2004 Report to Congress On China’s WTO Compliance

 

The publication of this Report marks three years since China’s accession to the WTO on December 11, 2001. That event was in many ways the culmination of two decades of economic reform that saw China move from a strict command economy to one in which market forces have played an increasing role.  Through an accession agreement founded on the key WTO principles of market access, non-discrimination, national treatment and transparency, China committed to overhaul its trade regime and, more fundamentally, to open its market to greater competition.

 

The United States and other WTO members negotiated with China for 15 years over the specific terms pursuant to which China would enter the WTO.   As a result of those negotiations, China agreed to extensive, far-reaching and often complex commitments to change its trade regime, at all levels of government.  China committed to implement a set of sweeping reforms that required it to lower trade barriers in virtually every sector of the economy, provide national treatment and improved market access to goods and services imported from the United States and other WTO members, and protect intellectual property rights (IPR).   China also agreed to special rules regarding subsidies and the operation of state-owned enterprises, in light of the state’s large role  in China’s economy.  In accepting China as a fellow WTO member, the United States also secured a number of significant concessions from China that protect U.S. interests during China’s WTO implementation stage.  Implementation should be substantially completed – if China fully adheres to the agreed schedule – by December 11, 2007.  By contrast, the United States did not make any specific new concessions to China, other than simply to agree to accord China the  same treatment it accords the other 146 members of the WTO.

 

China deserves due recognition for the tremendous efforts made to reform its economy to comply with the requirements of the WTO.  It is beyond the scope of this Report, however, to detail all the ways in which China is in compliance with its commitments. This Report sets out to reflect the significant concerns raised by U.S. stakeholders regarding China’s efforts to implement its WTO commitments and China’s adherence to WTO rules. As the Report shows, while China’s efforts to fulfill its WTO commitments are impressive, they are far from complete and have not always been satisfactory, and China at times has demonstrated difficulty in adhering to WTO rules.

 

As described in our 2002 Report, the first year of China’s WTO membership saw significant progress, as China took steps to repeal, revise or enact more than one thousand laws, regulations and other measures to bring its trading system into compliance with WTO standards.  However, that year also saw uneven implementation of many of China’s WTO commitments. 

 

In the 2003 Report, we concluded that China’s WTO implementation efforts had lost a significant amount of momentum, and we identified numerous specific WTO-related problems. As those problems mounted in 2003, the Administration responded by stepping up its efforts to engage China’s senior leaders. The Administration’s efforts culminated in December 2003, when President Bush and China’s Premier, Wen Jiabao, committed to upgrade the level of economic interaction and to undertake an intensive program of bilateral interaction with a view to  resolving problems in the U.S.-China trade relationship.  Premier Wen also committed separately to facilitate the increase of U.S. exports to China.

 

This new approach was exemplified by the highly constructive Joint Commission on Commerce and Trade (JCCT) meeting in April 2004, with Vice Premier Wu Yi chairing the Chinese side and Secretary of Commerce Evans and United States Trade Representative Zoellick chairing the U.S. side, with leadership from Secretary of Agriculture Veneman on agricultural issues. At that meeting, which followed a series of frank exchanges covering a wide range of issues in late 2003 and early 2004, the two sides achieved the resolution of no fewer than seven potential disputes over China’s WTO compliance.

 

In July 2004, the United States was able to successfully resolve the first-ever dispute settlement case brought against China at the WTO.  In that case, the United States, with support from four other WTO members, had challenged discriminatory value-added tax (VAT) policies that favored Chinese-produced semiconductors over imported semiconductors.  The United States also effectively used other mechanisms at the WTO throughout the year, including the transitional review process for China, to draw attention to a variety of areas where China needed to make progress.

 

U.S. stakeholders were significantly more satisfied with China’s WTO performance in 2004 than in the previous two years. For example, in September 2004, two U.S. trade associations representing many U.S. businesses doing business in China explained in a written submission:

 

It has been a good year for American companies in China . . . . We believe China is now substantially in compliance with its [WTO] obligations – a marked improvement over last year.

