WG on Trade & Environment The First Meeting of the Second Phase CCICED

The First Meeting of the Second Phase of The China Council for International Cooperation On Environment and Development October 1997

Pollution Havens and Ozone Depleting Substances Control in China

University Of International Business & Economics, China Policy Research Centre For Environment And Economy, Nepa

Pollution Havens and Ozone Depleting Substances Control in China*

Table Of Contents

EXECUTIVE SUMMARY

1

INTRODUCTION

5

CURRENT TRENDS IN FOREIGN DIRECT INVESTMENT TO CHINA RELATED TO ODS PRODUCTION AND CONSUMPTION

6

EVALUATION OF CHINA’S EXISTING POLICIES, REGULATIONS AND MEASURES

10

FIELD STUDY INVESTIGATION AND ANALYSIS

12

RECOMMENDATIONS

20

* This report is originally from two reports of the two phases of this project. The Phase I report was written by Sun Weiyan and Xia Youfu of China’s University of International Business and Economics. The Phase II report was written by Ye Ruqiu of China’s National Environmental Protection Agency (NEPA) and Cheng Lulian of NEPA’s Policy Research Centre for Environment and Economy. The final report is edited by David Runnalls and Wanghua Yang. The Working Group would like to express its thanks to UNEP for its financial support for the Phase II study.

EXECUTIVE SUMMARY The Montreal Protocol on Control of Substances that Deplete the Ozone Layer sets out timetables for phasing out the production and consumption of ozone depleting substances (ODS) in developed countries with a ten-year grace period for developing countries. It is one of the multilateral environmental agreements which contains trade measures. Trade measures could be used to restrict ODS trade between parties and non parties and to prevent non parties from gaining a competitive trade advantage over parties. In addition, there are some other trade measures not mandated by the Protocol but taken voluntarily by some parties in their control schedules to restrict ODS trade between parties. These include industry agreements to restrict imports, labelling requirements, import licenses, permit trading system for import allowance, quantitative import restrictions and import taxes on ODS, etc. Although the Montreal Protocol is widely regarded as among the most successful multilateral environmental agreements, it remains a concern of whether ODS-producing industries would move their production through foreign direct investment (FDI) to developing countries which enjoy a longer phase-out period. This study examines the current trend of foreign direct investment to China related to production and consumption of ODS, and to seek to identify if there exists a tendency of ODS production and consumption being shifted to China through foreign direct investment (FDI). It also reviews China’s existing policies, regulations and measures, assesses whether they are adequate to tackle this problem, and try to provide recommendations to the Government to effectively prevent transfer of production and consumption of ODS through FDI. The study consists of two phases. Phase I was undertaken by the University of International Business and Economics (UIBE). It covers more general issues of the overall trend, analysis of existing policies and regulations, and field study in Beijing. Phase Two, undertaken by the Policy Research Centre for Environment and Economy (PRCEE), focuses more on special investigation in Guangdong Province which is one of the major areas in China where ODS is increasingly used in recent years, and where there are most of foreign-invested ventures in the country. This report presents a synthesis of these two phases. Section 2 of the study examines the present situation of FDI in China related to ODS production and

consumption from the OECD countries and newly industrialized countries (NICs) and regions. The major conclusion of this section is that there has been an increase in recent years in FDI in industries related to ODS production and consumption, in particular, in solvent, refrigeration/air conditioning and foam industries. The majority of FDI flows to China’s coastal areas, and many of foreign funded enterprises (FFEs) rely on international markets for their raw materials and their final products. Section 3 evaluates China’s existing policies, regulations and measures for the control of ODS. This section concludes that China has established an institutional framework and formulated a policy and regulatory regime. A ten policy framework was specified in the Country Program and some sectoral strategies have been formulated. However, there are some shortcomings in the existing ODS regulatory regime. Control of the shift of ODS production and consumption through FDI has not been fully taken into consideration in the Country Program and the existing environmental policies, and the present guiding principles for foreign investment do not include measures to protect the ozone layer. Section 4 consists of results of field studies made by both UIBE and PRCEE in Beijing and Guangdong. These field investigations conclude: there is a lack of effective policy and institutional coordination among relevant central and local governmental agencies; The ODS awareness of personnel who are in charge of approving FDI and who are implementing environmental policies at grassroots level is weak; and many small foreign funded enterprises have not been aware of the issue and, although large foreign funded enterprises are well aware of the ODS issues in China related to ODS production and consumption. Medium size foreign enterprises are becoming aware of the issue and have begun to take measures or seek funds to replace ODS. The survey also exposes some problems for medium and small enterprises in getting funds from the Multilateral Fund to support their ODS replacement efforts. After the Phase I survey in Beijing and the Phase II survey in Guangdong, the research teams have realized that it is very difficult to grasp the whole situation of ODS production and consumption in the entire country due to the complexity of the issue and the constraints of limited funds and time for thorough investigation. Despite the fact that the field surveys made so far are not as thorough and complete as the research teams wish to be, they still reveal problems with the Montreal Protocol and with the Multilateral Fund, and major problems with China’s existing regulatory regime and with policy coordination as well as institutional coordination. The research teams feel that there are some actions that should be taken immediately to prevent ODS production and

