U.S.–China Trade Negotiations

288 Pages·1982·17.253 MB·English

by  Rosalie L. Tung (Auth.)

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PERGAMON
POLICY ON BUSINESS AND ECONOMICS
STUDIES
U.S.-China
Trade Negotiations
Rosalie L. Tung
Pergamon Press
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Dedicated to Byron and Michele
Copyright © 1982 Pergamon Press Inc.
Library of Congress Cataloging in Publication Data
Tung, Rosalie L (Rosalie Lam), 1948-
U.S.-China trade negotiations.
(Pergamon policy studies on business and economics)
Bibliography: p.
Includes index.
1. United States-Commerce-China. 2. China-
Commerce-United States. I. Title. II. Series.
HF3128.T86 1981 382Ό951Ό73 81-11904
ISBN 0-08-027187-1 AACR2
All Rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means:
electronic, electrostatic, magnetic tape, mechanical, photocopying,
recording or otherwise, without permission in writing from the
publishers.
Printed In the United Statez of America
List of Figures and Tables
Table 1.1. PRC Imports from and Exports to USA, 1970-1980 4
Figure 2.1. China's Foreign Trade Structure 34
Table 3.1. Foreign Trade Corporations that U.S. firms
negotiated with 57
Table 3.2. Factors responsible for the success of business
negotiations 66
Table 3.3. Factors responsible for the failure of business
negotiations 67
Table 3.4. Relationships between incidences of success and
practices and procedures of U.S.-China trade negotiations 72
vii
Preface
After the establishment of the People's Republic of China (PRC) on October
1, 1949, the United States did not recognize the new regime as the legitimate
government of China. Despite numerous attempts to resume diplomatic
relations between the United States and the PRC, little progress toward
normalization was made during the 1950s and the 1960s. A major break-
through came with the signing of the Shanghai Communique in February
1972 between President Richard M. Nixon and the late Premier Zhou Enlai
(Chou En-Lai). The Shanghai Communique expressed that the United States
and the PRC shared similar views on certain international issues and that
both sides would exert their best efforts to work toward the normalization of
diplomatic relations. Differences on several crucial issues remained unre-
solved, particularly with respect to the status of Taiwan. It took another 6V2
years before most of these thorny issues were ironed out. As of January 1,
1979, the United States recognized the PRC as the sole and legitimate gov-
ernment of China, and in the United States, reaction to President Carter's
announcement was mixed.
It is not the purpose of this book to debate the political issues arising from
normalization. Rather, the book will focus on one of the major activities
which follow from normalization, namely, trade between the two countries.
In fact, one of the major motivating forces behind the Chinese government's
decision to normalize diplomatic relations is the wish to expand economic
ties and relations with developed nations so as to acquire advanced technol-
ogy to facilitate the early attainment of the goals of the Four Modernizations
in the country and to promote exports from China to earn badly needed
foreign exchange to finance these ambitious projects at home. In the words
of Vice-Premier Deng Xiaoping (Teng Hsiao-Ping), who is often credited as
the architect of China's Four Modernizations program, "We have learned to
use this favorable international climate to accelerate our advance towards
the Four Modernizations. . . . No country has the process of modernization
occurred in isolation. It has always depended on mutual stimuli, on cross-
fertilization among different peoples. To accelerate China's modernization
we must not only make use of other countries' experience, we must also avail
ourselves of foreign funding" ("Foreign Broadcast Information Service,"
February, 12, 1980).
Trade between the United States and the PRC was negligible prior to
normalization. The volume of trade between the two countries for the year
IX
x Preface
ending 1979, a year after normalization, more than doubled that for the
preceding year. In the first half of 1980, trade between the two countries
increased by 104 percent over the corresponding period for the previous
year. Of course, U.S.-China trade could not have progressed as rapidly
without the concerted efforts of both parties. On the American side, the
United States granted most-favored-nation status to China in early 1980, a
status long sought by the Soviet Union. The Chinese were also offered the
use of subsidized Export-Import Bank credit facilities. In 1980, licensing
regulations governing the export of high-level technology to China were
relaxed. On the Chinese side, there is almost a complete reversal from its
former policy of economic isolationism and self-reliance to one of increased
interaction and interchange with advanced economics. Perhaps the most
significant demonstration of this change in policy was the enactment of the
China Joint Venture Law in July 1979, which governs the entry, operations,
and repatriation of earnings of foreign partners in profit-making ventures
with Chinese enterprises inside China. The Joint Venture Law provides for a
minimum 25 percent investment and 99 percent maximum. This law presents
foreign firms with the opportunities to set up factories and manufacturing
facilities within China. Many firms are expected to take advantage of these
new regulations. Numerous negotiations between China and investors from
the United States, Western Europe, and Japan are underway and several
joint-venture contracts are currently in the implementation phase. In order
to fully benefit from such joint-venture relationships, it is imperative that the
non-Chinese partner has a basic knowledge and understanding of how trade
negotiations are and ought to be conducted. Many experienced business
people are at a complete loss when it comes to negotiating with the Chinese.
