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Provisional Translation

Recommendations for Expanding Economic and Trade Ties with China Following Its Accession to the World Trade Organization

Part I. General Comments

May 20, 2003
Nippon Keidanren
(Japan Business Federation)

1. Introduction

In 1978, China committed itself to economic reform and open-door policies. Since then it has promoted domestic structural reform, switched to a market economy, and actively encouraged foreign investment. These steps have continually and greatly stimulated economic growth over the last 25 years.

In December 2001, China became a member of the World Trade Organization, promising to open its doors to the outside world and to respect international trade rules. Japan's business community welcomed this decisive step. Since China joined the WTO, its government has amended a remarkably large number of laws and reformed numerous systems, thereby taking steps to abide by the terms of WTO membership. Japan's business community fully welcomes these efforts and hopes that further efforts will be taken to speed the reform process.

Japanese corporations have increased their trade and investment activities with China, and are eager to strengthen economic ties between the two countries. One positive result of these efforts is that the economies of both countries are developing inter-relationships, thereby complementing one another. Increased Japanese investment in China has benefited Japanese corporations, created new employment opportunities in China, transferred technologies, expanded trade in intermediate goods, and encouraged the development of related service industries. These positive developments have helped China's economy to grow.

Over the last few years, a growing number of Japanese corporations have realized that China can be an important base for the promotion of their global strategies, and we at Nippon Keidanren hope to further promote economic relations that are advantageous to both countries.

It is for this reason that we call on China to continue abiding by the international obligations it assumed when joining the WTO, and to continue promoting domestic reforms without delay. For its part, Japan must promote domestic reform (especially regulatory reform), take further steps to improve its industrial structure, and encourage Japanese investments in China. The two countries may find these tasks difficult, but tackling them resolutely will not only stimulate their own economies but the economies of East Asia and the entire world.

When working toward these goals, many problems will have to be resolved in various sectors, especially the service sector where business opportunities show the highest potential. To facilitate the resolution of these problems, we at Nippon Keidanren have solicited input from the Japanese business community for the best ways to strengthen two-way economic ties. Our recommendation is for the Chinese government to abide by international rules, and to promote further liberalization and domestic reform.

2. Japan-China economic and trade relations

Over the last 10 years, Japan-China trade and investment has generally continued to expand, although there was a temporary period of stagnation caused by such factors as the Asian currency crisis. Japan is China's most important trading partner (with the exception of Hong Kong), and China is Japan's second most important trading partner, after the United States. Japanese direct investments in China have steadily expanded in the four years since 1999.

At the 16th National Congress of the Communist Party of China, held in November 2002, the Chinese government announced a plan to expand GDP four-fold over the 2000 level by 2020. But a number of risk factors could prevent this: China's growing deficit, the worsening financial position of state enterprises, bad debts held by state banks, an excess of supply over demand, and increasing social insecurity caused not only by growing disparities among regions and among rich and poor classes, but also by structural adjustments in the industrial sector. In order for China to overcome these risks and achieve its targeted economic growth rate, Japan-China economic relations will have to continue to develop in a stable environment. It is with this in mind that we place our hope in China's new administration headed by Hu Jintao, who was chosen as the country's new leader at the last National Congress.

3. Expanding Japan-China economic and trade ties

Japanese manufacturers have been vigorously promoting their business operations in China since the 1980s. Over the last few years, they have tended to promote a division of labor and manufacturing processes in order to better utilize the managerial resources available in Japan and China. This specialization has taken such forms as a vertical and horizontal division of labor, greater specialization at each manufacturing stage from design and development to the procurement of raw and other materials, the manufacture and procurement of components, and the manufacture and assembly of final products. Japanese corporations look on China as an important base for the manufacture of products and the global export of those products, and they are keen to promote their sales within the Chinese market as well.

For their part, service industries enrich the lives of people and play an essential role in the business infrastructure of manufacturing industries. In the past, China placed a relatively large number of restrictions on foreign investment enterprises (FIEs), inhibiting their ability to establish service industries in China. But China's membership in the WTO has opened up the service sector as well, creating the expectation that foreign participation in that country's service sector will expand rapidly in the future. In China, there is a growing need for services in such sectors as telecommunications, engineering, transportation, distribution, marketing, the recovery of capital and the settlement of accounts, after-sales service, and financing. All of these services are needed to optimize the manufacturing value chain. Other service sectors, such as financial, retail and construction services, will expand their operations targeting the new middle class emerging in China, especially in Shanghai and other coastal cities.

These types of business activities cannot be promoted without the free and unhindered movement of managerial resources - including people, goods, capital, services and information - between Japan and China. The free movement of these managerial resources would make it possible to promote effective business activities that take advantage of the fact that Japan's industrial structure complements that of China.

