China's Compliance with Its WTO Obligations Remarks of Alan Wm. Wolff* Dewey Ballantine LLP atThe
Center for American
and International Law Plano, Texas;
June 15, 2005 (The
original of this speech is posted on the Dewey Ballantine
history of the last half century will be dominated by several extraordinary
chapters. Among the most prominent of these will be the reconstruction and
economic integration of Europe, the spectacular rise of Japan and the Asian
tigers, the impact on world commerce of the internet, and most recently the
integration of China into the world economy. An important part of the China
story is that country's joining the World Trade Organization (the "WTO"). For
in this one step China decided to commit itself to continuing and expanding a
program of economic reforms as sweeping, if not more fundamental, as any ever
attempted by any nation at any time in history.
underlying economic reforms began in earnest in 1978 when Deng Xiao Ping began
an opening to the world for his country as spectacular as that achieved by
Commodore Perry for Japan over a century earlier, but one decided in this case
by the government of the country in question, rather than forced from outside.
What Deng chose as the path for China the Chinese Government formalized by its
Accession to the WTO on December 11, 2001.
So much liberalization has been accomplished in so short a period of time,
that it may seem uncharitable to focus too much on shortcomings. But China
is not an ordinary player in the world trading system, and vastly different than
the usual newly-acceding WTO member. China is the fifth largest trading
partner of the United States.
For China, the United States is the largest trading partner overall, and the
largest market for its exports.
Japan is the largest supplier of its imports.
China is among the top markets for many of the world's products - automobiles
cell phones (first),
and semiconductors (third)
to cite just a few examples. China is the third largest trading entity in the
So the obligations it undertakes and is willing to further undertake matter to
the world trading system.
Although China was
one of the 23 original signatories of the General Agreement on Tariffs and Trade
(the "GATT"), the Chinese Nationalist Party withdrew China from the GATT at the
time of the Chinese Communist Revolution in 1950, just two years after it had
The People's Republic of China ("China") applied for a resumption of membership
to the GATT as a Contracting Party in 1986, and formally completed its accession
to the WTO on December 11, 2001.
This step was the result both of an arduous process within China and intensive
protracted negotiations with the world's major trading nations. China engaged
in fifteen years of negotiations with the United States and other WTO members
before it completed its accession process.
China's accession application began to build in 1999 when the United States and
China concluded a bilateral agreement on China's entry into the WTO.
In 2000, China concluded a similar bilateral agreement with the European Union,
and was granted Permanent Normal Trade Relations ("PNTR") status
by the United States. China's PNTR status cleared the way for the United States
to grant China most favored nation ("MFN") treatment, as required by GATT Article I.
significant concessions in order to qualify for accession to the WTO.
·While in many ways China is considered a developing nation, as its
gross domestic product ("GDP") is approximately $1,000 per person,
it agreed to forgo many of the special and
differential WTO provisions that are available to developing countries.
This concession resulted in more stringent implementation terms and deadlines
than countries with comparable levels of gross per capita GDPs.
·Upon the insistence of the United States and other WTO members,
China agreed to be subject to several safeguard mechanisms and other trade
remedies that could be used to resolve disruptive surges and injury to the
industries of other WTO members to which China exported.
oChina agreed to abide by a transitional product-specific safeguard
("TPSS") in addition to the WTO Agreement on Safeguards for twelve years after
its accession. This means that during this twelve-year period, WTO members may
apply the TPSS provision on Chinese goods after a showing of injury without fear
of retaliation by China.
oChina agreed to be subject to safeguards on its textile products
for seven years after its accession.
In exchange for this concession, China benefited from the phase-out of worldwide
quotas on textiles.
oWTO members would have the continued ability to use a "non-market
economy methodology" in antidumping determinations against China until the end
·China also agreed to a special annual review, the Transitional
Review Mechanism, that is not applicable to other WTO members for 10 years after
As or more
important, China amended or adopted literally thousands of laws, regulations and
other measures in order to accede to the WTO. Even so, little of this would
have mattered if China had not also embarked upon a path of dissolving the
state-owned enterprises that accounted for most of its production, industrial
consumption and distribution, and if it had not welcomed foreign investment.
Without these two steps, trade concessions granted in the WTO would have had a
much more limited effect.
By China's own
estimates, during the period 1999-2004, China's exports nearly tripled and its
imports more than tripled.
During the 10-year period between 1994 and 2004, China's exports increased by
204 percent while imports increased by 239 percent.
Table 1: China's Trade with the World ($ billion)
IMF statistics generally conform with these data,
except that imports are valued on an FOB basis and are thus marginally smaller.
As measured by the U.S. Department of Commerce, the U.S. merchandise trade
deficit with China reached $162 billion last year up from only $34 billion as
recently as 1995.
The annualized bilateral U.S. deficit with China for April was $176.4 billion.
It is not possible to separate out changes due to
domestic economic reforms from those due to the trade and related economic
liberalization brought about by China's WTO Accession. The two were intimately
interrelated. Many changes were made to accommodate the Accession but were not
strictly required by the WTO, others preceded the Accession and would have been
in any event necessary under the WTO rules.
