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2013 Report to Congress On China’s WTO Compliance

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

December 2, 2013
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EXECUTIVE SUMMARY
OVERVIEW
 
Twelve years ago, on December 11, 2001, China acceded to the World Trade Organization. The terms of its accession called for China to implement numerous specific commitments over time, with all key commitments phased in by December 11, 2006. Looking back, it is easy to see how dramatically trade and investment have expanded among China and its many trading partners, including the United States, since China joined the WTO. This impressive growth has provided substantial opportunities for U.S. businesses, workers, farmers, ranchers and service suppliers, as well as a wealth of affordable goods for U.S. consumers. Despite these remarkable results, the overall  picture currently presented by China’s WTO membership has remained complex, largely due to the Chinese government’s interventionist policies and practices and the large role of state- owned enterprises in China’s economy.
 
During most of the past decade, the Chinese government emphasized the state’s role in the economy, diverging from the path of economic reform that had driven China’s accession to the WTO. With the state leading China’s economic development, the Chinese government pursued new and more expansive industrial policies, often designed to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial  government guidance, resources and regulatory support to Chinese industries, particularly ones dominated by state- owned enterprises. This heavy state role in the economy, reinforced by unchecked discretionary actions of Chinese government regulators, generated serious trade frictions with China’s many trade partners, including the United States.
 
Over the past year, as these policies and practices persisted, there also were several positive signs that China’s new leaders are focused on re-energizing economic reform in China, culminating in a Decision reached in November 2013 at the Third Plenum of the 18th Central Committee of the Chinese Communist Party, which endorsed a number of far- reaching economic reform pronouncements –  not the least of which is that the market shall be ”decisive” and “dominant.” Although these important developments have yet to translate into changes in China’s trade regime, the United States Is encouraged by the direction that they provide.
 
In 2013, as in past years, when trade frictions have arisen, the United States has preferred to pursue dialogue with China to resolve them. However, when dialogue with China has not led to the resolution of key trade issues, the United States has not hesitated to invoke the WTO’s dispute settlement mechanism. Since China’s accession to the WTO, the United States has brought 15 WTO cases against China, more than twice as many WTO cases as any other WTO member has brought against China. In doing so, the United States has placed a strong emphasis on the need for China to adhere to WTO rules, holding China fully accountable as a mature participant in, and a major beneficiary of, the WTO’s global trading system.
 
The United States recognizes the tremendous potential of the U.S.-China trade relationship for both the United States and China, and it therefore has continued to urge China to reinvigorate the economic reform that drove its accession to the WTO. If China is going to deal successfully with its economic challenges at home, it must reduce the role of the state in planning the economy, reform state-owned enterprises, eliminate preferences for domestic national champions and remove market access barriers currently confronting foreign goods and services. Addressing these challenges is also critical to the success of China’s enterprises in expanding abroad. At the same time, these reforms are strongly in the United States’ interest, not only because the Chinese government’s interventionist policies and practices and the large role of state- owned enterprises in China’s economy are principal drivers of trade frictions, but also because a healthier and more balanced Chinese economy will lead to increased U.S.-China trade and help drive global economic growth.
 
CHINA’S FIRST 12 YEARS AS WTO MEMBER
 
The commitments to which China’s leaders agreed when China joined the WTO in 2001 were sweeping in nature and required the Chinese government to make changes to hundreds of laws, regulations and other measures affecting trade and investment. These changes largely coincided with the Chinese leadership’s economic reform goals, which built on the economic reforms that China had begun under Deng Xiaoping in 1978. The Chinese leaders who negotiated China’s WTO accession negotiations correctly believed that China’s economy needed to rely more on market signals and less on Chinese government economic planners and state-owned enterprises. Indeed, these leaders oversaw a dramatic and rapid reform of state-owned enterprises from the mid-1990s through 2002.
 
Following China’s accession to the WTO, the Chinese government took many impressive steps to implement China’s numerous commitments. These steps unquestionably deepened China’s integration into the WTO’s rules-based international trading system, while also strengthening China’s ongoing economic reforms.
 
