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China's Compliance with Its WTO Obligations
Remarks of Alan Wm. Wolff*
Dewey Ballantine LLP
at The Center for American and International Law
Plano, Texas; June 15, 2005
(The original of this speech is posted on the Dewey Ballantine LLP site)

 

The economic 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.

The 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.[2]  Japan is the largest supplier of its imports.[3]  China is among the top markets for many of the world's products - automobiles (fourth largest),[4] cell phones (first),[5] and semiconductors (third)[6] to cite just a few examples.  China is the third largest trading entity in the WTO.[7]  So the obligations it undertakes and is willing to further undertake matter to the world trading system. 

I.       China's Accession to the WTO

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 joined it.[8]  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.[9]  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.[10]

Momentum for 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.[11]  In 2000, China concluded a similar bilateral agreement with the European Union,[12] and was granted Permanent Normal Trade Relations ("PNTR") status[13] 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.[14]

China made 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,[15] it agreed to forgo many of the special and differential WTO provisions that are available to developing countries.[16] 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. 

o       China 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.[17]

o       China agreed to be subject to safeguards on its textile products for seven years after its accession.[18] In exchange for this concession, China benefited from the phase-out of worldwide quotas on textiles.[19]

o       WTO members would have the continued ability to use a "non-market economy methodology" in antidumping determinations against China until the end of 2016.[20]

·        China also agreed to a special annual review, the Transitional Review Mechanism, that is not applicable to other WTO members for 10 years after its accession.[21]

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. 

II.  Measuring China's Growing Integration into the World Economy

By China's own estimates, during the period 1999-2004, China's exports nearly tripled and its imports more than tripled.[22] During the 10-year period between 1994 and 2004, China's exports increased by 204 percent while imports increased by 239 percent.[23]

Table 1: China's Trade with the World ($ billion)

 

1999

2000

2001

2002

2003

2004

Exports

194.9

249.2

266.2

325.6

438.4

593.4

% change

6.1

27.9

6.8

22.4

34.6

35.4

Imports

165.7

225.1

243.6

295.2

412.8

561.4

% change

18.2

35.8

8.2

21.2

39.8

36.0

Total

360.6

474.3

509.5

620.8

851.2

1,154.8

% change

11.3

31.5

7.5

21.8

37.1

35.7

Balance

29.2

24.1

22.5

30.4

25.5

31.9

 

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.[24]  The annualized bilateral U.S. deficit with China for April was $176.4 billion.[25]

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 alone.[26]  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.[27] 

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. 

III.  A Preliminary Assessment of China's WTO Commitments: Successes and Work in Progress

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

    Successes

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.[28]  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.[29] 

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.[30] (By contrast, the major developed countries have average tariff levels of under 3%). 

Despite some 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.[31]

    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.[32]

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.[33] 


Trading Rights and Distribution Rights

Before 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.[34]  This system was incompatible with the entire idea of liberalization of border measures - the foundation of the original GATT and now the WTO. 

    Successes

China formally 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 Agreement.[35]

The National 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").[36]  MOFCOM subsequently issued regulations on the proper registration procedures of foreign trade operators for the enjoyment of automatic trading rights.[37]

    Work in Progress

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.[38]  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.[39]

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.[40]  While progress is being made, this necessary adjunct to access to the Chinese market is still an issue for foreign business interests. 

Trade-related Investment Obligations

    Successes

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).[41] 

    Work in Progress

Trade-balancing 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 compliance.[42]  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.[43]

    Further issues

The basic 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.[44]

Another major 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.[45] 

Agriculture

    Successes

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 2004.[46]

    Areas of concern

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 products.[47]  Serious uncertainties and burdens remain with respect to quarantine processes.[48]  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 reasonable.[49]  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.[50]  As in most areas, foreign businesses ask for an improved opportunity to comment on draft standards.  

Services

    Successes

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, 2004.[51]

    Work in Progress

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.[52] 

China has 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.[53] 

According to 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.[54]

Product standards

    Successes

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 degree.