consumption from transferring to China from other countries. Section 5 puts forward some detailed recommendations in order to achieve this end. Major recommendations include: The implementation of the Montreal Protocol should be further strengthened and integrated policies and measures for ODS control and management should be formulated. ODS control should be integrated into the existing environmental legislation (e.g. the Law of Air Pollution Prevention and Control) and other environmental management policies (such as environmental impact assessment, the “three simultaneity” system, the permit system, pollution levying fees, etc). Some economic instruments for ODS control should be adopted, including a consumption tax on ODS, favorable loans or tax deduction or exemption for enterprises which take measures to replace ODS. China’s ODS control and phaseout plan should also be integrated in its related trade policies. China’s guiding policies for the use of FDI should prohibit FDI projects related to production and consumption of ODS. It is essential to establish an effective coordination mechanism among related governmental agencies and between the central and local governments, and set up a sound management system throughout the country; Environmental protection authorities should be included in the process of approving foreign investment projects. Without Environmental protection authorities, it would be difficult for the trade authorities to understand the implications of the ODS production and consumption transfer through FDI for China’s implementation of the Montreal Protocol. MOFTEC should fully participate in the international negotiation and domestic policy-making in this regard. In addition, a local ODS management office should be set up in each province to be in charge of ODS control and phaseout within its jurisdiction. 3. It is very important to strengthen public education and to provide training to related personnel and enterprises. It is necessary to provide training for managerial personnel of related governmental agencies and local grassroots departments. NEPA should be

responsible for organizing such training. The media should be encouraged to play a major role, including such as the daily newspaper of MEFTEC International Business and other major trade and environment journals. It is necessary to provide enterprises with technical support. Efforts will be made to provide enterprises with information on substitution technologies that are mature and applicable in China, in particular, to provide them with reliable technical support to replace ODS. The State should make necessary appraisal and test of foreign countries’ substitution technologies and introduce them to China only after proving they are mature and applicable in China. There is a need to further enhance international cooperation. China should continue to work with the other parties to further improve the Montreal Protocol, to include measures to prevent ODS production and consumption from being transferred from non Article 5 countries to Article 5 countries through FDI. The Multilateral Fund should be made more easily accessible to SMEs in developing countries. The Procedure for applying the funds should be simplified, and the period from applying to actually receiving the funds should be shortened. In order to use the Fund more efficiently, flexibility should be accorded to enterprises based on the specific situation including purchasing domestic facilities and substitutes, encouraging them to undertake their own R & D on alternative technology and substitutes. Sharing of local expenses should be further discussed.

Introduction The Montreal Protocol on Control of Substances that Deplete the Ozone Layer sets out timetables for phasing out the production and consumption of ozone depleting substances (ODS) in developed countries with a ten-year grace period for developing countries. It is one of the multilateral environmental agreements which contains trade measures. Trade measures could be used to restrict ODS trade between parties and non parties and to prevent non parties from gaining a competitive trade advantage over parties. In addition, there are some other trade measures not mandated by the Protocol but taken voluntarily by some parties in their control schedules to restrict ODS trade between parties. These include industry agreements to restrict imports, labelling requirements, import licenses, permit trading system for import allowance, quantitative import restrictions and import taxes on ODS, etc. The 1994 Chairman’s Report of the Scientific and Technical Committee of the Montreal Protocol (UNEP 1995) concluded that although overall progress was being made in developed countries in the phase out of controlled substances, considerable challenges existed in addressing developing country issues. The Committee report provides some preliminary evidence that developed countries have used FDI as means to meet legal obligations related to the phase-out of ODS, by shifting production towards Article 5 countries.1 Analysis by UNCTAD (UNCTAD Trade and Environment Committee, September 1995) confirms the possible establishment of pollution havens in developing countries as a means to circumvent the spirit of the Protocol. One of the findings of the UNCTAD report, based on over 18 country-case studies (co-funded by UNCTAD, UNEP and UNDP), is the need for more detailed and rigorous analysis of this issue. Meanwhile, the western press have repeatedly reported smuggling of ODS into the EU countries and the United States. The International Environmental Reporter reveals that there may be 30,000 tons of CFCs annually entering the illegal market worldwide, and somewhere between 10,000 and 20,000 tons per year are being illegally smuggled into the United States.2

An Article 5 Party is a developing country and whose annual per capita consumption o f Annex A and Annex B substances are below the limits set in Article 5 of the Montreal Protocol.

International Environment Reporter, October 30, 1996.

This study examines the current trend of foreign direct investment to China related to production and consumption of ODS, and to seek to identify if there exists a tendency of ODS production and consumption being shifted to China through foreign direct investment (FDI). It also reviews China’s existing policies, regulations and measures, assesses whether they are adequate to tackle this problem, and try to provide recommendations to the Government to effectively prevent transfer of production and consumption of ODS through FDI. The study consists of two phases. Phase I was undertaken by the University of International Business and Economics (UIBE). It covers more general issues of the overall trend, analysis of existing policies and regulations, and field study in Beijing. Phase Two, undertaken by the Policy Research Centre for Environment and Economy (PRCEE), focuses more on special investigation in Guangdong Province which is one of the major areas in China where ODS is increasingly used in recent years, and where there are most of foreign-invested ventures in the country.

Current Trends in Foreign Direct Investment to China Related to ODS Production and Consumption From 1985 to 1994, there were 218,525 foreign funded enterprises (FFEs), mainly joint ventures, contractual joint ventures and wholly-own foreign enterprises established in China. Due to incomplete data, the study only examines 42,380 of them and finds 957 are related to production and consumption of ODS, in particular, consumption of ODS. The total foreign investment value of these 957 FEEs amounts to US$1.45 billion. The study shows that the growth rate of foreign direct investment (FDI) in industries related to production and consumption of ODS is very high, especially during the 1987-1988 and 1991-1992 periods (see Table 1). The number of FEEs increased by 21.88% in 1988 than in 1987 with an increase of investment by 162.73%. In 1992, FEEs increased by 231.14%, and investment by 377.07% than in 1991.