Liberalization also occurred, and is reflected in the
trade figures above, by means of China's welcoming foreign investment -- a
strategy that Japan did not pursue in its post-WWII economic development. This
was also a Deng Xiaoping innovation. Much of China's exports and imports are
accounted for by foreign investors with facilities in China. Direct investment
into China amounts to over $500 billion, with $60.6 billion in the last year
China's anticipated and then realized accession to the WTO paved the way for
this extraordinary growth in China's participation in the world economy --
growing from the 14th largest trading nation in 1989 to the third
largest last year behind only the United States and Germany.
The confidence of investors depended heavily on the
degree of certainty that China's goods and services would be allowed
increasingly into the markets of its trading partners and vice versa.
This enhanced confidence can be credited with the remarkably high rate of
progress in China's integration into the world economy.
Only three and one
half years have elapsed since China joined the WTO. This is a relatively short
period upon which to base a judgment on the degree of China's compliance with
its WTO obligations. Nevertheless, a number of commitments were to be
implemented immediately, some by dates certain which have already occurred. It
is now possible to draw both some conclusions and note specific areas where more
needs to be done.
While China agreed
to adopt the obligations of more than twenty multilateral WTO agreements when it
acceded to the WTO, this analysis will focus on a limited number of broad areas
of China's compliance with its WTO commitments. One strong caveat is
also in order: China has not been judged to be in violation of any of its
obligations by a WTO dispute settlement panel. This may be in part because the
process of implementation is so new; it is also because China has on the face of
things complied with its clearest obligations. This paper is designed to be an
overview of compliance, progress toward compliance, and areas that should be of
concern. It does not try to come to judgments of which of the latter two
categories would constitute WTO violations. That would take a far more detailed
examination than time and currently available information allow.
What is clear is
that there has been an extraordinary effort made by China to achieve compliance
and that enormous progress has been made. There are also enormous challenges
looming that are likely to be contentious - just as there have been over time
between the United States and Europe, and between the United States and Japan.
There is a chance that if policymakers, legislators, thoughtful members of the
press, and industry leaders pay particularly close attention to issues that
arise in the case of China, as it experiments with industrial development tools
that limit access to the Chinese market, they might avoid some of the occasional
damage and acrimony that have arisen from time-to-time over the last several
decades in those other two equally important bilateral relationships.
Tariffs and quotas
As might be
expected, it is far easier to make a judgment on compliance with WTO obligations
when China has committed to make a specific change in a specific trade measure.
This is particularly true in the case of tariffs and quotas. China agreed to do
more, in some areas, than some other WTO members. For example, it agreed to
join the Information Technology Agreement ("ITA") requiring tariff elimination
on IT products.
It further agreed to implement its concession of a zero tariff on
semiconductors immediately rather than phasing its tariffs out, as it did for
other IT products.
China has thus far
abided by its tariff reduction schedule to promote increased market access for
foreign exporters. On January 1, 2005, China further decreased its average
tariff rate to 9.4 percent, down from 10.4 percent in 2004 and 16.4 percent in
2000. Large developing nations, such as India, Brazil and Indonesia, continue
to maintain tariff bindings that are well over 25 percent.
(By contrast, the major developed countries have average tariff levels of under
initial implementation delays, China eliminated all of the trade-distortive
non-tariff measures specified in its Protocol of Accession, including import
quotas, and licensing and tendering requirements, according to its WTO accession
schedule deadline of January 1, 2004.
Work in Progress
While China has
passed implementing regulations to abide by the WTO Agreement on Customs
Valuation (the "ACV"), foreign businesses have reported that China's enforcement
officials have not abided by the letter of the law. These customs officials
have allegedly used customs valuation methodologies that were in force before
China's accession to the WTO, and are against the requirements of the ACV.
There is an
obvious interrelationship between the value of a tariff concession for products
of high intellectual property content, e.g. DVDs, music CDs, software, auto
parts, etc., and the protection of intellectual property. Since piracy is
rampant, there is effectively only a very limited market in China for legitimate
products of these kinds.
Trading Rights and
China's accession to the WTO, trading rights were subject to an extremely
restrictive system of control. With a very few exceptions, foreign-invested
enterprises were only allowed to import what they needed for manufacturing in
China, and to export what they produced in China. Domestically-owned companies
were also subject to restrictions in that only those with government-granted
trading rights, mostly state-owned entities, could contract with foreign
entities and engage in trade.
This system was incompatible with the entire idea of liberalization of border
measures - the foundation of the original GATT and now the WTO.
implemented its WTO trading rights commitments in July 2004, six months ahead of
the December 11, 2004 deadline that was established under China's WTO Accession
People's Congress of China issued a revised Foreign Trade Law in April
2004 to allow domestic, joint venture and foreign entities to enjoy automatic
trading rights after proper registration with the Ministry of Commerce ("MOFCOM").
MOFCOM subsequently issued regulations on the proper registration procedures of
foreign trade operators for the enjoyment of automatic trading rights.
In the area of
distribution, China has yet to fully implement its commitments to eliminate
national treatment issues and market access restrictions on foreign
enterprises. While MOFCOM did issue a regulation in April 2004 to remove
restrictions on the ability of joint-ventures to provide distribution services
in China, the agency's delay in issuing implementing procedures limited foreign
businesses' ability to engage in domestic distribution in China.
