In 2015, 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 throughout the past year, culminating in three high-level meetings. In June 2015, the United States and China met in Washington and held their seventh U.S.-China Strategic and Economic Dialogue (S&ED) meeting. Constructive dialogue also took place in connection with President Xi’s state visit to Washington in September 2015. In addition, the United States and China held the 26th meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT) in November 2015. The United States used all of these avenues to engage China’s leadership on trade and investment matters and to seek resolutions to a number of pressing issues.
The two sides were able to make significant progress on the following key trade issues through their bilateral engagement in 2015:
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 intellectual property rights enforcement, secure and controllable ICT policies, technology localization, indigenous innovation, investment restrictions, export restraints, government subsidization, excess capacity, state-owned enterprises, strategic emerging industries, administrative licensing, government procurement, taxation, standards development, market access for U.S. beef and poultry, biotechnology product approvals, agricultural support, pharmaceuticals and medical devices, cosmetics, financial services, Internet- related services, film distribution, legal services, telecommunications services, express delivery services, competition policy and transparency, among others.
On the enforcement side, the United States continued to pursue a robust agenda in 2015. The United States brought two new WTO cases against China, while continuing to prosecute six other WTO cases against China.
One of the new cases challenges numerous Chinese central government and sub-central government export subsidies provided to manufacturers and producers across seven industries located in designated clusters of enterprises called “Demonstration Bases.” This case follows a case, launched in 2012, challenging similar subsidies 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 second new case challenges discriminatory Chinese government measures exempting sales of certain aircraft produced in China, including general aviation aircraft, business jets, agricultural aircraft and regional jets, from the value-added tax (VAT) while imposing that same tax on sales of imported aircraft. Compounding this problem, it appears that the Chinese government never published these measures as required by China’s WTO commitments.
Over the past year, the United States also continued to work to ensure that China fully complied with the WTO’s rulings in a case in which the United States had challenged antidumping and countervailing duties that China had imposed on imports of U.S. grain-oriented electrical steel (GOES), a product used by the power generating industry. In that case, the United States had pursued WTO litigation because of serious concerns that China’s Ministry of Commerce (MOFCOM) had imposed the duties in question without regard for applicable legal requirements or the facts. In October 2012, the United States prevailed before the WTO’s Appellate Body. Nevertheless, MOFCOM proceeded to issue a redetermination that maintained the duties in place. Because this redetermination appeared to be inconsistent with the WTO’s rulings, the United States launched a challenge to it in a proceeding under Article 21.5 of the WTO’s Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). This compliance challenge was the first one that any WTO member had initiated to challenge a claim by China that it had complied with adverse WTO findings. In July 2015, the WTO panel hearing the case found that MOFCOM’s redetermination did not comply with the WTO’s rulings.
Meanwhile, in August 2014, the United States secured a victory 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. China agreed to comply with the WTO’s rulings in this case by May 2015, and it subsequently announced that it had eliminated the export quotas and export duties at issue by that deadline.
Other active WTO cases against China involve challenges to export subsidies being provided to automobile and automobile parts enterprises in China, antidumping and countervailing duties that China had imposed on imports of U.S. chicken broiler products, restrictions that China had put in place to create and maintain a domestic national champion as the exclusive supplier of electronic payment services, i.e., the services needed to process most credit and debit card transactions in China, and importation and distribution restrictions applied to theatrical films. The status of each of these cases is detailed below in the Enforcement section (beginning on page 34).
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. In 2016, the United States will continue to pursue vigorous and expanded bilateral engagement to resolve the serious issues that remain in these areas. The United States also will continue to hold China accountable for adherence to WTO rules when dialogue does not resolve U.S. concerns, including through the use of the dispute settlement mechanism at the WTO.
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, inadequacies in China’s IPR protection and enforcement regime continue to present serious barriers to U.S. exports and investment. China was again placed on the Priority Watch List in USTR’s 2015 Special 301 report. In addition, in 2015, USTR announced the results of its 2014 Out-of-Cycle Review of Notorious Markets, which identifies online and physical markets that exemplify key challenges in the global struggle against piracy and counterfeiting. Several Chinese markets were among those named as notorious markets.
