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U.S.-China Economic and Security Review Commission, "Hearing: China and the WTO - Compliance and Monitoring," February 5, 2004

This hearing was conducted by the U.S.-China Economic and Security Review Commission on February 5, 2004. The U.S.-China Economic and Security Review Commission was created by the U.S. Congress in 2000 to monitor, investigate, and submit to Congress an annual report on the national security implications of the economic relationship between the United States and the People’s Republic of China.
February 5, 2004

Thursday, February 5, 2004
SD-124, Dirksen Senate Office Building
Washington, DC


On behalf of the U.S.-China Economic and Security Review Commission, we are pleased to transmit the record of our February 5, 2004 hearing on ‘‘China and the WTO: Compliance and Monitoring.’’

China is not a fully developed market economy and was even less so at the time of its accession to the WTO. Integrating a large non-market economy into an international trading system that was designed for and dependent upon the efficient operations of markets posed a challenge of monumental proportions. To help meet this challenge, China’s accession agreement required it to implement changes to its laws and economic system that had generally been a prerequisite for entering members. WTO members accepted China into the organization only after negotiating the most complex accession agreement in WTO history, one that reflected a large number of commitments by China to transition to a market- and rules-based economy and special safeguards for the domestic industries of other WTO members that could be significantly injured by surges of imports from China’s non-market economy. Assuring that China implements these commitments is a large and important task for the U.S. Government.

The Commission held this hearing with the twin goals of assessing China’s progress in complying with its schedule of commitments and gauging the adequacy of U.S. Government monitoring processes. At our hearing, the Commission received the testimony of officials from the U.S. Trade Representative (USTR) and the Departments of Commerce, State, and Agriculture. A panel of legal experts compared the contemporary situation with China’s stated obligations and with U.S. expectations at the time of China’s accession. The Commission also heard from representatives of agriculture, business, industry and labor organizations, many of whose members have first-hand knowledge of China’s practical compliance.

China’s Compliance

China has made only mixed progress towards complying with its WTO obligations. For instance, China has generally completed a broad range of tariff reductions in accordance with timetables stipulated in the accession agreement. It has revised or enacted a large number of laws and regulations to bring its trade system into better conformity with WTO norms. In the services sector, it has reduced capitalization requirements for some financial services operations, but requirements remain higher than can be justified. After sustained pressure from U.S. officials, China reduced barriers to U.S. agriculture exports through reform of tariff-rate quota implementation. Despite these and other positive steps, China has on the whole fallen behind its schedule of commitments, and in some areas has implemented new barriers to trade to compensate for those it is removing.

Some of the most egregious gaps between commitments and current practices include: rampant abuse and lax protection of intellectual property rights, lack of transparency in adopting and applying regulations, the use of technical or safety standards to unreasonably exclude foreign products—including non-science-based sanitary and phytosanitary standards on agricultural products—implementation of discriminatory tax incentives to encourage U.S. and other foreign semiconductor companies to move their manufacturing operations to China, and obstacles to the domestic distribution of imported products.

The Commission finds that:

  • China has made progress on WTO compliance in absolute terms, but this progress toward compliance has decelerated to an unacceptably slow pace. Furthermore, some lowered barriers to trade have been replaced by new barriers that deny market access to U.S. exports of goods and services, a practice that we categorically reject.


While the Commission is satisfied that the U.S. Government is competently monitoring China’s compliance, we question the enforcement effort to date. The U.S. has yet to file a single dispute against China in the WTO, despite numerous clear violations disclosed at our hearing. The Commission understands that something of a ‘honeymoon’ period was necessary for China to have the opportunity to implement its accession commitments and to afford the U.S. the time to review China’s nascent track record. The two years that have passed since China’s accession represent a period of sufficient length for such restraint and forbearance, a period which we now expect to come to a close.

