Yankee Traders Breathe A Sigh Of Relief

On the verge of an all-out trade war, negotiators were locked in heated talks in Washington on Jan. 16 over how to protect U. S. copyrights and patents in China. For months, tension had been mounting over a host of Chinese trade abuses, from textile cheating to prison exports. If the talks failed, Washington was threatening to slap 100% duties on up to $1.5 billion worth of Chinese imports the next day. In turn, Beijing vowed to retaliate against U. S. companies. A nasty election-year fight in Washington could have poisoned the entire $25 billion trading relationship.

But the stalemate was broken just before the U. S. deadline. Under the accord, China promised to outlaw theft of software and agreed to protect patents of agricultural chemicals and pharmaceuticals. Washington, in return, decided to scratch China from its "priority list" of trading rogues. The new accord was a badly needed victory for President Bush's widely assailed China policy. Renewal of China's most-favored-nation trading status this June seems assured.

All of this is bringing a profound sense of relief to U. S. companies doing business in China and Hong Kong. Even though Washington's relations with Beijing had been on a dangerous slide, U. S. companies serving the Chinese market had been quietly but sharply increasing their stakes. "We have been chewing our nails over this," says Thomas M. Culligan, McDonnell Douglas Corp.'s vice-president for program development and marketing. "Thank God they both agreed."

Now that both governments have stepped back from the brink, the U. S. could start to play a bigger role in the Chinese domestic economy than ever before. General Motors, Motorola, and DuPont are pushing ahead with major manufacturing investments that had been shelved after the 1989 Tiananmen Square massacre (table). Chrysler Corp. is discussing an expansion of its long-troubled Beijing Jeep operations. Manufacturers such as Boeing, Hewlett-Packard, and General Electric are making big-ticket sales left and right.

China's long-elusive market of 1.1 billion people is also picking up. A host of U. S. consumer-product giants is finding a booming business in everything from Head & Shoulders shampoo to Heinz baby food. "We're very optimistic about the market," says Barry Wong, manager of Avon Products Inc.'s operation in Guangzhou, which has signed up 8,000 saleswomen since opening in November, 1990. Procter & Gamble Co. says its business in China is growing at a 50% clip.

Part of what motivated the Chinese to strike a deal on intellectual property was fear of U. S. retaliation. But it may also be a reflection of the increasingly strong role being played by pragmatic officials at the top of the Chinese bureaucracy. Although hard-line conservatives still reign supreme in politics and the military, there is evidence that the reformers are once again driving the economy.

Even modest progress on patent abuses will create a new climate for U. S. companies. Many makers of software, pharmaceuticals, and computers had been holding back out of fear their products would get ripped off. "After these changes, I'm sure a lot of companies will be looking to expand in China," says Joseph Simone, a U. S. lawyer in Hong Kong who chairs the American Chamber of Commerce's intellectual-property committee.

BULGING COFFERS. To be sure, investor enthusiasm is still a far cry from the heady period before the bloody crackdown at Tiananmen Square in 1989. Doubts remain over China's stability after ailing octogenarian leaders such as Deng Xiaoping die off, and its most-favored-nation trade status could be attacked again if a Democrat wins the White House.

But for companies ready to tap into the growing domestic Chinese market, business is brisk. Thanks to China's booming exports, which have produced a windfall in hard currency, including a $15 billion trade surplus with the U. S. last year, the government has backed off from an austerity program launched in 1988. The policy succeeded in slashing inflation from 18% to below 5% now. As China's coffers swell with $35 billion in foreign-exchange reserves, Beijing's more confident economic planners have given the green light to U. S. companies to satisfy consumer demand.

Chinese consumers have money to spend, particularly in places such as Guangdong, a southern coastal province that is home to some 70 million people. With housing subsidized by the state, even workers earning only $900 a year have a surprising amount of discretionary income to spend on shampoo, packaged foods, and cosmetics. The hunger for brand-name goods has been intensified by TV ads broadcast from Taiwan and Hong Kong. Colgate-Palmolive Co. recently announced its first joint venture to produce and market Colgate toothpaste in southern China. And P&G, which already sells shampoo, is building a new plant to make tampons. Meanwhile, H. J. Heinz Co. is building a second baby-food plant for $17 million in the port city of Tianjin.

The auto industry is also gathering speed. Two years ago, this sector was so sluggish that the Chinese government had to bail out ventures by Chrysler, Volkswagen, and Peugeot. Now, all three are selling everything they can produce. Chrysler's Jeep plant, once plagued by parts-supply problems and acrimonious disputes with its Chinese partners, is now profitable and is weighing plans to double output to 100,000 Cherokees by 1995, according to industry sources. And by 1998, GM expects to be turning out 50,000 S-class pickup trucks annually.

Motorola is also taking the plunge. It was about to launch a $300 million venture in Tianjin when the political scene erupted in 1989. Now, the company is going ahead with an assembly plant for semiconductors, mobile phones, and auto electronics, although it has scaled the investment back by nearly two-thirds.

Racing to meet crushing demand for air travel, China is considering buying up to 150 jets from a McDonnell Douglas joint venture in Shanghai. Last year, China ordered 34 Boeing jets worth $1.6 billion. Those orders also brought $105 million in business to GE, which supplies engines to Boeing.

Although the irritations are certain to continue, there's no denying that the mood among U. S. executives in China is uncharacteristically upbeat. In fact, one of their main problems is to avoid attracting too much attention. "None of us wants to look like we're waving the flag for the butchers of Tiananmen," says an American executive stationed in Beijing. With Corporate America's role in China back on the fast track, keeping all the new deals secret will be increasingly difficult.

      Company          Investment    Product
      MOTOROLA                          Semiconductors,
                         $120            mobile phones
      GENERAL                            Trucks
      MOTORS              100
      DU PONT              25            Herbicides
      H. J. HEINZ                        Baby food
      PROCTER                            Tampons
      & GAMBLE             15
      AT&T                               Optical fiber
                           10            plant
      GENERAL                            CAT-scan
      ELECTRIC             10            equipment
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