The Australia-China Chamber of Commerce and Industry of New South Wales
ACCCI Business Letter No. 4
26 February 2001
Blake Dawson Waldron
Contact: Michael Lester on email@example.com
In China a representative office must employ local staff through an authorised employment agency.
The first and best known agency is the Foreign Enterprise Service Corporation (FESCO) which has offices in Beijing, Tianjin, Shanghai, Guangzhou and Shenzhen.
Shanghai has four other authorised employment agencies. They are:
· China International Intellectech Corporation (CIIC);
· China International Talent Development Centre (CITDC);
· China International Enterprise Cooperative Corporation (CIECC); and
· ChinaStar Cooperation for International and Economic and Technical Corporation (ChinaStar).
We have used CIIC.
The law does not allow a direct contractual relationship between the representative office and its local staff. The representative office enters into a service contract with the employment agency which provides the employee in return for a management fee. The employment agency then enters into an employment contract with the employee.
The normal duties and obligations imposed on an employer under the PRC, Labour Law (1993) including social insurance and welfare benefits are imposed on the employment agency. These items are usually repeated in the service contract.
There is no law governing the terms and conditions of the service contract between the representative office and the employment agency. Most employment agencies use their own model contract, which includes basic terms such as position, commencing date, term of employment, leave entitlements and salary.
Until recently representative offices could employ only those candidates recommended by the employment agency. Because the employee's salary was paid directly to the agency, there was no guarantee that the intended amount reached the employee.
Increased competition between employment agencies has brought about changes. Representative offices can now negotiate terms with the agencies or include additional terms into the service contract. Some agencies are more flexible than others. For example, most permit representative offices to select their candidates. Many, such as CIIC, also allow representative offices to pay their staff directly, without having the salary specified in the service contract.
It is possible, and not uncommon, for a representative office to enter into a supplementary contract directly with the employee. Many agencies' model contracts expressly permit direct supplementary contracts between the representative office and the employee to cover such matters as confidentiality and non-competition.
However, the legal basis for this type of contract is not clear. Some directives from the Labour Ministry indicate that such a contract would be classed as a "labour contract" and therefore subject to labour rules and regulations. Other authorities say that these types of contracts would be enforceable in accordance with the PRC, Contract Law (1999).
Contribution to social insurance and welfare benefits
All employers and employees are required to make social insurance and welfare benefits contributions. In Shanghai the relevant contributions are:
The contributions are calculated according to the employee's average monthly salary for the previous year. The employer contribution is not capped. However, the employee contribution is limited to 300 per cent of the average monthly salary of the region where the representative office or foreign enterprise is located.
Therefore, if the average monthly salary in Shanghai is RMB1,179, the maximum contribution of the employee is limited to RMB3,537. Any salary over and above this amount is not included in the calculation.
Representative offices and foreign enterprises using agencies to employ local staff have remitted a single amount for all the social insurance and welfare benefits without the need for the agency to charge the employee directly.
Until the late 1980s all foreign enterprises were required to employ their local staff through an authorised employment agency. While this rule now only applies to representative offices, many foreign enterprises continue to do so. They find it easier and less expensive if the agencies manage their employee's social insurance and welfare benefits.
Furthermore, agencies have been able to reduce the cost of social insurance and welfare benefits. Instead of using the maximum employee contribution base of 300 per cent of average monthly salary, employment agencies have been able to calculate social insurance and welfare benefits using the maximum employee contribution base of 120 to 200 per cent of average monthly salary.
This is clearly a grey area of practice which has now been partly clarified, at least in Shanghai. In early 2000 the Labour Bureau notified representative offices and foreign enterprises using employment agencies that the previous basis for calculating pension contributions would change from 200 per cent of average monthly salary to 300 per cent, unless the actual salary is less than the average monthly salary.
