2016 Report to Congress On China’s WTO Compliance

The commitments to which China’s leaders agreed when China joined the WTO in 2001 were sweeping in nature and required the Chinese government to make changes to hundreds of laws, regulations and other measures affecting trade and investment. These changes largely coincided with the economic reform goals of China’s leaders at the time, which built on the economic reforms that China had begun under Deng Xiaoping in 1978. The Chinese leaders who negotiated the terms of China’s WTO accession correctly believed that China’s economy needed to rely more on market signals and less on Chinese government economic planners and state-owned enterprises. Indeed, these leaders had initiated a dramatic and rapid reform of state-owned enterprises in the mid-1990s.

 

Following China’s accession to the WTO, the Chinese government took many steps to implement China’s numerous commitments. These steps unquestionably deepened China’s integration into the WTO’s rules-based international trading system, while also strengthening China’s ongoing economic reforms.

 

New leaders took over in China in 2003, two years after China’s WTO accession. While the Chinese government continued to take steps to implement China’s outstanding WTO commitments, it generally did not pursue economic reforms as aggressively as before. Instead, the Chinese government increasingly emphasized the state’s role in the economy, diverging from the path of economic reform that had driven China’s accession to the WTO. With the state leading China’s economic development, the Chinese government pursued new and more expansive industrial policies, often designed to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial government guidance, resources and regulatory support to Chinese industries, particularly ones dominated by state-owned enterprises. This heavy state role in the economy, reinforced by unchecked discretionary actions of Chinese government regulators, generated serious trade frictions with China’s many trade partners, including the United States.

 

In particular, beginning with the creation of the State-owned Assets Supervision and Administration Commission (SASAC) in 2003, China’s new leaders de-emphasized their predecessors’ move toward a greater reliance on market forces and a lesser reliance on Chinese government economic planners and state-owned enterprises. Instead, the new leaders set out to bolster the state sector by seeking to improve the operational efficiency of state-owned enterprises and by orchestrating mergers and consolidations in order to make these enterprises stronger. These actions soon led to institutionalized preferences for state-owned enterprises and the creation of national champions in many sectors.

 

By 2006, when China had taken steps to implement the last of its key WTO commitments, China’s policy shift became more evident. It was at this time that USTR began reporting on Chinese government policies and practices that demonstrated a stronger embrace of state capitalism, a trend that continued into 2012, the last full year under the Chinese leaders who had taken over in 2003. USTR also reported that some of these policies and practices suggested that China had not yet fully embraced key WTO principles, such as market access, non-discrimination and transparency. Exacerbating this situation was China’s incomplete adoption of the rule of law, including through government officials’ abuse of administrative processes.

 

For example, as we reported in 2012, confidential accounts from foreign enterprises indicate that Chinese government officials, acting without fear of legal challenge, at times require foreign enterprises to transfer technology as a condition for securing investments approvals, even though Chinese law does not – and cannot under China’s WTO commitments – require technology transfer. Similarly, in the trade remedies context, China’s regulatory authorities at times seem to pursue antidumping (AD) and countervailing duty (CVD) investigations and impose duties for the purpose of striking back at trading partners that have legitimately exercised their rights under WTO trade remedy rules. As three WTO cases won by the United States confirm, China’s regulatory authorities appear to pursue these investigations even when necessary legal and factual support for the duties is absent. In addition, U.S. industry and industries from other WTO Members have asserted that China’s competition policy enforcement authorities not only are targeting foreign companies, but also at times use Anti-monopoly Law investigations as a tool to protect and promote domestic national champions and domestic industries.

 

By 2013, when China’s next leadership transition was complete, some positive signs of a renewed commitment to economic reform in China began to emerge. The new Chinese leaders’ focus on economic reform soon led to a Decision reached in November 2013 at the Third Plenum of the 18th Central Committee of the Chinese Communist Party. The Third Plenum Decision endorsed a number of far-reaching economic reform pronouncements, calling for the market to play a “decisive” role in allocating resources, reducing Chinese government intervention in the economy, accelerating China’s opening up to foreign goods and services, reforming China’s state-owned enterprises and improving transparency and the rule of law to allow fair competition in China’s market. If fully translated into actions, these pronouncements would significantly change China’s trade regime and would provide tremendous benefits not only to China but also to its trading partners. Another notable development took place in July 2013. While the United States and China had launched Bilateral Investment Treaty (BIT) negotiations in 2008, it was at this time that China announced that it was prepared to negotiate a high-standard BIT with the United States, including China’s agreement for the first time to cover market access.

