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2002 Report to Congress On China’s WTO Compliance

This is a report to Congress on compliance by China with commitments made in connection with its accession to the World Trade Organization. 

December 1, 2002
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EXECUTIVE SUMMARY
(Download the full report)

For much of the past two decades, China had been gradually transitioning toward a market economy from what in the late 1970’s was a strict command economy. In acceding to the WTO,  China was required by the United States and other WTO members to agree to accelerate this process of market reform in order to comply with WTO requirements. Accordingly, China’s WTO accession agreement embodies a set of extensive and far-reaching commitments on the  part of China to change its trade regime, at all levels of government. Given the breadth and complexity of these commitments, assessing China’s WTO compliance efforts is not a simple task.
 
Overall, during the first year of its WTO membership, China made significant progress in  implementing its WTO commitments, although much is left to do. Progress was made both in making many of the required systemic changes and in implementing specific commitments. At the same time, serious concerns arose in some areas, where implementation had not yet occurred or was inadequate.
 
As expected, the principal focus of China’s first year of WTO membership was on its framework  of laws and regulations governing trade in goods and services, at both the central and local levels. China’s trade ministry, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC),  reports that the central government has reviewed more than 2,500 trade-related laws and  regulations for WTO consistency. By mid-2002, it had reportedly repealed 830 of these laws and regulations and amended 325 more. It had also reportedly drafted and adopted 118 new laws and regulations. Similar reviews are taking place at the local level, although the local governments  are generally not as far along in their review process, in part because of the need to give effect to changes made by the central government. At the same time, some localities, particularly those in China’s eastern provinces, are much further along in their review process than others.
 
Beginning early in 2002, China also devoted considerable resources to the restructuring of the various government ministries and agencies with a role in overseeing trade in goods and services. Some of these changes were mandated by China’s accession agreement, while others were undertaken by China to facilitate its compliance with WTO rules.
 
Another significant focus for China during the past year involved education and training. China embarked on an extensive campaign to teach central and local government officials and state- owned enterprise managers about both the requirements and the benefits of WTO membership, with the goal of facilitating China’s WTO compliance. The United States and other WTO members, along with many private sector groups, contributed substantial technical assistance and capacity building resources to this effort.
 
As a general matter, China took positive steps to implement many of its specific WTO commitments during the past year. It made required tariff reductions, notably for information technology products, chemicals, autos and auto parts, wood and paper products, and many agricultural goods, including beef, dairy products and citrus, among others. When discrepancies between committed and implemented rates were reported, China usually made necessary adjustments. China also began the process of removing numerous non-tariff trade barriers that had affected a range of industries, from chemicals to scientific equipment, and it continued to improve its standards regime. For the most part, these steps were managed without serious incident, and market access for U.S. products in the affected sectors has generally improved. In addition, although not without problems, China took the necessary legal steps to allow for increased market access for foreign service suppliers in a variety of sectors, including financial services, telecommunications, audio-visual services, tourism and travel-related services, constructions and engineering services, educational services and environmental services.
 
While the efforts of China’s leadership to implement China’s WTO commitments should be recognized, the Administration also found a number of causes for serious concern during China’s first year of WTO membership.
 
One area of cross-cutting concern involved transparency. In particular, China implemented its commitment to greater transparency in the adoption and operation of new laws and regulations unevenly at best. While some ministries and agencies did take steps to improve opportunities for public comment on draft laws and regulations, and to provide appropriate WTO enquiry points, the Administration found China’s overall effort to be plagued by uncertainty and a lack of uniformity. The Administration is committed to seeking improvements in China’s efforts in this area.
 
Apart from this systemic concern, three other areas generated significant problems and warrant continued U.S. scrutiny – agriculture, intellectual property rights and services.
 
The area of agriculture proved to be especially contentious between the United States and China. While concerns over market access for U.S. agriculture products are not unique to China, particularly serious problems were encountered on many fronts, including China’s regulation of agricultural goods made with biotechnology, the administration of China’s tariff-rate quota (TRQ) system for bulk agricultural commodities, the application of sanitary and phytosanitary measures and inspection requirements. The United States and China were able to make progress toward resolving some of these problems, particularly with regard to biotechnology. Other problems remain unresolved, however, with the most troublesome being China’s inadequate implementation of its TRQ commitments.
 
In the area of intellectual property rights (IPR), China did make significant improvements to its framework of laws and regulations. However, the lack of effective IPR enforcement remained a major challenge. If significant improvements are to be achieved on this front, China will have to devote considerable resources and political will to this problem, and there will continue to be a need for sustained efforts from the United States and other WTO members.
 
Meanwhile, concerns arose in many services sectors due to transparency problems and China’s use of prudential requirements that exceeded international norms. In addition, Chinese regulators imposed particularly problematic restrictions in the insurance sector, where transparency issues, excessive capitalization requirements and restrictions on branching combined to present unique difficulties, and in the express delivery sector, where existing rights were placed in jeopardy. Nevertheless, progress was made in 2002 toward resolving the concerns associated with these two sectors.
 
China’s compliance problems are occasionally generated by a lack of coordination among relevant ministries in the Chinese government. Another source of compliance problems has been a lack   of effective or uniform application of China’s WTO commitments at local and provincial levels.
China is taking steps to address both of these concerns, through more effective inter-ministerial mechanisms at the national level, and through a more concerted effort to reinforce the importance of WTO -consistency with sub-national authorities. In other cases, however, compliance problems involve entrenched domestic Chinese interests that may be seeking to minimize their exposure to foreign competition, circumstances that, as one private sector representative submitted, require “particular vigilance by the U.S. government and the American private sector.”
 
