WAITING FOR CHINA’S WTO BOW
Byline: Kristi Ellis
WASHINGTON — Cosmetics companies are eagerly waiting for China to join the World Trade Organization so it will have to abide by those rules.
Currently, many nontariff trade barriers U.S. companies face in China are considered non-WTO compliant.
In China, U.S. cosmetics companies can be forced to pay up to $50,000 in registration and testing fees for one imported lipstick product line that could include 40 different color shades. Facing that kind of cost-prohibitive barrier, many avoid the Chinese market altogether, while others struggle for several years to break even.
Still, a market of 1.3 billion people is hard to ignore. If China is a WTO member, companies like Estee Lauder, Avon and Procter & Gamble will have the opportunity to file unfair trade practices complaints and China will have to prove why these trade barriers are necessary.
So naturally, cosmetics companies are closely monitoring Congress’s renewal of China’s permanent normal trade relations status and its entry in the World Trade Organization.
The recent U.S.-China stalemate over the spy plane incident has only heightened the anxiety levels and cast a shadow of uncertainty over how the U.S. Congress will approach trade relations down the road.
“We will continue to sell our products [to China] and China will try to liberalize its market,” said Lou Santucci, international trade vice president of the Cosmetic, Toiletry & Fragrance Association.
Santucci said he does not expect the recent tensions between the U.S. and China to have an impact on trade relations.
“We see China as a big opportunity,” said Jeanette Wagner, vice chairman of The Estee Lauder Cos., in a statement to WWD. “We are encouraged by the strides being made in China to harmonize various regulations.”
She added that she expects the issues facing cosmetics importers to be solved between the U.S., China and Europe.
A company spokeswoman said Lauder does only a small amount of business in China, primarily in prestige products.
A look at the U.S. Trade Representative Office’s “Foreign Trade Barriers Report” released two weeks ago reveals that liberalization in China will take a lot of work, as well as major changes in current governmental rules.
China forces cosmetics companies to undergo duplicative and expensive quality and safety inspection procedures, while testing evaluates conformity to standards that are often unknown or unavailable to foreign companies, according to the USTR report, which did not include apparel and textiles. Furthermore, the assessment and registration process on a single product can take as a long as a year to complete.
“They discriminate between importers and domestic producers in terms of quality and quantity,” said Santucci.
For example, Chinese ministries usually require sensitive information, such as manufacturing flow charts, which places a burden on importers. Santucci said Chinese officials require importers to submit 13 copies of each document. For a company with 40 stockkeeping units, it could require anywhere from 5,000 to 12,000 pages, he added.
“We have been working with the European Union on lowering the nontariff barriers,” said Santucci. “We have been anticipating minor adjustments, but the question is whether any of the ministries will give up power.”
Avon Products Inc., which is a domestic producer in China, has fought trade barriers there for several years.
In 1998, the Chinese government banned direct selling, a mainstay of Avon’s business in the U.S. and abroad, and forced the company into a spiral from which it is just starting to recover, according to a company spokesman. Avon restructured its operations in China, shifting from independent sales reps to franchise beauty boutiques.
“They [Chinese officials] were concerned about smaller companies engaged in unethical practices so we had to refashion our business into a retail model,” he said. “We expect that ban to be lifted in the next several years.”
Avon currently operates 2,500 such boutiques and plans to add another 1,000 franchises this year, the spokesman said. Avon also has 1,000 beauty counters in Chinese department stores.
The company also became profitable in 2000, following three years of losses. Avon’s business in China rose 44 percent last year to $71 million, according to the spokesman. “We expect to more than double our volume there to over $150 million by 2003,” he added.
Procter & Gamble has been in China for 13 years and produces most of its product lines, from bar soaps to cosmetics in the country, according to a company spokesman.
He said the company faces trade barriers in the form of testing and registration fees on raw materials it imports, as well as some finished products. In addition to the punitive tariffs — as high as 40 percent on imported cosmetics — more than one ministry requires registration and duplicative testing, which is costly.
P&G produces most of its Oil of Olay products in China, though a few are imported from the U.S. Its entire Max Factor line is imported, as well.
“There has been a move in anticipation of China entering the WTO toward that being a major driver for reducing tariffs,” the spokesman said. “There are also efforts to change regulations and testing requirements, which is also linked to the WTO.”
P&G’s business in China is approaching just under $1 billion, he noted.
“We support China entering the WTO because we want the laws to change to get on an even footing,” the spokesman added.