By Alexander Chipman Koty
China and the US agreed to a trade deal on May 11 that will give US firms in certain industries increased access to the Chinese market. The deal is a result of the 100-day plan to resolve trade disagreements that Chinese President Xi Jinping and US President Donald Trump produced at their April meeting at the Mar-a-Lago estate in Florida.
Most of the provisions have a July 16 – the 100th day of the plan – deadline for concrete guidelines. The agreement benefits US beef producers, credit rating services, and credit card providers, among others, while Chinese cooked poultry producers can now sell their products to the US.
However, while the deal eases restrictions for US firms in a handful of industries, it does not tackle the larger structural issues affecting China-US trade, such as China’s technology transfer requirements and the perceived unequal market access for US companies.
Further, many of the affected sectors already appeared on track to open to foreign participation, while the regulatory status of others remains unclear. Although these longstanding issues have yet to be resolved, US companies in relevant sectors will benefit from increased access to the vast Chinese market.
Ban on US beef lifted
As part of the deal, China is lifting its ban on US beef, which has been in place since a mad cow disease scare in 2003. In return, China will be able to sell cooked poultry products in the US.
The US has continuously lobbied China to regain market access since the ban in 2003, with little success. China conditionally lifted the ban on US beef in late 2016, but the two sides did not agree on specific regulatory requirements to resume trade. Many observers believe that China had been using the ban on US beef as a bargaining chip to gain access for Chinese cooked poultry in the US.
The US Department of Agriculture recently announced that talks to finalize technical details of the beef agreement have been progressing smoothly, and should be completed by early June. For its part, the US will publish a list of outstanding issues surrounding the import of Chinese cooked poultry, and allow imports as soon as possible.
US producers will be required to document where cattle used for beef exports to China were born and slaughtered. The beef must also undergo testing to ensure it is not contaminated with beta-agonists, a class of growth-enhancing drugs, and must be from cattle under the age of 30 months.
US beef exports to China will begin no later than July 16, re-opening what US Commerce Secretary Wilbur Ross calls a US$2.5 billion market. China is the world’s second largest beef consumer, consuming 5.4 kg per capita in 2015. Brazil, Uruguay, Australia, and New Zealand were the leading exporters of beef to China in 2016.
US poultry, however, remains banned in China. China instituted the ban in response to an avian flu scare in the US in 2015.
RELATED: Pre-Investment and Entry Strategy Advisory from Dezan Shira & Associates
Restrictions on foreign credit rating services eased
All wholly foreign-owned financial services firms, not only US ones, will be able to provide credit rating services in China, and will also be able to apply for credit investigation licensing. Last year, China committed to fully open the sector to foreign firms in 2017. Previously, foreign credit rating services could only operate in China through a joint venture (JV) with a local partner.
The move comes at a time when the Chinese government is looking to curb financial risks and ballooning local debt.
Foreign credit rating agencies may encounter difficulties operating in China, however, as the entities that issue and hold the bulk of debt instruments are government-related and may be reticent to enlist a foreign credit rating agency over a domestic alternative.
US card payment services to gain access
Under the deal, US-owned electronic payment services (EPS) companies – bank and credit card suppliers like Visa and MasterCard – will be able to begin the licensing process to operate in China. China will develop implementation guidelines that will give EPS companies full market access. Local credit card issuers, principally Chinese banks, will continue to be able to issue dual brand-dual currency bankcards.
China committed to open access to its card market upon its accession to the WTO in 2001, but did not follow through. The Obama administration filed a complaint against China on this issue at the WTO, which mandated in 2012 that China open the sector. In response, Beijing issued guidelines to gradually open the sector in 2015, but has made little progress.
State-owned UnionPay has a virtual monopoly over China’s card market, which was valued at RMB 55 trillion (US$8.4 trillion) in 2015. Notably, credit cards never became as widespread in China as in neighboring South Korea and Japan, while digital payment services such as Alipay and WeChat Pay have exploded in popularity.
JPMorgan Chase and Citigroup, two US-owned banks, will be granted interbank bond underwriting and settlement licenses.
Meanwhile, the US has committed to eventually apply the same regulatory standards to Chinese banks as it does to other foreign banks. Ross stated that Chinese banks would get access if they comply with normal rules, though no timeline was given.
Further, China’s National Biosafety Committee will make decisions on all eight pending US biotechnology product applications. If safety certificates are granted, US biotech companies such as Monsanto, DuPont, and Dow Chemical may be able to sell genetically modified seeds and other biotech products in China.
The deal also welcomes China to import liquefied natural gas (LNG) from the US. While the statement encourages China to buy LNG from the US, China was not prohibited from doing so before, and has made no commitment to buy any. China, however, is the world’s third largest consumer of LNG, and is increasingly using it as an alternative to more highly polluting coal.
In the final point of the agreement, the US recognized the importance of China’s One Belt, One Road initiative, and promised to send delegates to attend the OBOR forum in Beijing, which was held on May 14-15. The statement gives greater legitimacy to President Xi’s signature foreign policy initiative, which has had a muted response from Western countries.
RELATED: China – UK Trade: The Effects of Brexit
Modest gains for market access
The trade deal offers US businesses in the affected sectors new opportunities to penetrate the Chinese market, but they will encounter many challenges in the process.
Though the deal is a win for US beef producers, they will have to compete with other established producers, such as Brazil and Uruguay. Similarly, US LNG companies – who were already able to sell to China – will need to compete with suppliers from the Middle East and Southeast Asia, whose politics may be friendlier towards China.
For sectors such as card payments and credit rating, US companies will face considerable hurdles to compete with powerful domestic companies that have benefited from China’s protectionist policies, such as UnionPay.
Additionally, the regulatory status in a number of sectors also remains unresolved. For example, though foreign financial firms will be able to provide credit rating services, they still have to apply for credit investigation licensing. If they are not granted such a license, their ability to operate will be severely limited in practice. Similarly, US biotechnology companies could still have their applications rejected – particularly if the China-US relationship sours.
Most of the measures in the deal either fast-track or put a deadline on existing commitments, such as allowing foreign credit rating and card payment services, and resolving outstanding biotech applications. However, fundamental issues affecting US businesses in China, including what US tech companies often consider discriminatory regulations, remain unresolved. As such, the deal is a win for US businesses in a few specific sectors, but does not resolve the issues affecting the majority.
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates Brochure
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
An Introduction to Doing Business in China 2017
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
Payroll Processing in China: Challenges and Solutions
In this issue of China Briefing magazine, we lay out the challenges presented by China’s payroll landscape, including its peculiar Dang An and Hu Kou systems. We then explore how companies of all sizes are leveraging IT-enabled solutions to meet their HR and payroll needs, and why outsourcing payroll is the answer for certain company structures. Finally, we consider the potential for China to emerge as Asia’s premier payroll processing center.
Dezan Shira & Associates