2009 Report to Congress On China’s WTO Compliance

 

Looking back on 2009, the new Administration worked to increase the benefits the United States derives from trade and economic ties with China by focusing on outcome-oriented dialogue at all levels of engagement, while also taking concrete steps to enforce China’s adherence to its international trade obligations. Within this framework, the United States’ intensive dialogue with China during the past year generated positive outcomes on a number of contentious issues. At the same time, the United States aggressively pursued WTO dispute settlement on issues left unresolved by dialogue, filing one new case, generating a favorable settlement in another case and obtaining favorable WTO panel decisions in two other cases.

 

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 newly created U.S.-China Strategic and Economic Dialogue (S&ED) and the U.S.-China Joint Commission on Commerce and Trade (JCCT).  The United States and China held their first S&ED meeting in July 2009 and the 20th meeting of the JCCT in October 2009.  A Presidential summit followed in November 2009. The United States used all of these avenues to establish a foundation for the new Administration’s engagement of China’s leadership on trade and economic matters and to seek resolutions to a number of pressing trade issues.

 

Bilateral engagement produced concrete results in a number of important areas in 2009. The two sides were able to resolve significant trade irritants, while also achieving incremental but important progress in other areas and agreeing to pursue dialogue in still other areas where more detailed discussions were needed to lay the foundation for possible resolutions. For example, China made the following commitments, among others:

 

 

At the same time, the two sides agreed to begin or continue discussions in a number of other important areas, including, for example, industrial policies, intellectual property rights, agriculture, standards and conformity assessment procedures, clean energy, health care reform and transparency. The two sides also continued to pursue bilateral investment treaty negotiations in 2009.

 

On the enforcement side, the United States brought one new WTO case against China in 2009. Joined by the EU and later Mexico, the United States initiated this WTO case in June 2009, challenging export quotas, export duties and other restraints maintained by China on the export of several key raw material inputs for which China is a leading world producer. These export restraints skew the playing field against the United States and other countries by creating potentially substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. At the request of the complaining parties, a WTO panel was established to hear this case in December 2009.

 

The United States also continued to pursue five other WTO cases in 2009. In each case, the United States was able to obtain either a favorable WTO ruling or a settlement agreement resolving all of its concerns.

 

In one case, initiated in December 2008, the United States and co-complainants Mexico and Guatemala had challenged a Chinese 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. Following  several months of intense negotiations, the parties concluded  a  settlement  agreement  in  December 2009 in which China confirmed that it had  taken steps to eliminate  all of the export-contingent benefits in the challenged measures.

 

In two cases focused on remedying problems encountered in China by U.S. holders of intellectual property rights, the WTO issued rulings favorable to the United States in 2009. A January 2009 WTO panel decision, which neither side appealed, found certain aspects of China’s legal regime for protecting and enforcing copyrights and trademarks to be WTO-inconsistent. Another WTO panel decision, issued in September 2009, ruled in favor of the United States on its challenges to market access restrictions affecting the importation  and distribution of copyright-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, and the WTO’s Appellate Body upheld the panel’s decision in December 2009.

 

Meanwhile, two other cases entered into the compliance phase in 2009. In one case, in which the United States, joined  by the  EU and  Canada, had challenged restrictions on foreign financial information service suppliers imposed by a Chinese regulator that also operated its own competing financial information service, China took key steps toward complying with the terms of the parties’ November 2008 settlement agreement by creating an independent regulator and removing the challenged restrictions on foreign financial information service suppliers. The other case involved a challenge brought by the United States, the EU and Canada to Chinese measures imposing discriminatory charges and other burdens on imported auto parts whenever they were used in the assembly of motor vehicles that failed to meet certain local content requirements. After a WTO panel had ruled in favor of the complaining parties in July 2008, and the WTO’s Appellate Body had upheld this ruling in December 2008, China repealed the challenged measures in September 2009.

 

Despite the progress achieved in 2009, 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.