The Commission also acknowledges the value of settling a potential dispute case through bilateral negotiations, which offer the promise of relief for afflicted U.S. industries on a compressed time scale. However, such negotiations will find greater success if accompanied by a history of determined use of the WTO dispute resolution mechanism when necessary. The Commission therefore urges continued bilateral discussions on the catalog of compliance gaps, but similarly advocates vigilant use of formal channels for redress when China fails to address grievances.

One area of monitoring we found to be particularly lacking is the WTO’s Transitional Review Mechanism (TRM) for reviewing China’s compliance. This annual review process was established as part of China’s accession agreement to the WTO. U.S. negotiators expected the TRM to be a robust mechanism for monitoring China’s WTO compliance and applying multilateral pressure for improvement. In practice, the TRM has been undermined by China’s refusal to abide by standard WTO procedural methods such as responding in writing to requests for information from other member countries and its unwillingness to have TRM issues raised in WTO subsidiary committee meetings at a sufficiently early stage to have a meaningful dialogue on the concerns. China argues that the normal customs of the WTO do not apply because the TRM is a discriminatory measure applying only to China. The Commission notes that China’s entry into the WTO was conditioned on China’s acceptance of the TRM and other special provisions intended to compensate for the disjunction between WTO standards and China’s non-market economy and underdeveloped legal system. China accepted and signed the WTO agreement that created and governs the TRM and therefore should desist from arguing that it is discriminatory and instead cooperate in making it a useful mechanism to improve its implementation of its WTO obligations.

The Commission finds that:

  • The TRM has failed to live up to the expectations of the U.S. and other WTO members that it would be a comprehensive tool for measuring and evaluating China’s compliance with the full range of its commitments and a robust mechanism for putting multilateral pressure on China to address compliance shortfalls.

U.S. Economic and National Security

The Commission believes that the Executive Branch is sufficiently monitoring China’s compliance with WTO obligations, and providing its results to the Congress and the public at large in a timely manner. However, the Commission finds that too little attention has been paid to the security implications of China’s participation in the WTO. American economic security rests on a broad foundation of economic activity, and actions to protect U.S. economic security will be bolstered by measures employed to compel China’s compliance with its WTO obligations. Finally, the U.S. must take care to preserve its domestic industries whose health is directly related to important military capabilities.

Based on the record of this hearing and the Commission’s other work on these issues to date, we present the following preliminary recommendations to the Congress for consideration. The Commission will continue to develop these recommendations and provide additional guidance in our annual Report to the Congress.

Preliminary Recommendations:

  • The U.S. Government should signal clearly to China that its WTO ‘honeymoon’ period has ended, and that the U.S. will no longer hesitate to secure its rights through formal recourse to the WTO when necessary. Such a statement should accompany the first filing of a WTO case. The Congress should press the Administration to use the WTO dispute settlement mechanism and/or U.S. trade laws, including Section 301 provisions, to seek redress for China’s practices in the areas of exchange rate manipulation, denial of trading and distribution rights, massive violations of intellectual property rights (IPR) that have cost U.S. firms billions of dollars, and government subsidies to export industries that harm the competitiveness of U.S.-based manufacturing firms.
  • China’s preferential value-added tax (VAT) treatment for domestically designed and produced semiconductors and other discriminatory policies are encouraging large foreign investments into semiconductor manufacturing facilities in China, leading to a global overcapacity in that industry that threatens U.S. producers. The Commission commends ongoing USTR efforts to resolve the issue expeditiously through negotiations, but now recommends that the U.S. forthwith file a WTO case on the matter.
  • China’s WTO obligations for curbing the abuse of intellectual property rights demand not only China’s promulgation of appropriate legislation or regulations, but also concrete results in the reduction of IPR violations, which are thus far lacking. The U.S. should offer China assistance in implementing a program to curb the abuse of IPR that includes criminal penalties against its citizens who engage in such WTO-required practices. This offer should be coupled with an explicit timeline for implementation and realization of results. The timeline should also guarantee filing of a WTO case if the offer is rebuffed or its implementation unsuccessful.
  • The U.S. should put in place procedures for consulting with trading partners at the outset of each new dispute over China’s compliance. Particular efforts should be made to work closely with the EU, Japan, and others to ensure that China lives up to its WTO commitments.
  • USTR and other appropriate U.S. Government officials should undertake strenuous efforts to reform the TRM process into a meaningful multilateral review and measurement of China’s compliance with its WTO commitments. If this is unsuccessful, the U.S. Government should initiate a parallel process with the EU, Japan, and other major trading partners to produce a unified annual report by which to measure and record China’s progress toward compliance. This measurement and evaluation should be provided in detail to Congress as part of USTR’s annual report on China’s WTO compliance.
  • The U.S. Government should make optimum use of the special Section 421 and textile safeguards negotiated as part of China’s WTO accession agreement. These important safeguards were designed to prevent our domestic industries from being forced into bankruptcy by surges of Chinese exports. Although the International Trade Commission has recommended that Section 421 relief be granted on a number of occasions, they have yet to be approved by the Executive Branch. Testimony was presented to the Commission that the Chinese Government has hired U.S. law and government relation firms to lobby the Executive Branch to ensure that the special safeguards are not utilized. This puts private sector U.S. firms seeking implementation of the safeguards at a disadvantage and may have the effect of nullifying important safeguards Congress relied on in approving PNTR for China.
  • The Congress should amend our countervailing duty laws to permit their usage in relation to non-market economies. For example, the Chinese Government makes non-market based loans to its state-owned enterprises, enabling them to export subsidized goods to the U.S. market that harm the competitiveness of U.S. manufacturers.
  • The transfer of technology by U.S. investors in China where it is a WTO-inconsistent condition of doing business with Chinese partners under Part I, Section 7(3) of China’s Accession Protocol remains an enduring security concern for the U.S. The Commission understands there has been some reduction of this practice, but condemns any remaining instances of it and asks U.S. companies to help maintain U.S. Government vigilance by reporting any continuing or future occurrences.

We hope that this hearing record and the Commission’s above findings and recommendations will assist the Congress in assessing a complex but vital subject of U.S.-China economic relations. As always, we stand ready to present to any interested Committees or Members the Commission’s research and analysis on this and any other subject contained in the Commission’s mandate.


Roger W. Robinson, Jr.

C. Richard D’Amato
Vice Chairman


Panel I: Administration Views
James J. Jochum, Assistant Secretary of Commerce, Export Administration
Charles W. Freeman, III Deputy U.S. Trade Representative, North East Asia
FAS Administrator A. Ellen Terpstra
Randal Schriver, Deputy Assistant Secretary of State for East Asian and Pacific Affairs

Panel II: China's Compliance Record
Terence P. Stewart, Managing Partner, Stewart and Stewart Law Offices
Robert Cassidy, Director of International Trade and Services, International Trade & Customs Collier Shannon Scott

Panel III: Agriculture, Labor and Business Views
Robert A. Kapp, President, U.S.-China Business Council
Richard L. Trumka, AFL-CIO Secretary-Treasurer
Robert Vastine, President, Coalition of Service Industries
Robert Carlson, President, North Dakota Farmers Union

Panel IV: Industry, Technology, Intellectual Property Rights
William Primosch, Director of International Business Policy, National Association Of Manufacturers
Eric H. Smith, President of the International Intellectual Property Alliance
Anne B. Craib, Director of International Trade and Government Affairs, Semiconductor Industry Association

Additional Material Supplied
Ann Wrobleski, International Vice President, American Forest and Paper Association
Patricia R. Sheikh, Deputy Administrator for International Trade Policy, USDA
Timothy P. Trainer, President, International AntiCounterfeiting Coalition, Inc.
Brad Smith Managing Director for International Relations American Council of Life Insurers



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