Licensing is still slow and cumbersome and not available at all for direct
selling organizations, although China committed to remove restrictions on these
firms by December 2004.
The value of
trading rights is limited by the restricted access to distribution rights.
While some foreign-owned enterprises have been able to register for trading
rights, the distribution obstacles have made the effect of this form of
liberalization far less than had been hoped.
While progress is being made, this necessary adjunct to access to the Chinese
market is still an issue for foreign business interests.
China has passed
legislation to eliminate "trade-balancing requirements" for foreign investment
in accordance with its commitments under the WTO Agreement on Trade-Related
Investment Measures (the "TRIMS Agreement"). It also agreed not to force
technology transfer (see separate section below).
requirements for foreign investment include export performance, local content,
foreign exchange balancing and technology transfer. Foreign investors have
periodically raised concerns regarding China's continued "encouragement" of
technology transfer despite regulations that formally prohibit the practice.
These matters were reported in USTR's 2004 Report to the Congress on China's WTO
The United States noted its concern regarding China's use of technology transfer
policies at the WTO's 2004 Transitional Review Mechanism of China's Compliance
with the TRIMS Agreement, and has stated that it will continue to monitor this
issue in 2005.
obligations of the TRIMS Agreement, which are by themselves limited, are of no
value of course if investment is extremely restricted or excluded completely.
Various areas of the Chinese economy are effectively off-limits to foreign
investment although joint ventures have had some successes in the Chinese
market. One example is media. As noted elsewhere in this paper, wholly
foreign-owned advertising companies will be allowed to establish in China only
in December of this year. There are strict limits which remain on investments
in content of print media and access to broadcasting licenses. Censorship also
results in limits on imported print and audio-visual works.
sector affected by investment limitations is the production of automobiles.
Foreign majority-owned firms are confined in their operations to special
economic zones and to exporting.
China has reduced
tariffs, improved administration of tariff-rate quotas, and limited further the
use of trade- or production-distorting agricultural subsidies. The trade
liberalization achieved with respect to China is more extensive than that
normally achieved with developing countries. China's reduction in tariff
bindings has proceeded according to its WTO accession schedule with average
tariff rates on agricultural goods decreasing from 31 percent in 1997 to 15.6 in
China has applied
sanitary and phyto-sanitary restrictions that have blocked access for major
crops and other agricultural products, such as beef, chicken and related
Serious uncertainties and burdens remain with respect to quarantine processes.
Defaults on import contracts have been widespread when commodity prices have
fallen. There is still a lack of transparency in the administration of
tariff-rate quotas, and allocations in some cases are not commercially
China is obligated to eliminate export subsidies, but there is evidence that
China has continued them in some cases. There are reports of a discriminatory
application of value added taxes in violation of national treatment obligations
- in effect imposing an added import restriction and granting an export subsidy
through tax rebates.
As in most areas, foreign businesses ask for an improved opportunity to comment
on draft standards.
China has allowed
greater market access to a number of its services industries in accordance with
its commitments under the General Agreement on Trade in Services (the "GATS
Agreement"). Specifically, in 2004, China removed some geographic limitations
on the banking and insurance sectors, and streamlined its licensing process
through the Administrative Licensing Law, which took effect on July 1,
While China has
complied with and even exceeded the requirements of the GATS Agreement in some
sectors, including certain types of professional, environmental and tourism
services, it has been less willing to provide greater market access in other
service areas, such as the audio-visual services sector. For example, China has
interpreted its commitment to allow the importation of twenty foreign films per
year to be a maximum annual limit instead of a minimum requirement.
complied with its commitments under the Trade in Services Agreement to open up
certain sectors of its industry to foreign investment, including travel
agencies, cinemas, publications distribution, communications, internet, internet
information services, etc. This liberalization effort appears to have stalled,
however. In addition, China has very narrowly construed its obligation to
provide open access for the provision of value-added telecommunications
services. Further liberalization is being sought.
the U.S. government, Chinese regulatory authorities continue to impede access
for foreign providers of insurance, telecommunications, and other services,
particularly through the use of excessively high capital requirements.
Any country, and
particularly a very large country, has an extraordinarily considerable body of
regulations. China had historically not provided much transparency in the
regulations and rulings it promulgated. This has improved to a very marked
elsewhere in this paper, standards can often completely deprive a foreign
producer of market access.
Failure to adopt international standards can be an effective barrier to imports,
as can additional expensive and duplicative testing requirements. For decades,
Japan effectively closed its automotive market through "homologation"
requirements, designed to bring foreign cars into exact conformity with Japanese
national standards. China has complex regulations for certification and testing
of autos and auto parts that are complex, and have a serious adverse restraining
effect on imports.
accession commitments for a WTO-compliant legal framework, China agreed to (1)
allow public comment on new or modified laws and regulations before they were
implemented; (2) translate all trade-related legislation into one or more of the
official WTO languages (English, French and Spanish); and (3) publish all
trade-related legislation in an official journal.
reviewed more than 2,500 trade-related laws, regulations and other measures for
compliance with its WTO commitments. This review led to the repeal of more than
800 laws, regulations and other measures, and the passage of 550 new or revised
pieces of legislation since 2002.