 

To date, the promise of the developments in 2013 has not been realized. The pronouncements of the Third Plenum have faced strong resistance from entrenched interests, and significant economic reform has yet to be realized. In addition, as of December 2016, while the BIT negotiations have proceeded with China’s full engagement, China has not yet decided to pursue a sufficient reduction of its investment restrictions to enable the successful conclusion of those negotiations.

 

In 2016, despite the new Chinese leadership’s initial re-focusing on economic reform, a wide range of Chinese policies and practices continued to generate significant concerns among U.S. stakeholders, as did the continuing abuse of administrative processes by Chinese government officials. Major areas of specific concern continued to include: serious problems with intellectual property rights enforcement in China, including in the area of trade secrets; the Chinese government’s prolific use of industrial policies favoring state-owned enterprises and domestic national champions, including “secure and controllable” information and communications technology (ICT) policies, export restraints, subsidies, unique national standards and investment restrictions, among other policies; troubling agricultural policies that block U.S. market access; numerous continuing restrictions on services market access; and inadequate transparency. China’s slow movement toward accession to the WTO Government Procurement Agreement (GPA) also hinders development of the U.S.-China trade relationship.

 

Going forward, as reported in prior years, the United States looks to China to reduce market access barriers, uniformly follow the fundamental principles of non-discrimination and transparency, significantly reduce the level of government intervention in the economy, fully institutionalize market mechanisms, require state-owned enterprises to compete with other enterprises on fair and non-discriminatory terms, and fully embrace the rule of law. Taking these steps is critical to realizing the tremendous potential presented by China’s WTO membership, including the breadth and depth of trade and investment – and prosperity – possible in a thriving, balanced global trading system.

 

 

• With regard to excess industrial capacity, China committed to take effective steps to address the challenges of excess capacity so as to enhance market function and encourage adjustment.
• Specifically with regard to excess capacity in the steel industry, where China’s State Council had issued guidelines calling for the elimination of 100 to 150 million MT of steel capacity, China committed to undertake further steps to ensure market forces are not constrained, so that its steel industry develops a stronger market orientation to enhance efficiency, and, in doing so, progressively reduces excess capacity.
• China also committed to ensure that no central government plans, policies, directives, guidelines, lending or subsidization targets the net expansion of steel capacity.
• China further committed to adopt measures to strictly contain steel capacity expansion, reduce net steel capacity, eliminate outdated steel capacity and urge the exit of steel production capacity that falls short of environment, energy consumption, quality or safety requirement standards and to actively and appropriately dispose of “zombie enterprises” through bankruptcies and other means.
• More broadly, the United States and China recognized the importance of the establishment and improvement of impartial bankruptcy systems and mechanisms to resolving excess industrial capacity, and China agreed to implement bankruptcy laws by continuing to establish special bankruptcy tribunals, further improving the bankruptcy administrator systems and using modern information tools
• Additionally, China agreed to support the establishment of, and actively participate in, a global forum on excess steel capacity envisioned to serve as a cooperative platform for dialogue and information-sharing on global capacity developments and on policies and support measures taken by governments.
• With regard to aluminum, the United States and China recognized that excess capacity in this industry had increased and had become a global issue requiring collective response, and accordingly the two sides agreed to work together to address the excess aluminum capacity situation.
• With regard to China’s “secure and controllable” ICT policies, China committed that ICT cybersecurity measures should be consistent with WTO agreements, be narrowly tailored, take into account international norms, be nondiscriminatory and not impose nationality-based conditions or restrictions on the purchase, sale or use of ICT products by commercial enterprises unnecessarily.
• China further committed that ICT cybersecurity measures generally applicable to the commercial sector are not to unnecessarily limit or prevent commercial sales opportunities for foreign suppliers of ICT products or services.
• China committed that its innovation policies would be consistent with the principle of non-discrimination and that it would not advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in China’s market.
• The United States welcomed new action by China’s State Council requiring all sub-central regions and agencies to take further action to review their measures and to remove any linkages between indigenous innovation policies and the provision of government procurement preferences.
• Building on past commitments from China that innovation policies should be consistent with the principle of nondiscrimination, China confirmed that its “secure and controllable” ICT policies will not limit sales opportunities for
• foreign companies or impose nationality-based restrictions, and relevant technical regulations will be notified to the WTO Technical Barriers to Trade Committee.
• China committed to further improve its approval processes for the products of agricultural biotechnology and specifically to revise a key regulatory measure to ensure that it provides for approval processes that are timely, transparent, predictable, science-based and based on international standards.
• China also committed to review outstanding applications for approval of agricultural biotechnology products and act on them in line with the timing and procedures set forth in China’s laws and regulations.
• With regard to China’s current policy of asynchronous biotechnology approvals, the two sides agreed to intensify their study and dialogue on the sustainability of this policy and its trade and innovation impacts.
• With regard to pharmaceuticals, China affirmed that drug registration review and approval shall not be linked to pricing commitments and shall not require specific pricing information.
• China addressed past commitments relating to medical devices by committing to strengthen oversight of government procurement of medical devices to ensure foreign brands and foreign-manufactured products are treated in a transparent, fair and equitable manner.
• China committed not to link government procurement to policies promoting domestically produced medical devices.
• China committed to ensure that China’s industry development plans treat all enterprises equally and operate in a manner consistent with market-based concepts.
• China affirmed that it is strengthening its trade secrets protections and that it is prioritizing enforcement against online counterfeiting and piracy. China specifically recognized the important role of online platforms and agreed to use them and other means to develop innovative new ways to deliver safe, reliable and legitimate products in convenient and affordable ways.
• With regard to the operation of the integrated circuit investment funds in China, China reaffirmed that they are based on market principles and that the Chinese government does not interfere with the normal operation of those funds and clarified that the Chinese government has never asked the funds to require compulsory technology or the transfer of intellectual property rights (IPR) as a condition for participation in the funds’ investment projects.
• China confirmed that MOFCOM has been coordinating with relevant departments and local governments regarding U.S. WTO concerns relating to so-called “International Well-Known Brand” subsidies and farm machinery subsidies and that China is prepared to adjust the measures at issue as necessary.

