2010 Report to Congress On China’s WTO Compliance

China has taken many impressive steps over the last nine years to reform its economy, but the overall picture is complex, given a troubling trend toward increased state intervention in the Chinese economy in recent years. Going forward, one of the critical challenges facing the United States and China’s other trading partners will be to work to ensure that China lives up to its WTO commitments and fully embraces the open, market-oriented and rules-based trading system of the WTO. This work will be key to achieving significant reductions in trade-distorting Chinese government interventions in the market, and to move state-owned enterprises toward full operation in accordance with market principles.

 

For the first four years after joining the WTO, China implemented a set of sweeping WTO accession commitments, including reducing tariff rates, eliminating non-tariff barriers that denied national treatment and market access for goods and services imported from the United States and other WTO members, and making legal improvements in intellectual property protections and  in transparency. Unquestionably, China’s actions to implement its WTO commitments led to increases in U.S. exports to China. They also deepened China’s integration into the international trading system, facilitating and strengthening the rule of law and the economic reforms that China began more than three decades ago.

 

Nevertheless, as this year’s report again demonstrates, 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, 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 and state-owned enterprises. This government intervention, evident in 2010, 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.

 

This tendency toward increased government intervention seemed to emerge in 2006, as China’s progress toward further market liberalization began to slow. The policies and practices emanating from some parts of the Chinese government  indicated that they had not yet fully embraced 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 policies. 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.

 

In 2010, the prevalence of interventionist policies and practices, coupled with the large role of state- owned enterprises in China’s economy, continued to generate concerns among U.S. stakeholders about the direction  of China’s reform. Major issues included China’s indigenous innovation policies, serious problems with intellectual property rights enforcement, and China’s slow movement toward accession to the WTO Government Procurement Agreement, as well as continued market access barriers and discrimination against foreign enterprises in many sectors of China’s economy. In a significant achievement this  year, however, the United States was able to work with China through the JCCT and other bilateral engagement to address several of these concerns.

 

Despite the many challenges that remain, China’s WTO membership has continued to provide substantial ongoing  benefits to the United States. Each year since China joined the WTO, with the exception of 2009, 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. Since 2001, U.S. exports of goods to China have increased by more than 260 percent, rising from a 2001 total of $19 billion to $69 billion in 2009, and positioning China as the United States’ largest goods export market outside of North America. China is also a substantial market for U.S. services, as the cross-border supply of services totaled $16 billion in 2009, and services supplied through majority U.S.-invested companies in China totaled an additional $20 billion in 2008, the latest year for which data are available. In 2010, moreover, U.S.-China trade in goods and services grew rapidly, like trade in the rest of the world, as global economic growth began to recover from the economic downturn that took hold in late 2008.

 

Nonetheless, hard work remains to ensure that these opportunities grow to reflect the breadth and depth of market access required for a healthy global trading system and contemplated by China’s WTO commitments.

 

 

Looking back on 2010, the 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 three important new cases, and continuing active pursuit of a case filed in 2009. The United States also successfully defended its use of trade remedies in two WTO cases brought by China, with strong WTO panel rulings issued in favor of the United States.

 

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 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  second  S&ED meeting in May 2010 and the 21st meeting of the JCCT in December 2010.   A Presidential summit is scheduled to follow in January 2011. The United States is using all of these avenues to engage China’s leadership on trade and economic matters and seek resolutions to a number of pressing trade issues.

 

Bilateral engagement produced concrete results in 2010. In particular, the two sides were able to make progress on significant trade issues through the JCCT in a number of areas, while also establishing channels for further engagement in other areas where more discussions are needed to find solutions. For example, China made the following commitments, among others:

 

 

At the same time, significant ongoing challenges – and opportunities – remain in many areas. The two sides therefore agreed to begin or continue discussions in a number of important areas, including, industrial policies, intellectual property rights, standards development, conformity assessment procedures, government procurement, clean energy, telecommunications,  insurance, express delivery services, pharmaceuticals and medical devices, and agriculture.

