China to Bolster Its Trade Power

Beijing's tariff-cutting pact with other Asian nations will challenge U.S. firms both at home and abroad.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

December 10, 2004

It's no secret that China wants to be the equal of the U.S., the European Union and Japan in the global marketplace. A free-trade agreement recently signed by Beijing and 10 Southeast Asian nations will make it easier for China to reach that goal.

The trade accord is going to give China a big edge over the U.S. in Southeast Asia, a fast-growing region that currently accounts for 6% of U.S. exports—nearly as much as the U.S. sells in Japan and more than in China. Leading American exports to the area are a wide range of manufactured goods—information technology, aircraft parts, health care products, water and wastewater treatment equipment, oil and gas exploration equipment, building materials and more.

The Asian trade pact also will accelerate the development of Chinese products and brands that can compete toe-to-toe with American ones worldwide, even in the U.S. China is going to use its unfettered access to dynamic Asian markets to test new products and achieve economies of scale on the production side at a fast clip.

The free-trade agreement between China and the Association of Southeast Asian Nations (ASEAN)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (formerly Burma), the Philippines, Singapore, Thailand and Vietnam—is likely to be ratified by all the countries during the coming year. Tariff barriers will be gradually phased down or eliminated, with most of the work finishing in 2010.

The falling barriers set the stage for an experiment in mass marketing. "We're going to see a lot of Pan-Asian conglomerates emerging," says Rob Koepp, a research fellow at the Milken Institute, a think tank based in Santa Monica, Calif. "You're going to see a very significant boost for China to get into the global economy by using Southeast Asia as a testing ground for its goods and its brands and its services."

Washington isn't entirely out of the free-trade loop in Southeast Asia—the U.S. has a trade and investment deal with Singapore. But politics would stand in the way of a broader pact with ASEAN. The idea of free trade with Vietnam still irks some in Congress and the general population with memories of the war there. Myanmar's military dictatorship rubs Washington the wrong way. And several ASEAN members, including regional giant Indonesia, have been highly critical of the U.S. war on terrorism in general and the war in Iraq in particular.

Even before China takes advantage of the ASEAN deal, Chinese brands are starting to make U.S. companies nervous—and not just in low-tech sectors such as textiles. Beijing-based Lenovo Group's $1.75-billion buyout of IBM's PC business this week catapults Lenovo into third place in the global computer market, giving Dell and HP reason to watch their backs. Meanwhile, Cisco Systems is looking over its shoulder at Huawei Technologies, a communications equipment manufacturer based in Shenzhen.

China is also preparing to take advantage of technology transferred to the country by BMW, General Motors, Toyota and Honda to develop globally competitive Chinese cars. State-run Shanghai Automotive Industry Corporation (Group) is currently in talks with MG Rover that could lead to a Chinese takeover of the troubled British carmaker.

China is already the world's largest producer of cell phones, but the vast majority are foreign brands such as Motorola. Expect a flood of new Chinese brands to jump into the market. In appliances, China's Haier Group is taking on U.S. and Japanese stalwarts such as Whirlpool and Sony in everything from TV sets and microwaves to refrigerators and washing machines. Haier's new plant in South Carolina is the leading edge of a trend for Chinese companies to set up shop stateside.

Meanwhile, U.S. companies that depend on sales in the ASEAN countries need to face up to the Chinese threat. Franklin J. Vargo, vice president for international affairs at the National Association of Manufacturing, says, "2010 sounds like it's far away, but it will come." If U.S. firms want to remain competitive, they'll probably have to move more production from the U.S. to China or the ASEAN states to achieve tariff-free access.

As usual, the larger multinationals will have an easier time relocating their operations than will smaller U.S. firms. In either case, count on a loss of U.S. jobs in a variety of manufacturing industries.