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U.S. businesses keen on setting up international trade with China should explore not only the opportunities in the import-export business but also the underlying cultural considerations that influence the business.

United States-China International TradeARTICLE

By Christine Parizo

China is the United States’ third-largest and fastest-growing export market, and our number one import partner. The growth rate of China’s economy hit 6.9 percent in the first half of 2017, higher than most forecasters originally expected,1 and the country accounts for 17.3 percent of the world’s GDP. Further, the Chinese economy has helped to boost U.S. economic growth: a World Economic Forum (WEF) article by a Yale University professor estimates that without our Chinese international trade, the U.S.’s 1.6 percent growth in 2016 would have been 0.2 or 0.3 percentage points lower.2

According to another WEF article written by a Chinese government official, China grew its economy by 6.7 percent and created 12.49 million new jobs in the first three quarters of 2016, despite a backdrop of global economic slowdown.3 To enhance its international trade, the country has also focused on improving its infrastructure, building a railway extension to the Qinghai-Tibet Plateau, a comprehensive highway system across the country, and multiple seaports. However, international trade with China can be a complex challenge due to its size, market diversity, political system, trade tensions with other countries, and historical currency volatility.

Exporting to China

The U.S. shipped $115.8 billion in goods to China in 2016, down 0.3 percent from 2015, according to the Office of the U.S. Trade Representative.4 Despite the slight decline, the U.S. Department of Commerce expects China to offer market growth potential for companies specializing in energy efficiency, clean technology, healthcare, and e-commerce.5 Top categories for export to China in 2016 included miscellaneous grains, seeds, fruits (soybeans), aircraft, electrical machinery, machinery, and vehicles. The U.S. dollar-Chinese Yuan (USD-CNY) exchange rate has traded within a one percentage point range from May 2016 to May 2017.6 The Chinese government expects good economic prospects in 2017, based on plans to encourage innovation and rebuild infrastructure.7 According to data from The World Bank, China’s inflation rate leveled off at 2 percent in 2016.8

China’s newly-approved 13th Five Year Plan, which spans 2016 through 2020, calls for policy reform to stimulate growth and sets the goal of doubling 2010 GDP and per capita incomes by 2020.9 Its population of 1.38 billion,10 GDP of $11 trillion in 2015,11 and GDP growth at 6.9 percent for the first half of 201712 makes it an attractive market for U.S. exporters. However, China’s GDP growth has been declining; in 2016, the country grew at its slowest pace since 1990 due to a manufacturing and construction slowdown.13 Additionally, some economists argue that real GDP is lower.14

Chinese per capita GDP was $8,127 in Q1 2017.15 China’s growing middle class is expected to comprise more than 75 percent of the country’s urban population by 2022, up from 68 percent in 2012 and only 4 percent in 2000, according to research firm McKinsey & Company.16 McKinsey’s research projects that the upper middle class will become the strongest purchasing engine in China, which means more sophisticated consumers willing to pay a premium for quality.

Chinese upper middle-class households will shift from purely necessity-based spending to more discretionary spending, particularly laptops, digital cameras, and household items down to laundry softeners. McKinsey says this growth will create more opportunities for domestic and foreign corporations, but companies also must consider the preferences of Chinese consumers before introducing goods into the market. China’s middle class is already the world’s largest, and is expected to remain so, according to Euromonitor International.17

E-commerce in China is viewed as a potentially explosive growth opportunity by U.S. consumer and services sector companies, according to the Commerce Department.18 The average Chinese digital buyer will reportedly spend $1,836 online in 2017, an increase of 7 percent over 2016.19 China has 731 million internet users.20

The U.S. is China’s second-largest import source, after South Korea.21 While speculation about national priorities, cybersecurity concerns and intellectual property disputes have appeared to threaten international trade between the two nations in 2016 and 2017, the countries continue making progress toward a bilateral trade agreement that is expected to improve U.S. companies’ access to Chinese markets.22,23

Importing from China

China was the U.S.’s largest importer of goods in 2016, totaling $462.8 billion. That number is down 4.2 percent from 2015 but 406 percent higher than import levels in 2006.24 The top goods categories imported by the U.S. from China in 2016 were electrical machinery, machinery, furniture and bedding, toys and sports equipment, and footwear. Agricultural imports totaled $4.3 billion, with processed fruit and vegetables, fruit and vegetable juices, snack foods, fresh vegetables, and tea at the top of the list. The U.S. imported $16.1 billion in services from China in 2016, including transport, travel, and research and development services.25