Since its accession, almost all new or revised laws, regulations and other
measures in China have been made available (in Chinese) soon after its issuance
and before its effective date. These laws have been published in at least one of
China's several official journals and newspapers and many have even been
published on the Internet.
China has not
been consistent in providing a public notice and comment period before
promulgation of a new or revised law, regulation or other measure. For example,
in 2004, China circulated drafts of its new insurance regulations for comment,
but did not provide a notice and comment period for a regulation on the rules of
China has been
slow to translate its laws into one of the official WTO languages.
progress has been made, by far the most common complaint of foreign business is
the lack of transparency in the formulation of regulations and rule-making by
Prior to joining
the WTO, in an effort to promote the production of semiconductors in China,
China began providing a rebate of 17 percent of the value-added tax ("VAT") for
domestically-produced integrated circuits ("ICs") while imposing the full 17
percent VAT on imported ICs.
2004, the United States and China, through consultations, successfully resolved
the first-ever dispute settlement case brought against China at the WTO.
The case involved a challenge of China's discriminatory VAT rebate policy for
Chinese-produced semiconductors. The settlement reached by the United States
and China resulted in the repeal of the discriminatory VAT rebates, which China
promulgated in October 2004.
There has also
been major progress in the automotive sector, including rules on auto financing
and the automatic licensing of imports replacing import quotas. Foreign
manufacturers are now allowed to distribute their cars.
The Government of
China has substituted a series of incentives which it states are designed to
replace the discriminatory VAT rebate system. The government of China has
stated that any replacement measures will be WTO-consistent. The United States
government is monitoring the programs being put into place.
In the automobile
sector, there is concern that the parts import measure
is in effect a new local content requirement, and a possible WTO violation.
Forced technology transfer
As part of
its Protocol of Accession, China agreed not to require the transfer of
technology as a condition for import licensing or investment.
However, China proposed to put into place a Wireless Local Area Networks ("WLAN")
standard that would have required the transfer of technology to be able to sell
wireless products in China (such as laptop computers). The WLAN Authentication
and Privacy Infrastructure ("WAPI") standard, which was scheduled to go into
effect on June 1, 2004, is an encryption technique for secure communications
that is incompatible with internationally recognized standards. China had
planned on providing the underlying technology for WAPI to only a few Chinese
producers, forcing foreign manufacturers to either (1) collaborate with their
Chinese counterparts and risk sharing valuable intellectual property, or (2)
forego the Chinese wireless market altogether.
negotiations at the bilateral U.S.-China Joint Committee on Commerce and Trade
(the "JCCT") meeting in 2004, China agreed to suspend indefinitely
implementation of its mandatory Chinese-developed WAPI standard.
proposed WAPI standard was suspended, not terminated. Monitoring by the U.S.
government continues, although there have been no indications of a near-term
imposition of the standard.
Concerns remain in a number of high tech industries that Chinese companies are
being encouraged by Chinese government agencies to replace foreign technologies,
to resist payment of royalties to foreign companies, and to intervene in what
would normally be private commercial negotiations regarding technology transfer
- conduct that China pledged not to engage in.
One area of current concern is China's delay in
fulfilling a key requirement of the Subsidies Agreement: notification of its
subsidy programs to the WTO on an annual basis. Thus far, China has never
submitted a subsidies notification to the WTO as required by Article 25 of the SCM Agreement. China briefly addressed its subsidy programs in 2001 as part of
the annex to its accession agreement, but many WTO Members have taken the
position that this description was inadequate and incomplete, as it contained
information only through 1999.
Far more data and extensive analysis would be
required to determine whether there are issues of noncompliance with the
Subsidies Agreement. A major charge of foreign businesses is that China's
currency is purposely undervalued and that this constitutes a large
across-the-board export subsidy and the equivalent of an import duty. No WTO
challenge has yet been brought on this basis against China's currency
valuation. Some revaluation of the yuan (or at least re-pegging to a
basket of currencies) is widely anticipated.
China has yet to initiate a
countervailing duty investigation.
Thus, while China has agreed to abide by the WTO Agreement on Subsidies and
Countervailing Measures (the "Subsidies Agreement"), and has generally
implemented regulations that are in conformity with the Agreement, it is not yet
possible to determine China's overall compliance with the Subsidies Agreement.
conducted only one safeguard proceeding since its accession to the WTO. In May
2002, China imposed safeguard measures against a type of steel that is produced
by a number of nations. These measures, however, were terminated in 2003.
No WTO challenge was brought with respect to China's compliance with the WTO
Agreement on Safeguards with respect to this case.
China has issued
several sets of regulations in the antidumping area, and has become a frequent
user of antidumping measures. Thus far, China has imposed 58 antidumping
measures with 35 additional antidumping investigations currently pending.
Some progress has
been made with China's antidumping regime's formal compliance with the legal
framework of the WTO Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade of 1994 (the "AD Agreement"). For example, China
issued a revised Foreign Trade Law in July 2004 that contained further
clarification of China's trade remedy regulations as part of its compliance
efforts with the AD Agreement.
