I. Identification

1. The Issue

Alcohol has long played an important role in Chinese lives. Some scholars even believe that alcohol production has been a part of China's civilization for over 7,000 years. Baijiu a very high grain and clear alcohol remains one of the most popular drinks in China. It is frequently used during family celebrations, business negotiations, and Chinese holidays such as New Year's. This "white brew" can be made of a variety of sources including sorghum beans, rice, corn, barley, wheat, oak and even peas. What makes Baijiu also unique is that it's alcoholic strength can vary between 55% and 65%.

This highly potent and distinctive smelling alcohol, is a dynastic treasure among China's population. Frequently hailed as THE national drink, this clear spirit is inevitably brought to your lunch or dinner table whenever business is conducted, at family functions, and any time a foreigner is a guest. Served in tiny shot glasses, the drink many times can seem harmless yet upon imbibing it, odds are you'll change your mind. Considering it's rude to turn down an offering in Chinese culture, one must be prepared to deal with this hospitality. While more and more women are drinking alcoholic beverages in China, including beer and foreign alcohols, it remains somewhat looked down upon when a woman indulges in a drink of baijiu. Just like the business world, Baijiu remains outside of the reach of Chinese women.

History: At the time that ancestors of Chinese people started living in communities along the Yellow River valley, the plantation of various kinds of grain laid the foundation for making wines and alcohol. Some scholars believe that the technique of making Chinese liquor originated in the Xia Dynasty (c.2100 BC-c.1600 BC). Historical records list Yi Di and Du Kang as the founding fathers ofmaking liquor professionally. According to historical records, Yi Di made great efforts to make mellow wine with fermented glutinous rice. Du Kang, living in the Xia Dyanasty, is credited with making top-notch liquor with Chinese sorghum beans. As the story goes, "According to historical legends, Du Kang stored some cooked Chinese sorghum seeds inside a hollow tree stump on a winter day. In the spring of the following year, a fragrant aroma wafted from the tree stump into the nostrils of Du Kang. Afterwards, Du Kang found that it was the fermented sorghum seeds which gave off the alluring fragrance." This accidental discovery gave rise to his inspiration of making liquor with fermented sorghum seeds.

Traditions: In traditional Chinese culture, the point of drinking is not to get drunk. Unlike some Western cultures, getting drunk is actually looked down upon and moderation is always encouraged. While moderation is frequently, alcohol does remain a huge part of Chinese culture. For example, alcohol has mainly been a beverage used in ceremonial rites. A number of the following ceremonies used alcohol to celebrate passages in life. In ancient times, alcohol was frequently used in Sacrifice ceremonies used to show respect to ancestors and gods. Another traditional toast is the Warrior foy where the Chinese usually toast for their warriors' victory before their departure. Baijiu is also used in the military's Triumph celebration after every victory. At a community level baijiu appears at many family celebrations and banquets to toast the state and business matters. Baijiu is also traditionally set out for Chinese holidays. The Chinese New Year's, the Spring Festival, the Lantern Festival, and the Dragon Boat Festival all include baijiu in its festivities.

One ancient tradition involving baijiu revolves around the birth of a daughter. In ancient times, family members would set out to make Shaoxing wine with rice shortly after a girl was born. They would place the well-prepared wine into bottles, and cover them with soil underground. Then, they would not touch them again until the girl grew up and was ready to be married. Only before the wedding ceremony, did the girl's family members unearth the bottles. During the wedding ceremony, the bride's family members would entertain all the guests with this alcohol.

Historically, baijiu has also been used to celebrate military victories and holidays such as Military Day on August 1st. There is even a story where alcohol is used as a military tool. The story goes that the city of Shaoxing belonged to Yue State at that time. Before launching attacks on other states, the kings of Yue state would pour yellow rice wine (a type of baijiu) into the river. The kings' soldiers then vied with each other to drink the wine by jumping into the river. They believed that the wine played a key role in boosting military morale.

Games: Drinking games known as Jiuling, were added as entertainment to ceremonial rites and holidays. Jiuling is a unique part of Chinese culture which in many ways actually works to lessen overdrinking. Jiuling has many forms, depending on the drinker's social status, literacy status and interests. Yet it can be classified into three categories - general game, contest game and literal game. The general game can involve waging drinks based on joke telling, playing hand games/finger guessing or riddeling or other diversions. Contest games usually involve betting a drink on the basis of another game such as archery, or chess or dice throwing. Finally the literal game, favored among the educated population involves guessing literary works or poems.