Japanese commercial activities with China look beyond bilateral business ties to include ties with the entire East Asian region, including Southeast Asia. Nippon Keidanren is convinced that Japan and China should combine their energies to work for the establishment of an East Asia Free Economic Area encompassing the ASEAN countries plus Japan, China and South Korea (ASEAN + 3), with a possible establishment target date of 2015. Establishment of such a free economic area would reduce the cost of doing business within the area, which would make manufacturing structures more efficient. The result would be a huge common market that brings tremendous benefits not only to all member countries but to the global economy as well.

4. Promoting Japan-China business: challenges requiring urgent action

Japan's business community strongly urges the Chinese government to place priority on resolving the following problems that hinder business activities. Resolution of these problems would expand business opportunities not only for FIEs operating in China, but also for Chinese corporations themselves, greatly contributing to China's economic growth.

We hope that the Chinese government will, while working to resolve these problems, at the same time: (1) strictly adhere to WTO obligations; (2) promote further liberalization during the new round of WTO negotiations; and (3) push forward with domestic structural reform, including the reform of state enterprises, financial systems, and government organizations. (For a more detailed discussion, please refer to Part II of this position paper, Barriers to Business Activities: Improvements Requested by the Japanese Business Community.)

(1) Swift and thorough implementation of WTO commitments:

We urge China to follow the agreed-upon implementation schedule of its WTO commitments and, when possible, to advance the date of its compliance with this schedule. We urge that this liberalization be aligned with actual business situations, especially with regard to trading and distribution rights. These rights should, in principle, be granted to all FIEs within 3 years of China's accession to the WTO.

(2) Further market liberalization:

China should open its market further during the new round of WTO negotiations, through voluntary liberalization. Market-opening measures should include: the reduction or removal of tariff- and non-tariff barriers, the reduction or removal of restrictions on foreign investments in primary service areas (such as financial services, distribution, telecommunications, construction and transportation), and improved market access.

(3) Transparency when deliberating on and promulgating laws and regulations:

Every effort should be taken to ensure a high level of transparency when drawing up basic laws and regulations, and during their application. This transparency should be ensured, for example, by permitting public comment on proposed laws and regulations, and by making the details of those laws and regulations public.

(4) Uniform application of laws and regulations by central and local governments:

Laws and regulations enacted by the central government of China should be interpreted in a uniform manner, and administered and applied equally by all local governments.

(5) Effective protection of intellectual property rights:

Nippon Keidanren calls on the Chinese government to ensure collaboration among its various administrative levels - the judicial system, the various ministries, the prosecutorial system, and the offices levying tariffs - with a view to ensuring that judicial systems and administrative procedures offer strong protection of intellectual property rights at every stage, up to and including the enforcement stage.

(6) Conformity with international standards:

At the present time, some compulsory standards established by the Chinese government differ greatly from internationally accredited standards. We request that such norms and compulsory standards be changed to conform to international standards.

(7) A floating exchange rate for the yuan:

The exchange rate for the Chinese yuan is, in effect, pegged to the US dollar. It has been rightly said that the yuan is undervalued for an economy that is growing rapidly. We call on the Chinese government to progressively liberalize capital transactions over the short term, while it liberalizes trade, and to eventually move to a floating exchange rate.

(8) Continuance of preferential treatment for FIEs:

Preferential treatment for FIEs is not prohibited under WTO rules and Nippon Keidanren hopes that such preferential systems will remain in place, whether or not China's central or local governments are implementing them at this time. If, however, the Chinese government were to eliminate such systems, we would strongly urge it to do so slowly over a considerably long period of time and to not eliminate them retroactively.

(9) Swift refund of the value-added tax:

We request that procedures for refunding the value-added tax be simplified and that refunds be made quickly and without fail.

5. Conclusions

Now that China has joined the WTO, it is necessary for Japan and China to reexamine their economic and trade relations and to implement measures geared to the changing situation. This is especially apparent when we consider the globalization of the world economy, China's rapid transition to a market economy and the growing economic ties between the two countries.

Japan and China should simultaneously promote all multilateral, regional and bilateral frameworks that can strengthen Sino-Japanese economic ties. These frameworks include the new round of WTO negotiations and efforts to establish an East Asia Free Economic Area. Also included are efforts to take further advantage of discussions on the Japan-China economic partnership, and a revision of the 1988 Japan-China agreement on investment.

In addition, in order to promote stronger business ties between the two countries, it is essential that existing communication channels in both private companies and government offices be examined and restructured, and that new strategic approaches suitable for the 21st century be developed. To promote these goals, Nippon Keidanren is eager to contribute to the strengthening of Japan-China relations, and to help ensure that these ties remain strong and stable.

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