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2008 Report to Congress On China’s WTO Compliance

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

December 1, 2008
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EXECUTIVE SUMMARY
2008 DEVELOPMENTS
 
China acceded to the World Trade Organization seven years ago on December 11, 2001. The terms of its accession called for China  to implement numerous specific commitments over time. All of China’s key commitments should have been phased in by December 11, 2006, two years ago. Consequently, China is no longer a new WTO member, and the United States and other WTO members have been holding China fully accountable as a mature member of the international trading system, placing a strong emphasis on China’s adherence to WTO rules.
 
On the bilateral front, the United States and China pursued a robust set of formal and informal meetings and dialogues over the last year, including numerous working groups and high-level meetings under the auspices of the U.S.?China Joint Commission on Commerce and Trade (JCCT) and the U.S.?China Strategic Economic Dialogue (SED). Indeed, the United States and China held JCCT meetings in December 2007 and again in September 2008, while also holding SED meetings in December 2007, June 2008 and December 2008. As in prior years, the United States used these various avenues to seek resolutions to a number of pressing trade issues.
 
Bilateral engagement produced more near?term results in 2008 than in 2007, largely because China’s leadership displayed an increased willingness to work constructively and cooperatively with the United States. In fact, the two sides were able to achieve incremental but important progress in numerous areas.
 
For example, China agreed to delay publication of final rules on information security certification that would have potentially barred several types of U.S. high technology products from China’s market so that experts from both sides could discuss the best way  forward. China confirmed that state-owned enterprises would base their software purchases solely on market terms without Chinese government intervention or directives favoring  domestic software. China agreed to eliminate all remaining duplicative testing and inspection requirements for imported medical devices. China lifted Avian Influenza?related bans on poultry imports from several U.S. states, and China also agreed to allow several U.S. pork processing plants to resume exports to China. China committed to submit an improved offer as soon as possible in  connection with its accession to the WTO’s Government Procurement Agreement. China agreed to additional market access for foreign suppliers in the banking and securities sectors. China also established notice? and?comment procedures for trade? and economic? related regulations. At the same time, the United States and China agreed to begin or continue discussions in a number of other important areas, including, for example, intellectual property rights (IPR), steel trade, insurance, medical device pricing and tendering policies, sanitary and phytosanitary (SPS) measures, transportation and environmental goods and services, among other areas. The two sides also launched bilateral investment treaty negotiations.
 
On the enforcement side, the United States brought two new WTO cases against China in 2008, as set out in Table 1. In March 2008, the United States challenged restrictions that China had placed on foreign suppliers of financial information services as well as China’s failure to establish an independent regulator in this sector. The European Communities (EC) and later Canada joined in this challenge. In November 2008, following several months of constructive discussions the parties  welcomed China’s agreement to resolve all of their concerns through a settlement. Joined by Mexico, the United States initiated a second WTO case against China in December 2008, challenging an industrial policy that generated a vast number of central, provincial and local government programs promoting increased worldwide recognition and sales of famous brands of Chinese merchandise through what appear to be prohibited export subsidies.
 
In addition, the United States continued to pursue four other WTO cases in 2008. In one of those cases, a challenge brought by the United States, the EC and Canada to China’s use of prohibited local content requirements in the auto sector, a WTO panel ruled in favor of the complaining parties in March 2008, and the WTO’s Appellate Body upheld that ruling on appeal in December 2008. In a WTO challenge to several prohibited tax subsidy programs, China followed through on the parties’ earlier settlement by eliminating all of the subsidies at issue by January 1, 2008. In two other WTO cases, a challenge to key aspects of China’s IPR enforcement regime, along with a challenge to market access restrictions affecting the importation and distribution of copyright?intensive products such as books, newspapers, journals, theatrical films, DVDs and music, the United States expects WTO panels to make their decisions public in 2009.
 
Looking back on 2008, the many developments in the U.S.?China trade relationship demonstrated that the Administration’s policy of serious dialogue and resolute enforcement is delivering real results. The United States’ intensive dialogue with China generated positive outcomes on a number of contentious issues, while U.S. use of WTO dispute settlement continued to generate favorable settlements and favorable WTO panel decisions.
 
However, despite the progress achieved in 2008, several specific issues continued to cause particular concern for the United States and U.S. industry, given China’s WTO obligations. These outstanding issues arose in a range of areas, including principally intellectual property rights, industrial  policies, trading rights and distribution  services, agriculture and services, as discussed below under the heading of Priority Issues.
 
