Statement of Terence P. Stewart, Esq.

Managing Partner

Law Offices of Stewart and Stewart

 

Before the

U.S.-China Economic and Security Review Commission

 

China and the WTO: Compliance and Monitoring

 

February 5, 2004

 

Members of the Commission, good morning.  China’s accession to the World Trade Organization at the end of 2001 was and is an historic event and a great experiment.  Because China is a huge country, with a very rapidly expanding economic base and an economy which continues to reflect significant state involvement in decisions of resource allocation, there was no certainty at the time of accession that China’s economic system would mesh well with the World Trade Organization rules and other trading partners’ generally market-oriented economies.  Indeed, in the history of the GATT, and now World Trade Organization, never has a country of such trading importance been admitted with a system that was still so far from conformance with GATT/WTO norms.  China has worked hard to make an enormous array of changes to its legal and regulatory system before accession and had much work to do after accession if membership was to present the market opportunities within China that trading partners expected.

 

My firm prepared an analysis in 2002 for this Commission of the benchmark commitments China undertook as part of its accession to the WTO and provided a very preliminary evaluation of how the early months of accession were going in terms of compliance.  Today we are nearly twenty-six months since China became a member of the WTO, and it may be possible to form a better picture of the level of compliance achieved to date and the problems that remain ahead.  My firm is in the midst of preparing an evaluation of the level of compliance to date for the Commission.  What follows are some preliminary impressions based on our analysis to date.

 

First, I want to be clear that many obligations that were to have been implemented by now have been.  Indeed, China has generally implemented in a timely manner tariff reduction commitments, certainly one of the important obligations assumed by China in joining the WTO.  Similarly, China has revised many laws and regulations to mirror WTO obligations -- obviously welcome developments.  Governments and companies report some improvements in enforcement of intellectual property rights (although piracy remains rampant).  There are also improvements in transparency even if not to the level desired or committed to by China.

 

            Problems with Compliance

 

However, many other obligations have not been met or have been met with significant delays:

 

For example, the problems that various parts of US agriculture have faced with China’s TRQ administration are one example of failure and/or delay in implementing obligations important to US exporters.

 

Similarly, China is at least two years in arrears on its commitment to open auto financing and has received significant criticism for its handling of auto and auto parts limits consistent with commitments undertaken, although there are recent positive developments in all these areas.

 

Financial service providers (and other service sectors) have found obligations being implemented late, if at all, and with restrictions not encountered in other countries and which effectively reduce the value of the market opening promised by China.

 

And trading rights – which were to have been significantly liberalized by now and to have become universal by the end of 2004 – remain severely limited in many circumstances despite the importance of these commitments to all WTO members during China’s accession negotiations.  China committed to giving full trading rights to joint-venture enterprises with majority share foreign-investment two years after accession, that is, by December 11, 2003.  China, however, failed to meet this deadline.  Instead, as USTR reported in its 2003 compliance report, eligibility for trading rights in China continues to be limited by pre-accession conditions such as requirements related to minimum registered capital, import levels, export levels and prior international trade experience.  These types of conditions on trading rights were common before accession but were precisely the types of restrictions that were to have been eliminated as part of China's accession commitments.

 

The 2003 compliance report issued by the US Trade Representative found that China’s WTO implementation efforts failed to meet expectations in many important areas.  In particular, USTR stated that 2003:

 

proved to be a year in which China’s WTO implementation efforts lost a significant amount of momentum.  In a number of different sectors, including some key sectors of economic importance to the United States, China fell far short of implementing its WTO commitments, offsetting many of the gains made in other areas. Indeed, institutionalization of market mechanisms still remains incomplete, and intervention by Chinese government officials in the market is common. In many instances, China has sought to deflect attention from its inadequate implementation of required systemic changes by managing trade in such a way as to temporarily increase affected imports from vocal trading partners, such as the United States.

 

USTR, 2003 Report to Congress on China's WTO Compliance (December 2003) at 4.

 

The 2003 report identifies the areas where China failed to meet its WTO commitments or has imposed new or additional trade barriers, including the following areas of importance to US interests:

 

·         Agriculture (TRQs on bulk agricultural commodities -- problems with sub-quotas, import licensing, allocation)

 

·         TRQ on fertilizer

 

·         Services (capitalization and other requirements that exceed international norms in such service sectors as banking, insurance, construction/engineering, and express courier)

 

·         Enforcement of intellectual property rights (continued IPR infringement affecting products, brands and technologies from a wide range of industries, including films, music, publishing, software, pharmaceuticals, chemicals, information technology, consumer goods, electrical equipment, automotive parts and industrial products)

 

·         Trading rights (continued restrictions)

 

·         Distribution rights (e.g., restrictions on ability to sell imported and China-made autos from same location)

 

·         SPS (new requirements on seafood; ban on soybeans)

 

·         Customs (continued use of inaccurate valuation methods)

 

·         VAT (discriminatory tax on semiconductors, fertilizer, and other products favors domestic producers over US exports)

 

·         Telecom standards (e.g., requirement to use two mandatory encryption standards in wireless networks different from internationally-recognized standard used by US companies)

 

·         China Compulsory Certification (CCC) mark (China safety certification process is duplicative and discriminatory)

 

·         Transparency (uncertainty and lack of uniformity is common; limited opportunity to comment on proposed laws and regulations)

 

Problems with compliance seem to fit into several categories.