In 2003, when new leaders took over in China, the Chinese government continued to take steps to implement the WTO commitments that China had agreed to phase in over time, furthering China’s economic reforms. However, beyond these steps, China’s new leaders for the most part did not continue down the path pursued by their predecessors. Beginning with the creation of the State-owned Assets Supervision and Administration Commission (SASAC) in 2003, China’s new leaders de-emphasized their predecessors’ move toward a greater reliance on market forces and instead set out to bolster the state sector by seeking to improve the operational efficiency of state-owned enterprises and by orchestrating mergers and consolidations in order to create stronger state-owned enterprises. These actions soon led to institutionalized preferences for state-owned enterprises and the creation of national champions in many sectors.
 
In 2006, once China had taken steps to implement the last of its key WTO commitments, China’s policy shift became more evident. The United States began reporting on China’s stronger embrace of state capitalism, which continued into 2012. The United States also reported that 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.
 
Unquestionably, China’s incomplete adoption of the rule of law has exacerbated this situation. For example, as USTR has reported previously, and as remains true today, confidential accounts from foreign enterprises indicate that Chinese government officials, acting without fear of legal challenge, at times require foreign enterprises to transfer teas a condition for securing investments approvals, even though Chinese law does not – and cannot under China’s WTO commitments – require technology transfer. Similarly, in the trade remedies context, China’s regulatory authorities at times seem to pursue antidumping and countervailing duty investigations and impose duties for the purpose of striking back at trading partners that have exercised their WTO rights against specific Chinese policies or practices. China’s regulatory authorities appear to pursue these investigations even when necessary legal and factual support for the duties is absent.
 
When China’s leadership transition began in 2012, there were some initial positive signs suggesting recognition among China’s new leaders that further economic reform is in China’s interest, as USTR noted in last year’s report. In 2013, with the leadership transition complete, a series of significant developments seemed to confirm a re-focusing of China’s energies on economic reform. One notable development took place in July 2013, when China referenced its ongoing Bilateral Investment Treaty (BIT) negotiations with the United States and announced that it was prepared to increase its ambition and  focus on  the negotiation  of a high- standard BIT. This announcement was followed a few months later by the creation of the Shanghai Free Trade Zone, which is intended to serve as a pilot project for significant trade and investment liberalization and financial reform. Then, in November 2013, the Third Plenum Decision endorsed a number of far-reaching economic reform pronouncements, which called for making the market ”decisive” and “dominant,” reducing Chinese government intervention in the economy, accelerating China’s opening up to foreign goods and services, reforming China’s state-owned enterprises and improving transparency and the rule of law to allow fair competition in China’s market.  While none of these 2013 initiatives has yet evolved to the point where concrete changes have been made, they do signal a high-level  determination to accelerate needed economic reform, which, if realized, would provide tremendous benefits not only to China but also to its trading partners.
 
Despite these positive developments, a wide range of Chinese policies and practices continued to generate significant concerns among U.S. stakeholders in 2013. Major issues included China’s export restraints, investment restrictions, serious problems with intellectual  property rights enforcement, including in the area of trade secrets, indigenous innovation policies, technology transfer initiatives, government subsidization, inappropriate use of trade remedy laws, and China’s slow movement toward accession to the WTO Government Procurement Agreement (GPA). In addition, the Chinese government’s provision of preferences and financial support to state-owned enterprises and domestic national champions continued to skew the commercial playing field in many sectors, both in China’s market and abroad.
 
At the same time, in the face of these ongoing challenges, trade between the United States and China has continued to expand rapidly. U.S. exports of  goods  to  China  totaled  $110  billion  in  2012, representing an increase of 476 percent since 2001 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, with U.S. services exports reaching $30 billion in 2012, representing an increase of 455 percent since 2001. Services supplied through majority U.S.- invested companies in China also have been increasing dramatically and totaled an additional $35 billion in 2011, the latest year for which data is available. In the first ten months of 2013, U.S. exports of goods and services to China continued to grow at a healthy pace.
 