Table 1. The FDI in ODS and related Products 1985-1994 (Value Unit: US$1,000) 1985

1986

N

18

21

V

8600

38490

A

480

1987

1988

32 6603

1830

1989

1990

71

15

39 17348

7219

3260

1991

1992

167 11116

1993

553 53031

1994

21 15292

20 26457

Total 957 14505

0

0

0

0

0

0

0

0

0

2060

4450

1020

2170

670

960

7280

13230

1520

N: Number of FFEs; V: Investment value of FFEs; A: Average investment amount. Only part of FFEs are analyzed in 1985, 1986, 1990, 1993 and 1994. Sources: Almanac of China’s Foreign Trade and Economic Relations 1986-1995 and other materials

The research indicates 96% of the examined FEES are in the solvent, refrigeration/air conditioning and foam industries with 97% of the total investment (see Table 2). The growth rate of FDI in these three sectors is high. Compared with those in 1987, FFEs in the solvent industry increased by 13.4% while investment amount raised by 4.1 times in 1992, 8.2 times and 5 times in the refrigeration/AC industry, and 61.8 times and 84.8 times in the foam industry respectively. Not many foreign businessmen have invested in aerosols and fire extinguishing industries, but the study finds many FFEs produce foam agents, aerosol propellants, refrigerants, halon extinguishants and cleaning reagents.

Table 2. 1985-1994 FDI by Sectors (Value Unit: US$10,000,000) Total

Foams

Refrigeratio

Solvent

Aerosol

Fire

n/AC

s

s

Extinguishing

N

957

401

157

361

38

15

%

100.00

41.90

16.41

37.72

3.97

1.57

V

145.035

25.961

42.885

71.882

3.104

1.156

%

100.00

17.90

29.57

49.56

2.14

0.80

N: Number of FFEs V: Investment value of FFEs Only part of FFEs are analyzed in 1985, 1986, 1990, 1993 and 1994. Sources: Calculated on the basis of statistics data from the Ministry of Foreign Trade and Economic Relations of China

The majority of FDI flows to the coastal regions of China. Guangdong Province absorbs about one fourth of the total FDI to China. If the data of the three special economic zones are included, the percentage would be over one third. Jiangsu, Shanghai, Shandong, Liaoning, Beijing, Fujian, Zhejiang also have a high percentage of investment (see table 3). FDI in the middle and western part of China is still not high, but in recent years, more and more FDI has flowed to the inner part of China, in particular, Hubei and Henan provinces.

Table 3. FDI in some provinces and municipals 1985-1994 (Value Unit: US$10,000,000) Number of % Investment % FFEs value Total 957 100.00 145.035 100.00 Guangdong 334 34.90 50.928 35.11 Shenzhen 86 8.99 9.164 6.32 Jiangsu 143 14.94 22.826 15.74 Shanghai 56 5.85 17.503 12.07 Shandong 64 6.69 7.525 5.19 Liaoning 36 3.76 6.994 4.82 Beijing 55 5.75 6.402 4.41 Fujian 39 4.08 4.550 3.14 Xiamen 15 1.57 0.957 0.66 Zhejiang 29 3.03 4.209 2.90 Henan 21 2.19 2.619 1.81 Tianjin 22 2.30 2.185 1.51 Hubei 18 1.88 2.067 1.43 Others 140 14.63 17.227 11.88 Sources: Almanac of China’s Foreign Trade and Economic Relations 1986-1995 and other materials

The study also reveals the sources of FDI to China related to production and consumption of ODS. Foreign investors are mainly from 25 countries and regions, 12 are OECD countries, 8 are newly industrialized countries (NICs) and regions. FFEs from Hong Kong account for 64.58% of the total enterprises examined with the total investment of 50.33%. Japan, the United States and the Netherlands are also the major investors in the production and consumption

of ODS in China through FDI (see Table 4). Many transnational corporations (TNCs) establish their subsidiaries or branches in Hong Kong, and then invest in China in the name of their Hong Kong companies.

Table 4. FDI by Sources, 1985-1994 (Value Unit: US$10,000,000) Number of % Investment % FFEs value Total 957 100.00 140.535 100.00 Hong Kong 618 64.58 73.001 50.33 Japan 48 5.02 18.664 12.87 The United 96 10.03 15.198 10.48 States The Netherlands 4 .42 14.041 9.68 South Korea 14 1.46 9.738 6.71 Taiwan Province 92 9.61 7.092 4.89 Thailand 9 0.94 2.484 1.71 Singapore 10 1.05 2.014 1.39 Canada 10 1.05 1.521 1.05 Others 56 5.85 1.282 0.88 Sources: Almanac of China’s Foreign Trade and Economic Relations 1986-1995 and other materials

There is also a great difference in scale of FFEs. The average investment of these FFEs is US$1,520,000, with some over US$50 million and some even over US$100 million. However, many of them are below US$500,000 with some even below US$100,000. The study found one enterprise with a US$ 10,000 investment. In recent years, the investment amount is gradually increasing. More and more TNCs invest in China, and some of them set up branches in different parts of China to produce various products using ODS as raw materials. The majority of foreign investors prefer joint ventures to wholly-owned subsidiaries. Their registered production period of time tends to increase in recent years. Before 1992, the registered production period of time of most FFEs was between 10 and 20 years ( this means many FFEs will stop production around or before 2010) , but in recent years, more and more FFEs registered their production period of time to over 20 years, 50 years and even up to 99 years. For example, 8 of 21 FFEs in 1993 registered their production period of time for over 25 years, 4 for over 50 years, and 1 for 99 years. 15

FFEs registered for production of over 20 years, 8 for over 50 years. Many of these FFEs sell their products in the domestic market. Yet, many of them rely on international markets to sell their products and obtain their raw materials. These FFEs import their raw materials mainly from the OECD countries and NICs. According to statistics from Guangzhou Customs, 34000 tons of ODS were imported in the first half of 1992.3 In recent years, as developed countries phase out production of ODS and the prices of ODS produced in China have been decreasing rapidly, more and more FFEs use the domestic produced ODS.

