China could offer a growing market for U.S. wood exports.

For the U.S. forest products industry, China's time may be coming - again. After years of decline - from a peak of $448 million in 1988 to a low of $28 million in 1995 - U.S. wood product exports rose more than 20 percent in 1996 to $34 million.

The composition of U.S. wood exports to China

has changed dramatically over the years. Most of the decline came from falling sales of softwood logs (which made up 98 percent of U.S. exports in 1988) caused by competition from other exporters and China's trade policy regime. Most of the recent growth has stemmed from vigorous sales of hardwood logs, lumber and veneer.

Softwood logs accounted for $13.2 million (just 23 percent) of U.S. exports in 1996, and stiff competition from New Zealand will likely constrain future sales. Hardwood logs and lumber made up $8.3 million of U.S. exports in January-September 1996, up over 50 percent from the same period a year earlier.

China's forest resources have come under increasing pressure as the country's economy develops and its population expands. Mature stands of timber are growing scarce: forests cover only 330.4 million acres (13.9 percent) of China's land area.

The country's economy has averaged 13 percent annual growth since the late 1980's, which has helped generate an increasing - and increasingly prosperous - middle class. Thanks to its beauty, versatility and workability, wood tends to be preferred for upgrading home and business interiors.

Product Prospects Surge

The market for lumber, paneling, furniture and other products continues to expand, spurred by rising consumer demand for higher-quality housing and better furniture, and renovations of business and tourist facilities. While most of the growth has been concentrated in coastal provinces, demand also is climbing in other regions.

The interior decoration market will likely grow rapidly because rising personal incomes have given consumers the means to improve their homes with wood products. Although sales of higher-cost woods like ash, maple, cherry and oak will eventually expand, incomes must increase sharply to bring these choices within the reach of most Chinese consumers.

Chinese prefer hardwood furniture because of its handsomeness and durability; about a third of China's total wood use goes for furniture production. But even relatively well-off Chinese still buy laminated furniture built around particleboard because of its ready availability and low cost. Furniture tastes vary between generations: younger people like modern designs, while older ones prefer traditional pieces.

Panel product imports are used in construction and furniture. Panel products are used in making furniture (including cabinetry for stereos and TV's) and interiors (mainly walls and floors).

The market for wood products for structural applications remains relatively weak because of the effects of China's wood substitution policy, which encouraged use of materials such as concrete, metal and plastic. Window frames and doors are just two examples of products once made of wood and now constructed of other materials.

On the other hand, wood housing, often favored by expatriates, could provide a market niche for 2-by-4 lumber.

Bowling alleys could create an important market for U.S. wood; it's estimated that 3,000 bowling lanes are under construction in Shanghai alone.

Market Outlets Boost Sales

One-stop shopping for the home and do-it-yourself projects have come to China, further fueling demand for wood products. In 1996, Home Way, a store modeled after Home Depot, opened its doors in Tianjin. The company plans to build a chain of stores across China.

Ten large cities now have "furniture cities" - areas full of stores with furniture and other merchandise spread over a colossal 10,000 square meters of floor space. More such outlets are planned in coming years.

Some Hurdles Remain

A number of factors limit China's market for U.S. wood products. Chinese importers note that U.S. products generally cost more than either domestic items or imports from Southeast Asia and Africa, which has led to widespread use of products from these regions in flooring, paneling and furniture.

Confusion surrounds the issue of whether China's wood quotas continue to restrict trade. Some trade and government representatives believe that quotas have been lifted; others maintain that quotas have been set so high that they no longer impede trade.

China continues to limit the right to import wood products to licensed firms, although several factors alleviate the full force of this restriction. Reportedly, many joint ventures and Taiwan sole proprietorships import products for resale in China, and some Chinese companies with licenses import products for other firms. Nevertheless, in regions lacking a strong commercial infrastructure, import license requirements can effectively bar imports, particularly in the minor markets of the interior provinces.

China has many middlemen in its distribution system, and each charges 12-15 percent of the product price for reselling. Markups can add 50 percent to the import price.

Although China implemented lower duties for 1996, nominal duties remain high for value-added products. In practice, however, the actual duties charged vary greatly. Some joint ventures receive tariff waivers, and in some areas Chinese firms that re-export processed products can import at roughly half the normal duty.

Further complicating the export equation, China applies its value-added tax inconsistently. In some regions, the rate does not change, but the tax is charged at different points in the distribution system. In other places, the rates differ for imports and domestic products: imports may be taxed at 17 percent, while similar domestic items get a rate of only 6 percent.

A Few Words to the Wise

Even for veteran exporters, China's wood market presents daunting challenges. Cracking this market requires the assiduous development of long-term relationships with importers, buyers and wholesalers. But for the patient, astute and experienced exporter, it also holds huge promise.

Major ports for wood exports to China are Shanghai, Guangzhou, Hong Kong and Tianjin. With its low trade barriers and knowledgeable importers, Hong Kong offers a viable alternative for entering the Chinese market.

Chinese importers explain that, for U.S. companies to succeed, they should maintain stocked warehouses of competitive products to enable them to fill orders quickly. They also need to locally and actively promote their products, and locate and train local buyers. Finally, U.S. exporters must study the Chinese market to better adapt their merchandise to customer demand.

Eric Trachtenberg is an agricultural economist with FAS' Forest and Fisheries Products Division; Tel.: (202) 720-3248, Fax.: (202) 720-8461, e-mail: trachtenberg@fas.usda.gov