View the report from other years:
(Download the full report)
Fifteen 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. The data confirm a dramatic expansion in trade and investment among China and its many trading partners, including the United States, since China joined the WTO:
- U.S. exports of goods to China totaled $116 billion in 2015, representing an increase of 505 percent since 2001 and positioning China as the United States’ largest goods export market outside of North America.
- U.S. services exports reached $48 billion in 2015, representing an increase of 802 percent since 2001. Services supplied through majority U.S.-invested companies in China also have been increasing dramatically, totaling an additional $43 billion in 2013, the latest year for which data is available.
As in past years, despite these positive results, the overall picture currently presented by China’s WTO membership remains complex.
Many of the problems that arise in the U.S.-China trade and investment relationship can be traced to the Chinese government’s interventionist policies and practices and the large role of state-owned enterprises and other national champions in China’s economy, which continue to generate significant trade distortions that inevitably give rise to trade frictions. The United States notes that China’s current leadership, in place since 2013, has highlighted the need to pursue further economic reform in China, but to date not much progress is evident. If pursued appropriately, a concerted reform effort offers the potential for addressing theproblems brought on by a state-led economy and for helping to realize the tremendous potential of the U.S.-China trade and investment relationship. Indeed, economic reform in China is a win-win for the United States and China.
In the United States’ view, if China is going to deal successfully with its increasing economic challenges at home, it must allow greater scope for market forces to operate, which requires altering the role of the state in planning the economy. China likewise must reform state-owned enterprises, eliminate preferences for domestic national champions and remove market access barriers currently confronting foreign goods and services. Otherwise, China’s economic challenges will only increase and become more difficult to solve.
Further economic reform in China also would provide strong benefits to the United States. It would help address the Chinese government’s interventionist policies and practices and the large role of state-owned enterprises in China’s economy, which are the principal drivers of trade frictions. At the same time, it would lead to more sustainable Chinese economic growth, which in turn would lead to increased U.S. exports to China and a more balanced U.S.-China trade and investment relationship while also helping to drive global economic growth.
In 2016, as in past years, when trade frictions arose, the United States pursued 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 20 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 and has held China fully accountable as a mature participant in, and a major beneficiary of, the WTO’s global trading system.
China’s first 15 years as a WTO member are described below, followed by a review of key developments in 2016. Then, USTR describes its conclusions regarding China’s WTO compliance efforts to date, which are subsequently summarized in Table 1 (beginning on page 24).
CHINA'S FIRST 15 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 economic reform goals of China’s leaders at the time, which built on the economic reforms that China had begun under Deng Xiaoping in 1978. The Chinese leaders who negotiated the terms of China’s WTO accession 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 had initiated a dramatic and rapid reform of state-owned enterprises in the mid-1990s.
Following China’s accession to the WTO, the Chinese government took many 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.
New leaders took over in China in 2003, two years after China’s WTO accession. While the Chinese government continued to take steps to implement China’s outstanding WTO commitments, it generally did not pursue economic reforms as aggressively as before. Instead, the Chinese government increasingly 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.
In particular, 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 a lesser reliance on Chinese government economic planners and state-owned enterprises. Instead, the new leaders 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 make these enterprises stronger. These actions soon led to institutionalized preferences for state-owned enterprises and the creation of national champions in many sectors.
By 2006, when China had taken steps to implement the last of its key WTO commitments, China’s policy shift became more evident. It was at this time that USTR began reporting on Chinese government policies and practices that demonstrated a stronger embrace of state capitalism, a trend that continued into 2012, the last full year under the Chinese leaders who had taken over in 2003. USTR also reported that some of these policies and practices suggested that China had not yet fully embraced key WTO principles, such as market access, non-discrimination and transparency. Exacerbating this situation was China’s incomplete adoption of the rule of law, including through government officials’ abuse of administrative processes.
For example, as we reported in 2012, confidential accounts from foreign enterprises indicate that Chinese government officials, acting without fear of legal challenge, at times require foreign enterprises to transfer technology as 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 (AD) and countervailing duty (CVD) investigations and impose duties for the purpose of striking back at trading partners that have legitimately exercised their rights under WTO trade remedy rules. As three WTO cases won by the United States confirm, China’s regulatory authorities appear to pursue these investigations even when necessary legal and factual support for the duties is absent. In addition, U.S. industry and industries from other WTO Members have asserted that China’s competition policy enforcement authorities not only are targeting foreign companies, but also at times use Anti-monopoly Law investigations as a tool to protect and promote domestic national champions and domestic industries.