Evaluation of China’s Existing Policies, Regulations and Measures As a party to the Montreal Protocol and its amendments, the Chinese government has been serious in fulfilling its international obligations in controlling and gradually phasing out ODS. The China has established an institutional framework and a technical supporting system. China Leading Group for Ozone Layer Protection was established in July 1991, and a Technical Information Clearinghouse and a Project Management Office were also set up for supervision on data collection, information exchange, proposal submission, program coordination and project implementation. China has formulated a policy and regulatory system for the control and phaseout of ODS. It has developed its Country Program specifying a ten policy framework and formulated strategies for phasing out ODS for 9 related industrial sectors. A number of sector regulations have also been adopted jointly by the National Environmental Protection Agency and related ministries. For example, the Circular on Enhancing Management of Production of CFCs and Alternatives specifies that no new project involving the production of CFCs shall be approved. And a license system will be set up for CFC production in 1998.4 Other sector regulations include the Circular on Suspension of Reallocation of Halon-based Fire Extinguishers at Unnecessary Place, The Circular on Control of Development and Use of Aerosal Products, and the Circular on Suspension of Construction of New Fire-Truck and Fire-extinguisher.5 China Environment News, December 29, 1992. Ozone Action in China, No. 1, March 1995. Id.

China has planned to phase out ODS production and consumption by 2005 (five years earlier than what is mandated by the Montreal Protocol) under the condition that China receives additional financial assistance and adequate technology transfer. More recently, China has issued a complete ban of the use of CFC in the aerosol sector by the end of 1997 (except the use for medical purpose)6. However, there are some shortcomings in the policies:

existing regulations and

1. The importance of the shift of ODS production and consumption to China through FDI has not been fully unverstood by China’s Country Program for the Phasing Out of Ozone Depleting Substances. The present Country Program indicates that in the industrial/commercial refrigeration industry, there are approximately 300 enterprises in the refrigeration and air-condition industry, about 130 of them are direct users of CFCs. They consist of 70% of Stateowned enterprises, 29% of collectively-owned and township and village enterprises (TVEs), and only 2% of joint-venture enterprises; in the aerosol industry, over 100 enterprises produce aerosols, 70% of which are State-owned , the rest, excluding 5 joint-ventures, are collectively-owned and TVEs. This study points out that CP(the Country Program) has not fully considered the whole situation of FDI in the production and consumption of ODS in China. 2. Current environmental laws (e.g. the Law on Air Pollution Prevention and Control) and environmental policies do not include requirements for ODS control. There are no specific stipulations to control FDI in ODS production and consumption in China’s current guiding policies for the use of FDI in China. 3. China’s present policy phasing out ODS production and consumption is that foreign investors must take responsibility for their share (their equity in FFEs); the Chinese government is only responsible for the Chinese portions (such as in a joint ventures). It is very difficult for small and medium size FFEs, especially small and medium sized enterprises (SMEs) from Hong Kong, Taiwan Province and Macao, to carry out this policy. The shift of production and consumption of ODS through FDI will bring two serious consequences if it is not fully taken into consideration:

People’s Daily, June 17, 1998

The schedule for phasing out the production and consumption of ODS will be seriously affected; and As China gradually limits and finally bans the imports of ODS, and in particular, developed countries gradually phase out ODS production and consumption as well as related products, many of these transferred FFEs, which rely on international markets for their raw materials and final products will run into difficulties in finding markets. The study also shows that although the Montreal Protocol provides a long grace period for developing countries, it doesn’t take any measures to prevent non Article 5 parties from transferring ODS production and consumption to Article 5 parties through FDI. Nor have effective legal measures been adopted by non Article 5 countries to limit and punish enterprises that shift ODS production and consumption to Article 5 countries through FDI.

Field Study Investigation and Analysis 1. Phase I Investigation in Beijing The Phase I research team, headed by Sun Weiyan and Xia Youfu of University of International Business and Economics visited the Beijing Yifeng Foam Rubber Products Co. Ltd., Beijing Matsushita Color CRT Co. Ltd. ( BMCC) and Capital Steel & NEC Electronic Co. Ltd. Some small and medium size FFEs were also surveyed through telephone inquiries. This phase of investigation led to four conclusions: Some newly established joint ventures of large transnational corporations have paid a good deal of attention to the protection of the ozone layer, and they have tried to use ODS substitutes. For example, Capital Steel & NEC Electronics Co. Ltd. is a joint venture of Capital Steel Co. with NEC Co. The total investment in this venture is 38 billion Japanese yuan. NEC 's equity is 51%. The main products of the venture are the large-scale integrated circuits which are exported to Japan, Hong Kong, Singapore and Thailand. Its export value in 1995 reached US$18,690,000. The venture uses H2SO 4, H 2O2 and two other substitutes for traditional cleaning reagents. Some early established joint ventures of well-known transnational corporations used controlled substances at the beginning, but have later switched to substitutes, as the result of the international agreement, especially under the pressure of foreign importers requiring the use of

substitutes. They have even developed new substitutes. BMCC is a joint venture of Matsushita Electric Industrial Co. Ltd. and Matsushita Electronics Co. with four Chinese operations. Established in 1987, BMCC’s total investment amounts to US$339.652 million with equal equity between the two sides. It produces tube for color TV and CRT using 60 tons of CFC-113 as cleaning reagents and exports US$66.303 million to Japan and the United States. Due to the influence of the Montreal Protocol and the pressure of its major importers, as well as the Japanese side’s willingness to be a good example of FFEs in China, BMCC has begun to develop substitutes since 1994, and invented a new type of water-based cleaning reagent which has the advantages of low cost (only 60% of the cost of the original one) and higher efficiency. BMCC is now applying for a patent. Since December 1995, all the controlled substances formally used have been replaced by new cleaning reagents. Some medium size joint ventures are seeking funds from the Multilateral Fund in order to phase out ODS. For example, Beijing Yifeng Foam Rubber Products Co. Ltd. is a joint venture of a Hong Kong enterprise , which produces foam rubber and products such as foam rubber cushions and shoulder pads. It exports shoulder pads to European countries which are equal to US$50000. The total investment in the venture in 1988 was US$2.26 million with foreign equity of 33%. It used 62 tons of ODS in 1995 and would use 110 tons in 2005. CFC-11 was used to be imported but it is now purchased from the domestic market because of the price. In May 1994, it learned by chance that the ODS must be replaced and that it could get support from the Multilateral Fund. Its board of directors decided immediately to contact related organizations and apply for funds. In November 1995, it received a notification that it could receive US$204,600 of support from the Multilateral Fund. It plans to use methylene dichloride as main substitute to replace 110 tons of ODS in 2005. Many small and medium size FFEs and especially those from Hong Kong, Taiwan Province and Macao have not adopted any measures to protect the ozone layer for the following reasons: (1) Because of inadequate information, many FFEs, especially the Chinese side, do not understand the need to protect the ozone layer. (2) The SMEs are too small to use the substitutes. (3) There are some problems in the use of the Multilateral Fund. For example, the procedures and formalities for applying and reviewing are

