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After its accession to the World Trade Organization (WTO) in 2001, China was supposed to revise hundreds of laws, regulations and other measures to bring them into conformity with its WTO obligations, as required by the terms set forth in its Protocol of Accession. U.S. policymakers hoped that the terms set forth in China’s Protocol of Accession would dismantle existing state-led policies and practices that were incompatible with an international trading system expressly based on open, market-oriented policies and rooted in the principles of non-discrimination, market access, reciprocity, fairness and transparency. But those hopes were disappointed. China largely remains a state-led economy today, and the United States and other trading partners continue to encounter serious problems with China’s trade regime. Meanwhile, China has used the imprimatur of WTO membership to become a dominant player in international trade. Given these facts, it seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.
Furthermore, it is now clear that the WTO rules are not sufficient to constrain China’s market-distorting behavior. While some problematic policies and practices being pursued by the Chinese government have been found by WTO panels or the Appellate Body to run afoul of China’s WTO obligations, many of the most troubling ones are not directly disciplined by WTO rules or the additional commitments that China made in its Protocol of Accession. The reality is that the WTO rules were not formulated with a state-led economy in mind, and while the extra commitments that China made in its Protocol of Accession disciplined certain state-led policies and practices existing in 2001, the Chinese government has since replaced them with more sophisticated – and still very troubling – policies and practices.
Today, almost two decades after it pledged to support the multilateral trading system of the WTO, the Chinese government pursues a wide array of continually evolving interventionist policies and practices aimed at limiting market access for imported goods and services and foreign manufacturers and services suppliers. At the same time, China offers substantial government guidance, resources and regulatory support to Chinese industries, including through initiatives designed to extract advanced technologies from foreign companies in sectors across the economy. The principal beneficiaries of China’s policies and practices are Chinese state-owned enterprises and other significant domestic companies attempting to move up the economic value chain. As a result, markets all over the world are less efficient than they should be.
Remarkably, this situation is worse today than it was five years ago. While some of the legal changes and related economic reforms that China made in the years immediately following its WTO accession offered the potential for China’s fuller embrace of market principles, these efforts stalled and stagnated. In fact, over the past five years, despite Chinese pronouncements to the contrary, the state’s role in the economy has increased, as have the seriousness and breadth of concerns facing U.S. and other foreign companies seeking to do business in China or attempting to compete with favored Chinese companies in their home markets.
Since China’s accession to the WTO, the United States has repeatedly attempted to work with China in a cooperative and constructive manner. Using intensive, high-level bilateral dialogues, the United States has sought to resolve significant trade irritants and also to encourage China to pursue market-oriented policies and become a more responsible member of the WTO. These bilateral efforts largely have been unsuccessful – not because of failures by U.S. policymakers, but because Chinese policymakers were not interested in moving toward a true market economy.
The United States established its first high-level trade dialogue with China in 2003, with the elevation of the existing U.S.-China Joint Commission on Commerce and Trade (JCCT), as the U.S. Trade Representative joined the Secretary of Commerce as a U.S. chair and a Vice Premier began leading the Chinese side. Another high-level dialogue, the U.S.-China Strategic Economic Dialogue (SED), was added in 2006 with a broad focus on economic matters, including some trade and investment issues. The SED was expanded and replaced by the U.S.-China Strategic and Economic Dialogue (S&ED) in 2009. Finally, in 2017, the United States and China created the U.S.-China Comprehensive Economic Dialogue (CED), which supplanted the JCCT and the S&ED. Nevertheless, despite this constant high-level engagement over the years, these dialogues failed to generate anything more than incremental market access improvements or the repeal or modification of problematic Chinese measures that should never have been issued in the first place. At times, the United States also secured broad commitments from China for fundamental shifts in the direction of Chinese policies and practices, but China repeatedly failed to follow through on those commitments.
For example, at the 2010 S&ED meeting, the 2012 S&ED meeting, the 2012 Obama-Xi summit meeting and the 2014 JCCT meeting, China committed that foreign companies are free to base technology transfer decisions on business and market considerations and to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises. It seems clear, however, that China’s regulatory authorities do not allow U.S. companies to make their own decisions about technology transfer and the assignment or licensing of intellectual property rights, but instead continue to require or pressure foreign companies to transfer technology as a condition for securing investment or other approvals.
China also has repeatedly committed not to link government procurement preferences to the ownership or development of intellectual property (IP) in China, including at the 2010 JCCT meeting, the 2011 S&ED meeting and the 2011 JCCT meeting. However, as recently as the November 2016 JCCT meeting, the United States brought to China’s attention more than 30 provincial and local measures linking government procurement preferences to the ownership or development of IP in China. Outside the government procurement context, China also has made broad commitments to treat IP owned or developed outside China the same as IP owned or developed in China, including at the 2012 S&ED meeting, the 2014 JCCT meeting and the 2015 JCCT meeting. Still, China continues to pursue myriad policies outside the government procurement context that require or favor the ownership or development of IP in China.
At the 2015 Obama-Xi summit meeting, the 2016 S&ED meeting and the 2016 JCCT meeting, China committed that its “secure and controllable” information and communications technology (ICT) policies applicable to the commercial sector will not unnecessarily limit or prevent commercial sales opportunities for foreign suppliers of ICT products, services and technologies and will not impose nationality-based conditions and restrictions on the purchase, sale or use of ICT products, services and technologies by commercial enterprises unnecessarily. Nevertheless, China continues to pursue myriad mercantilist policies under the guise of cybersecurity, as evidenced by, among other things, significant declines in commercial sales of foreign ICT products and services in China.