They do not know what to expect, how the negotiations will be conducted,
and most frustrating of all, how they could prepare for it.
This book seeks to examine important issues pertaining to U.S.-China
trade negotiations. Specifically, the book seeks to identify the mechanics of
U.S.-China business negotiations; how a company prepares for such negotia-
tions; the factors that contribute to the success or failure of such negotia-
tions; the outcomes of such negotiations; and how U.S. companies organize
for the China trade. The information provided is based on a survey of 138
U.S. firms that have entered into trade negotiations with the Chinese. These
include firms that have engaged in negotiations for trading agreements such
as import and export, and cooperative types of contracts such as joint ven-
tures, coproduction, processing,and other compensation-by-payback arrange-
ments. In addition, in-depth interviews were conducted with a select sample
of agencies and firms on how they prepared for such negotiations, their
experiences, and the outcomes of such negotiations. Edited versions of these
interviews are presented in the book. These include agencies and firms that
have entered into negotiations on such matters as textile and apparel, hotels,
Preface xi
oil exploration contracts, insurance, electronic equipment, and food
products.
In order to arrive at a truly accurate and comprehensive picture of trade
negotiations with the Chinese, the latter's perspective on such matters ought
to be presented as well. In-depth interviews were conducted with officials of
the country's Foreign Investment Commission (the highest agency under the
State Council that approves all joint ventures and major forms of investment
both inside and outside China), the Ministry of Foreign Trade, the China
International Trust and Investment Corporation, and the Bank of China.
Summaries of these interviews are also presented. Given the vast differences
in cultural, social, and economic systems between the two countries, the
information provided in the book will prove invaluable to companies that
will enter into negotiations with the Chinese for the first time. Even compa-
nies that have engaged in negotiations with the Chinese before will benefit
from the information presented in the book, as such knowledge would help
improve their approach to negotiations.
I would like to thank all those individuals who have given their time
willingly and generously to enable the successful completion of this project.
Due to the fact that respondents to the questionnaire survey were not re-
quired to disclose the names of their agencies or organizations, I cannot cite
them here by name.
I am particularly grateful and thankful to those individuals who gave their
time unsparingly by taking part in the interviews to provide a more compre-
hensive picture of their agencies or companies' trade negotiations and rela-
tions with the PRC. Specifically, I would like to thank Ambassador H. Reiter
Webb, Jr., Chief Negotiator for Textile Matters, Office of the U.S. Trade
Representative, Executive Office of the President; Mr. John Eaton, Treasur-
er of E-S Pacific Corporation, a subsidiary of the Cyrus Eaton Group of
Companies; Mr. Richard Chen, Director, China Project, Occidental Petrole-
um Corporation; Mr. Milton Sanders, Vice-President of Marketing, Elec-
tronic Associates, Inc.; Mr. Houghton Freeman, Executive Vice-President,
and Mr. Ned Cloonan, Deputy Director, International Relations and Public
Affairs, American International Group Inc.; and Mr. Murry Berger, Presi-
dent and Chief Executive Officer, Seabrook International Foods Inc., a
subsidiary of Springs Mills, Inc.
The Chinese officials have also contributed their time generously to the
successful completion of this project. Because many people have contributed
in various significant ways, I cannot thank them all individually here. Special
thanks are due to Mr. Han Yuanzuo, Director of Research, Foreign Invest-
ment Commission; Mr. Wang Liehwang, Division Chief, Research Institute
of International Trade, Ministry of Foreign Trade; Mr. Zhuang Shouchang,
Chief of Secretariat, China International Trust and Investment Corpora-
tion; Mr. Tang Gengyao, Deputy General Manager, General Coordination
xii Preface
Department, Bank of China; Mr. Li Jiahua, Deputy Manager, Research
Department, People's Insurance Company of China; and Messrs. Henry Fok
and Timothy Fok, owners of a consortium with interests in marine engineer-
ing, construction, real estate, hydrofoils, and Macau casinos. Mr. Henry Fok
is also a director of the China International Trust and Investment Corpora-
tion.
I would also like to thank Mrs. Dorothy Wynkoop and Miss Amy Stogdill
for transcribing some of the taped interviews.
