Highlights of China's WTO Implementation Efforts

General Overview

The US-China Business Council and its member companies approached the end of China's second year as a WTO member with a combination of growing concern over apparent loss of direction in China's implementation efforts and of bleakness of outlook for the future. The picture brightened at the very end of 2003, as China belatedly announced measures to deal with several of the key concerns articulated by the USCBC and most other business commentators, such as overdue rules governing auto finance and poor administration of tariff-rate quotas. Yet four months into 2004, a new menu of disagreements, many rooted in perceived failures of WTO implementation, had risen to the surface, to become the heart of the agenda for the April 2004 meetings of the US-China Joint Commission on Commerce and Trade (JCCT).

The JCCT meetings produced agreement on many of these outstanding issues, including a detailed action plan aimed at reducing rampant intellectual property piracy; a decision to step back from a controversial plan to develop China-only technical specifications for wireless communication devices; a commitment to open key trading and distribution rights for foreign firms in China on if not ahead of the country's WTO schedule; a pledge to adhere to the principle of "technology neutrality" regarding key decisions on standards, such as on third-generation telecom technologies; and movement to certify a list of bio-engineered US agricultural export products for import into China. China also agreed to establish US-China working groups for further cooperation on vital areas of long-term US-China economic engagement, such as agriculture.

Yet progress was lacking on numerous other issues that had achieved major prominence by April 2004. Thus the United States began dispute resolution procedures at the WTO in Geneva on China's value-added tax (VAT) policy on semiconductor imports. The long-discussed auto policy, while not officially promulgated, remains apparently on track. And signs continue to abound that the PRC approach to China's economy remains heavily dependent on state intervention, whether in terms of bank lending practices and interest rates or the continued designation of structural changes in a wide variety of state-designated strategic economic sectors.

The PRC government, moreover, has difficulty carrying out vital WTO commitments and eliminating practices incompatible with its WTO membership in key areas. For example, Chinese government agencies exhibit both a lack of interagency coordination in carrying out WTO-compatible measures and inadequate regulatory transparency. In addition, PRC authorities blatantly rely on excessively high capital requirements to prevent foreign investment in key service sectors of significant importance to US companies.

Overall, the positive results of the recent JCCT meetings signal a new momentum in China's implementation of WTO commitments in 2004. The task ahead is to focus with vigilance on China's implementation of its agreements. Even for issues that moved forward during the JCCT meetings, only time will provide the measure of serious progress; for now, the issues remain extremely sensitive, both economically and politically.

Import and Export Policies

Biotechnology

China issued rules in 2001 that in their original form would have all but shut out genetically modified organism (GMO) goods from the market, including most US soybean products.

Since early 2002, however, PRC authorities have embarked on a more constructive course in their treatment of this important US agricultural export sector. In the latest positive development, US Secretary of Agriculture Ann Veneman announced on the fringes of the April 2004 JCCT meetings that China had approved four biotechnology corn varieties and seven biotechnology canola varieties. She also announced that China would review two additional corn varieties in May 2004.

Intellectual property

Among China's WTO commitments, intellectual property rights (IPR) enforcement remains a significant weakness. Industry estimates place piracy rates at more than 90 percent and last year the PRC government valued commercial losses due to counterfeit goods between $19 and $24 billion.

Under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), China is required to implement deterrent civil and criminal remedies for IPR infringement. Obstacles to IPR protection include China's proof-of-sale requirements, which limit IPR rights holders' ability to recover damages because it is difficult to document the sale of counterfeit goods. Furthermore, the range of activities subject to criminal penalties under existing law is limited only to sales activities. And many rights holders have complained that China's administrative remedies are insufficient to prevent enduser piracy and that measures to preserve evidence are ambiguous and sometimes ineffective.

Additionally, China has still not ratified the World Intellectual Property Organization (WIPO) Internet treaties. Modifications to China's intellectual property laws to bring China into line with these treaties, expected last fall, have yet to occur.

