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2011 Report to Congress On China’s WTO Compliance

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

December 1, 2011
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EXECUTIVE SUMMARY
 
China acceded to the World Trade Organization ten years ago, on December 11, 2001. The terms of its accession called for China to implement numerous specific commitments over time, with key commitments phased in by December 11, 2006, five years ago. At this point, China is no longer a new WTO member; indeed, China has  proven to be  a major beneficiary of the global trading system. Accordingly, the  United States and other WTO members have been holding China fully accountable as a mature participant in the WTO system, placing a strong emphasis on China’s adherence to WTO rules.
 
OVERVIEW
 
Following China’s accession to the WTO, Chinese leaders took many impressive steps to implement a set of sweeping commitments. China reduced tariffs, eliminated non-tariff barriers that denied national treatment and market access for goods and services imported from other WTO members, and made legal improvements in intellectual property protections and in transparency. These steps unquestionably deepened China’s integration into the international trading system, strengthening both China’s rule of law and the economic reforms that China had begun in 1978. Trade and investment also expanded dramatically between China and its many trading partners, including the United States.
 
Since China joined the WTO, the impressive growth in U.S.-China trade has provided numerous substantial opportunities for U.S. businesses, workers, farmers and service suppliers, and a wealth of affordable goods for U.S. consumers.  In  fact, since 2001, U.S. exports of goods to China have increased by approximately 380 percent, rising from a 2001 total of $19 billion to $92 billion in 2010, 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; the cross- border supply of private commercial services totaled $21 billion in 2010, and services supplied through majority U.S.-invested companies in China totaled an additional $23 billion in 2009, the latest year for which data are available. In 2011, U.S.-China trade in goods and services continued to grow at a healthy pace.
 
Despite this progress, the overall picture currently presented by China’s WTO membership remains complex, given a troubling trend in China toward intensified state intervention in the  Chinese economy over the last five years. Increasingly, trade frictions with China can be traced to China’s pursuit of industrial policies that rely on trade-distorting government actions to promote or protect China’s state-owned enterprises and domestic industries. In fact, in recent years, China seems to be embracing state capitalism more strongly, rather than continuing to move toward the economic reform goals that originally drove its pursuit of WTO membership.
 
After 2006, as China’s progress toward further market liberalization began to slow, some Chinese government policies and practices raised increasing concerns that China had not yet fully embraced the key WTO principles of market access, non- discrimination and transparency. Similarly, in some instances, Chinese policymakers showed little appreciation of the carefully negotiated conditions for China’s WTO accession that were 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 frustrated economic reform efforts, and China’s difficulties in fully implementing the rule of law exacerbated this situation.
 
In 2011, the prevalence of interventionist policies and practices, coupled with the large role of state- owned enterprises in China’s economy, continued to generate significant concerns among U.S. stakeholders. 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 numerous sectors of China’s economy.
 
Throughout the past year, the United States worked bilaterally with China to try to address these concerns. Progress was made on some meaningful issues, but many issues remain outstanding, and the United States was frank in expressing its view that the two sides need to redouble their efforts going forward. In some cases where  progress was  not possible, the United States is seeking resolution of its concerns through the WTO.
 
Looking ahead, essential work for China includes the need to reduce market access barriers, uniformly follow the fundamental principles of non- discrimination and transparency, fully embrace the rule of law, and fully institutionalize market mechanisms. Completing this work is critical to realizing the tremendous potential presented by China’s WTO membership, including the breadth and depth of trade and investment – and prosperity – possible in a thriving, balanced global trading system.
 
2011 DEVELOPMENTS
 
Looking back on 2011, the Administration worked hard 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 protect U.S. rights under the WTO system when China’s actions caused concerns. On the bilateral front, the United States  and  China pursued numerous formal and informal meetings and dialogues over the last year, including 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 third S&ED meeting in May 2011 and the 22nd meeting of the JCCT in November 2011. The United States has been using all of these avenues to engage China’s leadership on trade and economic matters and to seek resolutions to a number of pressing trade issues.
 
In 2011, the two sides were able to make significant progress on the following key trade issues through negotiations conducted during the January 2011 visit of President Hu to Washington and through the 2011 S&ED and JCCT processes:
 