After its accession to the WTO, China undertook a wide-ranging revision of its framework of laws and regulations aimed at protecting the IPR of domestic and foreign rights holders, as required by the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement). Currently, China is in the midst of a further round of revisions to these laws and regulations, as it seeks to make them more effective. Nevertheless, inadequacies in China’s IPR protection and enforcement regime continue to present serious barriers to U.S. exports and investment. As a result, China was again placed on the Priority Watch List in USTR’s 2016 Special 301 report. In addition, in December 2016, USTR announced the results of its 2016 Out-of-Cycle Review of Notorious Markets, which identifies online and physical markets that exemplify key challenges in the global struggle against piracy and counterfeiting. Several Chinese markets were among those named as notorious markets.

 

 

The protection and enforcement of trade secrets in China is a serious problem and has been the subject of high-profile attention and engagement in recent years. Thefts of trade secrets for the benefit of Chinese companies have occurred both within China and outside of China. Offenders in many cases continue to operate with impunity. Most troubling are reports that actors affiliated with the Chinese government and the Chinese military have infiltrated the computer systems of U.S. companies, stealing terabytes of data, including the companies’ intellectual property (IP), for the purpose of providing commercial advantages to Chinese enterprises. To help address these challenges, the United States previously has won commitments from China not to condone this type of state-sponsored misappropriation of trade secrets and has urged China to make certain key amendments to its trade secrets-related laws and regulations, particularly with regard to a draft revision of the Anti-unfair Competition Law. China also has committed to issue judicial guidance to strengthen its trade secrets regime. The United States also has urged China to take actions to address this problem across the range of state-sponsored actors and to promote public awareness of this issue. In 2016, China circulated for public comment a draft of proposed revisions to the Anti-unfair Competition Law, but it included only minor changes to the provisions on trade secrets and therefore did not address the full range of U.S. concerns in this area. At the November 2016 JCCT meeting, China confirmed that it is strengthening its trade secrets regime and plans to bolster several areas of importance, including the availability of evidence preservation orders and damages based on market value as well as the issuance of a judicial interpretation on preliminary injunctions and other matters.