Looking ahead, as the United States has reported in prior years, we look to China to reduce market access barriers, uniformly follow the fundamental principles of non-discrimination and transparency, significantly reduce the level of government intervention in the economy, fully institutionalize market mechanisms, require state-owned enterprises to compete with other enterprises on fair and non-discriminatory terms, and fully embrace the rule of law. Taking these steps 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. China’s new leaders in 2013 seem to have embraced many elements of this approach, and the United States will be looking to work with China going forward to help make it a reality.
 
2013 DEVELOPMENTS
 
In 2013, the United States worked hard to increase the benefits that U.S. businesses, workers, farmers, ranchers, service providers and consumers derive from trade and economic ties with China. Throughout the past year, the United States focused on outcome-oriented dialogue at all levels of engagement with China, while also taking concrete steps to enforce U.S. rights at the WTO as appropriate in areas where dialogue had not resolved U.S. concerns.
 
On the bilateral front, the United States and China pursued numerous formal and informal meetings and dialogues over the past 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 fifth S&ED meeting in July 2013 and the 24th meeting of the JCCT in December 2013. Constructive dialogue also took place when President Obama hosted President Xi at Sunnylands in June 2013 and during Vice President Biden’s visit to China in December 2013. The United States used 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.
 
The two sides were able to make significant progress on the following key trade issues through their bilateral engagement in 2013:
 
  • China committed to negotiate a high-standard BIT that will embrace the principles of openness, non-discrimination and transparency, provide national treatment at all phases of investment, including market access (i.e., the “pre- establishment” phase of investment), and employ a “negative list” approach in identifying exceptions (meaning that all investments are permitted except for those explicitly excluded).
  • China agreed to submit a new revised offer to join the GPA by the end of 2013 that will take the requests of the GPA parties into consideration and that will lower coverage thresholds and increase coverage of sub-central entities, among other improvements.
  • China further agreed to accelerate its GPA accession negotiations and submit a revised offer in 2014 that is on the whole commensurate with the coverage of GPA parties.
  • China committed to cooperate with, and give serious consideration to the views of, the United States in 2014 on proposals to amend China’s trade secrets law as well as on related legislative and policy issues.
  • China further committed to adopt and publish an action plan on trade secrets protection and enforcement for 2014 that is expected  to include concrete enforcement actions, improvements of public awareness about trade secrets infringement, and requirements  for strict compliance with all legal measures providing for trade secrets protection and enforcement by all enterprises and individuals.
  • China affirmed that its existing patent requirements and procedures ensure that initial applications for pharmaceutical inventions filed early in the testing process can be supplemented with subsequently developed data and also ensure that pharmaceutical inventions receive patent protection during examinations and re-examinations and before China’s courts.
  • The United States and China agreed to intensify their discussions of detailed approaches for fostering sales of legitimate intellectual property-intensive goods and services in China.
  • China committed not to finalize or implement two measures that would have excluded vehicles manufactured by foreign enterprises or foreign-invested enterprises from procurement by the Chinese government and the Chinese Communist Party.
  • China committed that it will not require applicants to divulge source code or other sensitive business information in order to comply with the ZUC encryption algorithm standard provisions in the Ministry of Industry and Information Technology (MIIT) application process for 4G devices.
  • China committed that, beginning in Spring 2014, it   will   use   the   same   conditions   that   are applicable to domestic entities when reviewing applications from foreign-invested entities registered in China to be designated as testing and certification organizations for the China Compulsory Certification Mark, or CCC Mark.
 
While progress was made on some meaningful issues, as described above, many issues of concern remain. The United States will continue to engage China on important issues in the areas of investment restrictions, innovation, intellectual property rights, technology localization, industrial policies, state- owned enterprises, government subsidization, excess production capacity, administrative licensing, government procurement, taxation, standards development, express delivery services, financial services, telecommunications services, Internet- related services, legal  services, pharmaceuticals, medical devices and transparency, among others. In the area of agriculture, the two sides agreed to continue their discussions on U.S. beef products, with the shared goal of achieving a resumption in market access by July 2014. The United States also will continue to seek needed improvements in China’s biotechnology approval system.
 