China has repeatedly committed to review applications of agricultural biotechnology products in a timely, ongoing and science-based manner and to implement specific changes to the review process, including at the 2015 Obama-Xi summit meeting, the 2015 JCCT meeting and the 2016 S&ED meeting and during the run-up to the 2017 CED meeting. Undeniably, however, China’s approval process remains troubling, as the Chinese regulatory authorities continue to review applications slowly and without scientific rationale, while Chinese companies continue to try to build up their own capabilities in the area of agricultural biotechnology. China even issued a new measure after the 2016 S&ED meeting that added ambiguity and delay to the approval process, without making the previously promised changes.
Other examples could be given, but there can be no serious question about the underlying dynamic. China has shown a willingness to take modest steps to address isolated issues, and it will sometimes make broader commitments when pressed at very high levels, but it is not prepared to follow through on significant commitments or to make fundamental changes to its trade and investment regime. China is determined to maintain the state’s leading role in the economy and to continue to pursue industrial policies that promote, guide and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts, even though this approach is incompatible with the market-based approach expressly envisioned by WTO members and contrary to the fundamental principles running throughout the many WTO agreements.
Throughout the many years of high-level U.S.-China engagement since China joined the WTO, the U.S.-China trade imbalance has grown exponentially. While various factors can contribute to a trade imbalance, the size and direction of the U.S.-China trade imbalance evidences a trade relationship that is neither natural nor sustainable.
In 2001, at the time of China’s WTO accession, the United States had a goods trade deficit with China of $83 billion. In 2003, when the JCCT was elevated, the bilateral trade deficit had increased to $124 billion. By 2006, when the SED was established, the bilateral trade deficit had reached $234 billion. When the SED was replaced by the S&ED in 2009, the bilateral trade deficit had dropped slightly to $227 billion, largely because of the 2008 global financial crisis. In subsequent years, however, the bilateral trade deficit resumed its steep climb, reaching $350 billion in 2016, the year before the establishment of the CED. Finally, in 2017, when the United States sought to work with China in the newly formed CED, nothing changed. The United States’ trade deficit with China stood at $274 billion in the first nine months of the year and was projected to reach $365 billion by the end of the year.
It is true that the United States maintains a bilateral surplus with China in the area of services. However, this surplus stood at only $38 billion in 2016, and most of this surplus was due to travel-related services. Moreover, a comparison of total U.S. services exports to China versus total U.S. services exports to other countries in Asia as a percentage of each country’s services gross domestic product (GDP) shows that U.S. services exports to China are significantly underperforming in key services sectors such as banking, insurance, Internet-related, professional and retail services. The Chinese government, of course, continues to maintain numerous restrictions in these services sectors.
Going forward, the United States will continue to hold China strictly accountable for adherence to its WTO obligations. Like other WTO members, the United States will continue to use the WTO dispute settlement mechanism as an enforcement tool and also raise concerns during meetings of WTO committees and councils in order to highlight problematic Chinese policies and practices. In addition, the United States will continue to participate in other multilateral fora, such as the Global Forum on Steel Excess Capacity. At the same time, 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. The United States also will take all other steps necessary to rein in harmful state-led, mercantilist policies and practices pursued by China, even when they do not fall squarely within WTO disciplines, as evidenced by USTR’s ongoing investigation of Chinese technology transfer policies and practices pursuant to Section 301 of the Trade Act of 1974, as amended.
It is unfortunate that the United States and other WTO members have had to resort to so many enforcement actions, enforcement-related initiatives and high-level dialogues over the years in an attempt to rein in China’s state-led trade regime and to encourage China to act as a more responsible WTO member. It was never envisioned that enforcement would play such a large role for any WTO member, and it is especially unfortunate in the case of China, given that China is the largest trader among WTO members. Indeed, it is simply unrealistic to believe that WTO enforcement actions alone can ever have a significant impact on an economy as large as China’s economy, unless the Chinese government is truly committed to market-based competition. The notion that our problems with China can be solved by bringing more cases at the WTO alone is naïve at best, and at worst it distracts policymakers from facing the gravity of the challenge presented by China’s non-market policies.
It is important to recall that WTO members are supposed to be moving toward market-based outcomes voluntarily. The expectations of WTO membership were clearly set forth in the Marrakesh Declaration on April 15, 1994, at the conclusion of the Uruguay Round negotiations. There, WTO members expressly affirmed their view that the establishment of the WTO ushers in a “new era of global economic cooperation” that “reflect[s] the widespread desire to operate in a fairer and more open multilateral trading system.” WTO members further made clear their determination that their economies would participate in the international trading system based on both “open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions.” (Emphasis added.) It clearly was not contemplated that any member would adopt state-led economic and trade policies instead of market-oriented policies, nor was it contemplated that any member would pursue mercantilist trade policies instead of policies promoting a fairer and more open multilateral trading system.
Rather, with the creation of the WTO, it was expected that each WTO member would pursue open, market-oriented policies designed to ensure that trade flows as smoothly, predictably and freely as possible. Among other things, that means not only strictly adhering to the agreed rules but also observing in good faith the fundamental principles that run throughout the many WTO agreements. First among these principles is non-discrimination. A WTO member should treat foreign products, services and nationals the same as its own, not discriminate against them. A second key principle is openness. A WTO member should work to lower trade barriers, not raise them. A third key principle that runs throughout the many WTO agreements is reciprocity. Through rules such as the most-favored nation rule, the WTO seeks to avoid free riders and to encourage reciprocal concessions between and among members. A fourth key principle is fairness. That is why the WTO agreements provide remedies for certain types of situations where trade is deemed unfair. A fifth key principle is transparency. Among other things, a WTO member is required to publish all of its trade measures, to respond to requests for information by other members and to notify changes in trade policies.