 

 

Of particular and growing concern is the continuing registration of trademarks in bad faith. Although China has taken some steps to address this problem, U.S. companies across industry sectors continue to face Chinese applicants registering their marks and “holding them for ransom” or seeking to establish a business building off of U.S. companies’ global reputations. At the November 2016 JCCT meeting, China publicly noted the harm that may be caused by bad faith trademarks and confirmed that it is taking further steps to combat bad faith trademark filings.

 

 

The United States continues to engage China on a range of patent and technology transfer concerns relating to pharmaceuticals. At the December 2013 JCCT meeting, China committed to permit supplemental data supporting pharmaceutical patent applications. However, to date, it appears that China has only implemented that commitment in part. In October 2016, China circulated for public comment proposed revisions to its Patent Examination Guidelines, which included a proposed revision that would clarify that examiners must consider in their examination process certain post-filing supplemental data. If implemented, this proposed revision would represent an important step toward the supplemental data practice in the United States and other jurisdictions.

 

Meanwhile, many other concerns remain, including the need to provide effective protection against unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, and to provide effective enforcement against infringement of pharmaceutical patents. Additionally, a backlogged drug regulatory approval system presents market access and patient access concerns. At the December 2014 JCCT meeting, China committed to significantly reduce time-to-market for innovative pharmaceutical products through streamlined processes and additional funding and personnel.

 

A serious concern that first arose in 2015 stems from China’s proposals in the pharmaceuticals sector that seek to promote government-directed indigenous innovation and technology transfer through the provision of regulatory preferences. For example, a State Council measure issued in final form without having been made available for public comment calls for expedited regulatory approval to be granted to innovative new drugs where the applicant’s manufacturing capacity has been shifted to China. The United States is pressing China to reconsider this approach.

 

In April 2016, the China Food and Drug Administration (CFDA) issued a draft measure that effectively would require drug manufacturers to commit to price concessions as a pre-condition for marketing approval of new drugs. Given its inconsistency with international science-based regulatory practices, which are based on safety, efficacy and quality, the draft measure elicited serious concerns from the United States and U.S. industry. Subsequently, at the November 2016 JCCT meeting, China agreed not to link a pricing commitment to drug registration evaluation and approval. In addition, China agreed not to require any specific pricing information when implementing the final measure.

 

 

Online piracy continues on a large scale in China, affecting a wide range of industries, including those involved in distributing legitimate music, motion pictures, books and journals, software and video games. While increased enforcement activities have helped stem the flow of online sales of some pirated offerings, much more sustained action and attention is needed to make a more meaningful difference for content creators and rights holders, particularly small and medium-sized enterprises. At the same time, the United States has urged China to consider ways to create a broader policy environment that helps foster the growth of healthy markets for licensed and legitimate content. The United States also has urged China to revise existing rules that have proven to be counterproductive. For example, new rules on the review of foreign television content present a serious concern for the continued viability of licensed streaming of foreign television content via online platforms, as these rules are disrupting legitimate commerce while inadvertently creating conditions that allow for pirated content to displace legitimate content online. At the November 2016 JCCT meeting, China agreed to actively promote e-commerce-related legislation, strengthen supervision over online infringement and counterfeiting, and to work with the United States to explore the use of new approaches to enhance online enforcement capacity.

 

 

Although rights holders report increased enforcement efforts by Chinese government authorities, counterfeiting in China, affecting a wide range of goods, remains widespread. One area of particular U.S. concern involves medications. Despite sustained engagement by the United States, China still needs to improve its regulation of the manufacture of active pharmaceutical ingredients to prevent their use in counterfeit and substandard medications. At the July 2014 S&ED meeting, China agreed to develop and seriously consider amendments to the Drug Administration Law that will require regulatory control of the manufacturers of bulk chemicals that can be used as active pharmaceutical ingredients. At the June 2015 S&ED meeting, China further agreed to publish revisions to the Drug Administration Law in draft form for public comment and to take into account the opinions of the United States and other relevant stakeholders. As of December 2016, China had not amended this law, reportedly due to the prioritization of reforming the drug regulatory system to reduce the drug approval lag.

 

 

 

China continued to pursue a wide array of industrial policies in 2016 that seek to limit market access for imported goods, foreign manufacturers and foreign service suppliers, while offering substantial government guidance, resources and regulatory support to Chinese industries. The principal beneficiaries of these constantly evolving policies are state-owned enterprises, as well as other favored domestic companies attempting to move up the economic value chain.