On the enforcement side, the United States continued to pursue a robust agenda in 2013.  The United States worked on seven separate WTO cases against China during the course of the past year.
 
The United States won one case against China this past year in  which it challenged antidumping and countervailing duties that China had imposed on imports of U.S. chicken broiler products, after having won a similar case the prior year involving antidumping and countervailing duties on imports of U.S. grain-oriented electrical steel (GOES), a product used by the power generating industry. The United States expects a ruling in a third case involving antidumping and countervailing duties on imports of U.S. automobiles in early 2014. In each of these three cases, the United States is determined to hold China fully accountable for adherence to WTO rules, given    serious    concerns    shared    by    the    U.S. government and U.S. stakeholders that China’s Ministry of Commerce (MOFCOM) may have imposed the duties in question in response to the United States having exercised its WTO rights against China.
 
In early 2014, the United States is also expecting a ruling in a WTO case challenging highly trade- distortive export quotas, export duties and other restraints maintained by China on the export of rare earths, tungsten and molybdenum, which are key inputs in a multitude of U.S. manufacturing sectors and U.S.-made products, including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum and chemicals. The United States won a similar case involving several raw materials of key importance to U.S. steel, aluminum and chemicals industries in 2012.
 
The United States won another significant case against China in 2012 when it successfully challenged restrictions that China had put in place to create and maintain a domestic  national champion as the exclusive supplier of electronic payment services, which are the services needed to process most credit and debit card transactions in China. Unfortunately, China has missed its deadline for complying with the WTO’s rulings in that case, and U.S. suppliers remain blocked from entering the market. As of December 2013, the United States was considering its further options at the WTO while continuing to press China to comply with the WTO’s rulings.
 
CONCLUSIONS REGARDING CHINA’S  WTO COMPLIANCE EFFORTS
 
A summary of USTR’s conclusions regarding China’s WTO compliance efforts is set forth in Table 1. Each of these conclusions is discussed in more detail in subsequent sections of this report, and at the end of each of those sections, the report describes the next steps that the United States intends to take going forward to address shortcomings in China’s WTO compliance efforts.
 
PRIORITY ISSUES
 
At present, China’s trade policies and practices in several specific areas cause particular concern for the United States and U.S. stakeholders, including in relation to China’s approach to the obligations of WTO membership. The key concerns in each  of these areas are summarized below, and next steps for U.S. engagement of China are identified.
 
Intellectual Property Rights
 
Since its accession to  the WTO,  China  has undertaken a wide-ranging revision of its framework of laws and regulations aimed at protecting the intellectual property rights (IPR) of domestic and foreign right holders, as required by the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement). However, critical changes to China’s legal framework are still needed in several areas, such as further improvement of China’s measures for copyright protection on the Internet following China’s accession to the World Intellectual Property Organization (WIPO) Internet treaties, correction of continuing deficiencies in China’s criminal IPR enforcement measures, and updating and streamlining China’s laws and regulations on trade secrets.
 
Meanwhile, effective enforcement of those 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 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. The reported experiences of U.S. businesses on many fronts suggest that losses continue on a grand scale.
 
In 2013, the United States continued to seek ways to work with China to improve China’s IPR enforcement regime, as USTR’s May 2013 Special 301 report again placed China on the Priority Watch List and USTR’s December 2012 Out-of-Cycle Review of Notorious Markets, which identifies Internet and physical markets that exemplify key challenges in the global struggle against piracy and counterfeiting, again featured Chinese markets prominently. 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 held bilateral discussions on enforcement issues with their Chinese counterparts in 2013. These discussions generated real progress on certain issues, as discussed below, but much more work remains to be done.
 
The United States continues to urge China to build on its past commitments to eliminate the use of unauthorized software at all levels of government and to discourage the use of unauthorized software by enterprises, including major state-owned and state-invested enterprises. At the May 2012 S&ED meeting and the December 2012 JCCT meeting, China committed to intensify its use of software audits and inspections within the government and to expand its software legalization efforts in the enterprise sector. China also confirmed that it requires state-owned enterprises and state-owned banks under the supervision of the central government to purchase and use legal software. At the July 2013 S&ED meeting, China committed to promote further the use of legal software by strengthening the supervision of central state- owned enterprises and large state-owned financial institutions by establishing software asset management systems, providing budget guarantees for the purchase of legitimate software and promoting centralized software procurement.
 
