Remarks of Franklin L. Lavin
Under Secretary of Commerce for International Trade
China Roadshow Conference -
“Risk, Reward, and How to Win”
Washington, DC May 18, 2006
(as prepared)
It’s great to be here today and to speak about doing business in China. China has a lot of appeal to businesses. It’s a tricky market—usually difficult, but also, for many U.S. companies, highly rewarding.
Let me begin by thanking our distinguished guest Ambassador Zhou Wenzhong, Ambassador of the People’s Republic of China. I also want to thank our sponsors: Baker Daniels; GeneLogic; HSBC; NCS Enterprises LLC (Gold), Boeing; China Telecom (Silver), [Optional] Carhart Global Marketing Services; Commerce Bank; Comprehensive Language Solutions; Continental Airlines; M&T Bank; East-West Consultants; FedEx; Lingo Systems; the Maryland Department of Business and Economic Development; the Maryland District Export Council; Pacific Bridge Medical; PNC Bank; Rouse & Co.; Samuel Shapiro; and the Virginia District Export Council (Bronze). We could not have put this event together without their support.
In addition, I am pleased to recognize the domestic offices of the Commercial Service and the commercial section in China for providing the impetus for this series and the manpower to make it happen.
MY TOPICS TODAY
Today I will speak about U.S. trade policy in relation to China, specifically in relation to the two main components of the Commerce Department’s strategic efforts in China: The first component is business development, which is all about helping U.S. companies compete in China. The second component is U.S. trade policy with China and how we are working to improve the conditions that allow U.S. companies to compete in China.
I. CHINA BUSINESS DEVELOPMENT
Let me begin with the business development side, how to do business successfully in China. Few markets have captivated the world’s commercial imagination like the possibility of doing business in China. According to industry surveys, U.S. companies in China are generally successful and report solid sales in the Chinese market. Also, American business people dream of an opportunity to offer their products to a billion consumers.
The Commerce Department wants to do everything possible to help U.S. companies compete in China and we do just that every day. But, before we encourage everyone here to hop on the next plane to Beijing, I would like to ask you to think strategically about that market and about your companies’ international trade plans. The first part of a strategic approach is self-analysis. Why are you thinking about China? What is motivating you to tackle the Chinese market?
The point is that you need a clear understanding of your goals before you try to tackle this market. For most companies, the goal is MOS – More of the Same. They want more sales, more revenue, more customers, etc. That is a perfectly fine goal, at least initially, but it suggests starting in an easier market than China.
If your business plan is simply replicating your U.S. set of activities overseas, your U.S. product line, your U.S. management, your U.S. financing – you might not be ready for the China market. You need to think through how your U.S. model needs to be customized for the China market.
Many large companies have no choice but to do business in China. For those businesses already engaged globally and faced with tough global competitors, China is a strategic market. They cannot afford not to be there.
But for other businesses, China is more of a discretionary activity. You will need international business acumen to succeed there and there are other countries with lesser barriers to business success.
The point is this: even if China is where you want to end up internationally, it probably is not where you want to start. You might want first to master the basics of cross border business before you start in China.
II. CHINA TRADE POLICY
Hold that thought and let me turn to a few words on U.S. trade policy with China.
First, economic cooperation between the United States and China has greatly benefited both countries and we believe that the dynamic growth that China has realized through free trade will work for our mutual benefit in the future.
For more than 25 years, the U.S. has pursued a policy of open commercial exchange with China. We have encouraged Chinese leaders to embrace market principles and welcomed China into the global economy. We supported China’s accession to the World Trade Organization. We have an optimistic goal of a stable and prosperous partnership between America and China that will be better achieved with China fully participating in the international trading system.
China has been benefiting from this approach. Now, we believe that China has an obligation to act as a responsible stakeholder in the international trading system. The Administration believes that China needs to carry out reforms and deliver results in its international trade relationship with the U.S.
Three issues currently have a negative effect on that relationship:
- Our access to China’s market,
- The climate for intellectual property.
- And the rule of law
The Joint Commission on Commerce and Trade (JCCT) provides a forum for the U.S. and China to resolve trade concerns and promote bilateral commercial opportunities. In the April JCCT talks in Washington, we were able to achieve some clear progress on some of these areas and I would like to address that now in relation to these issues.
One of the biggest problems we have had in trade with China has been a lack of market access for U.S. products and services.
Our government’s aim in this area is to promote reliance on market forces to allocate resources rather than on administrative decisions by the Chinese authorities. We also want China to move to a rules-based environment based on the principle of non-discrimination against foreign interests, and to dismantle tariff and non-tariff barriers. We are especially looking at regulatory barriers, notably in the area of standards, where we continue to work with China on a more transparent and market driven standards system.
