*EPF206 10/17/00
Text: Larson Oct. 17 Speech on U.S.-China Aviation Relations
(Urges rapid modernization of bilateral regime) (2150)

U.S.-China aviation relations should be modernized as quickly as possible, says Alan Larson, Under Secretary of State for Economic, Business and Agricultural Affairs.

Speaking at the U.S. China Aviation Symposium October 17, Larson said: "I know that some in China believe modernization of our bilateral aviation regime should come slowly and incrementally, in order to give China's weaker carriers time to adapt. It is an understandable point of view, but one that I think is mistaken. I believe China's broader economic interests, as well as the interests of its air carriers, would be far better served by a rapid and significant modernization of our aviation relationship."

According to Larson, a modernized air agreement "would allow the level of air service to grow and adapt more quickly to seize the new opportunities presented by China's WTO (World Trade Organization) accession and the expansion of the New Economy. It would also create opportunities for China's carriers to partner with American companies so that they can participate in global air networks and learn how to use information technology to modernize their operations."

The under secretary predicted that China's accession to the WTO will support "a second stage of reforms that can help China's economy move to an even higher level of performance."

He added that "It is interesting to observe that liberalized aviation relations often have followed on the heels of agreements to liberalize trade."

Following is the text of Larson's remarks:

(begin text)

U.S. China Aviation Symposium

Alan Larson, Under Secretary for
Economic, Business & Agricultural Affairs

U.S. China Aviation Relations:
Building for the Future

October 17, 2000

Good morning. I'd like to thank Senator Rockefeller, Congressman Oberstar and the American Association of Airport Executives for their vision and leadership in organizing this timely symposium. And let me also extend a very warm welcome to our guests from China, especially Minister Liu Jainfeng and my co-panelist, Director General Wang.

This is an important moment in China's economic history and in the economic relationship between China and the United States. The economic reform program led by President Jiang and Premier Zhu is bringing high levels of economic growth and a striking transformation of China's economy. China's decision to join the WTO will further push the transformation and modernization of China's economy and will establish China as a major participant and decision-maker in the international trading system.

Cooperation between the United States and China has been a central part of this story. Investments by American companies are contributing to China's economic transformation. The successful negotiations between the United States and China were the catalyst for China's drive for WTO membership. The recent action by the United States Congress to extend normal trading rights to China on a permanent basis is a powerful signal that our economic relationship has reached a new, higher level. The gradual expansion of our bilateral aviation relationship has certainly a made contribution, albeit a modest one.

Looking to the future, two factors hold potential to give a powerful, positive boost both to China's economic development and also to trade and investment between the United States and China. The first is WTO membership and the second is the New Economy. Both factors create strong incentives for the modernization of our bilateral aviation relationship.

WTO membership is likely to bring dramatic and sustained increases in trade and investment between our two countries. This will increase demand for business travel and for air cargo services. Opportunities created by WTO membership will make it more important for a growing number of cities in China to have excellent international air connections.

In the New Economy, the pulse of business beats faster. To keep the pace, businesses need to integrate the efficiencies of information and communications technology into the systems that move goods and people. This will require the establishment of aviation systems, both within and among countries, which allow aviation services to grow and adapt quickly to meet the changing needs of the market place.

I know that some in China believe modernization of our bilateral aviation regime should come slowly and incrementally, in order to give China's weaker carriers time to adapt. It is an understandable point of view, but one that I think is mistaken. I believe China's broader economic interests, as well as the interests of its air carriers, would be far better served by a rapid and significant modernization of our aviation relationship. A modernized air agreement would allow the level of air service to grow and adapt more quickly to seize the new opportunities presented by China's WTO accession and the expansion of the New Economy. It would also create opportunities for China's carriers to partner with American companies so that they can participate in global air networks and learn how to use information technology to modernize their operations.

Let me briefly elaborate on these ideas. China has achieved admirable economic success during the last two decades by reforming state-owned enterprises and making more efficient use of capital and labor in traditional manufacturing industries. China's accession to the WTO will support a second stage of reforms that can help China's economy move to an even higher level of performance.

In the future China will need to use capital, labor and information more efficiently. Economic progress will be driven forward largely by innovation, information technology and international trade and investment. As China's production moves toward higher value internationally traded products, the demand for air cargo services will rise rapidly. In addition, China's effort to stimulate economic development in its western regions will require an expansion of air services to these regions and improved service between these regions and international destinations, including the United States.

It is interesting to observe that liberalized aviation relations often have followed on the heels of agreements to liberalize trade. My country's aviation relations with both Canada and Mexico used to be highly restrictive. After the conclusion of free trade agreements between the United States and those countries, increased trade and investment flows created a powerful demand for expanded and more flexible air service. These economic realities helped governments see the value of much more open and flexible aviation relationships. I believe the same will happen in the relationship between China and the United States.