The protection and enforcement of trade secrets in China is a serious problem that has attained a higher profile in recent years. Thefts of trade secrets that benefit Chinese companies have occurred both within China and outside of China. Offenders in many cases continue to operate with impunity. Most troubling are reports that actors affiliated with the Chinese government and the Chinese military have infiltrated the computer systems of U.S. companies, stealing terabytes of data, including the companies’ intellectual property (IP), for the purpose of providing commercial advantages to Chinese enterprises. In order to help address these challenges, the United States has won commitments from China not to condone this type of state- sponsored misappropriation of trade secrets and has urged China to update and amend its trade secrets- related laws and regulations, particularly the Anti- unfair Competition Law, and to consider issuing judicial guidance to strengthen its trade secrets regime. The United States also has urged China to
take actions to address this problem across the range of state-sponsored actors and to promote public awareness of this issue. At the November 2015 JCCT meeting, China announced that it is in the process of amending this law and intends to issue model or guiding court cases and clarify rules on preliminary injunctions, evidence preservation orders and damages.
Pharmaceutical Patents and Market Access
The United States continues to engage China on a range of patent and technology transfer concerns relating to pharmaceuticals. At the December 2013 JCCT meeting, China committed to permit supplemental data supporting pharmaceutical patent applications. However, it appears that China has only implemented that commitment in part. In addition, many other concerns remain, including the need to provide effective protection against unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, and to provide effective enforcement against infringement of pharmaceutical patents. Additionally, a backlogged drug regulatory approval system presents market access and patient access concerns. At the December 2014 JCCT meeting, China committed to significantly reduce time-to-market for innovative pharmaceutical products through streamlined processes and additional funding and personnel.
A serious and emerging concern that arose in 2015 emanates from China’s recently unveiled proposals in the pharmaceuticals sector that seek to promote government-directed indigenous innovation and technology transfer through the provision of regulatory preferences. For example, a State Council measure issued in final form without having been made available for public comment calls for expedited regulatory approval to be granted to innovative new drugs where the applicant’s manufacturing capacity has been shifted to China. The United States is pressing China to reconsider this approach.
The United States is also engaging China’s regulatory authorities as they consider amendments to pharmaceutical registration regulations. The United States is working to ensure that these amendments promote the early notification and resolution of patent disputes.
Due to the serious obstacles in China to the effective protection and enforcement of IPR in all forms, sales of legitimate IP-intensive goods and services, including software and audiovisual products, remain disproportionately low compared to similar markets with stronger IPR protection and enforcement. The United States continues to work with China on a series of JCCT and S&ED commitments to foster a better IP environment that will facilitate increased sales of legitimate IP-intensive goods and services. For example, sales of legitimate software to the Chinese government by U.S. companies have seen only a modest increase, while losses to U.S. software companies from the use of pirated software by Chinese state-owned enterprises and other enterprises remain very high. The United States continues to call on China to fulfill its existing commitments with regard to software legalization and to urge all levels of the Chinese government, state-owned enterprises and state-owned banks to take necessary steps to ensure the use of legitimate software.
Online piracy in China is widespread and continues on a large scale, affecting industries distributing legitimate music, motion pictures, books and journals, software and video games. Increased enforcement activities have yet to slow online sales of pirated goods. At the December 2014 JCCT meeting, China committed to strengthen enforcement against copyright piracy activities in the online environment and to deter the occurrence of copyright piracy through criminal, civil and administrative remedies and penalties. Separately,
new rules on the review of foreign television content present a serious concern for the continued viability of licensed foreign television content, as they are disrupting legitimate commerce while inadvertently creating conditions that allow for pirated content to displace legitimate content online.
Although rights holders report increased enforcement efforts by Chinese government authorities, counterfeiting in China, affecting a wide range of goods, remains widespread. One area of particular U.S. concern involves medications. Despite sustained engagement by the United States, China still needs to improve its regulation of the manufacture of active pharmaceutical ingredients to prevent their use in counterfeit and substandard medications. At the July 2014 S&ED meeting, China agreed to develop and seriously consider amendments to the Drug Administration Law that will require regulatory control of the manufacturers of bulk chemicals that can be used as active pharmaceutical ingredients. At the June 2015 S&ED meeting, China further agreed to publish revisions to the Drug Administration Law in draft form for public comment and to take into account the opinions of the United States and other relevant stakeholders. The United States will continue to work with China to ensure that China fulfill its commitments in this important area.
