothing factories in other parts of China as well as in Malaysia, the Maldives, Mauritius and Sri Lanka.

Smoother supply lines, reduced export quotas, and an average drop in tariffs from 57% to 9% all offer Yang the prospect of streamlined operations.

"A lot of foreign companies excel in supply chain management," Yang said. "Now they will get a chance to use those skills."

WTO membership also is likely to accelerate Hong Kong's integration with its Pearl River Delta hinterland, a development considered essential for the territory's long-term economic viability. Western investors, clearly betting that the WTO will make Hong Kong a major winner, last year funneled $64.4 billion of new capital into the territory--nearly twice the amount invested in mainland China and roughly triple the amount invested in Hong Kong just one year earlier.

Despite such optimism, exactly where this all leads--for Yang and all those affected by China's WTO accession--remains very much unclear.

But Laurence Brahm, a Beijing-based political economist who closely monitors China's reforms, said that for China, at least, the long-term goal is clear:

"The ultimate vision is that China's own enterprises are toughened enough by all this to compete internationally, to operate outside China as multinationals. That's the plan."

Times staff writers Evelyn Iritani, Henry Chu in Beijing and Ching-Ching Ni in Shanghai contributed to this report.

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Foreign Investment

The percent of foreign investment flowing into China/Hong Kong and Asia has changed over the past decade:

The Dollar Amounts

The foreign investment flowing into China/Hong Kong and Asia in billions of U.S. dollars: Source: Goldman Sachs

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