In 2013, the United States pressed China in the area of trade secrets, which has become a high-profile problem in recent years. The United States has urged China to update and amend its trade secrets laws  and  regulations,  given  that  the  Law  against Unfair Competition was first implemented in 1993 and has not been updated since China’s accession to the WTO. At the July 2013 S&ED meeting, China recognized the importance of trade secret protection to an innovative economy, and committed to the vigorous protection and enforcement of trade secrets and to strengthen procedures and remedies according to law. At the December 2013 JCCT meeting, China committed to cooperate with, and give serious consideration to the views of, the United States in 2014 on proposals to amend China’s trade secrets law as well as on related legislative and policy issues. China further committed to adopt and publish an action plan on trade secrets protection and enforcement for 2014 that is expected to include concrete enforcement actions, improvements of public awareness about trade secrets infringement, and requirements for strict compliance with all legal measures providing for trade secrets protection and enforcement by all enterprises and individuals.
 
The United States secured further progress on Internet intermediary liability. Building on a prior JCCT commitment to develop a Judicial Interpretation making clear that those who facilitate online infringement will be jointly liable for such infringement, China announced at the December 2012 JCCT meeting that its Supreme People’s Court would publish a Judicial Interpretation on Internet Intermediary Liability. The Supreme People’s Court subsequently issued this Judicial Interpretation, which became effective in January 2013.
 
In 2014, the United States will continue to work closely with U.S. stakeholders and to devote staff and resources, both in Washington and in Beijing, to address the many challenges in the IPR area. The United States will also continue its intensive 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 fail to resolve key issues, the United States will remain prepared to take other types of action on these issues, including WTO dispute  settlement  where  appropriate,  given  the importance of an effective, TRIPS Agreement- compliant system for IPR enforcement.
 
Industrial Policies
 
China continued to pursue industrial policies in 2013 that seek to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial  government guidance, resources and regulatory support to Chinese industries. The principal beneficiaries of these policies are state-owned enterprises, as well as other favored domestic companies attempting to move up the economic value chain.
 
In 2013, policies aimed at promoting “indigenous innovation” continued to represent an important component of China’s industrialization efforts. Through intensive, high-level bilateral engagement, the United States had previously secured a series of critical commitments from China that generated major progress in de-linking indigenous innovation policies at all levels of the Chinese government from government procurement preferences, culminating in the issuance of a State Council measure mandating that provincial and local governments eliminate any remaining linkages by December 2011. Since then, the principal challenge has been to begin addressing a range of discriminatory indigenous innovation preferences proliferating outside of the government procurement context. Using the U.S.- China Innovation Dialogue, the United States was able to persuade China to take an important step in this direction at the May 2012 S&ED meeting, where China committed to treat intellectual property rights owned or developed in other countries the same as intellectual property rights owned or developed in China. The United States also used the 2012 JCCT process to press China to revise or eliminate specific measures that appeared to be inconsistent with this commitment. Throughout 2013, China has been reviewing specific U.S. concerns, and the United States and China have intensified their discussions.
 
In one positive development, at the December 2013 JCCT meeting,  China  committed  not  to  finalize or implement two measures that would have excluded vehicles manufactured by foreign enterprises or foreign-invested enterprises from procurement by the Chinese government and the  Chinese Communist Party. In another positive development, dialogue during the past year reversed a troubling proposed measure, which China’s Food and Drug Administration (CFDA) had released for public comment, relating to the approval of new medical devices that, among other things, sought to limit eligibility for priority treatment to medical device manufacturers holding indigenous intellectual property. Using the JCCT process, the United States persuaded China to revise the measure to bring it into compliance with China’s JCCT and S&ED commitments.
 