China continued to pursue industrial policies in 2015 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.
Secure and Controllable ICT Policies
In 2015, global concerns heightened over a series of Chinese measures that would impose severe restrictions on a wide range of U.S. and other foreign ICT products and services with an apparent long- term goal of replacing foreign ICT products and services. Concerns centered on requirements that ICT equipment and other ICT products and services in critical sectors be “secure and controllable.”
Some of these policies would apply to wide segments of the Chinese market. For example, in June 2015, China passed a National Security Law with a stated purpose of safeguarding China’s security, but it included sweeping provisions addressing economic and industrial policy. China also drafted laws relating to counterterrorism and cybersecurity this year which, if finalized in their current form, would also impose far-reaching and onerous trade restrictions on imported ICT products and services in China. Additionally, in September 2015, the State Council published a big data development plan, which for the first time set a time table for adopting “secure and controllable” products and services in critical departments by 2020.
Other policies would apply to specific sectors of China’s economy. A high profile example in 2015 is a measure drafted by the China Banking Regulatory Commission (CBRC) that called for 75 percent of ICT products used in the banking system to be “secure and controllable” by 2019 and that imposed a series of criteria that would shut out foreign ICT providers from China’s banking sector. Other specific sectors currently pursuing “secure and controllable” policies include the insurance sector and the e-commerce sector.
This year, the United States, in concert with other governments and stakeholders around the world, raised serious concerns at the highest levels of government within China. President Obama and President Xi Jinping discussed this issue during the state visit of President Xi in September and agreed on a set of principles for trade in information technologies. The issue was also raised in connection with the June S&ED meeting and the November JCCT meeting, with China making a series of additional important commitments with regard to technology policy.
In 2015, 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 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 address 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 IPR owned or developed in other countries the same as IPR 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 and 2014, China reviewed specific U.S. concerns, and the United States and China intensified their discussions. At the December 2014 JCCT meeting, China clarified and underscored that it will treat IPR owned or developed in other countries the same as domestically owned or developed IPR, and it further agreed that enterprises are free to base technology transfer decisions on business and market considerations, and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises.
In 2015, China’s measures on “secure and controllable” ICT policy (discussed above) included provisions that would create discriminatory indigenous innovation preferences. In addition, China’s recent steps to reform its drug review and approval system raised new concerns related to indigenous innovation and technology transfer. For example, in 2015, China’s State Council issued a measure that calls for expedited review and approval to be granted to “innovative new drugs with manufacturing capacity shifted to China.”
While some longstanding concerns regarding technology transfer remain unaddressed, and new ones have emerged, such as tying government preferences to the localization of technology in China and granting regulatory review and approval preferences to innovative drug manufacturers that shift their production to China, some progress has been made in select areas. For example, China committed at the December 2013 JCCT meeting not to finalize or implement a selection catalogue and rules governing official use vehicles. The catalogue and rules would have interfered with independent decision making on technology transfer and would have effectively excluded vehicles produced by foreign and foreign-invested enterprises from important government procurement opportunities.
China continues to deploy a combination of export restraints, including export quotas, export licensing, minimum export prices, export duties and other restrictions, 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 pressure on foreign downstream producers to move their operations, technologies and jobs to China. In 2013, China removed its export quotas and duties 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 2014, as discussed above, the United States won a second WTO case, where the claims focused 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 automobile batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum, and chemicals. China agreed to comply with the WTO’s rulings in this second case by May 2015, and it subsequently announced that it had eliminated the export quotas and export duties at issue by that deadline.
China has continued to provide a range of injurious subsidies to its domestic industries, some of which 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 cases at the WTO, including a new one launched in 2015. 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 14 years ago, China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government, and it has not yet notified any of its sub-central government subsidies.
Chinese government actions and financial support in manufacturing industries like steel and aluminum have contributed to massive excess capacity in China, with the resulting over-production distorting global markets and hurting U.S. producers and workers in both the United States and third country markets such as Canada and Mexico. While China recognizes the severe excess capacity problem in the steel and aluminum industries, among others, and has taken steps to try to address this problem, there have been mixed results.