  • China established a new, permanent vice- premier led IP enforcement structure that will allow much better government coordination of IP enforcement efforts and stronger outcomes on the ground.
  • China committed to increased resources and further efforts to improve the effectiveness of its government software legalization program, as well as further work to promote the use of licensed software in enterprises.
  • China committed to sever the link between China’s innovation policies and government procurement preferences, including through the elimination of all indigenous innovation government procurement catalogues and the issuance of a State Council measure mandating that by December 1, 2011, provincial and local governments must  eliminate any policies that are inconsistent with  the de-linking commitment.
  • China confirmed that it will not require foreign automakers to transfer technology to Chinese enterprises nor to establish Chinese brands in order to invest and sell electric vehicles in China.
  • China also confirmed that foreign-invested enterprises are eligible on an equal basis for subsidies and other incentive programs for electric vehicles.
  • China committed to provide a fair and level playing field for all companies, including U.S. companies, in China’s strategic, newly emerging industries, including high-end equipment manufacturing, energy-saving and environment- ally friendly technologies, biotechnologies, new generation information technologies, alternative energy, advanced materials and new energy vehicles.
  • China committed to actively study and push forward the opening of the mandatory third- party liability auto insurance market to foreign- invested insurance companies.
  • China committed to issue a measure in 2011 to implement the requirement  that all proposed trade- and economic-related administrative regulations and departmental rules are to be posted on the website of China’s State Council for a public comment period of not less than 30 days.
 
At the same time, significant ongoing challenges remain in many areas. The United States will therefore continue to pursue discussions in areas including investment, innovation, intellectual property rights, industrial policies (especially as they relate to state-owned enterprises), agriculture, standards development, conformity assessment procedures, financial services, telecommunications, express delivery services, pharmaceuticals and medical devices, among others.
 
On the enforcement side, the United States pursued a robust agenda over the past year, bringing two important new WTO cases against China, while continuing to prosecute three other cases. One of the new cases challenges China’s imposition of antidumping and countervailing duties on imports of U.S. chicken products as appearing to be inconsistent with fundamental WTO obligations. The other new WTO case has already produced success, as China responded to the U.S.  case filing by removing large subsidies that appeared to be tied to using Chinese-made components – rather than imports – in the manufacturing of wind turbine systems in China. Among the cases continuing from prior years is a challenge to 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 United States also continues to pursue its challenge to an attempt by China to use its trade remedy laws to block imports of U.S. grain-oriented electrical steel products, which are used by the power generating industry. Another continuing case, nearing completion, involves a broad challenge to China’s restraints on the export of several raw materials of key importance to U.S. steel, aluminum and chemicals industries. Over the past year, the United States also successfully defended against China’s WTO challenge to the U.S. imposition of a China- specific safeguard on imports of tires from China.
 
PRIORITY ISSUES
 
At present, several specific areas cause particular concern for the United States and U.S. stakeholders in terms of China’s approach to the obligations of WTO membership. The key concerns in each  of these areas are summarized below, and a detailed summary of China’s WTO compliance efforts is set forth in Table 1.
 
Intellectual Property Rights
 
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 changes to China’s legal framework are still needed in a few areas, such as further improvement of China’s measures for copyright protection on the Internet, and correction of continuing deficiencies in China’s criminal IPR enforcement measures.
 
Meanwhile, 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. Indeed, in a study released in May 2011, the U.S. International Trade Commission estimated that U.S. businesses suffered a total of $48 billion in lost sales, royalties and license fees due to IPR infringement in China in 2009 – a figure that is more than two-thirds the value of the $69 billion in U.S. goods exported to China in the same year.
 
In 2011, with USTR’s annual Special 301 report again placing China on the Priority Watch List, the United States continued to seek ways to work with China to improve China’s IPR enforcement regime. Chinese markets were prominent in USTR’s publication of the first Out-of-Cycle Review of Notorious Markets in 2011, identifying Internet and physical markets that exemplify key challenges in the global struggle against piracy and counterfeiting. Following publication of the list, one important market in China, the website Baidu, reached a precedent- setting licensing agreement with U.S. and international rights holders in the recording industry to curtail illegal music downloads.
 
Given China’s increasing stake in effective IPR enforcement, as evidenced by its efforts to develop innovative industries and technologies, a variety of U.S. agencies also held multiple bilateral discussions with their Chinese counterparts in 2011. Real progress was made, but much more work remains to be done.
 
As noted above, in November 2011, the United States was able to use the JCCT process to secure China’s establishment of a high-level central government enforcement structure,  which essentially makes permanent the effective Vice Premier-led structure used in China’s 2010 Special IPR Campaign. As part of this effort, China also committed to revised legal measures to improve enforcement against IP infringement and to ensure that performance evaluations of local government officials include assessment of their IP enforcement efforts.
 
Through the January 2011 visit of President Hu to Washington, the May 2011 S&ED meeting and the November 2011 JCCT meeting, the United  States also pressed China to intensify its software legalization efforts. Building from key baseline commitments earlier in the year on implementing and strengthening audits and inspections, the United States obtained important JCCT commitments from China, including Vice Premier-level attention to this issue, increased resources for software audits and inspections, as well as further actions to improve the scope, efficiency and accuracy of this work. In addition, China agreed to conduct multiple enterprise software legalization pilot projects and to publish progress reports about the projects.
 
In 2012, 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 will also seek to intensify its bilateral engagement with China in an effort to achieve significant reductions in 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.
 