 

Some problems appear to reflect simply the difficulties with meeting the timeline commitment and not a lack of desire or willingness to make the changes.  Delays of a few months or longer in matters that have ultimately been complied with would be examples.

 

Other problems appear to reflect internal problems within the Chinese government in getting ministries to make changes agreed to by the government in their areas of control.  Problems in TRQ administration in agriculture and the delays and additional unwarranted burdens imposed in the financial services areas would be two typical examples.

 

Still other problems reflect infrastructure needs or longer-term educational or normative behavior change needs – intellectual piracy curtailment being the most obvious example.  While the local authorities and courts appear capable of handling pirated product where company logos or trademarks are involved, there is much less confidence in the ability of the court system to construe IP laws in ways consistent with norms in other countries, as major auto companies are discovering when product designs are stolen or knocked off.  For example, the Financial Times reported that a number of auto companies, including Nissan, Toyota, General Motors, and Volkswagen, have experienced trademark infringement and theft of auto designs by Chinese companies.  See Nissan alleges Chinese IP theft, Financial Times, November 28, 2003.

 

At the same time, China has aggressively worked to undermine the utility of provisions added to its accession protocol which were designed to ensure multilateral supervision of timely compliance or to permit other WTO members to exercise rights to limit imports from China during a transition period while China was making further modifications to its trading system to become more WTO compatible.  Such actions by China do not amount to problems with “compliance” as that term would normally be considered, but they nonetheless significantly undermine the value of the commitments undertaken by China and rights secured by China’s trading partners.  Let’s examine these two topics separately.

 

Article 18 -- Transitional Review Mechanism

 

On the issue of multilateral supervision of China’s implementation of its commitments, Article 18 of China’s protocol of accession to the WTO requires an annual review for eight years and a final review in the 10th year after accession by each standing committee and by the three councils of the WTO (Goods, Services, TRIPs) and by the General Council of China’s progress in implementing various obligations.  Article 18 envisions that recommendations could be made.  This obligation mirrors the obligation Congress sought to have included in China’s protocol of accession in 2000 in agreeing to grant China most-favored nation status under US law.

 

The US, EU, Japan and other countries considered the obligation would be robust, meaning that WTO members would be able to forward questions in advance, receive written responses and submit follow-up questions for similar treatment.  This is normal WTO practice in all of the Committees for other reporting obligations members have.

 

Other members (including the US) were also interested in setting up a schedule early in China’s membership to ensure the process would be meaningful and would permit a thorough evaluation.  China refused to permit the Article 18 process to go beyond the literal language of the protocol.  Since there was no timeline identified, China would not agree to early meetings and, in fact, blocked agendas being issued or meetings being held where the topic of the Article 18 TRM was included.  I am informed that such blocking action was unprecedented within the WTO.

 

China took the position that Article 18 did not mention written answers and so has refused to provide written responses or permit the process to be one where a series of Q&As takes place to provide better transparency on the operation of various Chinese programs.

 

Because the WTO works on consensus, China has not agreed to have any document originate from the various standing committees or the councils that goes beyond a review of topics identified.  No conclusions or recommendations have been made.

 

So strident was China’s behavior in 2002 that they effectively lowered expectations of WTO members for the Article 18 process, as can be seen in the various 2003 TRM committee reports and notes.  It is understood that while China continues to refuse to provide answers in writing in advance of meetings of the TRM, it did regularly provide a copy of the statement of their spokesperson at the end of the committee meeting this past year.

 

Because the Article 18 process is just one of the ways member nations work with China to understand developments in the country and to address problems that may arise, it is hard to characterize the lowering of expectations in the Article 18 process as critical for China’s compliance effort.  Nevertheless, it is an important example of concerted effort by China to minimize an obligation undertaken.  The same is true for other such obligations.

 

Special China Safeguard Measures:  Textile and Product-Specific

 

Specifically, the protocol of accession permits countries to take a safeguard action against imports from China alone where market disruption is caused by increased imports during the transition of China to full implementation of all obligations.  In addition, countries were allowed to have special textile safeguard provisions till 2008 to address import surges that cause market disruption.  These were important provisions in the US for Congress and many industries concerned about expanded competition with China when its economic system was still so dissimilar to that of the US.  They were important to other countries as well. 