From 2000 to 2014, China accounted for more than 75 percent of global steelmaking capacity growth. Currently, China’s capacity alone exceeds the combined steelmaking capacity of the European Union (EU), Japan, the United States, and Russia. China has no comparative advantage with regard to the energy and raw material inputs that make up the majority of costs for steelmaking, yet China’s capacity has continued to grow exponentially and is estimated to have exceeded 1.4 billion metric tons (MT) in 2014, despite weakening demand domestically and abroad. While China’s steel production is slowing and China may produce approximately 2 to 3 percent less steel in 2015 than in 2014, steel demand in China is projected to decrease 5 percent this year. As a result, China’s steel exports grew to be the largest in the world, at 93 million MT in 2014, a 50-percent increase over 2013 levels, despite sluggish steel demand abroad. In 2015, there is rising concern that China’s steel exports are still growing and may have increased 25 percent in the first ten months of 2015, as compared to the same period in 2014.
Similarly, monthly production of aluminum in China doubled between January 2011 and July 2015 and continues to grow. Large new facilities are being built with government support, including through energy subsidies. China’s aluminum excess capacity is contributing to a severe decline in global aluminum prices, harming U.S. plants and workers.
Excess capacity in China – whether in the steel industry or other industries like aluminum – hurts U.S. industries and workers not only because of direct exports from China to the United States, but because lower global prices and a glut of supply make it difficult for even the most competitive producers to remain viable. Domestic industries in many of China’s trading partners have continued to respond to the effects of the trade-distortive effects of China’s excess capacity by petitioning their governments to impose trade remedies such as antidumping and countervailing duties.
Value-added Tax Rebates and Related Policies
As in prior years, in 2015, 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 reinforces 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 products made by the steel, aluminum and soda ash industries. These practices, together with other policies, such as excessive government subsidization, also have contributed to severe excess capacity in these same industries. A positive development took place at the July 2014 S&ED meeting, when China agreed to improve its value- added tax rebate system, including by actively studying international best practices, and to deepen communication with the United States on this matter, including regarding its impact on trade. To date, however, China has not made any movement toward the adoption of international best practices.
Strategic Emerging Industries
In 2010, China’s State Council issued a decision on accelerating the cultivation and development of “strategic emerging industries” (SEIs) that called upon China to develop and implement policies designed to promote rapid growth in government- selected industry sectors viewed as economically and strategically important for transforming China’s industrial base into one that is more internationally competitive in cutting-edge technologies. China subsequently identified seven sectors for focus under the SEI initiative, including energy-saving and environmental protection, new generation information technology, biotechnology, high-end equipment manufacturing, new energy, new materials and new-energy vehicles.
To date, import substitution policies have been included in some SEI development plans at the sub- central government level. For example, a development plan for the light-emitting diode (LED) industry issued by the Shenzhen municipal government included a call to support research and development in products and technologies that have the ability to substitute for imports. Shenzhen rescinded the plan in 2013 following U.S. Government intervention with China’s central government authorities.
Similarly, some central and sub-central government measures use local content requirements as a condition for enterprises in SEI sectors to receive financial support or other preferences. For example, in the high-end equipment manufacturing sector, China has maintained an annual program that conditioned the receipt of a subsidy on an enterprise’s use of at least 60 percent Chinese-made components when manufacturing intelligent manufacturing equipment. Citing WTO concerns, the United States began pressing China in 2014 to repeal or modify these measures. In 2015, China reported that it had decided not to renew this subsidy program.
In addition, an array of Chinese policies designed to assist Chinese automobile enterprises in developing electric vehicle technologies and in building domestic brands that can succeed in global markets continued to pose challenges in 2015. 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 to be done.
Import Ban on Remanufactured Products
China prohibits the importation of remanufactured products, which it typically classifies as used goods. China also maintains restrictions that prevent remanufacturing process inputs (known as cores) from being imported into China’s customs territory, except special economic zones. These import prohibitions and restrictions undermine the development of industries in many sectors in China, including mining, agriculture, healthcare, transportation and communications, among others, because companies in these industries are unable to purchase high-quality, lower-cost remanufactured products produced outside of China.
Standards and Technology
In the standards area, two principal types of problems harm U.S. companies. First, 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. Second, China has continued to pursue unique national standards in a number of high technology areas where international standards already exist, such as 3G and 4G telecommunications standards, Wi-Fi standards and information security standards. To date, bilateral engagement has yielded minimal progress in resolving these matters.