 

 

China has taken many impressive steps over the last eight years to reform its economy, while 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 still 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 nearly 270 percent, rising from a 2001 total of $19 billion to $70 billion in 2008. While U.S.-China trade slowed in 2009 like trade in the rest of the world in the face of the global economic downturn, China remains 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 $16 billion in 2008, and services supplied through majority U.S.-invested companies in China totaled an additional $14 billion in 2007, the latest date for which data is available.

 

Nevertheless, as this year’s report again confirms, 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. Frequently, as in recent years, 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.

 

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 the key WTO principles of market access, non-discrimination and transparency or the carefully negotiated conditions for China’s WTO accession designed to lead to significantly reduced levels of trade-distorting government intervention. 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.

 

Beginning in 2007, 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 in reducing levels of trade-distorting government intervention and liberalizing China’s market. USTR explained that evidence of a possible trend toward a more restrictive trade regime appeared most visibly in an array of Chinese measures over the preceding two years, signaling new restrictions on market access and foreign investment in China.

 

In 2008 and again this  past year, U.S. companies pointed to further examples evidencing such a trend, including:

 

 

In a written submission provided in connection with this year’s public hearing on China’s WTO compliance, one major U.S. industry association noted its “growing concern that the pace of economic reform in China appears to have slowed in key sectors, and there are growing indications that China’s movement toward a market economy has stalled.” A similar view was also expressed by a number of other entities.

 

Despite the 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, with the exception of this year, which was affected by the global economic downturn, 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. In 2009, China remained the United States’ second largest goods trading partner and a significant services trading partner.

 

 

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 1.

 

 

Since its accession to the WTO, China has put  in place a 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 accession to the World Intellectual Property Rights Organization (WIPO) Internet treaties, and correction of continuing deficiencies in China’s criminal IPR enforcement 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. The U.S. copyright industries estimate that losses in 2008 due to piracy were approximately $3.5 billion for the music recording and software industries alone. These  figures indicate little or no overall improvement over the previous year. USTR’s  annual Special 301 report, issued in April 2009, similarly confirmed a lack of progress through 2008, as USTR continued to place China on the Priority Watch List.

 

In 2009, the United States continued to seek ways to work with China to improve China’s IPR enforcement regime. Recognizing that China has an increasing stake in effective IPR enforcement as evidenced by its efforts to develop innovative industries and technologies, a variety of U.S. agencies held regular bilateral discussions with their Chinese counterparts.

 

U.S. government officials also 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 October 2009, the United States was able to use the JCCT process to secure commitments from China to impose maximum administrative penalties, including the revocation of business licenses, for Internet piracy, to issue a notice ensuring compliance with all copyright laws in state- run and academic libraries, especially with regard to electronic journals, and to work to ensure that the Ministry of Culture’s prescreening requirements do not hamper the distribution of legitimate sound recordings online. In addition, China agreed to cooperative discussions on a range of other IPR issues, such as the relationship between IPR and innovation, China’s development of guidelines  on IPR and standards, public-private discussions on copyright and Internet piracy challenges including intermediary liability on the Internet, how to reduce the sale of pirated and counterfeit goods at wholesale and retail markets, and the development of recommendations on bad faith trademark registrations.

 

The United States also obtained a favorable ruling from a WTO panel in a case challenging deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks. Specifically, in a case in which 12 other WTO members had joined in as third parties, a WTO panel found WTO-inconsistent China’s denial of copyright protection to works that do not meet China's content review  standards as well  as  China’s  handling  of  border  enforcement seizures of counterfeit goods, while clarifying important legal standards relating to China’s criminal enforcement of copyrights and trademarks. Neither side appealed the panel’s decision, and China subsequently agreed to bring the measures at issue into compliance by March 2010.

 

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 other types of 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.

 

 

China continued to pursue industrial policies in 2009 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. Policies aimed at promoting “indigenous innovation” through preferential government procurement and other measures are an important component of this effort. In other cases, China appears simply to be protecting less competitive state-owned enterprises.

 

In 2009, China continued to deploy export quotas, export license fees, minimum export prices, export duties and other export restraints on a number of raw material inputs where it holds the advantage of being one of the world’s leading producers. Through these export restraints, it appears that China is able to provide substantial artificial advantages to a wide range of downstream producers in  China, both in China’s market and other markets around the world. The U.S. response, as noted above, was the filing of a WTO case in June 2009 challenging the export restraints that China maintains on certain inputs of key interest to U.S. industry.

