USTR Report: Trading and Distribution Rights

Thursday, December 14, 2006 1:13
Comments Off on USTR Report: Trading and Distribution Rights

Pages 13 to 24 contain the text related to trading rights and distribution services, and after reading this portion twice, one can easily see that it is possible to get a politician, an economist, and a lawyer all in the same room.

There is a lot of information in these sections, and it is suggested that readers download
the report and read through the fine print as needed.

Warning: Given the dry nature of the material, and as there is little one can do to lighten it up, we suggest you get a cup of coffee and have a seat before proceeding to read the below. Readers could experience sudden lose of consciousness otherwise.

Trading rights – this section deals with the ability of firms to import and export freely, not the ability companies to sell, and in this section the Chinese have (according to the report) done a fair job in complying here. the one sticking point has been the free importation of foreign publications

Since its accession to WTO, has gradually opened up this area, and has for the most part stayed to schedule (JV restrictions took 6 months longer than planned to be lifted). Prior to WTO, the importation of goods was restricted to SOE manufacturing and trading groups, but allowed foreign manufacturers to import for production of finished goods following ascension.

The major problem in this area is “For many U.S. companies, however, having trading right -and, in particular, the right to import – is only meaningful when coupled with the right to distribute goods in “…… and those rights were only granted in the last year or so (the report says in 2006, however I was in the office of a Fortune 500 agriculture company in mid 2005 when they physically received their license).

Distribution Rights – this topic deals with the ability of companies to freely distribute products inside , and within this area the USTR highlights direct selling as product/ service that is still “problematic”.

Overall though, the report gives credit to the fact that has stayed to schedule, and that the situation has vastly improved following MOFCOM granting provincial-level authorities the right to grant distribution licenses.

The product/ service of issue in the case of distribution is direct selling away and sales away from a fixed location. however, in the last couple weeks, Avon, Mary Kay, and Amway appear to have gained full approval, and for those following the progress, ‘s concerns of MLM were legitimate ones.

Regulation concerns were limited really to the Jan 2003 Notice on Strengthening Work for Urban Commercial Networks that could make it easier for cities to reject new outlets, but given the number of Walmarts, Nike outlets, McDonald’s, and other foreign branded outlets, these fears are to date unrealized.

the next few pages (I have decided to cut this post short), deal with:

  • Wholesaling Services and Commission Agent’s Services – Receiving 3 pages of attention, the U.S. position is that China has been slow to implement measures, introduced high barriers to entry (retails must commit 1-2M USD), and that it even granted rights to those that didn’t really need it. This area has improved, but foreign publications and auto parts are areas still of concern
  • Retailing Services – Major concern here is that cities have the right to withhold license approvals until the urban commercial network plan has been formulated. Call me crazy, but I would think retailers would want to have this plan in place to ensure their investment is not removed 3 months after renovations are completed…

Products mentioned in this section as still restricted are processed oil e.g. gasoline at retail level. however, BP and Shell both have investments in retail that are ongoing, but are not expanding due to the monopoly that is held on importing gas into China (thus, the real problem is on the trading regulation side, not the distribution).

  • Franchising Services – the primary concern here is with the ruling that a franchiser must own and operate 2 units in China for one year before being able to offer franchises in China. The report cites that this requirement will impact foreign hotels, yet with the Marriott, Super 8, Starwood, Interncontinental Group, and others having multiple properties in Shanghai alone, these concerns should again be minimal in nature
  • Sales Away From a Fixed Location – As shown above, while the report states China is behind on their commitment, this issued should be resolved with the recent news

Wrap up:
For the most part, it looks as if China currently is meeting their commitments, but that the process has experienced some delays have been deemed serious enough by the USTR to take the issue to JCCT.

The fact that the Chinese were able to work the system so that trading and distribution rights were separate items with separate timelines was a brilliant one, and the negotiators on the U.S. side were just outplayed on that.

For MLM companies like Amway, Avon, and Mary Kay, a lot of time and money has been spent convincing the central government that they are not pyramid schemes, and it appears that their efforts have recently paid off. however, even though they were restricted, each has done quite well through their new brick and mortar models.

When negotiating with the chinese, it is critical (I REPEAT CRITICAL) to understand, plan, and war game scenarios so that a realistic set of expectations is formed. Moving 1.3 billion people from the field to the city / from poverty to the middle class is the governments first priority. Not the importation of books and other foreign publications, or the ability of Starbucks to open another shop near city center.

In the eyes of those responsible for the 1.3 billion people of this country, and for most of those people on an individual basis, it is just not important, and so at times the timeline may be pushed back so that those responsible for the planning can focus on the tasks at hand

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