 

Indeed, in 2000, when it enacted Section 421 as part of the bill granting permanent normal trade relations with China, Congress indicated that Section 421 should be applied vigorously to address import surges from China.  The rationale behind Section 421 was that US industries should not lose jobs to competition from Chinese imports at a time when China was adjusting to WTO obligations.  Moreover, Congress expressly stated that "if the ITC makes an affirmative determination on market disruption, there would be a presumption in favor of providing relief." See House Report No. 106-632, 106th Cong., 2d Sess. 18 (May 24, 2000).  Further, Congress said that Section 421 established "clear standards for the application of Presidential discretion in providing relief to injured industries and workers," and that the presumption in favor of relief could be overcome "only if the President finds that providing relief would have an adverse impact on the United States economy clearly greater than the benefits of such action, or, in extraordinary cases, that such action would cause serious harm to the national security of the United States."  Id.

 

China has worked very hard in the United States to encourage the US not to take advantage of these rights enjoyed by all WTO members following China’s accession.  Indeed, China lobbied heavily during early Section 421 cases (Section 421 of the Trade Act of 1974, as amended, implements US rights to take selective safeguard action against China) and lobbied the Administration against using the textile safeguard provisions adopted by the US after China’s accession. 

 

For example, in the first Section 421 case involving pedestal actuators, press stories reported that the Chinese government conducted an intense and wide ranging lobbying campaign to block relief.  China's Vice-Minister for Trade, Long Yongtu, came to Washington and met with Commerce Department officials in December 2002, arguing that the use of Section 421 would undermine China’s market access to the United States.  The Commerce Department’s General Counsel, Theodore Kassinger, told Minister Yongtu that President Bush would take account of China's concerns in deciding on a remedy.  See Chinese Official Complains about China-Specific Safeguards, ChinaTradeExtra.com, posted December 6, 2002.  In addition, a press report indicated that some administration officials believed imposition of a safeguard measure on Chinese imports could have negative political consequences in that "a decision to impose the ITC remedy could lead to increased use of the China-specific safeguard, which could further complicate the bilateral trade relationship."  See U.S. Holds Door Open to Settlement in First China-Specific Safeguard Case, Inside US-China Trade, November 13, 2002.

 

After the President denied relief in the second Section 421 case concerning steel wire garment hangers, an observer commented that one possible view of the President's action was that it was "an overtly political decision by the President made under pressure from the Chinese government and a signal that this administration has no intention of ever granting relief under Section 421."  See Eliza Patterson, The U.S. President, Once Again, Rejects Import Sanctions Against China, ASIL Insights (May 2003) (available at the website of the American Society of International Law: www.asil.org.insights/insigh106.htm).

 

The result has been that the first two cases under Section 421 were denied relief by the President, even though the purpose of the statute and Congressional intent were that relief would be reasonably available.  Few involved doubt the effect of Chinese government efforts in preventing this important US law from serving its purpose.

 

These important US laws have been further handicapped either by delay in adopting implementing regulations (textile safeguard regulations were not adopted until 2003) and by the imposition of requirements on petitioning parties in Section 421 cases that impose burdens not actually required by the law (adjustment plans are irrelevant since Section 421 is meant to see that the US doesn’t lose manufacturing jobs during China’s transition to a more market oriented economy) or impose data requirements on petitioners that effectively deny the opportunity to seek relief to a wide range of US industries.

 

With respect to the textile safeguard, the US administering agency, the Committee for the Implementation of Textile Agreements (CITA) took almost 17 months to issue procedural rules detailing how petitions should be filed and the type of information that should be submitted.  During those 17 months, the US textile industry repeatedly urged CITA to act expeditiously and even filed a number of petitions before CITA issued its rules.  CITA did not act on these petitions and the US industry had to refile its petitions after CITA issued its procedural rules.  CITA's delay was costly to the US textile industry.  According to the American Textile Manufacturers Institute, in the period before CITA issued its regulations, imports of Chinese textile and apparel products increased more than 165 percent, 50 US textile plants closed, and some 39,000 textile workers lost their jobs.