On other fronts, 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 leverage of being among 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 creating incentives for foreign downstream producers to move their operations, technologies and jobs to China. Effective January 2013, China took steps to remove its export restraints on several raw material inputs of key interest to the U.S. steel, aluminum and chemicals industries after the United States won a dispute settlement case against China at the WTO. In early 2014, the United States expects a decision in a second WTO case, where the claims focus on China’s export restraints on rare earths,  tungsten and molybdenum, which are key inputs for a multitude of U.S.-made products,  including hybrid car batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum and chemicals.
 
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. In September 2012, the United States launched its most recent subsidies case, challenging numerous types of support provided by the central government and various sub- central governments in China to automobile and automobile-parts enterprises located in regions in China known as “export bases.” The United States and other WTO members also have continued to press China to notify its subsidies to  the WTO in accordance with its WTO obligations. Since joining the WTO twelve years ago, China has yet to submit to the WTO a complete notification of subsidies maintained by central, provincial and local governments.
 
As in prior years, in 2013, 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. 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. At the December 2012 JCCT meeting, China agreed to hold serious discussions with the United States in order to work toward a mutual understanding of China’s VAT system and the concepts on which a trade-neutral VAT system is based.
 
In the standards area, Chinese government officials in some instances have reportedly pressured foreign companies seeking to participate in the standards- setting process to license their technology or intellectual  property  on  unfavorable  terms. In addition, China has continued to pursue unique national standards in a number of areas of high technology where international standards already exist. To date, bilateral engagement has yielded minimal progress in resolving these matters.
 
In the area of government procurement, the United States continues to press China to take concrete steps toward fulfilling its commitment to accede to the WTO’s Government Procurement Agreement and to open up its vast government procurement market to the United States and other GPA parties. To date, however, the  United States, the  EU and other GPA parties have viewed China’s offers of coverage as highly disappointing in scope and coverage. In 2013, the United States secured two commitments from China in an effort to expedite China’s accession to the GPA while continuing to push for robust terms that are comparable to the coverage of the United States and other GPA parties. At the July 2013 S&ED meeting, China agreed to submit by the end of 2013 a new revised offer to join the GPA that will take the requests of the GPA parties into consideration and that will lower coverage thresholds and increase coverage of sub- central entities, among other improvements. At the December 2013 JCCT meeting, China further agreed to accelerate its GPA accession negotiations and submit in 2014 an additional revised offer that is on the whole commensurate with the coverage of GPA parties.
 
China has also 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 approval processes, where Chinese government officials can use vaguely defined powers on an ad hoc basis to delay or restrict market entry. In addition, according to confidential reports from foreign enterprises, Chinese government officials may use informal means to require  a foreign enterprise to conduct research   and   development   in   China,   transfer technology, satisfy performance requirements relating to exportation or the use of local content, or make valuable, deal-specific commercial concessions if it wants its investment approved. To date, sustained bilateral engagement by the United States has not led to significant relaxation of China’s investment restrictions, nor has it appeared to curtail ad hoc actions by Chinese government officials.
 
An array of Chinese policies designed to assist Chinese automobile enterprises in developing cutting-edge electric vehicle technologies and in building domestic brands that can succeed in global markets continued to pose challenges in 2013. As previously reported, these policies have generated serious concerns about discrimination based on the country of origin of intellectual property, forced technology transfer, research and development requirements, investment restrictions and discriminatory treatment of foreign brands and imported vehicles. Although significant progress has been made in addressing some of these policies, more work remains.
 
As noted above, China’s regulatory authorities seem to be pursuing antidumping and countervailing duty investigations and imposing duties for the purpose of striking back at trading partners that have exercised their WTO rights against China, even when necessary legal and factual support for the duties is absent. The U.S. response has been the filing and prosecution of three WTO cases. The two cases decided to date – the GOES case and the chicken broiler products case – confirm that China failed to abide by WTO disciplines when imposing its duties.
 
In 2014, the United States will continue to pursue vigorous and expanded bilateral engagement to resolve the serious concerns that remain over many of China’s industrial policy measures. The United States also will continue to seek the elimination of China’s export restraints on rare earths and other key raw material inputs through the dispute settlement case that it has brought at the WTO.
 