While the change applies only to pension
contributions and not to unemployment insurance and medical insurance, a
uniform adjustment is anticipated. This
change has led to a significant increase in local staff costs. Any cost advantages that may have existed
for foreign enterprises in using employment agencies to employ their local
staff may soon fade.
The U.S. Trade and Development Agency
Early this month ChinaOnline (www.chinaonline.com) reported that the U.S. Trade and Development Agency (TDA), an independent federal organisation that helps U.S. companies pursue business opportunities overseas, announced on 29 January that it will reopen its grant-assistance program in China.
This occurred through a national interest waver by President Clinton, lifting the 1989 sanction that had suspended the agency’s program in China after the Tiananmen incident. According to TDA, China was the “biggest customer” prior to 1989, with a total of US$24 million in grants that resulted in US$1.4 billion in U.S. exports.
This prompted the Chamber to log unto the TDA’s Internet site (www.tda.gov) to determine what that agency does to assist U.S. exporters. We think it is useful for Australia’s exporters to China to know what to expect with the “reopening”.
There are also broader issues. As many readers of this Business Letter know, the Chamber convened a roundtable discussion in November last year for the purpose of clarifying and commenting on trade and aid issues in Australia’s relations with China.
Part of the outcome of the discussion was the realisation among many of the participants that current policies are difficult to assess in relation to earlier policies or to alternative policies. We believe that knowledge of what other nations are doing is an important element in this assessment.
Accordingly, we report here some of the similarities and differences between TDA and counterpart agencies of the Australian Government. We invite comments from readers that might help in assessing current policies of the Australian Government and in suggesting alternatives.
Brief context of the U.S. Trade and Development Agency (TDA)
In 1980 the Office of Reimbursable Development Programs was removed from the U.S. Agency for International Development (AID) and became a separate unit, called Trade and Development Program (TDP), in the newly formed International Development Cooperation Agency. The latter also includes AID. In 1982, the name of TDP was changed to Trade and Development Agency when the U.S. Congress approved separate authorisation and funding for TDA. Prior to 1982 it was funded through AID appropriations.
This makes it an autonomous agency within the U.S. Government but retains links with AID and other government agencies as part of the larger agency (International Development Cooperation Agency). The director of TDA is appointed by the President of the United States.
The U.S. Omnibus Trade and Competitiveness Act of 1988 transferred all tied aid functions from AID to TDA, and effectively limited tied aid to grants to developing countries for feasibilities studies and for education and training. This ruled out the use of aid funds to support (or subsidise) exporters of products and equipment, or exporters of services that were not part of TDA’s objectives.
TDA’s contributions to U.S. exports
TDA’s Annual Report 2000 includes the statement that every tax dollar spent by TDA returned $40 to U.S. companies. How is this achieved?
The key element, according to TDA, is financial support for feasibility studies for large infrastructure projects in developing countries. Feasibility studies are defined as examinations of “the technical, legal, economic, and financial aspects of a development project in the concept stage”.
The project must benefit the “sustainable development” of the recipient country and must have a potential job-creating effect for the U.S. It must also pass an environmental test.
Projects that are initiated by developing countries include grants from TDA to cover part or all of the cost of the feasibility study, with the condition that the study is conducted by a U.S. company. This enables installation procedures and specifications for equipment to follow U.S. standards. It facilitates loans from the U.S Import-Export Bank and almost certainly makes bidding easier for U.S. suppliers. Priority is obviously given to projects for which both of these are relatively certain.
Projects that are initiated by TDA or by other government agencies require approval from the recipient country and the same conditions apply for U.S. companies to supply the required services.
Projects that are initiated by U.S. companies generally involve a “sharing” arrangement through which TDA does not fund the full cost of the feasibility study, and some or all of the grant from TDA may be returned if the bid is successful. The initial proposal includes a brief summary (2 to 3 pages) and consultation with TDA staff. This is followed by a “definitional mission” to the recipient country or by a ”desk study” before the grant is approved.
Information is not available on the proportion of projects from each of these three sources. It is nevertheless apparent in the annual report that company-initiated “sharing” arrangements are expanding.