 

On the enforcement side in 2010, the United States pursued a robust agenda, bringing three important new WTO cases against China, while continuing to prosecute another case. One of the new cases challenges China’s use of its trade remedy laws in ways that appear inconsistent with fundamental WTO obligations. A second new case challenges China’s creation of a national champion as the exclusive supplier of the electronic payment services needed to process most credit and debit card transactions in China, a policy that bars U.S. suppliers from the market. The third new WTO case challenges what appear to be prohibited import substitution subsidies being provided by the Chinese government to support the production of wind turbine systems in China. The ongoing WTO dispute from 2009 challenges China’s restraints on the export of several key raw materials, where China is a major world supplier. In 2010, the United States also successfully defended against China’s systemic challenge to the United States’ right to impose both antidumping duties and countervailing duties against the same Chinese imports, and against China’s challenge to the United States’ use of a China- specific safeguard against Chinese tire imports.

 

 

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 2009 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 2010, similarly confirmed a lack of progress through 2009, as USTR continued to place China on the Priority Watch List.

 

In 2010, 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. This deepening engagement, moreover, led to positive results.

 

As noted above, in December 2010, the United States was able to use the JCCT process to secure a series  of  commitments  from  China  that,  properly implemented, will have positive systemic consequences for the protection of IPR in China. In addition to announcing a six-month campaign to step up enforcement against a range of IPR infringements, China agreed to expand and enhance its software legalization program, to take steps to eradicate the piracy of electronic journals, to adopt more effective rules for addressing Internet piracy and to crack down on landlords who rent space to counterfeiters. China also agreed to continue cooperative discussions on a range of other IPR issues, including patent issues that arise in the standards-setting context.

 

Meanwhile, this past year, the United States also saw the positive results of its WTO case challenging deficiencies in China’s legal regime for  protecting and enforcing copyrights and trademarks. A WTO panel had found WTO inconsistencies in China’s denial of copyright protection to works that do not meet China's content review standards, as well as in China’s handling of border enforcement seizures of counterfeit goods. China came into compliance with these rulings in March 2010.

 

In 2011, the United States will continue 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 2010 that seek to limit market access for non-Chinese origin goods and foreign suppliers of services, while offering substantial government resources to support Chinese industries. The principal beneficiaries of these policies are less competitive state-owned enterprises and enterprises attempting to move up the economic value chain.

 

In 2010, policies aimed at promoting “indigenous innovation” became an important component of China’s efforts. For example, China began to link government procurement and other preferences to discriminatory criteria, such as the possession of intellectual property owned or developed in China. China’s industrial equipment catalogue also offered financial support to producers who exported or whose domestic products could substitute for imported products. In addition, in the wind energy sector, China pursued a range of preferential policies. In approving new wind power projects, China applied criteria that de facto discriminate against foreign enterprises, and provided subsidies to Chinese wind turbine system manufacturers that appear tied  to the purchase of domestic over imported wind power components and parts. China also introduced restrictions on foreign investment in offshore wind power projects.

 

As in prior years, China continued to deploy export quotas, export license restrictions, 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, both in China’s market and other markets around the world, to a wide range of downstream producers in China. 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 nine raw material inputs of key interest to U.S. industry. In 2010, China’s export restraints on rare earths – an important group of raw material inputs that had not been included in the initial U.S. WTO case on export restraints – began to generate increased concern among China’s trading partners, as China sharply reduced its export quotas and took other  actions  that  created  uncertainty  about  the stability of China’s supply.  The  United  States pressed China to eliminate its export restraints on rare earths, including through high-level engagement at the December 2010 JCCT meeting, but to date China has not been willing to change its policies. Going forward, the United States will continue to pursue vigorous engagement with China on this issue and will not hesitate to take further actions, including WTO dispute settlement, if appropriate.

 

The Chinese government also attempted to manage the export of  many primary, intermediate  and downstream products in 2010, 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 downstream products for which China is a leading world producer or exporter, such as steel, aluminum and soda ash. Domestic industries from many of China’s trading partners have responded to the effects of these and other trade-distortive practices by petitioning their governments to impose trade remedies such as antidumping and countervailing duties.

 

Meanwhile, in the  standards area, China in some instances has pressured 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. One example involves 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.

