Statement of Frederick W. Smith, President,
Chairman and Chief Executive Officer, FDX Corporaiton, Memphis Tennessee

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on United States-China Trade Relations and the
Possible Accession of China to the World Trade Organization

June 8, 1999

Mr. Chairman and Members of the Committee, I am pleased and honored to have the opportunity to speak before you today on China's accession to the WTO. I can think of no single issue of greater importance to the long-term health and viability of the world trading system. The direct and indirect implications for American business and the America economy are profound.

At the outset, let me state that the position of Federal Express is unequivocal. FedEx supports China's accession to the WTO and, with it, the extension of permanent Normal Trade Relations (NTR) rights by the United States to China -- just as we have with every other major trading partner. Simply put, China's accession to the WTO will move China's economy toward integration with the global economy, and this is good for American business. I have conveyed this view to Ambassador Barshefsky, whom I want to commend for having done an outstanding job in concluding this agreement.

I am particularly encouraged at the liberalization scheduled for the distribution field. With China's WTO accession, FedEx will be able to sell our services directly in the market place in four years, instead of leaving it to agents. Whether we choose to exercise that right, would depend of course on market conditions. But that's the point, isn't it? With China integrated into the WTO, our decisions on how to operate in China would be based on commercial considerations, not determined by government fiat.

Let me try to describe my perspective on the question of China's WTO accession by briefly relating the role of the air express industry to trade facilitation; outlining the obstacles we face now in China; and assessing how WTO accession affects our situation.

Even within our own country many do not realize the rapidly changing nature of world trade and the increasingly critical role of integrated air express. At present almost 40 percent of the value of all world trade goes by air. Representing only some two percent of the tonnage of trade, air shipments clearly account for the high value end of production.

Today's trends in e-commerce and just-in-time logistics underlie the phenomenal expansion of the integrated air express industry and reinforce growing requirements for fast, time-definite transportation of cargo from door-to-door. Air express is both a cause of, and a response to, the changing nature of competition in international markets. The ability to ship packages to destinations around the world in only hours or days widens the field of competition in all industries and accelerates the pace of commerce.

No country can expect to operate a modern economy of be at the forefront of trade in the 21^st century without a strong air express service. China is no exception. At present, outside of WTO discipline, China is a hodgepodge of regulatory barriers to efficient air express service. Let me cite a few.

Currently, foreign-owned companies are not allowed to conduct customs brokerage and clearance, ground transportation, warehousing, consolidation, forwarding, or related services. These functions, which lie at the heart of an integrated air express carrier's operations, all have to be conducted through joint ventures or agents and this means that the foreign integrated carrier loses control of the process. For a company like FedEx, the lose of control over these functions, jeopardize our ability to guarantee time-definite service, the essence of our products.

Joint venture regulations raise further disincentives. We are prohibited from taking a majority share of a joint venture and are limited geographically in where and how fast we can expand joint venture operations. As a non-majority partner, we do not control the sales force, must negotiate investment decisions and have no guarantee that introduction of new technology will yield optimum returns.

There may be good reasons to have an agent of JV partner for some functions in the distribution chain, but the decision should rest on commercial interest not regulatory restrictions. The net result of these artificial barriers is increased prices for our customers, lower quality of service and limits on growth -- for the integrated express carrier and the Chinese economy.

How does China's WTO accession affect this? Simply put, the restrictions I have noted above in the distribution field would be removed within four years. FedEx would be able to set up wholly-owned subsidiaries and, for the first time have the opportunity to provide the same standard of service to customers in China that we do in the United States and elsewhere in the world.

Of course, some will say that the Chinese may not keep their commitments. But, at least, if China were a WTO member, it would have to justify its actions before that body. The more a part of the system China becomes, the more the outside factors influence its behavior. In other words, the costs of non-compliant behavior go up. That is no guarantee of implementation, but it is an important, even critical, step in creating a more open, user-friendly economic environment in China. At present, if we encounter problems, there is no recourse to any system other than the homegrown variety. I prefer to take my chances in the more transparent WTO environment.

Finally, let's consider the alternative: a world trading system which excludes China. Does a China less subject to the discipline of the World Trade Organization transform itself more or less quickly into a responsible member of the world community? Does more or less contact with China influence it in a positive direction? Does attempting to isolate China from the responsibilities of WTO membership advance anyone's interest but those who oppose reform and a more modern, open China?

I think the answers to these questions are self-evident. Few would dispute that China has changed for the better in the past twenty years and that the lives of individual Chinese have improved. Livelihood, freedom of choice and, gradually, even human rights have become better not than at any time in modern Chinese history. The trend toward openness and reform is in the right direction, and American business has been a positive force for change.

I believe the continuation of this trend is in the interest of everyone and that China's accession to the World Trade Organization and the establishment by the United States of permanent, normal bilateral trading relations with China is fundamental to its achievement.

Thank you.