While discussion of tariff changes is ongoing, China paid an average of 3 percent on goods imported to the U.S. in 2015, compared to the average trade-weighted tax of 1.5 percent, according to a CNBC analysis of data from the U.S. International Trade Commission.26 Within the average there is a large range: apparel and footwear, for example, are taxed at a higher rate than vehicles and electronics.27

Setting up for International Trade in China

Success for foreign companies operating in China typically requires representation by a Chinese agent, distributors, or partners, as well as a good understanding of how to protect intellectual property rights under Chinese law. Due diligence of any Chinese agents is a must, as is consulting the U.S. Department of Commerce, United States Foreign Commercial Service (USFCS).28 U.S. foreign direct investment (FDI) in China reached $74.6 billion in 2015, a 10.5 percent increase from the previous year, led by manufacturing, wholesale trade, and depository institutions.29

The World Bank’s (WB’s) Ease of Doing Business Index rates China at 78th out of 190 countries. Some of the bigger challenges cited by the WB include dealing with construction permits (where China ranked 177), paying taxes (131), and starting a business (127). China scores better at enforcing contracts (5), registering property (42), and resolving insolvency (53).30

Overall, China ranks 71st out of 130 countries in the WEF’s Human Capital Index.31 It has a labor force participation rate of 70.8 percent. The tertiary-educated population, those that have completed the highest level of education including advanced degrees in medicine, numbers 77.7 million. China ranks 61st of 136 countries in the WEF’s Global Enabling Trade Index, well ahead of other BRIC nations (Brazil, Russia and India).32

Cultural Considerations

There are numerous resources available for Americans that wish to do business in China. Of note is the emphasis that the Chinese place on guanxi, or personal relationships. According to U.K.-based Global Business Culture, a cultural awareness consultancy, respecting seniority and refraining from open disagreement is critical, as is doing as many favors as possible. In addition, the consultancy recommends always formally exchanging business cards at the beginning of meetings, and treating the cards with respect. They say to expect to engage in several long, seemingly enigmatic meetings before seeing progress.33

The Takeaway

China’s new initiatives and relatively steady growth may make it an attractive opportunity for U.S. companies pursuing international trade. Experts say knowing local customs and engaging local agents may help in navigating Chinese laws.

Christine Parazio - The Author

The Author

Christine Parizo

Christine Parizo is a professional writer specializing in business and technology. She's written for a variety of TechTarget sites, including searchSAP.com, searchSOA.com, and searchcloudapplications.com, as well as HPE's Infrastructure Insights and The Pulse of IT.

Sources

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Original report: “2017 China’s E-Commerce Shopping Guide Report,” iResearch;http://www.iresearchchina.com/content/details8_32134.html
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23.“U.S. Treasury Secretary Mnuchin: China Bilateral Investment Treaty ‘On Our Agenda’,” The Wall Street Journal; https://www.wsj.com/articles/u-s-treasury-secretary-mnuchin-china-bilateral-investment-treaty-on-our-agenda-1496774628
24.“The Peoples Republic of China,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
25.Ibid.
26.“The countries that pay the highest U.S. tariffs, and the products they sell,” CNBC; http://www.cnbc.com/2016/12/07/trump-tariffs-countries-and-products-that-pay-the-highest-us-tariffs.html
27.Ibid.
28.“China Market Entry Strategy,” U.S. Department of Commerce; https://www.export.gov/article?id=China-Market-Entry-Strategy
29.“The Peoples Republic of China,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
30.Doing Business, World Bankhttp://www.doingbusiness.org/data/exploreeconomies/china
31.“Human Capital Index 2016: China,” World Economic Forum; http://reports.weforum.org/human-capital-report-2016/economies/#economy=CHN
32.“The Global Enabling Trade Report 2016,” World Economic Forum; http://reports.weforum.org/global-enabling-trade-report-2016/economy-profiles/#economy=CHN
33.“Top Tips on China,” World Business Culture; http://www.worldbusinessculture.com/country-profiles/china/top-tips/

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