TRENDS
 
China has taken many impressive steps over the last seven years to reform its economy, while making progress in implementing a set of sweeping WTO accession commitments that required it to reduce tariff rates, to eliminate non-tariff barriers, to provide national treatment and improved market access for goods and services imported from the United States and other WTO members, to protect intellectual property rights and to improve transparency. Although it does not appear  to  be complete in every respect, China’s implementation of its WTO commitments has led to increases in U.S. exports to China, while deepening  China’s integration into the international trading system and facilitating and strengthening the rule of law and the economic reforms that China began thirty years ago. Since China’s accession to the WTO in 2001, U.S. exports of goods to China have increased by 240 percent, rising from a 2001 total of $19 billion to $65 billion in 2007, while exports from January through September 2008 are 17 percent higher than 2007 exports during the same period. China is now the United States’ third largest goods export market. China is also a substantial market for U.S. services, as the cross?border supply of services totaled $14 billion in 2007, and services supplied through majority U.S.-invested companies in China totaled an additional $10 billion in 2006, the latest date for which data is available.
 
Nevertheless, in some areas it appears that China has yet to fully implement important commitments, and in other areas significant questions have arisen regarding China’s adherence to ongoing WTO obligations, including core WTO principles. Invariably, these problems can be traced to China’s pursuit of industrial policies that rely on excessive, trade?distorting government intervention  intended to promote or protect China’s domestic industries. This government intervention, still evident in many areas of China’s economy, is a reflection of China’s historic yet unfinished transition from a centrally planned economy to a free?market economy governed by rule of law.
 
The United States and other WTO members had fully anticipated that tensions would arise from China’s historic economic structure and the state’s large role in China’s economy. Consequently, they carefully negotiated  conditions  for  China’s  WTO  accession that would, when implemented, lead to significantly reduced levels of trade-distorting government intervention.
 
As previously reported, through the first four years after China’s accession to the WTO, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy. However, beginning in 2006, progress toward further market liberalization began to slow. It became clear that some parts of the Chinese government did not yet fully embrace key WTO principles of market access, non?discrimination and transparency. Differences in views and approaches between China’s central government and China’s provincial and local governments also continued to frustrate economic reform efforts, while China’s difficulties in fully implementing the rule of law exacerbated this situation.
 
Last year, USTR reported that one of the critical issues for the international trading system would be to ensure that China’s leadership does not retreat from the substantial progress made to date. USTR explained that evidence of a possible trend toward a more restrictive trade regime appeared most visibly in diverse Chinese measures over the preceding two years signaling new restrictions on market  access and foreign investment in China.
 
In 2008, U.S. companies have pointed to further evidence of  such a trend, including  the setting of unique Chinese national standards, the tremendous expansion of the test market for China’s home? grown 3G telecommunications standard, China’s government procurement practices, an  array of policies promoting and protecting “pillar industries,” the promotion of famous Chinese brands of merchandise using what appear to be prohibited forms of financial support, the continued and incrementally more restrictive use of export quotas and export duties on a large number of raw materials, new and additional restrictions on foreign investment in China, a ruling under the Anti? monopoly Law that imposed investment restrictions on   a   foreign   company   rather   than   competitive safeguards, and the continuing consideration of “national economic security” when evaluating mergers and acquisitions, among other significant restrictive practices.
 
Despite these many remaining challenges, China’s WTO membership has continued to provide substantial ongoing benefits to the United States. Each year since China joined the WTO in 2001, U.S.-China trade has expanded dramatically, providing numerous and substantial opportunities for U.S. businesses, workers, farmers and service suppliers and a wealth of affordable goods for U.S. consumers. Indeed, China was the United States’ second largest goods trading partner in 2007, with two?way trade totaling $387 billion and on track to increase by 9 percent in 2008 based on data from January through September,  while  two-way  services  trade  totaled $23 billion in 2007. 
 
PRIORITY ISSUES
 
At present, several specific areas cause particular concern for the United States and U.S. industry in terms of China’s adherence to the obligations of WTO membership. The key concerns in each of these areas are summarized below, while a detailed summary of China’s WTO compliance efforts is set forth in Table 2.
 
