Market Access Report: Planes, Trains and Automobiles

World Trade Organization (WTO)

Jones, Day, Reavis & Pogue

Market Access Report: Planes, Trains and Automobiles

Transportation industry executives worldwide await China's World Trade Organization (WTO) accession and the new opportunities it is expected to create for foreign companies in the lucrative, yet largely untapped, transport market. For the most part, foreign involvement in China's transport industry remains limited. Transport product manufacturers, such as automobile makers, have made some headway in China, technology transfers have been abundant, and transport infrastructure projects have been encouraged for several years, leading to a number of relatively large foreign investments being made in toll road construction and operations. But until recently foreign companies have been largely excluded from participation in any aspect of China's transportation services sector. Import quotas still exist on a number of key transportation products, such as cars and motorcycles, and tariffs, although recently reduced, remain high by international standards.

China's accession to the WTO will bring twofold opportunities to global transport manufacturing and services companies. First, quotas will gradually be phased out and tariffs will be dramatically reduced, leading to increased opportunities for overseas transport manufacturers to make sales in China. Second, China will gradually remove restrictive government control over transport sector manufacturers and will open its doors to investment in transportation services ranging from freight forwarding and agency services, auto financing, courier operations and trucking, to storage and warehousing services. While few would argue that China's transportation industry will be dramatically transformed over the next few years, the question on everyone's mind is whether foreign companies will find greater opportunities in post-WTO China through direct investments in transport ventures or through increased exports of products to China's vast market.

Investment

Foreign investments in China's transportation services sectors are currently severely restricted, and investments in strategic transport manufacturing sectors remain subject to confining government policies. In respect of services, wholly foreign owned enterprises (WFOEs) can now be established only in the shipping industry and in the construction and operation of specialized ports and piers, and foreign majority interest joint ventures (JVs) are allowed only in forestry and agricultural aviation, and in the construction and operation of roads and bridges. Investments in airport construction, rail freight transportation, construction and operation of public ports and piers, and freight forwarding agencies are limited to Chinese majority interest JVs, while foreign ownership of air transportation JVs is capped at 35%. There are no national laws or regulations that permit foreign participation in the complete spectrum of multi-modal transportation facilities and services. This issue was generally tackled in a piecemeal fashion during Sino-US or Sino-EU WTO accession bilateral negotiations.

As a result of the efforts of US negotiators in the Sino-US accession agreements, WFOEs will enter the rail cargo transport sector within six years of China's WTO accession; freight forwarding agencies and courier services by January 1, 2004; foreign participation in the road transport industry will be seen by 2003; and WFOEs will be allowed in storage and warehousing services upon accession. The Sino-EU agreement additionally earned a place for foreign-controlled automobile engine makers, which can open shop the day after accession. Prior to complete opening up to WFOEs, JVs will be permitted in many transport sectors. Nevertheless, some sectors will remain restricted, such as the aircraft repair and maintenance services industry, in which China has agreed only to permit JVs in which the Chinese investor has the controlling stake.

Quotas

Long used as a method by China to protect industries of national interest and to preserve favorable trade surpluses with trading partners, quotas will slowly be phased out upon China's WTO accession with annual reductions set at 15%. The import of transport industry products are currently subject to different annual quota restrictions set by the central government. For example, the current
quota level on motor vehicles is US$6 billion measured in aggregated value of the imported products, while motorcycles and parts totals US$286 million.

Tariffs

Current tariff levels for transportation products differ rather significantly depending primarily upon the competitive ability of the relevant industry sector, or in some cases upon whether or not China can itself manufacture needed products. For example, China currently applies high tariffs on the import of autos, considered an infant but strategic industry, while requiring lower or no tariffs on some airplane and rail-related products. The Chinese government has reduced tariffs on most transportation products over the past several years, but more substantial tariff reductions will occur following China's WTO accession.

Imported car tariffs will be reduced from the current 80-100% to 25% by July 1, 2006, with the largest cuts occurring the first few years after accession. Tariffs on auto parts will be reduced from an average of 23.4% to an average of 10% by 2006. For aviation products including civil aircraft, engines, parts and components, tariffs will be gradually reduced from the current rate of 14.7% to a final average rate of 8% by January 1 2002. Tariffs on tourist buses will be reduced from the current 50-70% to a final 25% before 2005. Tariffs on shipping-related products, such as cargo and passenger vessels and motorboats, currently ranging from 3% to 15%, will be reduced to between 3% and 10.5% by 2002. Perhaps most significantly, reduced tariffs across the board on almost all products entering China is expected to result in dramatic increases in the volume of China's imports leading to even greater opportunities for freight forwarding and cargo companies.

Conclusion

With China's global trade volume expected to reach US$600 billion by 2005, the time is ripe for foreign investors to take advantage of the opportunities that China's entry into the WTO will provide in most strategic transport and cargo sectors. Foreign vehicle and transport product manufacturers can look forward to a more open Chinese market and one in which their products can finally be competitively priced.

By Zhiyang Zhang and Dorothy Deng

Jones, Day, Reavis & Pogue, Shanghai