JANUARY 6-12, 2006 VOL. 26, NO. 37 In 2006: Seize economic opportunities with China Washington can justly claim a unique relationship with China that is quite different from many other regions in the country. China is Washington’s third largest trading partner and its fastest growing. Tradition and geography have helped this state build deep economic ties with the world’s most populated country. Many of our largest companies - Boeing, Microsoft, Starbucks, Weyerhaeuser and Costco to name a few - view China as an important and growing market. I believe 2006 will see increasing economic ties between Washington and China in both traditional and emerging markets areas. That being said, any responsible prediction on possibilities of economic relationships in Asia must acknowledge negative political undercurrents toward China at the national level. When CNOOC Ltd., one of China’s three largest energy firms, made an unsolicited bid for Unocal Corp. in June 2005, it sent shock waves through Congress. In many parts of the United States, China is viewed as a predatory country seeking to control markets and undercut major U.S. industries. Given our complex national relationship with China, it is critical that our local government leaders push forward on initiatives beneficial to the state’s economic opportunities. When calls for trade restrictions are floated, our leaders must highlight that we too are part of the national picture and those restrictions will hurt our economy. Gov. Gregoire’s recent visit to China should be encouraging to local businesses. The trip sent a message to local companies that they should be exploring the opportunities China offers both abroad and at home. Official involvement is still paramount to Chinese trade relationships and the state’s leadership is paving the way for more trade with Chinese industry. I expect our political leaders will push for fewer restrictions in the new year, in an effort to deepen our relationships with China. While Washington’s trade with China may be affected by Congress, our comparative and competitive advantages still mean the outlook for business in China is appealing for Puget Sound companies. Obviously, the aerospace industry continues to be a major export for our state. This long-standing industry makes up close to 70 percent of Washington’s exports to China. Boeing believes China will be one of its largest markets over the next two decades. We can expect that this market will continue to grow, along with other traditional markets such as lumber and agriculture. One agriculture market to keep an eye on is our state’s wine industry. Local winemakers believe that China presents an enormous opportunity. With its growing middle class, China has become a major market, with Washington wines INTERNATIONAL STRATEGY David Tang sold to restaurants, hotels and wine specialty retailers in Beijing, Shanghai and other major cities. The ports of Seattle and Tacoma enjoyed record years in container traffic in 2005 and there is no indication that this activity will decline over the next year. Currently, China is the largest trade partner for the Port of Seattle and the second largest for the Port of Tacoma. The challenge to growing port business is our transportation infrastructure. We can easily move the containers to the docks, but we need to improve infrastructure to move goods out of our region to markets across the continent. Expect growing legislative calls for rail, road and airport capacity improvements in the next legislative session. With strong sales projected at large importers like Costco and Supervalu, the region will continue to be a major player in retail imports. Major import products are currently dominated by consumer goods, but look for growth in electronics, white goods like refrigerators, and high-definition televisions. Many of these products will be branded with well-known names, but will be produced in China. Many U.S. businesses are looking to open factories in China either as owners or as partners in existing plants. This will continue. Recent headlines of environmental disasters in China, including the poisoning of the Songhua River and a major mine accident, showcase the abundant environmental problems of the country. As China continues its rise as a country of consequence, it understands that media reports about such disasters negatively impact business, trust and prosperity. Expect China to start investing in environmental industries. This is good news for Washington state, where we have a strong environmental industry in both technology development and consulting to bring China up to global environmental standards. This will be a growth area next year and in the future. Concerns about piracy and intellectual property continue to make headlines but as China’s own intellectual property-based industries grow, outside pressure for protection will be joined by homegrown force and the incentive for protections will increase. Growth in Chinese Internet usage will provide opportunities for Western Washington software and hardware developers and e-commerce businesses. We can expect to see both e-commerce and research and development exchanges between local business and Chinese counterparts continue to improve along with better intellectual property protection. Right now, enforcement of current laws, not policy development, is the key. China is also a strategic partner with the capability to invest here in the United States. China itself attracted approximately $55 billion in inbound foreign direct investment (FDI) in 2005 and shows no signs of dampening in the upcoming year. On the flip side, even though Chinese companies may hesitate to make high-profile investments, like the proposed Unocal deal, smaller merger and acquisition transactions continue. American business benefits not only from the inflow of money the acquisitions bring but also the distribution systems that can come along with the deal. In the New Year, expect Chinese companies to look for partnerships or buyout targets with strong distribution systems that can support the flow and sales of Chinese goods. Beyond low-cost manufacturing, China also has a strong intellectual capital base, particularly in the life sciences and biotechnology industries. Over the past year, Washington has increased investment in these industries as a way to create a life sciences research industry that will benefit this region. Recent research collaborations between Chinese research teams and the Fred Hutchinson Cancer Research Center and the University of Washington are benefiting the state. This trend will continue. The results of these collaborations will be new technologies, new treatments and new pharmaceuticals. Each of these products represents economic opportunity. It’s good to be unique. Where others may see danger in opening the door to China, we see opportunity in Washington state. China is emerging as a powerful player in the world economy and will likely not be isolated by restrictions as some advocate. We should continue to believe in economic relationships as the true mover of reform on other fronts. Our challenge in the New Year must be to demonstrate to our national audiences how economic opportunities that benefit Washington ultimately benefit our entire country. DAVID TANG is a partner at Preston Gates & Ellis and the architect of the firm’s Asia strategy. He also was recently named chairman of the San Francisco Federal Reserve Bank. Reprinted for web use with permission from the Puget Sound Business Journal. ©2006, all rights reserved. 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