By 2013, when China’s next leadership transition was complete, some positive signs of a renewed commitment to economic reform in China began to emerge. The new Chinese leaders’ focus on economic reform soon led to a Decision reached in November 2013 at the Third Plenum of the 18th Central Committee of the Chinese Communist Party. The Third Plenum Decision endorsed a number of far-reaching economic reform pronouncements, calling for the market to play a “decisive” role in allocating resources, 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. If fully translated into actions, these pronouncements would significantly change China’s trade regime and would provide tremendous benefits not only to China but also to its trading partners. Another notable development took place in July 2013. While the United States and China had launched Bilateral Investment Treaty (BIT) negotiations in 2008, it was at this time that China announced that it was prepared to negotiate a high-standard BIT with the United States, including China’s agreement for the first time to cover market access.
To date, the promise of the developments in 2013 has not been realized. The pronouncements of the Third Plenum have faced strong resistance from entrenched interests, and significant economic reform has yet to be realized. In addition, as of December 2016, while the BIT negotiations have proceeded with China’s full engagement, China has not yet decided to pursue a sufficient reduction of its investment restrictions to enable the successful conclusion of those negotiations.
In 2016, despite the new Chinese leadership’s initial re-focusing on economic reform, a wide range of Chinese policies and practices continued to generate significant concerns among U.S. stakeholders, as did the continuing abuse of administrative processes by Chinese government officials. Major areas of specific concern continued to include: serious problems with intellectual property rights enforcement in China, including in the area of trade secrets; the Chinese government’s prolific use of industrial policies favoring state-owned enterprises and domestic national champions, including “secure and controllable” information and communications technology (ICT) policies, export restraints, subsidies, unique national standards and investment restrictions, among other policies; troubling agricultural policies that block U.S. market access; numerous continuing restrictions on services market access; and inadequate transparency. China’s slow movement toward accession to the WTO Government Procurement Agreement (GPA) also hinders development of the U.S.-China trade relationship.
Going forward, as reported in prior years, the United States looks 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.
In 2016, 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 2016, the United States and China met in Beijing and held their 8th U.S.-China Strategic and Economic Dialogue (S&ED) meeting. Constructive dialogue also took place in connection with President Obama’s visit to Hangzhou in September 2016. In addition, the United States and China met in Washington in November 2016 and held the 27th meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT). 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, while also working to ensure that China fully implemented past commitments.
The two sides were able to make significant progress on the following key trade and investment issues through their bilateral engagement in 2016:
- With regard to excess industrial capacity, China committed to take effective steps to address the challenges of excess capacity so as to enhance market function and encourage adjustment.
- Specifically with regard to excess capacity in the steel industry, where China’s State Council had issued guidelines calling for the elimination of 100 to 150 million MT of steel capacity, China committed to undertake further steps to ensure market forces are not constrained, so that its steel industry develops a stronger market orientation to enhance efficiency, and, in doing so, progressively reduces excess capacity.
- China also committed to ensure that no central government plans, policies, directives, guidelines, lending or subsidization targets the net expansion of steel capacity.
- China further committed to adopt measures to strictly contain steel capacity expansion, reduce net steel capacity, eliminate outdated steel capacity and urge the exit of steel production capacity that falls short of environment, energy consumption, quality or safety requirement standards and to actively and appropriately dispose of “zombie enterprises” through bankruptcies and other means.
- More broadly, the United States and China recognized the importance of the establishment and improvement of impartial bankruptcy systems and mechanisms to resolving excess industrial capacity, and China agreed to implement bankruptcy laws by continuing to establish special bankruptcy tribunals, further improving the bankruptcy administrator systems and using modern information tools
- Additionally, China agreed to support the establishment of, and actively participate in, a global forum on excess steel capacity envisioned to serve as a cooperative platform for dialogue and information-sharing on global capacity developments and on policies and support measures taken by governments.
- With regard to aluminum, the United States and China recognized that excess capacity in this industry had increased and had become a global issue requiring collective response, and accordingly the two sides agreed to work together to address the excess aluminum capacity situation.