The United States continues to press China to take concrete steps toward fulfilling its commitment to accede to the GPA 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. China submitted its fifth revised offer in December 2014. This offer showed progress in a number of areas, including thresholds, entity coverage and services coverage. Nonetheless, it fell short of U.S. expectations and remains far from acceptable to the United States and other GPA parties as significant deficiencies remain in a number of critical areas, including thresholds, entity coverage, services coverage and exclusions.
China’s current government procurement regime is governed by two important laws. The Government Procurement Law, which is administered by the Ministry of Finance, governs purchasing activities conducted with fiscal funds by state organs and other organizations at all levels of government in China. The Tendering and Bidding Law falls under the jurisdiction of the National Development and Reform Commission and imposes uniform tendering and bidding procedures for certain classes of procurement projects in China, notably construction and works projects, without regard for the type of entity that conducts the procurement. Both laws cover important procurements that GPA parties would consider to be government procurement eligible for coverage under the GPA. The United States will continue to work with the Chinese government to ensure that China’s future GPA offers include coverage of government procurement regardless of which law it falls under, including procurement conducted by both government entities and other entities, such as state-owned enterprises.
China seeks to protect many domestic industries through a restrictive investment regime, which adversely affects foreign investors in services sectors, agriculture, extractive industries and manufacturing sectors. In line with its own plans for domestic reform, including as expressed through the Third Plenum Decision, China continues to consider improvements to its foreign investment regime, including through the use of a “negative list” to govern access. However, many aspects of China’s current investment regime, including lack of substantial liberalization, maintenance of a case-by- case administrative approval system and the potential for a new and overly broad national security review, continue to cause foreign investors great concern. In addition, foreign enterprises report that Chinese government officials may condition investment approval on a requirement that a foreign enterprise transfer technology, conduct research and development in China, satisfy performance requirements relating to exportation or the use of local content or make valuable, deal- specific commercial concessions. The United States has repeatedly raised concerns with China about its restrictive investment regime. To date, this sustained bilateral engagement has not led to a significant relaxation of China’s investment restrictions, nor has it appeared to curtail ad hoc actions by Chinese government officials.
Meanwhile, the United States and China have committed at high levels to seek to conclude a high standard BIT. Building on China’s commitment at the July 2013 S&ED meeting to negotiate a BIT that will provide national treatment at all phases of investment, including market access (i.e., the “pre- establishment” phase of investment), and will employ a negative list approach in identifying exceptions (meaning that all investments are permitted except for those explicitly excluded), the United States and China exchanged initial negative list offers in June 2015. Subsequently, as agreed at the June 2015 S&ED meeting, the two sides exchanged revised, improved negative list offers in September 2015. During the state visit of President Xi later that month, the United States and China reaffirmed, as a top economic priority, the negotiation of a high standard BIT that represents on each side an open and liberalized investment regime. Based on the progress made in the negotiations and both sides’ improved negative list offers, the two sides also committed to intensify their negotiations and to work expeditiously to conclude the negotiation of a mutually beneficial, high-standard treaty.
China’s regulatory authorities in some instances 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 disputes. The decisions reached by the WTO in those three disputes – the most recent of which was issued in July 2015 – confirm that China failed to abide by WTO disciplines when imposing the duties at issue.
The prospects for U.S. service suppliers in China are promising, given the size of China’s market and the Chinese leadership’s stated intention to promote the growth of China’s services sectors. The United States continues to enjoy a substantial surplus in trade in services with China, as the United States’ cross-border supply of services into China totaled $43 billion in 2014. In addition, services supplied through majority U.S.-invested companies in China totaled $43 billion in 2013, 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 U.S. Government’s comprehensive engagement with China’s various regulatory authorities, including in the pursuit of sector openings that go beyond China’s WTO commitments.
Nevertheless, in 2015, 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 and expansion, overly burdensome licensing and operating requirements, and other means to frustrate efforts of U.S. suppliers of banking, insurance, telecommunications, Internet- related, audiovisual, express delivery, legal and other services to achieve their full market potential in China. Some sectors, including electronic payment services and theatrical film distribution, have been the subject of WTO dispute settlement. While China declared an intent to further liberalize a number of services sectors in its Third Plenum Decision, few concrete steps have been taken.