When confronted with compliance problems in 2002, the Administration used all available and appropriate means to obtain China’s full compliance, including intervention at the highest levels of government. The Administration worked closely with the affected U.S. industries on compliance concerns, and utilized bilateral channels through multiple agencies, at all levels, to press these concerns. The Administration also initiated a regular dialogue on compliance issues between USTR and China’s lead trade agency, MOFTEC, with the goal of bringing all involved Chinese ministries and agencies together when the resolution of particular problems warrants it. Where possible, the Administration also multilateralized its enforcement efforts, by working with like-minded WTO members on an ad hoc basis, whenever particular issues have had an adverse impact beyond the United States.
 
Despite the compliance problems that arose over the course of the past year, most private sector representatives remain enthusiastic about the actual and potential benefits for U.S. industry from China’s WTO membership. As one witness at the September 18, 2002 hearing testified:
 
[W]e all recognize that this is a process that will take time, and patience. The institutional, legal, and regulatory changes demanded of the Chinese are extraordinary, reaching in most corners of their economy, and complicated further by a highly decentralized administrative structure covering a vast, diverse country.
 
At the same time, the private sector wants to see China comply fully with its WTO commitments, as does the Administration. As one representative made clear, “we all believe that full implementation of the letter and spirit of [China’s] WTO commitments is essential.” The United States, working with fellow WTO members, will use all means at its disposal to ensure  that China achieves full implementation.
 
CHINA’S ACCESSION TO THE WTO
 
Negotiations
 
In July of 1986, China applied for admission to the WTO ’s predecessor, the General Agreement on Tariffs and Trade (GATT). The GATT formed a Working Party in March of 1987, composed of all interested GATT contracting parties, to examine China’s application and negotiate terms for China’s accession. For the next eight years, negotiations were conducted under the auspices of the GATT Working Party. Following the formation of the WTO on January 1, 1995, a successor WTO Working Party, composed of all interested WTO members, took over the negotiations.
 
Like all WTO accession negotiations, the negotiations with China had three basic aspects. First, China provided information to the Working Party regarding its trade regime. China also updated this information periodically during the 15 years of negotiations to reflect changes in its trade regime. Second, each interested WTO member negotiated bilaterally with China regarding market access concessions and commitments in the goods and services areas, including, for example, the tariffs that would apply on industrial and agricultural goods and the commitments that China would make to open up its market to foreign services suppliers. The most trade liberalizing of the concessions and commitments obtained through these bilateral negotiations were consolidated into China’s Goods and Services Schedules and apply to all WTO members.
 
Third, overlapping in time with these bilateral negotiations, China engaged in multilateral negotiations with Working Party members on the rules that would govern trade with China. Throughout these multilateral negotiations, U.S. leadership in working with China was critical to removing obstacles to China’s WTO accession and achieving a consensus on appropriate rules commitments. These commitments are set forth in China’s Protocol of Accession and an accompanying Report of the Working Party.
 
WTO members formally approved an agreement on the terms of accession for China on November 10, 2001, at the WTO Ministerial Conference in Doha, Qatar. One day later, China signed the agreement and deposited its instrument of ratification with the Director-General of the WTO. China became the 143rd member of the WTO on December 11, 2001.
 
China’s Protocol of Accession, accompanying Working Party Report and Goods and Services Schedules are available on the WTO ’s website (www.wto.org).
 
Overview of China’s Commitments
 
In order to accede to the WTO, China had to agree to take concrete steps to remove trade barriers and open its markets to foreign companies and their exports from the first day of accession in virtually every product sector and for a wide range of services. China further agreed to eliminate or significantly reduce restrictions on the rights of foreign companies to import and export goods and to distribute goods within China. Supporting these steps, China also agreed to undertake important changes to its legal framework, designed to add transparency and predictability to business dealings.
 
Like all acceding WTO members, China also had to agree to assume the obligations of more than 20 existing multilateral WTO agreements, covering all areas of trade.  Areas of principal concern to the United States and China’s other trading partners, as evidenced by the accession negotiations, included the core principles of the WTO, i.e., most-favored nation treatment, national treatment, transparency and the availability of independent review of administrative decisions. Other key concerns could be found in the areas of agriculture, sanitary and phytosanitary measures, technical barriers to trade, trade-related investment measures, customs valuation, rules of origin, import licensing, antidumping, subsidies and countervailing measures, trade-related aspects of intellectual property rights and services.  For some of its obligations in these areas, China was allowed minimal transition periods, where it was considered necessary.
 
Even though the terms of China’s accession agreement are directed at the opening of China’s market to WTO members, China’s accession agreement also includes several safeguard mechanisms designed to prevent injury that U.S. or other WTO members’ industries and workers might experience based on import surges or unfair trade practices. These include a unique, China-specific safeguard provision allowing a WTO member to restrain increasing Chinese imports that disrupt its market (available for 12 years), a special textiles safeguard (available for 7 years) and the continued ability to utilize a special non-market economy methodology for measuring dumping in anti-dumping cases against Chinese companies (available for 15 years). The Administration is committed to maintaining the effectiveness of these mechanisms for the benefit of affected U.S. businesses, workers and farmers.
 
With China’s consent, the WTO also created a special multilateral mechanism for reviewing China’s compliance on an annual basis. Known as the Transitional Review Mechanism, this mechanism operates annually for 8 years after China’s accession, with a final review by year 10.
 
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