Vermont Cynic

Issue date: 4/4/06 Section: Business and Economics

Early last year, as part of its obligations as a World Trade Organization member, China lifted rules that required foreign retailers to form joint ventures with local partners, prompting a flood of chain stores. Italian Spanish retailer Inditex SA, which runs the Zara chain, will open its first store in mainland China this week. Spain's Mango group, Japan's Fast Retailing Co.'s Uniqlo and Italian jean maker Diesel SpA. U.S.-based Gap Inc., which recently signed its first franchise agreement with a Singapore-based distributor, is also said to be looking at the China market.

Previously, most foreign companies with stores in China were luxury suppliers like Louis Vuitton, and Prada Group NV. Since the luxury brands enjoy higher profit margins on each product, the companies were therefore more willing to share profits with local investors and invest in the relatively expensive task of building brand awareness.

Analysts predict that China's casual-wear retail sector-the segment Inditex's Zara is entering-will grow to 468 billion yuan (approximately $58 billion) by 2010, with 10% annual growth rates. Zara has noted that while they currently manufacture 50% of their products in Europe and 12% in China, that proportion could easily change as their Asian presence grows.

China's decision to open its borders to foreign companies has several implications for its domestic conditions. China will benefit from the onset of foreign companies because products sold in China will provide taxes payable to the Chinese government. Additionally, the employees working in the companies will most likely be Chinese citizens. Increased employment has positive implications for both consumption and aggregate welfare. Further, as Zara noted, there is a higher probability that once these companies thrive in China, they will move manufacturing facilities to the nation. This has the potential for even more jobs.

China's decision to make trade and commerce easier for foreign companies might be returned in kind, enabling Chinese companies to ease into foreign markets.

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