I would also encourage our friends from China to consider the contribution that leisure travel could make to the growth of China's economy and the strengthening of ties between our two countries. A study by the World Travel and Tourism Council found that travel and tourism account for ten per cent of jobs, investment and total economic activity around the world. In my country, interest in China has increased, in part because of the exchange of visits between President Clinton and President Jiang. There is considerable scope for expanding tourism between China and the United States, which of course would create jobs in China and would require expanded air services.

In short, as we consider the increasing ties between China and the United States, it is important that the air services regime between the United States and China does not become a bottleneck. A rapid expansion of business travel, air freight and leisure travel is likely to follow China's accession to the WTO and the establishment of permanent normal trading relations between our two countries. We need to be negotiating now an aviation agreement that can keep pace with our expanding economic and people-to-people ties.

The New Economy makes this task much more urgent. Electronic commerce is changing the way that business is done. Within the United States, significant increases in productivity have been achieved as businesses use information technology to manage supply chains and distribution systems. While the growth of electronic commerce transactions has been most pronounced in business to business (B2B) arena, there also has been a significant expansion of electronic commerce sales from businesses and to their retail customers (B2C). Both forms of electronic commerce are growing at astonishing rates.

Electronic commerce and the application of information technology are making a powerful impact on the aviation industry here in the United States. Products ordered electronically must be delivered quickly and reliably; air cargo and small parcel delivery companies typically provide this service. To provide this service reliably, these companies are using increasingly sophisticated information systems to track the flow of products through their systems.

In the transportation business, information increasingly is the key to adding value and increasing profits. Some analysts assert that an aviation company's computer reservation system can be worth at least as much as its airplanes. In the cargo business, some experts suggest that the only path to profitability is to use information technology to become a "logistics manager" for other businesses, effectively taking charge of the physical movements of their raw materials and products.

Certainly one key to success for an advanced economy or a profitable company is to avoid producing "commodities." By commodities, I mean undifferentiated products with slim profit margins. Because new producers who enjoy lower costs can start producing commodities using the techniques of mass production, it is hard for commodity producers to be profitable. In the future, airline companies that simply move passengers and freight without using modern information technology to add value to their services essentially will be commodity producers. It will be very difficult for such companies to be profitable.

What does all this mean for the aviation relationship between China and the United States? First, it suggests that the expansion of electronic commerce between China and the United States could be spurred if aviation companies were free to operate between our countries in the way they now do within the United States. In that way we could begin to see the New Economy producer closer "real-time" links between businesses in our two countries. Other initiatives are needed as well, including fast, efficient and professional customs services and modern, competitive telecommunications systems.

Second, this analysis suggests that the China's domestic air carriers may well be weakened, not strengthened, by delaying the modernization of our air services agreement. To be efficient today, carriers need to be linked into global trade networks. An open aviation regime that permits greater cooperation between your carriers and ours can hook Chinese into international transportation networks, increasing their global reach. Moreover, by working with American carriers, Chinese carriers can learn to apply information technology to their business. In these ways, Chinese air carriers can modernize more quickly. It is hard for me to see how Chinese carriers will grow stronger if they are cut off from the global economy and relegated to the low value, low profit commodity business of simply moving people and cargo from one place to another.

In short, I believe that a slow and incremental approach to aviation liberalization would not be consistent with China's needs. The rest of the Pacific Rim is moving ahead quickly to seize the benefits of the New Economy. China should too. In fact, the importance of the New Economy and airline liberalization will be major themes at the APEC Summit meeting that will be held this year in Brunei.

Speaking of APEC and the Pacific Rim, it also is worth noting that the bilateral aviation relationship between China and the United States lags behind the relationships we have with many of your neighbors in the region. Chinese and American carriers presently operate only 51 weekly flights between China and the United States. In contrast, American and Japanese carriers operate 370 flights between Japan and the United States each week. Cargo flights between our two countries are similarly limited; Chinese and American carriers operate only 19 weekly flights between our two countries. In fact, one third of the total traffic between the United States and China is being transported on third country carriers.

Many countries in the region have negotiated Open Skies aviation agreements with the United States. In addition, five members of APEC including the United States are negotiating a multilateral Open Skies arrangement. I hope that China might see fit to join the growing number of countries moving to Open Skies. The APEC Summit meeting next year in China could be a useful target date for the conclusion of such a negotiation.

China, of course, will decide for itself what aviation policy is most likely to its own interests. I appreciate the courtesy of our guests from China in listening to my views. I also hope that the fascinating tour our guests soon will undertake will stimulate further thoughts about how air transportation can spur China's economic development and our bilateral ties.

Of one thing I am sure. Working together, we can build for a better aviation future. Thank you.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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