The JCCT yielded substantive advances in a number of areas. The Chinese government has agreed to the following: First, to lift the ban on U.S. beef. It will eliminate duplicative testing of eight categories of imported medical devices. It has restated its commitment on neutrality for 3G standards. China has also pledged not to discriminate against American express-delivery services.
China also agreed to move on joining the WTO’s Government Procurement Agreement; to launch a Steel Dialogue; and to work with us in regard to the production of bulk chemicals.
Another significant barrier to U.S. exports is Intellectual Property Rights Protection:
Inadequate IPR enforcement is one of China’s greatest shortcomings as a trading partner. In 2005, China was reportedly the 2nd largest market for personal computers but only the 25th largest market for software as well as the source of 69% of IPR seizures at the U.S. border.
In 2004, 9 out of every 10 copies of software installed on PCs in China were pirated, representing a loss to the U.S. software industry of about $3.6 billion. This is why the U.S. placed China on its Priority Watch List of countries that do not provide an adequate level of IPR protection or enforcement.
The Chinese government has committed to significantly reducing IPR infringement levels. At the JCCT meeting, the Chinese government committed to require the pre-loading of legitimate operating system software on all computers produced and imported into China and imported into China, ensure the use of legal software in government and enterprises, and reported enforcement actions against 14 plants that produce pirated optical disks.
China also announced a comprehensive action plan to improve IPR enforcement. While we appreciate China’s new commitments, we remain fixed on seeing concrete results -- a significant reduction in infringement levels.
We are looking for China to impose deterrent penalties, increase the number of criminal prosecutions for IPR violations, to stop trademark-squatting by unauthorized entities, to cooperate in worldwide programs that “fingerprint” optical disks so that pirated material can be traced to its manufacturers. The Chinese government has pledged its cooperation on this front, and also agreed to police public markets where infringing products are sold.
Protecting IP will enhance China’s global economic competitiveness. Last year a million new patent and trademark applications were filed in China and only 20% of the patent applications involved foreign applications. Chinese ideas and products deserve to be protected.
The Department of Commerce is committed to assisting U.S. companies, particularly small and medium-sized enterprises (SMEs), on obtaining and protecting their IPR in China. Commerce’s outreach efforts include: domestic seminars and one-on-one counseling sessions on the risks of global piracy and counterfeiting and suggested best practices to protect IPR in China.
We have created a free China IPR legal advisory program; and a “Case Referral Mechanism” for bringing individual U.S. company IPR complaints to the attention of China’s Ministry of Commerce.
The Stopfakes.gov website contains a China IPR Toolkit, which provides detailed information on China’s IPR protection regime and resources, and an inquiry form through which U.S. exporters can submit requests for assistance to DOC.
We are also adding two IPR attaches to be posted in China to assist U.S. businesses in navigating China’s IPR regime and ensure China lives up to its commitments; and in May will launch a webinar series on IPR in China for U.S. companies that will run thru December.
The remaining major concern for U.S. companies doing business in China is the lack of a transparent and uniform application of the Rule of Law:
Dealing with the unpredictable legal environment in China has been a major hindrance to U.S. exports and investment.
Given this, the U.S. was pleased with China’s announcement at the JCCT that it will begin negotiations to join the WTO Government Procurement Agreement.
Also, China’s State Council has now issued a notice requiring that all trade-related laws and regulations issued by government ministries and agencies be published in a single official journal issued by the Ministry of Commerce. Our business community has often complained that these regulations were hard to find, that the comment period was too short, and that the implementation of regulations was unevenly applied. This is a step in the right direction.
In sum, there is a range of commercial issues in the bilateral relationship, and some of these are matters that we believe treat U.S. businesses unfairly and also hurt China’s economy. But if we look at China’s progress since they started market reforms in 1978, we have to give China credit. Particularly since joining the WTO at the beginning of 2001 China has made considerable progress in implementing its commitments. We believe there is a lot of good news in this relationship and although we have more work to do, let me take just a moment to thank Ambassador Zhou for his government’s success to date.
The Department of Commerce is here to help American businesses
Let me conclude with a general comment. Every company in America will have a different view of that market as it attempts to weigh the commercial attractiveness against the many operational and policy challenges. How and when you decide to enter to market, or whether you go into China at all, is entirely for each company to decide, through its own analysis of risks and opportunities. To my mind, how each company answers the question of the China market is less important than how it asks the question. As long as you have a rigorous analytical framework you will be more likely to end up with a business decision that can be sustained in the market.
Two of the most common mistakes U.S. businesses make in China are to try everything, or to try nothing.
Somewhere between those two extremes, I would suggest, there is likely to be a suitable approach for your company.