Amidst slowing Chinese growth, growing concern about national security implications of technology supply chains, and U.S. and Chinese retaliatory tariffs, many American companies are increasingly pessimistic about their prospects in the Chinese market. Still, China accounted for more than a quarter of global GDP growth in 2018, and, despite a falling growth rate, is on track to account for more than a quarter of global GDP growth in 2019 – more than the EU, Japan, India, Brazil, and Mexico combined. Chinese consumers, especially in smaller Chinese cities, have a growing demand for high quality U.S. products.
China’s growth dipped down to 6.6% in 2018, its slowest in nearly 30 years, and most analysts expect this rate to slide again in 2019. Many economists remain concerned about China’s medium-term growth prospects due to the slow pace of economic reforms, failure to bring debt levels under control, and an uncertain external environment. Maintaining politically acceptable economic growth without further exacerbating the buildup in debt will be a major challenge for the Chinese leadership.
U.S. exports to China in 2018 were $120.34 billion, down from $129.89 billion in 2017. That downward trend continues as of the writing of this report – U.S. exports of China were down 20% YoY through April of 2019. U.S. exports of services to China were $58.9 billion in 2018.
While China’s leadership has, in response to increasing global concerns about Chinese economic policy, repeated long-standing commitments to gradually open China’s market further to foreign participants and remove barriers to increased imports, tangible progress has been marginal at best. Indeed, foreign companies report growing concerns about the business climate in China. China continues to rely upon industrial policy tools – including subsidies, market access restrictions, pressures to transfer technology, and other support for domestic competitors – to drive the economy. These policy tools undermine the ability of foreign firms to operate on a level playing field in the Chinese market. Furthermore, the Chinese Communist Party’s control over every economic actor in the market has increased. The United States continues to vigorously advocate for a more balanced, reciprocal, and fair bilateral economic relationship. Despite these serious challenges, market potential does exist for foreign companies, particularly those operating in industries such as energy efficiency, clean technology, and healthcare, where critical Chinese needs provide opportunities for mutual benefit.
China is a challenging place to do business. In its 2019 American Business in China White Paper, the American Chamber of Commerce in China (AmCham) noted that the business outlook of their companies shifted from one of cautious optimism to cautious pessimism. AmCham reports that American businesses in China faced headwinds arising from inconsistent and generally unfavorable interpretation of regulations, rising costs of doing business, increased competition from Chinese competitors, and regulatory compliance risks. AmCham’s 2019 survey found that over half of its member companies experienced an increase in non-tariff barriers in 2018.
Day-to-day business operations present a variety of obstacles. The World Bank in its 2019 Ease of Doing Business Report ranks China 46th out of 190 countries in ease of doing business. Despite significant Chinese government efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about lengthy and opaque administrative procedures, especially with respect to permits, registration, and licensing.
China also continues to pursue industrial policies that limit market access for imported goods, foreign manufacturers, and foreign services providers, while offering substantial government guidance, resources, and regulatory support to Chinese industries. The principal beneficiaries of these policies are state-owned enterprises, as well as other favored domestic companies attempting to move up the economic value chain. Provincial and local governments often have an ownership stake in private companies, incentivizing support of these enterprises.
Foreign enterprises continue to report that Chinese government officials may condition approvals on a foreign enterprise’s agreement to transfer technology, conduct research and development in China, satisfy performance requirements relating to exportation or the use of local content, or make valuable, deal-specific commercial concessions.
While foreign firms largely continue to report profitability in China, their profit margins are shrinking. This reflects increasing competition, rising costs, heightened regulatory impediments, a shrinking labor pool, and—in many sectors—overcapacity.
