California Poised to Gain From Open Markets

By CHRIS KRAUL and STUART SILVERSTEIN

May 25, 2000 12 AM PT

TIMES STAFF WRITERS

From almonds to aerospace, cell phones to semiconductors, California stands to be a big long-term winner in the wake of Wednesday’s vote to normalize U.S. trade relations with China.

Analysts and business executives say the opening of the vast China market will mean more jobs and prosperity in a state uniquely positioned to gain from better trade ties. Not even California’s dockworkers’ union could bring itself to oppose the trade deal.

Technology-hungry China’s lack of communication and transportation infrastructure presents huge opportunities for companies like Qualcomm Inc., the San Diego-based wireless company, and Boeing Co., the aircraft space manufacturer that is California’s largest private employer.

And China’s voracious appetite for computers signifies a potential mother lode for manufacturers of the parts and equipment that go into making them, especially semiconductors. The chip industry is predicting that the state’s semiconductor exports to China and Hong Kong could explode to $100 billion in 2010 from $4 billion currently.

“We are growing friends in China at a phenomenal rate,” said Alex Lidow, chief executive of International Rectifier Corp. of El Segundo, a manufacturer of power management chips, whose Chinese revenues are already up 55% from a year ago.

Ports Prepare for Growth in Traffic

China’s fast-expanding middle class also means a huge and largely untapped market for the state’s high-quality foods and entertainment exports, economists said. And the ports of Los Angeles and Long Beach, the nation’s busiest commercial harbor, are investing heavily in anticipation of significantly higher levels of traffic.

Last month, for example, the Port of Los Angeles completed a $338-million landfill project that will increase its terminal space by nearly a fifth. The Port of Long Beach has budgeted about $895 million for dockside capital improvements, including conversion of a former Navy shipyard into a 375-acre cargo-container terminal.

“Nationally, there might be more pain” from job losses, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. But California is less dependent on industries that must now compete with China.

“We’re not churning out huge amounts of textiles for jeans or T-shirts. There’s only one auto manufacturing plant in California. And we really don’t have people making appliances.”

In fact, California’s ties to China help explain why the San Francisco-based International Longshore and Warehouse Union was one of the few labor groups to dissent from the national AFL-CIO’s negative stance on China trade. The core of the union’s membership consists of longshore workers who stand to benefit from increased port traffic.

But other local labor leaders, echoing the nationwide labor coalition that opposed Wednesday’s vote, said focusing on the short-term economic gains of China trade has blinded business interests to the long-term hazards.

“We have to be realistic that China has an agenda that’s not a capitalist agenda, it’s a nationalist agenda,” said Goetz Wolff, research director for the Los Angeles County Federation of Labor. He cited China’s history of human rights and labor abuses, including its use of forced labor and denying workers the right to organize into unions.

Not All Companies Happy With Vote

There are other dissonant voices, including apparel companies that provide low-wage jobs to thousands of immigrants in the Los Angeles area. Many fear the deal will hasten offshore job flight, which is already underway, to Mexico and other cheap-labor nations. Also, while most agriculture officials applauded the vote, some fresh vegetable growers say China over time could steal some Pacific Rim produce markets.

And to be sure, there will continue to be plenty of problems and risks to doing business in China, with graft at the top of the list. Moreover, it will take years for some California industries to realize the benefits, which are phased in over several years.

Although the film industry applauded the legislation, it is chafing at restrictions that still limit it to exporting to China only about 20 of the 400 movies it makes every year.

“The door still has quite a ways to open,” said Craig Parsons, senior vice president at MGM Inc. studios in Santa Monica.

But on balance, “I don’t think that there’s any question that the benefits for both sides are substantial,” said Ted Gibson, economist for the California Department of Finance.

Pace of Exports Should Accelerate

The state now exports about $2.67 billion worth of goods to China, the 11th-biggest foreign market for California-made goods, a figure that should compound quickly.

Economists say California has more to gain economically than any other state because of its high-tech profile. While Chinese tariffs overall are dropping from an average 25% to 9%, tariffs on computer chips and most high-technology goods that California specializes in will disappear altogether by 2005.