What makes this case unusual, just like all other cases from China is the restructuring that China is going through. This restructuring will severely impact domestic vendors. While many merchants and hotels will be pleased at offering Western products through importation, many domestic producers are actually worried about this. Vice versa these same producers are itching to export their products abroad. China will have to do a balancing act between protecting its companies and also allowing for foreign investment. China has continuously tried to avoid any sort of market regulations and now they have to enact and more importantly ENFORCE regulations domestically due to WTO norms.

Key Issues:
• Importation of Foreign Alcohol
• Exportation of Baijiu alcohol
• Chinese culture
• Environmental problems in China
• Work conditions in China
• The alcohol industry
• Legal aspects

3. Related Cases: http://www.american.edu/TED/

Alcohol Related Cases: Bacardi, Tequilia, Grappa, Pisco, German Beer, Kentucky Bourban, Tennessee Whisky, Canadian Whisky, Mezcal, Smirnoff, Polish Vodka, Weiss Bier, Beercan

China Cases: Adoption , Jade, Chinese Toys, Three Gorges Dam, Asianflu ,U.S. China Rhino & Tiger Dispute, China & Coal, Spratly Islands Dispute , Daya Bay Nuclear Power Dispute , Amway in China, Crawfish

4. Author and Date: Diana E. Alonzo November 11, 2003

II. Legal Clusters

5. Discourse and Status: Allegation & In Progress

The U.S. right now has a trade deficit of over $117 billion with China. As recently as this week, the U.S. has criticized China because of this trade surplus and a number of other economic issues. While China has taken some steps to ease the mounting pressure, they remain at odds with many countries over the rate of their liberalization program. With the threat of trade sanctions at their door, China’s responsibility towards domestic companies including the alcohol industry weighs heavily in their minds. The legal aspects of the baijiu case will provide an interesting analysis on China’s changing economic program.

I imagine China’s protectionism is an effort to keep control of their economic situation and their political stability. Along with stability, the PRC are also acting to ensure that their companies get the most out of the market. The Chinese want to ensure that their industries continue to earn more and more as they enter the free market. Baijiu remains only a possible geographic indicator, yet based on past cases like Japan's Rice Wine, it may be able to gain protection under the WTO in the future.

6. Forum and Scope: WTO & Multilateral

When China entered the WTO on December 31, 2001, they agreed to settle their trade disputes within the WTO settlement process. China has already taken the U.S. to court on the issue of steel production, yet so far there has not been any legal action taken against China. Yet this could clearly change. Earlier this month, the U.S. was threatening sanctions against China for not complying with the regulations set out at the WTO.

Already in 2002, tariffs are 34.4% for wine in containers less than 2 litres, and 38% for bulk wine. In 2004, tariffs will be reduced to 14% for baijiu in containers less than 2 litres and 20% for bulk wine. With reducing regulations, costs and import barriers, an increasing number of baijiu distributors and brands will enter the export market. Baijiu makers will face tougher competition as increased foreign alcohol brands enter the market and sell at lower prices. As Chinese consumers have an increased selection of alcohol, price, value and quality will become increasingly important.

7. Decision Breadth: 1 (Unilateral)

• Copy right laws & Counterfeit products: When Commerce Secretary Donald Evans visited with Premier Wen Jiabao in China, he arrived with a gift. A DVD of an American movie purchased for only $1.00. Piracy remains a Big problem in China and the Chinese have taken very little action in stopping it. Copyright laws certainly are an issue that the U.S. and other nations would want China to resolve as soon as possible.

• Protectionism/Removal of Barriers: According to a Washington Post article this week, many U.S. Representatives are angry that China continues to prevent many U.S. products from entering into the Chinese markets. Following the meeting mentioned above, Commerce Secretary Evans told reporters that “he had pressed Chinese officials for swifter removal of barriers to free trade”. In comparison the U.S, the world's largest consumer market, last year bought one-fourth of China's exports.” China has agreed to quiet domestic calls for protectionism and start increasing its American imports with a $103 billion dollar purchase of U.S. goods. While the Chinese have agreed to eliminate the trade surplus they have with the U.S., it remains to be seen if the Chinese will open up their markets to other nations.

