INTRODUCTION

My name is Dan Brody, and I am the Executive Director of the United States Information Technology Office (USITO) in Beijing, China. Thank you for inviting me to appear before you today and to join these distinguished panelists.

USITO is a trade organization designed to promote trade and cooperation in the information technology industries of the United States and China. It is committed to increasing the market share of U.S. companies in China’s burgeoning information technology sector. USITO is a consortium led by:

• AeA (formerly the American Electronics Association),
• The Computer Systems Policy Project (CSPP)
• The Information Technology Industry Council (ITI),
• The Software & Information Industry Association (SIIA),
• The Semiconductor Industry Association (SIA), and
• The Telecommunications Industry Association (TIA).

Outline

This panel has been convened to discuss China’s commitments to and compliance with its terms of accession to the World Trade Organization (WTO). Since China officially joined the WTO on December 11, 2001, time has been far too short for me to discuss in any detail China’s compliance with its WTO obligations. Therefore, I will focus my remarks on three areas:
The Chinese economy and the IT industry in China;
The policy areas the American high-tech industry will be monitoring with respect to China’s terms for accession, and;
My general impressions related to China’s compliance with its commitments.

ECONOMIC OVERVIEW

I’d like to review a few key economic indicators to explain why China’s market is important to the American high-tech sector.

Overall Economy: Government spending still accounts for a large portion of economic growth. Even though the non-state sector now accounts for over half of output, the core group of state-owned enterprises (SOEs), especially a few large SOEs, still dominates China’s economic activity in select downstream industrial areas.

Foreign Trade: China has risen to become the world’s 7th largest trading nation in 2001,¹ jumping 2 ranks from 9th in 1999 and up from 32nd in 1978.
• “Electronics and Machinery” is expected to grow at 10% year-on-year during the 10th Five Year Plan (2001-2005), with electronics exports growing at least 15% year on year.
• With overall exports expected to grow at a slower pace, this means that electronics are expected to grow to account for roughly half of China’s exports by 2005.

IT: China’s information technology (IT) manufacturing sector is very large but relatively weak. This is most graphically illustrated in the extremely high revenue but extremely low profit margins regularly displayed by the sector. China IT/manufacturing sector in 2001 reached industrial output of $198.8 billion, sales revenue of $108.4 billion, value add of $24 billion, but profits of only $7.8 billion.²

Telecom: China’s telecom sector has received a great deal of attention in recent years, due to its rapid growth and large size.
• China’s mobile and fixed line networks and number of subscribers have become either first or second in the world, rivaled only by the U.S. and growing at a faster pace.
• Throughout 2001, China added roughly 5 million new wireless subscribers per month. Preliminary statistics indicate that China’s telephony users have reached 324 million by the end of 2001.
• Telecom services revenue (all types) increased 165% year-on-year to approximately $47.83 billion.³ China continues to break up monopolies, introducing competition.

Semiconductors: The current semiconductor market in China is estimated to be up to $8 billion per year. China is the third largest semiconductor market and is expected to become the second largest by 2010. China’s domestic production can only account for 20% of domestic demand, meaning that 80% of demand is met by imports of foreign semiconductors. The current semiconductor equipment and materials market in China is estimated to be over $1 billion per year and is projected to reach almost $4 billion in 2003.

Computers: The International Data Group, a research firm, forecasts that 13.2 million computers will be sold next year, surpassing Japan as the world’s second-largest PC market.

Internet: At the end of last year, the number of Internet users in China reached 33.7 million, up 49.8 percent over the year before. China has 12.54 million computers linked to the Internet, an increase of 40.6 percent over the same period in 2000. China also has over 2,000 Internet Service Providers in operation.

With the overall IT industry expected to grow between 20-40 %, the American high-tech sees enormous potential in being involved in the dynamic Chinese IT market.