Intellectual Property Rights
 
Since its accession to the WTO, China has put  in place a largely satisfactory framework of laws and regulations aimed at protecting the intellectual property rights of domestic and foreign right holders, as required by the WTO Agreement on Trade?Related Aspects of Intellectual Property Rights (the TRIPS Agreement). However, some critical reforms are still needed in a few areas, such as further improvement of China’s measures for copyright protection on the Internet following China’s notable accession to the World Intellectual Property Rights Organization (WIPO) Internet treaties, and correction of continuing deficiencies in China’s criminal measures.
 
In addition, effective enforcement of China’s IPR laws and regulations remains a significant challenge. Despite repeated anti?piracy campaigns in China and an increasing number of civil IPR cases in Chinese courts, counterfeiting and piracy remain at unacceptably high levels and continue to cause serious harm to U.S. businesses across many sectors of the economy. U.S. industry estimates that levels of piracy in China across most lines of copyright products, except business software, ranged between 90 and 95 percent based on data for 2007, while business software piracy rates were approximately 80 percent. These figures indicate little or no overall improvement over the previous year. USTR’s annual Special 301 report, issued in April 2008, similarly confirmed a lack of progress through 2007, as USTR continued to place China on the Priority Watch List.
 
In 2008, the United States continued to seek ways to work with China to improve China’s IPR enforcement regime. Indeed, as part of its efforts to develop innovative industries and technologies, China has an increasing stake in effective IPR enforcement. Throughout the year, a variety of U.S. agencies held regular bilateral discussions with their Chinese counterparts and conducted numerous technical assistance programs for central, provincial and local government officials on TRIPS  Agreement rules, enforcement methods and rule of law issues. In addition, in September 2008, the United States was able to use the JCCT process to secure a renewed commitment from China to cooperate on a range of IPR issues, such as IPR and innovation, China’s development of guidelines on IPR and standards, public?private discussions on copyright and Internet piracy challenges including infringement on user? generated content sites, and reducing the sale of pirated and counterfeit goods at wholesale and retail markets.
 
The United States also continued to prosecute a WTO case challenging specific deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks. Following the establishment of a WTO panel last year to hear the case, 12 WTO members  joined  in  as  third  parties. Proceedings before the panel took place in April and June 2008, and the panel is expected to make its decision public in 2009.
 
The  United  States  continues  to  work  closely  with U.S. industry and to devote considerable staff and resources, both in Washington and in Beijing, to address the many challenges in the IPR area. The United States also remains committed to working constructively with China on a bilateral basis to significantly reduce IPR infringement levels in China. At the same time, as has been demonstrated, when bilateral discussions prove unable to resolve key issues, the United States remains prepared to take further action on these issues, including WTO dispute settlement where appropriate, given the importance of China developing an effective, TRIPS Agreement?compliant system for IPR enforcement.
 
Industrial Policies
 
China continued to pursue industrial policies in 2008 that seek to limit market access for non?Chinese origin goods and foreign service suppliers while offering substantial government resources to support Chinese industries and increase exports. In some cases, the objective of these policies seems to be to promote the development of advanced Chinese industries that are higher up the economic value chain than China’s current labor?intensive industrial base. In other cases, China appears simply to be protecting less competitive state?owned enterprises.
 
As the WTO’s Appellate Body confirmed in a December 2008 ruling, China has been applying WTO?inconsistent taxes on imported  auto parts whenever they are used in the assembly of motor vehicles that fail to meet certain local content requirements. The United States looks forward to China’s prompt compliance with this ruling.
 
China continues to deploy export quotas, export license fees, minimum export prices, export duties and other export restrictions on a number of raw materials where it holds the advantage of being one of the world’s leading producers. Through these export restrictions, it appears that China is able to provide substantial artificial advantages to a wide range of downstream producers in China, both in the China market and other markets around the world.
 
In 2008, it became apparent that China was seeking to expand the market share of famous Chinese brands of merchandise around the world  through the use of what appear to be prohibited forms of financial support, provided by the central government as well as provincial and local governments throughout China. The U.S. response, as noted above, was the filing of a WTO case challenging the financial support that China provides through its famous brands programs.
 
China continues to pursue unique national standards in a number of areas of high technology where international standards already exist, such as information security standards. China also pressures foreign companies seeking to participate in the standards?setting process to license their technology or intellectual property on unfavorable terms. In addition, even after repeatedly committing to technology neutrality for 3G telecommunications standards through the JCCT process, China’s regulatory authorities continued to promote the home?grown TD?SCDMA standard and, in 2008, substantially expanded its test market, without allowing any operations by telecommunications service providers seeking to employ other 3G telecommunications standards.
 