As of June 1, 2019, China has announced several rounds of retaliatory tariffs on U.S. imports, ranging from 5% to 25% on a total of $110 billion in goods. The list of applicable tariffs is available here: $50 billion tariff list: List 1- $34 billion, List 2- $16 billion; $60 billion Tariff list: List 1- 25% tariff, List 2- 20% tariff, List 3- 10% tariff, List 4- 5% tariff. On May 13, 2019, China’s State Council Customs Tariff Commission (SCCTC) announced that China would implement a trial exclusion process for imports from the United States that are subject to additional tariffs in retaliation for Section 301 tariffs. The process will be administered in two batches. The first batch applies to products on China's $50 billion list announced June 2018 and $16 billion list announced 2018. Applications will be accepted from June 30 - July 5, 2019. Batch 2 applies to products on China’s $60 billion list which was initially announced on August 2018. Exclusion Applications for Batch 2 will be accepted from September 2, 2019 until October 18, 2019. To qualify for the exclusion an applicant must explain whether any of the following factors are applicable:
Products included on the exclusion list in principle will be entitled to exclusion from additional tariffs going forward and refunds on additional tariffs that have already been collected. This process is in the trail stage and many factors ranging from the application criteria to the application determination are unclear.
China’s vast size, growing wealth, changing demographics and economic transformation will continue to create opportunities for U.S. firms. China’s growing middle class will create market opportunities across a number of industries. China’s manufacturing economy – already 50% larger than the manufacturing economy in the United States – will continue to evolve away from low-cost, labor-intensive manufacturing toward more technology-intensive high value-added production. According to AmCham’s most recent member survey, companies in the aerospace, healthcare services, and retail and distribution industries were most optimistic about China’s investment environment. Consumer-based, R&D-intensive, service-sector companies view the continued rise of China’s affluent middle class as a key driver for growth in China. Companies in the services sector expect to benefit from the globalization of Chinese companies and increased outbound investment. Some top sectors we will explore in this report include:
As always, companies should consider their own resources, previous export or business experience abroad, and long-term business strategy before entering the China market. Representation in China by a Chinese agent, distributor, or partner who can provide essential local knowledge and contacts is often critical for success, but finding the right Chinese agent or partner requires preparation, patience and hard work.
Given the enormous size of the China market, U.S. companies should view it in geographic segments and search for business partners, agents, or distributors that can cover specific geographical areas or industry sectors. It is best to start in first-tier cites, such as Beijing, Shanghai and Guangzhou, where businesspeople have more experience in dealing with foreign companies. While the first-tier markets may be more saturated, they offer an easier entrée into China through which U.S. companies can then expand into second and third tier cities, often working with their existing business partners or even identifying new partners. Moreover, potential business partners that specialize in specific industry segments are also important to consider as they make have connections to the large state-owned and private enterprises often representing the most likely end-users.
The following are some important considerations for U.S. companies to consider when exploring business opportunities in China.
Intellectual property rights holders should understand how to protect their IP under Chinese law before entering the China market and should conduct thorough due diligence on potential partners or buyers before entering into any transaction. All companies and IP rights holders should consult closely with lawyers who have extensive experience with the China market.
The U.S. Department of Commerce’s United States and Foreign Commercial Service (USFCS) offers customized solutions to help U.S. companies, including small- and medium-sized enterprises, succeed in the China market. USFCS stands ready to help U.S. companies develop comprehensive market-entry or expansion plans, learn about export- and customs-related requirements, obtain export financing, and identify potential partners, agents, and distributors through business matchmaking programs, trade shows, and trade missions led by senior U.S. government officials. As starting point, Commercial Service China offer the Initial Market Check (IMC) that delivers an assessment for a product or service’s market potential in specific city or region in China.
The U.S. Department of Agriculture’s Foreign Agricultural Service (FAS) provides equivalent-level trade services at no cost for U.S. companies interested in exporting agricultural, fishery, and forestry products through their Agricultural Trade Offices. FAS maintains offices in Beijing, Chengdu, Guangzhou, Shanghai, and Shenyang. FAS works with USDA agencies and other U.S. food safety-related agencies (the United States Food and Drug Administration) to coordinate the U.S. response to newly arising sanitary, phytosanitary, and technical barriers to trade, such as identifying and resolving challenges posed by new procedures introduced at port or acquiring, translating, and coordinating the U.S. response to draft regulations that could affect U.S. exports.
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