INDUSTRY MONITORING

China has undertaken significant reform of its economy, internally and through its WTO commitments, and the American high-tech industry will be monitoring several key areas of China’s implementation of those commitments. The industry will monitor eight key areas:


China’s adoption of the Information Technology Agreement;
China’s elimination of non-tariff barriers;
China’s development and imposition of product standards and conformity assessment procedures;
China’s enforcement of the Agreement on Trade-Related Intellectual Property (TRIPS);
China’s adherence to the Agreement on Trade-Related Investment Measures (TRIMS);
China’s obligation for state-owned and state-invested enterprises (SOEs/SIEs) to purchase and sell on a commercial, non-discriminatory basis;
China’s provision of universal trading and distribution rights, and;
China’s liberalization of its telecommunications services market.

• The Information Technology Agreement will eliminate tariffs on most IT products by 2005. U.S. high-tech exporters are expected to save at least $500 million in 2002 alone from reduced import tariff payments, with the savings continuing to rise in the future.⁴

• China will eliminate of non-tariff barriers by 2005, including tariff-rate quotas (TRQs), import quotas, and discriminatory licensing and tendering requirements that affect many high-tech products.

• China is also obligated to develop and impose legitimate and non-discriminatory product standards and conformity assessment procedures, which are embodied in the WTO Agreement on Technical Barriers to Trade.

• China must also enforce the Agreement on Trade-Related Intellectual Property (TRIPS), which is of particular importance to:
• The software industry, which finds 94 percent of its products pirated, and;
• The protection of manufacturing, circuit, and systems utility patents.

• China’s adherence to the Agreement on Trade-Related Investment Measures (TRIMS) will eliminate the imposition, particularly by local/regional authorities, of policies that were put in place in order to grow infant industries in China. These requirements forced foreign firms:
• To use local content as preconditions to incentives intended to attract foreign investment;
• To transfer technology to a local “partner,” and;
• To export a certain percentage of production.

• China has also committed to ensure that state-owned and state-invested enterprises (SOEs/SIEs) purchase and sell on a commercial, non-discriminatory basis. SOEs make up a large portion of electronics manufacturing firms in China.

• China will also allow universal trading and distribution rights.

• Finally, the industry will monitor China’s liberalization of its telecommunications services market (which includes all types of services), which is the most important factor in the development of electronic commerce.

CHINA’S COMPLIANCE

Most would agree that implementation of China’s WTO commitments will likely be uneven and challenging. China has set itself on an ambitious course to modernize and reform it economy and faces difficult hurdles, including:
Increased levels of domestic unemployment as a result of a global economic slowdown and dislocations from reforms,
Taking into account the political needs of local and regional authorities, and
The management and direction of a country and an economy of enormous size and complexity.

However, USITO will work closely with our member companies on-the-ground in China, as well as our parent associations and their member companies to closely monitor China’s implementation of its commitments. We are confident that China will continue to be a major growth market for IT products and services, and we look forward to working with the Chinese government to assist in their transition to a market economy, based on the rule of law and respect for WTO commitments.

CONCLUSION

We look forward to working with this Commission, the Congress, and the Administration to ensure that China’s historic entry to the WTO benefits American high-tech companies and our 5.3 million American workers. I’d like to thank the Commission again for including me among the participants on this distinguished panel, and I’d be happy to answer any questions.


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FOOTNOTES


1. IMF statistics
2. MII Dept of Economic Operations
3. ibid.
4. USITO calculated savings by two methods. First, assuming the average tariff drop on Jan 1 for a single product is 10% and overall trade is around $5 billion ($4.5 by US Customs and $6 billion for the top 10 high tech items alone by China’s GAC). Second, line-by-line information on HS imports for GAC for 2000 and assuming a 10% rise in imports for 2001, a fairly conservative estimate, with new tariff rates, results in $418 million in savings for the top 10 high tech products alone. The top 10 high tech products refer to the 10 4-digit HS codes that accounted for around 75-80% of overall U.S.-China high tech trade. (There are over 30 4-digit HS codes that are classified as “high-tech” by AeA, and are available from AeA or USITO upon request.