The United States
and other WTO members, including the European Union and Japan, have voiced
concerns regarding China's antidumping regime. Foreign business interests have
serious questions as to whether China is acting consistently with its WTO
obligations with respect to a number of cases. Their governments are concerned
about the lack of transparency and fair procedures that foreign businesses are
subject to when engaged in China's antidumping investigations as well as the
standards that are being applied by China's administrative authorities,
particularly with regard to injury determinations.
As more cases are concluded that result in antidumping measures being imposed,
undoubtedly more intense scrutiny will be given by China's trading partners to
the fairness of China's antidumping administration.
China committed as
part of its accession agreement to join the Government Procurement Agreement "as
soon as possible." This has not yet occurred, nor has China entered into
negotiations to do so.
procurement can serve as a tool of industrial promotion at the expense of
foreign competitors. This may occur in China with respect to the government
policy for purchasing of software through draft regulations issued by the
Ministry of Information Industries in April 2005.
This proposed buy-domestic regulation would be a step backward in China's
integration into the world economic system, especially as it involves a key
element in the IT sector that contributes significantly to GDP growth when
competition is allowed to flourish. Chinese law also generally directs central
and local agencies to give priority to the purchase of local goods and services.
Just a few years
ago, China did not have basic laws to protect intellectual property similar to
those of most trading nations. China has made significant progress in
establishing a legal framework for compliance with the international
intellectual property rights ("IPR") standards set forth in the WTO
Trade-Related Aspects of Intellectual Property Rights Agreement (the "TRIPS
promulgated laws, measures and other regulations on trademark, copyright, and
patent infringement. In December 2004, its Courts enunciated a Judicial
Interpretation that would enhance the use of criminal penalties to enforce the
protection of intellectual property.
The high level Market Order Rectification Office (MORO) was established to
strengthen interagency coordination of IPR enforcement efforts.
At a U.S.-China
Joint Commission on Commerce and Trade meeting in April 2004, Vice Premier Wu Yi
vowed to "significantly reduce IPR infringement" through an "action plan" that
called for improved legal measures for criminal prosecution of IPR violations,
increased enforcement activities, and a national IPR education program.
However, it is
the view of China's trading partners that enforcement is wholly inadequate.
This is on the top of their trade agendas with China. Some foreign businesses
have reported that China's IPR infringement levels are very high for virtually
every form of intellectual property. Overall piracy rates in China have not
decreased significantly since China's accession to the WTO.
Automotive designs have been copied and it is still unclear whether local
enforcement will cure this problem.
enforcement of IPR violations has not yet had a significant deterrent effect on
infringers, as China has pursued criminal prosecutions against only a small
number of infringement cases. The United States and other WTO members are also
concerned about China's lack of transparency in providing sufficient information
about its IPR infringement and enforcement levels and are concerned that China
is in violation of its TRIPS Agreement obligations.
In April 2005, the
United States released an out-of-cycle review of China's progress in the
implementation of Vice Premier Wu's action plan and other IPR commitments. The
review concluded that China has not made a significant reduction in IPR
infringement as promised by the Vice Premier. Based on the United States'
concern about China's compliance with its WTO TRIPS obligations and its
commitments, China was elevated onto the United States' Priority Watch List -
designed to give a very high level of attention and potential response to a
pattern of IPR violations.
Whether formal WTO action will be taken by the United States government is
currently an open question.
challenge to the WTO as it was with the GATT
occurs when a WTO member decides to employ a web of measures to promote an
industry at the expense of its foreign competitors. Looked at broadly, Airbus
is one example.
This chapter in the history of industrial competition was about more than launch
subsidies - it was also about distortions in government procurement and
development assistance, and political pressure to obtain or direct purchasing.
example of trade distorting industrial policies is the Korean government-backed
Buy Korean campaigns that undoubtedly impaired the value of tariff concessions
granted to its trading partners,
among other measures.
Despite its GATT
obligations, for decades Japan prevented trade liberalization from having its
intended effects through a wide variety of measures. It blocked agricultural
imports through unreasonable phyto-sanitary standards. It prevented price
competition through means of competition laws that were drafted to protect
consumers but applied to assist domestic competitors. It prevented large scale
retail discount stores from operating. At an early stage, it restricted
channels for imports and made distribution of foreign products uneconomic. It
backed cooperative R&D with domestic industry through direct government
assistance and assistance of state-owned entities (such as NTT). These efforts
were called by the Japanese Government "counter-liberalization measures."
No other GATT Contracting Party was as thorough in the defense of its market
against GATT-intended liberalization as Japan was in the last half of the 20th
arises whether this pattern might occur in the case of China. With China, there
is concern that state agencies may use a combination of measures to defeat the
primary objective of WTO obligations - the liberalization of the domestic market
to foreign trade in goods and services. There are some troubling signs that
this problem could occur in China. If this is the case, it would become the
central feature in economic relations between China and its trading partners.