- With regard to China’s “secure and controllable” ICT policies, China committed that ICT cybersecurity measures should be consistent with WTO agreements, be narrowly tailored, take into account international norms, be nondiscriminatory and not impose nationality-based conditions or restrictions on the purchase, sale or use of ICT products by commercial enterprises unnecessarily.
- China further committed that ICT cybersecurity measures generally applicable to the commercial sector are not to unnecessarily limit or prevent commercial sales opportunities for foreign suppliers of ICT products or services.
- China committed that its innovation policies would be consistent with the principle of non-discrimination and that it would not advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in China’s market.
- The United States welcomed new action by China’s State Council requiring all sub-central regions and agencies to take further action to review their measures and to remove any linkages between indigenous innovation policies and the provision of government procurement preferences.
- Building on past commitments from China that innovation policies should be consistent with the principle of nondiscrimination, China confirmed that its “secure and controllable” ICT policies will not limit sales opportunities for
- foreign companies or impose nationality-based restrictions, and relevant technical regulations will be notified to the WTO Technical Barriers to Trade Committee.
- China committed to further improve its approval processes for the products of agricultural biotechnology and specifically to revise a key regulatory measure to ensure that it provides for approval processes that are timely, transparent, predictable, science-based and based on international standards.
- China also committed to review outstanding applications for approval of agricultural biotechnology products and act on them in line with the timing and procedures set forth in China’s laws and regulations.
- With regard to China’s current policy of asynchronous biotechnology approvals, the two sides agreed to intensify their study and dialogue on the sustainability of this policy and its trade and innovation impacts.
- With regard to pharmaceuticals, China affirmed that drug registration review and approval shall not be linked to pricing commitments and shall not require specific pricing information.
- China addressed past commitments relating to medical devices by committing to strengthen oversight of government procurement of medical devices to ensure foreign brands and foreign-manufactured products are treated in a transparent, fair and equitable manner.
- China committed not to link government procurement to policies promoting domestically produced medical devices.
- China committed to ensure that China’s industry development plans treat all enterprises equally and operate in a manner consistent with market-based concepts.
- China affirmed that it is strengthening its trade secrets protections and that it is prioritizing enforcement against online counterfeiting and piracy. China specifically recognized the important role of online platforms and agreed to use them and other means to develop innovative new ways to deliver safe, reliable and legitimate products in convenient and affordable ways.
- With regard to the operation of the integrated circuit investment funds in China, China reaffirmed that they are based on market principles and that the Chinese government does not interfere with the normal operation of those funds and clarified that the Chinese government has never asked the funds to require compulsory technology or the transfer of intellectual property rights (IPR) as a condition for participation in the funds’ investment projects.
- China confirmed that MOFCOM has been coordinating with relevant departments and local governments regarding U.S. WTO concerns relating to so-called “International Well-Known Brand” subsidies and farm machinery subsidies and that China is prepared to adjust the measures at issue as necessary.
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 IPR enforcement, including trade secrets, secure and controllable ICT policies, technology localization, indigenous innovation, investment restrictions, excess capacity, government subsidization, export restraints, strategic emerging industries, state-owned enterprises, administrative licensing, government procurement, taxation, standards development, market access for U.S. beef and poultry, biotechnology product approvals, food safety, pharmaceuticals and medical devices, cosmetics, financial services, Internet-relatedservices, theatrical films, telecommunications services, express delivery services, legal services, competition policy and transparency, among others.
On the enforcement side, the United States continued to pursue a robust agenda in 2016. The United States brought three new WTO complaints against China, while continuing to prosecute five other WTO cases against China.
In one new case, the United States is challenging export quotas and export duties maintained by China on various forms of 11 raw materials, including antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin. These raw materials are key inputs in important U.S. manufacturing industries, including aerospace, automotive, construction and electronics.
A second new case challenges excessive government support for the production of rice, wheat and corn by farmers in China. Like other WTO members, China made commitments that its support for these agricultural commodities would not exceed certain levels. However, the United States’ investigation of the market price support programs maintained by the Chinese government for these agricultural commodities appears to exceed the agreed levels of domestic support.