While the WTO agreements do include a dispute settlement mechanism, this mechanism is not designed to address a situation in which a WTO member has opted for a state-led trade regime that prevails over market forces and pursues policies guided by mercantilism rather than global economic cooperation. The WTO’s dispute settlement mechanism is narrowly targeted at good faith disputes where one member believes that another member has adopted a measure or taken an action that violates a WTO obligation. It can address this type of discrete problem, but it is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system. No amount of enforcement activities by other WTO members would be sufficient to remedy this type of behavior.
In the case of China, the analysis in this report shows where China appears to have adopted measures or taken actions in conflict with its WTO obligations. This analysis also shows that China has fallen far short when it comes to embracing the “new era” contemplated by WTO members, where “global economic cooperation” reflects the widespread desire to operate in a fairer and more open multilateral trading system and where all WTO members pursue open, market-oriented policies. Unfortunately, the “new era” contemplated by China is one that is based on “socialism with Chinese characteristics,” as recently enshrined in the Constitution of the Chinese Communist Party.
changing significantly as long as China continues to remain committed to an economy dominated by the state and built on mercantilist industrial policies designed to promote, guide and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts. If China does not truly embrace a market-oriented approach, rooted in the fundamental WTO principles of non-discrimination, market access, reciprocity, fairness and transparency, the very serious and harmful problems generated by China’s trade regime likely will persist.
CHINA'S APPROACH TO WTO MEMBERSHIP
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 believed that China’s economy needed to rely more on market signals and less on the role of the state in China’s economy. 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 began to implement China’s numerous commitments. At the time, U.S. policymakers were hopeful that these actions would deepen 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. Under their leadership, 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 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. Chinese government policies and practices 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. Many of these policies and practices suggested that China had decided not to fully embrace 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, confidential accounts from non-Chinese enterprises indicated that Chinese government officials, acting without fear of legal challenge, at times required these enterprises to transfer technology as a condition for securing investments approvals. Similarly, in the trade remedies context, China’s regulatory authorities at times seemed to pursue antidumping (AD) and countervailing duty (CVD) investigations and impose duties for the purpose of striking back at trading partners that legitimately exercised their rights under WTO trade remedy rules. As three WTO cases won by the United States confirm, China’s regulatory authorities pursued 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 target 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 signs of a renewed commitment to economic reform in China began to emerge. The new Chinese leaders’ apparent 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. Once again, however, significant economic reform was neither pursued nor realized, despite these pronouncements.
Instead, the state’s role in the economy has increased, as the Chinese government has continued to pursue and expand industrial policies that promote, guide and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts. A plan issued in 2015, known as Made in China 2025, is emblematic of China’s evolving industrial policies. Using government intervention and substantial government financial and other support, the Made in China 2025 plan targets 10 advanced manufacturing industries in China. In these industries, the plan seeks to replace foreign products with Chinese companies’ products in the China market through a variety of fair and unfair means, including through the extraction of foreign technologies. Once dominant market shares are secured in the China market, the plan turns to its ultimate goal, which calls for Chinese companies dominating international markets.
Thus, as of now, fundamental changes in China’s trade regime still have not emerged. Rather, the state’s role in the economy remains strong, and a wide range of Chinese policies and practices continue to generate significant concerns among U.S. stakeholders, as does the continuing abuse of administrative processes by Chinese government officials, among other things. Major areas of specific concern continue to include: the Chinese government’s prolific use of industrial policies that promote, guide and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts; massive subsidies; severe excess capacity; investment restrictions; “secure and controllable” ICT policies; overly broad and discriminatory cybersecurity restrictions; data transfer restrictions; serious problems with intellectual property rights enforcement in China; export restraints; unique that block U.S. market access; numerous continuing restrictions on services market access; and inadequate transparency.
On the bilateral front, the United States and China agreed to four new high-level dialogues at the summit meeting between President Trump and China’s President Xi held in April 2017 in Mar-a-Lago, Florida. The new dialogue covering trade and investment issues, known as the U.S.-China Comprehensive Economic Dialogue (CED), was chaired on the U.S. side by the Treasury Secretary and the Commerce Secretary and on the Chinese side by a Vice Premier, Wang Yang. In addition to trade and investment issues, the CED’s mandate also extended to macroeconomic policy, financial stability, currency and energy issues.
Discussions under the auspices of the CED began shortly after the Mar-a-Lago summit meeting, with the U.S. side agreeing to China’s proposed 100-day action plan. In May 2017, the two sides agreed to certain initial results for this action plan, with each side committing to five outcomes for the other side.
The outcomes secured from China by the U.S. side largely focused on overdue actions by Chinese regulatory authorities, rather than any fundamental changes to China’s trade and investment regime. Specifically, these outcomes included a resumption in market access for U.S. beef, a commitment to render decisions on certain pending U.S. biotechnology product applications, the lifting of certain investment restrictions on foreign suppliers of credit rating and credit investigation services, further steps toward the licensing of foreign suppliers of electronic payment services and the issuance of bond underwriting and settlement licenses to two U.S. companies.