At the JCCT meetings in April, Vice Premier Wu Yi unveiled an action plan to address US IPR concerns. Though the details of the plan have not been made public, a statement released following the JCCT indicates that China committed to "significantly reduce" IPR infringement levels; strengthen penalties for IPR violations by broadening the scope of activities subject to criminal penalties; and apply criminal sanctions to online piracy and to the import, export, storage, and distribution of pirated goods. The vice premier also committed to conduct nationwide crackdowns on IPR infringers, improve customs enforcement of IPR, and ratify and implement the WIPO treaties quickly.

China has made progress in a few discrete areas. Almost a year after implementation of the Administrative Rules on Well-known Trademarks, the first two well-known foreign marks were registered with the State Administration of Industry and Commerce. The recently released Foreign Trade Law empowers the Ministry of Commerce (MOFCOM) to prohibit the import of goods by an IPR infringer. And modifications to the Regulation of the People's Republic of China on Customs Protection of IPR streamline the application process for customs protection of IPR and extend the duration of IPR protection at Customs--but fail to address outstanding issues such as expensive bond requirements and storage fees and destruction of confiscated goods.

Quota rules, allocation principles, and import licensing

Autos China's WTO commitments require auto quotas to increase 15 percent annually through January 1, 2005, at which time quotas will expire and autos will be freely traded. In February 2004, PRC Vice Minister of Commerce Wei Jianguo announced that China would comply with its auto quota commitments by canceling its auto import quota as of January 1, 2005. Other PRC officials have made similar comments in the press. China had problems administering its auto quota system in both 2002 and 2003; despite better performance in 2004, companies will be watching closely as the 2005 deadline approaches.

TRQs China's implementation of its tariff-rate quota (TRQ) system has been inconsistent, at best, since it joined the WTO in December 2001. Though US exports to China in a number of key agricultural areas--principally cotton and soybeans--soared in 2003, China's compliance with its TRQ promises under the WTO remains a work in progress.

In addition to China's failure to issue regulations on time, the TRQ process has been plagued by four key problems: (1) burdensome and WTO-inconsistent licensing procedures; (2) poor transparency, specifically, an unwillingness by the PRC government to identify domestic quota allocation recipients publicly; (3) allocation of large amounts of quota to domestic processing for re-export only; (4) allocation of quota to domestic entities in commercially unviable quantities.

In June 2003, PRC officials promised their US counterparts that new efforts were under way to improve the TRQ allocation process in 2004 dramatically. Accordingly, PRC authorities issued new regulations in October 2003 for shipments beginning on January 1, 2004 that appear to eliminate a number of the obstacles to higher fill-rates by foreign exporters. In late April 2004, Agriculture Secretary Veneman announced that PRC officials had agreed to provide recipient names of the TRQ holder companies upon written request from a foreign company.

Sanitary and phytosanitary measures

PRC officials are continuing to apply import standards to US agricultural exports that appear not to be based on generally accepted scientific criteria. Application of such standards, when not based on rigorous science, is a direct violation of China's WTO commitments under the WTO's Agreement on the Application of Sanitary and Phytosanitary Measures.

PRC authorities' decision in August 2003 to block shipments of soybeans into China from the United States, Argentina, and Brazil raised serious concerns among the US business community and the US government that China was using arbitrary phytosanitary standards to bar US soybeans from the China market. Following aggressive intervention by the US government, China agreed in September 2003 to technical discussions with the US Department of Agriculture (USDA) on its phytosanitary barriers for soybean imports, and in the interim, removed the restrictions on US exports.

According to USTR's 2004 National Trade Estimates Report on Foreign Trade Barriers, China continued in 2003 to employ phytosanitary barriers against US exports to China of wheat, stone fruit, varieties of apples, pears, potatoes, and processed foods containing certain food additives.