Last, but not least, I would like to thank my husband, Byron, for his
understanding and moral support throughout the project.
1
An Overview
of U.S.-China Trade
Prior to the signing of the Shanghai Communique on February 2,1972, trade
between the United States and the People's Republic of China was negligible.
Under the terms of agreement of the communique, both parties expressed
the desire to explore ways and means to further develop relations between
the countries. As a demonstration of goodwill on either side to work toward
this goal, President Nixon lifted the embargo on the import of Chinese goods
into the United States. China reciprocated, and for the first time since the
establishment of the People's Republic of China (PRC), invitations were
extended to a team of U.S. businessmen to attend the Spring 1972 Chinese
Export Commodities Fair in Guangzhou (commonly referred to as the Can-
ton Trade Fair). Since then, contacts between the two countries on various
fronts and at different levels has increased, although the rate of progress
leaves much to be desired.
In the United States, the country's attention was diverted to the Watergate
affair in 1973. President Gerald Ford tried to further relations by visiting
China in 1975 , but his defeat in the 1976 presidential election brought the
process to a halt. In the early months of the Carter administration, the new
President was preoccupied with issues such as U.S. relationships with the
Soviet Union, NATO, and the Middle East question. It was not until August
1977 that Secretary of State Cyrus Vance was dispatched to Beijing to resume
the overtures made under the Nixon and Ford administrations. This coin-
cided with a change in political situation in China which made the fruition of
such efforts more possible. After the arrest of the "Gang of Four"* in
October 1976, the country came under the control of pragmatists. It soon
became evident that the path to be followed in the post-Mao era was under
the direction and leadership of Chinese Senior Vice-Premier Deng Xiaoping
(Teng Hsiao-Ping), whose pragmatic approach to matters, either domestic or
international, was exemplified in his remark that "it does not matter whether
a cat is black or white as long as it catches mice."
* The "Gang of Four" refers to Wang Hung-wen, Chiang Ching (the widow of Mao Zedong),
Chang Chun-chiao, and Yao Wen-yuan.
1
2 U.S.-China Trade Negotiations
In 1977 China's leaders proclaimed the mission of the new era as that of
socialist modernization of the country so as to "bring it to the first ranks of
the world" by the year 2000. The emphasis of the post-Mao era is on raising
productivity and increasing efficiency in the operations and management of
the country's economy. Political and ideological considerations, as known to
the West during the Cultural Revolution years, were deemphasized. China's
leaders were fully cognizant that given the backward state of the country's
economy, development and modernization could not take place in isolation.
In his "Report on the Work of the Government " delivered at the Second
Session of the Fifth National People's Congress on June 18, 1979, Hua
Guofeng spelled out the role of foreign trade and economic cooperation in
the Four Modernizations program: "China should take energetic steps to
develop foreign trade, expand economic cooperation and technical ex-
changes with foreign countries and adopt various appropriate means current
in international practice to absorb funds from abroad. . . . Economic ex-
changes between countries and importation of technology are indispensable,
major means by which countries develop their economy and technology"
{China's Foreign Trade, No. 6, 1979, pp. 2-4). This is an echo of a pronounce-
ment made several years earlier by Deng Xiaoping in a speech delivered at
the Special Session of the United Nations on April 10, 1974 , which outlined
the principles governing China's foreign trade policy: economic independ-
ence, self-reliance, mutual benefits, and equality.
By self-reliance, we mean that a country should mainly rely on the strength and
wisdom of its own resources. . . . Self-reliance in no way means "self-seclusion"
and rejection of foreign aid. We have always considered it beneficial and necessary
for the development of the national economy that countries should carry on
economic exchanges on the basis of respect for state sovereignty, equality and
mutual benefit, and the exchange of needed goods to make up for each other's
deficiencies (Speech by Chairman of the Delegation of the PRC, Deng Xiaoping
at the Special Session of the U.N. General Assembly, 1974, p. 15).
This favorable turn of events in both countries facilitated the reaching of
accord on the terms of normalization as spelled out in the Joint Commu-
nique on the Establishment of Diplomatic Relations between the United
States and China on December 15-16, 1978. This resulted in an upsurge in
trade activities between the two countries.
Table 1.1 presents the statistics on two-way trade between the U.S. and
China for 1970 to the first half of 1980. It should be noted that prior to 1978,
the PRC's State Statistical Bureau did not release official figures on the
country's foreign trade or on other aspects of the country's economy. Con-
sequently, the statistics on the total value of China's imports and exports for
years prior to 1978 are based on the best estimates available from various
sources.