Chinese agencies charged with promotion of indigenous industry in China and
those aligned with this objective have proposed and are proposing measures that
could nullify and impair WTO benefits:
·The new draft Antimonopoly Law could be employed against strong
·National standards could be applied in a manner that deprives
foreign competitors of the ability to sell any or much of their product in
·Encouragement could be given to domestic firms to avoid paying
royalties to foreign firms for technology being utilized by Chinese domestic
These are not purely hypothetical examples.
·Press reports and statements by government agencies suggest that
the principal target of the AML is the competitive foreign multinational in
general and specific strong foreign competitors have been cited by Chinese
officials by name;
·The WAPI (wireless LAN) example, cited above, indicates that
standards can be used to close a market completely. A similar problem could
exist with respect the next generation (3G) cell phone market, in which the
national standard (TD-SCDMA)
may be adopted in preference to broadly accepted international standards
(currently, CDMA2000, which is supported by Qualcomm and WCDMA, which is used in
European nations and Japan);
·Repeated statements by senior Chinese officials that payment of
royalties to foreign firms for their intellectual property is to be discouraged.
There is reason for concern, and active monitoring by
China's trade partners, of statements and measures by those in China who favor
autarchy. Mandated national self-sufficiency is the antithesis of what the WTO
Antimonopoly Law (AML)
While this subject
has been dealt with above under the heading of industrial policy, it cannot be
overemphasized that the AML can either be a force for making a market operate
efficiently, or it can, if misapplied, be a tool for intervening to prevent
competitive outcomes. It can encourage foreign investment (as can protection of
IP rights) or it can hinder it.
Under China's WTO
obligations, a discriminatory application of an AML would constitute a denial of
national treatment insofar as it limited the sale of foreign goods or services.
President Bush and Chinese Premier Wen Jiabao agreed that JCCT meetings would be
used as an important mechanism to resolve issues that contribute to imbalances
in U.S.-Sino economic relations. At the April 2004 JCCT meeting, U.S. Secretary
of Commerce Don Evans and U.S. Trade Representative Ambassador Robert Zoellick
met with Vice Premier Wu Yi to resolve a number of potential disputes over
China's WTO compliance measures.
In early June 2005, U.S. Secretary of Commerce Carlos Gutierrez and U.S. Trade
Representative Ambassador Rob Portman visited China to stress the importance of
resolving bilateral trade issues between the two nations.
While China has
made significant progress towards compliance with its WTO commitments, including
successes in tariff rate reductions and removal of formal barriers to trade, it
has yet to comprehensively and effectively implement some of its key WTO
commitments, especially in the area of IPR enforcement. The United States and
other WTO members will continue to monitor and cooperate with China in order to
promote China's complete compliance with its WTO commitments.
What is equally
interesting will be China's emerging role as a shaper of its external
environment - the rules by which it and other trading nations are to abide by.
It has tabled a paper in the Technical Barriers to Trade ("TBT") Committee
suggesting that [foreign] patents might be seen as a barrier to adoption of
standards. It has raised the subject of its own WTO-rights in connection with
others' imposition of restrictions on its textile exports and the discrimination
it says is inherent in the application by others of a non-market economy status
for purposes of applying the antidumping law.
In exchange for
its commitments to the WTO, China has gained important rights from the
international community. It has obtained market access abroad through
reciprocal benefits from other WTO members, which includes use of the WTO
Dispute Settlement System. While China has been a complainant in only one WTO
dispute settlement case - the 2002 case against the United States regarding U.S.
safeguard measures on imports of certain steel products
- it has been a frequent third-party intervenor. As of 2004, China has made
nineteen third-party submissions to WTO DS cases,
including cases on the United States' rules of origin for textiles and apparel
products and the European Union's export subsidies on sugar.
In addition, China
has become a member of the Orwellian-named "Friends of Antidumping
Negotiations," group, which is a 17-member organization that has made several
submissions to the Doha Negotiations "Rules Group,"
designed to undermine the use of antidumping measures.
In the books that
will be written on the process of China's integration into the world economy,
some of the most fascinating passages will probably focus on China's attempts to
pursue national industrial policy objectives in the context of its WTO
obligations and the effects of its efforts to shape the international trading
system's rules. For the present, those doing business in China and those
concerned with international trade in general policy (as opposed to just narrow
questions of violation of or compliance with specific WTO rules) will be judging
China's integration into the world economy by a much broader standard than "WTO
compliance." The WTO is a series of legal agreements among sovereign countries,
as well as an organization seeking to administer the rules provided by those
agreements. While there is a basis for a WTO claim for "nullification and
impairment of benefits" if measures that are not strictly WTO-illegal by their
terms nevertheless deprive other WTO members of the benefits of the bargains
they struck, no claim lies for imposing measures in violation of the "spirit of
The answer to
barriers to and distortions of trade may lie in bringing a WTO case to enforce
current obligations (or better still to resolve a matter through a settlement of
the case through consultations among governments). The answer may lie in
negotiating new obligations pursuant to new trade agreements. But the test for
elected officials of China's trading partners will in the first instance be far
more basic: Are their nation's companies able to conduct themselves fully in
China in accordance with dictates of economic efficiency and a legal regime that
ensures fairness, or is market access denied for reasons of industrial promotion
As a political
matter, China's "WTO compliance" will be judged by the standard that a business
would apply - is China delivering in fact an open market?