 

At the December 2010 JCCT meeting, in a positive development, China committed to address several of the worrisome policies and practices that had taken on prominence in 2010. Specifically, China agreed not to provide government  procurement preferences based on the nationality of intellectual property, committed to revise its industrial equipment catalogue and not to use it for import substitution or the provision of export subsidies or otherwise to discriminate against foreign suppliers, and to revise its criteria for approval of new wind power projects to recognize prior experience both inside and outside of China.  China also committed to technology neutrality for 3G networks and for future networks based on new technologies and to ensure transparency, cooperation and non- discriminatory treatment of U.S. suppliers in the development of China’s smart grid market.

 

In 2011, the United States will continue to pursue vigorous and expanded bilateral engagement to resolve the serious disagreements that remain over China’s various other industrial policy measures. The United States will also continue to seek China’s withdrawal of subsidies that appear tied to the use of domestic content in wind  turbines and 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 have remained.

 

In particular, China has continued to restrict the importation and distribution of copyright-intensive products such as books, newspapers, journals, theatrical films, DVDs and music, in contravention of its trading rights and distribution services commitments, leading the United States to mount a successful WTO challenge to these policies. China has agreed to remove these restrictions in 2011 in order to comply with the WTO ruling against it.

 

The United States  began seeing progress  in retail services after the September 2008 JCCT meeting. China had been requiring foreign retailers to satisfy burdensome requirements not applicable to domestic retailers when seeking to open new stores. However, in 2008, China announced that it was delegating authority for foreign retail outlet license approvals to the provincial government level. Over the last two years, U.S. retailers have reported that this change has streamlined and facilitated approvals for foreign retail outlets.

 

In the area of direct selling services, even though China has become a major market for U.S. direct sellers, China continues to subject foreign direct sellers to unwarranted restrictions on their business operations, such as overly burdensome service center requirements. Going forward, the United States will continue to press China to reconsider these problematic restrictions.

 

 

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 2010, the principal targets of worrisome practices by China’s regulatory authorities were poultry, pork and beef products, where anticipated growth in U.S. exports of these products was again not realized. In particular, China continued to block the importation of U.S. beef and beef products, well over three years after these products had been declared safe to trade under international scientific guidelines. China also continued to maintain several unwarranted state- level Avian Influenza import bans on poultry, even after announcing the lifting of two state-level bans at the December 2010 JCCT meeting. Additionally, while China lifted bans on imports of U.S. pork and pork products in April 2009, it continued to impose a ban on imports of live swine, ostensibly related to its concern about the transmission of the H1N1 influenza A virus. China also continued to maintain overly restrictive pathogen and residue standards for raw meat and poultry.

 

In 2011, as agreed at the December 2010 JCCT meeting, the United States and China will resume talks on beef market access. In addition, the United States will continue to urge China to lift the bans on imports of U.S. poultry and 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 suppliers in China remains promising, Chinese regulators continue to use an opaque regulatory process, overly burdensome licensing and operating requirements and other means that frustrate efforts of U.S. suppliers of banking, insurance, express delivery, telecommunications, construction and legal services to achieve their full market potential in China. In addition, China places unwarranted restrictions on foreign companies, like the major U.S. credit card companies, which supply electronic payment services to banks and other companies that issue credit and debit cards; as discussed above, the United States launched a WTO case in September 2010 in order to secure the removal of those restrictions.

 

In 2011, the United States will continue to engage China on the 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.

 

As previously reported, 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 use a single official journal for all ministries’ notices and to use notice-and-comment procedures for all new or revised trade-related measures, it should lead to significantly improved transparency. Currently, however, China’s implementation remains incomplete, and the United States continues to engage with China on this issue and to monitor China’s progress closely.

 

 

In 2011, the Administration will continue to pursue increased benefits for U.S. businesses, workers, farmers, ranchers and service suppliers 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 S&ED and the JCCT, as well as ongoing engagement through JCCT working groups, 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 continue to place particular emphasis on reducing Chinese government intervention in the market. Moreover, based on the willingness that China’s leadership displayed for the past two years to work cooperatively and pragmatically with the new Administration on contentious issues, the United States is optimistic that concrete progress is again obtainable in 2011.

 

In addition, as the United States has repeatedly demonstrated, 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, the United States will continue to rigorously enforce U.S. trade remedy laws, in accordance with WTO rules, when U.S. interests are being harmed by unfairly traded or surging imports from China.