With regards to Baijiu, China appears to slowly be removing barriers in the importation of alcohol. For example before entering the WTO, China equalized tax treatment for both Chinese and overseas companies. In the case of baijiu this equalization allowed China to change the method of calculating taxable prices of tobacco and alcohol products. This allowed China to eliminate loopholes and gain entrance into the WTO.

While Baijiu production is a powerful force, there are difficulties it could face with competition. As stated below baijiu is the Chinese term for a high grain clear alcohol produced throughout the country, yet it is not unique to China. Many other nations including Japan and Taiwan produce similar products. In Japan this alcohol is known as rice wine which has been produced for centuries just like Baijiu. This similarity could lead to future problems involving trademark. So far there have been no complaints filed on this yet it is possible in the future. A possibly similar case is where Mexico wanted Tequila to only be produced in Mexico. While Mexico won this judgement it remains to be seen if China will face the same problem with Baijiu.

Baijiu could also face the similar problem that Chinese beer is experiencing right now. Japan has been heavily competing with domestic brewers in its beer sales. While beer production in China remains diffuse with countless beer brands, Japan's brewers are more centralized and have the capability, money and patience to enter the Chinese markets. As China removes trade barriers on alcohol and beer, they have legitimate concerns with other nations. For example, Japan and Korea have already taken actions to protect their own liquours.

8. Legal Standing: LAW

As for the case of baijiu, so far there appears to be no disputes going right now on it. There have been other notable liquor industry cases involving Chile, Japan, Mexico and Korea. But, baijiu does not appear to be a forthcoming dispute issue.

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: Asia

b. Geographic Site: East Asia

c. Geographic Impact: China

While Baijiu Production remains primarily in the provinces of Sichuan, Guangdong, Guizhou, Anhui, and Hebei, many more minor distilleries can be found in all parts of China.

10. Sub-National Factors:

11. Type of Habitat: Temperate

IV. Trade Clusters

12. Type of Measure: Intellectual Property

13. Direct v. Indirect Impacts: Direct

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: No

b. Indirectly Related to Product: Yes, Baijiu

c. Not Related to Product: No

d. Related to Process: Yes, Culture

15. Trade Product Identification: Alcohol/Beverage Industry

16. Economic Data

Importation: The importation of products closely related to Baijiu in China has steadily increased in the past few years. According to a recent study since 1999, imports of beverages and tobacco have steadily increased. By gaining entry into the WTO, it is expected that China will open up its markets after making such a widespread financial commitment. The level of importation will increase as China starts removing trade barriers. While many domestic alcohol producers will undoubtedly be angered at this increase in competition, they are looking forward to exporting their goods.

In 2001, China consumed 115, 000 metric tons of foreign alcohol and wine. In the future because of fierce competition from Chinese companies, the demand for foreign alcohol and wine will grow at a slow rate. In 2006, the total demand for foreign alcohol and wine will increase to 143, 000 metric tons, growing by 4.5%.

Exportation: With regards to exportation of beverages, the export percentage had been decreasing as of late 2000. But afterwards the percentage rebounded and has been steadily increasing every year since. As exportation becomes more viable, rates will continue to increase. Exportation of baijiu is evident around the world. According to China Business Review “Traditional rice, fruit, and medicinal Chinese-style wines are being exported to Europe, Southeast Asia, and the United States, while drier Western-style wines produced by wineries such as Great Wall and Dynasty are beginning to appear on store shelves in Chinatowns in the United States and Europe.” Exportation has already begun but remains low.

Because Chinese alcohol and wine remains largely popular among the Chinese, China exports very little so far. Yet with the expansion of the markets domestic producers are looking forward to higher exportation rates. According to the Gale Group Report on Chinese alcohol and wine, the government is expecting exports to increase to 21,500 metric tons, growing by 2.7% annually by the year 2006.

Conclusions: Both exports and imports are expected to increase as China begins to conform to WTO rules. Yet this is not without some According to Asiainfo China Daily News, it is believed that the impact of China's WTO entry, would lead the prices of beer and wine to drop slightly. Asiainfo also feels that the raw materials needed to produce alcohol would be acquired internationally as opposed to domestically. Despite the minor setback of the SARS outbreak in the summer of 2003, the economy has appeared to have recovered. The increase may be due to younger and wealthier sectors of the population.

