No one close to the WTO negotiations doubts that China will join the organization this year, even though no package agreement was reached during the 15th session of the working party on China's accession to the WTO, due to differences on key issues in the agriculture and service industries. For businessmen from Taiwan or other countries, how they will be affected by China's accession is an important issue.
For Chinese exports, accession will increase competitiveness with a price advantage in the global market. This includes exports of textiles, toys, electrical products, shoes, bicycles and ships. These industries are normally the target of Taiwan investors.
This precipitated growth in exports will boost trading across the Taiwan Strait, especially in raw materials, components and parts which are supplied to China's industries from Taiwan.
Chinese industries that are still developing may initiate restructuring and product improvement programs to cope with global competition. This restructuring may boost trade with Taiwan as China-based industries will become more competitive and will import more raw materials.
Another result will be the lowering of China's customs duties, particularly those on raw materials. This may not only boost Taiwan's exports to China, but also encourage Taiwan to source materials there. In addition, China's institutionalizing of its trading framework will reduce many uncertainties and irregularities in the trade environment, thus encouraging investment from medium-sized and large enterprises across the Strait.
Recent trends show that Taiwan investors in China mostly deal with the upper and middle stream of production. Reduced trade barriers, however, may encourage Taiwanese investors in the lower-stream to source from China rather than from Taiwan.
The opening up of the market may cause the still-developing Chinese high-tech sector to experience tough competition from foreign imports. This may affect entrepreneurs in Taiwan who have invested in them.
In addition, foreign products sold at lower prices than their Chinese counterparts will also provide added competition. The products influenced will include air-conditioners (foreign air-conditioners are 28 percent cheaper), color TVs (19 percent), photocopiers (34 percent), rubber (36 percent), chemicals (13 percent) and audio products (2 percent).
Industries facing this competition, such as those with redundant production capacity as a result of overlapping investments, may reduce their imports of raw materials from Taiwan.
Surveys in Taiwan show that Chinese exports seized a substantial portion of the global market from neighboring East Asian economies between 1989 and 1997. China's market share took over from the "Four Tigers." Taiwan has lost 70 percent of its US exports to China, while the figures for South Korea and Hong Kong were 60 percent and 50 percent respectively. As a result, the original complementary and collaborative relationship between Taiwan and China will change to one that is more competitive in nature once China in is the WTO.
In order to cope with the impending competitive pressure from trade liberalization, China intends to extend trade authorization and strengthen the competitiveness of its domestic enterprises. Since January 1999, China has granted import and export authority to manufacturers in the private sector and research institutes, and developed a registration system for recording the authorization details of large industrial enterprises.
Such authorization can provide Taiwan entrepreneurs with an opportunity to cooperate with authorized private enterprises in China and develop overseas markets, but it may also alter the collaborative relationship between the two economies. Previously, Taiwan entrepreneurs cooperated with China's industries through processing consignments or cooperative joint ventures in order to benefit from low production costs. When Chinese industries are granted import and export rights, the two economies may become competitors, particularly in the industries granted the import and export rights -- including pharmaceuticals, metallurgy, construction materials, textiles, machinery and computer software. Even if products manufactured in China are of lower quality, Taiwan exporters will still have to compete with China's price advantage.
Most of the raw materials and equipment exported from Taiwan to China are used for the manufacture of textiles, apparel, shoes, plastic products, electronic appliances and toys for export to the US. These industries are the favorite targets of Taiwan investors. Any disturbances in US-China trade, therefore, will affect both these investors and trading activity across the Strait.
China's accession will open up opportunities for multinationals from the US, Japan and South Korea who will enjoy the advantages of scale and capital resources. They will become a competitive threat to Taiwan firms, which are mostly small and medium-sized enterprises.
China will face fiscal pressures upon relaxing many of its customs duties. To cope, the Chinese authorities may withdraw some of the preferences given to the import of processing materials so as to prevent foreign investors evading taxes. The authorities may also implement stronger enforcement measures.
The Chinese authorities will probably resort to customs as a means of fine-tuning external trade. Permits and quotas may be imposed; systems and procedures will be made more transparent; and the exchange rate will be standardized. The reform of the external trade system will lead to a further overhaul of China's current fiscal, financing, investment and price policies.
All these measures will not only accelerate China's entry into the global economic and trading system, but will also signal a new era for China and Taiwan in developing an interactive exchange in economic and trading activities. The scope of trading products and the level of manufacturing techniques will continue to improve in both economies. WTO membership will make the China market more attractive and more in line with international practices. WTO accession will speed up China's opening-up process in such areas as banking, insurance, transportation and telecommunications as well as tourism and trade.
In order to offset the negative impact of trade liberalization on these industries and to promote industrial upgrading, China will continue its policy of "markets in exchange for technology." It will shift to giving preferential treatment to selected strategic industries rather than regions, will adjust industrial policies to give support to its capital -- and technology -- intensive industries and will welcome foreign companies to set up R&D centers or invest in new technology and high technology. Foreign investors will also be encouraged to participate in the reform of state-owned enterprises and reorganization in the form of equity holding, leasing, acquisition and joint operation.
For Taiwan businesses, China's WTO accession will reduce uncertainties in China's business environment and increase the available marketing and distribution channels. They will begin investing in transport, storage, real estate, finance, information, legal, telecommunication and network services. This trend will produce cross-strait strategic alliances in the service sectors.
But the producers of petrochemicals, information technology (IT) products and auto parts will face global competitors in the China market. If Taiwan products lack a price, quality or quantity advantage, they will lose the ability to compete.
The rapid development of China's IT sector is also likely to encourage Taiwan producers of information electronics to increase their investment across the Strait, reducing the technological gap between the two sides.
So Taiwan businesses will assess whether or not the products are able to compete internationally in terms of function, price and service. They will also strengthen their design capability, production and sales operations and take cooperative strategies to expand China market channels.
Whether Taiwan entrepre-neurs can benefit from the opening up of the China market depends on their ability to compete at an international level. The people of Taiwan must strengthen their design capability, production and sales operations if they want to maintain their position in the China market.
Tsai Horng-ming is deputy secretary-general of the Chinese National Federation of Industries.
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