Electronic Payment Services
China continued to place unwarranted restrictions on foreign companies, including the major U.S. credit card and processing companies, which supply electronic payment services to banks and other businesses 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 access by foreign suppliers to this market. The United States is actively pressing China to comply with the WTO’s rulings and also is considering appropriate next steps at the WTO.
Theatrical Film Distribution
In February 2012, the United States and China reached an alternative solution with regard to certain rulings relating to the importation and distribution of theatrical films in a WTO case that the United States had won. The two sides signed a memorandum of understanding (MOU) 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. 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 critical commitments to open up film distribution opportunities for imported films. As a result, the United States has been pressing China for full implementation of the MOU, particularly with regard to films that are distributed in China on a flat-fee basis rather than a revenue-sharing basis. At the June 2015 S&ED meeting, China committed to ensure that any Chinese enterprise licensed to distribute films in China can distribute imported flat- fee films on their own and without having to contract with or otherwise partner with China Film Group or any other state-owned enterprise. China further committed that SAPPRFT, China Film Group or any other state-owned enterprise would not directly or indirectly influence the negotiation, terms, amount of compensation or execution of any distribution contract between a licensed Chinese distributor and a U.S. flat-fee film producer.
China has exercised significant caution in opening up the banking sector to foreign competition. In particular, China has imposed working capital requirements and other requirements that have made it more difficult for foreign banks to establish and expand their market presence in China. Many of these requirements, moreover, have not applied equally to foreign and domestic banks. For example, China has limited the sale of equity stakes in existing state-owned banks to a single foreign investor to 20 percent, while the total equity share of all foreign investors is limited to 25 percent. Another problematic area involves the ability of U.S. and other foreign banks to participate in the domestic currency business in China. This is a market segment that foreign banks are most eager to pursue in China, particularly with regard to Chinese individuals. Under existing governing regulations, only foreign-funded banks that have had a representative office in China for two years and that have total assets exceeding $10 billion can apply to incorporate in China. After incorporating, moreover, these banks only become eligible to offer full domestic currency services to Chinese individuals if they can demonstrate that they have operated in China for three years and have had two consecutive years of profits. The regulations also restrict the scope of activities that can be conducted by foreign banks seeking to operate in China through branches instead of through subsidiaries.
China’s regulation of the insurance sector has resulted in market access barriers for foreign insurers, whose share of China’s market remains very low. In the life insurance sector, China only permits foreign companies to participate in Chinese- foreign joint ventures, with foreign equity capped at
50 percent. The market share of these joint ventures is less than 4 percent. For the health and pension insurance sectors, China also caps foreign equity at 50 percent. While China allows wholly foreign-owned subsidiaries in the non-life insurance (i.e., property and casualty) sector, the market share of foreign-invested companies in this sector is only 1 percent. China’s market for political risk insurance is completely closed to foreign participation. China has recently modified its treatment of insurance brokerage in the latest version of its Foreign Investment Catalogue, but it is not clear that any liberalization is actually taking place on the ground. Meanwhile, some U.S. insurance companies established in China continue to encounter difficulties in getting the Chinese regulatory authorities to issue timely approvals of their requests to open up new internal branches to expand their operations.
Restrictions maintained by China on value-added telecommunications services have created serious barriers to market entry for foreign suppliers seeking to provide value-added services. In addition, China’s restrictions on basic telecommunications services, such as informal bans on new entry, a requirement that foreign suppliers can only enter into joint ventures with state-owned enterprises, and exceedingly high capital requirements, have blocked foreign suppliers from accessing China’s basic services market. In May 2013, China introduced rules establishing a pilot program for the resale of mobile services, which can increase competitive opportunities in China’s heavily concentrated market. The United States is very concerned that foreign firms continue to be excluded from the pilot program, while China has issued licenses to more than a dozen Chinese suppliers.
China’s Internet regulatory regime is restrictive and non-transparent, affecting a broad range of commercial services activities conducted via the Internet. In addition, China’s treatment of foreign companies seeking to participate in the development of cloud computing, including computer data and storage services provided over the Internet, raises concerns. For example, China has imposed value-added telecommunications licensing requirements on this sector, including a 50 percent equity cap on investments by foreign companies, even though the services at issue are not telecommunications services.