The first plenary meeting of the CED took place in July 2017, at the conclusion of the 100 days allotted for the two sides’ action plan. While the two sides discussed a number of issues in the run-up to that meeting, no outcomes were achieved. At the conclusion of the meeting, Secretaries Mnuchin and Ross and Vice Premier Wang Yang discussed a possible one-year action plan, although they did not identify the specific issues to be discussed as part of it. In the ensuing months, China sought agreement on the issues that would be discussed in a one-year action plan. After assessing the productiveness of the CED process, however, the Administration withheld agreement on a one-year action plan.
In November 2017, further discussions took place when President Trump met with President Xi in Beijing. The U.S. side explained that it had no interest in engaging in the types of bilateral discussions pursued in the CED and in past dialogues like the JCCT and the S&ED’s Economic Track, which have only achieved isolated, incremental progress on problematic Chinese trade and investment barriers. Instead, the United States made clear that it is seeking fundamental changes to China’s trade regime, including the overarching industrial policies that have continued to dominate China’s state-led economy. As the U.S. side noted, these unacceptable state-led industrial policies persist and continually evolve in myriad ways not only to promote China’s domestic industries, but also to impose severe, unfair disadvantages on U.S. and other foreign industries.
Immediately after President Trump’s visit to Beijing, China made certain unilateral announcements. Specifically, China stated that it would be taking steps to ease certain foreign investment restrictions in the banking, securities, fund management, asset management, futures and life insurance services sectors. China also announced that it would cease imposing a discriminatory value-added tax (VAT) on imports of dried distillers’ grains with solubles (DDGS) from the United States and that it would gradually reduce its import tariff on automobiles. No time frame was given, and to date China has not yet implemented any of these changes, except with regard to the VAT on DDGS
On the enforcement side, in August 2017, in response to a Presidential memorandum, USTR initiated an investigation under Section 301 of the Trade Act of 1974, as amended. This investigation is focused on policies and practices of the Government of China related to technology transfer, intellectual property and innovation. The investigation’s status is detailed below in the Enforcement section.
The United States also continued to hold China accountable for adherence to WTO rules in 2017. Pending cases involve (1) China’s administration of tariff-rate quotas (TRQs) for rice, wheat and corn, (2) excessive government support for the production of rice, wheat and corn by farmers in China, (3) export quotas and export duties maintained by China on various forms of 11 raw materials, (4) antidumping and countervailing duties that China imposed on imports of U.S. chicken broiler products, (5) restrictions that China put in place to create and maintain a domestic national champion as the exclusive electronic payment services supplier in China’s market and (6) importation and distribution restrictions applied to theatrical films. The status of each of these cases is detailed below in the Enforcement section.
CHINA'S WTO COMPLIANCE
Each conclusion set forth below is discussed in more detail in subsequent sections of this report.
At present, China’s trade policies and practices in several specific areas cause particular concern for the United States and U.S. stakeholders. The key concerns in each of these areas are summarized below.
China continued to pursue a wide array of industrial policies in 2017 that seek to limit market access for imported goods, foreign manufacturers and foreign services suppliers, while offering substantial government guidance, resources and regulatory support to Chinese industries. The beneficiaries of these constantly evolving policies are not only state-owned enterprises but also other domestic companies attempting to move up the economic value chain.
At the beginning of 2017, longstanding and serious U.S. concerns regarding technology transfer remained unaddressed, despite repeated, high-level bilateral commitments by China to remove or no longer pursue problematic policies and practices. At the same time, new concerns have continued to emerge. In August 2017, as discussed above, USTR initiated an investigation under Section 301 of the Trade Act of 1974, as amended, focused on policies and practices of the Government of China related to technology transfer, intellectual property and innovation. Specifically, in its initiation notice, USTR identified four categories of reported Chinese government conduct that would be the subject of its inquiry, including but not limited to the use of a variety of tools to require or pressure the transfer of technologies and intellectual property to Chinese companies, depriving U.S. companies of the ability to set market-based terms in licensing negotiations with Chinese companies, intervention in markets by directing or unfairly facilitating the acquisition of U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property, and conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft for commercial gains. As of December 2017, this investigation was ongoing.
Made in China 2025 Industrial Plan
In May 2015, China’s State Council released Made in China 2025, a 10-year plan spearheaded by the Ministry of Industry and Information Technology (MIIT) and targeting 10 strategic industries, including 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 (NEVs), power equipment, farm machinery, new materials, biopharmaceuticals and advanced medical device products. While ostensibly intended simply to raise industrial productivity through more advanced and flexible manufacturing techniques, Made in China 2025 is emblematic of China’s evolving and increasingly sophisticated approach to “indigenous innovation,” which is evident in numerous supporting and related industrial plans. Their common, overriding aim is to replace foreign technology with Chinese technology in the China market through any means possible so as to ready Chinese companies for dominating international markets.
Made in China 2025 seeks to build up Chinese companies in the 10 targeted, strategic industries at the expense of, and to the detriment of, foreign industries and their technologies through a multi-step process over 10 years. The initial goal of Made in China 2025 is to ensure, through various means, that Chinese companies develop, extract or acquire their own technology, IP and know-how and their own brands. The next goal of Made in China 2025 is to substitute domestic technologies, products and services for foreign technologies, products and services in the China market. The final goal of Made in China 2025 is to capture much larger worldwide market shares in the 10 targeted, strategic industries.