Services
 
The market for U.S. service suppliers in China is promising. The United States continues to enjoy a substantial surplus in trade in services with China, as the United States’ cross-border supply of private commercial services into China totaled $30 billion in 2012. In addition, services supplied  through majority  U.S.-invested  companies in  China  totaled $35 billion in 2011, the latest year for which data are available. 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 with China’s various regulatory authorities.
 
Nevertheless, in 2013, 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 reflecting  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. The United  States prevailed in a WTO case challenging those restrictions, and China agreed to comply with the WTO’s rulings by July 2013, but China has not yet taken needed steps to authorize foreign suppliers’ access to this market. The United States is actively pressing China to comply with the WTO’s rulings and also is considering its further options at the WTO.
 
As previously reported, the United States and China reached an alternative solution with regard to another WTO case that the United States had won involving the distribution of theatrical films. In February 2012, the two sides reached an agreement providing for substantial increases in the number of foreign films imported and distributed in China each year, along with substantial additional revenue for foreign film producers. To date, significantly more U.S. films have been imported and distributed in China since the signing of the MOU and the revenue received by U.S. film producers has increased significantly. However, China has not yet fully implemented its MOU commitments, including with regard to opening up film distribution opportunities. As a result, the United States has been pressing China for full implementation.
 
One other outstanding concern in the area of distribution services involves 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.
 
In 2014, the United States will continue to engage China on outstanding service market access issues and will continue to press China to address problematic restrictions. The United States also will closely monitor developments in an effort to ensure that China fully adheres to its WTO commitments.
 
Agriculture
 
China became 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.  In 2011, U.S. exports to China increased by 8 percent, and continued to increase in 2012, when they exceeded $25 billion. In 2013, U.S. agricultural products continued to experience strong sales to China, even though not at the record level of 2012. Much of this success resulted from the United States’ intensive engagement with China’s regulatory authorities.
 
Notwithstanding this success, 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 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 2013, the principal targets of practices of concern by China’s regulatory authorities were beef, poultry and pork products, just as in 2012. As a consequence, anticipated growth in U.S. exports of these products was again not realized. For example, China continued to block the importation of  U.S. beef and beef products, more than six years after these products had been declared safe to trade under international scientific guidelines established by the World Organization for Animal Health (known by its historical acronym OIE), and despite the further fact that this year the United States received the lowest risk status from the OIE, i.e., negligible. China also continued to impose some 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 2013, China also continued to delay approvals of agricultural products derived from biotechnology. These delays created increased uncertainty among traders and also resulted in trade disruptions for U.S. corn exports.
 
In 2014, the United States will continue its discussions with China on U.S. beef products, with the shared goal of achieving a resumption in market access by July 2014. In addition, the United States will continue to urge China to lift the restrictions on imports of U.S. poultry products and to improve its regulatory process for biotechnology 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 affecting other products.
 
Transparency
 
One of the core principles 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 WTO transparency commitments in many ways required a profound historical shift in Chinese policies, and China has made important strides to improve transparency across a wide range of national and provincial authorities following its accession to the WTO. However, China still  has more work to do if it is to fully implement some of its commitments.
 
As previously reported, China committed to adopt a single official journal for the publication of all trade- related laws, regulations and other measures, and China finally adopted a single official journal, to be administered by the Ministry of Commerce (MOFCOM), in 2006. To date, it appears that most but not all government entities publish some trade- related measures in this journal. Nevertheless, these government entities tend to take a narrow view of the types of trade-related measures that need to be published in the official journal. As a result, while trade-related regulations and departmental rules are often published in the journal, it is less common for other measures such as opinions, circulars, orders, directives and notices to be published, even though they are in fact all binding legal measures. In addition, China still does not regularly publish in the journal certain types of trade-related measures, such as subsidy measures.
 