Industrial Policies
 
China continued to pursue industrial policies in 2011 that seek to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial government resources to support Chinese industries. The principal beneficiaries of these policies are state-owned enterprises, as well as other favored companies attempting to move up the economic value chain.
 
In 2011, policies aimed at promoting “indigenous innovation” continued to represent an important component of China’s efforts, creating  great concerns across the globe.  However,  critical Chinese commitments secured during the December 2010 JCCT meeting, the January 2011 visit of President Hu to Washington, the May 2011 S&ED meeting, and the November 2011 JCCT combined to generate major progress in de-linking indigenous innovation policies at all levels of the Chinese government from government procurement preferences. The most recent step, at the November 2011 JCCT meeting, focused specifically on ensuring that all outstanding local government level measures would be halted immediately. In a major step, China agreed to issue a State Council measure mandating that provincial and local governments eliminate any remaining linkages by December 1, 2011. This significant reform now needs to be matched by eliminating a range of discriminatory indigenous innovation preferences proliferating outside of the government procurement context.
 
In addition, 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 economic advantages to a wide range of downstream producers in China, at the expense of foreign downstream  producers,  while simultaneously creating incentives for these foreign downstream producers to move their operations and technologies to China.
 
The U.S. response, as noted above, was the filing of a WTO case in 2009 challenging the export restraints that China maintains on nine raw material inputs of key interest to the U.S. steel, aluminum and chemicals industries. In 2010, China’s export restraints on rare earths – an important group of raw material inputs used in a wide range of advanced technologies, including a variety of green technologies – 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 most recently through high-level engagement at the November 2011 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 using WTO mechanisms, if appropriate.
 
China has continued to provide a range of injurious subsidies to its domestic industries, and some of these subsides appear to be prohibited under WTO rules. The United States has addressed these subsidies both through countervailing duty proceedings conducted by the Commerce Department and through dispute settlement proceedings at the WTO. At the same time, China has yet to submit to the WTO a complete and up-to- date notification of subsidies maintained by central, provincial and local governments. The United States continued to press China in this area in 2011, including by taking the extraordinary step of submitting a counter notification of 200 unreported Chinese subsidy programs.
 
As in prior years, in 2011, the Chinese government attempted to manage the export of many primary, intermediate and downstream products by raising or lowering the value-added tax rebate available upon export. In addition, China sometimes reinforced its objectives 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 where 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 continued to respond 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. To date, bilateral engagement has yielded slow progress in resolving these matters.
 
In the area of government procurement, U.S. engagement is spurring China to take some concrete steps toward fulfilling its commitment to accede to the WTO’s Government Procurement Agreement (GPA) and to open up its vast government procurement market to the United States and other GPA parties. In December 2011, following up on commitments made at the December 2010 JCCT meeting and during the January 2011 visit of President Hu to Washington, China submitted a revised offer of coverage, which for the first time included some sub-central entities.  However, China’s offer still falls short in many respects. Going forward, China will need to expand the scope of its offer much further to be comparable to other GPA parties.
 
China also has sought to protect many domestic industries through a restrictive investment regime. In addition to restrictions imposed via  China’s foreign investment catalogue, China can readily impose additional constraints on investment through its foreign investment screening processes, particularly in “pillar industries,” using vaguely defined powers granted to regulators under the rules governing foreign mergers and acquisitions. To date, sustained bilateral engagement by the United States has not led to relaxation of these restrictions.
 
Finally, a serious problem that emerged in 2011 involved an array of Chinese policies designed to assist Chinese automobile enterprises in developing cutting-edge electric vehicle technologies and then building domestic brands to succeed in global markets. These policies generated serious concerns about  forced  technology   transfer,  research  and development requirements, investment restrictions and discriminatory treatment of foreign brands and imported vehicles. Through the November  2011 JCCT meeting, the United States was able to secure China’s commitment to eliminate many of these concerns, though more work remains to be done.
 
In 2012, the United States will continue to pursue vigorous and expanded bilateral engagement to resolve the serious disagreements that remain over many of China’s industrial policy measures. The United States will also continue to seek the elimination of China’s export restraints on raw material inputs, both through the WTO dispute settlement process and bilateral engagement.
 
Trading Rights and Distribution Services
 
In most sectors, China has implemented its critically important 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), enabling many U.S. companies to import and export goods directly without using middlemen and to establish their own distribution networks in China. Over the years, some significant restrictions persisted, but, by the end of 2011, many of the United States’ outstanding concerns were being addressed, and others were the subject of intensive work.
 
As previously reported, the United States mounted a successful challenge at the WTO to China’s restrictions on 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, and China subsequently agreed that it would remove these restrictions in 2011. China took positive steps by issuing several revised measures, and repealing other measures, relating to its restrictions on books, newspapers, journals, DVDs and music. As  China acknowledges, however, it did not issue any measures addressing theatrical films. Instead, China proposed bilateral discussions, and the two sides are currently discussing alternative solutions on an expedited basis.
 