China will also eliminate a series of non-tariff barriers that have stifled investment and added costs.

China will also let U.S. companies distribute their own products in China and is dropping local content rules that up to now have required that U.S. companies include a significant percentage of Chinese components and raw materials in the finished products they sell there.

“What this means is, companies will no longer have to invest in factories or other operations in China in order to get around the high walls of protection,” said Tim Bennett, senior vice president of the Santa Clara-based American Electronics Assn. The clause could slow, if not reverse, the tide of foreign investment in Chinese factories in recent years, he said.

Along with finished technology products, such as computers, China also wants the latest equipment for producing its own semiconductors and other high-tech goods--a boon for such firms as Applied Materials, a Silicon Valley manufacturer of equipment for making computer chips.

The potential sales gains being bandied about are huge.

Industry analysts say Qualcomm could have as many as 21 million new Chinese consumers using mobile phones made with its licensed digital technology by 2004, up from 110,000 this year. Qualcomm signed a technology agreement this year with the Chinese government to set up a wireless network to compete with the state-owned monopoly.

“Chinese tele-density is very low, about 12% . . . . That suggests that mobile telephones will be a cost-effective means for increasing that figure, as opposed to wiring every home,” said Qualcomm Vice President Bill Bold.

Sizing up China, a country with no interstate highway system, Boeing sees big things ahead for its Boeing 717 short-hop commercial jets, which are made in Long Beach. The company employs 34,000 Californians.

“We see $120 billion in sales in China over the next 10 years,” said Boeing’s Tim Neale.

“We’ve been successful in China, but in recent years we’ve seen our main competitor, Airbus of Europe, make inroads, and that’s largely attributed to our political tensions with China,” Neale said. “So, moving toward normal trade relations will ease that and help us do better.”

Tariffs on Food Set to Drop Dramatically

California agricultural exports to China can only go up, since they are negligible currently, said Frederick W. Klose, acting export director at the California Department of Food and Agriculture.

Farm tariffs will shrink dramatically. The tariff on beef drops by 2004 to 12% from the current 45%; on almonds, to 10% from 30%; on plums and raisins, to 10% from 40%; on cheese, to 12% from 50%.

China opened its citrus market in March to California growers for the first time since World War II. Sunkist Growers, the Sherman Oaks-based cooperative, is predicting that China will account for one-fifth of the state’s citrus exports by 2005.

“The Chinese made it clear last year when they gave us market access that had the Congress voted down PNTR [permanent normal trade relations], all bets were off,” said Sunkist Vice President William Quarles.

But Klose warned that China will soon pose serious threats to California vegetable farmers in lucrative Asian markets like Korea and Japan.

“We have a lot of Chinese study groups who visit California every month, and it’s my impression they are here not so much to purchase products as to find out how we grow them,” Klose said.

Special correspondent Stephen Gregory contributed to this story.

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Much at Stake for California

As the largest exporting state in the nation, California has particular interest in the China trade agreement:

CALIFORNIA EXPORTS TO CHINA, 1995-1999 (in billions)

California exports to China have increased 93% since 1995.

1995: $1.4

1996: 1.9

1997: 2.3

1998: 2.5

1999: 2.7

TOP 5 EXPORTING STATES (EXPORTS WORLDWIDE) (in billions)

California: $107.4

Texas: 91.0

New York: 40.5

Washington: 40.2

Michigan: 33.5

TOP 12 CALIFORNIA EXPORT MARKETS, 1999 (in billions)

Separately, Hong Kong and mainland China ranked as California’s tenth and eleventh largest export markets in 1999, combined they would be California’s fifth largest market with more than $6.6 billion in exports:

Mexico: $ 14.9

Japan: 13.8

Canada: 13.2

South Korea: 6.7

Taiwan: 6.5

United Kingdom: 5.5

Singapore: 4.9

Germany: 4.6

Netherlands: 4.2

Hong Kong: 3.9

China (mainland): 2.7

Australia: 2.4