too complicated for medium and small enterprises to understand and are not suitable for them. The period from the application to the actual receipt of funds and the installation of facilities is too long. The prolonged procedure for applying funds from the Multilateral Fund would inevitably have a negative effect on the initiative of those enterprises that want to find substitutes for ODS. The 1 to 1 requirement for local expenses does not suit China’s situation. It is very difficult for SMEs to pay extra money for ODS substitutes if there are no obvious economic benefits. The Multilateral Fund mainly relies on foreign equipment, technology, substitutes and experts. As a result, the actual situation of Chinese enterprises cannot be fully considered. The initiative of Chinese enterprises and experts cannot be brought into full play. China’s policy that foreign cooperators should bear their share of the cost of ODS control is not practicable for SMES, especially for those from Hong Kong, Taiwan Province and Macao. The study also indicates that in using any substitutes, many factors such as their negative environmental impacts should be carefully considered and examined. For example, methylene dichloride is harmful to the health of workers (it may cause cancer) and may result in another form of air pollution when discharged. At the same time, using cleaning facilities may cause noise pollution. The cost may increase when using the substitutes, thus the competitiveness of enterprises will be affected. Although the price of methylene dichloride is the same as that of CFC-11, using the substitute requires a closed production process while additional facilities such as ventilating equipment must be added, energy consumption be increased, and working conditions must be considered. All these factors will affect the cost of products.

2. Phase II Investigation in Guangdong Guangdong Province is one of the major areas in China where ODS is increasingly used in recent years. The research team of the second phase of the study, headed by Ye Ruqiu of the National Environmental Protection Agency and Cheng Lulian of the Policy Research Centre for Environment and Economy, focuses on a survey of FDI ventures in foam and cleaning sectors in this province. The study was undertaken with funding from UNEP. The research team had a great deal of help from related ministries, commissions and local departments. The investigation aimed to discover if foreign enterprises are transferring ODS to China; to obtain actual data on ODS production and consumption of FFEs; and to analyze the current situation and the trends of FFEs in ODS control and

phaseout. With the assistance of the Guangdong Environmental Protection Bureau and the Guangdong Foreign Trade and Economy Commission, the research team obtained some very useful information on FFEs in foam and cleaning sectors in some parts of Guangdong Province. There are a total of 120 FFEs in the foam and cleaning sectors approved from 1994 to 1996 in some parts of Guangdong Province. Table 5 shows the distribution of these 120 enterprises.

Table 5. FFEs in Foam and Cleaning Sectors in Parts of Guangdong Approved during 1994 to 1996 Area Foam Sector Cleaning Sector Total Shenzhen 8 50 58 Guangzhou 5 3 8 Huizhou 2 6 8 Panyu 8 8 Shantou 3 4 7 Jieyang 5 1 6 Dongguan 4 1 5 Shunde 2 2 4 Zhaoqing 3 1 4 Shanwei 3 3 Jiangmen 2 1 3 Meizhou 1 1 Foshan 1 1 Nanhai 1 1 Shaoguan 1 1 Others 1 1 2 Total 41 79 120 "Others" refers to those ventures whose names or locations are not known.

Table 5 indicates that ventures in the foam and cleaning sectors approved during 1994 to 1996 mainly concentrate in Shenzhen. However, only Huizhou (representing regions with a relatively large number of FFEs), Dongguan (representing regions with a relatively small number of such enterprises), and Foshan (representing regions with the smallest number of such ventures) are selected for the first survey. Shenzhen will be the focus for the second field survey.

This phase of the study also finds that Guangdong is the major importer of ODS in China. Statistics from Guangdong Customs Administration shows that about 1,800 tons of CFC-11 and CFC-12 were imported in 1996.

Table 6. Imports of CFC-11 & CFC-12 to Parts of Guangdong in 1996 Area CFCCFCTotal (kg) 11(kg) 12(kg) Shenzhen 178,836 185,947 361,783 Chaozhou 29,890 170,710 200,600 Shantou 30,461 103,757 134,218 Jieyang 75,804 75,804 Dongguan 59,323 326 59,649 Guangzou 21,555 21,555 Foshan 20,000 20,000 Others 612,866 299,204 912,070 Total 984,180 801,499 1,785,679 "Others" refers to those ventures whose names or locations are not known.

