40 Years of US-China Commercial Relations

From sales of airplanes and grains to today’s complex commercial relationship, the US-China Business Council has witnessed 40 years of business and trade between the United States and China.

By Ben Baden

At an event in September in Washington, DC, US Ambassador to China Gary Locke gave a speech highlighting the tremendous growth in trade between the United States and China over the past few decades. “In 1972, our annual bilateral trade was less than $100 million,” Locke said. “Two-way investment in each other’s markets was close to zero. Only a handful of American jobs relied on trade with China. Today, more than a billion dollars of goods and services flow between our two countries each day. More than 800,000 American jobs depend on producing goods and services sold to China.”

China is now the world’s second-largest economy and the third-largest market for American-made products, but it wasn’t always this way.

THE EARLY TALKS

In 1973, the National Council for US-China Trade, later renamed the US-China Business Council (USCBC), led the first American business delegation to China since the founding of the People’s Republic of China in 1949. After a more than two-decade long trade embargo, the United States decided to once again begin talks with China after President Richard Nixon’s historic trip to China in 1972. Robert Hormats, now under secretary of State for economic growth, energy, and the environment, was involved in the formation of USCBC when he was an international economist at the National Security Council. “At the time, there was very little business between the two countries, so one of the reasons behind [USCBC] was to figure out how China could do business with us and we could do business with China, because at the time there was very little China had to sell to us,” Hormats says. “We tend to forget that now, but there was a period when there was virtually no trade.”

Hormats recalls asking a Chinese official what the Chinese might be interested in buying from American companies. “[The Chinese official’s] response was, ‘We’re revolutionaires. There is nothing you could sell us that we want,’” Hormats says. “That was the last time we saw him. He was no longer among our intelocuters after that, but it certainly represented a stream of thinking at that time in China. They didn’t really want to trade with us. Economic relations were really a minor part of the process of normalization, which is why we wanted this group to be set up.”

Eugene Theroux, then an associate at Baker & McKenzie LLP, took a leave of absence to join the staff of House Majority Leader Hale Boggs, who was traveling to China with Minority Leader Gerald Ford to observe the business environment in China in 1972. Theroux said at that time the Chinese government was extremely wary of any foreign influence. “They wanted to be self-reliant and be able to stand on their own two feet,” he says.

Theroux later became USCBC’s first vice president. His first trip to China with Boggs and Ford marked the beginning of nearly 40 years of traveling back and forth between China and the United States with American delegations and clients. Selling to the Chinese was difficult at that time, Theroux says. Chinese leaders had taken pride in the fact that they had been able to survive over the last 20 years cut off from most of the outside world. Those feelings were still on display in 1976 when Theroux traveled to China with a delegation of American companies that wanted to find a way to sell their products to the Chinese. “The rightward lurch at the time was so strong, and antipathy to business with foreign companies so profound, that China’s leading newspaper, People’s Daily, referred to China’s own Ministry of Trade as the ‘Ministry of National Betrayal,’” Theroux says. In his early discussions, the Chinese said they wouldn’t buy products with American labels on them. “They wouldn’t use foreign names,” he says. “They wanted their specifications and their names on everything.” That made it tough for US companies to gain traction in the early days. The only major deal outside of agricultural products during that period was the sale of 10 Boeing aircraft to China in 1972.

CHINA OPENS UP

Roger Sullivan took over as USCBC’s vice president in 1981 and became USCBC’s second president in 1986. “At that time, people were still saying to us ‘trade with China is a joke. It’s a poor country. They can’t buy anything. They don’t have any money,’” Sullivan says. “But even then, China was starting to become a major purchaser of things, particularly in those days, farm products.”

Sullivan says that in the early days, trade between the United States and China usually consisted of foreigners traveling to the Canton Trade Fair in Guangzhou and buying products right off the shelves. Similarly, it was difficult for companies to sell products directly to the Chinese buyers. “It was not easy to travel around China and meet your customers,” says Carolyn Brehm, Procter and Gamble Co.’s vice president of global government relations and public policy. Brehm began her career at USCBC in 1978.