China has been absent from, or a passive attendee of, the proceedings of international organizations that help set WTO-recognized standards on sanitary and phytosanitary issues: the International Plant Protection Convention, the Codex Alimentarius, and the World Organization of Animal Health. In a positive step, PRC Premier Wen Jiabao in 2003 promised to increase the number and level of representatives to these bodies. In an effort to foster a regular bilateral dialogue on regulatory and standards issues related to agricultural trade and to acclimate PRC authorities to the regular activity in international organizations on these issues, the USDA's Animal and Plant Health Inspection Service hosted the US-China Bilateral Plant and Animal Health Regulatory Symposium in Beijing in 2003. Agriculture Secretary Veneman and PRC Minister of the General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) Li Changjiang also jointly signed a letter of intent in April 2004 to establish a consultative mechanism on food safety and animal and plant issues.

Standards, testing, and certification

China's recent performance in the standards arena has been mixed. Despite progress in many areas, China's standards formation processes remain largely opaque and exclusionary. The implementation of the China Compulsory Certification (CCC) mark regime has been complicated by poor interagency coordination. In some areas, such as telecom type testing, the CCC mark has yet to supplant preexisting type approval processes, thereby requiring manufacturers to endure delays and costs associated with serial testing and certification requirements imposed by separate testing bodies. CCC mark certification has also imposed significant costs on US companies seeking to enter or maintain sales in the Chinese market because it requires expensive factory inspections and does not recognize foreign product type testing.

Other manufacturers have encountered difficulties importing product not subject to CCC mark testing and certification simply because their product falls within the same harmonized tariff schedule (HTS) classification as other products that do require CCC mark certification. To their credit, the China National Certification and Accreditation Commission and Customs have cooperated to modify HTS codes slightly in an attempt to resolve this problem. Unfortunately, this has led to further confusion on the part of some manufacturers and importers accustomed to consistency in HTS codes in all markets.

At the same time, AQSIQ's mandate to the Standardization Administration of China to rationalize the country's standards system by repealing up to 40 percent of the standards currently on the books by year's end promises to clear up ambiguity created by maintaining so many outdated and irrelevant standards. Companies also hope that China's decision in April to suspend compulsory implementation of a proprietary wireless encryption standard has set a precedent that China will no longer set discriminatory and protectionist new standards.

Subsidies, taxes, and price controls

The PRC government has traditionally used subsidies in the form of VAT rebates, especially in the fertilizer and semiconductor industries, to promote domestic production over imports. (GATT [the WTO's predecessor] Article III prohibits discriminatory taxation that is more burdensome to imported than domestic goods.) Domestic shortages and international pressure have forced the PRC government to reevaluate these policies. In the first instance, China's State Administration of Taxation suspended the VAT rebate for fertilizer exports in 2004, to discourage such exports, and instituted a subsidy of RMB 100 per ton for imports because of short domestic supply. Regarding semiconductors, in March 2004 the United States requested consultations with the PRC in Geneva, the first step in the WTO dispute settlement process. As of this writing, the United States and China are engaged in consultations to resolve the dispute. If no agreement is reached, the United States as of June 10 can request a ruling from a WTO panel on the WTO consistency of China's discriminatory tax systems for imported semiconductors.

Investment-Related Measures

Express delivery services

In an encouraging development, PRC Vice Premier Wu Yi assured US Trade Representative (USTR) Robert Zoellick at the April JCCT meetings that the agreements on express delivery services issues that arose in December 2001 and in February 2002--entrustment and weight and rate restrictions on letter deliveries by private firms, respectively--would not be reopened by the PRC government. But foreign express delivery companies are concerned about a provision in China's November 2003 draft Postal Law that calls for a tax, imposed only on the express industry, to finance a Universal Postal Fund that would enable China Post to construct postal facilities in underserved parts of China.

Autos

China's new draft auto policy, which circulated during the first quarter of 2004, still contains a number of potentially WTO-incompatible measures, the most salient of which is a provision that would set a 50 percent target for the number of domestically designed automobiles in China by 2010. The draft policy also establishes targets for use of domestic technology, calls for restrictions on imports of complete knocked-down auto kits, and seeks to minimize use of imported auto parts.