[*] Alan W. Wolff
leads the International Trade Practice of Dewey Ballantine LLP. These
remarks represent the views of the author, and do not necessarily reflect
the views of the Dewey Ballantine firm or any of its clients. Dewey
Ballantine LLP recently opened its Beijing Office, headed by Sharon Mann,
former head of the Trade Facilitation Office at the U.S. Embassy, Beijing.
The text of this and other trade papers of the firm can be found at
www.dbtrade.com. Lisa Wang, Summer Associate at the firm, contributed
substantially to the research represented by this paper.
Jackson, World Trade and the Law of GATT, Bobbs-Merrill, 1969,
at p. 900. China joined the WTO on May 21, 1948, and withdrew on
May 5, 1950; Press Release, World Trade Organization, WTO Successfully
Concludes Negotiations on China's Entry, pp. 3-4 (Sept. 17, 2001)
http://www.wto.org/english/news_e/pres01_e/pr243_e.htm ("WTO 2001 Press
While the People's Republic of China never recognized the Nationalist
Party's withdrawal of China from the GATT, it nonetheless applied for a
"resumption" of membership to the GATT. See supra note 8, WTO 2001
Press Release at pp. 4-5.
See id. at p. 5; Charles W. Freeman III, Deputy Assistant U.S. Trade
Representative, Testimony Before the U.S.-China Commission, p. 1
(Feb. 5, 2004).
What for centuries had gone by the term "most-favored-nation" status.
Extension of Nondiscriminatory Treatment to the People's Republic of China,
P.L. 106-286, 114 Stat 880
(Oct. 10, 2000).
Unless on its accession to the WTO, the United States and China agreed not
to apply the WTO to each other (see GATT Article XXXV,
Non-Application of the Agreement between Particular Contracting Parties
) which, however, would have defeated much of the purpose of China's joining
Some economists contend that the way in which the U.S. Department of
Commerce measures trade with China overstates the bilateral imbalance
primarily due to the valuation of entrepôt trade through Hong Kong.
U.S.-China Business Council, Understanding the U.S.-China Balance of
different valuation methods may produce different absolute values for any
given year, the sharply deteriorating trend in the U.S. trade balance with
China is apparent under any valuation method.
See Ministry of Commerce of People's Republic of China, Main
Indicators of Foreign Trade and Economy in Total (2004/01-12), March 11,
2005; Nicholas R. Landy, China: The Great New Economic Challenge,
in Institute for International Economics, The United States and the
World Economy: Foreign Economic Policy for the Next Decade, at 123 (Jan.
See supra note 7, WTO International Trade Statistics.
See supra note 17, China's Protocol of Accession of Accession,
Annex 2B (Products Subject to Designated Trading); see also supra
note 2, USCBC Summary of China's Trade Performance for 2004,
See supra note 2, USCBC Summary of China's Trade Performance for 2004,
p. 5 (stating that China's average import tariff rate decreased to 9.4
percent on January 1, 2005); China to Cut Overall Tariff Rates,
People's Daily, Dec. 30, 2000.
Supra note 17, China's Protocol
of Accession, Part I, Article 7; United States Trade
Representative, 2004 Report to Congress on China's WTO Compliance, p.
26 ("USTR 2004 Report to Congress").
See supra note 1, USTR 2005 NTE Report, p. 79.
See supra note 31, USTR 2004 Report to Congress, p. 11; note
1, USTR 2005 NTE Report, p. 74.
See supra note 31, USTR 2004 Report to Congress, pp. 12-14.
China Daily, Foreign Trade Law of the PRC, Article 15 (July 4, 2004)
(allowing "free import and export of goods and technologies" to foreign
trade dealers) ("China's Revised Foreign Trade Law") available at
See supra note 31, USTR 2004 Report to Congress, p. 14.
See supra note 36, China's Revised Foreign Trade Law, Article
23 (granting market access and national treatment to all WTO member
See supra note 31, USTR 2004 Report to Congress, p. 14.
See supra note 17, China's Accession Protocol, Part I, Article
See supra note 31, USTR 2004 Report to Congress, p. 48.
World Trade Organization, Committee on Trade-Related Investment Measures'
Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of
Accession of the People's Republic of China to the World Trade Organization,
G/L/708 (04-4737), p. 3 ¶16 (Nov. 17, 2004) ("2004 China TRM Report on
See American Chamber of Commerce, Beijing, China, White Paper on
Media & Entertainment (AmCham, Beijing); supra note 1, USTR
2005 NTE Report, pp. 111-12.
See supra note 43, 2004 China TRM Report on TRIMS, p. 3 ¶16.
World Trade Organization, Report to the Council for Trade in Goods on
China's Transitional Review, G/AG/19, Attachment 2 (Nov. 3, 2004) ("2004
China TRM Report on Agriculture").
See supra note 31, USTR 2004 Report to Congress, p. 51.
See supra note 46, 2004 China TRM Report on Agriculture, at
Attachment 1 (Questions to China from the United States).