Table 6 indicates that a large quantity of CFC-11 and CFC-12 was imported to Shenzhen, Chaozhou, Shantou, Jieyang and Dongguan. According to the information from the customs, imported CFC in Chaozhou is mainly used as a coolant, imported CFC in Jieyang is used as a foaming agent, while it is difficult to identify end uses for the CFCs imported to Shantou. The imported CFC in Shenzhen may be used in the cooling, cleaning and foaming sectors. Some management and technical personnel from Guangdong’s Dongguan and Huizhou Environmental Bureaus participated in the first field survey. Information from the University of International Economics and Trade and Guangdong Foreign Trade and Economy Commission provided details of FFEs in the foam and cleaning sectors in Guangdong, and information from Guangdong Customs Administration gave details of enterprises which import CFC in Guangdong Province, including categories and quantities of CFC imported. Based on these, the research team asked relevant local environmental departments to provide information on the business operation of these enterprises. Five enterprises in the foam and cleaning sectors in Dongguan and Huizhou were selected according to all the available information and were investigated. They include a factory for polystyrene foam materials, a factory making soft polyurethane foam materials, a factory for polyolefine foam materials, a factory with cleaning process for circuit boards and a factory with cleaning process for the magnetic

heads of recorders. Where the study team was unable to do the field study, local environmental departments were asked to continue the survey. Details of the field survey of these five enterprises are summarized as follows:

Foam Sector (1) Dongguan Lianxing Foaming-Rubber Bowl Co., Ltd. This corporation is located in Shangjin Industrial District, Jiekou Commune, Changan Town in Dongguan. It is a joint venture established by Hong Kong Lianxing Foaming Rubber Bowl Co., Ltd. in 1988. It mainly produces fast food bowls and beverage cups with polystyrene. Its facilities were from US, Japan and the Netherlands, and it imports its raw materials from the United States. The majority of its products are exported and are marked with the CFC-free label and the three-arrow recycling label. The company is using polystyrene plastic foaming technology and pentane as a foaming agent. It is CFC-free. (2) Dongguan Fuzeng Foaming Cotton-rubber Co., Ltd. It is located in Xiping Management District, Hangnei Industrial and Agricultural Zone in Huang Village, Dongguan. It is a polyurethane foaming plastics factory and wholly owned by Hexiang Trading Company, Ltd. Taoyuan County, Taiwan Province. Its main product is polyurethane which is used as a raw material for shoe-making, handbags, toys, furniture, massage cushions, etc. Its products are mainly exported to Australia, Germany and other European countries. It used CFC as a foaming agent at its inception and has now substituted CFC by dichloro-methane. The factory has a certificate from Hong Kong Standard and Testing Center Ltd., confirming its products do not contain CFC and HCFC. The factory owner understands the issue of controlling ODS, and is planning to employ a set of CO2 foaming equipment. Dichlorothane currently used is being imported from Taiwan. The polyurethane soft plastic foaming technology with dichloromethane used as a foaming agent is CFC-free. (3) Huizhou Huisheng Foaming Rubber Co., Ltd. This company is located in Xiao Jinkou Town, Huizhou. It is a polyolefine foaming factory established in 1996 by a company based in Macao. Its main products are packing materials for electrical household appliances (such as

TV, tape-recorder and speakers) made of polyolefine foaming plastic. Its foaming technology is similar to that of Dongguan Lianxing Foaming Rubber Bowl Factory, but its shaping equipment is larger. Its production facilities are mainly imported from Taiwan. Its raw material is imported from Macao with its main components unknown. Its products are also marked with the three-arrow sign showing that they are recyclable. The components of the raw materials are unknown and the research team has asked Huizhou Environmental Bureau to carry out further investigation.

Cleaning Sector (1) Dongguan Baoqun Electronic Co., Ltd. The company is located in Humen Town, Dongguan. It is a small factory established by a Hong Kong company to produce alarm devices. Most of its products are exported. In the process of cleaning they use a cleaning liquid purchased from Shenzhen without any trade mark and signs but a smell of alcohol. It is hard to identify this substance. The factory consumes about 200 kg of this cleaning agent per year. Dongguan Environmental Protection Bureau and Humen Town Environmental Protection Office have been requested to survey the sources and components of the cleaning agent. (2) Huizhou Dongming Electronic Co., Ltd. The company is located inside Huizhou, which was solely funded by Hong Kong Dongming Electronic Co., Ltd. in the early 1996. Its main products are small recorders and mainly are exported. A cleaning agent with a code number of 26, bought from Huizhou Electronic Accessory Factory, is used to scrub the magnetic heads in its production process. It is hard to identify the alcoholsmelling agent without a proper sign. About 100 kg of this material is consumed annually. Huizhou Environmental Protection Bureau has been requested to make further investigation into the components of the cleaning agent. After this first stage survey, the research team came to realize that the scope of survey was not wide enough. Enterprises in the cleaning sector surveyed this time were all medium or small-sized electronic cleaning enterprises which use a small quantity of cleaning liquids annually. Enterprises using a large quantity of

cleaning liquids annually have not been included in this survey. This survey on the foaming sector was focused on civil foam plastic enterprises, not including enterprises manufacturing building and thermal insulating materials. From what the research team experienced in its preliminary survey in Guangdong, it found it difficult to grasp the whole situation of Guangdong in the production and consumption of ODS. In a small area of 2,465 km2, Dongguan has as many as 15,000 FFEs. According to the incomplete data, there are more than 30 FFEs in the foam and cleaning sectors. Due to inadequate funds and time, it is almost impossible to investigate all of them, not to mention the entire Guangdong Province. Nevertheless, the investigation reached a number of tentative conclusions: (1) ODS control has not been considered in the approval of FFEs and imports of ODS, nor in the customs’ examination Although NEPA has enacted some detailed policies and measures for controlling ODS, it has not coordinated fully with the Ministry of Foreign Trade and Economic Cooperation and the General Administration of Customs in implementing them. (2) Local institutional coordination among relevant governmental agencies needs to be strengthened According to China’s institutional system, the approval of FFEs in Guangdong is the responsibility of Guangdong’s foreign trade commission. The registration of foreign enterprises goes to the industrial and commercial bureau. Guangdong’s customs controls imports and exports of ODS, while Guangdong’s environmental protection bureau implements environmental laws and policies for ODS control and phaseout. A set of mutually supporting policies to provide necessary policy and institutional coordination among these institutions in the ODS control is needed. Such a policy and institutional coordination is necessary for a thorough investigation of FFEs related to ODS production and consumption in Guangdong province. (3) Large enterprises are more active in ODS control. Some high-level technicians in FFEs know about policies, technology and methods for ODS control. In order to meet the market demand in developed countries and ensure their international competitiveness, many export-