 

 

 

 

China continues to deploy a combination of export restraints, including export quotas, export licensing, minimum export prices, export duties and other restrictions, on a number of raw material inputs where it holds the leverage of being among the world’s leading producers. Through these export restraints, it appears that China is able to provide substantial economic advantages to a wide range of downstream producers in China at the expense of foreign downstream producers, while creating pressure on foreign downstream producers to move their operations, technologies and jobs to China. In 2013, China removed its export quotas and duties on several raw material inputs of key interest to the U.S. steel, aluminum and chemicals industries after the United States won a dispute settlement case against China at the WTO. In 2014, the United States won a second WTO case, where the claims focused on China’s export restraints on rare earths, tungsten and molybdenum, which are key inputs for a multitude of U.S.-made products, including hybrid automobile batteries, wind turbines, energy-efficient lighting, steel, advanced electronics, automobiles, petroleum, and chemicals. China removed those export restraints in May 2015. In July 2016, as discussed above, the United States launched a third WTO case challenging export restraints maintained by China. The challenged export restraints include export quotas and export duties maintained by China on various forms of 11 raw materials, including antimony, chromium, cobalt, copper, graphite, indium, lead, magnesia, talc, tantalum and tin. These raw materials are key inputs in important U.S. manufacturing industries, including aerospace, automotive, construction and electronics.

 

 

China has continued to provide substantial subsidies to its domestic industries, causing injury to U.S. industries. Some of these subsidies also appear to be prohibited under WTO rules. The United States has addressed these subsidies through countervailing duty proceedings conducted by the Commerce Department, invocation of a trade policy compliance mechanism established by China’s State Council, and dispute settlement cases at the WTO. The United States and other WTO members also have continued to press China to notify all of its subsidies to the WTO in accordance with its WTO obligations. Since joining the WTO 15 years ago, China has not yet submitted to the WTO a complete notification of subsidies maintained by the central government, and it did not notify a single sub-central government subsidy until July 2016, when it provided information only on sub-central government subsidies that the United States had challenged as prohibited subsidies in a WTO case.

 

 

Chinese government actions and financial support in manufacturing industries like steel and aluminum have contributed to massive excess capacity in China, with the resulting over-production distorting global markets and hurting U.S. producers and workers in both the United States and third country markets such as Canada and Mexico, where U.S. exports compete with Chinese exports. While China recognizes the severe excess capacity problem in these industries, among others, and has taken steps to try to address this problem, there have been mixed results.

 

From 2000 to 2014, China accounted for more than 75 percent of global steelmaking capacity growth. While China’s capacity growth appears to have slowed since 2014, according to Organization for Economic Cooperation and Development (OECD) figures, China’s efforts to address excess capacity to date have not resulted in reduced total steelmaking capacity in China. Currently, China’s capacity alone exceeds the combined steelmaking capacity of the European Union (EU), Japan, the United States, and Russia. China has no comparative advantage with regard to the energy and raw material inputs that make up the majority of costs for steelmaking, yet China’s capacity has continued to grow and is estimated to have exceeded 1.16 billion metric tons (MT) in 2016, despite weakening demand domestically and abroad. Steel demand in China decreased 5 percent in 2015 as compared to 2014, and demand in China is projected to decrease by another 1 percent in 2016 and then by 2 percent in 2017, according to the World Steel Association. As a result, China’s steel exports grew to be the largest in the world, at 93 million MT in 2014, a 50-percent increase over 2013 levels, despite sluggish steel demand abroad. In 2015, Chinese exports reached a historic high of 110 million MT, and China’s steel exports are expected to grow even further in 2016, causing increased concerns about the detrimental effects that these exports may have on the already saturated world market for steel.

 

Similarly, monthly production of primary aluminum in China doubled between January 2011 and July 2015 and continues to grow, despite a severe drop in global aluminum prices during the same period. Large new facilities are being built with government support, including through energy subsidies, as China’s primary aluminum production accounted for 54 percent of global production from January through October 2016. As a consequence, China’s aluminum excess capacity is contributing to a severe decline in global aluminum prices, harming U.S. plants and workers.

