AIG Dispute Keeps China Out of WTO

EU Objects to Special Status of U.S. Firm

SHANGHAI, Sept. 6 -- Global trade negotiators have winnowed the list of impediments to China's 15-year bid for admission to the World Trade Organization down to a spat over market privileges for a single U.S. firm: New York-based insurance giant American International Group Inc.

At issue is a seemingly arcane dispute about whether AIG, which has a long history in China, can operate new insurance subsidiaries in this country without a local partner. But the clash means that the tens of thousands of companies waiting for the WTO membership to knock down trade barriers to the world's most populous market are left revving their engines at the starting line.

After a China-European Union summit meeting in Brussels earlier this week, Chinese Prime Minister Zhu Rongji cited the AIG impasse as the only issue blocking China's admission to the global trade group before the end of the year.

"If this obstacle is removed, I believe China will become a WTO member in November," when trade ministers from the 141 WTO members are scheduled to gather for talks in Qatar, Zhu said. Chinese leaders are eager for WTO membership to lower tariff barriers to Chinese exports.

To sell insurance in China, foreigners must form joint ventures with local companies -- except for AIG. The EU doesn't want AIG to continue getting preferential treatment because it puts European insurance companies at a disadvantage. U.S. and EU officials are meeting next week in Geneva to try to resolve their differences.

In recent days, WTO officials have expressed confidence that the matter will be sorted out by the end of next week. The EU's top trade negotiator, Pascal Lamy, is working with U.S. officials to "find the appropriate form of words" to break the deadlock before next week's meetings, according to his spokesman, Anthony Gooch.

Resolving the AIG dispute would allow trade ministers to approve terms of China's admission to the WTO at their November meeting. That vote would clear the way for China's ratification of its WTO membership, enabling it to enter by late this year or early next year.

AIG operates several branches in China and is the only foreign company allowed to own 100 percent of its Chinese insurance subsidiaries. U.S. trade negotiators insist that a November 1993 agreement between the United States and China granted AIG the right to own 100 percent of any additional insurance branches it opens in China. Bush administration officials are pushing for a "clarification" that AIG won't be required to pair up with a Chinese company if it is expands its operations.

Trade officials from the European Union dispute the U.S. interpretation. They contend that the U.S.-China accord, as well as a subsequent EU-China pact, limits all foreign insurers -- including AIG -- to 50 percent ownership of any new China branches.

The Wall Street Journal recently quoted a senior official from the China Insurance Regulatory Commission as saying AIG might be forced to sell some of its insurance operations in China to comply with the WTO accord. "We need to give fair treatment to everyone," the official was quoted as saying.

But AIG said it had "firm assurances from China" that it would not be required to reduce ownership of any of its wholly owned subsidiaries in China.

"The question of whether AIG would be allowed to continue to expand its branch operations on a wholly owned basis in China was never an issue in the WTO negotiations," the company said in a prepared statement. "AIG is confident that its expansion rights will be satisfactorily resolved in the course of China's final accession."

A spokesman for China's Ministry of Foreign Trade and Economic Cooperation, which handles the country's WTO negotiations, said today that there will no change to AIG's current businesses in China. A spokesman for the China Insurance Regulatory Commission declined comment.

The fact that a transatlantic insurance dispute would trip up China in its long quest for recognition as a member of the global trade community demonstrates the magnitude of Western insurers' ambitions in this burgeoning economy. China has nearly 1.3 billion lives to insure, and its residents are formidable savers.

But the intensity of the insurance dispute also is a testament to the political clout of AIG's chairman and chief executive, Maurice Greenberg, who has spent years cultivating allies in China and the United States.

During Greenburg's tenure, the company has donated generously to the political campaigns of Republicans and Democrats alike, and spent heavily on public projects in China's. Greenburg is an old confidant of Zhu, the Chinese premier. In his earlier post as mayor of Shanghai, Zhu recruited Greenberg to serve as one of the city's foreign advisers.

It helps, too, that AIG has deep roots in China. The company was founded by an American businessman in Shanghai in 1919. It moved its headquarters to New York in the 1940s as China spun into civil war, famine and xenophobia. But by 1975, Greenberg had secured permission to call on officials in China. In 1992, AIG was granted permission to sell life insurance in Shanghai and the southern city of Guangzhou. Those licenses were the first granted to a foreign insurance firm by the People's Republic of China. And as China's leaders embraced market reforms, AIG won additional operating licenses in several coveted business areas that were off limits to other firms.

AIG has reaped modest profits in China thus far, but industry experts say the China subsidiaries of other multinational insurers operate at a loss. Skeptics argue that China's giant population belies the tiny number of its citizens who earn enough to make insurance a worthwhile investment. And so far, locating those customers has proved costly.

In developed markets, insurers generally derive most of their profits from investment income rather than insurance premiums. But in China, yields from investments in government bonds or bank deposits are razor thin, while the nation's stock markets are rife with fraud and insider trading.