In the third new case, the United States challenged China’s administration of tariff-rate quotas (TRQs) for rice, wheat and corn. Due to China’s poorly defined criteria for applicants, unclear procedures for distributing TRQ allocations, and failure to announce quota allocation and reallocation results, traders are unsure of available import opportunities and producers worldwide have reduced market access opportunities.
Over the past year, favorable outcomes were achieved in two of the ongoing WTO cases that the United States previously had brought against China.
In a WTO case launched in February 2015, the United States challenged 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.” The subsidies at issue appeared to be inconsistent with China’s obligation under Article 3 of the Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) not to provide subsidies contingent upon export performance. Consultations in the new case took place in March 2015. In April 2015, a WTO panel was established to hear the case at the United States’ request, and the two sides subsequently engaged in extensive further discussions exploring steps for China to take to address U.S. concerns. In April 2016, the United States announced that China had terminated the subsidies at issue.
In a case launched in December 2015, the United States challenged discriminatory Chinese government measures exempting sales of certain aircraft produced in China, including general aviation aircraft, agricultural aircraft, business jets and regional jets, from the value-added tax (VAT) while imposing that same tax on sales of imported aircraft. Compounding this problem, it appeared that the Chinese government never published these measures as required by China’s WTO commitments. Consultations took place in January 2016. In October 2016, the United States announced that it had confirmed that China had terminated the discriminatory tax measures at issue.
Other active WTO cases against China involve challenges to antidumping and countervailing duties that China imposed on imports of U.S. chicken broiler products, restrictions that China 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 36).
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.
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 2017, 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
After its accession to the WTO, China undertook a wide-ranging revision of its framework of laws and regulations aimed at protecting the IPR of domestic and foreign rights holders, as required by the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement). Currently, China is in the midst of a further round of revisions to these laws and regulations, as it seeks to make them more effective. Nevertheless, inadequacies in China’s IPR protection and enforcement regime continue to present serious barriers to U.S. exports and investment. As a result, China was again placed on the Priority Watch List in USTR’s 2016 Special 301 report. In addition, in December 2016, USTR announced the results of its 2016 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 and has been the subject of high-profile attention and engagement in recent years. Thefts of trade secrets for the benefit of 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. To help address these challenges, the United States previously has won commitments from China not to condone this type of state-sponsored misappropriation of trade secrets and has urged China to make certain key amendments to its trade secrets-related laws and regulations, particularly with regard to a draft revision of the Anti-unfair Competition Law. China also has committed to issue 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. In 2016, China circulated for public comment a draft of proposed revisions to the Anti-unfair Competition Law, but it included only minor changes to the provisions on trade secrets and therefore did not address the full range of U.S. concerns in this area. At the November 2016 JCCT meeting, China confirmed that it is strengthening its trade secrets regime and plans to bolster several areas of importance, including the availability of evidence preservation orders and damages based on market value as well as the issuance of a judicial interpretation on preliminary injunctions and other matters.
Bad Faith and Trademark Registration
Of particular and growing concern is the continuing registration of trademarks in bad faith. Although China has taken some steps to address this problem, U.S. companies across industry sectors continue to face Chinese applicants registering their marks and “holding them for ransom” or seeking to establish a business building off of U.S. companies’ global reputations. At the November 2016 JCCT meeting, China publicly noted the harm that may be caused by bad faith trademarks and confirmed that it is taking further steps to combat bad faith trademark filings.
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, to date, it appears that China has only implemented that commitment in part. In October 2016, China circulated for public comment proposed revisions to its Patent Examination Guidelines, which included a proposed revision that would clarify that examiners must consider in their examination process certain post-filing supplemental data. If implemented, this proposed revision would represent an important step toward the supplemental data practice in the United States and other jurisdictions.
Meanwhile, 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 concern that first arose in 2015 stems from China’s 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.
In April 2016, the China Food and Drug Administration (CFDA) issued a draft measure that effectively would require drug manufacturers to commit to price concessions as a pre-condition for marketing approval of new drugs. Given its inconsistency with international science-based regulatory practices, which are based on safety, efficacy and quality, the draft measure elicited serious concerns from the United States and U.S. industry. Subsequently, at the November 2016 JCCT meeting, China agreed not to link a pricing commitment to drug registration evaluation and approval. In addition, China agreed not to require any specific pricing information when implementing the final measure.