Many of the policy tools being used by the Chinese government to achieve the goals of Made in China 2025 raise serious concerns. These tools are largely unprecedented, as other WTO members do not use them, and include a wide array of state intervention and support designed to promote the development of Chinese industry in large part by restricting, taking advantage of, discriminating against or otherwise creating disadvantages for foreign enterprises and their technologies, products and services. Indeed, even facially neutral measures can be applied in favor of domestic enterprises, as past experience has shown, especially at sub-central levels of government.
Made in China 2025 also differs from industry support pursued by other WTO members by its level of ambition and, perhaps more importantly, by the scale of resources the government is investing in the pursuit of its industrial policy goals. In this regard, even if the Chinese government fails to achieve the industrial policy goals set forth in Made in China 2025, it is still likely to create or exacerbate market distortions and create severe excess capacity in many of the targeted industries.
continue to represent an important component of China’s industrialization efforts. Through intensive, high-level bilateral engagement with China since 2010, the United States has attempted to address these policies, which provide various preferences when IP is owned or developed in China, both broadly across sectors of China’s economy and specifically in the government procurement context.
For example, at the May 2012 S&ED meeting, China committed to treat IP owned or developed in other countries the same as IP 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, the United States and China intensified their discussions. At the December 2014 JCCT meeting, China clarified and underscored that it will treat IP owned or developed in other countries the same as domestically owned or developed IP. Once again, however, these commitments were not fulfilled. China continues to pursue myriad policies that require or favor the ownership or development of IP in China.
The United States secured a series of similar commitments from China in the government indigenous innovation policies at all levels of the Chinese government from government procurement preferences, including through the issuance of a State Council measure mandating that provincial and local governments eliminate any remaining linkages by December 2011. Nearly five years later, however, this promise had not been fulfilled. At the November 2016 JCCT meeting, in response to U.S. concerns regarding the continued issuance of scores of inconsistent measures, China announced that its State Council had issued a document requiring all agencies and all sub-central governments to “further clean up related measures linking indigenous innovation policy to the provision of government procurement preference.” Again, the United States should not have to seek the same promises over and over through multiple negotiations.
through a restrictive investment regime, which adversely affects foreign investors in key services sectors, agriculture, extractive industries and certain manufacturing sectors. Many aspects of China’s current investment regime, including lack of substantial liberalization, foreign equity caps, joint venture requirements, maintenance of a case-by-case administrative approval system for certain investments, the potential for a new and overly broad national security review, and the impact of China’s Cybersecurity Law and National Security Law and related implementing measures, 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. China did announce during President Trump’s visit to Beijing in November 2017 that it would be relaxing certain restrictions on foreign investment in banking services, life insurance services and securities and asset management services in the future. It remains to be seen if these promises will be fulfilled.
Secure and Controllable ICT Policies
In 2017, as China issued a series of draft and final measures to implement the Cybersecurity Law that it had adopted in November 2016, global concerns heightened over China’s approach to cybersecurity policy. As demonstrated in the implementing measures, China’s approach is to 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. Stakeholders and governments around the world expressed serious concerns
about requirements that ICT equipment and other ICT products and services in critical sectors be “secure and controllable,” as these requirements are used by the Chinese government to disadvantage non-Chinese firms in multiple ways.
For example, China references its “secure and controllable” requirements to require Chinese IT users to purchase Chinese products, to favor Chinese service suppliers, to impose local content requirements, to impose domestic R&D requirements, to consider the location of R&D as a cybersecurity risk factor and to require the transfer or disclosure of source code or other IP. China also invokes “secure and controllable” requirements to restrict cross-border data transfers.
More broadly, China’s passage of several cybersecurity-related laws since 2015 provides an overall statutory framework for technology-related restrictions on foreign companies in the name of cybersecurity or national security. However, the sweeping approach of this legislation has raised concerns that the framework will be used as an industrial policy tool both to promote and favor national champions and other domestic companies and to block or impede foreign companies’ access to the China 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 adopted a Counterterrorism Law in December 2015 and then a Cybersecurity Law in November 2016, which impose far-reaching and onerous trade restrictions on imported ICT products and services in China.
Meanwhile, sector-specific policies under this broad framework continue to be deployed across China’s economy. A high profile example from December 2014 was 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 pursuing “secure and controllable” policies included 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. During the state visit of President Xi in September 2015, the U.S. and Chinese Presidents committed to 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).
Yet again, however, it appears that China does not intend to comply with its promises. The numerous draft and final cybersecurity measures issued by China in 2017 raise serious questions about China’s approach to cybersecurity regulation. China’s measures do not appear to be consistent with the non-discriminatory, non-trade restrictive approach to which China committed. Accordingly, throughout the past year, the United States conveyed its serious concerns about China’s approach to cybersecurity regulation through written comments on draft measures, bilateral engagement under the auspices of the CED and multilateral engagement at WTO committee meetings in an effort to persuade China to revise its policies in this area to ensure that they are consistent with its WTO obligations and bilateral commitments. These efforts are ongoing.
China continues to provide substantial subsidies to its domestic industries, which have caused injury to U.S. industries. Some of these subsidies also appear to be prohibited under WTO rules. To date, the United States has been able to address some of these subsidies through countervailing duty proceedings conducted by the Commerce Department 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 16 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.
Because of its state-led approach to the economy, China is the world’s leader in creating excess capacity, as evidenced by unprecedentedly severe excess capacity situations in several industries. China also is well on its way to creating severe excess capacity in other industries through its pursuit of industrial plans such as Made in China 2025, where China is pouring in hundreds of billions of dollars to support Chinese companies and requiring them to achieve preset targets for domestic market share and global market share in each of 10 advanced manufacturing industries.