Meanwhile, China has sought to protect many domestic industries through an increasingly restrictive investment regime. Since 2006, China has imposed new and additional restrictions on foreign investment, particularly in “pillar industries,” while also granting its regulators vaguely defined powers under the Anti?monopoly Law and the rules governing foreign mergers and acquisitions that can be used to restrict legitimate foreign investment.
 
In 2008, bilateral discussions yielded some progress in resolving U.S. concerns regarding these problematic industrial policy measures, some of which raise questions about China’s compliance with its WTO obligations in the areas of national treatment, market access, export restrictions, technology transfer and subsidies, among others. As noted above, China agreed to delay publication of final rules on information security certification that would have potentially barred several types of U.S. high technology products from China’s  market,  so that experts from both sides could engage in discussions and find the best way forward. In addition, as previously reported, the United States was able to leverage its use of the WTO dispute settlement mechanism to gain China’s agreement in November 2007 to eliminate several prohibited tax subsidy programs by January 1, 2008. The United States has monitored China’s implementation of this agreement and has confirmed that China eliminated these subsidies, as agreed.
 
In 2009, the United States will continue to pursue vigorous bilateral engagement to resolve the serious disagreements that remain over a number of China’s industrial policy measures. If dialogue fails to address U.S. concerns, however, the United States will not hesitate to take further actions seeking elimination of these industrial policy measures, including WTO dispute settlement, where appropriate.
 
Trading Rights and Distribution Services
 
For many U.S. companies, China’s commitments to fully liberalize trading rights (the right to import and the right to export) and distribution services (wholesale, retail, direct selling and franchising services) are critically important. While China has implemented these commitments in  most sectors, enabling many U.S. companies to import and export goods directly without using middlemen and to establish their own distribution networks in China, some serious problems still appear to remain.
 
Despite extensive and persistent bilateral engagement by the United States, China refused to remove import and distribution restrictions on copyright-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, in apparent contravention of China’s trading rights and distribution services commitments. These restrictions reduce and delay market access for these copyrighted products, creating additional incentives for infringement in China’s market. Consequently, in April 2007, the United States initiated WTO dispute settlement proceedings. Hearings before the panel took place in July and September 2008, and the panel is scheduled to make its decision public in 2009.
 
In 2008, China also continued to make foreign retailers that seek to open new stores satisfy burdensome requirements not applicable  to domestic retailers, although U.S. bilateral engagement did lead to incremental progress. At the September 2008 JCCT meeting, China announced steps that should streamline the  licensing process and facilitate approvals for new foreign retail outlets, although some concerns remains.
 
Finally, while China is a major market for U.S. direct sellers, China continued to subject foreign direct sellers to unwarranted restrictions on their business operations in 2008. China also appears to have stopped issuing new licenses for direct sellers. Working closely with U.S. industry, the United States sought improvements in this area in 2008 and will continue to press China in 2009 to ensure that China fully meets its WTO commitments.
 
Agriculture
 
While U.S. exports of agricultural commodities to China continued to perform strongly in 2008 and largely fulfill the potential envisioned by U.S. negotiators during the years leading up to China’s WTO accession, China remains among the least transparent and predictable of the world’s major markets for agricultural products, largely because of selective intervention in the market by  China’s regulatory authorities. As in past years, capricious practices by Chinese customs and quarantine agencies can delay or halt shipments of agricultural products into China, while SPS measures with questionable scientific bases and a generally opaque regulatory regime frequently bedevil traders in agricultural commodities, who require as much predictability and transparency as possible in order to preserve margins and reduce the already substantial risks involved in agricultural trade.
 
In 2008, the principal targets of questionable practices by China’s regulatory authorities were poultry and pork, and anticipated growth in U.S. exports of these products was not realized. In addition, China continued to block the importation of U.S. beef and beef products, well over one year after these products had been declared safe to trade under international scientific guidelines.
 
In 2009, the United States will continue to pursue vigorous bilateral engagement with China in order to obtain progress on its outstanding  concerns. The United States also will not hesitate to take other actions to resolve its concerns if dialogue fails, including WTO dispute settlement, where appropriate.
 
Services
 
While the United States continued to enjoy a substantial surplus in trade in services  with China and the market for U.S. service providers in China remains promising, Chinese regulators continue to use an opaque regulatory process, overly burdensome licensing and operating requirements and other means to frustrate efforts of U.S. providers of banking, insurance, express delivery, construction and engineering, telecommunications and legal services to achieve their full market potential in China. In addition, China still does not allow foreign credit card companies and other suppliers to provide electronic payments processing and related services for domestic currency transactions in China. USTR continues to consult closely with U.S. credit card companies on this issue.
 