 

At the same time, U.S. exports to China continued to increase dramatically in 2004, as they have done in every year since China joined the WTO.  U.S. exports to China totaled $35 billion for the most recent twelve-month period, more than double the total for 2001.  In fact, from 1999 to 2004, U.S. exports to China increased nearly ten times faster than U.S. exports to the rest of the world. As a result, China has risen from our 11th largest export market five years ago to our fifth largest export market today.

 

The reports from the private sector and improved export statistics are heartening.  Nevertheless, serious problems remain, and new problems regularly emerge. Most seriously, China’s implementation of its WTO commitments has lagged in many areas of U.S. competitive advantage, particularly where innovation or technology play a key role.

 

The areas of particular concern to the United States are summarized below.

 

 

Upon joining the WTO, China agreed to overhaul its legal regime to ensure the protection of intellectual property rights in accordance with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).  China has undertaken substantial efforts in this regard, as it has revised or adopted a wide range of laws, regulations and other measures. 

 

While some problems remain, China did a relatively good job of overhauling its legal regime.

 

However, China has been much less successful in ensuring effective IPR protection, as IPR enforcement remains problematic.  Indeed, counterfeiting and piracy in China are at epidemic levels and cause serious economic harm to U.S. businesses in virtually every sector of the economy.  One U.S. trade association reports that counterfeiting and piracy rates in China remain among the highest in the world, exceeding 90 percent for virtually every form of intellectual property.

 

The Administration places the highest priority on improving the protection of IPR in China. At the April 2004 JCCT meeting, in response to concerns raised by the United States, Vice Premier Wu presented an “action plan” to address the IPR problem in China. Intended to “substantially reduce IPR infringement,” this action plan calls for improved legal measures to facilitate increased criminal prosecution of IPR violations, increased enforcement activities and a national education campaign.  The Administration is monitoring implementation of this action plan closely and will conduct an out-of-cycle review early next year under the Special 301 provisions of U.S. trade law to assess China’s implementation of its IPR commitments. The Administration has called on U.S. companies to submit a range of information to enhance its monitoring of China’s enforcement efforts in every industry and in all regions of China. In addition, the Administration has taken comprehensive action – under the Strategy Targeting Organized Piracy (STOP!) – to block trade in counterfeit and pirated goods, regardless of their origin. The Administration will take whatever action is necessary at the conclusion of the out-of-cycle review to ensure that China develops and implements an effective system for IPR enforcement, as required by the TRIPS Agreement.

 

 

Of key importance during 2004 was China’s implementation of its commitments to full liberalization of trading rights and distribution services, including wholesaling services, commission agents’ services, retail services and franchising services, as well as related services. As agreed at the JCCT meeting in April 2004, China implemented its trading rights commitments nearly six months ahead of schedule, permitting companies and individuals to import and export goods in China directly without having to use a middleman.  China is scheduled to implement its distribution services commitments by December 11 of this year and thereby allow foreign enterprises to freely distribute goods within China. While China has issued regulations that call for timely implementation of these commitments, China has not made clear the precise means by which foreign enterprises will actually be able to apply for approval to provide any of the various types of distribution services. In addition, China has not yet fulfilled its commitment to open its market for sales away from a fixed location, or direct selling, by December 11, 2004, as none of the measures necessary to allow foreign participants have been issued. The Administration will pay particular attention to these areas over the coming months to ensure that China fully meets these important WTO commitments.

 

 

The United States enjoys a substantial surplus in trade in services with China, and the market for U.S. service providers in China is increasingly promising. However, the expectations of the United States and other WTO members when agreeing to China’s commitments to open China’s service sectors have not been fully realized in all sectors. Indeed, through an opaque regulatory process, overly burdensome licensing and operating requirements, and other means, Chinese regulatory authorities continue to frustrate efforts of U.S. providers of insurance, express delivery, telecommunications and other services to achieve their full market potential in China.  At the April 2004 JCCT meeting, China committed to abandon problematic proposed express delivery restrictions and to resume a dialogue on insurance issues, although it has been slow to follow through on these commitments.

 

 

With U.S. agricultural exports totaling $5.4 billion in 2003, China has become one of the fastest growing overseas markets for U.S. farmers. U.S. soybeans, cotton and other agricultural commodities have found ready customers in China, largely fulfilling the potential recognized by U.S. negotiators during the years leading up to China’s WTO accession.