In manufacturing industries like steel and aluminum in particular, China’s economic planners and their government actions and financial support 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 some 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, even though China has no comparative advantage with regard to the energy and raw material inputs that make up the majority of costs for steelmaking. Currently, China’s capacity represents about one-half of global capacity and twice the combined steelmaking capacity of the European Union (EU), Japan, the United States and Russia. Meanwhile, China’s steel exports grew to be the largest in the world, at 91 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, causing increased concerns about the detrimental effects that these exports would have on the already saturated world market for steel. China’s steel exports continued to grow in the first half of 2016, before beginning to decline in the second half of the year, a trend that continued into 2017.
Similarly, production of primary aluminum in China increased by more than 50 percent between 2011 and 2015, and it has continued to grow in subsequent years despite a severe drop in global aluminum prices beginning in 2015. Large new facilities have been built with government support, including through energy subsidies, as China’s primary aluminum production accounts for more than one-half of global production. As a consequence, China’s aluminum excess capacity has been 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 continued in 2016. Further, China’s soda ash production, which totaled 26 million MT in 2016, is projected to grow at nearly three 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.
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, focusing 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, 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. It is deeply concerning that the United States has been forced to bring multiple cases to address the same obvious WTO compliance issues.
Value-added Tax Rebates and Related Policies
As in prior years, in 2017, 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. An apparently positive development took place at the July 2014 S&ED meeting, when China committed 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. Once more, however, this promise remains unfulfilled. To date, China has not made any movement toward the adoption of international best practices.
Imported 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. Nevertheless, China is apparently prepared to pay this price in order to limit imports of remanufactured goods.
Import Ban on Recoverable Materials
In 2017, China issued two measures that would limit or ban imports of certain recoverable wastes and recovered materials, such as plastic waste and unsorted paper. It appears that these measures are intended to promote a policy of import substitution, as similar restrictions do not appear to apply to domestically sourced recoverable wastes or recovered materials.
In the standards area, two principal types of Chinese policies harm U.S. companies. First, Chinese government officials in some cases reportedly have 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. In 2016 and 2017, China published draft versions of a new Standardization Law on which the United States submitted written comments. At the same time, the existing technical committees continue to develop standards. For example, while the United States’ substantive concerns have not been addressed, 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. Nevertheless, we remain very concerned about China’s policies with regard to standards.
Notably, U.S. concerns about China’s standards regime are not limited to the implications for U.S. companies’ access to China’s market. China’s ongoing efforts to develop unique national standards aims eventually to serve the interests of Chinese companies seeking to compete globally, as the Chinese government’s vision is to use the power of the large China market to promote or compel the adoption of Chinese standards in global markets.
China made a 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 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, 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.
China’s regulatory authorities in some instances seem to be pursuing antidumping and countervailing duty investigations and imposing duties – even when necessary legal and factual support for the duties is absent – for the purpose of striking back at trading partners that have exercised their WTO rights against China. 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.
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 intellectual property rights (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 an extended round of revisions to these laws and regulations. Despite various plans and directives issued by the State Council in 2017, 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 2017 Special 301 report. In addition, in January 2018, USTR announced the results of its 2017 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.
Serious inadequacies in the protection and enforcement of trade secrets in China have been the subject of high-profile attention and engagement between the United States and China 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. Particularly 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 an effort to address these problems, the United States secured commitments from China to issue judicial guidance to strengthen its trade secrets regime. The United States also has secured commitments from China not to condone state-sponsored misappropriation of trade secrets for commercial use. In addition, the United States 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. The United States also has urged China to take actions to address inadequacies across the range of state-sponsored actors and to promote public awareness of trade secrets disciplines.
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. In addition, in 2016 and 2017, China circulated proposed revisions to the Anti-unfair Competition Law for public comment. China issued the final measure in November 2017, effective January 2018. Despite improvements in the protection of trade secrets relative to prior law, the final measure reflects a number of missed opportunities for the promotion of effective trade secrets protection.
Furthermore, as discussed above, the United States continues to have significant concerns about IP protection in China, including with regard to trade secrets. Thus, the protection of trade secrets and IP more broadly represents yet another area where China has failed to comply with its promises for a more market-oriented system, particularly to the extent that the state itself sponsors the theft of trade secrets or actively frustrates the effective protection of trade secrets.
Bad Faith Trademark Registration
Of particular concern is the continuing registration of trademarks in bad faith. At the November 2016 JCCT meeting, China publicly noted the harm that can be caused by bad faith trademarks and confirmed that it is taking further steps to combat bad faith trademark filings. Nevertheless, 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.
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 not consistently implemented this commitment.
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. In addition, in 2017, the State Council and China’s Food and Drug Administration (CFDA) issued several draft measures evidencing a positive trajectory for the protection of pharmaceutical patents and regulatory data in China and for a more streamlined drug approval process. However, these draft measures are general in nature, and it is not yet clear whether China finally intends to comply with its commitments in this area. Accordingly, the United States will remain in close contact with U.S. industry and will actively examine developments to ensure that appropriate and non-discriminatory changes are made to the anticipated implementing measures in the areas of patent linkage, regulatory data protection and clinical trials.