Over the last year, U.S. engagement through the JCCT and SED processes led to China’s agreement to increase market access for foreign suppliers of securities services. China also reduced capital requirements for providers of basic telecommunications services, although these capital requirements still remained excessive by international norms and will continue to discourage new providers from entering China’s market.
 
Meanwhile, in March 2008, after dialogue failed to resolve U.S. concerns, the United States brought a WTO case challenging restrictions that China had placed on foreign suppliers of financial information services as well as China’s failure to establish an independent regulator in this sector. As noted above, the EC and later Canada joined in this challenge, and following several months of constructive discussions China agreed to a settlement fully addressing all of the complaining parties’ concerns. The settlement calls for China to install an independent regulator and remove the challenged restrictions through a series of steps, to be completed no later than June 1, 2009.
 
In 2009, the United States will continue to engage China on the many outstanding services issues and will closely monitor developments in an effort to ensure that China fully adheres to its WTO commitments. If necessary, the United States also will not hesitate to take further actions seeking to enforce China’s WTO commitments, including WTO dispute settlement, where appropriate.
 
Transparency
 
One of the core principles of the WTO Agreement, reinforced throughout China’s WTO accession agreement, is transparency. Transparency permits markets to function effectively and reduces opportunities for officials to engage in trade? distorting practices behind closed doors. While China’s transparency commitments in many ways require a profound historical shift, China made important strides to improve transparency across a wide range of national and provincial authorities during the first four years of its WTO membership. However, two shortcomings stood out. As of December 11, 2005, China had still not adopted a single official journal for publishing all trade?related measures, and it had yet to regularize the use of notice-and-comment procedures for new or revised trade?related measures prior to implementation.
 
In 2006, after the United States elevated the issue to the JCCT level, China finally adopted a single official journal, to be administered by the Ministry of Commerce (MOFCOM). However, MOFCOM proved unable to secure full participation by all relevant government entities. In December 2007, following further U.S. engagement through the SED process, China re?committed to publishing all trade?related measures in a single official journal.
 
The United States also used the SED process to urge China to adopt a mandatory notice?and?comment practice. Subsequently, in April 2008, the National People’s Congress (NPC) instituted notice?and? comment procedures for draft laws. In addition, at the June 2008 SED meeting, China similarly committed to publish all proposed trade? and economic?related regulations  and  departmental rules for public comment, subject to specified exceptions.
 
As these steps are implemented, they should lead to improved transparency, particularly for proposed Chinese laws and regulations. China’s commitments in this area also signal increasing recognition by many Chinese government officials that improved transparency and greater input from stakeholders and the public contribute to better regulatory practices and improved policymaking.
 
THE YEAR AHEAD
 
In 2009, the United States will continue its concerted efforts to ensure that China fully implements its WTO accession commitments and fully adheres to its fundamental obligations as a WTO member, with particular emphasis on reducing Chinese government intervention in the market, removing remaining trade and investment barriers and lowering IPR infringement levels in China.  As always, USTR will continue to consult closely with U.S. stakeholders to ensure that U.S. policies and actions advance their interests.  Throughout  this  process, the United States will continue  to solve  problems with dialogue if possible, and legal action when appropriate, while working within the rules?based international trading system.
 
In particular, on the bilateral front, the United States will continue to pursue a robust set of formal and informal meetings and dialogues with China, including high?level meetings, in order to ensure that the benefits of China’s WTO membership are fully realized by the United States and other WTO members and that problems in the U.S.?China trade relationship are appropriately resolved. Through these efforts, the United States will place particular emphasis on issues arising in the areas of intellectual property rights, industrial policies, agriculture and services. Based on the increased willingness that China displayed in 2008 to work cooperatively and pragmatically with the United States on contentious issues, the United States is optimistic that significant progress is obtainable in 2009.
 
Nevertheless, as the United States has demonstrated on several occasions, when bilateral dialogue is not successful in resolving WTO?related concerns, the United States will not hesitate to invoke the dispute settlement mechanism at the WTO. In addition, when U.S. interests are being harmed by unfairly traded imports from China, the  United States  will continue to vigorously enforce U.S. trade remedy laws, as envisioned by WTO rules.
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