Impact on Baijiu: With the information above, one can conclude that the Bajiu market is in for a tumultuous couple of years. While domestic producers have much to look forward to, they also are faced with many concerns. Baijiu not only will have to compete with international versions of its products but it will also have to tackle competition from different types of liquor. Undoubtedly, the baijiu market alone within China is likely to decrease especially as the market centralizes to specific brands. But on the other hand producers will also have the advantage of being able to export their product to the Chinese Disapora, globally.

Quota, tariff, import bans: The biggest item to affect China’s beverage industry is really the entry to the WTO. China will now have to remove any import bans or tariffs they may have placed on international products. China’s assurances will lead to a huge influx of international products that may lead to problems with domestic brewers.

According to China Business Review “And tariffs on most lines of imported beer, wine, liquor, and tobacco remain in the 60%-70% range.” Removing these high tariffs will lead to a tumultuous market. According to the WTO, China will have to implement anti-free trade economic policies and also eliminate privileges enjoying by domestic firms dealing in chemical products, cigarettes and alcohol. China must also cut 8-10% on 150 leading European exporting spirits. A possible threat to the sale of Baijiu is the increasing sales of grape based wine. While grape wine is enjoyed all over the world, it remains missing in Chinese markets. Yet as China has opened its market, there has been a steady increase in demand for grape wine. A leading Baijiu producer Maotai has already started producing standardized quality grape wine. Fearing the impact of the WTO, Maotai and other companies want to get a jump ahead of international competitors for the grape wine consumers.

17. Impact of Trade Restriction: Medium

18. Industry Sector: Alcohol & Beverage Industry

Jobs: With a projected increase in exports after entering the WTO, jobs will certainly be increasing within the alcohol industry. According to a January 2003 report by the Gale Group, by 2006 total alcohol production will reach 4.5 million metric tons growing 6.2% annually. This will certainly provide many people with job opportunities both as factory workers and as farmers.

19. Exporters and Importers:

China Profile EXPORTS					(U.S. $ M; fob)
Years	1997	1998	1999	2000	2001
Beverages & Tobacco	1,049	975	771	745	874

Source: National Bureau of Statistics, China Statistical Yearbook 2002.

Source: National Bureau of Statistics, China Statistical Yearbook 2002.

The above statistics highlight the rates at which Alcohol has been projected in total amount for exportation and importation. The amounts reflect U.S. dollar value.

Main Exporting Companies: Maotai, Wuliangye, Luzhou, Laojiao, Jiannanchun, Quanxing, Gujing, Gongjiu, Tuopai, Xinghuachun, Xiangquan, Great Wall, Dynasty, Great Dragon, Changyu/Zhangyu, Zhujiang, Kongfu, Guizhou, Guzhenggong, Guangxi Hongri

Examples of production amounts:

Maotai: A major exporter of Baijiu, Maotai exports are expected to increase to 4,500 metric tons, growing by 3.5% annually.

Wuliangye: The most famous brand of Chinese alcohol for a long time, they are expected to increase to 238 million metric tons by the year 2006. It is forecast that their exports will rise to 5, 000 metric tons by the year 2006, growing by 4%.

Great Wall: Great Wall remains one of the most popular producers in China. It is Forecast that this company will increase production to 66,000 metric tons by the year 2006, growing 9.5% per annum, by 2011, the number will reach 96,000.

Dynasty: This highly popular brand is expected to produce 55,000 metric tons in 2006, increasing by 10.1%.

 

Exporting to: U.S., Germany, Spain, Singapore, Malaysia, Holland, Belgium, Korea, Thailand

Main Importing Items: Vodka, Whisky, Bourbon, Rum, Brandy, Cognac, Gin, Tequila.

 

Chinese farmers face a different set of problems. Sometimes they are left with depleted lands after growing items for the alcohol production. Many farmers end up leaving their homes and heading into already over-crowded cities. While, alcohol production does give its population jobs, it really doesn’t provide the Chinese with self sufficiency.

Future: Already China is taking steps to adopt emission control regulations. According to a Financial Times article, there are some 15 alcohol production companies in the Shandong province that will be closed by the end of 2003. Shandong province is known to be not only a fairly well developed region but also a high polluter. Also according to the World Conservation Union, China is reaching out to international NGO’s as well. Recently the State Environmental Protection Agency (SEPA) met with IUCN and other organizations to discuss biodiversity and trade issues. According to a Business Week article the country has committed $85 Billion dollars on environmental protection by 2005.