Another serious concern 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, in 2016, a State Council measure issued in final form without having been made available for public comment creates an expedited regulatory approval process for innovative new drugs where the applicant’s manufacturing capacity has been shifted to China. The United States is pressing China to reconsider this approach.
With regard to the treatment of supplemental test data, amended patent examination guidelines that entered into force in April 2017 now require patent examiners to take into account supplemental test data submitted during the patent examination process. However, there are reports that China’s patent examiners continue to deny applicants’ requests to supplement their test data.
In April 2016, 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 promised not to link a pricing commitment to drug registration evaluation and approval. In addition, China promised not to require any specific pricing information when implementing the final measure. Given China’s lack of follow through in other areas, as discussed in this report, the United States remains concerned about whether these promises will be fulfilled. Accordingly, the United States has remained in close contact with U.S. industry and has been examining developments carefully in this area.
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.
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. 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. In addition, in December 2016 and November 2017, China published drafts of a new E-Commerce Law for public comment. In written comments, the United States has stressed that the final version of this law should promote an effective notice-and-takedown regime that addresses online infringement while providing appropriate safeguards to Internet service providers.
Although rights holders report increased enforcement efforts by Chinese government authorities, counterfeiting in China, affecting a wide range of goods, remains widespread. One of many areas of particular U.S. concern involves medications. Despite years of 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 committed 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 committed 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. In October 2017, China published limited draft revisions to the Drug Administration Law and stated that future proposed revisions to the remainder of this law would be forthcoming. Although many elements of the October 2017 draft revisions appear to be positive, the United States remains in close contact with U.S. industry and will continue to examine developments vigilantly in this area.
The prospects for U.S. service suppliers in China should be promising, given the size of China’s market. While the United States maintained a $38.0 billion surplus in trade in services with China, the U.S. share of China’s services market remained well below the U.S. share of the global services market.
In 2017, numerous challenges persisted in a range of services sectors. As in past years, Chinese regulators continued to use case-by-case approvals, 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 to achieve their full market potential in China, including U.S. suppliers of banking services, securities and asset management services, insurance services, electronic payment services, cloud computing services, telecommunications services, video and entertainment software services, film production and distribution services, express delivery services and legal services, among other services. In addition, China’s Cybersecurity Law and related draft and final implementing measures, including mandates to purchase domestic ICT products and services, restrictions on cross-border data flows and data localization requirements, are making it even more difficult for U.S. services suppliers to take advantage of any market access provided. Even though some sectors, including electronic payment services and theatrical film distribution, have been the subject of WTO dispute settlement, U.S. concerns have still not been fully addressed.
Electronic Payment Services
In 2017, China continued to place unwarranted restrictions on foreign companies, including major U.S. credit card processing companies, that have been seeking to supply electronic payment services to banks and other businesses that issue or accept credit and debit cards in China. In a WTO case that it launched in 2010, the United States argued that China had committed in its WTO accession agreement to open up this sector in 2006, and a WTO panel agreed with the United States in a decision issued in 2012. China subsequently agreed to comply with the WTO panel’s rulings in 2013, but China did not take needed steps even to allow foreign suppliers to apply for needed licenses until June 2017. Reportedly, several U.S. suppliers have since submitted their applications. Throughout the time that China has actively delayed opening up its market to foreign suppliers, China’s national champion, China Union Pay, has used its exclusive access to the China market to support its efforts to build out its electronic payment services network abroad. Recently, China Union Pay announced that it had reached 100 percent penetration at U.S. automated teller machines and between 80 and 90 percent penetration at U.S. stores that accept credit cards. This history shows how China has been able to maintain market-distorting practices that benefit its own companies, even in the face of adverse rulings 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 U.S. 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. In 2017, in accordance with the terms of the MOU, the two sides began discussions regarding the provision of further meaningful compensation to the United States.
China has largely refused to open its banking sector to significant non-Chinese competition. The most recently available data shows that the foreign share of banking assets in China has fallen to 1.2 percent. China has imposed various 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.
One 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. In addition, China imposes substantial asset and capital requirements on foreign banks that it does not apply to domestic banks, and it is slow to act upon foreign banks’ applications to set up new internal branches. Furthermore, China restricts the scope of activities that can be conducted by foreign banks seeking to operate in China through branches instead of through subsidiaries. Discriminatory and non-transparent regulations also have limited foreign banks’ ability to participate in China’s capital markets.
For years, China has limited the sale of equity stakes in existing Chinese-owned banks for a single foreign investor to 20 percent, while the total equity share of all foreign investors is limited to 25 percent. In November 2017, China announced that it would be easing these foreign equity restrictions, but to date it has not done so.
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 establish as Chinese-foreign joint ventures, with foreign equity capped at 50 percent. The market share of these joint ventures is about five 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 (i.e., property and casualty) insurance sector, the market share of foreign-invested companies in this sector is only about two percent. China’s market for political risk insurance remains closed to foreign participation. Although China’s Foreign Investment Catalogue indicates that China has liberalized insurance brokerage services, China in practice seems to continue to restrict the scope of insurance brokerage services that foreign companies can provide. Meanwhile, some U.S. insurance companies established in China sometimes 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. In November 2017, China announced that it would be easing certain of its foreign equity restrictions in the insurance services sector, but to date it has not done so.
Securities and Asset Management Services
In the securities and asset management services sectors, China only permits foreign companies to establish as Chinese-foreign joint ventures, with foreign equity capped at 49 percent. Recently, however, China reportedly licensed one foreign company to establish as majority foreign-owned joint venture. In addition, China has started to license a small number of wholly foreign-owned companies to provide certain private fund management services to high-wealth individuals, but these services represent only a subset of the services normally provided by securities and asset management companies. In November 2017, China announced that it would be easing certain of its foreign equity restrictions in the securities and asset management services sectors, but to date it has not done so.