    Areas of concern

As noted elsewhere in this paper, standards can often completely deprive a foreign producer of market access.[55]  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.[56]

Legal Framework

Under its 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.[57]

    Successes

China has 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.[58]  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.

    Work in Progress

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 origin.[59]

China has been slow to translate its laws into one of the official WTO languages.

    Area of greatest concern

Although some 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 regulatory agencies.[60] 

National treatment

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.[61]

    Successes

In July 2004, the United States and China, through consultations, successfully resolved the first-ever dispute settlement case brought against China at the WTO.[62]  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.[63]

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.[64]

    Work in Progress

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[65] 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.[66]  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.[67]

    Successes

After 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.[68]

    Work in Progress

The 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.[69]  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.[70]

Subsidies

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.[71]

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.[72]  

Trade Remedies

    Countervailing duties

China has yet to initiate a countervailing duty investigation.[73] 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.

    Safeguards

China has 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.[74]  No WTO challenge was brought with respect to China's compliance with the WTO Agreement on Safeguards with respect to this case.

    Antidumping

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.[75] 

    Status

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.[76]

    Subjects of concern

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.[77]  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. 

Government Procurement

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.[78] 

Government 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.[79]  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.

IV. Areas of Greatest Concern

Intellectual Property Rights

    Successes

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 Agreement").[80]

China has 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.[81]  The high level Market Order Rectification Office (MORO) was established to strengthen interagency coordination of IPR enforcement efforts.[82] 

    Area of concern

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.[83]

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.[84] Automotive designs have been copied and it is still unclear whether local enforcement will cure this problem.

Criminal 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.[85] 

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.[86]  Whether formal WTO action will be taken by the United States government is currently an open question. 

Industrial policy

A major challenge to the WTO as it was with the GATT [87] 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[88].  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.

Another 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,[89] 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."[90]  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 century.

The question 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 foreign competitors;

·        National standards could be applied in a manner that deprives foreign competitors of the ability to sell any or much of their product in China; and

·        Encouragement could be given to domestic firms to avoid paying royalties to foreign firms for technology being utilized by Chinese domestic competitors.

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;[91]

·        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)[92] 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[93]); and

·        Repeated statements by senior Chinese officials that payment of royalties to foreign firms for their intellectual property is to be discouraged.[94]  

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 is about.   

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.[95] 

V.  The Bush Administration's Approach to China's Compliance with the WTO

In 2003, 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.[96]  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.[97]

VI.  Conclusion

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[98] - it has been a frequent third-party intervenor.  As of 2004, China has made nineteen third-party submissions to WTO DS cases,[99] including cases on the United States' rules of origin for textiles and apparel products and the European Union's export subsidies on sugar.[100]

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,"[101] 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 WTO". 

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 or protection?   

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?


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[*] 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.

[1] United States Trade Representative, 2005 National Trade Estimate Report on Foreign Trade Barriers, p.72 available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_NTE_Report/asset_upload_file469_7460.pdf ("USTR 2005 NTE Report").

[2] U.S.-China Business Council, China's Trade Performance for 2004, at p. 2, Tables 4 and 5 available at http://www.uschina.org/statistics/2005tradeperformance.html ("USCBC Summary of China's Trade Performance for 2004").

[3] Id. at p. 3, Table 6.

[4]  Shanghaied: Things are going awry for foreign carmakers in China, The Economist, April 21, 2005, available at http://www.economist.com/business/displayStory.cfm?story_id=3899068 (stating that China had car sales of 2.3 million in 2004).

[5]  Cell phone use surges in China, News.com, June 7, 2004 available at http://news.com.com/Cell+phone+use+surges+in+China/2100-1039_3-5227836.html.

[6]  China was third largest semiconductor market in 2004, ITworld.com, April 19, 2005 available at http://www.itworld.com/Comp/1622/050419chinasemiconductor/pfindex.html.

