Foreign Investment and Trade Disputes in China

A cursory review of relevant Chinese trade disputes may, in fact, lead investors to believe they do not pose a real threat. For example, it is true that anti-dumping and safeguard actions only target export-oriented manufacturers. Or, the perception may be that anti-dumping investigations are the plight of domestic Chinese companies only, rather than foreign-invested companies working in China, which is not true. Additionally, investors may not be concerned about the possibility of anti-dumping actions because of the odds: of the US$150 billion worth of goods imported from China in 2003 by the United States-China's second largest trade partner-only $1 billion bore tariff penalties.

The fact remains, however, that China's manufacturing advantages and capabilities, enhanced by tax incentives or other concessions, have created tremendous international interest on the part of multinational companies that seek to employ the country as a production base in order to reduce cost or gain price competitiveness. Consequently, the rise in the foreign investment presence in China's manufacturing industry has been significant. In 2003, more than 70% of contracted foreign direct investment projects were in manufacturing. These ventures are also focused primarily on the export business: foreign-invested enterprises account for over half of China's exports. Although many investors hope to supply China's domestic market, questions of market size and the costs of establishing a distribution network and other operational difficulties have led many companies to either concentrate on manufacturing in China for export, or to do so at least initially or concurrently with a domestic strategy.

As alluded to above, it is often falsely assumed that trade disputes are more likely to be a threat to domestic Chinese enterprises. However, while anti-dumping petitions typically name just a few companies, they in fact indict the entire industry. These suits do not make a distinction between domestic and foreign investment. For example, Philips Suzhou, the Chinese subsidiary of Philips Netherlands, was included in a US anti-dumping investigation against Chinese colour televisions. In another case, many seemingly remote and unconnected Taiwanese investors have become involved in a suit because of their financial involvement with bedroom furniture companies at the centre of the dispute.

As a result of the growing number of foreign companies moving their production facilities to China, the number of goods targeted for anti-dumping or safeguard investigations will rise correspondingly. More and more industries-from chemicals to consumer goods and metals to vitamins -face the possibility of future trade disputes.

China's Non-market Economy Status

The task of defending against trade claims in China can be challenging because some of its largest trading partners-including the United States and the European Union-do not consider China a market economy. This is important in the context of anti-dumping cases. When companies defend themselves in US anti-dumping cases, for example, they must go through the process of calculating a Normal Value for their goods. However, the US Department of Commerce (DOC) maintains that it cannot use the actual domestic sales prices/costs of Chinese companies under investigation to calculate the Normal Value of their goods because of this status. The DOC believes that those sales prices/costs are not based on free market principles and, therefore, would result in values that would be unsuitable for evaluating whether dumping occurred. As a result, the manufacturers' factors of production are valued using prices gathered from a surrogate country-generally one with an industry similar to the one being investigated and a GDP similar to that of China's. This method is generally unfavourable to defendants, as the use of values from a surrogate country often increases the chance that dumping will be found and that the dumping margins will be significant.

Protecting Investments

Potential investors can minimize the risk of trade disputes by arming themselves with, among other things, information. Anti-dumping and safeguard investigations are generally initiated upon the request of an industry seeking protection. Conducting due diligence on potential trade disputes with the product in the key export markets prior to investing in China can alert one to future problems. Has this industry suffered recent hardships? Have they sought governmental protection? Also, investors or businesses should not forget to review the domestic industry into which the company intends to export their product. Is it an industry that the targeted country will want to protect? What is the historical data on the industry and its spin-off products?

Another prudent action for potential investors is to make connections with trade associations, which are often the best industry resource and have information on possible trade disputes and import data and history.

If investors are already invested in a manufacturing business, the key to maintaining the best position in an investigation is evaluating and possibly restructuring operations beforehand. It is advised not to wait until an anti-dumping suit is probable. Dumping is determined by evaluating a company's books, so the employment of international standard accounting systems is imperative. Re-evaluating raw material sourcing may also help lessen the impact of threatened anti-dumping duties. Companies can use the input prices of key inputs that they purchase from certain market economy countries with market economy currency, thus minimizing unanticipated problems in possible dumping investigations under non-market economy status proceedings. Another example of preventative action is to examine and possibly modify sales/export processes to reduce possible dumping duties. This might be accomplished by selling to the export market through an affiliated importer.

Trade disputes are often time-consuming and costly not only to those targeted by them, but also to the initiators. One consideration under the threat of a suit is to work toward an accommodation with the complaining industry (while being sensitive to anti-trust concerns).

Political lobbying can be used effectively under certain circumstances. While a government's ability to prevent the initiation of an anti-dumping suit is severely limited if a domestic industry meets its legal requirements, other trade disputes-such as safeguards and 421 actions-can be responsive to political elements. Trade protectionist actions can often result in greater economic harm than good. For example, duties on imported steel that benefit US steel manufacturers negatively impact other US manufacturers such as auto makers-a factor the government may consider in safeguard cases.

Actively Managing Risk

World Trade Organization (WTO) statistics shed light on the volume of China's trade disputes: of 101 newly initiated anti-dumping investigations in the first half of 2004, 23 were directed at China-the most among all WTO members.

And trade disputes will likely continue to grow. Textile quotas are one area that can be cited as an area of future contention. The elimination of textile quotas on January 1 2005 will almost certainly bring its own set of trade disputes, and the move already provoked the US textile industry to file safeguard petitions with the US government.

Like any other investment risk, working to minimize the effects of trade disputes on a business should be part of a long-term strategy. While it is an ongoing menace and sometimes impossible to avoid, early protective measures can be taken to ensure the best possible outcome in the event of a dispute. By actively managing risk, investors and foreign companies can better enjoy the opportunities that abound in China.