In what could be an acknowledgement by PRC authorities that key provisions of the draft may be WTO inconsistent, China has refrained from publishing the new policy. Officials at the National Development and Reform Commission (NDRC), the agency with key responsibility for drafting the new auto policy and for which developing an indigenous auto manufacturing capacity remains a priority, have nevertheless stated that the policy could be published in June.

China is also considering mandating separate distribution channels for domestically manufactured and imported vehicles. Such a bifurcation would violate China's WTO commitments; China's national treatment obligations require that China not favor domestic goods and services at the expense of imported ones. Vice Premier Wu's statement to USTR Zoellick during the April JCCT meetings that China would put into place WTO-consistent distribution rules in time for China's December 2004 deadline is an encouraging sign that China intends to meet its commitments in this area.

Construction services

Companies are deeply concerned about recent PRC regulations that impose a more restrictive environment for foreign-invested construction, engineering, and design companies than existed prior to China's WTO entry. Ministry of Construction officials claim that the new regulations open the market to foreign firms, but foreign companies will be largely unable to meet the regulations' requirements and thus will, in effect, be barred from the market. PRC Premier Wen indicated to EU representatives that the issue would be resolved during his recent European visit, but as of this writing there has been no progress.

Trading and distribution rights

The release in mid-April of the revised Foreign Trade Law and the Regulations on Management of Foreign Investment in the Commercial Sector go a long way toward ensuring that China will implement its WTO commitments on trading and distribution rights in a timely and transparent manner. Nevertheless, perhaps because trading and distribution are treated as two separate service areas in China's WTO commitments, the question of when trading ends and distributing begins remains unanswered in the new rules. To operate fully in the Chinese market, companies will need a system in which they can seamlessly import or manufacture and distribute their product, as is articulated in China's WTO commitments. These new regulations do not indicate whether such a system will be in place by the December 11, 2004 deadline.

Foreign companies are also concerned that China will use the new law to impose a special safeguard on service imports. As with other aspects of the law, the lack of implementation detail raises the question of China's intent toward liberalizing trade in services.

MOFCOM also released a draft of the regulations in late 2003 for comment; foreign companies made numerous comments that regulators appear to have taken into account. For example, the final distribution regulation removed the minimum registered capital requirements that appeared in the draft and instead requires only that the minimum registered capital for foreign-invested commercial enterprises comply with relevant provisions in the PRC Company Law.

Overall, the regulation reflects China's WTO commitments in the distribution sector. But the regulation states that new stores opened by foreign-invested distribution companies must suit the urban and commercial development plans of the city in which the store will be located and present local government documentation to that effect when submitting an application. This requirement could be used as a market entry barrier to restrict the number of foreign distribution operations in a given city. In fact, MOFCOM appears to be applying this requirement very strictly in the oil and gas sector. MOFCOM has asked all municipalities to provide detailed maps of where gas stations would be located. Currently the approvals for both Royal Dutch/Shell Group and BP plc gas stations are on hold as localities figure out how to comply with this order.

Market Access for Services

Auto finance

China committed to open its auto finance sector when it joined the WTO. Late last year, the China Banking Regulatory Commission (CBRC) issued rules governing auto-financing activities by nonbank financial institutions. By December 2003 CBRC had approved the initial applications for General Motors Corp., Toyota Motor Corp., and Volkswagen AG. Final approval of the ventures was still pending at the time of this writing.

In addition to the two-year delay in the issuance of the regulations, companies have voiced concerns about the practical limitations of the implementing rules. Capitalization requirements for establishing an auto financing company are quite high--$480 million in assets and at least $60 million in paid-in capital. A further limitation, that total lending may not exceed 200 percent of registered capital, restricts the availability of dealer-based financing to many purchasers. Interest rates chargeable on loans are limited to 10-30 percent of the base rate published by the People's Bank of China.

