I.          EXECUTIVE SUMMARY

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.

It is twenty-seven months since China became a member of the WTO, and it may be possible now to form a better picture of the level of compliance achieved to date and the problems that remain ahead.

First, it must be noted that China has complied with many of its WTO obligations. China has generally implemented in a timely manner tariff reduction commitments, one of the more important obligations assumed by China in joining the WTO. Similarly, China has revised many of its laws and regulations to mirror WTO obligations. Although governments and companies report improvements in China's legal framework supporting intellectual property rights, IPR enforcement lags seriously behind as piracy and counterfeiting remain rampant. China has also

Final Report, March 19, 2004                                                                                                Page 1

improved transparency in many htmects though not consistently and not to the level desired or

committed to by China.

However, the record of China's first two years of WTO membership demonstrates that many obligations have not been met or have been met but with significant delays. For example, the problems that various parts of US agriculture have faced with China's TRQ administration are one example of China's failure and/or delay in implementing obligations that are 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 (as well as other service sectors) have found that China is implementing its obligations late, if at all, and with restrictions not encountered in other countries, which effectively reduces the value of the market opening promised by China.

So also, 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 and continues to impose conditions such as capitalization requirements, 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.

Final Report, March 19, 2004                                                                                                Page 2

The 2003 China WTO compliance report issued by the US Trade Representative found that China's WTO implementation efforts failed to meet its commitments in important areas, and that, in some cases, China has imposed new or additional trade barriers. Among other problems,

USTR found significant shortfalls with China's commitments regarding: agriculture (TRQs on bulk agricultural commodities -- problems with sub-quotas, import licensing, allocation); the

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., potential restrictions on the ability to sell imported and China-made autos from the same location); SPS (new requirements on seafood; a threatened 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., a requirement to use two mandatory encryption standards in wireless networks different from internationally-recognized standard used by US companies); the use of the China Compulsory Certification (CCC) mark (China safety certification process is duplicative and discriminatory); and transparency (uncertainty and lack of uniformity is common; limited opportunity to comment on proposed laws and regulations).

The problems with China's WTO compliance appear to fit into several categories. Some problems simply reflect the difficulties experienced with meeting timeline commitments and not

Final Report, March 19, 2004                                                                                                Page 3

a lack of desire or willingness to make the changes. Delays of a few months or longer in matters that China ultimately complied with would be examples of this category. Other problems appear to reflect internal problems within the Chinese government in getting ministries to make changes agreed to by the central 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 of this category. Still other problems reflect the need for infrastructure changes or longer-term educational or normative behavior changes - the chronic and pervasive problem of piracy and counterfeiting of intellectual property in China and the need to make effective changes in the system of IPR enforcement is a prime example of this category.

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 transitional period as China makes further modifications to its trading system to become more WTO compliant. 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. Two examples of this action at work may be seen in the Transitional Review Mechanism (or TRM) and the use of special safeguard mechanisms.

Regarding the multilateral supervision and monitoring 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

Final Report, March 19, 2004                                                                                                Page 4

China's progress in implementing various WTO obligations. Article 18 envisions that recommendations could be made to China by the TRM review bodies with respect to improving China's WTO compliance. 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 believed that the Article 18 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.

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. 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 in which a series of questions and answers 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. Consequently, no conclusions or recommendations have been made.

As a result of China's behavior in 2002, expectations of WTO members for the Article 18 process were effectively lowered, as can be seen in the various 2003 TRM committee reports and

Final Report, March 19, 2004                                                                                                Page 5

notes. It is understood, however, 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 committee meetings during the 2003 TRM process.

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 a concerted effort by China to minimize an important obligation undertaken.

With respect to special safeguards, 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 the

United States, this safeguard action is referred to as a Section 421 action. In addition, the accession agreement permits Members to apply special textile safeguard provisions until 2008 in order to address import surges of textile products that cause market disruption. Both of these special safeguard measures were important provisions in the US for Congress and many industries concerned about expanded competition with China at a time when China's economic system was still so dissimilar to that of the US. These special measures were important to other countries as well.

When Congress enacted Section 421 as part of the bill granting permanent normal trade relations with China, it 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 suffer job losses to competition from Chinese imports during a transitional period when China was still

Final Report, March 19, 2004                                                                                    Page 6

adjusting to WTO obligations. Moreover, Congress expressly stated that there was a statutory

presumption in favor of providing relief to affected industries.

China, however, has worked very hard in the United States to encourage the US

Government not to take advantage of these rights enjoyed by all WTO Members pursuant to

China's accession agreement. Indeed, China lobbied heavily during early Section 421 cases and lobbied the Administration against using the textile safeguard provisions adopted by the US after China's accession. 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. Chinese officials met with US officials and argued that the use of Section 421 would undermine China's market access to the United States and have a negative political impact. The result has been that the first five cases brought under Section 421 were denied relief (three by the President), even though the purpose of the statute and Congressional intent was that relief would be reasonably available.

With respect to the textile safeguard, the US administering agency (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 in

terms of closed plants and lost jobs.

Final Report, March 19, 2004                                                                                                Page 7

As a self-selected developing country, China is eligible for technical assistance from the

WTO. In keeping with the Doha Ministerial mandate to increase and improve technical and capacity building assistance to developing countries, China has received substantial technical assistance from the WTO, as well as from other multilateral organizations and from individual countries, including the United States. Much of the technical assistance to China has focused on helping China to understand and effectively implement its WTO obligations.

Active monitoring of China's implementation of its WTO commitments is essential to successful integration of China into a rules-based world trade regime and to the ability of China's trading partners to reap the benefits of liberalized trade. Meaningful monitoring is also important to maintaining public support and confidence in the benefits of trade agreements.

With respect to China's compliance with the WTO, a number of federal agencies, led by USTR, have devoted special attention and additional resources to monitoring China's implementation, and Congress has mandated that USTR prepare an annual report on China's progress. In addition, the private sector has a strong interest in monitoring China's implementation of its

WTO obligations, as it is likely to experience implementation problems first hand. The private sector also supports and supplements the US Government's monitoring efforts by identifying actual and specific incidents of non-compliance.

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 China compliance report highlights these bilateral efforts and stresses their importance given China's shortfalls in meeting many of its WTO commitments. The bilateral channels include formal high-level discussions as well as informal meetings. And, in 2003, the

Final Report, March 19, 2004 Page 8

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) and were used to communicate specific trade concerns and served as an early warning mechanism for emerging trade disputes.

In sum, given the disappointing results of 2003 as noted in the USTR's compliance report, China's compliance with its WTO commitments would merit a grade of no better than

"C". Although 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 conform to GATT/WTO requirements, China's record in the first two years of WTO membership shows that China has not fully complied with its obligations, and that there have been, and are still, significant problems in China's implementation of its WTO commitments which cannot be attributed simply to start-up difficulties.

Final Report, March 19, 2004 Page 9