June 5, 2007 4:56 pm

Foreign investors tread fine line in China

Mounting trade complaints launched by foreign governments against Beijing are making the landscape for overseas investors in China increasingly complicated.

The US has filed three separate cases against China in the World Trade Organisation and confirmed last week the imposition of countervailing anti-dumping duties against Chinese producers of coated paper.

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IN China

The European Union is already under pressure from member countries, especially Italy, to reimpose restraints on Chinese textile imports when the current system of temporary quotas runs out at the end of the year.

The trade disputes are fundamentally in response to Beijing’s swelling current account surplus, which could reach $400bn this year, equal to about 12 per cent of gross domestic product.

Protection of intellectual property rights, the subject of one of Washington’s WTO complaints, is also a major issue.

Tim Stratford, the assistant US trade representative for China affairs, told the Financial Times that, after a five-year honeymoon since Beijing joined the international trade body, “the time has come to hold China accountable to WTO standards”. The approach taken by the US government in all of the disputes has been driven by positions adopted by industry groups and individual companies as well as the need to deal with pressure from Congress.

Robert Poole, of the US-China Business Council in Beijing, said: “Companies do not like generally to get caught up directly or indirectly in cases, but it is important that trade commitments be honoured.”

The countervailing duties case was initiated by NewPage, an Ohio company. It successfully argued that the US Department of Commerce should overturn decades of trade practice and consider low interest loans, tax breaks and debt forgiveness received by Chinese coated paper manufacturers as state subsidies.

NewPage does not have substantial investments in China.

Paper industry officials say the duties will hit one foreign company with significant paper manufacturing investments in China hard – Asia Pulp & Paper, an Indonesian-Chinese company.

Gandhi Sulistiyanto, a spokesman in Jakarta for APP, the world’s fifth-largest pulp and paper company, said the group’s exports to the US were not enough to trigger the imposition of duties.

Company executives and APP suppliers privately admit that exports from the group’s plant in Jiangsu could be seriously hurt by the case.

The other WTO disputes, involving car parts, piracy and counterfeiting, have been much more difficult for Washington to manage.

The US has been trying to mount an IPR case against China for many years, but has been held back in part by the refusal of American companies to provide information that might publicly identify them with the action.

The government had decided to proceed with a case last autumn but held back at the last moment when a major US media company withdrew its co-operation, said lawyers familiar with the case. The company was reluctant to associate itself directly with the case because of possible damage to its efforts to enter the Chinese market.

The case finally filed by Washington earlier this year challenged China’s overall IPR protection regime, but did not cite any particular complaint linked to specific companies. The case was instead publicly supported by the industry lobby, the Motion Picture Association of America, which had the effect of shielding individual companies.

Mounting the car parts case, on this occasion with EU co-operation, was equally difficult because of the fear of some auto companies that they would suffer retaliation in China if they became involved.

After more than five years of average annual sales growth of 30-40 per cent, China is now the second largest car market in the world and an important battleground for carmakers.

In all such cases, foreign companies have come under pressure from the Chinese not to co-operate in the trade disputes.

“Chinese officials frequently look to industry or specific companies to take a position to ensure that the US government does not take action,” said a Beijing-based industry official, who asked not to be named. “In the case of the automakers, the Chinese very early on showed their disapproval, leaving in the air a threat of possible retaliation.”

Foreign investors and companies that import from China have to calibrate other possible impacts that may occur from rising trade tensions.

Chinese goods could become more expensive, something that may force both foreign investors and buyers to look elsewhere to source goods.

Any upsurge in local costs cuts into margins sharply in China, where about half of all exports are part of so-called “processing trade”, in which China is simply the last point of assembly.

US charges of improper subsidies could lead to investment terms being offered by the Chinese government, at the both the local and central level, that are less attractive to foreign companies.

Additional reporting by Joe Cochrane in Jakarta

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