Later in the 1980s, after the United States and China formally established diplomatic relations, trade with China began to take off. “The phone was ringing off the hook,” says Scott Seligman, USCBC’s Beijing representative from 1980 to 1982. “Everybody was interested in doing business in China.” Back then, the trade balance was in the United States’ favor. “The Chinese would constantly lecture us that if we didn’t buy more from China, then they weren’t going to be able to buy from us,” Seligman says.

Still, the climate was far from open. All foreign companies were forced to set up shop in hotels due to the lack of office buildings. In addition, the only investment model available for foreign companies was to establish a joint venture with a Chinese partner. “You simply had to have a Chinese partner,” Seligman says. “The idea was that you would bring in the technology and know-how, and they would work the bureaucracy and make the world safe for your business.”

When Brehm left USCBC for General Motors Co. in 1984, the nature of the relationship was changing. Her first assignment was opening an office for GM in Shanghai. “[Shanghai] was still a very closed off, rather insular place,” Brehm recalls. She was at GM when it created its first joint venture with Shanghai Automotive Industry Corp. Group (SAIC) in the mid-1990s. “The economics of that agreement were based on the ability to sell to foreign trade organizations, to cadres in the Chinese government, and to foreigners, and that was a relatively small market,” Brehm says. “No one would have predicted how quickly the private ownership of vehicles took off.” China is now the world’s largest auto market, and GM sold more than 2.5 million vehicles in China last year, making it the best-selling foreign car brand in China.

FROM BOOM TO BUST

Richard Brecher, now a senior director with Motorola Solutions, Inc., joined USCBC in the fall of 1988. “When I started it was the first investment boom-let,” Brecher says. “I say boom-let because we thought investment was booming, but we had no idea what was to come.” The Chinese government used to publish an annual yearbook that listed all the foreign direct investment projects for the year. “It’s hard to believe they could capture all the deals in a single volume today,” Brecher says. Around this time there was a surge of investment into China because of a number of policy changes, such as relaxed rules on foreign investment, permission to set up wholly foreign-owned enterprises in certain sectors, and other reforms that effectively made it easier and more attractive to invest in China.

But June 1989 was a dramatic turning point for US-China commercial relations. After the government crackdown on protesters in Beijing’s Tiananmen Square and subsequent slowdown in economic growth in China, companies began to question whether China was a healthy and stable market. “Clearly, it was the nadir in the relationship and in the health and strength of the council itself,” Brecher says.

The developments in China sparked negative reactions in the United States, and members of Congress began to question whether they should continue extending certain trading rights to China. The United States first granted China most-favored-nation (MFN) status in 1980, which made trading with China more attractive by lowering tariffs on goods imported to the United States. The status was subject to annual renewal. After Tiananmen, negotiating MFN status became a “political football,” Brecher says. The issue surfaced most notably during the 1992 presidential election campaign. Then-candidate Bill Clinton said President George H.W. Bush “coddled” the Chinese government, which Clinton also referred to as the “butchers of Beijing.”

Some members of Congress argued that as a serious human rights violator China did not deserve to have its trading rights extended. But Congress eventually began to take up the idea of allowing permanent normal trade relations (PNTR) with China, which would cement China’s trading status with the United States. Those discussions lasted until 2000 when China was eventually granted PNTR status. “Strangely enough, after Congress voted for PNTR, China disappeared from the political radar screen,” says Robert Kapp, USCBC president from 1994 to 2004. “I drew from that you could light a fire under the US about China, but you couldn’t make it last.” Once he took office, President Clinton backed off his campaign trail rhetoric. Clinton signed the trade bill into law, which paved the way for China’s accession to the World Trade Organization (WTO) in 2001.

CHINA’S ACCESSION TO THE WTO

China’s trade with the world skyrocketed after it became a member of the WTO. With WTO membership, China could trade more reliably with the world. “It was important economically in all kinds of ways for China, but it was an important event symbolically for China as a sign that China was going to be open to the world,” says James Bacchus, who served in the US House of Representatives from 1991 to 1995 (D-FL) and is now chair of law firm Greenberg Traurig LLP’s Global Practice Group. “Had China not been a WTO member over the past decade all other countries would have been free to discriminate against China, and this would have crippled China’s economic rise.”