 

With respect Section 421 cases, the ITC's rules have burdened US industries seeking relief by requiring onerous data submission and by requiring submission of adjustment plans.  These latter requirements are not warranted in the case of the special China safeguard because, unlike regular safeguard actions where the US industry is seeking temporary relief from, and time to adjust to, increased global imports, the special China safeguard is intended to address the effect of import surges from China only during the transitional period in which China has not fully implemented all of its WTO commitments and is still operating as a less-than-full-market economy.  The special safeguard was negotiated as a form of compensation for allowing China to enter the WTO before it had fully complied with or conformed to all WTO obligations.  The standards for imposing a special China safeguard were deliberately set lower than a regular safeguard because it was intended that affected industries should not be burdened with onerous standards.  Moreover, adjustment plans are not relevant to a special China safeguard.  Congress stated that Section 421 was intended to replace Section 406 (addressing market disruption caused by imports from communist countries) and that the Section 421 procedures were modeled after Section 406.  See House Report No. 106-632, 106th Cong., 2d Sess. 16 (May 24, 2000).  Section 406 actions do not require the submission of industry adjustment plans.  See 19 U.S.C. § 2436.

 

            Bilateral Relationship

 

It should be noted that, in addition to US efforts through the WTO to encourage China's WTO compliance, the US has maintained an active series of bilateral discussions with China throughout the past two years.  USTR's 2003 report (at 5) highlights these bilateral efforts and stresses their importance given China's shortfalls in meeting WTO commitments.

 

·         As the slowdown in China’s WTO implementation efforts became evident in 2003, the Administration stepped up its efforts to engage senior Chinese leaders. Over the course 2003, President Bush emphasized the importance of China’s WTO obligations in meetings with his counterpart, Hu Jintao, and with China’s Premier, Wen Jiabao.

 

·         USTR Zoellick made two separate visits to China for talks on WTO implementation matters with Premier Wen and with Vice Premier Wu Yi.

 

·         USTR Zoellick raised U.S. concerns throughout the year with his Ministry of Commerce (MOFCOM) counterpart, including most recently at the October 2003 APEC meetings in Thailand.

 

·         The Secretaries of Commerce and Treasury made their own trips to China carrying the message that China’s WTO implementation was a matter of the highest priority.

 

·         Sub-cabinet officials from various U.S. economic and trade agencies also met with their Chinese counterparts in China, Washington and Geneva to work through areas of concern, including WTO implementation issues, on numerous other occasions.

 

·         In 2003, the Administration established the "Trade Dialogue", a sub-cabinet dialogue on WTO compliance and other trade matters that brings together U.S. economic and trade agencies and various Chinese ministries and agencies with a role in China’s WTO implementation.  Trade Dialogue meetings were convened twice in 2003 (February and November).  The Trade Dialogue meetings were used to communicate specific trade concerns and served as an early warning mechanism for emerging trade disputes.

 

Other Important Issues -- Undervaluation of Chinese Currency

 

There are some significant trade problems, such as currency misalignment, that are not directly addressed by commitments in China's accession agreement but over which the WTO has some possible oversight.  Currency misalignment is a problem that can create trade distortions in international trade because misalignment results in misallocation of economic resources and undermines stability.  Undervalued currencies, in particular, can produce false market signals -- making it appear that industries in the country with an undervalued currency are more competitive than they actually are, leading to overexpansion of production and export flooding by particular products. 

 

Of late, China has been singled out as a country with an undervalued currency that has had substantial negative effects on trade.  Economists have observed that China manipulates its currency through large and persistent central bank purchases of dollars and other foreign currencies, resulting in the RMB being undervalued by about 40 percent.  They have estimated that the effect of this undervaluation is that the US trade deficit is about $100 billion larger than it would otherwise be, which translates into one million fewer US jobs in manufacturing.  See Chinese Currency Manipulation and the U.S. Trade Deficit, Statement Before the U.S.-China Economic and Security Review Commission by Ernest H. Preeg, Senior Fellow in Trade and Productivity, Manufacturers Alliance/MAPI, September 25, 2003.

 

The current concern about China's undervalued currency and its effects on U.S. manufacturing and increased imports has led to a number of proposals presently introduced in Congress to address this problem.  For example, a bill introduced by Senator Schumer would impose a 27.5% additional rate of duty on Chinese imports.

 

The US government needs to address this urgent problem beyond the initial discussions conducted with Chinese officials.

 

Conclusion

 

The Commission asked for an overall assessment of China's record of compliance to date with its WTO obligations and asked what grade would one give it.  Given the disappointing results of 2003 as noted in the USTR compliance report, I think one would have to give China a grade of no better than "C" in meeting its WTO commitments.  It must be acknowledged that China has, in many areas, made a good faith effort in reforming its laws and regulations, in implementing changes to its tariffs, and in transforming its trade practices to GATT/WTO requirements, but the record of the past two years shows that there have been, and are still, significant problems with China's implementation of its WTO commitments.  And, as USTR itself noted, China's shortcomings in 2003 cannot be attributed simply to start-up difficulties.  China needs to, and must, do better.

 

 

Thank you for the opportunity to appear today.  I would be pleased to respond to questions.