[7] World Trade Organization, International Trade Statistics (2004) available at http://www.wto.org/english/res_e/statis_e/statis_e.htm ("WTO International Trade Statistics"). The rankings were based on country rankings of total imports and exports.

[8] 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) available at http://www.wto.org/english/news_e/pres01_e/pr243_e.htm ("WTO 2001 Press Release") 

[9] 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.

[10] 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).

[11] U.S.-China Bilateral WTO Agreement, Nov. 15, 1999 available at http://clinton4.nara.gov/WH/New/WTO-Conf-1999/factsheets/fs-004.html

[12] E.U.-China Bilateral WTO Agreement, May 19, 2000 available at http://europa.eu.int/comm/trade/issues/bilateral/countries/china/index_en.htm.

[13] 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).

[14] 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 the WTO.

[15] Zhao Cheng and Liu Zheng, What does per-capita GDP over US$1,000 mean?, People's Daily, Dec. 31, 2003, available at http://english.people.com.cn/200312/29/eng20031229_131472.shtml. See also Central Intelligence Agency, The World Factbook - China (May 17, 2005) (estimating that China's GDP, as measured by purchasing power parity, was $5,600 in 2004) available at http://www.cia.gov/cia/publications/factbook/geos/ch.html.

[16]  Office of the United States Trade Representative, response to author (June 8, 2005).

[17] World Trade Organization, Protocol Accession of the People's Republic of China, WT/L/432 (01-5996), Nov. 23, 2001, at Part I, Article 16(9) ("China's Protocol of Accession").

[18] See supra note 8, WTO 2001 Press Release, p. 2.

[19] World Trade Organization Agreement on Textiles and Clothing, Article 9 terminated on January 1, 2005.

[20] See supra note 17, China's Protocol of Accession, Part I, Article 15.

[21] Id. at Part I, Article 18.

[22] U.S.-China Business Council, China's Customs Statistics from the PRC General Administration of Customs available at http://www.uschina.org/statistics/tradetable.html

[23] See id.

[24] 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 Trade available at http://www.uschina.org/statistics/2004balanceoftrade.html.  While 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.

[25] Trade Deficit Widened in April; Exports and Imports Set Records, New York Times, June 11, 2005 available at http://www.nytimes.com/2005/06/11/business/11trade.html.

[26] 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. 2005).

[27] See supra note 7, WTO International Trade Statistics.

[28] World Trade Organization, List of ITA Participants available at http://www.wto.org/english/tratop_e/inftec_e/itapart_e.htm.

[29] 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, p. 5.

[30] 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.

[31] 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").

[32] See supra note 1, USTR 2005 NTE Report, p. 79.

[33] See United States Trade Representative, Out-of-Cycle Review Results: China (2005) available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_Special_301/asset_upload_file835_7647.pdf.

[34] See supra note 31, USTR 2004 Report to Congress, p. 11; note 1, USTR 2005 NTE Report, p. 74.

[35] See supra note 31, USTR 2004 Report to Congress, pp. 12-14.

[36] 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 http://english.sohu.com/2004/07/04/80/article220848094.shtml.

[37] See supra note 31, USTR 2004 Report to Congress, p. 14.

[38] See supra note 36, China's Revised Foreign Trade Law, Article 23 (granting market access and national treatment to all WTO member nations).

[39] See supra note 31, USTR 2004 Report to Congress, p. 14.

[40] Id. at 14-15.

[41] See supra note 17, China's Accession Protocol, Part I, Article 7(3).

[42] See supra note 31, USTR 2004 Report to Congress, p. 48.

[43] 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 TRIMS").

[44] See American Chamber of Commerce, Beijing, China, White Paper on Media & Entertainment (AmCham, Beijing); supra note 1, USTR 2005 NTE Report, pp. 111-12.

[45] See supra note 43, 2004 China TRM Report on TRIMS, p. 3 ¶16.

[46] 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").

[47] See supra note 31, USTR 2004 Report to Congress, p. 51.

[48] See supra note 46, 2004 China TRM Report on Agriculture, at Attachment 1 (Questions to China from the United States).

