US-China Economic and Security Review Commission
Testimony of Robert A. Kapp
President, US-China Business Council
February 5, 2004

Thank you for inviting me to meet with you today.

Since I testified at the first hearing of this Commission, much has happened in the world, in the United States, in China, and in United States-China relations. Suffice it to say that after years of tumult, events following the release of the United States Navy EP-3 aircraft from Hainan Island and the terrible attack of September 11 have contributed to a warming of US-China relations across many sectors. It has been an extremely eventful three years, and the atmosphere that prevailed when the Commission was created has changed significantly under the pressure of world events and changes in US and PRC conduct. While by no means the most significant development in this period, the accession of the PRC to membership in the World Trade Organization, just as the US and world economies fell into serious difficulties that the aftermath of September 11 only made worse, has been a major milestone in the history of China's economic modernization and its commercial and economic relations with the world's major trading nations, including the United States.

This Commission was created late in 2000, shortly after the Senate's passage of legislation establishing Permanent Normal Trade Relations for China. The actions of the House and Senate, in May and October, 2000, establishing PNTR treatment for China, contributed significantly to the completion of WTO negotiations with China over the specific terms of PRC membership in the WTO, and China became a WTO member on the 11th of December, 2001.

Given the massive political debate that surrounded the Congressional decision on PNTR, it was understandable and appropriate that both the executive and legislative branches made formal commitments to minute monitoring of China's performance of its WTO obligations following accession. WTO compliance became something of an overnight sensation, and a range of US agencies has been focusing on the topic ever since. It is an understatement to note that there has been no lack of compliance investigations since accession.

The US-China Business Council has maintained a constructive dialogue with several US government agencies, notably the Office of the US Trade Representative and the Department of Commerce, in regard to post-accession, as it did in the years leading to accession.

The Council has offered two annual evaluations of China's WTO progress to date, and has submitted those, with accompanying brief oral testimony, to the annual hearings of the Trade Policy Staff Committee (TPSC). Elements of the Council's analysis, with that of many other trade groups, has perhaps helped the USTR in formulating its annual China WTO report to the Congress.

Since the Council has so recently conducted a detailed examination of Chinese WTO progress, and so recently published its conclusions, I am submitting the Council's September, 2003 Year Two analysis as part of my written testimony today, together with the oral testimony I offered to the Trade Policy Staff Committee at its October 2003 meeting. In addition, I am pleased to provide an article from the latest issue of our magazine, The China Business Review, which looks ahead to the coming of China's third-year tasks.

For today's purposes, a few additional points should suffice.

1. The USTR report to Congress, dated December 2003, is more recent than our Council's materials dating from autumn, 2003. We applaud the USTR for its thoroughness, and suggest that the USTR's description of the status of outstanding issues is generally authoritative through the time of its publication.
   
   
2. We may be seeing, as we work into the third year of China's WTO participation, an emerging pattern:
   
   
   1. The implementation, on time and in full, of some major commitments, notably but not exclusively in tariffs;
   2. the delayed promulgation of certain key measures whose failure to emerge exactly on schedule caused anxiety and dissatisfaction in the US and elsewhere;
   3. the extensive and intensive consultation between duly constituted US and Chinese authorities on numerous issues, resulting at times in the resolution or the defusing -- or the temporary postponement -- of trade conflicts;
   4. the slow, halting, but steady approach of certain major changes in government administrative practice, including increased transparency and the elimination of complex "application and permission" systems in favor of simpler registration systems less liable to official obstruction or corruption;
   5. the emergence of legal or regulatory measures that pose very serious new obstacles to international participation in certain sectors of the Chinese economy, raising questions of national treatment under WTO;
   6. signs of an increasing Chinese interest in defining technical standards for international firms to meet, rather than simply in establishing externally-written technical standards as authoritative within China; this may or may not have specific WTO implications;
   7. continued hesitation in some areas to promulgate regulations that American firms consider fully compatible with China's WTO accession agreements;
   8. slow progress on the perennial issue of intellectual property protection;
   9. persistence of a pattern of economic dirigisme in certain sectors, the implications of which for China's WTO obligations will require close observation.
   