See supra note 31, USTR 2004 Report to Congress, p. 53.
See e.g., the wireless LAN (or WAPI) standard.
See American Chamber of Commerce, Beijing, China, Annual White
Paper on the Automotive Industry (AmCham, Beijing); supra note 1,
USTR 2005 NTE Report, p. 86; see also discussion on the WAPI
standard infra, p. 14.
See supra note 17, China's Protocol of Accession, Part I,
See supra note 31, USTR 2004 Report to Congress, p. 81.
See supra note 1, USTR 2005 NTE Report, p. 88.
See supra note 31, USTR 2004 Report to Congress, p. 43;
infra discussion on 3G telecommunication standards, p. 18.
See supra note 17, China's Protocol of Accession, Annex 5A; supra
note 31, USTR 2004 Report to Congress, p. 39.
But see No Timetable Set for Exchange Rate Reform,
Xinhua Daily, June 8, 2005
(quoting Zhou Xiaochuan, head of the People's Bank of China, as saying that
while China was "determined to reform its exchange rate system," it had "no
See supra note 1, USTR 2005 NTE Report, p. 81.
See supra note 1, USTR 2005 NTE Report, pp. 120-21. China
issued the Government Procurement Law on January 1, 2003 in an effort
to follow the "spirit" of the WTO Government Procurement Act. China's new
law, however, still entitles "local" goods and services" to priority
Benjamin Wu, Assistant Secretary for Technology Policy, U.S. Department of
Commerce, Testimony Before the Committee on Government Reform (May
13, 2005) available at
http://www.technology.gov/Testimony/p_BHW_050513.htm; see also
Office of the United States Trade Representative, response to
author, June 8, 2005.
See supra note 1, USTR 2005 NTE Report, p. 95.
American Chamber of Commerce, Beijing, China, Annual White Paper on the
IT Industry (AmCham, Beijing); Benjamin Wu, Assistant Secretary for
Technology Policy, U.S. Department of Commerce, Testimony Before the
Committee on Government Reform (May 13, 2005) available at
See supra note 82, USTR 2005 Special 301 Report, pp. 16-17.
See generally World Trade Organization, Report of the Panel, Japan
- Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R
(Mar. 31, 1998). The GATT proved unequal to the challenge.
The EU would say "look at Boeing and cross-product subsidization from
military procurement," which charge the U.S. government denies.
For a variety of nonmarket reasons, worthy of a separate paper, import
penetration for foreign automobiles has for decades been so low as to not
credibly be a reflection of market forces.
Foreign firms also complained of Japanese companies using blanket patenting
of incremental innovations to prevent exploitation of intellectual property
rights through this "patent-blocking."
Office of Anti-Monopoly, Fair Trade Bureau, State Administration of Industry
and Commerce, Anticompetitive Practices of Multinational Companies in
China and Countermeasures, Administration of Industry and Commerce (May
2004) (stating that a foreign company's refusal to authorize "any other
company to use its [IPR protocols]" may constitute a "refusal to deal" for
purposes of the AML).
Home-Grown 3G Trials Set for October,
People's Daily, July 10, 2001
(stating that the International Telecommunication Union has accepted TD-SCDMA
as one of its six recognized 3G standards).
Chinese 3G Standard heralds the Year of Rooster,
People's Daily, February 8,
China's Self-Made EVD Enters Market,
People's Daily, November 21,
2003 (discussing implementation of a Chinese alternative to DVD players to
counteract the payment of "exorbitant patent royalties"
to foreign DVD manufacturers).
Competition policy is a conscious exclusion from the WTO and the GATT before
it. Its inclusion in the ITO Charter is the primary reason that the Havana
Charter of the International Trade Organization (ITO) was never ratified by
the United States and why that organization never came into existence. More
recently, the EU at the beginning of the Doha Development Agenda talks
sought to have competition policy added to the Doha Agenda. This initiative
failed due to widespread opposition. It was felt that in the current
climate, new WTO rules would tend to be permissive of illiberal measures
with regard to trade rather than promoting trade liberalization.
See supra note 1, USTR 2005 NTE Report, p. 72.
World Trade Organization, Note by the Secretariat, United States-
Definitive Safeguard Measures on Imports of Certain Steel Products,
WT/DS248/15, WT/DS249/9, WT/DS251/10, WT/DS252/8, WT/DS253/8, WT/DS254/8,
WT/DS258/12, WT/DS259/11 (Aug. 12, 2002).
World Trade Organization, Report of Panel, United States - Rules of
Origin for Textiles and Apparel Products, WT/DS243/R, Section IV(A)
(June 20, 2003); World Trade Organization, Report of Appellate Body,
European Communities - Export Subsidies on Sugar, WT/DS265/AB/R,
WT/DS266/AB/R, WT/DS283/AB/R, Section II(I)(3) (April 28, 2005).
United States Trade Representative, 2005 Trade Policy Agenda, p. 33.
The members of the "Friends of Antidumping Negotiations" group are Brazil,
Chile, Colombia, Costa Rica, Hong Kong, Israel, Japan, Korea, Mexico,
Norway, Singapore, Switzerland, Taiwan, Thailand, and Turkey.