oriented foreign enterprises which import their raw materials and export their products to international markets have used ODS substitutes, and mark their products with the CFC-free label or the three-arrow recycling label. Some enterprises are looking for technologies that are completely safe to the ozone layer and are planning to expand production using such technologies. Products of some factories have even obtained the CFC-free certificate issued by related institutions in Hong Kong before going to international markets. (4) Employees in grassroots agencies lack ODS knowledge and training. Some employees in environmental departments in some cities and counties of Guangdong Province do not know much about global ODS control activities. Before the research team started the investigation, Guangdong Provincial Environmental Protection Bureau had issued an order to five cities requiring a list of FFEs in the foam and cleaning sectors using ODS. Some of them simply reported "no such enterprises according to their survey". Yet, the investigation found that it was just those cities who reported “no such enterprises” that imported the largest quantity of ODS and had a relatively large number of such FFEs. This shows that local environmental protection bureaus are not well aware of the ODS issue. Yet, officials of these grassroots environmental protection bureaus must be relied on for a better understanding of the actual situation of ODS production and consumption and for better implementation of the country’s policies and regulations for controlling and phasing out ODS. Therefore, it is an urgent task to raise their awareness and to build their capacity in this respect.

Recommendations After the Phase I survey in Beijing and the preliminary survey of Phase II in Guangdong, the research teams have realized that it is very difficult to grasp the whole situation of ODS production and consumption in the entire country due to the complexity of the issue and the limited funds and time for thorough investigation. Despite the fact that the field surveys made so far are not as thorough and complete as the research teams wish to be, they reveals a number of problems. Although the study as a whole indicates that there is an increase in the number of FFEs related to ODS production and consumption in recent years, it is still hard to say that the growth in the number of such enterprises has resulted in a

significant increase of ODS production and consumption in China. While further thorough investigation should continue, the present study nevertheless reveals some major problems with the Montreal Protocol and the Multilateral Fund as well as some problems with China’s policy and institutional coordination, and suggests some measures should be taken immediately. The Montreal Protocol provides a long grace period for developing countries. It does not take any measures to prevent non Article 5 parties from transferring ODS production and consumption to Article 5 parties through FDI. Although some countries have taken some trade measures in their control schedules, these non-mandatory trade measures have not effectively prevent some countries from exporting ODS to Article 5 countries when ODS production and consumption have been controlled or phased out in their own countries. The Multilateral Fund is mainly established to support experimental technologies in developing countries. However, the complex application formalities, the prolonged procedures and the requirements for local costs as well as the requirements for the procurement of foreign goods and expertise are the major barriers to small and medium enterprises obtaining funds from the Multilateral Fund to support their initiatives to phase out ODS. China has adopted some detailed ODS control and phaseout policies and measures. Yet, there is also a lack of policy coordination and institutional coordination. ODS control has not been incorporated into the approval of FDI projects. Relevant governmental agencies such as the State Planning Commission, NEPA and MOFETEC do not seem to coordinate effectively in the implementation of ODS control policies and measures. The issue of lack of ODS awareness was rather prominent throughout the entire research. Many FFEs related to ODS production and consumption were approved and registered in the name of high-tech transfer. Some officials of local environmental bureaus are not aware of foreign enterprises in industries related to ODS production and consumption. This shows that people who are in charge of examining and approving FDI and people whose main responsibility is to implement environmental laws are not well aware of the need to protect the ozone layer. Despite these problems, there are positive aspects of FFEs in controlling production and consumption of ODS. There is an increasing number of FFEs in China addressing the ODS issue in recent years. Among them, some enterprises have adopted ODS substitute technology because of the requirements of international markets or their parent companies. Some medium

size joint ventures have been actively seeking funds from the Multilateral Fund to replace ODS. Yet, some medium or small enterprises have not taken any measures. Some are still importing ODS and some are using unidentified substances which are suspected to be ODS. This may imply some companies in developed countries still are transferring the controlled substances to Article 5 countries despite the control measures specified by the Montreal Protocol and its Amendments. The Montreal Protocol provides a long grace period for developing countries arguing this is in the interests of developing countries. As the present study indicates, there is an argument to be made that the delay in implementing the Montreal Protocol will ultimately put industries in question of disadvantage. This study clearly show that larger enterprises have had this message, and medium enterprises are also getting the message. It seems that small enterprises neither get the message, nor even know what is going on. In order to prevent ODS from flowing into China through FDI and ensure that China, implements the Montreal Protocol effectively some measures should be taken immediately. The following are major recommendations the research teams would like to put forward:

1. The implementation of Montreal Protocol should be further strengthened and integrated polices and measures for ODS control and management be formulated Relevant central authorities as well as local government departments should pay more attention to the implementation of the Protocol. It is crucial to bring local governmental agencies into a full play in ODS control. Policies and regulations for better implementation of the Protocol should be formulated as planned, ODS control should also be integrated into the existing environmental legislation. For example, it should be included in the present Law on Air Pollution Prevention and Control. Existing environmental management policies, such as environmental impact assessment, the “three simultaneity” system, the permit system, pollutant levying fees, should also include ODS control. Some economic instruments for ODS control should be considered, such as imposing a consumption tax on ODS and providing some incentives, i.e. favorable loans or tax deduction or exemption for enterprises which actively take measures to replace ODS.