One other outstanding concern involves 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.
 
Agriculture
 
In 2011, U.S. agricultural products continued to experience strong sales to China. China had become the United States’ largest agricultural export market in 2010, when U.S. exports to China exceeded $17 billion, more than eight times the level in 2002. Through the first nine months of 2011, U.S. exports to China increased by 27 percent, when compared to the same period in 2010. Much of this success has been ensured by the United States’ persistent engagement of China’s regulatory authorities.
 
At the same time, 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, seemingly capricious practices by Chinese customs and quarantine agencies can delay or halt shipments of agricultural products into China. In addition, both 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 2011, 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, more than four 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. Additionally, China continued to maintain overly restrictive pathogen and residue standards for raw meat and poultry.
 
In 2012, the United States will continue to urge China to lift the restrictions on imports of U.S. beef and U.S. poultry products. The United States will also continue to pursue vigorous bilateral engagement with China and take other actions, as appropriate, to achieve progress on its outstanding concerns.
 
Services
 
The United States continued to enjoy a substantial surplus in trade in services with China in 2011, and the market for U.S. service suppliers  in  China remains promising. This success has been largely attributable to the market openings phased in  by China pursuant to its WTO commitments, as well as the United States’ comprehensive engagement of China’s various regulatory authorities.
 
At the same time, in 2011, numerous challenges persisted in a range of services sectors. As in past years, Chinese regulators continued to use discriminatory regulatory processes, informal bans on entry, overly burdensome licensing and operating requirements and other means to frustrate efforts of U.S. suppliers of banking,  insurance,  express delivery, telecommunications, legal and other services to achieve success that begins to reflect their full market potential in China. China also continued to  place 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 or accept 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 2012, the United States will continue to engage China on outstanding services issues and will closely monitor developments in an effort to ensure that China fully adheres to its WTO commitments.
 
Transparency
 
One of the core principles of the WTO Agreement reflected 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, even though China had agreed to implement its transparency commitments immediately upon its accession to the WTO, it appears that China still has more work to do if it is to fully implement some of its commitments.
 
As previously reported, China had committed to adopt a single official journal for the publication of all trade-related laws, regulations and other measures. In 2006, China finally adopted a single official journal, to be administered by the Ministry of Commerce. To date, it appears that most but not all government entities publish at least some of their trade-related measures in this journal.
 
China also had committed to provide a reasonable period for public comment before implementing new trade-related laws, regulations and other measures. In 2008, the National People’s Congress (NPC) instituted notice-and-comment procedures for draft laws, and shortly thereafter China  indicated that it would also publish proposed trade- and economic-related administrative regulations and departmental rules for public comment.
 
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. Since 2008, the NPC has been regularly publishing draft laws for public comment, and China’s State Council has been regularly publishing draft regulations for public comment. However, many of China’s ministries have not been consistent in publishing draft departmental rules for public comment.
 
At the May 2011 S&ED meeting, China committed that it would issue a measure in 2011 to implement the requirement to publish all proposed trade- and economic-related administrative regulations and departmental rules on the State Council’s website for a public comment period of not less  than  30 days. To date, however, China has not issued the promised measure.
 
Meanwhile, after ten years of WTO membership, China still has not issued any measures related to another important transparency commitment, i.e., China’s agreement to make available translations of all of its trade-related laws, regulations and other measures in one or more of the WTO languages (English, French and Spanish). Some Chinese ministries at times make available  English translations of their measures. However, overall, China has a poor record  of providing the agreed- upon translations.
 
The United States will continue to monitor China’s progress closely and push China to undertake further necessary steps to improve transparency.
 
THE YEAR AHEAD
 
In 2012, the Administration will continue to energetically pursue increased  benefits for  U.S. businesses, workers, farmers, ranchers and service suppliers from our trade and economic ties with China. Tools for achieving these objectives include productive, outcome-oriented dialogue at all levels of engagement and in both bilateral and multilateral 
settings; negotiation of new disciplines, where feasible; and vigorous use of the WTO dispute settlement mechanism, where appropriate. The Administration will also 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 work in JCCT working groups. The United States will also take full advantage of multilateral venues such as the WTO to engage China. Key goals will include ensuring that the benefits of China’s WTO commitments are fully realized by the United States and other WTO members and that problems in the U.S.-China trade relationship are appropriately resolved. The United States will continue to place particular emphasis on reducing Chinese government intervention in the market.
 
At the same time, as the United States has repeatedly demonstrated, when 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.
 
Breaking down Chinese market barriers and maximizing our stakeholders’ opportunities to compete in the global marketplace could not be more important in today’s world. Going forward, the Administration will continue its dedicated efforts to achieve these goals.
 

 

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