China’s restrictions in the area of theater services have wholly discouraged investment by foreign suppliers, and China’s restrictions on services associated with television and radio greatly limit participation by foreign suppliers.
Express Delivery Services
The United States continues to raise concerns with China regarding implementation of the 2009 Postal Law and related regulations. China has blocked foreign companies’ access to the document segment of China’s domestic express delivery market, and it does not have a strong track record of providing non-discriminatory treatment in awarding foreign companies business permits for access to the package segment of China’s domestic express delivery market, where it also applies overly burdensome regulatory approaches.
China has issued measures intended to implement the legal services commitments that it made upon joining the WTO. However, these measures restrict the types of legal services that can be provided and impose lengthy delays for the establishment of new offices.
China is the largest agricultural export market for the United States, with more than $24 billion in U.S. agricultural exports in 2014. Much of this success resulted from intensive engagement by the United States 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 uneven enforcement of regulations and 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. Sanitary and phytosanitary (SPS) measures with questionable scientific bases and a generally opaque regulatory regime frequently create difficulties and uncertainty for traders in agricultural commodities, who require as much certainty and transparency as possible. Market access promised through the tariff-rate quota (TRQ) system set up pursuant to China’s WTO accession agreement has yet to be fully realized. At the same time, China has been steadily increasing domestic support for key commodities, and reports commissioned by certain U.S. farm groups have concluded that China may be exceeding its WTO limits.
Beef, Poultry and Pork
In 2015, beef, poultry and pork products were affected by questionable SPS measures implemented by China’s regulatory authorities. For example, China continued to block the importation of U.S. beef and beef products, more than eight 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 in 2013 the United States received the lowest risk status from the OIE, i.e., negligible risk. China also continued to impose an unwarranted and unscientific Avian Influenza-related import suspension on U.S. poultry due to an outbreak of high-pathogenic Avian Influenza (AI). Specifically, China has been unwilling to follow OIE guidelines and accept poultry from regions in the United States unaffected by this disease. Additionally, China continued to maintain overly restrictive pathogen and residue requirements for raw meat and poultry. Consequently, anticipated growth in U.S. exports of these products was again not realized.
In 2014, delays in China’s approvals of agricultural products derived from biotechnology worsened, creating increased uncertainty among traders, resulting in trade disruptions, particularly for U.S. exports of corn and dried distillers’ grains with solubles (DDGS), and delaying the adoption of new seed varieties in the United States. In early December 2014, shortly before the JCCT meeting, China announced that it would be issuing import approvals for three outstanding biotechnology products of significant importance to U.S. farmers, including two soybean events and one corn event. In addition, while China still needs to improve its regulatory process and begin reviewing biotechnology products in a transparent and predictable manner, China did agree at the December 2014 JCCT meeting to hold an annual, multi-ministry dialogue with the United States at the Vice Minister level to discuss science-based agricultural innovation and the increased use of innovative technologies in agriculture. In September 2015, using this new dialogue, the United States discussed science-based agricultural innovation with China, including the benefits of increased use of innovative technologies in agriculture. At the same time, however, delays in China’s approvals of agricultural products derived from biotechnology continued throughout 2015. The United States will continue to pursue dialogue with China in this important area in 2016.
Over the past several years, China has been significantly increasing domestic subsidies and other support measures for its agricultural sector. China has established a direct payment program, instituted minimum support prices for basic commodities and sharply increased input subsidies. China has implemented a cotton reserve system, based on minimum purchase prices, and cotton target price programs. China also has begun several new support schemes for hogs and pork, along with a purchasing reserve system for pork. China submitted its most recent notification concerning domestic support measures to the WTO in May 2015, but it only provided information up to 2010. The United States remains concerned that the methodologies used by China to calculate support levels, particularly with regard to its price support policies and direct payments, result in underestimates. Certain U.S. farm groups have commissioned reports to calculate support levels for certain commodities, including corn, wheat and soybeans, and these reports have concluded that China may be substantially exceeding its WTO- agreed domestic support spending limits.
One of the core principles reflected throughout China’s WTO accession agreement is transparency. China’s WTO transparency commitments in many ways required a profound historical shift in Chinese policies. Although China has made strides to improve transparency following its accession to the WTO, there remains a lot more for China to do in this area.