   
3. The very end of 2003 saw movement by China on some of the outstanding issues of its WTO membership, and further movement is expected in early 2004. This is discussed in the recent China Business Review article. Here are examples:
   
   
   1. Trading rights. A draft of the new Foreign Trade Law has begun to circulate. It is expected to simply the granting of trading rights by mandating a simple examination and approval process, and thus to approach the meeting of WTO requirements;
   2. Distribution. Some forms of liberalization took place in 2003 (See the China Business Review article), while new regulations on the Management of Foreign Invested Commercial Enterprises, expected soon, are expected to liberalize further this sector;
   3. GMO. This issue has approached resolution with a verbal agreement in December of 2003 between the USDA and the PRC agriculture ministry certifying GMO products;
   4. TRQ. The PRC belatedly issued regulations in the fall of 2003 outlining the TRQ allocation process. Some concerns regarding TRQ administration, however remain;
   5. High capital requirements in the service sector. We understand that quiet work is underway to persuade China to eliminate or reduce some of these onerous requirements;
   6. Auto finance regulations. These rules, on which we placed considerable emphasis in our Fall 2003 report, have been issued, and the first automobile companies to seek to set up auto financing systems, including General Motors, have been approved;
   7. VAT issues. These have not been resolved, but the two sides are apparently in substantive content in regard to them. The problem is particularly acute in the area of semiconductors and fertilizer;
   8. Tariffs. A new tariff law took effect January 1, bringing China closer to international standards for valuing imported and exported goods and for implementing tariff levies established according to the provisions of the law;
   9. Insurance. Five new cities were opened to foreign nonlife insurance companies December 12, 2003. By the end of 2004 geographic restrictions on foreign insurers are scheduled to be eliminated. Serious disagreements, however, remain in the area of Chinese regulations regarding the corporate structures required for branching.

A number of issues of very serious concern to individual sectors of the US economy, and to individual companies, remain to be dealt with or have arisen since accession. The United States and China have established a reasonably robust engagement on WTO-related issues, even as the overall engagement of the two governments has expanded and improved. Signs of "pushback"--resistance or delay in regard to WTO-mandated reforms of established practices--from sectors of the Chinese economy which may, in some cases, not have understood at the time the full contents and implications for them of China's 2001 WTO commitments, have surfaced.

Meanwhile, 2003 saw the beginning of what many predict will be a tide of "Safeguard" cases against Chinese imports to the United States as well as a continuing flow of US anti-dumping cases, which now see parallel anti-dumping procedures in China with increasingly frequency.

In 2003, the question arose as to whether the PRC peg of the currency to the US dollar constitutes a form of "manipulation of the currency" requiring a stern and trade-restricting US response. The claim is debatable (key sources would be the Congressional Research Service December 2003 report on the RMB peg, the testimony of Congressional Budget Office's director to the House Ways and Means Committee on October 20, 2003; and the speech by Fed Chairman Alan Greenspan to the Dallas World Affairs Council in December of 2003).

The direct link of this issue to WTO is tenuous. At this time, an entity has arisen in Washington to support the bringing of an unfair trade case against China, under American law, over the maintenance of the RMB peg to the dollar at the current rate.

As pointed out above, serious concerns exist in some segments of the US business community as to China's policies and practices subsequent to PRC accession to the WTO. Nevertheless, we believe that the intensive engagement that the United States and China have created on trade and economic issues in the months following the installation of the new Chinese government and the SARS emergency in the spring and summer of 2003 represents the most promising approach to the identification and resolution of WTO-related issues in the Chinese trade regime.

Trade and economic relations with China have once again emerged as a frequently raised discussion topic (if not, to date, a potent vote-getter) on the campaign trail in the current US political season; this was demonstrated by the Commission's foray into South Carolina and the testimony of its witnesses there, only a few days before the intensely publicized South Carolina presidential primary.

If it is indeed true, as reported by the Associated Press, that a member of the United States Senate declared, following testimony to your group, that "This is not a cold war, this is a hot war...This is a nuclear war when it comes to our economy. And they're using nuclear weapons. ... They have made a conscious effort as a government to steal market share...", only time will tell whether such sentiments and rhetoric will make objective examination of the complexities of China's WTO progress into a footnote.

I am happy to take questions, and hope to learn more about the Commission's perceptions after two and one half years of its operations.