Online piracy continues on a large scale in China, affecting a wide range of industries, including those involved in distributing legitimate music, motion pictures, books and journals, software and video games. While increased enforcement activities have helped stem the flow of online sales of some pirated offerings, much more sustained action and attention is needed to make a more meaningful difference for content creators and rights holders, particularly small and medium-sized enterprises. At the same time, the United States has urged China to consider ways to create a broader policy environment that helps foster the growth of healthy markets for licensed and legitimate content. The United States also has urged China to revise existing rules that have proven to be counterproductive. For example, new rules on the review of foreign television content present a serious concern for the continued viability of licensed streaming of foreign television content via online platforms, as these rules are disrupting legitimate commerce while inadvertently creating conditions that allow for pirated content to displace legitimate content online. At the November 2016 JCCT meeting, China agreed to actively promote e-commerce-related legislation, strengthen supervision over online infringement and counterfeiting, and to work with the United States to explore the use of new approaches to enhance online enforcement capacity.
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. As of December 2016, China had not amended this law, reportedly due to the prioritization of reforming the drug regulatory system to reduce the drug approval lag.
China continued to pursue a wide array of industrial policies in 2016 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 constantly evolving 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 and 2016, 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 July 2015, China passed a National Security Law whose stated purpose is to safeguard China’s security, but it also includes sweeping provisions addressing economic and industrial policy. 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. China also enacted a Counterterrorism Law in December 2015 and then a Cybersecurity Law in November 2016, which imposed far-reaching and onerous trade restrictions on imported ICT products and services in China.
Other policies would apply to specific sectors of China’s economy. A high profile example from December 2014 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.
In 2015, 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 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 2015 S&ED meeting and the November 2015 JCCT meeting, with China making a series of additional important commitments with regard to technology policy.
China reiterated many of these commitments at the November 2016 JCCT meeting, where it affirmed that its “secure and controllable” policies are not to unnecessarily limit or prevent commercial sales opportunities for foreign ICT suppliers or unnecessarily impose nationality based conditions and restrictions on commercial ICT purchases, sales or uses. China also agreed that it would notify relevant technical regulations to the WTO Committee on Technical Barriers to Trade (TBT Committee).
In 2016, 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. At the November 2016 JCCT meeting, in response to U.S. concerns regarding the continued issuance of inconsistent measures, China announced that its State Council had issued a document requiring all local regions and all agencies to “further clean up related measures linking indigenous innovation policy to the provision of government procurement preference.”
Addressing related concerns, the United States, using the U.S.-China Innovation Dialogue, persuaded China to take an important step 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 2016, China’s measures on “secure and controllable” ICT policy 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.” As discussed above, at the November 2016 JCCT meeting, China issued a helpful clarification on the intent of its “secure and controllable” policies, a subject on which the United States will continue to engage with China closely in 2017.
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, 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 removed those export restraints in May 2015. In July 2016, as discussed above, the United States launched a third WTO case challenging export restraints maintained by China. The challenged export restraints include export quotas and export duties maintained by China on various forms of 11 raw materials, including antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin. These raw materials are key inputs in important U.S. manufacturing industries, including aerospace, automotive, construction and electronics.
China has continued to provide substantial subsidies to its domestic industries, causing injury to U.S. industries. Some of these subsidies also appear to be prohibited under WTO rules. The United States has addressed these subsidies through countervailing duty proceedings conducted by the Commerce Department, invocation of a trade policy compliance mechanism established by China’s State Council, and dispute settlement cases at the WTO. The United States and other WTO members also have continued to press China to notify all of its subsidies to the WTO in accordance with its WTO obligations. Since joining the WTO 15 years ago, China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government, and it did not notify a single sub-central government subsidy until July 2016, when it provided information only on sub-central government subsidies that the United States had challenged as prohibited subsidies in a WTO case.
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, where U.S. exports compete with Chinese exports. While China recognizes the severe excess capacity problem in these 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. While China’s capacity growth appears to have slowed since 2014, according to Organization for Economic Cooperation and Development (OECD) figures, China’s efforts to address excess capacity to date have not resulted in reduced total steelmaking capacity in China. 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 and is estimated to have exceeded 1.16 billion metric tons (MT) in 2016, despite weakening demand domestically and abroad. Steel demand in China decreased 5 percent in 2015 as compared to 2014, and demand in China is projected to decrease by another 1 percent in 2016 and then by 2 percent in 2017, according to the World Steel Association. 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, Chinese exports reached a historic high of 110 million MT, and China’s steel exports are expected to grow even further in 2016, causing increased concerns about the detrimental effects that these exports may have on the already saturated world market for steel.
