Accord Reached; Now Firms Face Tests

James Lee strolled the aisles of the Wal-Mart Supercenter, passing Korean televisions, Chinese packaged noodles and a glistening seafood display overflowing with such fresh fish as two whole sharks. He was on a quest for “Made in the USA” labels.

Lee stopped for a moment, then brightened. “Sunkist oranges,” he said triumphantly. And there was more: “Act II popcorn. I’m helping develop a market for that in China. I think it could be very popular.”

That Lee, the vice president and chief operating officer of Wal-Mart China Co., had to search so hard for so little explains one of the challenges facing foreign firms hoping to profit now that China has completed its 15-year quest to join the World Trade Organization.

The group announced the agreement Monday.

“China can produce pretty much everything it needs,” acknowledged Lee, who said 95% of the products sold at Wal-Mart’s 13 China stores are manufactured domestically. “It won’t be easy for U.S. companies.”

After a last-minute deal was struck in Geneva, China’s sweeping 900-page agreement--which covers everything from grain and beef tariffs to foreign telecom ownership qualifications--is expected to be adopted by the WTO’s 142 members at a November ministerial meeting in Qatar.

The final step in China’s accession process is approval by the Chinese government, which is expected early next year.

The deal not only will dramatically accelerate China’s economic reforms and boost its global stature but it also promises to reshape trade patterns in the region because it opens the door for Taiwan to join the trade group. That could help lower economic barriers between the two longtime political enemies.

Nicholas Lardy, China expert at Washington-based Brookings Institution, expects China to begin exerting greater influence in global economic affairs, though it is not yet clear what direction the world’s leading producer of electronic components and tennis shoes will take.

“This is going to be a very interesting story,” he said. “What views will China articulate within the WTO process and the international trading system? Not very much is known about this.”

Some of the thorniest disputes are likely to reemerge. In a face-saving compromise, WTO negotiators agreed to allow foreign insurers American International Group and Canada’s Manulife Financial to continue special deals allowing them majority control of subsidiaries in China.

European insurers, limited to 50% ownership, argued they should get equal access. That issue may end up in the WTO’s dispute settlement process.

But for U.S. firms such as Wal-Mart, having the world’s most populous economy in the rules-based trade group is a hopeful step for a global economy reeling from last week’s terrorist attacks.

After watching the U.S. trade deficit with China soar to nearly $90 billion last year, they hope to benefit from a reduction in thousands of tariffs and the dismantling of a bureaucratic system designed to protect money-losing state-owned industries and preserve jobs.

“There is every reason to believe American farmers, industrial producers and investors, as well as American consumers of imported goods from China, will benefit noticeably from the new rules of the road to which China is about to subscribe,” said Robert Kapp, president of Washington-based U.S.-China Business Council, the nation’s leading China business group.

The opportunities are particularly good for firms from California, which produces nearly 16% of all U.S. goods sold overseas and already is one of China’s leading trade partners.

California winemakers, citrus packers and rice growers are among those expecting to see immediate benefits from lower entry costs, increased foreign ownership limits and the elimination of government monopolies on trading and distribution.

WTO membership will change the rules. By the time a bottle of California Chardonnay makes it to a store shelf in Shanghai today, it has tripled in price because of tariffs, taxes and other hidden costs.

“It’s tough to introduce the general population to wine when they can go out and have lunch for $1 but a glass of wine costs $10,” said Joe Rollo, director of international sales for the San Francisco-based Wine Institute.

With China as a WTO member, tariffs on wine are supposed to drop from 85% to 20% over a five-year period.

None of this will happen quickly. With the WTO battle behind them, Chinese officials face the massive task of bringing their legal system into compliance and shoring up their strongest domestic companies to withstand the new foreign competition that WTO membership will bring.

Inefficient domestic firms are under pressure to pool their resources and cut costs. Unemployment is on the rise. China is consolidating more than 100 auto manufacturers, most of which lost money and may produce just a few thousand vehicles a year. But these factories also employ millions of people, many of them in underdeveloped regions.

In spite of fierce domestic protests, China has agreed to slash tariffs on imported vehicles and allow greater foreign participation in the manufacturing and sales of vehicles.

“The WTO is a huge lever to help the central government push forward its reforms,” said Timothy Stratford, vice president of General Motor’s China division, which has invested more than $2 billion in 16 ventures in China.

But even with lower tariffs and reduced entry costs, U.S. exporters will find it hard to compete against nearby Asian manufacturers and Chinese producers that benefit from an ample supply of low-cost labor and foreign investment and technology.

“If you are coming here long term, you must set up a production facility in China,” Wal-Mart’s Lee said. “This is a big market. Everybody’s here.”

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ABOUT THIS SERIES

This is one of an occasional series on the impact of China’s entry into the World Trade Organization. It will examine social and political issues in California and China, as well as key industries such as agriculture and telecommunications.

Previous: China’s impending WTO entry will mean greater clout, golden opportunities--and the loss of millions of jobs.

Previous: California growers worry about how to earn a profit while doing business in China. Meanwhile, Chinese farmers worry they will have difficulty competing with foreign growers.

Previous: The telecommunications industry is like the canary in the mine shaft, an early-warning system for whether China can carry out changes the international community demands as the price of admission to the WTO.

Previous: Once gleeful about the profits to be made from helping feed 1.3 billion Chinese, farmers from California’s lush San Joaquin Valley to the apple orchards of eastern Washington now worry they will be overwhelmed by China’s growing power, particularly once it enters the World Trade Organization.

Previous: South Korea is hurting because of the downturn in exports, but it also is feeling the heat as China becomes a more formidable competitor. The result for Korea, a mid-level economic power, is that it increasingly finds itself squeezed between Japan, with its technological edge, and China, with its lower costs and wages.

Today: Because China can produce most of what it needs, foreign companies face a special challenge in entering the market.