[Intl-tobacco] Special: China and WTO – The dragon stir s (fwd)

[Robert Weissman]

Special: China and WTO – The dragon stirs
Source: Tobacco Journal International, Wednesday, 8/8/01

The tug-of-war finally appears to be coming to an end: If entry
negotiations run smoothly, China’s accession to the World Trade
Organisation (WTO) will be approved in November – a membership that will
mean a tremendous change in the global tobacco landscape.

During the past few months, there have been clear signals in the tobacco
industry indicating that China has come to friendlier terms with the idea
of an open market. It started with the opening of the leaf market in
April, when China and the United States signed an agreement that allows US
farmers to export their flue-cured and Burley tobacco produced, cured and
processed in the States to the Far Eastern country. Valid for one year for
the time being, the contract provides the option of being extended if both
parties agree.

Even more striking, however, was the news that China is permitting British
American Tobacco (BAT) to establish a new joint venture company at
Mianyang in the Sichuan province. For the first time, an international
cigarette manufacturer had been assigned the right to use land for
building a factory. In BAT’s long history of involvement in China, this,
according to the company’s Chairman Martin Broughton, was a significant
breakthrough.

China, it seems, after fifteen years of negotiations, is now progressing
on its way into the World Trade Organisation, and WTO members recently
stepped up their efforts to get the new partner from the Far East on board
soon.  Continuing differences over agriculture and services were the main
cause of delay; conflicts focus on the question of whether China will be
admitted to the WTO as a developing country, which would enable it to
subsidise its farmers by 10 per cent, as opposed to the 7 or 8 per cent
the US is willing to concede.

Hopes are high, however, for another meeting of the WTO working party,
scheduled for mid-July, is intended to pave the way for approval of
Chinese membership at the Qatar ministerial meeting in November. Headed by
Swiss diplomat Pierre-Louis Girard, the working party in July should
provide WTO members with a consolidated draft text of the accession
protocol and with a report that lays down the exact conditions for China’s
adherence to WTO rules.  If the negotiations in July are successful and
the necessary paperwork is completed in time, which trade officials now
think is possible, China will be given formal approval in November. After
that, things would happen quickly:  After ratification of its accession
protocol, China would become a member of WTO 30 days later, meaning that
full membership could be obtained at the beginning of 2002.

Entering the largest market

The effects on the world economy will be far-reaching. China’s admission
to the WTO could just come right on time for the launch of a new global
round of trade liberalisation talks. With the country’s WTO membership, a
new wind will blow in the international tobacco sector, too. With more
than 300 million smokers, China is the largest tobacco market; it
represents one third of the entire world cigarette market. The production
figures of the Chinese tobacco industry reflect the huge demand: In 1999,
China National Tobacco Corporation (CNTC), the executive branch of the
State Tobacco Monopoly Administration (STMA), manufactured 1,642.5 billion
cigarettes; profits and taxes in the same year reached RMB 98.9 billion
(US$ 11.96 billion) and even climbed to RMB 105 billion in 2000 (US$ 12.7
billion). Almost 1,600 different brands are produced, most of them sold at
provincial level.

However, several very well-known brands are sold throughout China, and
exports are gathering momentum. Although some joint ventures exist,
imported cigarettes have only played a minor role. Faced with the prospect
of increased competition under the WTO, the Chinese government has started
a far-reaching restructuring programme within the country’s tobacco
industry. It is estimated that only around half of the existing 180
factories will survive the ‘process of natural selection’.

Despite the enormous size of the Chinese market, opinions about the
consequences its opening will have on the various branches of the
international tobacco sector remain divided. “We anticipate a positive
development of our business, since the Chinese cigarette factories will
prepare for the world market and for export and will hence have to import
new technologies in order to remain competitive,” says Thomas Schmidt,
General Sales Manager at tobacco machinery manufacturer Hauni. The German
company has been present on the Chinese market since 1957; having
delivered more than 2,100 machines to the country, it claims that 75 per
cent of all cigarettes made in China are produced on Hauni makers.

Critical voices

Other suppliers are less optimistic. Sam Saw of UK-based machinery
manufacturer Molins, which has been active in the Chinese market since the
1920s, also speaks of a positive development for his company in the
country so far, but is uncertain about how the WTO entry will affect
China: “Our understanding is that multinationals are keen to penetrate the
region, but STMA has made no comment on the subject. Furthermore, the time
scales for entry are still unspecific and it is likely that China will
require many years to fully open the doors.”

Neil Robertson, Managing Director of UK cigarette paper manufacturer
Robert Fletcher, whose Chinese business relations go back to the 1980s,
points into the same direction. Although for him the Chinese market is and
will continue to be one of the most important in the world because of its
size and its history of strong technical development, he is hesitant when
it comes to the prospects for the international paper industry: “It has
been agreed that the duties on cigarette materials such as cigarette
tissues will reduce over a period of five years. Potentially, this gives a
good opportunity for western manufacturers to make significant inroads
into the market place again.

However, this does not take into account the investment currently being
undertaken by the Chinese papermaking industry. There are five centres in
China which have or will be equipped with modern papermaking machinery,
which has the potential to supply most or all of the domestic requirement.
Potentially the efficiencies could equal those in the West and this can be
achieved with a lower cost base.” He designs a worst-case scenario:
“Chinese cigarette tissue makers could become much more active on the
export market, particularly in South-East Asia, and eventually China could
even take over as the major supplier of cigarette materials in the world
as it has done in many other industries. Business-to-business marketplaces
may favour such a development.”

In this issue’s special feature, Tobacco Journal International provides a
detailed view from various perspectives – from the inside as well as from
the outside – of the chances, risks and consequences related to China’s
entry into the World Trade Organisation. So while the dragon gets ready,
you may judge yourself whether there is more reason for pessimism or for
optimism.  Stefanie Rossel