 

As in prior years, the Chinese government also attempted to manage the export of many intermediate and downstream products in 2009, often by raising or lowering the value-added tax rebate available upon export and sometimes by imposing or retracting export duties. These practices have caused tremendous disruption, uncertainty and unfairness in the global markets for some products, particularly ones for which China is a leading world producer or exporter such as steel. Domestic industries from many of China’s trading partners have responded to these and other trade- distortive practices by petitioning their governments to impose trade remedies such as antidumping and countervailing duties and China-specific safeguards on imports from China.

 

Through the pursuit of a WTO case initiated last December, the United States was able to bring about the elimination of a Chinese industrial policy designed 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 through a multitude of measures issued by the central government and provincial and local governments throughout China. As a result of months of intense negotiations, as noted above, China took steps to remove all of the export-contingent benefits from the numerous Chinese measures at issue, as confirmed in a settlement agreement executed in December 2009.

 

Another problematic industrial policy was also eliminated through the WTO dispute settlement process this year. In September 2009, as noted above,  China  complied  with  the  WTO’s  ruling  by repealing measures that had imposed discriminatory charges and other burdens on imported auto parts whenever they were used in the assembly of motor vehicles that failed to meet certain local content requirements.

 

Meanwhile, in the standards area, China continues to pressure foreign companies seeking to participate in the standards-setting process to license their technology or intellectual property on unfavorable terms. China also continues to pursue unique national standards in a number of areas of high technology where international standards already exist. For example, in 2009, China was working to finalize draft rules on information security certification that would potentially have barred several types of U.S. high technology products from China’s market. As noted above,  bilateral discussions yielded progress in resolving U.S. concerns when China confirmed earlier this year that the compulsory certification requirement only applies when products are sold to government agencies, and not to state-owned enterprises or other  sectors  of  China’s  economy. Another example of China’s pursuit of unique national standards involves third generation (3G) mobile handsets. In 2009, China began requiring new 3G mobile handsets to be enabled with China’s home- grown WAPI standard, despite the growing commercial success of other products in China complying with the internationally recognized WiFi standard. To date, bilateral engagement has yielded no progress in resolving this matter.

 

China has also sought to protect many domestic industries through an increasingly restrictive investment regime. Since 2006, for example, China has pursued more restrictive foreign investment screening processes, particularly  in  “pillar industries,” by taking advantage of vaguely defined powers granted to regulators under the rules governing foreign mergers and acquisitions, which can be used to restrict legitimate foreign investment. To date, sustained bilateral engagement by the United States has not led to any relaxation in these investment restrictions, although the United States and China continue to pursue bilateral investment treaty negotiations.

 

In 2010, the United States will continue to pursue vigorous and expanded bilateral engagement to resolve the serious disagreements that remain over China’s various industrial policy measures. The United States will also continue to seek the elimination of China’s export restraints on raw material inputs through the WTO dispute settlement process.

 

 

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 significant challenges remain unresolved.

 

As previously reported, 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. In August 2009, as noted above, a WTO panel ruled in favor of the United States, and China appealed. In December 2009, the WTO’s Appellate Body rejected China’s appeal on all counts.

 

In the area of retail services, where China had been requiring  foreign  retailers  to  satisfy  burdensome requirements not applicable to domestic retailers when seeking to open new stores, the United States began to see incremental progress in 2009. During the run-up to the September 2008 JCCT meeting, China had announced that it was delegating authority for foreign retail outlet license approvals to the provincial government level. Over the last year, U.S. retailers have reported that this change has streamlined and facilitated approvals for foreign retail outlets.

 

Incremental progress was also achieved in the area of direct selling services in 2009. While China is a major market for U.S. direct sellers, China continues to subject foreign direct sellers to unwarranted restrictions on their business operations, and China had not issued any new licenses for direct sellers since 2007. Working closely with U.S. industry, the United States sought improvements in this area in 2008 and 2009. At the October 2009 JCCT meeting, China indicated that it was in the process of concluding its licensing procedures for certain qualified direct selling companies, and since then it has issued one new license to a U.S. direct selling company.