[49] See supra note 31, USTR 2004 Report to Congress, p. 53.

[50] Id. at p. 58.

[51] Licensing Law - Driving Force of China's Administrative Reform,  People's Daily, Feb. 7. 2004 available at http://english.people.com.cn/200402/07/eng20040207_134140.shtml.

[52] See supra note 44, AmCham, Beijing.

[53] See supra note 31, USTR 2004 Report to Congress, p. 80.

[54] Id. at p. 6.

[55] See e.g., the wireless LAN (or WAPI) standard. 

[56] 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.

[57] See supra note 17, China's Protocol of Accession, Part I, Article 2(C).

[58] See supra note 31, USTR 2004 Report to Congress, p. 81.

[59] Id.

[60] See supra note 1, USTR 2005 NTE Report, p. 125.

[61] Id. at p. 76.

[62] A case in which the European Union, Japan and Mexico joined as interested parties.

[63] See supra note 1, USTR 2005 NTE Report, p. 76.

[64] See supra note 56, AmCham, Beijing.

[65] February 28, 2005, Measures on the Management of Parts Import Constituting an Entire Automobile, Customs Administration. 

[66] See supra note 17, China's Protocol of Accession, Part I, Article 7.

[67] See supra note 31, USTR 2004 Report to Congress, p. 42.

[68] ISO Meeting Fails to Back WAPI Standard, China Daily, February 25, 2005 available at http://www.chinadaily.com.cn/english/doc/2005-02/25/content-_419204.htm.

[69] See supra note 1, USTR 2005 NTE Report, p. 88.

[70] See supra note 31, USTR 2004 Report to Congress, p. 43; infra discussion on 3G telecommunication standards, p. 18.

[71] See supra note 17, China's Protocol of Accession, Annex 5A; supra note 31, USTR 2004 Report to Congress, p. 39.

[72] 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 fixed timetable.").

[73] See supra note 1, USTR 2005 NTE Report, p. 81.

[74] Id.

[75] Id. at p. 80.

[76] See supra note 31, USTR 2004 Report to Congress, p. 29 (noting that the United States was currently analyzing the language of the Foreign Trade Law for compliance with China's WTO commitments).

[77] Id.

[78] 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 consideration.

[79] 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.

[80] See supra note 1, USTR 2005 NTE Report, p. 95.

[81] Id. at p. 99.

[82] United States Trade Representative, 2005 Special 301 Report, pp. 50-51 available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_Special_301/asset_upload_file195_7636.pdf ("USTR 2005 Special 301 Report"). The USTR 2005 Special 301 Report includes the 2005 "Out-of-Cycle Review Results" for China.

[83] Id. at pp. 15-16.

[84] 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 http://www.technology.gov/Testimony/p_BHW_050513.htm

[85] See supra note 82, USTR 2005 Special 301 Report, pp. 16-17.

[86] Id.

[87] 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.  

[88] The EU would say "look at Boeing and cross-product subsidization from military procurement," which charge the U.S. government denies. 

[89] 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. 

[90] Foreign firms also complained of Japanese companies using blanket patenting of incremental innovations to prevent exploitation of intellectual property rights through this "patent-blocking."

[91] 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).

[92] 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).

[93] Chinese 3G Standard heralds the Year of Rooster, People's Daily, February 8, 2005.

[94] 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).

[95] 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. 

[96] See supra note 1, USTR 2005 NTE Report, p. 72.

[97] Press Release, U.S. Department of State, Gutierrez Urges China To Speed Progress on Bilateral Trade Issues (June 2, 2005) available at http://usinfo.state.gov/usinfo/Archive/2005/Jun/02-180632.html.

[98] 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).

[99] Ministry of Commerce, Interview with the Deputy Director General of MOFCOM's WTO Department, Zhang Xiangchen (2004) (available only in Chinese) available at http://www.mofcom.gov.cn/fangtan/0601wb.shtml.

[100] 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).

[101] 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.



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