 

Not unlike the situations in the steel and aluminum industries, China’s production of soda ash has increased as domestic demand has stagnated. As a result, China’s soda ash exports increased 23 percent in 2015 as compared to the previous year, and this trend has continued in 2016. Further, China’s soda ash production, which totaled 26 million MT in 2015, is projected to grow at nearly 3 percent annually through 2020, which is more than double China’s projected 1.2 percent annual increase in domestic demand over that same time period. It also is estimated that China’s excess soda ash capacity will continue to grow in the coming years, reaching over 10.5 million MT by 2019.

 

Excess capacity in China – whether in the steel industry or other industries like aluminum or soda ash – hurts U.S. industries and workers not only because of direct exports from China to the United States, but because lower global prices and a glut of supply make it difficult for even the most competitive producers to remain viable. Domestic industries in many of China’s trading partners have continued to respond to the effects of the trade-distortive effects of China’s excess capacity by petitioning their governments to impose trade remedies such as antidumping and countervailing duties.

 

 

As in prior years, in 2016, the Chinese government attempted to manage the export of many primary, intermediate and downstream products by raising or lowering the VAT rebate available upon export. China sometimes reinforces its objectives by imposing or retracting export duties. These practices have caused tremendous disruption, uncertainty and unfairness in the global markets for some products, particularly downstream products where China is a leading world producer or exporter, such as products made by the steel, aluminum and soda ash industries. These practices, together with other policies, such as excessive government subsidization, also have contributed to severe excess capacity in these same industries. A positive development took place at the July 2014 S&ED meeting, when China agreed to improve its VAT rebate system, including by actively studying international best practices, and to deepen communication with the United States on this matter, including regarding its impact on trade. To date, however, China has not made any movement toward the adoption of international best practices.

 

 

In 2010, China’s State Council issued a decision on accelerating the cultivation and development of “strategic emerging industries” (SEIs) that called upon China to develop and implement policies designed to promote rapid growth in government-selected industry sectors viewed as economically and strategically important for transforming China’s industrial base into one that is more internationally competitive in cutting-edge technologies. China subsequently identified seven sectors for focus under the SEI initiative, including energy-saving and environmental protection, new generation information technology, biotechnology, high-end equipment manufacturing, new energy, new materials and new-energy vehicles. The list of sectors was expanded with the issuance of China’s 13th Five-year Plan in March 2016.

 

To date, import substitution policies have been included in some SEI development plans at the sub-central government level. For example, a development plan for the light-emitting diode (LED) industry issued by the Shenzhen municipal government included a call to support research and development in products and technologies that have the ability to substitute for imports. Shenzhen rescinded the plan in 2013 following U.S. Government intervention with China’s central government authorities.

 

Similarly, some central and sub-central government measures use local content requirements as a condition for enterprises in SEI sectors to receive financial support or other preferences. For example, in the high-end equipment manufacturing sector, China has maintained an annual program that conditioned the receipt of a subsidy on an enterprise’s use of at least 60 percent Chinese-made components when manufacturing intelligent manufacturing equipment. Citing WTO concerns, the United States began pressing China in 2014 to repeal or modify these measures. In 2015, China reported that it had decided not to renew this subsidy program.

 

In addition, an array of Chinese policies designed to assist Chinese automobile enterprises in developing electric vehicle technologies and in building domestic brands that can succeed in global markets continued to pose challenges in 2016. As previously reported, these policies have generated serious concerns about discrimination based on the country of origin of IP, forced technology transfer, research and development requirements, investment restrictions and discriminatory treatment of foreign brands and imported vehicles. Although significant progress has been made in addressing some of these policies, more work remains to be done.

 

In May 2015, China’s State Council released “Made in China 2025,” a long-term plan spearheaded by the Ministry of Industry and Information Technology (MIIT) intended to raise industrial productivity through more advanced and flexible manufacturing techniques. Specifically, through Made in China 2025, the Chinese government hopes to make advanced manufacturing technologies and sectors a key driver of economic growth. The implicated technologies and sectors include advanced information technology, automated machine tools and robotics, aviation and spaceflight equipment, maritime engineering equipment and high-tech vessels, advanced rail transit equipment, new energy vehicles, power equipment, farm machinery, new materials, biopharmaceuticals and advanced medical products. According to industry experts, Made in China 2025 represents a modest improvement over SEI development plans and indigenous innovation initiatives rolled out since 2010. However, Made in China 2025 includes many holdovers from these prior state-driven plans and initiatives, as it, for example, sets targets for indigenous production or control of up to 40 percent of certain critical components in the aerospace, power and construction sectors, among other sectors, by 2020, while aiming to achieve substantial productivity gains in these sectors. Industry experts are skeptical that China will be able to reach its Made in China 2025 goals due to other policies that hold back competition, limit market access and over-regulate new technologies and cross-border data flows.