 

 

While U.S. exports of agricultural commodities to China continue to perform strongly 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 what seem to be 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 2009, the principal targets of questionable practices by China’s regulatory authorities were raw poultry and pork products, and anticipated growth in U.S. exports of these products was not realized. In particular, China continued to maintain overly restrictive pathogen and residue standards for raw meat and poultry. China also continued to maintain several state-level Avian Influenza bans on poultry. Additionally, China imposed bans on imports of U.S. pork and pork products and live swine in April 2009, ostensibly related to its concern about the transmission of the H1N1 influenza A virus. In addition, China continued to block the importation of U.S. beef and beef products, well over two years after these products had been declared safe to trade under international scientific guidelines.

 

The United States was able to achieve progress on China’s H1N1-related bans. At the October 2009 JCCT meeting, China announced its intent to reopen the China market to U.S. pork, pork products and live swine, and  in December 2009, China issued  a measure removing the bans on imports of U.S. pork and pork products. In 2010, the United States will monitor China’s implementation of this measure closely, while  continuing to urge China to lift the remaining ban on imports of U.S. live swine. The United States will also continue to pursue vigorous bilateral engagement with China and take other necessary actions, as appropriate, to achieve progress on its other outstanding concerns.

 

 

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. suppliers of banking, insurance, express delivery, telecommunications and legal services to achieve their full market potential in China. In  addition, China has not yet fully opened up its market to foreign companies that supply electronic payment and related services to banks and other companies that issue credit and debit cards, and China recently excluded foreign suppliers from a major segment of the domestic express delivery market.

 

Through its pursuit of a WTO case, the United States was able to convince China to remove restrictions that China had placed on foreign suppliers of financial information services and to remedy China’s failure to establish an independent regulator in this sector. As noted above, by June 2009, China had complied with the terms of a November 2008 settlement agreement, which had required China to install an independent regulator and remove the restrictions at issue.

 

In 2010, 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.

 

 

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. China’s transparency commitments in many ways required a profound historical shift in Chinese policies, and China made important strides to improve transparency across a wide range of national and provincial authorities following its accession to the WTO. However, two shortcomings stood out, as China delayed adopting a single official journal for publishing all trade-related measures and did not regularize the use of notice-and-comment procedures for new or revised trade-related measures prior to implementation.

 

Following sustained U.S. engagement, China finally adopted a single official journal in 2006, to be administered by the Ministry of Commerce.  Then, in 2008,  the  National  People’s  Congress  instituted notice-and-comment procedures for draft laws. Shortly thereafter, China also committed to publish all proposed trade-  and  economic-related regulations and departmental rules for public comment, subject to specified exceptions. These steps signaled 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.

 

Once China fully implements its commitments to adopt a single official journal and to use notice-and- comment procedures for new or revised trade- related measures, it should lead to significantly improved transparency. Currently, however, China’s implementation is incomplete, and the United States continues to engage with China on this issue and to monitor China’s progress closely.

 

 

In 2010, the Administration will continue to pursue increased benefits for all Americans from our trade and economic ties with China by focusing on productive, outcome-oriented dialogue at all levels of engagement, while also taking further steps to enforce China’s adherence to its international trade obligations, including both full implementation of China’s WTO accession commitments and full adherence to the fundamental obligations that China has taken on as a WTO member. To achieve these objectives, the Administration will continue to consult closely with U.S. stakeholders to ensure that U.S. policies and actions advance their interests.

 

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 under the auspices of the newly created S&ED and the JCCT, 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 reducing Chinese government intervention in the market. Based on the willingness that China’s leadership displayed in 2009 to work cooperatively and pragmatically with the new Administration on contentious issues, the United States is optimistic that significant progress is obtainable in 2010.

 

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 where appropriate. Similarly, when U.S. interests are being harmed by unfairly traded or surging imports from China, the United States will continue to rigorously enforce U.S. trade remedy laws, in accordance with WTO rules, including China’s WTO accession commitments.