Similarly, monthly production of primary aluminum in China doubled between January 2011 and July 2015 and continues to grow, despite a severe drop in global aluminum prices during the same period. Large new facilities are being built with government support, including through energy subsidies, as China’s primary aluminum production accounted for 54 percent of global production from January through October 2016. As a consequence, China’s aluminum excess capacity is contributing to a severe decline in global aluminum prices, harming U.S. plants and workers.
Not unlike the situations in the steel and aluminum industries, China’s production of soda ash has increased as domestic demand has stagnated. As a result, China’s soda ash exports increased 23 percent in 2015 as compared to the previous year, and this trend has continued in 2016. Further, China’s soda ash production, which totaled 26 million MT in 2015, is projected to grow at nearly 3 percent annually through 2020, which is more than double China’s projected 1.2 percent annual increase in domestic demand over that same time period. It also is estimated that China’s excess soda ash capacity will continue to grow in the coming years, reaching over 10.5 million MT by 2019.
Excess capacity in China – whether in the steel industry or other industries like aluminum or soda ash – 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 2016, the Chinese government attempted to manage the export of many primary, intermediate and downstream products by raising or lowering the VAT 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 VAT 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. The list of sectors was expanded with the issuance of China’s 13th Five-year Plan in March 2016.
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 2016. As previously reported, these policies have generated serious concerns about discrimination based on the country of origin of IP, 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.
In May 2015, China’s State Council released “Made in China 2025,” a long-term plan spearheaded by the Ministry of Industry and Information Technology (MIIT) intended to raise industrial productivity through more advanced and flexible manufacturing techniques. Specifically, through Made in China 2025, the Chinese government hopes to make advanced manufacturing technologies and sectors a key driver of economic growth. The implicated technologies and sectors include advanced information technology, automated machine tools and robotics, aviation and spaceflight equipment, maritime engineering equipment and high-tech vessels, advanced rail transit equipment, new energy vehicles, power equipment, farm machinery, new materials, biopharmaceuticals and advanced medical products. According to industry experts, Made in China 2025 represents a modest improvement over SEI development plans and indigenous innovation initiatives rolled out since 2010. However, Made in China 2025 includes many holdovers from these prior state-driven plans and initiatives, as it, for example, sets targets for indigenous production or control of up to 40 percent of certain critical components in the aerospace, power and construction sectors, among other sectors, by 2020, while aiming to achieve substantial productivity gains in these sectors. Industry experts are skeptical that China will be able to reach its Made in China 2025 goals due to other policies that hold back competition, limit market access and over-regulate new technologies and cross-border data flows.
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.
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. The United States continues to press China to address these specific concerns, but to date this bilateral engagement has yielded minimal progress.
Currently, China is undergoing a large-scale reform of its standards system. As part of this reform, China is seeking to incorporate a “bottom up” strategy in standards development in addition to the existing “top down” system. At the same time, the existing technical committees continue to develop standards. For example, the technical committee for cybersecurity standards has begun allowing foreign companies to participate in standards development and setting, with several U.S. and other foreign companies being allowed to vote and to participate at the working group level in standards development.
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” as a mechanism to govern access for foreign investors. 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 actions by Chinese government officials.
The United States and China have continued 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 have engaged in extensive negotiations, which were ongoing as of December 2016.
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 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 $48 billion in 2015. 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 2016, 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 the efforts of U.S. suppliers of services, including banking services, insurance services, telecommunications services, Internet-related services (including cloud services), audiovisual services, express delivery services, legal services 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, no meaningful 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.
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 the State Administration of Press, Publication, Radio, Film and Television (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. In 2017, under the terms of the MOU, the two sides are scheduled to hold discussions regarding the provision of further meaningful compensation to the United States.