In the standards area, two principal types of problems harm U.S. companies. First, Chinese government officials in some instances have reportedly pressured foreign companies seeking to participate in the standards-setting process to license their technology or intellectual property on unfavorable terms. Second, China has continued to pursue unique national standards in a number of high technology areas where international standards already exist, such as 3G and 4G telecommunications standards, Wi-Fi standards and information security standards. The United States continues to press China to address these specific concerns, but to date this bilateral engagement has yielded minimal progress.

 

Currently, China is undergoing a large-scale reform of its standards system. As part of this reform, China is seeking to incorporate a “bottom up” strategy in standards development in addition to the existing “top down” system. At the same time, the existing technical committees continue to develop standards. For example, the technical committee for cybersecurity standards has begun allowing foreign companies to participate in standards development and setting, with several U.S. and other foreign companies being allowed to vote and to participate at the working group level in standards development.

 

 

The United States continues to press China to take concrete steps toward fulfilling its commitment to accede to the GPA and to open up its vast government procurement market to the United States and other GPA parties. To date, however, the United States, the EU, and other GPA parties have viewed China’s offers of coverage as highly disappointing in scope and coverage. China submitted its fifth revised offer in December 2014. This offer showed progress in a number of areas, including thresholds, entity coverage and services coverage. Nonetheless, it fell short of U.S. expectations and remains far from acceptable to the United States and other GPA parties as significant deficiencies remain in a number of critical areas, including thresholds, entity coverage, services coverage and exclusions.

 

China’s current government procurement regime is governed by two important laws. The Government Procurement Law, which is administered by the Ministry of Finance, governs purchasing activities conducted with fiscal funds by state organs and other organizations at all levels of government in China. The Tendering and Bidding Law falls under the jurisdiction of the National Development and Reform Commission and imposes uniform tendering and bidding procedures for certain classes of procurement projects in China, notably construction and works projects, without regard for the type of entity that conducts the procurement. Both laws cover important procurements that GPA parties would consider to be government procurement eligible for coverage under the GPA. The United States will continue to work with the Chinese government to ensure that China’s future GPA offers include coverage of government procurement regardless of which law it falls under, including procurement conducted by both government entities and other entities, such as state-owned enterprises.

 

 

China seeks to protect many domestic industries through a restrictive investment regime, which adversely affects foreign investors in services sectors, agriculture, extractive industries and manufacturing sectors. In line with its own plans for domestic reform, including as expressed through the Third Plenum Decision, China continues to consider improvements to its foreign investment regime, including through the use of a “negative list” as a mechanism to govern access for foreign investors. However, many aspects of China’s current investment regime, including lack of substantial liberalization, maintenance of a case-by-case administrative approval system and the potential for a new and overly broad national security review, continue to cause foreign investors great concern. In addition, foreign enterprises report that Chinese government officials may condition investment approval on a requirement that a foreign enterprise transfer technology, conduct research and development in China, satisfy performance requirements relating to exportation or the use of local content or make valuable, deal-specific commercial concessions. The United States has repeatedly raised concerns with China about its restrictive investment regime. To date, this sustained bilateral engagement has not led to a significant relaxation of China’s investment actions by Chinese government officials.

 

The United States and China have continued to seek to conclude a high-standard BIT. Building on China’s commitment at the July 2013 S&ED meeting to negotiate a BIT that will provide national treatment at all phases of investment, including market access (i.e., the “pre-establishment” phase of investment), and will employ a negative list approach in identifying exceptions (meaning that all investments are permitted except for those explicitly excluded), the United States and China have engaged in extensive negotiations, which were ongoing as of December 2016.

 

 

China’s regulatory authorities in some instances seem to be pursuing antidumping and countervailing duty investigations and imposing duties for the purpose of striking back at trading partners that have exercised their WTO rights against China, even when necessary legal and factual support for the duties is absent. The U.S. response has been the filing and prosecution of three WTO disputes. The decisions reached by the WTO in those three disputes confirm that China failed to abide by WTO disciplines when imposing the duties at issue.