China is now the third-largest buyer of US exports, trailing only Mexico and Canada. USCBC President John Frisbie says that China is now a $250 billion market for American companies if exports and sales in China by US affiliates are taken into account. The growth in trade and investment has been two-way. For instance, before 2008 Chinese investment in the United States amounted to less than $1 billion each year, according to the Rhodium Group. By 2010, the number had grown to $5 billion, and Chinese investment in the United States is on track for a record year in 2012.

But since China joined the WTO, trade has remained a point of contention. While US exports have grown at a rate of more than 500 percent since 2000, the US bilateral trade deficit with China has reached record levels. America’s traditional import suppliers from other economies in Asia have shifted their export production to China, consolidating the United States’ long-standing trade deficits with the region in China.

Critics say China unfairly boosts its exports through subsidies or other unfair trade practices. In response, over the last four years the Obama administration has filed WTO cases against China in industries including auto parts, rare earths, and credit card payments. Bacchus says these disputes are a natural progression for two large trading economies. “It’s only to be expected that two large countries with billions upon billions in bilateral trade will have trade disputes,” says Bacchus, who was also the presiding judge in the first WTO case in which China appeared. “There is no need to see any of these as adversarial. This is simply how commercial trading partners resolve disputes.”

MIXED REACTIONS ON PROGRESS

Today, foreign companies operating in China offer a range of viewpoints on China’s efforts to open its economy. After China became a member of the WTO, it slowly began to fulfill its commitments over the next few years, opening up different industries to foreign companies. Some companies such as P&G have been able to gain a decent foothold in the China market. Brehm says that a growing middle class of consumers that are beginning to demand higher quality products is encouraging for foreign companies like P&G, which sells consumer products such as laundry detergent, soap, toothpaste, and shampoo. “There is no economy on earth that has transformed itself so quickly, and in that process, the 30 some years that I’ve been in and out of China, the changes that have occurred in individual Chinese quality of life—the increasing freedom to make decisions about one’s future, about one’s educational path, and about where one lives—is far greater than it was before,” she says.

But other businesses that must deal directly with the government complain that not as much has changed over the past few decades. “The level of engagement and attention to and awareness of China has expanded tremendously,” Brecher says. “At the same time, it’s amazing how many of the issues that plague business in China are unchanged.” Brecher cites a lack of transparency, the burdensome government approval process, local protectionism, and the protection of intellectual property rights as serious impediments for foreign companies operating in China. Motorola Solutions makes telecom equipment products, such as two-way radios and bar code scanners, and offers communications services to companies and governments. “These are perennial issues that have dogged the commercial relationship from day one, and remain problematic with uneven, at best, progress,” he says. Brecher adds that China needs to adopt the WTO’s government procurement agreement, which would open up the market of products the government and its agencies buy to international competition. China committed to joining the agreement when it became a member of the WTO more than a decade ago, but has yet to make a credible offer. Market access to China’s government procurement market remains a vital issue for international companies that do business in China.

USCBC’s Vice President Erin Ennis says China has fully implemented a lot of its WTO commitments, but there are a number of industries, such as telecom and express delivery, in which more must be done to give US companies an equal playing field. In addition, China maintains ownership restrictions in nearly 100 manufacturing and services sector categories in China, which inhibit foreign investment.

In USCBC’s latest member survey on the business environment in China, member companies said China remains a significant source of revenue growth for their companies, but rising costs, increasing competition, and persistent market access and regulatory barriers make it a challenging area to do business. Eighty-nine percent of companies said they were profitable in China last year, which is the highest rate to date in the seven-year history of the USCBC survey. While 90 percent of respondents said they are optimistic or somewhat optimistic about the outlook for the next five years, 45 percent said they were less optimistic about the business climate than they were three years ago.

“China can be a complicated and frustrating place to do business, for companies and for government trade policy negotiators,” Frisbie says. “But there is no more important relationship for the United States in the years ahead, and China will only grow more important to American companies, our economy, and employment. USCBC will continue to engage the Chinese government on behalf of our membership so that American companies can compete on an equal footing.”

[author]Ben Baden is associate editor of the China Business Review.[/author]