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 about 5 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 about 2 percent. China’s market for political risk insurance is closed to foreign participation, and China restricts the scope of foreign participation in insurance brokerage services. Meanwhile, some U.S. insurance companies established in China 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, in a positive but very modest move toward liberalization, China introduced rules establishing a pilot program for the resale of mobile services, which can increase competitive opportunities in China’s heavily concentrated market. However, the United States is very concerned that China continues to exclude foreign firms from the pilot program, and there are indications that China may be backing off from this initiative altogether.
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 services, 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. Furthermore, certain provisions of China’s new Cybersecurity Law, issued in November 2016, as well as draft MIIT regulationson regulationson cloud computing services circulated in November 2016, suggest that China may seek to further restrict market access for cloud computing and related services. These developments have generated serious concerns in the United States and among U.S. and other foreign companies.
China’s restrictions in the area of theater services have entirely discouraged investment by foreign suppliers, and China’s restrictions on services associated with television and radio greatly limit participation by foreign suppliers. In addition, the United States has become very concerned about the impact of new online publishing rules issued by SAPPRFT and MIIT in February 2016, and related measures, on the ability of foreign companies to engage in the online distribution of videos and entertainment software.
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 by foreign law firms, including through a prohibition on foreign law firms hiring lawyers qualified to practice Chinese law, and impose lengthy delays for the establishment of new offices.
China is the second largest agricultural export market for the United States, with more than $20 billion in U.S. agricultural exports in 2015, down from $24 billion 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. 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 or a generally opaque regulatory regime frequently have created difficulties and uncertainty for traders in agricultural commodities, who require as much certainty and transparency as possible. With China moving forward with implementation of its 2015 Food Safety Law, new regulations – and new concerns – are on the increase. In addition, market access promised through the TRQ system set up pursuant to China’s WTO accession agreement still 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. In September 2016, the United States launched a WTO case challenging China’s government support for the production of rice, wheat and corn as being in excess of China’s commitments. Subsequently, in December 2016, the United States also launched a WTO case challenging China’s administration of TRQs for rice, wheat and corn.
Beef, Poultry and Pork
In 2016, 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 nine 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), which has now been eliminated in the United States. 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.
Overall delays in China’s approval process for agricultural products derived from biotechnology worsened in 2016, creating increased uncertainty among traders and resulting in adverse trade impact, particularly for U.S. exports of corn. In addition, the asynchrony between China’s product approvals and the product approvals made by other countries widened.
In February 2016, China issued safety certificates for three of the 11 products of agricultural biotechnology under review. However, China continued to delay approvals for eight other products, with applications dating as far back as 2011, even though more than a dozen other countries have deemed them to be safe. At the JCCT meeting in November 2016, China indicated that it would have the opportunity to review the status of its safety evaluation for these products in December 2016, but it gave no indication as to whether it would issue safety certificates for them.
At the June 2016 S&ED meeting, the United States agreed to provide China’s regulators with a study addressing the impact of asynchronous approvals on sustainability, innovation and trade. The United States subsequently commissioned a study, which has been provided to China’s regulators.
For 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. It 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 has remained 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. As discussed above, in September 2016, the United States launched a WTO case challenging China’s government support for the production of rice, wheat and corn as being in excess of China’s commitments. In December 2016, the United States challenged China’s administration of TRQs for rice, wheat and corn.
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 some U.S. companies have expressed concern that enforcement against state-owned enterprises is 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. The United States continues to work closely with affected U.S. parties as it seeks to ensure that China’s anti-monopoly enforcement agencies fully implemented these commitments.
In 2015, the United States secured additional commitments from China relating to Anti-monopoly Law enforcement proceedings. These commitments addressed 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 enforcement 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, the United States used all platforms available to encourage China to pursue Anti-monopoly Law measures and enforcement policies that are consistent with its 2015 commitments. In addition, in June 2016, China’s State Councilestablished a “Fair Competition Review System” designed to prevent unjustified restrictions on competition through government regulations and activities, an initiative for which the United States has expressed support.
In 2017, as in prior years, it will be in the interests of the United States to 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 United States can and should 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, it will be in the interests of the United States to continue to pursue robust engagement with China at all levels of government focused on producing practical and meaningful outcomes. The United States also needs to take full advantage of multilateral venues such as the WTO to engage China. Key goals of this engagement should 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 should not hesitate to invoke the dispute settlement mechanism at the WTO where appropriate. Similarly, the United States should 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.