In addition to funding for feasibility studies, TDA also sponsors conferences and reverse trade missions called "orientation visits." Both of these activities “familiarise foreign decision makers with American-made products and services, build business relationships, and encourage U.S. companies to export to developing and middle-income countries”.
A chapter in the annual report devoted to the orientation visits highlights the contributions these “reverse trade missions” made to small businesses in the U.S.
In certain regions, TDA also funds trade-related training, which enables host country project personnel to receive technical and managerial training when a U.S. firm is selected to implement a project. Technical assistance is funded by TDA in some situations where the complex demands of a given project require expertise that is unavailable from the host country.
A final contribution of TDA emerges through its trust funds at 6 multilateral development banks, including the World Bank. These funds are available for U.S. companies that conduct feasibility studies on behalf of those lending institutions. Final procurement of equipment for the project is normally open to international competitive bidding, but the basic rationale for TDA-funded studies is that “when U.S. companies compete in project development, they are likely to be selected when the contracts are awarded to supply goods and services to implement the project”.
Comparison with Australian practices
Australian Agency for International Development (AusAID) is more similar the U.S. AID prior to the separation of TDA into an autonomous unit. Austrade is more similar to the International Trade Administration of the U.S. Department of Commerce.
Specifically, AusAID’s current objectives are to advance Australia's national interest by assisting developing countries to reduce poverty and achieve sustainable development. “National interest” includes a number of considerations that are linked to the reduction of poverty and achieving sustainable development. These include benefits to Australia from increased security within the Asian region (mainly but not exclusively), as well as longer-term benefits from stronger regional economies.
Implementation of AusAID-funded development projects is carried out exclusively by companies that are registered in Australia or New Zealand. This includes feasibility studies as well as training and technical assistance.
It is generally hoped that participation in AusAID projects by Australian companies adds to the level of expertise and experience of these companies and that economic development of the recipient nations enhances their international trading capacity. However, AusAID projects are not chosen specifically for their contribution to Australian companies or for the trade enhancement benefit.
Austrade is concerned exclusively with export and investment facilitation. It has no involvement in “sustainable development” or in foreign aid policy or strategy. Austrade’s advisory service concentrates on Australian companies that are “ready to export” and provides assistance to those companies through export marketing grants.
Through its global network of offices, Austrade provides a range of “in-market services such as setting up appointments with distributors or other useful contacts, providing on-the-spot briefing on the local business culture and environment, organising interpreters and office facilities, attending meetings to help overcome language or cultural barriers, organising product launches and seminars, and preparing publicity material”.
Austrade does not support feasibility studies or training programs for overseas buyers. It organises and supports Australian participation in international trade exhibitions, but does not organise reverse trade missions.
The U.S. Trade and Development Agency therefore has no direct counterpart in Australia. Its objectives and main functions are not replicated here.
Is that gap important? We invite comments specifically about perceptions of the value to Australian businesses of the following:
Funding for feasibility studies in relation to
infrastructure projects that do not fall into the normal range of AusAID
projects. This would include grants
to foreign project sponsors on the condition that an Australian or New
Zealand company performs the feasibility study. It would also include infrastructure projects that are likely
to be considered commercially viable and eligible for normal trade finance
Funding for managerial and technical training for
host country personnel for projects using Australian equipment or services,
but which are not included in AusAID-funded projects.
· Reverse trade missions.
Stated differently: Do Australian exporters suffer a competitive disadvantage in China or elsewhere as a result of TDA’s support for U.S. exporters in the activities mentioned above?
For more information about AusAID, various reports, including the aid strategy with China, are available from their Internet site: www.ausaid.gov.au
For information about Austrade: http://www.austrade.gov.au
A brief report on the
roundtable discussion organised by the Chamber last November on Australia’s
trade and aid strategies with China can be obtain from Online Publications.
Send comments to: firstname.lastname@example.org