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.
China’s Internet regulatory regime is restrictive and non-transparent, affecting a broad range of commercial services activities conducted via the Internet. Especially troubling is 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. China prohibits foreign companies from directly providing cloud computing services. Instead, a foreign company must establish a contractual partnership with a Chinese company, which is the holder of the necessary Internet data center license, and turn over its valuable technology, IP, know-how and branding as part of this arrangement. This evolving treatment has generated serious concerns in the United States and among other WTO members as well as U.S. and other foreign companies.
Audio-visual and Related Services
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. China also prohibits foreign companies from providing film production and distribution services in China. In addition, the United States remains very concerned about the impact of new online publishing rules issued by State Administration of Press, Publication, Radio, Film and Television (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 have concerns regarding China’s implementation of the 2009 Postal Law and related regulations. China has blocked foreign companies’ access to the document segment of its domestic express delivery market, and China 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 and inconsistent regulatory approaches, including with regard to security inspections.
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 largest agricultural export market for the United States, with more than $21 billion in U.S. agricultural exports in 2016, up from $20 billion in 2015. Notwithstanding this data, China remains problematically opaque and unpredictable for U.S. agricultural exporters, largely because of inconsistent enforcement of regulations and selective intervention in the market by China’s regulatory authorities.
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. In addition, at times, Chinese customs and quarantine authorities delay or halt shipments of agricultural products into China without providing a risk basis for the decision.
With China moving forward with implementation of its 2015 Food Safety Law, new regulations – and new concerns – are on the increase. One of China’s most troublesome implementation proposals is a requirement that all foods entering China must be accompanied by an export certificate. The United States and other WTO members pressed China to clarify this requirement and to delay its implementation. In October 2017, China announced that it would delay implementation by two years.
Meanwhile, 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. 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 aWTO case challenging China’s administration of TRQs for rice, wheat and corn. The United States intends to aggressively pursue these cases.
Beef, Poultry and Pork
In 2017, beef, poultry and pork products were affected by questionable SPS measures implemented by China’s regulatory authorities. For example, through May 2017, 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.
One month after the April 2017 Mar-a-Lago summit meeting between President Trump and China’s President Xi, as part of the initial results of the CED’s 100-day action plan, China agreed to allow the resumption of U.S. beef shipments into its market, although it insisted on maintaining certain conditions that the United States considers unwarranted and unscientific. For example, contrary to internationally accepted guidelines and standards, China maintains a zero-tolerance ban on the use of beta-agonist hormones and other synthetic and natural chemicals widely used by the global beef industry. China also continued to impose an unwarranted and unscientific avian influenza-related import suspension on U.S. poultry due to an outbreak of high pathogenicity avian influenza (HPAI), 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 continued in 2017, and the process itself remained opaque and unpredictable, creating continued uncertainty among traders and resulting in adverse trade impact for U.S. exporters. In addition, the asynchrony between China’s product approvals and other countries’ product approvals remained wide.
In May 2017, as part of the initial results of the CED’s 100-day action plan, China committed to conduct science-based evaluations of eight pending U.S. biotechnology product applications. By the time of the CED plenary meeting in July 2017, China had only approved four of the eight applications. Since then, work on the remaining four applications appears to have stalled.
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 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. 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. The United States will aggressively litigate both of these cases.
One of the core principles reflected throughout China’s WTO accession agreement is transparency. Unfortunately, there remains a lot more work 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. More than 10 years later, 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. 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. Atthe 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. This measure, even if fully implemented, is not sufficient to bring China into full compliance in this area. The United States has pressed China to ensure that it also 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.
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 there has been an overall reduction in license approval requirements and a 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. While Chinese regulatory authorities have clarified that the Anti-monopoly Law does apply to state-owned enterprises, to date they have only brought enforcement actions against provincial government-level state-owned enterprises, not any central government-level state-owned enterprises under the supervision of SASAC. In addition, provisions in the Anti-monopoly Law protect the lawful operations of state-owned enterprises and government monopolies in industries deemed nationally important. Overall, many U.S. companies cite selective enforcement of the Anti-monopoly Law as a major concern to doing business in China, and they have highlighted the limited enforcement of this law against state-owned enterprises.
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 unspecifiedallegations or face steep fines and actions by NDRC to discourage or prevent foreign companies from bringing counsel to meetings.
For more than 15 years, the United States has relied on cooperative high-level dialogues to effect meaningful and fundamental changes in China’s state-led, mercantilist trade regime. These efforts have largely failed. Accordingly, the United States intends to focus its efforts on enforcement going forward. These efforts will include not only use of the WTO’s dispute settlement mechanism to hold China strictly accountable for adherence to its WTO obligations, but also other needed mechanisms, including mechanisms available under U.S. trade laws.
The United States is determined to use every tool available to address harmful Chinese policies and practices, regardless of whether they are directly disciplined by WTO rules or the additional commitments that China made in its Protocol of Accession to the WTO. The United States will not accept any Chinese policies or practices that are unfair, discriminatory or mercantilist and harm U.S. manufacturers, farmers, services suppliers, innovators, workers or consumers. Americans have waited long enough. The time has come for China to stop its market-distorting policies and practices and finally become a responsible member of the WTO.