The future of the services sector in post-WTO China

The future of the services sector in post-WTO China

David L. Cunningham, Jr.
President
FedEx Asia Pacific
Jakarta

After 15 years of debate and negotiation, the People's
Republic of China was officially inducted into the World Trade
Organization as a full trading partner.

With so much hype around the accession of China to the WTO,
what are the facts and what are the expectations that are central
to this momentous event for the services sector, in particular
for distribution and logistics? The opening of China's economy
will have profound impact across many business sectors, but
especially those in the services categories, such as
investments/banking, telecommunications, and transportation and
distribution.

China is Asia's second largest economy after Japan in terms of
gross domestic product. Recent estimates by the World Bank and
International Monetary Fund, using purchasing power parity, put
China as the second largest economy in the world after the U.S.

In terms of foreign direct investment (FDI), the Economist
Intelligence Unit predicts that China's total FDI will increase
from $30 billion to $70 billion within five years of its WTO
entry, creating a cycle of new wealth that will further increase
demand for a broader range of goods and services. Recently,
Goldman Sachs estimated that by 2005, external trade will double
to $600 billion and direct investments will top $100 billion.

China's entry into WTO comes at a time when three major trends
are driving business: globalization; creation of high value and
high-tech products; and fast-cycle manufacturing.

To be competitive, China will have to build tightly focused,
efficient supply chains in order to prevent obsolescence or
inventory carrying costs. Speed and efficiency within the chain
shaves costs and satisfies customers. The lack of it destroys
profits and drives customers away.

Given the reliability and availability of express services,
industries worldwide are able to adopt Just-in-time inventory
systems as part of their strategic plans for growth. Though
express services represent less than five percent of total ton-
miles moved in international transportation today, it constitutes
37 percent of the value of goods.

Currently, there is little integration in freight-forwarding
and logistics services in China. Inland transportation is handled
by Chinese freight forwarding companies. In many cases, these are
single truck operations subcontracted by international freight
forwarders to move goods and materials from warehouses to
seaports or airports. At present, there are about 1,500 licensed
international freight-forwarding operators in China. Of these,
450 are Sino-foreign joint ventures, primarily involved in the
management of freight at the international level.

If China is to keep pace with the rest of the logistics
industry it will need to carefully reconsider its current laws
regulating the role of foreign companies in the distribution
services sector.

Phenomenal changes will take place over the next decade,
driven by the commitments made in WTO. Foreign firms will be
allowed to distribute imported products, besides those made in
China. In addition, China has agreed to phase out all
restrictions on distribution services within three years of its
WTO accession. In the most sensitive and protected sectors, such
as chemicals, fertilizer, crude oil and processed petroleum
products, China has agreed to provide distributions rights to
foreign companies within five years of accession.

Restrictions on all services auxiliary to distribution will be
phased out in three to four years. These include express delivery
services, vehicle rental and leasing, freight forwarding, storage
and warehousing. Foreign companies engaged in these businesses
will be able to set up wholly owned subsidiaries in China.

Investment options will also change dramatically. As rules and
regulations relax, and greater transparency is guaranteed,
companies will be more willing to make more significant
investments in China.

A fast-growing services sector is pivotal to the long-term
health of China's economy. According to a Morgan Stanley Dean
Witter report, China's infrastructure and services sector
investments have risen about 10 to 15 percent year-to-date. For
the first seven months this year, the government reported a 24
percent increase in the services sector, which now accounts for
less than one-third of China's GDP. The China Reform and
Development Institute estimates that, for every one percent of
growth in this sector, about 1.3 million new jobs will be
generated.

For the air cargo industry and air express transportation
these projected changes will have a substantial effect on growth
and sustainability. Currently a small consuming market, the
projected growth rate of China's exports will have huge
implications for air cargo.

As trade liberalizes, China should become one of the dominant
players in every manufacturing segment, from the high-end, high
quality to the medium level and to the low-end. Given the scale
of its economy, and a potentially significant domestic market to
underpin economic growth and development, China will simply skip
over some of the traditional stages of manufacturing. It will not
migrate from low-end, low value products to the high-end. It will
just establish itself in all market segments, enabling it to
compete effectively and in some cases, leapfrog its ASEAN
neighbors.

Without a doubt WTO accession will make the economic landscape
more predictable. But it will take time. WTO accession will not
see vast changes ushered in overnight. Instead, the types of
sweeping changes that entry into the WTO will afford to China
will take decades to fully develop. To expect that these changes
will all be perfectly smooth and wonderfully executed is
unrealistic.

Over time, increased foreign investment and greater access
overseas for Chinese exports will create jobs and prosperity.
But, in the short term, there will be employment pressures, job
losses, especially among family run farms and state-owned firms
as they try to meet global competition. The challenge for China
will be to create enough jobs in other sectors, such as the
services section, to offset losses in its traditional economy.

China is growing and constantly changing. WTO will have
implications that are going to require massive changes in
infrastructure and in fundamental business practices. All of us
will do well to remember that the road will be bumpy, but the
direction is positive the prospects are good for China to
continue its long march toward economic strength and prosperity.