 

 

 

 

 

 

In addition to the area of transparency, several other areas of China’s legal framework can adversely affect the ability of the United States and U.S. exporters and investors to access or invest in China’s market. Key areas include administrative licensing, competition policy, the treatment of non-governmental organizations (NGOs), commercial dispute resolution, labor laws and laws governing land use. Corruption among Chinese government officials, enabled in part by China’s incomplete adoption of the rule of law, is also a key concern.

 

 

Despite numerous changes made by the Chinese government since the issuance of the Third Plenum Decision in November 2013, U.S. companies continue to encounter significant problems with a variety of administrative licensing processes in China, including processes to secure product approvals, investment approvals, business expansion approvals, business license renewals and even approvals for routine business activities. While U.S. companies are encouraged by the overall reduction in license approval requirements and the focus on decentralizing licensing approval processes, U.S. companies report that these efforts have only had a marginal impact on their licensing experiences so far.

 

 

Chinese regulatory authorities’ implementation of China’s Anti-monopoly Law poses multiple challenges. One key concern relates to how the Anti-monopoly Law will be applied to state-owned enterprises, given that a provision in the Anti-monopoly Law protects the lawful operations of state-owned enterprises and government monopolies in industries deemed nationally important. To date, China has enforced the Anti-monopoly Law against state-owned enterprises, and it has stated that this law applies to state-owned enterprises, but some U.S. companies have expressed concern that enforcement against state-owned enterprises is more limited.

 

Another concern relates to the procedural fairness of Anti-monopoly Law investigations. U.S. industry has expressed concern about insufficient predictability, fairness and transparency in the investigative processes of the National Development and Reform Commission (NDRC), including NDRC pressure to “cooperate” in the face of unspecified allegations or face steep fines and limitations imposed by NDRC on the ability of foreign companies to bring counsel to meetings. Through the S&ED and JCCT processes in 2014, the United States was able to secure commitments from China designed to help address most of these matters, although some concerns remain. The United States continues to work closely with affected U.S. parties as it seeks to ensure that China’s anti-monopoly enforcement agencies fully implemented these commitments.

 

In 2015, the United States secured additional commitments from China relating to Anti-monopoly Law enforcement proceedings. These commitments addressed the protection of confidential business information, the independence of Anti-monopoly Law decision making, the jurisdiction of courts reviewing administrative Anti-monopoly Law decisions and anti-monopoly enforcement agencies’ processes for reconsidering decisions. China also recognized the importance of maintaining coherent rules relating to intellectual property rights in the Anti-monopoly Law context, including by taking into account the pro-competitive effects of intellectual property licensing.

In 2016, the United States used all platforms available to encourage China to pursue Anti-monopoly Law measures and enforcement policies that are consistent with its 2015 commitments. In addition, in June 2016, China’s State Councilestablished a “Fair Competition Review System” designed to prevent unjustified restrictions on competition through government regulations and activities, an initiative for which the United States has expressed support.

 

 

In 2017, as in prior years, it will be in the interests of the United States to continue to vigorously pursue increased benefits for U.S. businesses, workers, farmers, ranchers and service providers from our trade and economic ties with China. The United States can and should use all available tools to achieve these objectives, including the pursuit of productive, outcome-oriented dialogue in both bilateral and multilateral settings, as well as the vigorous use of enforcement mechanisms, where appropriate.

 

On the bilateral front, it will be in the interests of the United States to continue to pursue robust engagement with China at all levels of government focused on producing practical and meaningful outcomes. The United States also needs to take full advantage of multilateral venues such as the WTO to engage China. Key goals of this engagement should include ensuring that the benefits of China’s WTO commitments are fully realized by the United States and other WTO members, and that trade frictions that may arise in the U.S.-China trade relationship are effectively resolved.

 

At the same time, as the United States has repeatedly demonstrated, when dialogue is not successful in resolving concerns, the United States should not hesitate to invoke the dispute settlement mechanism at the WTO where appropriate. Similarly, the United States should continue to rigorously enforce U.S. trade remedy laws, in accordance with WTO rules, when U.S. interests are being harmed by unfairly traded or surging imports from China.