In 1999, the chief executives of the world’s leading companies gathered for the Fortune Global Forum, a yearly meeting to review the state of trade and trading policies.

What made the meeting unique was its location. Shanghai, the booming commercial center of China was the locale, a symbol of the evolution and progress being made by the world’s most populous country.

These are opportune times to do business or expand in China. The Chinese Government, with its commitment to bringing the country into the World Trade Organization, is pushing ahead with economic reform. Observers note China’s decision not to devalue the Reminbi during the 1998 Asian currency crisis as proof of its goodwill and determination to join the fold of the world’s major trading nations.

Western multinationals, including companies such as General Motors, General Electric and Eastman Kodak who all took part in the Shanghai Forum, in fact looked to China as a critical growth market in the following years.“Every day, more doors are opened, more opportunities created,” says Sammy Chey, corporate manager, freight development - China for PBB Global Logistics.

Every day, more doors are opened, more opportunities created,” says Sammy Chey, corporate manager, freight development - China for PBB Global Logistics.

“But with this openness, knowledge of the market’s unique characteristics and established personal relationships are even more important,” Mr. Chey says.
Mr. Chey points to the lowering and lifting of tariffs and non-tariff barriers as an example of improvements in Chinese trade policy.

“In recent years, tariffs have been lowered and non-tariff barriers such as import licenses and quotas have been lifted for a number of product categories, a trend which will continue. The average import duty has fallen in past years and by 2005 most industrial products will be levied at 10%,” forecasts Mr. Chey.

Shippers seeking to profit from this economic liberalization, however, must remember that the country’s trade policy remains highly regulated by Western standards.

“MOC (the powerful Ministry of Commerce) continues to play a primary role in overseeing foreign companies, regardless of whether they are wholly foreign-owned or joint-ventured,” he says.

Protectionist laws have considerable impact on the bottom line success of importers and exporters alike. For example, shipping costs and transit times are influenced by the fact that no foreign company can get a business license to forward freight in China unless through a joint venture with a local Chinese partner. These Class “A” forwarders are benefiting, however, from their partnership with foreign logistics companies, which place a premium on customer service and modern information systems.

Strong competition and the purchasing power of foreign buyers are additional reasons for the improvement in shipping practices. Only ten years ago, 95% of China’s export business was on CIF terms, because the inclusion of freight charges helped state-owned enterprise reach government targets and incentives faster. Buyers, in an effort to reduce costs, and improve service levels and transit time, increasingly relied on FOB terms so that they could choose their own freight forwarders. Faced with competition from other Far East countries, Chinese shippers were forced to comply. Today, 95% of exports are on FOB terms.

"But with this openness, knowledge of the market's unique characteristics and established personal relationships are even more important."

Buyers will also find it encouraging that shipping capacity pressures are expected to ease in the near future. “China’s booming export economy over the past several years put a strain on shipping capacity,” says Chey. “In effect, we witnessed a seller’s market for cargo space. We expect this imbalance to begin correcting itself as capacity increases and as the Chinese economy grows at a more modest pace.”

While benefiting from improved shipping service and space availability, companies exporting from China are facing additional costs, in the form of a General Rate Increase (GRI) for Eastbound Pacific freight. In April 1999, spearheaded by the carriers of the Canada Transpacific Stabilization Agreement, a GRI of $1,000 for a 40' container came into effect, supplemented by a $300 per FEU (forty foot equivalent unit) Peak Season Surcharge between June 1 and November 30. The cost of repositioning equipment and empty containers to Asia is responsible for similar increases in effect for U.S. - bound cargo.

“As the Asian economies recover, we can expect this imbalance to even out over the medium-term,” says Mr. Chey. In the meantime, companies selling to China, benefit from this disparity, which in effect amounts to freight rate subsidization.
Massive infrastructure investment, identified in China’s Ninth Five-Year Plan, bears long-term implications for traders. Approximately US $100-billion was invested in roads, rail, ports and airports between 1996 and 2000.

Shanghai continues to be the largest port, featuring the Pudong International Airport. Observers expect expansion in Yantian, with its natural deep-sea port and proximity to Hong Kong, to challenge the economic supremacy of the former British territory. Xingang, Qingdao, Ningbo and Dalian are also major ports to watch in the coming years.

While infrastructure and the regulatory environment in China are progressing at a rapid pace, business culture is not as quick to change. “Patience and relationship-building are concepts that cannot be stressed enough,” advises Chey. “Personal friendships, which then develop into personal relationships (Guanxi), offer valuable connections for those doing business in China. To succeed, one must earn the trust and respect of the Chinese partner.”

To learn more about the opportunities and gain insight into China’s unique trading practices, call Sammy Chey, corporate manager, freight development - China, at (905) 677-2740 or e-mail schey@pbb.com.