Banking and securities

China continues to implement the letter of its financial services commitments in a timely manner. In February, Citigroup Inc. was among the first four companies to receive one of the first licenses allowing foreign banks to offer RMB services to Chinese companies.

China is ahead of schedule with respect to its securities commitments. In 2002, the China Securities Regulatory Commission issued regulations satisfying the requirement permitting foreign investors to take up to 33 percent interest in joint ventures underwriting A shares and underwriting and trading B and H shares. Similarly, rules that increase the permitted level of foreign ownership to 49 percent beginning in December of this year are already in place.

Insurance China has permitted foreign insurers to expand into the cities required by the WTO agreement but continues to maintain excessive capitalization requirements and imposes ambiguous branching requirements for foreign companies. After an initial commitment of $24 million to establish a foreign-invested insurance company, insurance regulations released last month would require the commitment of $2.4 million for the establishment of any additional branches. Recently released implementing rules are silent as to whether the approval of a branch within a province would permit the establishment of sub-branches within that province or whether separate approvals for each sub-branch are required.

Telecom services

The Ministry of Information Industry (MII) faces a critical deadline in 2004 to demonstrate its ability to meet the country's WTO accession commitments in telecom services. China's third-year commitments include raising the ceiling on foreign joint venture participation in mobile voice and data basic telecom services to 49 percent and opening fixed-line basic telecom services among Beijing, Shanghai, and Guangzhou to joint ventures in which foreign investors may hold up to a 25 percent stake.

The Council understands that a draft of China's new Telecommunications Law may be submitted to the State Council in June. However, the law must undergo three readings by the National People's Congress after approval by the State Council, so its final passage is unlikely before 2005. This is of particular concern as the passage of the new law is a necessary first step to opening the market to new entrants consistent with the country's WTO accession protocol. Notably, the delay has not been attributed to questions concerning the opening of the sector to foreign competition, but rather to larger issues such as establishing mechanisms for network consolidation, interconnection, universal service provisioning, and the consolidation and establishment of a regulatory authority.

The lack of transparency in the drafting process to date calls into question China's commitment to establish an independent regulator through a reformed MII, as does the ministry's attempts to interfere in technology royalty negotiations between domestic carriers and US firms this past year.

Rule of Law

Transparency

China's transparency commitments as contained in its WTO entry agreements were far-reaching. Most significantly, China committed to provide a reasonable period for public comment on all trade-related regulations. China also committed to translate all regulations upon release into WTO languages.

China's overall record in 2004 of institutionalizing public comment periods on draft regulations has been poor. PRC ministries typically circulate draft regulations within the government bureaucracy and to affected domestic companies only. Foreign companies' opportunities to comment on such regulations in draft form remain infrequent, at best.

The notable exception to this record is China's Ministry of Commerce, which issued in November 2003 the Provisional Regulation on Administrative Transparency for MOFCOM. The regulation requires MOFCOM to release drafts of rules that may affect nongovernment interests for a minimum 10-day comment period and to take public comments into consideration when the draft regulations are finalized. The rules also describe the channels to be used to disseminate the drafts and the publishing deadlines for each channel.

Since the rule took effect, MOFCOM has released a number of key drafts for public comment, including the draft Foreign Trade Law, which it released in final form in March. Many, if not most, of the comments on the draft from foreign interests appeared to have been incorporated into the final regulation that was issued in March 2004.

Separately, PRC authorities have improved the degree to which they make regulations affecting foreign companies available to the public prior to their effective date. Almost all regulations affecting foreign companies are now available in Chinese on the Internet and in WTO-authorized journals shortly after their release. But the timeliness of government translations of newly issued regulations into WTO-authorized languages continues to lag far behind China's WTO commitments.

Many analysts are looking to China's implementation this summer of a new law on administrative licensing as a possible watershed in the area of PRC transparency. The law requires that all regulations be made public and states that internal (neibu) regulations are invalid as a basis for licensing. The law further stipulates that agencies may not discriminate against any applicant who meets the legal criteria for the license.