Publication of Trade-related Laws, Regulations and Other Measures
In its WTO accession agreement, China committed to adopt a single official journal for the publication of all trade-related laws, regulations and other measures, and China adopted a single official journal, to be administered by MOFCOM, in 2006. To date, it appears that some but not all central- government entities publish trade-related measures in this journal, and 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 administrative regulations and departmental rules are more commonly (but still not regularly) 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 does not normally publish in the journal certain types of trade-related measures, such as subsidy measures, nor does it normally publish sub-central government trade-related measures in the journal.
In its WTO accession agreement, China 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 often (but not regularly) published draft administrative regulations for public comment. In addition, 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 that appear to address this requirement. Since then, despite continuing U.S. engagement, little noticeable improvement in the publication of departmental rules for public comment appears to have taken place, even though China confirmed that those two SCLAO measures are binding on central government ministries.
In its WTO accession agreement, China committed to make available translations of all of its trade-related laws, regulations and other measures at all levels of government in one or more of the WTO languages, i.e., English, French and Spanish. Prior to 2014, China had only compiled translations of trade- related laws and administrative regulations (into English), but not other types of measures, and China was years behind in publishing these translations. At the July 2014 S&ED meeting, China committed that it would extend its translation efforts to include not only trade-related laws and administrative regulations but also trade-related departmental rules. Subsequently, in March 2015, China issued a measure requiring trade-related departmental rules to be translated into English. This measure also provides that the translation of a departmental rule normally must be published before implementation. The United States is pressing China to ensure that it similarly publishes translations of trade-related laws and administrative regulations before implementation, as required by China’s WTO accession agreement.
In addition to the area of transparency, several other areas of China’s legal framework can adversely affect the ability of the United States and U.S. exporters and investors to access or invest in China’s market. Key areas include administrative licensing, competition policy, the treatment of non- governmental organizations (NGOs), commercial dispute resolution, labor laws and laws governing land use. Corruption among Chinese government officials, enabled in part by China’s incomplete adoption of the rule of law, is also a key concern.
Despite numerous changes made by the Chinese government since the issuance of the Third Plenum Decision in November 2013, U.S. companies continue to encounter significant problems with a variety of administrative licensing processes in China, including processes to secure product approvals, investment approvals, business expansion approvals, business license renewals and even approvals for routine business activities. While U.S. companies are encouraged by the overall reduction in license approval requirements and the focus on decentralizing licensing approval processes, U.S. companies report that these efforts have only had a marginal impact on their licensing experiences so far.
Chinese regulatory authorities’ implementation of China’s Anti-monopoly Law poses multiple challenges. One key concern relates to how the Anti-monopoly Law will be applied to state-owned enterprises, given that a provision in the Anti- monopoly Law protects the lawful operations of state-owned enterprises and government monopolies in industries deemed nationally important. To date, China has enforced the Anti- monopoly Law against state-owned enterprises, and it has stated that this law applies to state-owned enterprises, but U.S. industry continues to express concerns that enforcement against state-owned enterprises will be more limited.
Another concern relates to the procedural fairness of Anti-monopoly Law investigations. U.S. industry has expressed concern about insufficient predictability, fairness and transparency in the investigative processes of the National Development and Reform Commission (NDRC), including NDRC pressure to “cooperate” in the face of unspecified allegations or face steep fines and limitations imposed by NDRC on the ability of foreign companies to bring counsel to meetings. Through the S&ED and JCCT processes in 2014, the United States was able to secure commitments from China designed to help address most of these matters, although some concerns remain.
In 2015, the United States secured additional commitments from China relating to Anti-monopoly Law enforcement proceedings. These commitments address the protection of confidential business information, the independence of Anti-monopoly Law decision making, the jurisdiction of courts reviewing administrative Anti-monopoly Law decisions and Anti-monopoly Law agencies processes for reconsidering decisions. China also recognized the importance of maintaining coherent rules relating to intellectual property rights in the Anti- monopoly Law context, including by taking into account the pro-competitive effects of intellectual property licensing.
In 2016, 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. 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 continue to focus on China’s implementation of the Third Plenum Decision, whose goals include 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 will continue to urge China to speedily implement these promising reforms, which have many similarities with the U.S. trade agenda with China.
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.