Unfortunately China is known for not doing the best job at policing. Protecting the environment is not high on most inspectors’ priorities when faced with bribes. While the Olympic Games have led to a massive clean-up effort in the major cities of Beijing and Shanghai, the rest of the country remains an environmental disaster waiting to happen. As I have mentioned before many companies are now in rural areas, authorities are much less inclined to police factories. Most authorities in the rural areas are more concerned with jobs and taxes then they are with the environment. China’s investment of $85 billion dollars in sewage treatment facilities, hazardous waste treatment and disposal plants will only put a small dent into their environmental and ecological problem. But these small efforts by the Chinese government are certainly applauded by environmentalists and the world.

21. Name, Type, and Diversity of Species

While baijiu is generally thought to be a rice alcohol, it can actually be made from a wide variety of items. Baijiu can be made from almost anything: corn, barley, rice, sorghum, wheat, oak and even peas. Because baijiu can be produced from a variety of sources, production by mere individuals as opposed to companies remains widespread. There are many brands of small and local alcohol items yet the majority of the main companies use sorghum or rice. Yet, without clear government regulations, many baijiu distilleries use questionable ingredients as well. The use of questionable ingredients leads to even more problems for consumers, who don’t exactly know what they are getting after purchasing a bottle. Many times these bottles of low grade or even fake alcohol are extremely cheap thus adversely affecting poorer individuals' health.

25. Culture: Yes- Alcoholism

Culture: A part of culture that may be compromised by alcohol production is the country’s levels of alcoholism. With the importation of foreign alcohol, the expansion of baijiu products, and especially with the increasingly wealthy middle class, alcoholism may be on the rise. Another aspect that may increase levels of alcoholism is that younger Chinese people are many times more attuned to Western influence, thereby leading younger consumers to act as Western consumers would. Baijiu is readily available in cans, plastic bottles, and even snap off lids! The combination of these factors may lead to future problems for the Chinese people. Yet according to a recent article in the Global Alcohol Policy Alliance they cite reasons listed below for why alcoholism is not as pervasive as in the West and why alcoholism may not rise with the entrance to the WTO:

Chinese society is based on strong family units and people exercise considerable influence on one another. Family and community norms effectively shape behavior (Fei Ping, 1982).

Both Confucian and Taoist philosophies emphasize moderation, a standard widely applied to alcohol use in China today (Sue, et al., 1985).

Chinese are highly "situation-centered," and therefore unlikely to exhibit reckless behavior in a social setting (Hsu, 1981). The avoidance of embarrassment and the concept of "face" are powerful forces against drunkenness.

Chinese traditionally drink alcohol only when eating. Drinking with food decreases the rate of alcohol absorption and may also reduce the amount consumed (Johanson & Schuster, 1981; Kalant, 1971). It is believed that alcohol should be consumed slowly to enhance its pleasure (Wang, et al., 1992).

Traditionally, when drinking Chinese play games requiring cognitive and motor skills, especially at banquets. The goal of the game is not to get drunk because getting drunk is the penalty for losing (Barnett, 1955; Fei Ping, 1982; Moore, 1948). Playing games while drinking heightens sensitivity to the state of intoxication (Cicero, 1980).

Chinese do not typically frequent western-style bars. Banquets and other drinking occasions are infrequent (Singer, 1972). Solitary drinking is looked down upon (Williams, 1998).

For many Chinese, economic conditions restrict the use of alcohol to special occasions.

Home production of alcohol depends upon the availability of grain, the economy, the alcohol makers' (usually the women) inclination to make the alcohol, and the auspiciousness of the occasion.

28. Relevant Literature:

BBC Monitoring International Reports, "China's Shandong Province to Shut Down 23 'Heavily Polluting' Factories", Global News Wire, December 12, 2002.

Gale Group, Inc. "Chinese Markets for Wine and Alcohol" January 2003.

Gale Group, Inc. "Chinese Markets for Wine and Alcohol" January 2003. (Expanded)

Goodman, Peter S., "China Plans to Purchase U.S. Goods in a Big Way", Washington Post, October 29, 2003.

Kahn, Joseph, "Workplace Deaths Rise in China Despite New Safety Legislation" New York Times, October 24, 2003.

Revkin, Andrew, "Cutting Greenhouse Gasses, or Not", New York Times, October 26, 2003.

Roberts, Dexter, "The Greening of China", BusinessWeek, October 27, 2003.

Waters, Jennifer, " Survey says--even Russians turning to Rum", Marketing News, March 2, 1998.