China also committed to provide a reasonable period for public comment before implementing new trade- related laws, regulations and other measures. China has taken several steps related to this commitment. 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. Subsequently, the NPC began regularly publishing draft laws for public comment, and China’s State Council regularly published draft regulations for public comment. However, many of China’s ministries were  not consistent in publishing draft departmental rules for public comment. At the May 2011 S&ED meeting, China committed to issue a measure implementing the requirement to publish all proposed trade- and economic-related administrative regulations and departmental rules on the website of the State Council’s Legislative Affairs Office (SCLAO) for a public comment period of not less than 30 days. In April 2012, the SCLAO issued two measures imposing this requirement. Since then, however,  no noticeable improvement  in the publishing of departmental rules for public comment appears to have taken place.
 
On other fronts, after twelve years of WTO membership, China still has not implemented its commitment 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). This commitment is very important to the United States and China’s other trading partners, but China has not yet even established an infrastructure to undertake the agreed-upon translations of its trade-related measures.
 
In 2014, the United States will continue to monitor China’s progress closely and push  China  to undertake further steps necessary to improve transparency.
 
NEXT STEPS
 
In 2014, as in  prior years, the Administration  will continue to vigorously pursue increased benefits for U.S. businesses, workers, farmers, ranchers and service providers from our trade and economic ties with China. The Administration will use all available tools to achieve these objectives, including the pursuit of productive, outcome-oriented dialogue in both bilateral and multilateral settings, as well as the vigorous use of enforcement mechanisms, where appropriate.
 
On the bilateral front, the United States will continue to pursue robust engagement with China at all levels of government focused on producing practical and meaningful outcomes. The United States will also take full advantage of multilateral venues such as the WTO to engage China. In addition, the United States looks forward to working with China during its upcoming APEC host year in order to produce outcomes on trade and investment issues of mutual interest. Key goals of this engagement will include ensuring that the benefits of China’s WTO commitments are fully realized by the United States and other WTO members, and that trade frictions that may arise in the U.S.-China trade relationship are effectively resolved.
 
At the same time, as the United States has repeatedly demonstrated, when dialogue is not successful in resolving 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.
 
As part of this upcoming engagement, the United States will focus on China’s implementation of the recent Third Plenum Decision. While this initiative has not yet evolved to the point where  concrete changes have been made, it does signal a high-level determination to accelerate needed economic reform, which, if realized, would provide tremendous benefits not only to China but also to its trading partners and the global economy. The United States shares the Third Plenum Decision’s goals of reducing Chinese government intervention in the economy, accelerating China’s opening up to foreign goods and services, reforming China’s state- owned enterprises and improving transparency and the rule of law to allow fair competition in China’s market.  The United States therefore will urge China to speedily implement these promising Third Plenum Decision economic reform elements, which have many similarities with the U.S. trade agenda with China.
 
The United States also will closely monitor developments relating to the Shanghai Free Trade Zone in 2014. Specifically, the United States will be looking to China as it begins to implement significant trade and investment liberalization in the Shanghai Free Trade Zone,  including through  the establishment of increased market access in important services sectors and the lifting of investment restrictions.
 
In addition, the United States looks forward to intensified negotiations with China in order to reach agreement on a BIT that embraces the principles of openness, non-discrimination and transparency, provides pre-establishment national treatment and employs a negative list approach in identifying exceptions. A high-standard BIT between two of the world’s largest economies would not only provide significant benefits to U.S. and Chinese investors but also would have broad significance for the  global economy.
 
Going forward, the Administration will continue to consult closely with the Congress and U.S. stakeholders in order to ensure that the actions being pursued by the  United States address  their concerns. The Administration remains dedicated to maximizing U.S. stakeholders’ opportunities to compete in China and the global marketplace.

 

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Events

December 3, 2020 - 3:00pm

Outside the Box [Office], USC U.S.-China Institute, and MTV Documentary Films present a Live Q&A with Writer/Director/Producer Hao Wu discussing his new documentary film 76 DAYS. Everyone who registers for the webinar will be sent a link to view the film 48 hours prior to the Q&A.

December 10, 2020 - 1:00pm

David Shambaugh speaks on his new book focusing on the United States and China in one of the world's most dynamic regions.