 

Despite the impressive export figures, China’s WTO implementation in the agricultural sector is beset by uncertainty.  Capricious practices by Chinese customs and quarantine officials can delay or halt shipments of agricultural products into China, while sanitary and phytosanitary standards with questionable scientific bases and a generally opaque regulatory regime frequently bedevil traders in agricultural commodities.  Like all commodity markets, agricultural trade requires as much predictability and transparency as possible in order to reduce the already substantial risks involved and preserve margins.   Agricultural trade with China, however, remains among the least transparent and predictable of the world’s major markets.

 

In 2004, the United States was able to make substantial headway on a number of key issues in agricultural trade, particularly in the area of biotechnology approvals and the removal of problematic sanitary and phytosanitary measures that had been curtailing trade.  Given past experiences, however, maintaining and improving China’s adherence to WTO rules in the area of agriculture will require continued high-level attention in the months and years to come.

 

 

Since acceding to the WTO, China has increasingly resorted to policies that limit market access by non-Chinese origin goods and that aim to extract technology and intellectual property from foreign rights-holders. The objective of these policies seems to be to support the development of Chinese industries that are higher up the economic value chain than the industries that make up China’s current labor-intensive base, or simply to protect less-competitive domestic industries.

 

Prime examples of these industrial policies in 2004 included China’s discriminatory semiconductor VAT policies, China’s efforts to promote unique Chinese standards for wireless encryption and third generation (3G) wireless telephony and, more recently, a government procurement policy that mandates purchases of Chinese-produced software.  These are among an array of steps that China has taken to encourage or coerce technology transfer or the use of domestic content across many sectors. Some of these policies stray dangerously close to conflict with China’s WTO commitments in the areas of market access, national treatment and technology transfer.

 

In 2004, the United States and China made important progress toward resolving conflicts over a number of these and other industrial policies, such as China’s export restrictions on coke. However, more work needs to be done, and the advent of new or similar policies in the future will require continued vigilance by the United States and other WTO members.

 

 

The foundation of WTO compliance is transparency, which permits markets to function effectively and reduces opportunities for officials to engage in trade-distorting practices behind closed doors. China has not traditionally operated according to the WTO’s transparency principles, and thus its commitments in this area in many ways represent a profound historical shift. By that scale, China has come a great distance toward achieving transparency in its official decision-making and regulatory regimes. Indeed, in the last several years, China has made important strides to improve transparency across a wide range of national and provincial authorities. China’s Ministry of Commerce (MOFCOM) is most notable for its impressive moves toward adopting WTO transparency norms.  However, many other ministries and agencies have made less than impressive efforts to improve their transparency. As a result, China’s regulatory regimes continue to suffer from systemic opacity, frustrating efforts of foreign – and domestic – businesses to achieve the potential benefits of China’s WTO accession.

 

 

Most of China’s key commitments – including trading rights and distribution services – were scheduled to be phased in fully by December 11, 2004.  This coming year – 2005 – will therefore provide a critical glimpse at what to expect of China as a WTO member once its full range of commitments are in place.

 

In 2005, the Administration will continue to be relentless in its efforts to ensure China’s full compliance with its WTO commitments, with particular emphasis on ensuring effective protection of U.S. patents, trademarks and copyrights in China. This work will be facilitated by additional funding from the Congress in 2004 that has allowed USTR and other agencies to increase their level of engagement and enforcement vis-à-vis China.  With this additional funding, USTR established a separate office focused solely on China trade issues and doubled the resources devoted to those issues, while other agencies increased staffing levels in Washington and Beijing.

 

As in 2004, the Administration is committed to working with China to ensure that all of the benefits of China’s WTO membership are fully realized by U.S. workers, businesses, farmers, service providers and consumers. The Administration is also committed to working with China to resolve problems in our trade relationship before they become broader bilateral irritants.

 

When this process is not successful, however, the Administration will not hesitate to employ the full range of dispute settlement and other tools available through China’s WTO accession agreement.  At the same time, the Administration will continue to strictly enforce its trade laws to ensure that U.S. interests are not harmed by unfair trade practices.