China’s ODS control and phaseout plan should also be integrated in its related trade policies. For example, China’s guiding policies for the use of FDI should prohibit FDI projects related to production and consumption of ODS completely, and limit FDI using interim substances such as HCFC-22 strictly. A detailed product catalogue listing all controlled substances should be published for authorities as the reference in examining and approving FDI and domestic enterprises. 2. It is essential to establish an effective coordination mechanism among related governmental agencies and between the central and local governments, and set up a sound management institutional system throughout the country The central governmental agencies supervising FDI ventures' production and consumption of ODS include the State Planning Commission, MOFTEC, the State Administration for Industry and Commerce, China General Customs Administration, NEPA and relevant industrial ministries. There must be effective coordination among these governmental agencies to implement China’s policies, regulations and measures in order to ensure the ODS phaseout as planned and scheduled by the Montreal Protocol and China’s Country Program and to prevent ODS from transferring to China from other countries, in particular, from non Article 5 countries. There should be a set of mutually coordinated policies based on each agency’s own policies to support the institutional coordination. At the central level, NEPA should be included in the process of approving foreign investment projects. Without NEPA, it would be difficult for the State Planning Commission and MOFTEC which have authority to approve investment projects to understand the implications of the ODS production and consumption transfer through FDI for China’s implementation of the Montreal Protocol. MOFTEC should fully participate in the international negotiation and domestic policy-making in this field. Such institutional coordination among these relevant departments should also take place at local level. Coordination between central governmental departments and local related agencies is also essential to ensure the implementation of the nation’s policies in controlling and phasing out ODS. In addition to necessary institutional coordination, local environmental protection bureaus should be brought into full play. A local ODS management

office should be set up in each province to be in charge of the ODS control and phaseout within its jurisdiction. 3. It is very important to strengthen public education and to provide training to related personnel and enterprises The study shows that related personnel’s awareness of ozone layer protection is rather weak and the publicity on ODS needs to be increased. Therefore, it is very important to increase the environmental awareness of Chinese enterprises and people who are in charge of examining and approving foreign direct investment in order to make them aware of the importance of protecting the ozone layer. They must also be made aware of China’s obligations to the Montreal Protocol and its commitments in China’s Country Program as well as China’s policies and regulations regarding ODS control. It is necessary to provide training for managerial personnel of related governmental agencies and local grassroots departments. NEPA should be responsible for organizing such training which should include: the harm of ODS to ozone layer, related international agreements, China’s Country Program and Sectoral Strategies, ODS substitution technology. Provincial ODS offices should be responsible for training within their jurisdiction including cities and counties in each individual province. While this report was being written, it was reported that the Foreign Economic Cooperation Office of NEPA was organizing such a training program. There are still some other ways to increase public awareness of the ODS issue effectively. The media should be encouraged to play a major role, including such as the daily newspaper of MOFEC International Business and some other major trade and environment journals. 4. It is necessary to provide enterprises with technical support Efforts will be made to provide enterprises with information on substitute technologies that are mature and applicable in China, and, in particular, to provide them with reliable technical support to replace ODS. The State shoold appraise and test foreign countries' substitution technologies and introduce them to China only after proving they are mature and applicable in China. For example, dichloro-methane foaming technology is relatively mature, but its possible harm to human health needs to be studied.

There is a need for further international cooperation China should continue to work with the other parties to further improve the Montreal Protocol, to include measures to prevent ODS production and consumption from being transferred from non Article 5 countries to Article 5 countries through FDI. The Multilateral Fund should be made more easily accessible to SMEs in developing countries. The Procedure for applying the funds should be simplified, and the period from applying to actually receiving the funds should be shortened. In order to use the Fund more efficiently, flexibility should be accorded to enterprises based on the specific situation including purchasing domestic facilities and substitutes, encouraging them to undertake their own R & D on alternative technology and substitutes according to their own situation. Sharing of local expenses should be further discussed. Information exchange channels should be set up between China and those countries which have established FFEs in China. Special agreements should be reached between China and these countries. Special funds should be made available by these countries to help their FFEs phase out ODS production and consumption, use substituting technology and producing permitted products. Information exchange channels should be established among the mainland, Hong Kong, Taiwan Province and Macao. A special agreement should be concluded to solve the problems of FFEs among these regions. Further research to the related problems after the return of Hong Kong in 1997, and Macao in 1999 should be encouraged. It is worthy studying whether the enterprises from these regions can benefit from the Multilateral Fund. Other recommendations of the research teams are: • •

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China’s Country Program should be further amended and the issue of the ODS transfer through FDI should be fully considered. A nation-wide survey of use of FDI in this field should be conducted to analyze the actual situation of FFEs in order to formulate necessary policies and measures to tackle the problem TNCs in China should be encouraged to take actions to phase-out ODS production and consumption according to their parent countries’ requirements. Their parent companies should provide advanced technology, financial support to their subsidiaries or branch companies in China. In order to promote more enterprises to take action in protecting the ozone

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layer, the role of the industrial associations should be further strengthened. The Government should encourage enterprises including the joint ventures to adopt suitable substitutes through establishing special national fund, providing subsidies and favorable loans, and or tax deductions or exemptions. Further study should be given to the environmental negative impacts and industrial and intellectual property rights of the substitutes and their suitability for China.

Main references: 1. The People’s Republic Of China Country Program For The Phasing Out Ozone Depleting Substances, 1992; 2. The Amendment To The People’s Republic Of China Country Program For The Phasing Out Ozone Depleting Substances, 1994; 3. Xia Youfu, international environmental agreements and China’s opening to the outside world, Chapters 2, 3, China Youth Press, 1996; 4. Zhang Shangtang and Su Ning ed. study on the problems of China’s utilization of foreign investment, China International Culture Press, 1996; 5. Almanac of China’s foreign trade and economic relations, 1984-1995; 6. MOFTEC, statistics of China’s use of foreign investment, 1979-1988; 7. MOFTEC, statistics of China’s use of foreign investment, 1987, 1988, 1989, 1991, 1992; 8. UNCTAD, trade and environment: international debate, 1994.